The current situation has the potential to be a historical contrarian buying opportunity, as a banking implosion in the U.K., and a high profile book from former Fed Chairman Greenspan, have combined to create a climate of high anxiety and hysteria, commonly known in the old days as a "blood in the streets" moment.
Thousands of savers lined up outside the offices of the U.K.'s Northern Rock PLC, a mortgage lender and savings institution, creating a classic "blood in the street" moments for the financial markets.
It takes a lot of guts to pony up big dough in the stock market when you see such a scene, but if you follow the wise tenets of J.P. Morgan, that's exactly what you have in mind when you see this kind of thing.
For one thing, the Drudge Report went crazy with the news, in between the wild and crazy revolving lights surrounding the latest weirdness regarding O.J. Simpson. But, for another, it just means that the Bank of England, the only central bank that had yet to start flushing money into the market, now has to join the rest of the posse.
And until proven otherwise, despite all the handwringing from talking heads and other pundits, money is what makes market bottoms and fuels bull markets.
According to the Wall Street Journal 'Amid United Kingdom television broadcasting scenes of lines at bank branches and screaming newspaper headlines such as the Daily Mail's "How safe is our money?," the Financial Services Authority, the U.K.'s financial regulator, took the rare step of issuing a statement Saturday night in support of the bank.'
Indeed, the statement was issued, noting, "If we believed Northern Rock was not solvent, we would not have allowed it to remain open for business." Meanwhile, "Northern Rock says it has funding to cover withdrawals," according to the Journal.
But, time seems to be running out as "With each passing day, though, options are looking more stark for Northern Rock, the latest focus of the credit crisis that began in the U.S. subprime market. They include trying to muddle through, selling the business in whole or in parts to other banks, a forced sale at a token price organized by regulators, or a winding down in which regulators would likely ask other banks to take over Northern Rock's deposits."
And as the headlines get crazier, and the lines outside the bank's branches get longer, so will the vultures be sharpening their claws to get their hands on the good assets that Northern Rock will almost surely have to let go of at panic prices.
Yet, according to the Journal, this has been ongoing for some time, as Northern Rock had been talking to insurer Lloyd's. But talks ran into trouble, as the Bank of England did not want to provide "financial support for the deal" as "Offering funds at a market rate to subsidize a deal would fly in the face of the central bank's policy, which is to penalize troubled banks by providing emergency funds only at a higher rate." t
Greenspan Gets Even
Former Fed Chairman Alan Greenspan started his book promotion in style, hitting 60 Minutes and the "Today" show, while granting high profile interviews to The Washington Post and The Wall Street Journal.
The big buzz was about Greenspan's bashing of the Bush administration for its fiscal policies and praising Clinton for his, while alluding to a comment in the book about the war in Iraq being "about oil."
But, Greenspan, obviously not just a fan of Ayn Rand, but also of P.T. Barnum, had an opportunity to clarify his comments, nicely of course after the excerpts helped sell about a zillion books.
On the Iraq comments, Greenspan noted that his concern about Iraq's Saddam Hussein had been about the latter's seeming attempts to control the Straits of Hormuz. According to Bob Woodward, in The Washington Post: 'Greenspan, who was the country's top voice on monetary policy at the time Bush decided to go to war in Iraq, has refrained from extensive public comment on it until now, but he made the striking comment in a new memoir out today that "the Iraq War is largely about oil." In the interview, he clarified that sentence in his 531-page book, saying that while securing global oil supplies was "not the administration's motive," he had presented the White House with the case for why removing Hussein was important for the global economy.'
Greenspan further clarified: '"I have never heard them basically say, 'We've got to protect the oil supplies of the world,' but that would have been my motive." Greenspan said that he made his economic argument to White House officials and that one lower-level official, whom he declined to identify, told him, "Well, unfortunately, we can't talk about oil." Asked if he had made his point to Cheney specifically, Greenspan said yes, then added, "I talked to everybody about that."'
More than anything, the pundits seem to think that Greenspan's concerns about the potential for inflation and or a recession might be well placed, thus prompting a selloff in U.S. stock index futures.
The key comments on the economy, according to the Journal were: 'There is now a "very large" inventory of unsold, newly built homes whose condition is deteriorating more rapidly, than, say, a steel mill's, and that puts pressure on builders to sell them quickly, he said. As a result, "we have the capability of far bigger price declines," which will pinch home equity, lead to more defaults on subprime mortgages and pressure consumer spending. The probability of a recession, which earlier this year he put at one-third, is now "slightly more than a third," he said.'
Conclusion
This is a contrarian's paradise. First, you've got a high profile run on a big bank in the U.K. And second, you've got former Fed Chairman Alan Greenspan trying to sell books.
It just doesn't get any better than this, as the media hype and frenzy have reached a fever pitch, just as central banks continue to pump liquidity into the system while overnight rates in Europe remain at high levels.
Unemployment is starting to rise. A housing glut is on the rise. And the Federal Reserve meets this week.
The last thing Bernanke wants is to be remembered alongside of Herbert Hoover, and the Federal Reserve bank of the late 1920s.
He is under huge pressure to ease, and almost has to, unless he wants all hell to break loose.
Sure, "Gentle Ben" is stone deaf, and sits in a soundproof office with the shades drawn, looking at econometric doodles all day. At least that's the common perception. But, his lowering of the Discount Rate, and his jawboning of the markets lately, have proven to be quite calming, even if he's less entertaining than Greenspan's mumbling, or lacking the panache of the "irrational exuberance" speech.
In other words, the odds are more likely in favor of the Fed giving the markets a positive surprise than most expect.
So here's the bottom line. If the Fed exceeds expectations on its decision about interest rates, the market is going to go significantly higher.
We have already seen two big up volume to down volume days in the last month. So momentum is in place.
All that's left, is the excuse for the bears to throw in the towel. And that may come as early as tomorrow afternoon.
If we're wrong, we'll get stopped out of our long positions, re-evaluate, and move on. That's trading. |
