The Bounce Continues!

Good Afternoon Folks!

Stocks continued to rally today as Wall St cheered the new economic plan that was laid out by Obama over the weekend. Here is a great summary on the rally from Bloomberg:

"Dec. 8 (Bloomberg) -- Stocks rose around the world, sending the Standard & Poor’s 500 Index to a one-month high, as President-elect Barack Obama pledged to boost the economy with the biggest public-works spending package since the 1950s.

U.S. Steel Corp. and Alcoa Inc. climbed at least 19 percent, while Chevron Corp. added 5 percent, as Obama’s plan to increase infrastructure spending spurred gains in commodities. General Motors Corp. jumped as much as 25 percent as lawmakers agreed in principle with the White House to provide funds to shore up the car industry. Benchmark indexes in Germany and France added more than 7.6 percent, while Tokyo’s Nikkei 225 climbed 5.2 percent, as Siemens AG and Komatsu Ltd. rallied.

“Hopefully it helps get the economy turned around, jumpstarting private spending with public spending,” said Bill Stone, who helps oversee about $56 billion as chief investment strategist at PNC Wealth Management in Philadelphia. “That’s the whole point of this is to try to get that jumpstart going.”

My Take:

Obama's New Deal Part 2 cracks me up. How is this going to fix our economic problems? Can you imagine seeing unemployed Wall Streeters who were making 500k a year agreeing to put on a pair of work boots and begin laying concrete for $20/hour as we rebuild America? I can't either. Obama will end up creating 2.5 million jobs that no one wants.

We are in for some seriously bad times if the government thinks we need another New Deal in order to get out of this.

The Markets

Interesting day today. The bulls continued the momentum from Friday and took stocks up close to 4%. This rally is getting some serious legs. Obama is offering investors hope just like the Fed did when it bailed out Bear Stearns. That was one nasty two month rally if you were short.

I learned some big lessons after that bear pounding. Luckily, I was mainly in ETF's and held onto them thinking that the fundamentals would prove me right. Luckily in May, the market fell apart again and those ETF shorts became profitable.

The main thing that I learned from that experience is that government interventions/actions can reverse the markets for a long period of time if the people believe that hope for a recovery has been restored. Investors are extremely bullish by nature. They will buy on any news as long as its got a nice story behind it. Obama's hope and change message looks to be working so far.

What I find even more dangerous about this Obama "hope" rally is the fact that the market has severely sold off. When Bear Stearns occurred, the market rallied from much loftier levels. This tells me that there is a chance that this retrace rally may be more severe than the Bear Stearns run in March.

That being said, I can't see this market moving too much higher. My guess is the DOW could get back up to around 10,000 before starting to tank again. I mean things are still going to hell and investors are in a panic. Example: Bloomberg reported that yields on short term treasuries today were the lowest seen since 1929!:

"Dec. 8 (Bloomberg) -- The Treasury sold $27 billion in three-month bills at the lowest rate since it starting auctioning the securities in 1929 amid record demand for the safety of U.S. debt during the worst financial crisis since the Great Depression.

The bills were sold at a high discount rate of 0.005 percent, the Treasury said today in Washington. At last week’s auction, the bills drew a rate of 0.05 percent. The government received bids for the bills totaling more than triple the amount sold."

Bottom Line:

As you can see above, we are seeing historical movements in the markets on a daily basis.

I made a few trades today. I sold my GDX calls on the bounce in gold today. Gold could still move higher here especially if it begins to be viewed as a currency alternative to the US dollar. However, deflation makes gold a risky play and the calls were nicely profitable so I decided to dump them.

I also(warning, you all might think I am crazy with this one) bought some Jan $9 calls on Citi (C). No I didn't take any drugs today before I bought these! I have a little thesis on the large banks for the short term.

The government has pretty much come out and said they will not let the chosen banks fail. The chosen ones being banks like BofA, Citi, Wells Fargo etc. My main concern that had prevented me from jumping into one of these short term was the risk of the government coming in with liquidity injections and wipe out the equity holders.

This concern was quelled once the Citigroup bailout went down and the common equity holders were kept whole.

The Citi bailout basically gives you the map on how the feds plan on saving these banks. I figured C would be nice little long play short term once I saw that they did not wipe out the equity.

Please note that long term I am extremely bearish on all of these companies because housing is going to continue to get worse. However, short term, you can own the big banks knowing that they won't go bankrupt because you know the government is going to backstop them. You now also know that they won't wipe you out as an equity holder if they need to go in and prop them up with more capital.

I will not be holding C very long and I played small on this one. In fact, I may only hold these calls for a few days. I am still very much a bear! The economy is a disaster and we are going to face some extremely challenging times in 2009.

The way I see it now, the higher this market goes, the better the entry points will be for going short down the road. I will continue to play small ball as this relief rally continues. I must say I am beginning to drool watching SRS free fall day after day. I refuse to buy here after Obama's comments on infrastructure. The REITS could move higher for awhile on the hope that Obama's New Deal will need a lot of commercial buildings as we work on our infrastructure. We all know thats not going to last!

If SRS gets into the 60's I am backing up the truck.

Until next time!