Don’t get me wrong, it’s really nice to get back 2/3 of what was lost yesterday.  From the surface, it looks like a classic bottom.  Panic selling followed immediately by panic buying.  The classic “the train leaving the station” mentality.  Also, new bull markets and the end of bear markets usually come out of nowhere when nobody expects it.  In other words, investors have no reason to buy.  Too many people agree that they should be selling and have already done so.  That means eventually the selling gets exhausted and markets are buoyed up.  That’s what a bottom looks like.  Is this it?  I don’t think so.

When we dig deep into the numbers from today’s rally, it fell a little short.  Yesterday, we saw down volume was 98% of the total volume.  Today, up volume was about 88% of total volume.  It would have been nice to see real strength.  It was strong, but not strong enough.  We’ll take these days for sure but we’d have to see another day similar to this to get me real excited.  And then that would have to be followed by even more buying.  That’s what a bottom looks like.  Remember that I pointed out a few months ago that up 300+ points on the Dow usually come in a bear market going back to the 1990s, not in bull markets.  So, we have to be leery.  This market has burned too many people and has had too many headfakes.  Now, I didn’t sell anything today.  I’ll ride this wave as long as I can but I suspect we’ll have to jump off real soon.  

Today, the Jewish holiday started so volume was lighter as traders took today and tomorrow off.  We had some consumer confidence numbers come out this morning higher than expected which was startling to me and I’ve pointed out before this is correlated with the market.  Higher number, higher market.  But, why would it be up 500 points on just that kind of news?  That’s what volatility is all about.  It’s not just volatility to the downside.  Volatility means it goes up and down a lot.  That’s why I’ve been saying whipsaw risk is high.  If you jumped off and panicked yesterday, you feel real dumb right now.  Fear remains high and I suspect we could get some more rally from this but do not abandon your sell strategy, whether it’s price stops or conditional stops.

I want to make sure everyone knows what I meant yesterday in my post regarding allocation.  I was pointing out that there are some unbelievable deals and some of those should be bought if you have a ton of cash and not enough stocks.  But, if you had too many stocks and were not sleeping well at night because of it, then you have to continue to scale out by using time stops or selling some on good days like today.  Again, it’s all about your allocation right now.

I was wondering if the economic recovery bill would be a ‘buy the rumor sell the news’ event after it was passed.  We saw the markets mildly up late last week.  However, the unthinkable happened today when it wasn’t passed.  Traders were shocked.  The Dow went from down 170 to down over 700 in a matter of minutes when it looked as if the bill wouldn’t pass. Traders were literally staring at the televisions watching the votes as if it was a sporting event.  There were simply no bids.  Stocks across the board were down, some over 20% today.  Pure panic.

All I’ve heard the last two weeks is that we’re going to have a bipartisan bill.  I actually started to believe it.  What was I thinking?  I heard Pelosi’s speech today and realized that it’s business as usual. If you didn’t know any better, you’d think Pelosi wasn’t for it after listening to her.  But, it wasn’t just Pelosi talking bad about this bill.  Many Republicans voted no and were against this bill.  It’s really a strange situation.  You have a bill introduced by the President and the Secretary of the Treasury.  The Democrats were for it, tried to rush it through before McCain came up to the Hill.  They said they had a bill when there wasn’t a deal done.  Republicans, on the other hand, weren’t for it.  They got some changes in there but obviously there weren’t enough to support the bill.  Americans didn’t want the bill and mainly because of that, it didn’t get passed.  Congress didn’t want to get tossed out of office.  Politicians were on television saying they were voting for it but then said they hated it.  That doesn’t exactly exude confidence.  So, it didn’t pass and down we went.  And, it was nasty.

I’m upset with the politics involved and I’m upset that at the end of the day it didn’t pass.  I truly don’t think the average American and the average politician realize how bad the market really is.  Perhaps they’ll understand after today.  It’s not just the equity markets, it’s the credit markets.  Interest rates in treasuries are plummeting as investors are panicking.  Money is coming out of everything and going into treasuries.  Once again, there is real panic.  The credit markets are simply frozen and the people saying we need to get this passed quickly aren’t lying.  I see these markets freezing up.  It’s not good.  Something has to be done very soon or we might think this was a mild day.

