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
- 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.
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.
- 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).
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!