Wednesday, February 25, 2009

Lack of Confidence in Banking

Top Line: The market seems to still be bottoming. The next move of significance should be a violent one in the northerly direction.

The stock market doesn't know what to do with all of the information it's getting. The news seems to be bearish because an end to the economic situation appears to be getting further away rather then closer. When the whole world is anticipating a major meltdown, the logical outcome is a sharp rally.

Since we expect a sharp rally developing any day now, this would be a good thing and we feel confident to be long. The extreme selloff we have seen over the past couple of weeks also supports our confidence. This week has been a little tough on our portfolio but it's in much better shape than it was back in late November.
We are now being, or should we say, trying to be, patient waiting for the rally to begin. The positions we purchased in the last few weeks have been at pretty good prices. We purchased a small amount today in fact. These purchases look cheap even now but they should look dirt cheap by the time this rally is over.
In the news today, the one that moved the market could have been the one that talked about stress testing banks. The idea is that the banks need to see what their capital looks like if unemployment moves up and home prices drop more. We're not sure how this information would be used but it may get at the kind of exposure some of these banks have.

We have considered that this entire situation is a lack of confidence. Treasury Secretary Geithner mentioned that he thinks the banks are responsible for creating a lack of confidence in the banking system. The problem is how to restore that confidence. That is the market's focus in the short run...or at least that's what we think is it's focus.


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