-- Posted Tuesday, 19 August 2008 | Digg This Article | Source: GoldSeek.com
Rick's Picks
Tuesday, August 19, 2008
"Phenomenally accurate forecasts"
Even when crude was down by $2 a barrel yesterday traders were unable to rally stocks, so worried were they about the rapidly deteriorating condition of Fannie and Freddie.What a difference a day makes! For the last month or so, it almost seemed as though Wall Street had forgotten that the two mortgage Leviathans even had a problem. From mid-July's extremely oversold lows, the Dow Industrials rallied more than a thousand points as Paulson et al. continued to insist that no bailout of the GSEs would be necessary. We doubt officialdom would have changed its tune even if we'd sent them a copy of our friend Porter Stansberry's pre-mortem report, which diagnosed the condition of Fannie and Freddie' as terminal back in May. In his monthly newsletter, Porter minced no words, asserting in the headline that both of the quasi-governmental companies were flat broke after subtracting liabilities from assets.
So why did stocks rally spectacularly anyway, considering it was possible months ago to make an airtight case that two of the biggest corporations in the world, companies that formed the backbone of the U.S. mortgage market, were doomed? Our take is that economic facts will never be so grim as to wholly prevent the blind and the ignorant from taking temporary refuge in denial. It was ever thus, even during the Great Depression, when people desperately needed to believe that prosperity was just around the corner. These days, it is recovery that supposedly lies just around the corner, although it's getting harder and harder to find anyone to hazard a guess as to just how this might occur.
Bear Is Back
For our part, we had been mildly bullish on stocks simply because a modest rally target in the S&Ps had yet to be achieved. However, with the Fannie/Freddie "mess" likely to dominate the financial headlines for a while, we would surmise that yesterday's middling selloffrepresents the decisive resumption of the major bear market interrupted by July's psychotic short squeeze. We bears will need to scramble for cover whenever these flights of hysteria occur, but even as we are diving into the trenches we should not lose sight of the fact that the fundamental facts have not changed.
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