-- Posted Tuesday, 16 September 2008 | Digg This Article
| Source: GoldSeek.com
Rick’s Picks
Tuesday, September 16, 2008
“Phenomenally accurate forecasts”
U.S. Treasury paper racked up huge gains yesterday, and all it took to make it happen was for Secretary Paulson to say the magic words “Drop dead!” to Lehman Brothers. The Treasury Department’s surprising hardball decision amounts to tough love for Lehman employees and shareholders, but any Econ 101 student could explain why we’ll all be better for it in the end. Somewhat more difficult to understand is why, with U.S. bond prices soaring on the news, the dollar finished moderately lower in quiet trading. After all, if T-bondholders were wildy enthused about Uncle Sam’s refusal to bail out yet one more financial giant, why wouldn’t their enthusiasm have boosted the dollar as well?
A possible answer is that the bond rally was driven by a panicky short-covering while the dollar was constrained by more rational thinking in the form of doubts that the government’s new-found laissez-faire policy will last. While it looks like insurance giant AIG is about to be told to go to hell, if any more too-big-to-fail players turn up in the emergency ward, the Fed could be forced, finally, to open the funny-money floodgates.
Bears Were Trapped
When global trading began Sunday night. bond bears would have had no choice but to scramble for cover on word that the feds had decided not to bail out Lehman. Most of them would have gone home short on Friday relatively confident that Lehman’s problems would be resolved in much the same way that other banks’ problems have been resolved – i.e., with a buyout orchestrated and underwritten by the U.S. Government. Considering what actually occurred, shorts were caught with their pants down around their ankles.
The dollar’s reluctance to follow bond prices higher could be attributed to two factors. For one, dollar bears have been roughed up so badly in recent weeks that they would not likely have gone home Friday as brashly certain as bond traders about a Lehman bailout.
And for two, as implied above, even with the news that there would be no bailout, it is perhaps unrealistic to think the Government will remain in laissez-faire mode if and when a bank (or two) even bigger than Lehman gets its back up against a wall, as it assuredly will.
A Catch-22
For officials trying to navigate these very dangerous shoals, there’s a Catch-22: The stock market performed inversely to the bonds, registering its worst one-day loss in seven years. This suggests that if Bernanke and Paulson were to continue to Do the Right Thing, letting dying financial corporations go naturally, it could conceivably send stock prices down to levels that would trigger a full-blown collapse of the economy. Treasury’s borrowing power might come through the initial firestorm intact, but if the U.S. wanted to preserve it, higher real interest rates would be needed to attract lenders. The effect of this on an already severely depressed housing market would be devastating, perhaps bringing about the 90% price decline that we forecast here some time ago.
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Is This the Big One?
For weeks, we’d held to an 1195.00 downside target in the E-mini S&P, and we reiterated a recommendation to bottom-fish there in a tout disseminated to subscribers Sunday night. As it happened, the futures fell more than 60 points during Monday’s session to a low at 1194.50, just two ticks from the target. We remained on the sidelines, however, and advised in a bulletin that subscribers do the same, because the low was hit in the final minutes of the day.
We would have had no qualms about buying some contracts at the target if there had been a couple of hours left in the session to shoot for a profit. But the fact that our number was hit on the final bell left us unenthused about taking an overnight position. Moreover, we think that significantly lower prices impend, and that this is therefore not a good time to buck the trend, other than via scalp-trading. Permabears who have been waiting more or less forever for the stock market to fall apart should take note: This feels like the start of the Big One.
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Information and commentary contained herein comes from sources believed to be reliable, but this cannot be guaranteed. Past performance should not be construed as an indicator of future results, so let the buyer beware. Rick's Picks does not provide investment advice to individuals, nor act as an investment advisor, nor individually advocate the purchase or sale of any security or investment. From time to time, its editor may hold positions in issues referred to in this service, and he may alter or augment them at any time. Investments recommended herein should be made only after consulting with your investment advisor, and only after reviewing the prospectus or financial statements of the company. Rick's Picks reserves the right to use e-mail endorsements and/or profit claims from its subscribers for marketing purposes. All names will be kept anonymous and only subscribers’ initials will be used unless express written permission has been granted to the contrary. All Contents © 2008, Rick Ackerman. All Rights Reserved. www.rickackerman.com
-- Posted Tuesday, 16 September 2008 | Digg This Article | Source: GoldSeek.com
