Wednesday, September 24, 2008

A Calm Day for a Change

Top Line: The stock market seems to be in a wait and see mode when it comes to the government's CessPool project. We are still bearish going into the middle of October.

Wednesday's market was one of the calmest days in the past few weeks. Then in the evening, the President tried to explain the need for the $700 billion CessPool project in an address to the nation on national television. The public is none too happy with this plan so we'll see if the President changed their minds tonight.

With the public outrage for saving highly paid CEO's and/or Wall Street, or even their own bank, the Congress is having significant trouble denying their constituents. They are asking the "experts" what they can say to justify passing this blank check legislation. The answers they got were not what we would call rock solid or something that will be accepted by a normal person...

What we are having trouble with is the actual transaction. Let's say a bank wanted to take part in the sale of some "troubled" mortgage backed securities. The bank has a current value on it of about $5 million, having been written down from $10 million. They want to sell this to the government CessPool. What would you do? Would you offer it to the government for $3 million knowing you really can't sell it for any amount of money on the Street?

Now, let's complicate your decision. Let's say the current public pleas that want the CEO's that take advantage of this "bailout" to take a pay cut get to be part of the final legislation. So now, if you want to be part of the "reverse auction", you now may face the penalty of a lower paycheck. To us, this is where the plan falls short and presents problems. In fact, some opponents suggest that companies that take advantage of these should be taken over by the government. These are just ridiculous enough to be endorsed by congressional legislation...

We may have to wait until next week to find out if Congress can get something together for Hank and the boys. The question is how the market will react to such action. We are confident that there are people who still want to buy here because they don't want to miss the bottom. This type of thinking gives us Contrarians a thought that the worst is still in the future for the stock market. Be Careful out there...

Our Position (from our August 7th post, August 19th post, August 26th post, September 10th):

Bearish on US stocks, Dow target of 9000 (possible dip below 9000)

Bearish on Gold, target of $600. (possibly a little aggressive, we'll keep the $600 level for now)

Bearish on Oil, target of $100. (Target Acquired)

Still Bearish on US Residential Real Estate, no real target

Bullish on US Treasury bonds, ETF TLT target of 100 (Target Acquired)

Bullish on US Dollar, target 90 (Sept 10th we said dollar was at 80 and ready for a short term pullback, very close to being over now near 76)

Bullish on Volatility, VXO to 50

GDX 37.39
BGEIX 18.28
HUI: 346.02

FSI: 70.94 (is the Big Bounce over???)

VXO: 39.28 (Thursday's high of 45.81, getting close to 50 or higher)

SDS: 69.10 -0.33 (distribution today)
QID: 51.44 -1.37 (distribution today)

Dow Industrials: 10,825.17 -29.00

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