Thursday, January 22, 2009

A Violent Rally

Here's something you probably wouldn't expect to hear from me:

I think the stock market is capable of a violent, explosive rally upward at some point over the next six months.

Right now there is about $9 trillion sitting on the sidelines, earning no returns, and looking for a home. I think just a small amount of positive news, or an announcement of a new plan could trigger this rally. What is my guess on what that news would be?

The announcement of the aggregate bank that is currently being worked on. This would be a "national" bank that would essentially be a true backstop behind Bank of America, Citigroup, Wells Fargo, J.P. Morgan, and Goldman Sacs.

Along with protecting the debt of these companies, which would take systemic risk out of the system, it would also create a tremendous new source of lending.

With this fear out of the system it would spark a massive short covering rally. That rally would be pushed upward by the cash sitting on the sidelines coming back into the market.

I'm not recommending buying American stocks now in hopes of this artificial rally, but if it does occur it would represent the last chance to sell the American stock you already own, and get out of the market before the real pain begins.

Wednesday, January 21, 2009

Nouriel Speaks

It was a joyous day yesterday for many people around the country as they were glued to the television to watch their new leader take his post as the 44th President of our country.

As I'm sure you've probably noticed by now, I do not discuss any sort of political stance on this website. The truth is that I hate both sides equally. The leaders of our country make me sick, and to try and pick a side would be like picking between two poisonous food groups.

But I'm young, so I probably just don't understand yet.

What I was focused on yesterday was the banking sector of the global economy. Financial shares cratered yesterday, leading our stock market downward to the worst day in inauguration history.

A big spark for this event was commentary from Nouriel Roubini, an economist who was one of the few who understood the oncoming crisis over the past few years:

“I’ve found that credit losses could peak at a level of $3.6 trillion for U.S. institutions, half of them by banks and broker dealers,” Roubini said at a conference in Dubai today. “If that’s true, it means the U.S. banking system is effectively insolvent because it starts with a capital of $1.4 trillion. This is a systemic banking crisis.”

The virus has continued to spread overseas. Jim Rogers, the legendary investor who co-founded the Quantum fund with George Soros, said he now felt that the UK might not survive this meltdown. Not the banks, the country. Fears have spread around the world that many countries could be at risk of default.

State Street, a financial firm who was considered one of the most immune from the current climate, announced massive losses yesterday coming from an "off balance sheet" portfolio. Their stock fell 60% on the news.

All this has moved the idea of bank nationalization from rumors to the most likely outcome. Bank of America and Citigroup are trading as zombie banks, and J.P. Morgan and Goldman Sacs are slowly getting pulled into the black hole.

When all the banks are nationalized we can finally end phase one of this storm, the financial crisis. Next up will be the continuing economic crisis as unemployment will continue to grow forcing consumers to stop spending. Unfortunately spending represents 70% of our economy. The decrease in spending will lead to additional unemployment and the spiral downward will become self reinforcing.

Over the next 24 months the economic meltdown will meet an unexpected face: the currency crisis. The dollar will begin to wobble under the weight of the recent actions to nationalize all the bad debt and mistakes. As previously mentioned, this is the real crisis, wiping away any dollar denominated savings Americans have in the stock market, bond market, or cash.

I felt a great sadness talking to people yesterday about their hope for what Obama can do to save this country.

Perhaps he can. Perhaps I don't understand the government's ability to make $3.6 Trillion just disappear off balance sheets and not be accounted for. Perhaps adding trillions and trillions in additional debt to our $57 trillion will be good for our country. I would love to share that hope and joy, but I guess I just don't understand.