If you’re asking if it’s time to sell, the answer is no.  You can’t sell on a day when there’s a huge surprise and panic to the downside.  With that said, if you’re overexposed right now (and that’s anybody with 1 stock), you have to use time stops to slowly get out.  That means averaging out so that you don’t miss the inevitable rally.  Fear is at an extreme high and markets are oversold.  Oversold can stay oversold for some time as I’ve been writing, but if you’re not forced to sell, don’t.  If you’re in 100% cash, look at the bargains.  There are plenty out there.  Apple, for example, is down 50% from its high around $200.  I’m not buying yet, but it’s on the radar.  I’m not one of those guys that all says buy the dips.  But, I think as I mentioned the other day that you have to look at everything you own at time like this and decide what do you need more of at a time when it’s on sale.  I think we’ll look back in a couple of years and wonder why we didn’t buy the biggest banks in the world and very cheap prices after the government was doing everything they could to make them profitable and they were able to gobble up competitors and bargain basement prices.  If you’re not panicking right now and you are properly allocated, then you can use this time to rationally look at the bargains and decide where to put your capital.  Days like today remind us where we are overallocated.

There are some estimates saying that if Paulson’s plan goes through, there could be over $1.3 trillion of profit.  I don’t think that’s out of the question.  I’ve discussed that this plan isn’t an expense, but an investment.  It does put American taxpayers at risk for $700 billion.  No question about that.  However, I believe it’s a very good trade.  And, that’s really what this is.  It’s just a huge number.  But, let’s say that the Treasury does make money on this trade.  Why not propose that instead of wasting the profits (as they probably would), the Treasury sends out a rebate check for the profits?  I think the American public would view this plan a little differently.  

Just a thought.

A friend of mine called me last night and said three people at his company had told him they were taking cash out of the bank and literally stashing it at home.  He asked me if I thought he should do this?  My obvious answer was no.  But, at that moment, it dawned on me that this is like Y2K.  Do you remember the fear in December of 1999?  Do you remember the panic?  That’s where we are right now.  Do you remember how silly those same people looked when January 1st, 2000 everything worked fine and they had 50 gallons of water in their house, rolls of duct tape, & mountains of canned goods?

This isn’t just a money issue.  It’s a confidence issue right now.  People are freaking out.  And, to be honest, I don’t blame them.  Borrowing costs for banks is skyrocketing.  Treasury rates are falling as investors seek safety.  Banks are failing.  Banks aren’t lending and they aren’t borrowing.  Stocks and bonds are falling.  And, our economy is probably in a recession and it’s going to get deeper.  So, they have reason to be scared.  But, to start stashing cash?  That’s going overboard.  Let’s be clear.  Things are serious.  They need to get a deal done very quickly.  But, this isn’t the great depression. 

Diversification

We don’t need to stash cash under our mattress.  However, it is a time to diversify and it has been.  I’ve been writing about diversification for some time now.  Investors got so used to (and a lot still are) keeping almost all of their savings in stocks/mutual funds.  We haven’t gone anywhere since 1998 measured by the S&P 500.  That’s a long time but it’s actually very normal after a run from 1982 to 1998 of basically going straight up.  So, going sideways for several years is normal.  We did it in the 1960s and 1970s.  You have to own real estate, stocks, bonds, private deals, cash, etc.  You would have thought the 2000-2003 bear market would have taught people to diversify.  But, there were basically two camps.  First, there was the camp that lost so much money in the early 2000s that they never came back to stocks and missed a fairly good run in 2003-2006.  Then, there were the people who lost a bunch of money in 2000-2003 and stayed in there and made some money back but still have 100% of their money in mutual funds.  We’re the group of people that have real diversification.  This is where it comes in handy.

I’ll be filling in for Daniel Frishberg today on The MoneyMan Report from 4-6 p.m. today on Biz Radio.  You can listen on 1110 AM in Houston or Dallas/Ft. Worth or streaming at www.bizradio.com .  You can call in and be on the show at 877-777-7713 (toll-free).

It looks as if the relief package will come perhaps as early as Friday but more than likely this weekend.  We must have something in place by Monday morning I believe in order to have markets remain calm.  Jack Welch & Jeremy Siegel joined Warren Buffet in showing their support for this plan and pointing out that it can make a lot of money.  I want to clarify something I wrote yesterday.  I said the Treasury would buy these assets for pennies on the dollar.  That may be an exaggeration.  Some believe these assets are worth $0 and perhaps some will be bought for pennies on the dollar.  However, the Treasury is proposing a reverse auction where sellers basically push prices down to where you get to more of a fair market value.  What they pay for the securities is very important.  They need to purchase them at a good price for us as taxpayers so there are gains in the future.  I believe there will be. 

