Let's review:
First, the Fed brokers a deal for Bear Stearns to be taken over (and personally backs the deal with Fed money) at the same time it opens the Discount Window (to include non-members) - there is a rush of borrowing ($100s of billions). Then, we needed to blame someone for all this mess, for it could NOT be their own balance sheets. They picked an easy patsy, those nasty "Naked" Short-sellers, it was THEM that forced the share prices down and these companies into bankruptcy. The SEC issued an Emergency Order to protect 19 stocks (financials) from these bad "Naked" short-sellers (by the way, NO one was prosecuted for "Naked" Short-selling). But after a one day rally, they started back down again. How could that be, we got rid of those bad "Naked" short-sellers? Why are the stocks going back down?
The Fed continued to pour money into the system and assured us it was something else and there was plenty of liquidity in the system. Congress earlier in the year, lead by Frank and Dodd, told us that Freddie and Fannie were well capitalized and will be used to help bailout these faulty mortgages. "Don't worry, the government is here, our mandated GSEs will save the day!" Of course they were warned by people that could do basic math - but they had something mightier than math - they had a Printing Press.
Of course the market continued to go down (because basic math trumps the printing press - but they still don't know that). Then Freddie, Fannie, Lehman, AIG, start falling like dominos. The Fed is granted "Bazooka" powers by Congress and pulls the trigger on Freddie and Fannie, but let Lehman fail (even though they lent Lehman lots of money at the Discount Window - didn't Bernanke tell us that they were loans at the Discount Window and not one has ever failed?). Then after they let Lehman fail, they draw a line in the sand and said "NO MORE!", within hours the line in the sand is erased and they bailout AIG.
This time instead of a "Bazooka", Paulson goes for the full-nuke option! First we need to blame someone for the market going down, no one really believed that horse shit about the "Naked" short selling, so let's just say it is ALL short-sellers. They are NOT patriotic selling shares on troubled companies, how could they do that!. We are going ban short-selling on 800 stocks, we will have the President of the United States state publicly they will prosecute to the full extent of the law if ANYONE sells a stock short! That will stop this market turmoil. Secondly, we are also going to create a new agency (Homeland Investments) and buy all the bad mortgage debts, $500 billion, no wait $700 billion and also not just mortgages, but ALL crappy debt, including credit cards and car loans. And we are going to let Goldman and Morgan become banks, that will give them free access to the Discount Window whenever they want.
Of course on Friday when Paulson pushed the Red Nuke Button and wind of the bailout hit the streets a massive rally ensues, but the idiot talking heads think it is because the "worst is behind us again" and Paulson is coming to the rescue. Of course they fail to mention that when you ban short-selling on 800 stocks you are going to have the world's biggest short-covering knee jerk rally.
Now we enter the market Monday - all is saved right? No more "Naked" short-selling, no more short-selling, $700 billion bailout package, nationalized GSEs, nationalized insurance, the last two investment banks and now banks. But wait - the market sells off another 300 points and all the indices are down. Gold is rallying, Oil is rallying, the dollar slides hard against the world currencies. Why is that happening? I thought Paulson saved us and the “Worst was behind us!”
They have blamed the "Naked" Short-sellers, they have blamed Short-sellers, they have fired all the CEOs, bailed out companies, injected money, let people borrow from the Discount Window, etc. He has pushed that "Red Nuke Button" - but it really is just delaying reality. We have to deleverage and the Fed getting in the middle of the deleveraging and that (in my humble opinion) is not a good thing. Why - because it shifts that risk from the companies that are failing to the government. Our treasuries could (and are starting) to befall the same credit problems of these companies. Several foreign countries are already treating our Treasuries as toxic waste - simply because the government has taken on massive amounts of debt.
Paulson, Bernanke, Frank, Dodd, and others may look like a Hero in some people's eyes - but reality clearly shows they have not stopped the losses and have clearly shifted the risk on to the backs of the government (and you the tax payers). Ron Paul has been shaking his head and stating - the government is a tool to lend money for emergencies, but emergencies are NOT buying toxic waste to justify failed business models.
We have a bigger problem now - the US Credit Rating, the dollar, and bringing more uncertainty to where the bottom is and how much debt we have added to our national debt.
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New Legislation
Bernanke and Paulson are meeting with Congress to pass this new legislation.
