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Monday Morning Quarterback: Can Stella Get Her Groove Back?


People must pull themselves out of this mess....


"I ran out of gas. I, I had a flat tire. I didn't have enough money for cab fare. My tux didn't come back from the cleaners. An old friend came in from out of town. Someone stole my car. There was an earthquake. A terrible flood. Locusts. IT WASN'T MY FAULT, I SWEAR TO GOD!" -Jake Blues, The Blues Brothers

A lot of things are wrong in the world right now. Levees are bursting in the heartland, polar bears are drifting on puddles, energy prices are absurd, home values have fallen in the abyss, wars rage in the Middle East and air fares, college tuitions and healthcare are unaffordable to those who need it most.

Heck, recent reports even show that Las Vegas brother business is down 45% and Beverly Hills plastic surgery is off 50%!

Want to get away from it all? Easier said than done considering the sad state of the U.S. dollar, which has fallen almost 40% since 2002 as a function of U.S. policy to prop up asset classes. If you're lucky enough to find an on-time plane, be wary of landing in China, where 70,000 people passed in the quake, or Myanmar, where six-figure souls were saddened by the cyclone.

No worries, you say, you'll stay at home and watch the tube? The writer's strike stopped many of our favorite shows mid-season and actors are threatening the same. We've always got sports, right? Sure, if you like baseball stars on steroids, basketball referees on the take or euthanized horses at the end of the race.

Indeed, according to various polls conducted this weekend, the mood in the U.S. has never been dourer. It's up to we, the people, to pull ourselves out of this mess one person at a time. The problem, as we've been documenting on Minyanville the last few years, is that when the going gets tough, as it is now, the tough have a tendency to take care of themselves.

I don't highlight this to be a Debbie Downer. I, like most of you, have much to gain from an economic upturn and sincerely hope that we'll soon climb this wall of worry. Instead, I'm offering necessary perspective such that, while we hope for the best, we can prepare for a more somber potential reality. Remember, as we said last week, the stock market crash didn't cause the Great Depression-it was the other way around.

Keep your chin up, your thoughts pure and your mind open. Now, more than ever, we need to dig deep and reach down, summoning the strength to carry on while remembering the immortal words of Ruby Peck: This too, shall pass.

Random Thoughts

  • As our ultimate destination pales in comparison to the path that we take to get there, I used the cascading prices into BKX 60-which are ten year lows and the last level of near-term support-to buy some upside calls in the banks late Friday. Names include Wachovia Bank (WB), JP Morgan (JPM) and Citigroup (C).

  • This, of course, is a pure trade. In a perfect world-and if I sense that the wheels will wobble on the wagon anew, I'll short some S&P against them with an eye on the eye-popping wishbone we've been discussing. As Minyans know, one of two things must happen-either the banks must bounce or the S&P is gonna do the Wiley Coyote-Cliff thang.

  • Peering around the corner, the next "best bet" for the bovine is a successful retest of the March lows. If (big, monster IF) S&P 1275 holds, the technical types would be emboldened for a trade. And yes, I offer this as "higher futures following a market melt" typically get tested to the downside.

  • China Check? Down 2.5%, to Shanghai 2760. Remember, 3000 is, er, was the level of lore.

  • Ya think it's Hank Moody out there? The latest weekly AAII (American Association of Individual Investors) Survey reading came in at a -22% (% bulls less % bears), which is the third lowest reading this year (worse readings during the March lows). Merrill's latest portfolio manager survey reveals the highest bearish in the past 10 years (more than '00 and '03) according to the FT.

  • Given that the market moves in three phases-denial, migration and panic-does oversold "matter" given that the panic phase typically occurs in an oversold (or overbought) condition?

  • Do we need to see forced selling and redemptions before this phase of the muck passes?

  • Do you think she'll let me borrow it?

The Three Phases of Leave

Circling back to Pepe's post on Friday regarding nationalization, I'll offer that there are three distinct phases of government intervention.

The first is the massive liquidity injection and auction facilities that have been in play. These are "structural crutches" aimed at alleviating the stress in the system.

The second will be increased legislation, as evidenced by the Lieberman proposal, as politicians reactively address problems that persisted in the past.

The third will be outright nationalization, although that prolly won't come into play this year (or next).

The standout factoid in Pep's post is that during the Great Depression, the government accounted for upwards of 70% of GDP. That's above and beyond the three phases and something I expect we'll see a lot more of in the coming years.

Not being alarmist, just being prepared as we stare into the eye of a multi-year de-leveraging storm.

Good luck Minyans!


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