I find it interesting that Barney Frank wants companies that participate in this program to be forced to give warrants to the government.  Everyone was bashing Paulson last week for getting warrants from AIG.  Now, it’s a good idea?  Amazing.

I think this plan will go through and pretty quickly.  I think everyone wanted their face time and wanted to show how tough they are but everyone agrees something has to be done very quickly.  I thought it was a good idea to have the president give a primetime speech last night explaining this.  The Bush administration has had the worst PR department.  They don’t communicate their message effectively and never have.  Paulson & Bernanke are doing the same.  They speak in Wall Street terms and with this much opposition from the average Joe, they need to change their message.  I thought President Bush’s speech was shockingly very clear, concise, and it really explained how we got here and why this is necessary.

I think the market is a coiled spring in the short run.  The trading atmosphere seems as if investors are on the sidelines waiting for this to go through and when something doesn’t happen, the market sells off as the day goes on.  Being this oversold usually leaves to a quick rally.  But, the longer it takes to rally, the lower the chances of a good sustained rally.  I have scaled out of some positions but I’m not making any big moves in any one direction.  I’ve mentioned this several times before but whipsaw risk remains very high. 

So, be careful as it remains very difficult to make money in the short run in either direction.

Finally I heard someone explain to the American people how the $700 billion plan will really work.  All we’ve been hearing the last few days is that “we’re not going to bail out Wall Street”.  It’s been really frustrating watching this unfold.  There’s a lot of blame for this.  It’s not just Wall Street.  It’s greedy lenders AND greedy borrowers.  It’s not enough oversight from Dems & Republicans.  Paulson & Bernanke haven’t done a good job of explaining to the average Joe what this plan really means.  Secondly, politicians & television commentators certainly haven’t explained it.  Finally, Warren Buffet came out this morning and discussed this plan in terms that make sense. 

I hear politicians saying “we’re not going to write a blank check”.  Here are the facts.  The Treasury is proposing a plan to buy assets from various institutions.  $700 billion isn’t going down the toilet.  The Treasury is making an investment in some assets for pennies on the dollar.  I’d love to do this.  Buffet said he would love to do it but he doesn’t have that much money and can’t get the financing that the Treasury does.  They will buy bad assets from institutions for pennies on the dollar from distressed sellers.  Then, they will manage them and wait.  And, if they have to, they’ll wait longer.  Unlike a lot of firms, they have staying power.  Once the housing market stabilizes (which it will), these same securities are going to be worth a lot more than they are now.  It’s an investment.  These institutions that hold these securities right now would prefer to hang on to them because they know they’ll be worth much more in a couple of years.  But, they can’t.  They are being forced to mark them down which is hurting their borrowing capacity and it’s forcing them to either be bought out or go bankrupt.  By selling these to the government, they get a cleaner balance sheet which will enable them to operate as they normally would.  Keep in mind, they aren’t being bailed out.  They are selling these assets for pennies on the dollar when they bought them for a dollar on the dollar.  Seems like a stiff price to pay.  You & I are buying them through the government for pennies on the dollar.

The next stage will be for them to control the supply of homes through various processes of slowing down foreclosures, and hopefully offering incentives to us investors to buy some of these emtpy homes as investments.  The demand for homes is there and accelerating but the supply is going up faster.  So, they will tackle the supply issue and if they can get demand to go up even more with incentives, that will help home prices.  Once they do that, these assets the government is buying will start to go back up.  Taxpayers could make a lot of money from this deal in conjunction with the deal of lending AIG money at 11.5%.  When they do start to see a return on that $700 billion, my vote is not to send it to me, but to pay down the national debt.

Everyone agrees we need to get something done now, both Democrats & Republicans.  But, both sides have their incentives for arguing for it and against it.  But, Warren Buffet coming out and saying it’s the right plan for the right time and it’s being run by the right guy speaks volumes.  In fact, he is betting on the plan getting done soon.  He made a $5 billion investment into Goldman Sachs today with the option for $5 billion more.  This is a guy who’s not on the right but realizes this is a good plan that needs to be done quickly.  He did a good job of explaining it on television this morning. 

