Top Line: The market staged a breath taking rally on Monday. The Dow is now up 1300 points in about two weeks...maybe not tomorrow but there is more to come.
The stock market has possibly completed the first leg of its rally by jumping 500 points today. The media would have you believe that this rally had something to do with the proposal by Treasury to use "already committed" money, from the TARP, along with private funds to Save the World.
With so few details surrounding the "plan", we just don't think the market was particularly moved by this news. It is possible that some excitement was generated by the news but let's make it clear that if the market didn't want to go up, it wouldn't have. Period.
The plan, from what we can tell, is sort of a non-plan anyway. We're going to get a few parties together to think about buying these Toxic assets and then we'll invite the sellers to see if they want to really sell what they have. To us, the biggest question is, "What is the difference between how they are currently valued and what the buyers will bid for them?" If the sellers are holding them at the correct price already, why would they sell them? To raise capital??? That may be a motivation, if they have already marked these assets down to close to what the buyers will pay for them.
But, if the sellers have a gap between the price they are holding these assets and what they are going to sell them for, then they have to take an immediate capital loss and this would not help their capital situation.
The answer should have been figured out a long time ago but doesn't seem to have been. What needs to happen is that these assets get marked to what they are worth and let's stop pretending that they're worth more than that. So far, these institutions have stayed in business and we think the writedowns would have to be dealt with just like they have been done over the past two years. Of course, no institution wants to go the way of Bear Stearns or Lehman or even AIG. Everyone is afraid of where the next shoe will fall.
We apologize for the complicated discussion here but we are so baffled by the lack of leadership in this entire mess going way back to the initial announcement that subprime mortgages were Not really a problem and they could be contained.
Keep your focus on the market or, as we recommend, just relax and let it ride. We will have pullbacks but the next big move should make this 1300 points look like a warm up band. It is appropriate to buy weakness, if some develops and if you have funds available; but, please don't chase these stocks. That's one of the ways we got in trouble last fall. We chased a few stocks and then they dropped back. Let these stocks come to you. If they don't, fine, wait until another day.
If you're a trader, like we are, then you may want to play these back and forth moves but just remember, the market is not going to act like it did over the past few months. The next up move will be powerful and you don't want to miss out on that. (Yes, this 500 points felt pretty powerful but so far it's just one day.)