Wednesday, November 26, 2008

The Market Likes TARP2

So, the market's moving, the technical internals are improving and it seems as though the bear rally may be gathering steam. What is the market responding to, and will we get more of it? Or to quote the R-Man, "
Classically, based on over 70 years of Lowry's data, a series of 90% down-days followed by a 90% up-day signals the end of a bear market and the beginning of a new bull trend. Is that what happened this week?" He thinks yes.

It look as though the market likes the fiscal stimulus package out of the UK, the one coming from Europe, the new TARP, the Citi saver plan and the massive stimulus/easing out of china. The fiscal packages are easy to understand: it's the trigger we thought would cause a rally as it feeds directly into the economy and boosts demand, thus picking the velocity of money up from a stand still. It makes investors hope/think that the recession we are all in will be shorter and more shallow than Roubini has been saying.

If, please, if we get a fiscal package in the next 2-3 weeks from the US, then we have a real chance to get back to the Dow 10's. The bear market rallies from the past range anywhere from 30-50%; up 50% from 7500 gives us 11,000. We are up about 15% so far. For perspective, until Nov 20, 2008 was shaping up to be the worst year in the history of US stock markets, down 48%. That's worse than anytime since James Madison was President. There's gotta be some value in there...

We have made it through a reporting season so EPS numbers are likely to remain, while deeply at risk, largely unchanged until late January. So for now, PE's are cheap, measures against book value are cheap, analysts are going positive and it appears that over half of the equity delevering by hedge funds is over (we may have another week or so of redemption risk). Best of all, the percent of equity analysts bearish on stocks is at an all time low - the perfect time to get positive.

The new TARP is the real story, however. It immediately puts a stop to the two week balance sheet deterioration of the banks caused by TARP1 turning into TERP. The market likes the attempted recapitalization of banks, but doesn't see how it helps housing in the near term and isn't really sure that buying preferred shares is the way to go.

But backstopping $600b in crappy assets on the bank balance sheets and buying F'nF securities does give confidence to investors and begins the process of putting a floor in housing related securities - the key, I think, to investor confidence. In fact, 30 year mortgage rates have plunged in the last two days in response to the TARP2, which will spur loads of latent refinancing interest and maybe housing demand. The normal spread between 30 M rates and the 10yrT is about 1.30%; a week ago it was 2.35% and it's now 1.70%.

The further $200b of consumer lending support of TARP2 acts as a psuedo fiscal stimulus; it's money that supports financing companies buying the consumer debt, in theory adding to the availability of capital for consumers. Add in the brobdignanian backstop of Citi - $340b of pure government inflationary muscle - and confidence grows further. Collectively, these Fed efforts are flattening the yield curve, a first sign
in months that their efforts are making a difference. I think the pro investors have been waiting to see this.

So, next week we get the Eurozone fiscal stimulus, followed by news of the car rescue - which looks to be passed on to the next administration, and a hopeful US stimulus package. Maybe we do get a nice December rally. I'm back in a small SSO position at $23 with stops; I don't really know what bottoms up names to pick, so I'll look to add to this position.

The only group that has shown strength is the construction/remediation group - GVA, ACM, URS. But they're all up 50-100% off the bottom. Oil will move on any rally, in the hope that economic recovery is sooner rather than later, but that will be a trap. The TBT look s very oversold. We are looking for a further move down in long bond yields, but the moves of the last week have been too big. In this world just described, EEM would also be a good place for upside - lots of commodity exposure.

If there is a sustained rally, look for the Dow to move above the 50 day MA, or 9287, for some metric of confirmation. The Dow has been amazingly faithful to simple technical levels. The next stop is the Nov 4 peak of 9625. The 50 week MA has just crossed down on the 200 at Dow 11500; that's obviously bad for the longer term but may provide a market top for the hopeful rally.


Post a Comment

<< Home