Wednesday, August 6, 2008

When You've Got the World by the...

In psychology, the Theory of Cognitive Dissodance suggests that while people admit the acceptance of one ideal, they often times will gravitate to the opposite. Take Billy the Kid, Jesse James, and John Dillinger for instance. Ask anyone on Wall Street and they would tell you this trio were outlaws. Such is the case for Wall Street. While one expects truth, honesty, and integrity as the foundation for successful business it often turns out to be that greed, theft, and deception win the day.

Consider the concept of a free market economy. In a recent conference call with Freddie Mac to the financial markets CEO Dick Syron was asked about "the balance between the responsibility to shareholders and its public policy mission." In a bit of a flip attitude Syron reminded all listeners that "I think we — virtually everyone, including our critics, would say that this would be an extremely ugly mortgage market, if you were looking at a mortgage market now that — that didn’t have the GSEs." Executives and analysts took note of these comments understanding that Freddie Mae may be part of the problem, not part of the solution. One analysts believes that Syron has yet to come clean with the additional write-downs that Freddie and Fannie are bound to make. According to Dan Alpert of Westwood Capital Management "They’re just vamping for time, and hoping that something happens politically or in the economy to bail them out.” (1)

Yet the unbridled desire of a winner drove the NYSE to a 330 point gain yesterday. Sure, oil is on the way down. It is much more a case of lower demand and a market correction as opposed to an increase in production. Gold too has retreated across the $900.00 level. In spite of the great numbers over the past day or two, one thing remains the same. We are in a bear market. And, every manipulative practice from changes in accounting rules, government bailouts, and SEC closeouts cannot last forever. Mark August 13th on the calendar. That is the date when the SEC lifts the naked -shorting rule... again.

Speaking of naked-shorting... and shorting. Jim Cramer believes that shorting in general, and naked shorting in particular in particular is dangerous and outright un-American. (2) Of course, this sets the stage for unlimited upside potential with a minimal downside risk. Consider where Bear Sterns would be today if it were not shorted... It would in some way shape or form be under SEC protection, and be in the process of dumping its riskiest loans on the American taxpayer. If that is American capitalism, you can keep it. Weak inept policies and decisions should be challenged by investors on a continual basis. That requires an upside as well as a downside on Wall Street.

Speaking of downside, Megatrends favorite Thomas Lee of JP Morgan was on Bloomberg this morning. As bad as his original recommendations have been (See XLE, XLF, XLY), even Thoas Lee sees a market that is WAY OVER BOUGHT!!!! His new market strategy suggests finding stocks that are below the 200 day moving average. I guess that means pulling the plug on th ENTIRE FINANCIAL SECTOR. Stopping short of screaming "I smell a rat." Thomas Lee's caution suggests there are more bad times to come. (3)

One need no go further to address the financial future of many banks holding mortgages and counting the seconds until they can be dumped on the U.S. government... sorry guys implementation may take up to one year... In Wal-Mart I spoke with an individual who described herself and husband as former fast-trackers... a.k.a. house flippers. I asked if they had a house or two for sale... she said she had 26 homes that she is stuck with... land contracts won't work... and renters can't make the payments. Land contracts have been nothing but a continual disaster. She told me that she WANTS THE BANK TO FORECLOSE on several of the properties! The flipper told me that the banks don't want the houses either... One bank in particular has lost the foreclosure paper work twice. I guess this is the type of bank that would report this write-down if... if it was on their books. And these investors will not be saved by the Housing Bill... oops law! I wonder if this is another one of the financial sector's dirty little secrets.

As for Wall Street, there is a marked difference between their information, and reality. More sooner than later, the truth will come out and when it does, I want to be long on gold and short on the financials.

Sources Cited

1 comment:

AX said...

Let the race begin between reality and Wall Street. AIG let loose a little secret this afternoon, that reality is bleak. Why anyone would own stocks in this environment is well beyond me.

Sage advice from Crammer. Actually, it would be great if they banned short-selling outright. Then all any investort would have to do is buy. Shorts keep companies like Ambac in line. We will stil have our day.