Next Downleg Coming

Well, today’s action confirmed my worst case scenario. We got passage of the bailout bill and the market stumbles down all afternoon into the close. Extremely gay monkey-dicked behavior, but to be expected.

Get ready to get clown raped next week. Oh, and earnings season will be soon upon us. Very soon. See, there’s much more to this problem than meets the eye. Bankers and brokers aren’t the only ones who will be shooting up heroin and smoking crack.

I bought healthy amounts of [[DXD]] near the close at $67.62, filling my accounts with it, up to a 10% allocation. Right or wrong, I hate the Dow.

Enjoy your weekend trying to figure things out.

Today, the market decided to resume its fearfully gay ways. So much for a bailout. I can’t tell you how many people I talked to today that thought the market would be up in anticipation of the House vote tomorrow on the bailout package. Poor chaps. What if they don’t vote on it?

Ha! Maybe the market could care less about a bailout. I keep hearing, “we need to get this done. The market will recover once the bailout package is passed”….. Really? Gee, is that what’s going to happen? And I thought the market was forward-looking. You mean, it actually waits until the event to occur before something happens? Wow! I better buy stocks right now! ….Riiight.

The problem is about more than just a bunch of asshat bankers needing a handout.

In case you hadn’t noticed, the signs for more downside surfaced again this week. Tuesday’s Case-Schiller index didn’t help The PPT. Apparently, there are more than enough houses to go around, so no bottom yet in housing prices.  Fancy that. As I’ve indicated before, real estate prices need to recover for many of the banks to have any resemblence of solvency. We’re not going to see that happen anytime soon.

Also, yesterday’s ISM number points to more of a contraction in the economy than expected. And today, we get the once high-flying Ag stocks getting their balls sheared off again (they keep trying to grow them back) with a set of rusty tongs. AGCO Corporation [[AG]] , The Mosaic Company [[MOS]] , Potash Corp./Saskatchewan (USA) [[POT]] , Monsanto Company [[MON]] and Deere & Company [[DE]]   apparently must be going out of business, no? Who knew? No, irrational prices for commodities eventually result in irrational behavior.  Was today’s price action was just a return to more reasonable price levels, or is there more to it than that? 

What’s going on? …..Fear for one. It’s all the rage.

Yes, there is much to be concerned about. Employment numbers come out tomorrow. Since they’re lagging indicators of the economy, no surprise they will have a negative tone. However, look for the magnitude of how negative. Any surprise from consensus, and the market gets fearfully gay again.

And if all that isn’t enough on your plate, just try a heaping helping of margin compression and earnings deterioration. That’s on the menu for most companies now. The fundamentals don’t mesh with a recovery in the market any time soon.

Granted, if your stocks have been getting poleaxed, then hold a shotgun to your Congressmans head and politely ask him to vote for a bailout. If you’re market neutral or mostly in cash, just make another batch of hot buttered popcorn, kick back in your pleather Lay-Z Boy, swing trade and watch the clown show.  

If the House vote gets pushed back to Monday….we could see sub-10,000 on the Dow. Or, maybe we’ll see it regardless of the outcome of the bailout vote anyway.

Bottom line, take heart. With the crisis we’re seeing will come tremendous opportunities  down the road to bank mucho dinero. We’ll get to that point. It just takes more patience and less fear.

kidstock asked the question recently:

“Alpha –

What do you make of JPM, WFC, BAC, PNC all trading above 200 Day MA. Sign of strength…no?”

kidstock—

In a word, yes. There are a number of banks that have been annointed as the “golden children”. In effect, our government has said they will survive, because they are “too big to fail”. Three of the four you named above are in that group. I think the others are C, GS and MS.

In my view, these banks are going to get stronger over time. With open access to the Fed, an egregious bailout, and the prospect of another rate cut, margins will be at the highest levels—-ever, going into the new year (assuming a reasonable bailout package).

Also, consider that they’ve been able and may continue to be able to acquire other banks assets at pretty steep discounts. It can’t be that bad for these banks in the long run.

Consumer banking and lending may be dead for a while, but commercial banking as it pertains to these guys should be pretty darn good. In spite of the “slowdown” / “recession” we’re experiencing, consider that the earnings for the eight sectors ex-financials and ex-consumer discretionary, have increased Y-O-Y. The risk is that the recession will worsen from here—something that I see as a distinctly high probability.

That said, technical analysis of the price action would seem to point that there is demand for these stocks, despite anecdotal evidence to the contrary.

Perhaps Hank’s colorful urging to, “buy the banks, now!…or we’ll kill you!!”, isn’t such a bad idea as long as you cherry pick through the annointed ones.

That’s the key to hitting a baseball. That, good eye-hand coordination, bat speed and strong hip rotation. But I digress.

Keep an eye open to the credit markets. The spike we saw in LIBOR reflects a larger international banking crisis in the making. Taking a page from the “inexperienced asshat investors manual”, bankers are panicky and worried. They’re not only reluctant to lend to consumers, but also to each other. Consequently, they are raising the ante on access to capital and rationing the supply of credit due to huge loan losses and deteriorating balance sheets.

As the spreads widen between Treasuries and corporate debt, just know that sets up a negative scenario for stocks. More on this later…..

We are facing the same 1930s style crisis which could lead to severe recession or a depression. Don’t believe me? Imagine a “run on the bank”, globally.

If the problem was simply a liquidity crisis, then any actions taken by the Fed and other central banks should be enough to solve the problem.

Reality, on the other hand is proving otherwise. The problem isn’t solved. The system isn’t stable. In fact, as we are witnessing, it has gotten far worse.

Bottom line, the problem is insolvency. Lack of liquidity is a symptom of that problem. This mountain of “toxic debt” we have on our hands is a result of the lack of transparency and a crisis of confidence in the marketplace. In several words, we fucked ourselves with a large handled broom. Go figure.

The only way out of this is to fix the insolvency issue. This goes to the heart of the matter—-asset values: residential real estate, commercial real estate, accounts receivable, investment securities, etc.  These are balance sheet items that are collateral pledged as surety for debt. We must see improvement in these collateral values, if we are to recover from this death spiral. Values have to stabilize and stop dropping.  Until then, we are fucked.

Addressing the liquidity issue via a bailout is necessary if we want to solve the crisis. But it’s not enough. The big risk of insolvency is what has to be reduced, and that will only happen when asset values stabilize or are perceived to be stable.  

That, my friends, is the bottom line.