Sunday, March 01, 2009

Shaky markets + AIG Bailout #2 + 1 foot of snow =??

Monday could be a very interesting day in the markets. We've broken down technically on the Dow and S&P 500 and some technicians don't see a clear line in the sand until 600 on the S&P 500. Now I still think following a historical chart to predict future moves is like predicting stock prices with today's horoscope, but huge money follows these charts so you have to be aware of what kool-aid drinkers are thinking.

Since it's been a couple of days since we've bailed anyone out, this seems like a good time to pump another $30 billion into the mess that is AIG. AIG was the most complicated financial firms of its time and I'm not sure anyone has a clear grasp of the situtation at AIG.

"A revised bailout of American International Group Inc (AIG.N) may be just another "band-aid" solution, but more than five months after it was first rescued by the government the option of letting the insurer fail would still be considered too big a shock to already fragile global markets.

It was the third time the government has reached out to the struggling insurer and the latest rescue is expected to put greater funds at AIG's disposal to keep it afloat as it readies to report a roughly $60 billion loss early on Monday.

While putting more taxpayer money at risk is unlikely to be palatable in the current economic environment, analysts said the U.S. government had little choice. Without government intervention, AIG's expected losses would prompt credit ratings downgrades -- triggering even more debilitating losses for the insurer, and its trading partners."

AIG is too big to fail but too sick to save. Some form of nationalization or pre-packaged bankruptcy seems appropriate but the fear that this will crash the markets is pretty powerful. Unfortunately, we're going to suffer death by a thousand cuts - billions and billions to AIG, the markets fall 50% and then in six months you still have to force them into bankruptcy.

Finally, don't underestimate the power of the weather tomorrow to move the markets. Nimble traders will swing the markets one way or the other while junior people (who live in the city and commute via subway) run the big trading desks because their bosses are stuck in snow in Greenwich, Long Island or NJ. I know it sounds silly, but I saw some of the craziest trading on days where inclement weather impacted the commute in the Northeast. Also, note that the Asia markets are trading down 2-3% right now and if we have a similar reaction here, it will take the Dow under 7,000. That in and of itself is not that important, but it's sort of move that will get plenty of attention.

Cheers.

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