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The biggest stock market rallies occur in bear markets. Today we witnessed
one of the biggest bear market rallies in history on Plans
To Shore Up Banks.
U.S. stocks rallied the most in six years on prospects the government will
formulate a "permanent" plan to shore up financial markets, while regulators
and pension funds took steps to curb bets against banks and brokerages.
Traders erupted into cheers on the floor of the New York Stock Exchange
as the Dow Jones Industrial Average jumped 617 points from its low of the
day after Senator Charles Schumer proposed a new agency to pump capital into
financial companies. The Standard & Poor's 500 Index climbed 4.3 percent
as 68 companies in the gauge rose more than 10 percent.
Traders erupted into cheers on the floor of the New York Stock Exchange
as the Dow Jones Industrial Average jumped 617 points from its low of the
day after Senator Charles Schumer proposed a new agency to pump capital into
financial companies. The Standard & Poor's 500 Index climbed 4.3 percent
as 68 companies in the gauge rose more than 10 percent.
Wachovia Corp. soared 59 percent, Citigroup Inc. added 19 percent and Bank
of America Corp. jumped 12 percent, sending the KBW Bank Index to its biggest
gain since July. Morgan Stanley erased a 46 percent tumble and Goldman Sachs
Group Inc. recovered most of a 25 percent slide after the nation's three
largest pension funds stopped loaning shares of the brokerages to investors
betting on their declines.
The Russell 2000 Index of small-company stocks surged 7 percent, the most
since two days after the stock market crash in October 1987.
Wachovia, the fourth-largest U.S. bank, rallied $5.38 to $14.50, its steepest
advance since at least 1983. Citigroup, the biggest, jumped $2.62 to $16.65,
its largest gain in 10 years. Bank of America, the No. 2, added $3.38 to
$30.58. MGIC Investment Corp., the biggest U.S. mortgage insurer, rose 75
percent for its best rally since July.
Schumer urged forming an agency to inject funds into financial companies
in exchange for equity stakes and pledges to rewrite mortgages and make them
more affordable. His remarks indicate momentum is building for some wider
plan after the Fed and Treasury's takeovers of Fannie Mae, Freddie Mac and
American International Group Inc. this month.
"The Federal Reserve and the Treasury are realizing that we need a more
comprehensive solution," Schumer, a Democrat who chairs the congressional
Joint Economic Committee, told reporters in Washington. "I've been talking
to them about it."
Morgan Stanley and Goldman began erasing their declines after the California
Public Employees' Retirement System and the New York State Common Retirement
Fund joined the California State Teachers Retirement System in deciding to
stop lending its shares of the two companies. The decisions curb the supply
of shares available to short-sellers.
Morgan Stanley is down almost 45 percent in September. Chief Executive Officer
John Mack, in a memo to employees yesterday, blamed short sellers for driving
down the price of his company's shares. Morgan may sell a new stake to China
Investment Corp., which owns a 9.9 percent position, and is in talks about
a possible merger with Wachovia, a person familiar with the matter said.
State Street Corp., the world's biggest money manager for institutions,
fell 8.9 percent to $59, paring a drop of as much as 55 percent. Federated
Investors Inc., the fourth-largest money-fund manager, fell 11 percent to
$27.10 after earlier retreating as much as 44 percent. State Street and Federated
issued statements saying that none of their money-market funds had fallen
below $1 a share.
It's hard to know where to begin. The stock market is rallying when we we
have not even seen the plan. If Schumer gets his way with an "agency to inject
funds into financial companies in exchange for equity stakes" there is going
to be massive shareholder dilution on top of effective nationalization of banks.
Action in gold was particularly interesting. The reality is the printing presses
are going to soar if this plan is carried out, yet gold after blasting to $910
gave nearly every penny of it back as the following chart shows.
Gold Daily Chart
Perhaps gold got ahead of itself, perhaps there is still more unwinding of
leverage by gold bulls upcoming. I do not know, and no one else does either.
If someone tells you they do know, the odds are that person was calling for
gold to hit $1500 and silver to hit $40 earlier this year.
I will repeat my long term conviction: gold is a buy. Shorter term there are
still many warning signs. The best thing for gold would actually be a long
term consolidation in this area as opposed to another parabolic blast higher.
Such blasts are very prone to failures as we have recently seen.
Ran Out Of Time
In Senate
Majority Leader Reid: "No One Knows What to Do" I commented on Senator
Dodd statement "There is not enough time left in the congressional session
for U.S. lawmakers to consider setting up a Resolution Trust Corp-type fund
to buy up toxic mortgage assets."
This is what I had to say.
No time To Do Anything
Thank God time ran out. Otherwise Congress would be doing something even
though "No One Knows What to Do". Besides, all Congress can do is make any
problem it touches worse by trying to fix it.
The biggest problem is that Congress does not even know what the problem
is. And unless you know what the problem is you sure as hell can't fix it.
Dodd thinks the problem is the "housing foreclosure crisis".
