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Obama Administration Calls for "Second Stimulus"

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As the stock market begins to show signs of the bear, policy makers look to a new $200 billion stimulus package, quantitative easing, or both.

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The stock market has been showing signs of the bear for less than a month and already Washington is calling for a second stimulus package.

An article in this morning's Financial Times says that the Obama administration asked Congress yesterday for a new set of spending measures -- called the "second stimulus" -- to keep the economy from dipping back into a recession. The plea was made by senior economic adviser Lawrence Summers, who asked Congress to pass $200 billion in spending.

His plan calls for more loans made to small businesses, an extension of unemployment insurance, and aid to states to prevent teacher layoffs. The announcement is expected to be met by resistance in Washington as right now Congress is looking for ways to cut spending, not increase it.

While $200 billion may sound like a lot, it may not be enough and it could only calm the market temporarily. Bob Janjuah, a strategist at RBS, released a note yesterday saying that policy makers won't like deflation (the US is basically one poor CPI report away from deflation) and will do everything to inflate the economy. Janjuah calls this the "last real roll of the dice," which he believes will be a new quantitative easing program by the Fed of $5 trillion to be released sometime in the fourth quarter.

Stimulus, quantitative easing, or both, expect policy makers to make a move soon before the market loses all confidence.

How to Play It:


Just because the bear is back doesn't mean the world is going to end. That said, as of this writing, the S&P futures are down 2.5% and it looks like the market will open near the February low of 1044.

For those who don't like to short stock or write calls against long positions, the best way to protect your portfolio is by using the Ultra Short S&P 500 ETF (SDS). Other ultra short ETFs to consider are the Ultra Short QQQ (QID) and the Ultra Short Financials (SKF).


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No positions in stocks mentioned.

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