Paulson+Bernanke PUT - The Sequel

On Monday, the market declined big time (about 8% on average on the US indices) on the news that the Congress didn't pass one of the most abject rescue plan ever created and that was a big victory for liberals and libertarians (which seem to be an endangered species now, while they constituted 95% of the US citizens just 12 months ago) and also for the 300,000,000 American citizens and the billion of other people who own valueless paper from the Fed (Federal Notes, aka US Dollars).

The Market didn't crash though, this was merely the pricing of the rejection of the bailout. As Paulson and Bernanke used to say just a couple of months ago, the markets are efficient and adapt automatically to any new piece of information.

But this was just enough for the US government to be scared to death, and push for the bailout plan to be resurrected from the ashes, like the Phoenix. And the market got hysterical again on Tuesday, gaining 4 to 5% on average on the US indices. The Paulson+Bernanke PUT was back on track: all the bad news got discarded straight to the bin both Tuesday and Wednesday (today).

So what happened during the last two days? Here's a brief summary:
  • Yesterday, President Bush signed a bill into law that gave U.S. automakers a $25 billion low interest loan. Yet another bail-out.
  • Consumer spending is at best stable, more likely decreasing
  • Auto sales are collapsing as the sales of Ford showed a decline of 35% YoY, 24% for Honda, 32% for Toyota 37% at Nissan.
  • Unemployment is still rising
  • The ISM Index is collapsing
  • Crude Inventories are increasing (which might be confirming the declining consumer spending and slowing down of the economy)
  • CNBC reported that the SEC staffers say the commission is heavily leaning toward extending the short-selling ban
  • General Electric is in deep deep trouble and will be raising $15 billion USD through a $12 billion of common shares sales and $3 billion of preferred stock yielding 10% to Berkshire Hathaway. (Somehow, the market manages to consider this as good news!).
  • The US National Dept reached above the $10 trillion dollars
After all this, it easy to see that the Market keep on repeating the same pattern over and over again for the past 12 months:
  • Every time there is no news, the market rallies. No news is good news!
  • 50% of the time, when there is real bad news, the market rallies. That's because we hit the bottom, of course.
  • Every time there is pure speculation but no tangible news, the market rallies.
What does this mean? That the market is overly bullish still and that the day there will be a real readjustment of the risk and the fact that we are in a severe recession, we will have a real crash. Real like -20% or -30%.

You can still see contradictory and irrational behavior on the various assets such as:
  • The USD rallying while the market rallies on the bailout package.
  • Gold and Oil declining while the bailout package is considered as being passed.
  • Bank and financial rallying while the bailout package is only a drop in the ocean of the bad dept.
  • Bankrupt companies - Fannie, Freddie, AIG, Wachovia - rallying.
And have you noticed that:
  • JPMorgan is only at 2-3% from a multi-year high?
  • Citigroup is up +100% in two weeks or so?
  • The Euro is falling against the USD because the European countries bailed out several banks with about 10 billion € while the US have spent about 100 times this amount in the past 2 weeks? (actually, this is not totally right as Ireland has gone crazy and created its own Paulson-flavoured bailout package as you can see on this Reuters news).
As predicted just a few months ago by several bright minds (like Jim Rogers or Peter Schiff), the US government has now totally nationalized the mortgage industry, a big slice of the insurance industry, the 3 major automobile companies (3 times $25 billion = $75 billion in loans for a total market cap of these companies of about $20 billion) and the financial industry is about to get nationalized as well. Soon will follow credit cards, then auto-loans and students loans, as they predicted?

If the bailout passes and then if the market rallies (this is likely, even though the bailout package is supposedly already priced in the markets), it is probably going to be one of the best shorting opportunity in the bear market. Provided that the SEC doesn't ban short selling on the remaining stocks or even worse: ban any selling at all. Wouldn't that be just great!

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