"You know what the news is-- in a minute, you're going to hear the rest of the story"- Paul Harvey
Despite yesterday's 400+ point rally, the disciplining process is not over. Prudent investors who were alert enough to recognize the irresponsible excesses prior to the credit crunch are now sitting in the catbird seats as stocks bargains appear across all three major exchanges.
It seems as if Americans are always scared of something. The current housing downturn is being heralded as the worst since the Great Depression. And consumers who received daily solicitations from credit card and mortgage companies are finding out their newly found money wasn't free after all.
Alert investors could have seen the current wave of bankruptcies coming if they had just paid attention. In 2005, I told investors that the timing of new bankruptcy law signed by President Bush (Bankruptcy Abuse Prevention and Consumer Protection Act of 2005) was a little odd. Well of course now we know why the new law was enacted.
You can tell me that the administration and corporate America (lenders, credit card companies, etc...) didn't see the credit crisis coming. Almost 12 months before the signs of economic trouble appeared, the new bankruptcy law was enacted.
Now that irresponsible consumers are paying the price for overspending and over borrowing, they basically face two choices when declaring bankruptcy;
1) Chapter 7- A court supervised liquidation of personal assets to pay creditors as much as the assets will allow. These debts are primarily consumer debt.
2) Chapter 13- Which basically allows individuals with jobs to pay off their creditors with future income rather than a liquidation of their property.
Of course, if a person’s job has been outsourced to a foreign country, and they have been unable to find a new a job, their assets will be liquidated under Chapter 7.
After the Bear Stearns news on Monday, the brotherhood of investment bankers came out today and began defending one another. Lehman and Goldman Sachs were upgraded by the brotherhood after a Morgan Stanley analyst said "it was time for the bears to ease up on the financials and for shorts to cut their positions".
Huh, after this little piece of advice from MS, it maybe its time to doubled down on the short positions.
Goldman Sachs upgraded Lehman to a buy from neutral, and Wachovia upgraded Goldman Sachs to a buy from market perform.
This morning’s early rally came after the government eased capital constraints on Fannie Mae and Freddie Mac, essentially allowing the companies to buy more mortgages.
Gold and Energy are down on profit taking. I've thought for sometime that oil and gold were overheated and due for a pullback. Another thing to consider is the Fed is close to ending the rate cuts, and once rates begin to rise, gold, energy, and commodities will fall.
We seem to be on the verge of witnessing two extremes in the market place. One extreme is the bubble that seems to be building in commodities and in precious metals. The other potential extreme would occur with a sell-off of another 1000 points in the DJIA.
I think it would be wise to sell the first, and buy the second.
The big news on the day was the initial public offering of Visa (V). Visa shares are up 15 points at $59.03
