Insights & Advice

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Putting Lipstick on a Bear

Given the market volatility, I wonder if anyone is actively trading the market outside of professional traders and a few desperate hedge funds. All week they tried to stem the rising tide of sentiment which threatens to drive the markets lower. In the end they succeeded but it was a bit like putting lipstick on a bear.

Monday started off with a bang when Fannie Mae and Freddie Mac were essentially nationalized by the Treasury Department with your money. Congratulations on the purchase. I estimate it will cost us $200 billion. The market loved it as well they should since half the nation’s mortgages are held by the mortgage giants. Then came Tuesday and the markets gave it all back when it was discovered that a Korean bank was no longer interested in buying Lehman, our fourth largest broker, which is teetering on the edge of bankruptcy.

Thursday was pure theater as the sequel “Lehman, Son of Bear Sterns” played out across the globe. Overseas markets in Asia and Europe all plunged by 2-3%. When the U.S. markets opened that morning, the S&P 500 immediately dropped a couple of percent getting as low as 1211 (close to my 1200 target) before rallying by the end of the day up to 1250. It was a “woulda, coulda, shoulda” rally where traders speculated on a whirlwind of rumors: the Fed was cutting rates, the Treasury was working on a weekend bailout to rescue the beleaguered broker, Bank of America was in talks to acquire Lehman, Superman was buying stock in Kryptonite, so on and so on.

In the background the same old song of foreclosures, bank failures, hurricanes, and budget deficits added to the volatility. In case you missed it, the Treasury announced that this year’s budget deficit would be $407 billion versus $162 billion last year (not counting the Fannie/Freddie bailout of Monday). Then on Friday it was the retail sales number for August that unexpectedly fell 0.3%. August is usually a good month for the retail sector. That’s when we usually spend a couple of gazillion dollars on back-to-school stuff for the kids. I guess Wall Street analysts don’t have children because it was pretty obvious to me that the kids were going to have to settle for calculators rather than computers this fall.

An hour or so later an aide to Treasury Secretary Henry Paulson made it clear that no government money was going to be used to bail out Lehman Brothers. The Treasury believes that the Federal Reserve, through its Primary Dealer Credit Facility, has done its job. This facility, which was established in the same week the Bear Sterns bailout occurred, allows brokers like Lehman to borrow from the Fed at below-market interest rates. I expect that over this weekend some deal involving several parties, possibly including a sovereign wealth fund, may hammer out a deal to buy the company.

Commodity stocks experienced a bounce during the end of the week but that was to be expected. Many energy, agriculture and metal stocks have halved in value in a very short time period; typically when corrections occur of that magnitude several short term “relief rallies” occur. Do not, I repeat, do not get sucked into buying them. If you still own some of these stocks it is an opportunity to sell them. I reiterate my price target for oil at $88-90/BBL. and other commodities will follow it down. Oil closed just below $101/BBL.

As for the markets in general, after a week of volatility, the three averages barely changed closing within a percent of last week’s close. The Dow was the exception it gained 1.7%. Next week, depending on what happens over the weekend, we may have another bounce (if Lehman can sell itself). But I stick with my forecast that we will see a new low this year in the S&P 500 before we see a new high. Whether it occurs this week or next, does not matter. The bulls can try all the cosmetics they want, the bear is in control.

Posted in A Few Dollars More, At the Market