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September 6, 2008

No BS Rally

As you may have heard, the Treasury is once again tinkering with free market mechanisms under cover of false prudence. In order to shore up the debt of Fannie Mae and Freddie Mac... which, by the way, is owned en masse by Paulson's old colleagues... the GSEs are getting bent over and injected with liquidity. But it the middle-class taxpayer who is getting boofooed. What really grates me about this behavior is that liberal twits will point to the ill effects of these actions as evidence that capitalism does not work. I've got news for you: Capitalism works fine. There is no better economic system yet to be invented by mankind. It's the corrpution that ruins everything, and corruption is not a byproduct of capitalism. It's a byproduct of humanity.

The government's latest monetary malfeasance sent share prices for the GSEs plummeting in Friday's late session as if the news were some big surprise. I don't believe for a second that this move was unanticipated. After all, Paulson obtained a carte blanche from Congress for this purpose over the summer. It's the timing that was unforseen. No one thought this bailout would unfold so soon, and I suppose some gamblers who were shooting for a quick 30% had to dump their bets on FNM and FRE into a thin market.

I also don't believe for a second that the news of this bailout is going to produce a Bear Stearns-like rally. (Let's call it a "BS" rally for the sake of brevity.) The initial reaction in equities is likely to be higher as people buy into such a concept, but I think the pop will quickly fail, and by "quickly" I mean by mid-week, but perhaps immediately. For one, the general underlying optimism behind the government's bailout efforts is thinning. The Bear Stearns rescue was seen in the light of the LTCM rescue: a one time, "sweep it under the rug and lets get back to the punchbowl" kind of optimism. I get the sense that folks are finally waking up to the scope of the issues facing the world of credit. Besides, they watched the BS rally fail in nasty form in June. Who is going to eagerly step foot into those waters again?

Second, the market was already sold out when Bear Stearns danced across the newswires with Bernanke's balls in tow. Take a look at these rather reliable indicators of selling extremes and tell me if you think a major rally will be launched from here:

indicator chart

indicator chart

indicator chart

VIX chart

There is simply no impetus for a big rally here. In fact, in most cases it appears like the selling is just getting underway!

Fannie Mae, you are no Bear Stearns.

 

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