Wednesday, July 9, 2008

A Small Leak Can Sink A Great Ship!

I have a great admiration for Ben Franklin. Maybe it's the rags to riches story...maybe just his humor...maybe his insight. Insight is something that is sadly lacking when it comes to Wall Street...and that is where we could use some good old fashioned Ben Franklin type common sense.

In a pure move of politics and back-scratching Ben Bernanke gave a speech that would have made the greatest confidence men in Sing-Sing envious. Prior to the market's open Tuesday morning Bernanke made a damage control speech in Richmond, Virginia touting the following initiatives:

1. The end of shady mortgage lending practices.

2. A possibile reform movement in the credit card industry.

3. The suggestion that weaker banks and mortgage companies should be allowed to fail.

4. Continued access to the special loan window through 2009.

The market responded as one would expect with a 175 point jump in the NYSE led by financials. This was done to shake loose the shorts that seem to be resounding the bear sentiment on Wall Street. (This did cut into my short positions which I will address later in this blog post.) A down day on the oil market and it looked as though the long awaited market bottom was found, and the rebound was under way. Back slapping and table pounding was under way. The market got its much awaited good news.

Today however, was a different story. The short-lived bounce was gone, and the market found a new bottom dropping 237 points. Of the panel of six experts who appeared on CNBC's Market Wrap only one admitted he had a cash position because the market was too volatile for his or more importantly his client's money. The other "experts" did what they have been doing all along...talking about the great buying opportunities, dollar cost averaging, and near bottom forecasts. After all, aren't all stocks on sale now?

Ironically, David Tice from the Prudent Bear made a sound case the the U.S. Economy is headed for a deep recession...and even muttered the word depression (1). These words seemed almost as piercing as Warren Buffet's words in late April which mentioned the words... deeper... longer... and "Worse than feared." (2) Let's face it, the market fundamentals did not change Tuesday morning when Bernanke made the Rah... Rah... speech. Remember folks, his job is to support and help make the financial system work.

Speaking of the financial system of the United States, let's look at those fundamentals:

1. The dollar's buying power has been going down for years.

2. We are the largest debtor nation in world history.

3. We are in the midst of a sub-prime crisis that is still only being unfolded.

4. Consumer credit is tightening... and our economic growth is reliant on consumer spending.

5. Gasoline hoovers around $4.00 per gallon.

6. The housing, real estate, and construction components of the economy are on life support.

7. Unemployment is one of the dominoes falling... now near 6%.

*These are just some of the arguments for a Bear Market off the top of my head...

As we head into Thursday, I am even for the week. Monday's great numbers were killed by a strong day for financials on Tuesday. Wednesday, the pep rally was over, and reality was sinking in again. Today at market close, Lewis from BAC was holding a Town Hall type meeting. He was quoted as saying that the recovery should take place in mid-2009. Other positive comments were that BAC did not need to raise capital, and the dividend was safe. I do believe Lewis was telling the truth. His company's stock price will continue to tank, and the dividend will be the only reason to hold it. Stay tuned for Thursday. Remember from one Ben to another Ben, a small leak can sink a great ship. A big leak will sink the ship faster!

Works Cited


AX said...

Volatility is tremendous this week. Hold on tight and don't panic on up days. Knew Lehman would bounce and then bottom, didn't think it would be this quickly...

Tiger Coach said...

Obviously LEH did not respond to the "Pep Rallys" that were held this week.

Should be another sell-off tomorrow...