Wednesday, October 01, 2008

Senate Passes Historic Legislation, Now House's Turn

Top Line: The stock market went back into wait and see mode as the Senate intimated that they would be sending a new bill back to the House for consideration. This bill passed the Senate without difficulty this evening even though the number went up to $850 billion. Whatever happens, including tonight's modest selloff in US stock futures, will lead to further downside over the next couple of weeks.

The stock market is being distracted from the economic realities with this "little" government intervention. As stock market participants do most of the time, they have all of the bad news in their vision but the magician is mesmerizing them with the big rescue. In the perfect scenario, the big rescue should, in their minds anyway, take care of all of the problems for everyone in the galaxy.

In any event, the news is twisted into being bullish. We can't imagine a bullish scenario for the economy when the administration is standing with their hand out in front of Congress begging for $850 billion. This is after the $160 billion rebate to the people and after the $300 billion Hope for Homeownership program that just started today. (Did you forget about this one?) Then there is the Fed's attempts to inject liquidity into the market place with all of their term lending facilities as well as facilitating the Bear Stearns bailout and the $85 billion to prop up AIG. That's the financial side of the world. Let's talk about the economic side of the world, the place where most of us live

Today's housing news took a turn for the worse. The Case-Shiller index told us that home prices dropped 16.3% in the last year. Oh yeah, housing has bottomed...right. Then the ISM Manufacturing index that we sometimes mention here dropped much more than expected. Plus, it was well below the magic 50 level, the level which is the line between expansion and contraction. For several months this index has been bouncing around 50 giving observers a little hope that things may bottom out. This index could easily have been held up over recent months by the rebate package, although we don't think the manufacturers adjusted their expectations due to a little $160 billion. Now that the money has been spent this index dropped.

There are so many expectations associated with the bill from the Senate especially in the stock market. Even though the money is not available right now and won't be for a little while anyway, the stock market is expecting it to solve the problem and is providing confidence to traders to be buying stocks. We are not sure that the passage of this bill is bullish at all. Most conventional wisdom suggests that the market will pop on the news. If you're a contrarian that begs for a little more perspective. We really don't care if the market pops, in fact we would like that because we could take advantage of it.

The problem tonight is that right after the Senate passed the bill, the futures dropped about a percent. No, that's not much but it is a drop, much different than most were expecting. Time will tell as the market opens on Thursday morning, but for now the market is not giving the bulls what they expected.

Whatever happens, we expect a 10% plus selloff between now and the end of the month.

Our Position (from 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)
Bullish on GDX, target 50
Bullish on BGEIX, target about 25
Still Bearish on US Residential Real Estate, no real target
Bullish on US Dollar, target 90 (back to rallying, now near 80 again)

Bearish on Oil, target of $100. (Target Acquired)
Bullish on US Treasury bonds, ETF TLT target of 100 (Target Acquired)
Bullish on Volatility, VXO to 50 (Target Acquired)

GDX 33.77 (may get another chance at this)
BGEIX 16.82
HUI: 316.60

FSI: 63.83 (a bounce from the annual low)

VXO: 45.27 (probably will go higher than the 55 set on Monday)

SDS: 69.77 -0.53
QID: 55.41 +0.69

Dow Industrials: 10,831.07 -19.59


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