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The big banks have spoken. The worst is over. All is well.
I wouldn't be pulling all that cash you've stashed under the mattress and running into a bank just yet.
Back on September 28th I wrote that October 17th,18th, and 19th would be the "3 scariest days in October" due to the reality of how bad the credit crunch has hit the big banks. The moment has passed, so let the Monday morning quarterbacking begin.
First the good news:
1. The big banks have teamed up with the blessing of the Treasury Secretary Henry Paulson to create the 200 billion dollar superfund to restore liquidity in the commercial paper market. This move, along with the cut in the discount rate and the recent cut in the Federal funds rate mean that plans are in place to avert disaster.
2. J. P. Morgan Chase didn't get hammered from the credit crunch. Though it hasn't been smooth sailing, JPM has shown they can navigate through choppy waters.
3. The lower dollar means a reduced trade deficit, that is, we will be exporting more and importing less. It also means more foreign investment, another plus for the economy.
Now the bad news: All of the above.
It's a funny thing about financial news; one trader's bad news is another trader's good news. Every market dip is either a financial loss or a buying opportunity. For every home seller that has seen his property plummet in price, there is a real estate vulture circling the sky. It's all about perspectives. It's also about being on the right side of a zero sum game.
Here is the Bear's take on the above good news:
1. The big bank superfund is a sign that the bankers and Treasury Secretary are preparing for the inevitable Armageddon. No European bank has signed on to the superfund yet, so is the superfund a good idea? The FED threw the market a life preserver--make that a yacht--with the rate cuts. That is a sign that the FED knows there is big trouble on the horizon. Try to forget that this latest idea of the superfund shares its name with a plan designed to protect people by cleaning up toxic waste dumps they lived on or beside.
2. JPM made it through the choppy waters indeed, along with steady numbers from Fifth Third, but with Citigroup, Bank of America, Wachovia, Washington Mutual, and Wells Fargo checking in with dismal numbers, it's hard to feel confidence. All of those dismal numbers were rewarded with a small hit on the stock price, but don't expect buyers to be rushing in. MSN's Jon Markman lays the big bank problem out perfectly in the second half of his "Boeing bends the plane truth" article on 10/18. Put the corks back in the champagne bottles, the cops just crashed the party.
3. Let's forget the debate on whether the trade deficit even matters. A falling dollar is a good thing for foreign investment, but can that make up for the big bite American consumers will pay at the pump? Oil is priced in dollars, and as the dollar falls, oil will go up. That isn't as big an issue when the economy is expanding, but the economy is slowing down. The last thing we need is higher fuel costs priced into our consumer goods. The Dow transportation average has not recovered from the August lows. It is off over 12% from its July high and is now sitting a mere 2.5 % higher than its August low. The transports have been taking some hits with slowing freight orders lately, but the glass jaw of the transports is fuel. In a slowing economy, so go the transports, so go the market. In addition, the cheap stuff we have grown to love shipped in from China just became more expensive thanks to the falling dollar. With the powder keg in the Middle East ready to explode at a moments notice, things are a bit uneasy. The economy has been able to handle high oil before, but let's see what happens when it starts pushing $100 a barrel. Don't forget about how the $100 mark will be a milestone anxiously awaited by fear media only compounding the problem.
Last week's market slide isn't a "getting rid of the froth". Rather, it is a clear sign that there are serious problems that exist that we have been denying since August. The market in the next 2-4 weeks may recover a bit, but the longer we go, the more information we will have bringing to light the true damage of the credit meltdown. Back when the market took a dive in August, many were beating the "buying opportunity drum", and many people were able to take advantage and book some paper profits. However, going long is getting more and more risky.
How does the wannabe bear take advantage of the above situations? Several SLO players have already beat me to the punch.
The first play is SKF, the ultra short financial ETF.
SKF is up over 12% since last Monday. I increased my stake in SKF 2 weeks ago anticipating some bank earnings fallout, and I wasn't disappointed. However, I am not locking in any gains yet. There is more turmoil to come. SKF topped out at $96.50 in August, and though it went as low as $72, it still has room to run as the financial reality hits home.
The second play is SRS, the ultra short real estate ETF.
Most people think that they missed the train when it comes to making money on the downside of real estate. Not so. Though SRS clocked in at over a 10% gain last week, it is still sitting at its price in late July. It ran all the way up to $121 in the August meltdown, wildly swinging between $95 and $115 four times in a month. If you can stomach 10-15% swings in price when the market gets crazy and you think that real estate isn't out of the woods yet, SRS is one to study.
The third play is SZK, the ultra short consumer goods ETF.
If you think that buying SRS and SKF would be getting in late, then SZK is just about right. It's a little over $64 now, up from its $61.43 low. With the Dow transports down, Fedex and UPS warning about lower freight volume, lower earnings numbers across several sectors, and the continuing drag from the housing problems, consumer goods will take a hit sooner or later. Better to get on the short side sooner than later.
My bearish bets have not panned out so far in the SLO, but I am staying the course. Being early to the bear party isn't a bad thing if you can tough it out while others make money. I still have $35,000 to put down on one more buy, something I will do between now and our favorite 78th anniversary on the 29th. I believe that the bull market has run its course and the warning signs in the economy will soon translate into the market headed south. Until then, cheers.
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