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Bedtime with BTIG Market Observations

September 24, 2008

"One thing is for sure, by taking such aggressive action, and going beyond the market's expectations, the Chairman has put his credibility on the line in a very big way. I hope he is prepared for the Dollar to break down to new lows in the near term and Crude to go through $100 over the intermediate term. Those are two predictions that appear to be low risk calls to make at this juncture. When those events occur, the finger will automatically point at the Fed. Those are two challenges that Greenspan did not encounter during his last couple of easing campaigns. A weaker dollar, as Food and Energy are rising, will hurt the little guy more than anyone else. Just in time for an election year. The Democrats should have a field day. I can see it now, Fed bails out Wall Street executives making $35 million a year, the average American pays the price at the pump and the supermarket." Bedtime with BTIG, September 18, 2007.

We made those comments a year ago when the Fed opted to lower interest rates to ease the burden at financial institutions rather than force financial institutions to clean up their messes. To our own amazement, a year later, they are more true than ever. What we have witnessed over the past year is the failure of the Federal Reserve's twenty five year policy of lowering interest rates in order to support asset prices. In the current environment, the problems were too great and the Central Bank's response was too friendly. So now that the Fed's major policy tool is broken, we have hit the point where we finally need to print and spend actual money. As Congress performs its necessary due diligence, we cannot blame our elected officials for their contempt of CEO pay since we expressed the same concern ourselves and it is obviously a feeling shared by most of Main Street America. The obvious retort is that in most cases, the executives who presided over the creation of the current mess are no longer in charge. While we still do not doubt that a deal will be reached, the Equity market remains in a holding pattern and the credit markets more seized up than ever while the details of the bailout are being worked out.

Anecdotally, the response to Warren Buffett's investment in Goldman Sachs was rather interesting. A great deal of attention was given to the attractive terms that Buffett got and that they were a result of some type of implied weakness. From our perspective, since Buffett gave up on Wall Street firms over a decade ago (we thought for good), it's hard to find any negatives in this story. In addition, an institution whose business model was described as "broken" last week just raised $10 Billion in capital. Again, it is hard to not view that as a positive for the market. We like the negativity, however, as an indicator that hope is breaking. If we thought there were significant shorts in the market, we would think the market is setting up for a major rally. Instead, the government has distorted the mechanics of the market. With what appears to be an extension of the short sale rule in the mix, traders have no choice but to hold onto their short positions. They do not need to worry about short covering rallies or buy-ins, and once a short takes off, they do not know if they'll ever be allowed to put it back on. It is amazing how this ban on short sales is such a bearish dynamic for the market. That being said, we still remain in the constructively bullish camp for the intermediate term. If the Treasury Secretary and the Fed Chairman get their way (the real question is how much will it be watered down), the market could explode to the upside. It will be an extremely bullish short/intermediate term event, but a bearish long term event.