Both Paulson & Bernanke should be out doing town hall meetings explaining this but they won’t.  First, they don’t have time and second, I don’t think they are capable.  If it was me, I’d take $1 billion of the $700 billion and give it to Buffet and hire him to not only go around the country and explain to people what this means to them as taxpayers, but to also be on a board watching over this.  Americans trust him and would listen to him.

I like the plan and wish I had $700 billion to do it.

Another disappointing day for the markets.  Congress had the opportunity to restore confidence by getting a bill passed quickly.  But, they didn’t.  I shouldn’t be surprised that many there don’t mind seeing confidence and the markets continue to drop.  At least until November.  But, you can see by the volume and the lack of conviction that investors are waiting for the details of this plan and to get the plan started.  We did have weak volume today and yesterday relative to the big up days last week.  It has felt that investors are waiting for good news and when they don’t get it, they sell.

I’ve had no other choice but to start scaling out.  I’m not running for the exits in a hurry yet because we’re still oversold.  However, I’m scaling out of positions that are lagging the market and those would first be material stocks.  These stocks bounced hard and the global growth slowdown is being talked about once again and dragging those stocks with it.  Great long-term investments but potentially more pain in the coming days and weeks.  Thursday & Friday were good examples of how fast markets can go up with any bit of good news.  So, averaging out is at this point the prudent thing to do.  It will reduce the whipsaw risk.

I mentioned this morning that the best thing the market could do right now would be to pull back with weak internals.  Well, it didn’t do that.  For most of the day we were down around 200 points and then sold off into the close.  A sell off wasn’t shocking given the big moves of Thursday & Friday.  But, almost 400 points doesn’t really exude a lot of confidence by investors.  Now, you could argue that those people who have been wanting to sell were able to do so with higher prices from the last two days.  But, that’s the point.  Those people have been wanting to sell after every rally this year.  Too much supply.  It still exists.  And, not enough demand.  I thought over the weekend that the parties involved in the various bailout packages would give us something to cheer about come Monday morning.  Give us something we didn’t see coming.  Please.  Surely this is too big of a crisis to bicker over what should go in the packages, right?  Wrong.  Monday morning comes and we hear the Democrats want this in the package.  The Republicans want this in the package.  They should have come up with some creative package that would have blindsided us and surprised investors to get even more confidence back in.  They didn’t do that.  That’s a missed opportunity.  This market has to build on itself.  Today was a let down.

The good news is today wasn’t nearly as bad as Friday was good.  There was much weaker volume today than on the up days.  Today wasn’t a 90% downside volume day.  And, there were a lot of stocks up today in various spots.  Materials stocks held up very well for example.  It didn’t hurt that oil had its biggest one day jump ever.  That helped energy stocks, etc.

I’m not giving up on this market just yet.  The good news is that there is still a ton of fear.  And, there are plenty of people doubting that the market can rally.  Those are both contrarian indicators that are bullish.  But, my leash is short.  Markets that are oversold (which this one is) can stay oversold for a long time.  I mentioned this morning that the volatility will remain high and whipsaw risk will be high as well.  So, don’t panic and sell everything tomorrow morning just to see the afternoon give us a huge rally.  We’ve seen that before.

Future are up a little after hours.  We’ll see what tomorrow brings.

After going up almost 800 points on the Dow in two days, a weak pullback would be welcomed by me and probably by most on Wall Street.  Markets don’t go straight up.  They breathe, they consolidate.  So, don’t be scared if the market pulls back today or for a few days.  We just need to monitor the internals of that pullback.  If it’s strong, then we have no choice but to get defensive again.  But, if it’s down and it’s on lower volume, a lot of stocks are still up, then we buy more. 

Fear is still very high and many are doubting this rally.  That’s a good thing.  Remember, the more people doubting this rally means that there is still fuel to get this market higher.  Things haven’t changed overnight but there are some tailwinds I believe for the short-run.  Keep in mind also that the whipsaw risk is still very high as volatility hasn’t gone away.  So, if you bought last week and we get one down day, don’t panic.  If this rally doesn’t pan out and we end up selling, that means there will be plenty of downside yet to come.  It’s much easier to trade this market looking at it from a helicopter.  Otherwise, it’s very easy to get confused and get whipsawed.