Bear Stearns Part 2

Just a commentary tonight

Haven't we seen this rally before? I feel like it is March all over again. The government sticksave is back.

The Paulson pump machine was in full gear again today saying the financial system is as strong as ever. Huh, really? Then why did Wachovia lose $9 billion dollars in a QUARTER.

Why did WAMU just announce a $3 billion dollar loss which was triple what analysts were expecting.

"July 22 (Bloomberg) -- Washington Mutual Inc., the biggest U.S. savings and loan, reported a $3.3 billion second-quarter loss as tumbling home prices left a record number of borrowers unable to keep up with mortgage payments. The shares surged 10 percent as the company announced it would cut costs.

The loss of $6.58 a share compared with net income of $830 million, or 92 cents a share, a year earlier, the Seattle-based company said today in a statement. The cost of uncollectible loans jumped 58 percent to $2.2 billion from the first quarter."

This is insanity at its finest. I hope the financials go up another 30%. It will create a nice shorting opportunity. Right now you simply can't fight the financial rally. The change on naked shorting combined with the stick saves has too much momo behind it. Plus, asI said before, these stocks are down 70-80%.

I am amazed that the government has somehow managed to talk everyone into believing they will bail everyone out again. Hello! Haven't we seen this before? Anyone remember Bear Stearns?

Look at what the 10 year rate has done in the bond market since Paulson announced legislation to backstop Fannie/Freddie(Image is from Karl Denninger's Market Ticker):

Final Take:

Wake up people! The government can't bail everyone out! Look at how the bond market has reacted even to the thought of trying to bailout the GSE's.

If this bill passes you are going to see a violent reaction in the bond market thats going to push interest rates up to levels not seen since the 1980's.

Imagine what this chart will look like if Paulson gets his way and the bill passes through Congress. If it does, 9% interest rates on mortages are right around the corner.

Bottom Line

There is only so much money to go around and the government can't save everyone. We can't print our way out of this because of the risk of severe inflation/hyperinflation. They are again sending the message that they can save everyone. There is no free lunch in life boys and girls.

If this was such a piece of cake for the government, then why is Paulson out EVERY SINGLE DAY selling this bailout to anyone who will listen?

I'll tell you why he is selling this so hard. Paulson sees the financial destruction that we are on the brink of reaching, and he is scared to death and doesn't know what else to do. Why do you think he pulled his right hand man out of Goldman Sachs this week to help him with this disaster.

Sometimes there are no good choices in life. Unfortunately, our economic mess is one of those times where you just need to bite the bullet and accept what has happened and deal with the consequences. All of this interevention is increasing the risk of an even worse event down the road.

These stocks are rallying based on a government stick save just like they were when Bear Stearns was "saved". We learned a harsh lesson about stick saves in May and June. Look at these bank losses and ask yourself if this rally makes any sense?

Buy financials at your own risk if this bill passes and its almost guaranteed to do so. "Moral Hazard" will officially be thrown out the window when it does. I would rather be late in buying financials versus being early when so much is at stake regarding our financial system.

Sometimes I am at a loss for words from what I am witnessing. Today is one of those days.