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!"
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!
Todd Harrison is the founder and Chief Executive Officer of Minyanville. Prior to his current role, Mr. Harrison was President and head trader at a $400 million dollar New York-based hedge fund. Todd welcomes your comments and/or feedback at firstname.lastname@example.org.
The information on this website solely reflects the analysis of or opinion about the performance of securities and financial markets by the writers whose articles appear on the site. The views expressed by the writers are not necessarily the views of Minyanville Media, Inc. or members of its management. Nothing contained on the website is intended to constitute a recommendation or advice addressed to an individual investor or category of investors to purchase, sell or hold any security, or to take any action with respect to the prospective movement of the securities markets or to solicit the purchase or sale of any security. Any investment decisions must be made by the reader either individually or in consultation with his or her investment professional. Minyanville writers and staff may trade or hold positions in securities that are discussed in articles appearing on the website. Writers of articles are required to disclose whether they have a position in any stock or fund discussed in an article, but are not permitted to disclose the size or direction of the position. Nothing on this website is intended to solicit business of any kind for a writer's business or fund. Minyanville management and staff as well as contributing writers will not respond to emails or other communications requesting investment advice.
Copyright 2011 Minyanville Media, Inc. All Rights Reserved.
Daily Recap Newsletter