I want to thank
"Barry Ritholtz's Big Picture" for this great WSJ link.
Well the market rallied strong yesterday up 400 plus points which was its biggest move in 5 years. One of the things that I like to do on a big bull rally is watch the bulls reaction and listen to their expectations going forward. I watched Jim Cramer for example. I also listened to many anlysts on CNBC and read some research reports.
I was expecting to hear cheers of joy and the Fed had saved the day!!!. I predicted the biggest permabull of them all Jim Cramer to be screaming like a madman saying that we found a bottom and the Fed would save the market!!!
To my surprise I heard none of this. Cramer complained that the FED should be buying 200 billion of these mortgage assets not just allow institutions to borrow against them using them as collateral. He had 3 people during his lighting round ask about three banks including Wachovia and his advice was to sell all of them into the rally. He said if the rally carried into today sell some more of the same stocks. He then went on to say until housing gets straightened out this is not the time to be buying financials.
Then I listened to the above video from Wilbur Ross and his reaction to the 200 billion dollar Fed action taken yesterday and his comments on wether he thinks banks will fail. His take: Expect bank failures aka 1990/91. 1000 BANKS failed during this time. He expects mostly local and regional failures. His take on th $200 billion dollar Fed collateral move is also dicussed without much adulation.
So the bull reaction to this move is from what I can tell is this: The market was oversold and this was for the most part a short covering rally. Most bulls were advising clients to sell into the rallies.
Bear Stearns continues to take heat about their solvency because their main business model was securitizing this triple a paper that now no one wants to touch. I expect them to get bought.
Doug Kass. One of the brightest on the street.com had this analysis:
• The Fed's initiative is a good "first step" but small (and too late!)
compared to the magnitude of the credit problem. The $200 billion Term
Securities Lending Facility (TSLF) pales in comparison to the $6.0 trillion in
agency (and non-agency) markets. Moreover, the need for such a large and
innovative rescue plan further underscores the lack of validity inherent in the
ratings agencies' analysis of risk (and AAA ratings!).
• The Fed's recent moves of slashing interest rates between scheduled meetings and the large TSLF suggest that the credit problem could be larger than most recognize. This is especially the case at primary dealers, such as Bear Stearns (BSC), which are facing a tsunami of financial problems
• Bear market rallies are sharp, as short-covering is spirited. The role of short-covering in Tuesday's broad move cannot be precisely determined, but undoubtedly, it played a role. This is especially true as negativity had recently grown and markets were increasingly oversold. That said, every rally of the last 10 months has proven to be an opportunity to sell. The burden of proof remains on the shoulders of the bulls until proven otherwise. In light of the above circumstances, my market rating moves this morning to 5-5, as I am now firmly a market agnostic with no convictions whatsoever, waiting for my right pitch. Quite frankly, sometimes it is best to admit some confusion and to avoid conviction because I'm stuck in the middle with you.
My bottom line:
Don't get too excited about yesterday. This was a band-aid by the Fed(zero liquidity) that forced a short covering rally. Bear markets are often like chainsaws. Quick Bull rallies followed by big drops as housing, recession fears, and bank failures will continue to haunt the market. Expect a ton of volatility. We could move higher with some follow through from the big rally yesterday. Rally or no rally Stay mostly in cash and sit on the sidelines. The housing time bomb is about a done deal. The Fed will continue to be creative but they simply don't have the assets to fix this problem. Remember if it comes down to them or the banks becoming insolvent who will the Feds choose? Themselves. When the bulls can't get excited from a 400 point day I think it says something...BOOO YAAAAH