Sunday, September 28, 2008

Historic Times

Top Line: The big government intervention program for troubled assets came into better focus on Sunday, yes, before the "markets" opened. Now that the markets are open, they seem to be, at best, ignoring the news. The US futures are down slightly as we write.

The Update continues to expect the market to decline over the next few weeks. With the government program and the short sellers ban, the stock market moved up a little but has now settled into a wait and see mode. On Sunday the details came into some more focus. There was some give and take between all the parties but in the end the taxpayer still gets to foot the bill of the modest sum of $700 billion.

We have a few questions. How did they come up with $700 billion in the first place? How do they know that this is the right amount to "take care" of the problem? Who gets to decide what assets to buy and how much to pay for them? How long does the government plan to stay in these assets so that they can "make" money? There are more but we think there are few answers to these and many of our other questions.

Our Biggest Question is the one that asks, "What problem are we solving?" The problem is that housing prices are dropping. How does providing $700 billion to buy up distressed mortgage backed (in-)securities prop up house prices? The politicians want us to think they're doing the best they can for the tax payers but the fact is that nothing can actually prop up house prices now that they are falling.

Our position is that the "bailout", as it is being dubbed by the masses, will fail and they will come back to us and say that the reason it didn't work was we didn't use enough money. And, could we use some more? We don't think the tax payers will find the next request tolerable.

The Update does think there is a major problem with the credit system so they would be correct. The very credit expansion in the past several years needs ever increasing credit in order to keep the entire "house of cards" up. Now that the reason for the credit expansion has begun to fail, that would be house prices are falling, there can be no further credit expansion.

The government is buying assets. They are telling all of us that they think they can make money on them if they hold them long enough. Do you believe this is true? The only way these assets will be worth more than what "WE" pay for them is if house prices stabilize and go up.

The Update has tried to help you think about the concept of buying Low and selling High. What is the government doing with our $700 billion? They are essentially buying on the way down which is equivalent to buying lower than the high but then holding to much lower lows. Thank you very much...but that's just our opinion.

We would appreciate your comments on the matter. This subject is of historic consequence and we intend to spend more time discussing it over the next few weeks.

GDX 35.83
BGEIX 17.50
HUI: 329.18

FSI: 68.05 (RIMM put a big drag on the FSI on Friday down about 27 points)

VXO: 39.41 (September 18th high of 45.81, getting close to 50 or higher)

SDS: 66.71 -0.12
QID: 51.27 +0.09

Dow Industrials: 11,143.13 +121.07

Jackson went to his first Twins game on Sunday.

Jackson wonders if he should get a Joe Mauer shirt, too.

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