What The Problem Really Is
- The Fed
- Fractional Reserve Lending
- Congressional Meddling In The Free Market
- Congressional Spending
- An Unsound Currency
- An Unsound Banking System
For more on the banking system, inquiring minds may wish to consider You
Know The Banking System Is Unsound When.... and Don't
Worry, The Banking System Is Sound.
Sadly, I have to take back my proclamation of "No Time To Do Anything" with
the following warning: "Never underestimate the ability of Congress to do something
completely insane, no matter how little time is left in the session".
Paulson, Bernanke Seek Support for an Agency to Buy Bad Debt
Treasury Secretary Henry Paulson and Federal Reserve Chairman Ben S. Bernanke
will seek support from Congress for an agency to buy bad debt to address
the deepening credit crisis, a Democratic lawmaker said.
Paulson and Bernanke will speak with congressional leaders this evening
on current market conditions, Treasury spokeswoman Michele Davis said. Lawmakers
warned this week the legislative calendar makes it difficult for Congress
to act quickly enough to address a plunge in confidence in U.S. financial
markets.
Democratic Senators Christopher Dodd and Charles Schumer have said the Federal
Reserve, which is getting $200 billion in special funding from the Treasury
this month, has the authority to take on a broader role.
"The Federal Reserve and the Treasury are realizing that we need a more
comprehensive solution," said Schumer, who today proposed an agency to pump
capital into troubled banks. "I've been talking to them about it," Schumer,
a Democrat who chairs the congressional Joint Economic Committee, told reporters
in Washington today.
Schumer urged forming an agency to inject funds into financial companies
in exchange for equity stakes and pledges to rewrite mortgages and make them
more affordable.
Schumer advocated a Great Depression-era Reconstruction Finance Corp. model,
different from the Resolution Trust Corp.- type plan others have floated.
Another RTC, which was a 1990s agency that sold devalued assets in the Savings
and Loan Crisis, would "simply transfer excessive risk to the U.S. government
without addressing the plight of homeowners," he said.
An increasing number of lawmakers are advocating a stronger response to
the crisis sparked by record homeowner defaults. The turmoil swept Lehman
Brothers Holdings Inc. into bankruptcy three days ago and prompted government
takeovers of Fannie Mae, Freddie Mac and American International Group Inc.
this month.
Setting up an RTC-type of fund would require an act of Congress. House Majority
Leader Steny Hoyer said Sept. 16 a proposal to have the U.S. create an agency
to buy distressed debt won't be considered before Congress adjourns ahead
of the Nov. 4 elections.
Discussions with the Treasury and Fed focus on "trying to do something more
permanent" after the series of government interventions, the New York senator
said. For the Fed, "it's hard for them to do monetary policy, which is their
primary task, and then run all these businesses," he said.
Fed officials announced an $85 billion takeover of AIG two days ago, hours
after leaving their benchmark interest rate unchanged in a decision that
rebuffed some investors' calls for a cut.
"There is some preliminary discussions about how to sort of encapsulate
and separate the two -- both to keep focus on monetary policy by the main
Fed leaders, but also to prevent any conflicts of interest," Schumer said.
"The series of ad-hoc interventions in the market over the past 10 days
were important to avoid a systemic disaster," Schumer said. "But we cannot
continue to act in such an uncoordinated and ad-hoc fashion."
Under Schumer's RFC plan, "the government would come first," he said. "The
government would get repaid before the others in the financial chain."
Government First?
Who believes that? I don't assuming "government" means taxpayers. However,
that does not mean shareholders get of scott free either. Still it's hard to
comment on a plan that we have not seen yet. However, I can comment on global
coordinated panic.
Global Coordinated Panic
Every one of those actions was announced today. It is the biggest global panic
in history.
That panic is on the heels of ...
Futures Soaring
If you are recently short this market you are screwed. S&P futures are
+34 (nearly 2.8%) and that is on top of today's rally. It just so happens (and
if anyone thinks it is by coincidence they are nuts) that tomorrow is triple
witching options expiration.
Q&A
- Is this blatant market manipulation? Of course it is.
- Is the government acting to suppress the price of gold or silver? No, gold
and silver is the least of governmental concerns. If you are paying money
for any newsletter that claims otherwise, cancel it.
- Can we expect more manipulation? Absolutely, count on it.
- Will this bail out the stock market? No. However, it is a massive transfer
of wealth from little guys who are currently short to the market makers.
- Will this rally fail? Yes, but it is a pure guess when. This can be a gap
and crap tomorrow or it can last a choppy 3 months.
- Will this solution resolve the fiscal crisis? No, it actually makes it
worse.
Weak institutions need to die. It is an enormous waste of capital to prop
them up. Instead of wasting money bailing out the likes of Washington Mutual
or Wachovia the US could be rebuilding infrastructure instead.
There is over capacity in housing. That overcapacity needs to be annihilated,
not added to.
Every proposal above by Congress and Paulson amounts to fiscal insanity. Yet,
the stock market is cheering wildly. In my opinion this rally will not hold.
However, the rally will hold long enough to destroy any overleveraged bears,
especially those in front month options.
This is one of the reasons for an old Wall Street adage that goes something
like this: "Bear markets destroy the bulls and bears alike".
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