Mission Accomplished

Good Morning. Its a bright new day. The S&P Futures are surging as people are equating this event to the Long Term Capital bailout, the Bear Stearns takeover and the surprise Fed rate cuts. While all those events were excellent short term buying opportunities I believe there is a very important distinction between those events and our current situation. All those events happened after a market panic. A large part of those rallies were a result of the cessation of panic and the relieving of the oversold state of the market. Currently, we have not had a market panic and are actually overbought.
There is a large short base in the market that can fuel a market rally. However, I believe that rally would be an excellent short selling opportunity. Fannie Mae and Freddie Mac will not be aggressively expanding lending under the government plan and hence this plan does not change much. As I have previously said it averts a disaster but a disaster was not priced in. Quick and easy solutions will not clear up a decade of excesses. Hope is the enemy in a Bear Market as Bear Markets fall down the slope of hope. While the bulls are now hopeful I don't believe this is the cure to all that ails us.
  • The Bull case is that this will alleviate the credit crunch. Watch corporate and bank spreads to see if the bull case holds any water. While they will rally the question is how much and for how long?
  • The heavily shorted areas of the market, financial stocks and consumer discretionary should be the standouts.
  • There is potential for something special in the financial sector. Many will learn the meaning of the saying "The market can stay irrational for longer than you can stay solvent".
  • Will this bailout help people who can't pay their mortgages? What does this do to bank losses from people who default?
  • Will people charge the US government more to borrow now that they have taken on 5 trillion dollars in obligations? How much will lower spreads be offset by a higher government bond yield?
  • Karl Marx would be smiling.
  • One would have thought that the failure of two institutions that play an integral part in our economy would give people some pause. Does that mean we have not learned anything and have a long way to go in this adjustment period?
  • The fact that the Treasury is actually buying Fannie and Freddie debt is smart. Considering that they are now guaranteeing the debt they might as well earn the higher rate.
  • The preferred shares of Fannie and Freddie will be the equivalent of an option on Fannie and Freddie while the common stock will be more like lottery tickets.
  • As much as I hate to admit it the government actually did well in the structure of the bailout. That said, it is a sorry state of affairs.

No comments: