When it Comes to Bailouts --- Congress Be Nimble, Congress Be Quick

But if history is any example, Congress usually falls when jumping over the Candle Stick --- at least for the first few times. Take a look at what I wrote in 2009 and tell me if it sounds eerily similar to what is happening today. Does this mean that as humans we don't learn from our mistakes? I would hope not but wow the similarities cannot be overlooked. If you're lazy I'll paste a few excerpts here from the initial 2009 bailout response from Congress (https://urbanomics.blogspot.com/2008/11/bailout-tarp-abandoned.html):

2009: "Here goes another I told you so. The bailout money allocated to buy distressed assets was abandoned by the Treasury Department. 

Fundamentally I agree with the fact that a bailout is needed but I have noted that the government needs to address both the supply and demand side of our economy. On the Supply side, I don't mind the Treasury department injecting cash into banks but I do think that one of the strange things is that but private investors like Warren Buffett are brokering better deals then the GOVERNMENT is. Part of the problem is no oversight or poor oversight because these banks are not lending to the public!"

2020 - Fast forward to March 23, 2020, the bailout provision did not pass the Senate last night. This will undoubtedly cause the stock market to fall swiftly even further, and oh boy is it ever. With a majority of my investments in cash, you have to take history into account. Everyone I talk to NEEDS the market to go up I assume due the sheer amount of leverage they have in the system. While I am hopeful as well, risk management IS NOT about hope. It's about threats and likelihood. I am certain no matter what the climate is, politicians cannot do the right thing the first time around. Similar to the courageous fighters "300", that they are NOT --- until the markets are truly crashing and panic is all around will something finally get done. Look at 2009, same circumstances in 2020. Compromise, take care of people first, protect your companies but make then remember the pillars so we learn from our past mistakes. 

2009: "Where do we go from here:

The markets will continue to trend lower or remain in a trading pattern. When I first spoke of actions to take to address the direction of the markets I recommended most folks get a majority of their money out of the market and into bonds. Then the Dow Jones Industrial Average (basket of the 30 large stocks representing the US economy) was trading around 9000 and my guess was that we would head lower and test recession like lows. The last time we could compare lows like this was in roughly 2002-2003 when the market hit lows of roughly 7700 (I believe). My assumption is that this will be the prudent time to begin to reallocate your portfolio back into the market. Again that is an assumption because I don't really think that this last time can be effectively compared to now. We are facing a local recession, rising probability of a global recession (in most areas except for China), and if these conditions exist we could be facing a depression due to deflationary pressure. This could be the one area that I initially got wrong...I thought we would be facing inflationary pressures or rising costs but that appears to be far down the line. Right now deflation is running wild and that is evident is the sharp decline of prices across the board. Gas is down from $4.00 to now roughly $2.00 and everything is falling with it, stocks included. If this trend continues deflation could lead to an extended recession and Dow 7700 may not even be a legitimate floor for the market."

2020: Again striking similarities. Gas then dropped dramatically to $2. Where are we now in 2020... this exact same range. I have not looked at the charts but my gut tells me we are headed to the highs of PAST which are significant lows from where we were just a month ago. Let's flash back the good times in 2007 and 2013 as examples:

Before the Crash we topped 14,000 on the DOW in 2007: https://urbanomics.blogspot.com/2007/07/dow-take-bow.html

After the Crash we hit 14,000 in 2013: https://urbanomics.blogspot.com/2013/02/dow-at-14000-pt1-are-you-too-late-for.html


We will get a bailout package in the next few days. Then expect the markets to bounce with euphoria. But then we will have to live with the unwinding process. If many of us are trying to get by living paycheck to paycheck...not everyone can be bailed out. Usually you see/hear debt or margin calls (people calling say you owe them money), foreclosures, evictions, etc. I am proud of the companies that have stepped up and delayed these payments already. But its a band aid measure. But proud non the less. I have not looked at the charts yet so this is not a prediction...but this could be a psychological number that is tested as it has been in the past.

Exchange Traded Funds (ETF) Mania...

There has been a lot of buzz about the ETF industry and the flexibility it gives the average investor of trading like the pros. You can buy or sell short industries and sectors and even multiply the effect of your returns 2x or 3x the daily amount. One ETF that I would like to discuss is Direxion Financial Bear 3x Shares (FAZ)

FAZ seeks to increase the magnitude of a decline in financial stocks by the tune of 3 to 1. When you pick up these shares be ready for the crazy ride you will be on. On any given day this ETF can fluctuate from a difference of over 10 points from the high and low prices of the day! With the banks desparate for the release of the second half of the 700 Billion dollar TARP fund this could continue to fuel FAZ's rise. I see one of two scenarios coming down the pipeline:
1. More investments from the government into financials mean more stock dilution; or
2. A program to get rid of the bad bank assets means huge write-downs for the banks

Use FAZ for no longer than a day as you can end up on a downward slide very quickly. I am already in the red on the timing of this play and will cut my losses short. However, I will intently watch the financial sector and during periods of weaknesses this will definitely be a way to use a little bit of money to maximize your returns.

Been Busy...

Some would say being right on the money. Well lets look back at over four months ago, when we told you to re-allocate your portfolios because the worst ain't here yet. And what have we seen is that are call is right on. The Dow has continued to plummet to the level I thought we wouldn't hit for awhile. and that is roughly around Dow 8000. This is a compelling moment because months ago I said that I would recommend that we all start inching back into the market, but at this point the news continues to be bad. Just searching articles on the internet you may come across these themes: Banks Need the rest of the TARP Bailout - Citigroup is selling their brokerage unit! - Bank of America is showing signs of cracking Retailers are not looking good. - Even Walmart sales are declining - Circuit City can't find a buyer and is liquidating all their stores!! Unemployment rates continue to rise - GE Capital is set to shed 11000 jobs Downgrades send stocks to their 52week/all-time/all world lows There is no strategy when the headlines read like this. The only thing is to stay the course with the consistent message that we've had before. I repeat I am and have recommended that you are completely out of the stock market and fully allocated to Treasurys and cash assets. This is especially true for your 401K portfolio because it primary purpose is capital preservation...not appreciation. A portion of your portfolio needs to be exposed to the market and I recommend that you have your own trading account where you can DO IT YOURSELF (DIY)...I don't need Bernie Madoff or any other scandalous investors out there losing my money...when I can do that on my own. It this portfolio you should be shorting more that buying things. Find attractive price points (see previous posts on price points) for both buys and shorts:

SHORTS:
- SSG: ETF that shorts the Semiconductor Sector
- KBE: EFT that shorts the Retail Banking Sector
- Also short the retail, and credit sensitive sectors
BUYS: - BBY: Best Buy is primed for increased earnings now that Circuit City is going BANKRUPT
- V: VISA is down towards their Initial Public Offering (IPO) again after being downgraded

I'll be back to update this post later

Bailout / TARP Abandoned

Here goes another I told you so. The bailout money allocated to buy distressed assets was abandoned by the Treasury Department. I wrote here early, that this program was flawed for so many reasons. The biggest reason: "There was no way they could value the bad assets, manage them, or dispose of the assets correctly!!!"



Fundamentally I agree with the fact that a bailout is needed but I have noted that the government needs to address both the supply and demand side of our economy. On the Supply side, I don't mind the Treasury department injecting cash into banks but I do think that one of the strange things is that but private investors like Warren Buffet are brokering better deals then the GOVERNMENT is. Part of the problem is no oversight or poor oversight because these banks are not lending to the public! This would begin to address the demand side, however the banks are getting the cheapest money ever made available and using it to MAKE INVESTMENTS like buying other banks...SEE PNC Bank's acquisition of National City.


What the Government Should Require:

- All common stock dividends should be taken away
- Force banks to lend to consumer
- Punitive terms of the banks (firing managers)
- Goverment must get Main Street bank on their feet through mortgage adjustments, incentives for homebuyers to acquire homes, addressing unemployment, and some sort of stimulus (tax cuts/credits)



Where do we go from here:

The markets will continue to trend lower for remain in a trading pattern. When I first spoke of actions to take to address the direction of the markets I recommended most folks get a majority of their money out of the market and into bonds. Then the Dow Jones Industrial Average (basket of the 30 large stocks representing the US economy) was trading around 9000 and my guess was that we would head lower and test recession like lows. The last time we could compare lows like this was in roughly 2002-2003 when the market hit lows of roughly 7700 (I believe). My assumption is that this will be the prudent time to begin to reallocate your portfolio back into the market. Again that is an assumption because I don't really think that this last time can be effectively compared to now. We are facing a local recession, rising probability of a global recession (in most areas except for China), and if these conditions exist we could be facing a depression due to deflationary pressure. This could be the one area that I initially got wrong...I thought we would be facing inflationary pressures or rising costs but that appears to be far down the line. Right now deflation is running wild and that is evident is the sharp decline of prices across the board. Gas is down from $4.00 to now roughly $2.00 and everything is falling with it, stocks included. If this trend continues deflation could lead to an extended recession and Dow 7700 may not even be a legitimate floor for the market.