"Action by the Congress is urgently required to stabilize the situation and avert what could otherwise be very serious consequences for our financial markets and for our economy, Global financial markets remain under extraordinary stress.'' Bernanke said.
However, all their new found powers have not kept the market from declining or has solved the problems. They are both pushing for a quick approval of the $700 billion plan to buy the illiquid assets (mortgages, car loans, credit card debt) from banks. However, many in Congress have backed off from rubber-stamping the proposal. Democrats want to expand the plan to include MORE bailouts of homeowners and limits on executive pay. Some Republicans question they ever expanding size of the bailout. While few, like Ron Paul, just shake their head and will vote NO. Clearly printing more money and tossing it into the fire so far has not resolved anything, but only delayed it.
Of course I expect Barney Frank to slip in an amendment to change the "S" in USA from "States" to "Socialist".
Bernanke has indicated if something is NOT resolved NOW – we could be in for a economic crisis. But some would argue, while that may be true, shifting that risk to the US government doesn’t absolve the risk – but rather transfers the credit risk to the US, which could have longer lasting negative impacts to the economy.
Today will be about Congress and if they pull the trigger on the latest plan to bring about the New New Deal.
If this doesn’t work, well I know Paulson’s next idea: NO SELLING STOCKS AT ALL! Americans are no longer allowed to sell stocks ever! We can only BUY stocks. It is not American to sell stocks. (Of course this is a joke).
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Futures Pre-Market
The futures are paused with little volatility – waiting as if to move when they hear IF and HOW Congress will react to Bernanke and Paulson’s plan and increase in powers they have asked for. If futures remain, don’t expect big moves at the opening.
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Support / Resistance
Well – I guess supports are now in question again. The world didn’t think the bailout was a good idea, as per the credit value of the US currency.
INDU 11,000 / 11,500 (We are right back at the pivot point of 11,000 where we broke down 500 points, rallied back and went 500 points higher. I can assure you that we will NOT remain at the 11,000 line for long. The question is do we hold and does Congress sell the FAITH and we get a rally or does the world again say – thanks but no thanks.)
NDX 1650 / 1700 (We came off hard, 4.5% yesterday, and there is no reason for a rally – except if optimistic euphoria comes back into play.)
SPX 1200 / 1250 (Just like the INDU, we are at that pivot point. Do we HOLD at 1200 or does it break down again. It will really be based on how people react to Congress’s action.)
RUT 700 / 740 (This index has been between 680 and 760 – anything in the middle is just noise at this point. It is too hard to call – other than it has a big range.)
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Conclusion
There is no certainty in this market, we can’t make value or fundamental decisions because it is clouded by government intervention. Many forget this nation’s economy is an extended credit line by foreign entities the purchase vast quantities of treasuries, which allows our government to lend (print) more money. When the credit lines issued to the government dry up – then we have a bigger problem. First it was the consumers that was tapped out of credit (homes foreclosed, credit card debt, car loan defaults), that trickled up to the companies (their debt paper defaulted and they had to borrow more), now it is slowly shifting over to the government (who is printing and pouring money into the system that has increased the debt and now are on the brink of their credit failing).
Foreign nations are not dumb. They see the lending, the increase debt, the lower interest rates, treasuries (30 day notes) invert to NEGATIVE interest. They certainly don’t want to purchase more US treasuries as the currency’s credit risk increases and the interest to off-set that risk DECREASES. That means the government is printing paper and creating inflation, which could reach debasing or devaluing levels. In my opinion we are right on that tipping point of devaluing the dollar and it’s credit risk to a point we could see foreign nations not just slow their investments but actually run for cover and look to a NEW World Reserve Currency. China is moving into gold and Euros other nations are questioning the US dollar as a reserve currency. OPEC has even discussed taking oil off the dollar or creating a mix basket currency rate. The FAITH in the dollar is falling fast.
This bailout package COULD give us short-term reprieve in the market place, even spur another knee jerk rally. It may even save some companies from failing. But at what costs? I say the credit rating of our country is not worth the short-term help that printing money and bailing out a few large companies is worth it. The world would have more respect for this nation and its currency (sealing the faith) if we did not head down this avenue. However, I think it is to late – we have bailed out too many firms, pour too much money into the system, and given Paulson and Bernanke sweeping powers.
Owning some extra downside Gamma is probably something you should already have on!
I don’t expect this latest bailout is going to solve the longer term issue – that is Deleveraging – which will continue to happen (with or without) a bailout.
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