Monday, September 08, 2008

Here Comes the Rally....

How long can it last is the real question. There have been numerous bailout attempts over the past year and most have led to sharp rallies that fade within 4-6 weeks.

1) Why should you care about the bailout? One quote says it all - "In the end, the ultimate cost to the taxpayer will depend on the business results of the GSEs going forward." I think you and I are on the hook for multiple hundreds of billions of dollars if real estate doesn't snap back sharply (highly unlikely). At the end of the day, our government implied that the debt of Fannie and Freddie was backed by our government. The Chinese and other foreign investors bought their paper, like US Government debt and the result was that we risked a global meltdown without this move.

2) Can this fix housing and financials? Not so much. Housing might get a little pick up if rates dip a bit (but it doesn't change the fact that Joe consumer can't get financed b/c his salary is stagnate, his job is at risk, and credit standards have become more stringent), but financials are beautifully set up for the big shorts. Financials are rallying like crazy, but their July and August results are going to be disastrous. Any moves up 10% or so will be very attractive to the big hedge funds and the shorts will be back.

3) The Great Hope - The number of major financial pundits today saying that "We hope this will stop the losses" is stunning. Hoping for a fix, isn't exactly smart financial planning.

4) Dollar/Oil/Commodities - The US dollar has been insanely strong as of late. Once, we get through this current rally, I think you could see another repeat of the Spring 2008 trade - long oil and other commodities and short the $ because of rising inflation fears. Just when you were getting used to the joy of paying $3.92/gallon for gas, it could start climbing again (not due to demand but b/c of financial investment in commodities).

Given the rapid fire trading nature of the market this rally should last for sometime (technically, it looks good up here) but in the next two weeks we are going to start getting concerned about Q3 and that will likely take us back down to our previous July/Sept lows.

I'm still a little long here, but I'll put stop-losses in and look for Nov/Dec/Jan puts on the big indexes.

Note again the new address -


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