Monday, December 8, 2008

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!

18 comments:

Mberenis said...

Obama is making it better for us already! The bailout is spilling over into deals you'd never imagine. Most will miss out because they don't do the research. Bailout for Citizens

Avl Guy said...

Potential pre-Jan. 20 ‘Bounce Killers’ forming off the star-board side of the S.S. DeLeverage:
1. rash of post X-mas Announcement of bankruptcy filings & liquidations by over-leveraged retailers; 2- bizarre pre-emptive strike against Iran by an Israeli Air Force (mis)gambling that today’s uber-cheap oil ensures minimal global economic harm (and thus minimal blowback from aghast Great Powers) from the inevitable post-strike SPIKE in oil future prices, making the gamble seem worthwhile for Israel; 3- Ambrose Pritchard-Evans ‘Doomsday Insolvency’ scenarios for the UK, as outlined in his The Telegraph columns, become contagious.

Of course a host of less apocalyptic events already justify a ‘No Bouncing Zone’ but that’s irrelevant to markets that are akin to a juiced up bi-polar teen w/raging hormones. Shouldn’t the pigs be locking-in gains for the year?

Jeff said...

Avl

Don't forget the oncoming nuclear war between India and Pakistan!

Plus the Tribune BK today. It appears The New York Times is next.

I swear the worlds gone mad.

FedEx just came out with a huge warning tonight. We may see some red tomorrow.

teddy bear said...

a lot of "good" news yesterday/today ;)

-Tribune Files Bankruptcy (the 161-year-old newspaper and broadcast company)
-Texas Instruments Cuts Forecasts (the second- largest U.S. chipmaker)
-FedEx cuts '09 Profit Outlook (second-biggest U.S. package-shipping company)
-Majority of Modified Loans Fail Again (almost 53 percent of borrowers whose loans were modified in the first quarter)
-Credit Stress' May Depress Card Issuers ("the unwinding of consumer leverage is just beginning")
-Pension Funds Beg Congress to Suspend Billions in Contributions (About 800 companies in the Standard & Poor’s 1500 Index have pension funds)
-Japan’s Economy Shrank 1.8% Last Quarter (Japan’s economy shrank in the third quarter faster than the government initially estimated)

etc.

but it does not matter because rally is sponsored by even "better" news i.e.

Obama's Great Spending & Bush's Big 3 Great Saving

:D

Show Must Go On
http://tinyurl.com/59qncc

Jeff said...

Makes you want to jump off the neaest the bridge doesn't it Teddy?

I wonder when the pigmen will start jumping out of office building windows like they did in the '20's?

teddy bear said...

interesting idea how US can pay off his debt to other countries :DDD

http://www.youtube.com/watch?v=mcFeoeDheR0

http://kylekeeton.com/2008/11/russia-professor-igor-panarin-america.html

Jeff said...

Teddy

I saw that a few weeks ago. I think Russia is in more trouble than we are. $40 oil is killing them!

Their debt just got lowered by S&P today to BBB from BBB+.

teddy bear said...

Russian problems don't worry me :D

but,
oil seems to rebound a little bit (~44$ now) and rating companies seems to be somewhat untrustworthy recently :D

as for theories predicting future,
there are so many of them that some will come true surely :D

Jeff said...

Teddy

Thats what scares me.

I don't see how we get outta this mess without all of us being forced to go through some severe pain.

Wait until the job losses start mounting. This thing is only getting started.

Every week in my area there are layoff announcements.

I don't think any of us will ever be the same after this.

John Maynes said...

I don't think any of us will ever be the same after this.

I already changed. That's for sure. Can take hits like never before.

teddy bear said...

http://www.google.com/insights/search/#q=unemployment&cmpt=q

Jeff said...

Yup

This recession has humbled many and forced us all to become stronger.

Teddy

If you take out part time wage earners and measure it like they did during the depression, the rate is 12%.

We are half way to the 35% unemployment seen in The Great Depression.

Avl Guy said...

@Jeff: I don't think any of us will ever be the same after this.

@Maynes: Can take hits like never before.

Look to 1973-1982 for lessons on adjusting/adapting. The 1960s social upheavals and war hits to the economy prepared the US workforce to take the 1st salvo of $$ hits in 1973-74 from that 9-year economic crisis. Ignorance was bliss for them; in 1973 they didnt know we had 7 more years to go and that gas rationing and hi-inflation were just 1st round sucker punches.
By 1982, they were dodging 18% mortgage rate grenades tossed at us. In between, we tossed out Nixon, Ford & Carter. Tens of millions of us abandoned the dying rustbelt industries and migrated to new careers and homes in the alien SunBelt. The 1960s hardened workers to trod thru the crisis One-Day-At-a-Time for 9 Years!
Today, we're told daily that sunny days (e.g. a market bttm) is just a month away.

Debt Deleveraging seems to dictate that white-collar workers in any debt-based economy are guaranteed to remain on a Slippery Slope of Downward Mobility as long as debt is unwinding.

Our Feds just tacked on $8 Trillion of new obligations, guarantees and debts, since Bear Stearns, atop our existing $53 Trillion in debt & unfunded long-term obligations; while Obama is being told to tack on another $1 Trillion. All this adds to the pile that’s unwinding and the years it will take to do so..

58% of 2008 mortgage restructures to prevent foreclosures re-defaulted within 8 months...so its back to Square 1. Question? Who’s mentally tough enuff to repeat that experience 1,2,or 3 times?
Then seek a new job in a new career in a new state, and toss out 3 consecutive presidents?
Well, look at ur spouse, biz partner, associates, boss; and ask: who really has the mental toughness to negotiate multiple shape-shifting downward mobility traps while the years (decades?) flow for Debt Unwind to run its course...given that unlike our parents, we were never mentally prepared for these hardships, we were promised Dow 36,000, and ‘A Long Boom’ and ‘Rise of the Creative Class’, and ‘Golden Retirements’.
I bet every guy who re-defaulted on his mortgage last week and got a pink slip this week bet he was finished with this crisis months ago...now he’s back to square 1 with his nerves even more frayed.

teddy bear said...

interesting 0% and $100

http://www.treasurydirect.gov/RI/OFBills

;)

Jeff said...

avl

Great post.

I totally agree. Moral will hit an all time low as this crisis continues thru 2009.

I have many friends who are worn out even though they survived layoffs.

I have seen this crisis hurt some loved ones in my family and its tough to watch.

Lets hope our culture begins to change and realize we will all need to help each other in order to get through this.

Jeff said...

Teddy

0%. That will make you rich! Not!

Unbelievable to say the least. It will be interesting to see where all of this treasury market goes when things start to look a little better in the economy.

That may be 10 years from now but one day there will be a massive shift!

Jeff said...

should have something up around 6:30-7pm.

Busy day today

John Maynes said...

Take your time, Jeff.