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Social Studies: One-Two Punch of Bernanke and Paulson


While Bernanke officially opened the door for a rate cut on December 11th, Hank Paulson was banging out a deal with banks.


"Aloha Mr. Hand!"
--Jeff Spicoli

Do you remember how you felt in the middle of August?

The markets were meandering around these very levels as the wheels wobbled on the financial wagon.

Central banks and government officials pulled out all the stops to save the day as we wondered to ourselves what they knew that we didn't.

The collective mindset, as it tends to do, was reactive to the price action.

Things were good when the screens were green and fingers pointed as red spread.

The more things change, the more they stay the same.

We awake this morning to find a one-two punch from the dynamic duo.

While Ben Bernanke officially opened the door for a rate cut on December 11th, Hank Paulson was in the back of the bar banging out a deal with banks.

"If only we could freeze the rates on loans to sub-prime borrowers," he must be thinking, "we could stem the surge in foreclosures and sidestep the coming storm of adjustable-rate mortgages."

The reaction on the Street, at least out of the gate, is happy, shining people.

Perception is reality and the knee-jerk reaction is to buy first and ask questions later. That could spur the herd for a bit, particularly as year-end performance anxiety manifests, but these actions are troubling on a few levels.

First and foremost, you can't arbitrarily freeze select components of the market machination without affecting derivative markets. There are two sides to every trade and someone will be left holding the bag.

Details are still being ironed out, from what I understand, but I don't foresee this going through without government subsidy. I have the same view regarding the proposed super-conduit rescue plan. We never heard particulars on who was providing the funds but I would lay odds that Mr. Paulson and his deep pockets are involved at some level.

This is yet another step towards the socialization of our markets. Mr. Practical and I had dinner last night as we spoke about what we both believe to be the most interesting juncture in financial history.

For further reading on socialism in the markets, please see Minyan Satyajit Das' Socialism for Wall Street.

I posed a question to him. "Why did the government nix the CNOOC (CEO) bid for Unocal and the UAE run at the ports but we haven't heard a peep as China nibbles on Bear Stearns (BSC) and Abu Dhabi takes some Citigroup (C)?"

His response, which I suspected, was one word. "Desperation."

We've spoken about the Battle Royale for a long time as the 800-lb gorilla that is the credit crunch battles the elephants in the room that are global central banks and government officials. The stakes are great and the risk is mind-boggling.

History will tell the tale but the onus is on us to navigate it.

In the near-term, I have taken the trade on my upside rentals, including Schering Plough (SGP) and Pulte Homes (PHM), and added a spate of January puts in the S&P with a stop on the other side of 1490.

I'm not smart enough to know if we reverse today but given resistance and the rate of the recent rally, I'm happy to take some trades and take a shot. If we power through this level, the potential remains that we'll stay buoyant into the FOMC on December 11th before, perhaps, selling that news.

Good luck today.


Holiday Festivus is here! Come join us and support the Ruby Peck Foundation For Children's Education at an old-fashioned Southern-style hoe-down in the heart of New York City on December 7th. Click the image below to learn more!

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