Today's Sneak Peak for September 08, 2008 - Excerpt from the Bedford's
Tradecraft Newsletter
All week I have been singing essentially the same
song. I have been suggesting that the market would continue lower into
Thursday's close where I would want to be aggressively long with the expectation
that the Feds (Federal Reserve, Securities and Exchange Commission and Treasury
Department) would fire some sort of "magic bullet" Friday before the
open. The reasons for this strategy were simple; The stock market was in
trouble and the Feds knew this. They watched seemingly from afar as Lehman
Brothers (LEH) and American International Group (AIG) bit the dust in
quick succession. They urged frantically that private investors step-up
and help both but none were forthcoming. They wrung their hands suggesting
that they would not subject the taxpayers to further potential losses. In
the end, they let Lehman go but stepped-up and put the taxpayers on the hook for
$85 billion with American International Group. The feds looked absolutely
inept. Thursday morning, in the wake of further losses even after they
bailed-out American International Group, they got together with their friends
across the pond and to the North and pumped massive amounts of liquidity into
the system. For a while, it seemed to work as the DOW squirted to a 214
point advance in the early part of the session. Bulls were back... or so
it seemed. But that rally quickly faded when rumors began to hit the tape
that several regional banks were having their own liquidity crises.
Indeed, at one point State Street Boston (STT) skidded to a near
50-percent loss in very active trade. Now, make no mistake, these regional
banks are having liquidity issues. That is not in doubt. A great
many of these firms have seen their access to capital completely dry-up.
Still, with the spotlight on money center banks and insurance firms entangled in
the derivatives trading mess, they have largely flown under the radar.
Yesterday, bears turned toward the next vulnerable targets and the stocks slumped
in a major way. That is when something very amazing occurred. Across the
ocean, the United Kingdom equivalent of the SEC prohibited short sellers' participation
in the British capital markets. As you can imagine this sent shivers up
the spines of stateside short sellers. Their British friends were
essentially being put out of business. American bears began to cover short
positions. The DOW, that had been as much as 100-points lower in the
afternoon slump, quickly rallied to positive territory. The gain for those
heavily shorted regional banks was more pronounced. Indeed, many reversed
all of their early losses and stood near unchanged. It was
remarkable. Still, the market began to settle lower again. It looked
as though I would get my decline into the close Thursday after all. Then,
CNBC reported that the Feds were working on a magic bullet. This was to be
a bailout of epic proportions that would essentially take all of the toxic paper
held by banks and replace it with treasury bills. In the wave of a hand,
the root of the credit crisis would be erased. Magic. The market
soared, advancing some 400-points for the DOW. Now, it is tempting to
dismiss all of this as some sort of slight of hand that will not work.
While that may be true longer-term, in the short term this is the dream scenario
for bulls. Taxpayers are going to eat a good portion of the losses.
Stocks are going to move higher, perhaps dramatically so. I will be a
buyer of any early weakness. While I expect the market to open significantly
higher Friday, there should be periods of weakness. Use that to add long
positions.
