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BAILOUT BY US FEDERAL RESERVE, WARREN BUFFET BUYING BROKERAGE SHARES, FEAR RISING, GOLD BENEFITING

In Uncategorized on September 25, 2008 at 2:07 pm
US FEDERAL RESERVE BAILOUT…. The public is outraged at the $700 Billion price tag and “golden parachutes” given to the leaders of the failed firms. Philosophically, I disagree with the bailout because of the potential “moral hazard”. Why should the large investment banks be saved by the taxpayer for mistakes that they made? Pragmatism, however, must trump philosophy in times like these. The entire financial system took a look into the abyss when Lehman Brothers failed last Wednesday, and it didn’t like what it saw. The bailout was necessary. The market needed saving. Period. The fallout of a collapse of the financial system would have been far worse for the taxpayer.

Freddie Mac Chairman and CEO Richard Syron’s total compensation last year was $19.8 Million while his stock has gone from $65 to pennies.



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WARREN BUFFET BUYING INTO GOLDMAN SACHS… Recall that I have written that bank stocks may have bottomed (August 28th update). Reports indicate that Mr. Buffet is buying a large position in troubled investment bank turned commercial bank Goldman Sachs. The lows from July on the banking index have held in the face of enormously bad news, and I am confident we have seen the lows in the banks. Buffet was on CNBC saying that six months from now we will look back on this as a great buying opportunity.

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VIX FEAR INDEX… now at 36.65, has eclipsed its recent peak of 36.22 on 9/17/08, which was the highest level of Fear since 10/11/02. Previously, VIX fell from a peak of 32.64 on 3/17/08 to a low of 16.30 on 5/15/08, indicating decreasing Fear. The all-time high was 45.74 on 10/8/98. The all-time low was 9.89 on 1/24/07. If the VIX can moderate at this level or go lower, it would be positive for stocks.

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GOLD BENEFITING FROM FEAR AND INFLATION… The $700 Billion dollar bailout and rising fear (above) has put a bid into gold. Mad Money host and ex-hedge fund star Jim Cramer recommended gold on his CNBC show. According to Jim, it’s “Heads you win” and “Tails you win” with gold. Heads you win if the bailout is not approved on a timely basis. Failure quickly will cause a collapse in the world’s financial system and a flight to financial security through gold. Tails you win if the bailout is approved. The U.S. Dollar will drift lower, boost inflation and trigger strength in gold.

COMMENT: The most difficult part of this business is that people demand certainty where there is no certainty. My experience is that the older and more experienced the client, the less demand for certainty. They accept that we are dealing in probabilities. If we are right 3 out of 10 times, but keep our 7 losses to a minimum, we will deliver reasonable positive returns. As the famous economist Keynes put it “When the facts change, I change. And what do you do, sir?”

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GOLD STAGES LARGEST RALLY SINCE 1979, OIL RALLYING, FEAR INDICATOR SUGGESTS SHORT-TERM BOUNCE IN STOCKS

In dow theory, Gold, OIL on September 22, 2008 at 1:53 pm

GOLD RALLIES ON FLIGHT TO SAFETY… Investors worried about soaring inflation spurred by the bailouts of AIG, Fannie May and Freddie Mac pushed gold up to $878 an ounce. The Federal Reserve in the US is leading the rescue party. An increase in the money supply causes general price levels to rise. Gold is a hedge against such price increases. Also, the Chinese newspaper The China Daily carried an editorial urging diversification out of US$. The buying stampede in gold, known as a “hard” currency, resulted in the largest one-day increase since 1979.

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OIL RALLYING AFTER 50% RETRACEMENT… After a massive move in oil to a record $150 a barrel, the July to September correction took prices back near $91. This coincided with an OPEC statement suggesting $90-$95 Oil was acceptable. Now I’m looking for oil to rally back to the declining blue trendline around $107-108.


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VIX HITS HIGHEST LEVEL IN YEARS… The market’s “fear” gauge hit levels previously seen only at short-term bottoms in the stock market. Generally, spikes to extreme levels are followed by short-term rallies. Yesterday’s panic selling in US financial stocks may have been one such time. Once the fear starts to subside (as it is today – highlighted in yellow) it usually results in a market rally.

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