Tuesday, September 9, 2008

Throwing It All Away

Special Late Edition of THE BBB....

Just when I pooped my pants a lot yesterday as my forecasted and never doubted Fannie and Freddie bailouts actually propped up world markets for a day (thanks for forcing our hand China, it was overdue), today gave us lots back and more as Lehman went into crisis mode on a Tuesday. Eerily similar to Bear, we've been leaked reports for weeks that Lehman has numerous bidders and has the crown jewel in Neuberger. Well, Bove and Kass, Fuld and his minions, no one was biting. S. Korea doesn't want your pile of junk and you're going to have to Merrill this one at 5 cents on the dollar.

With that said, it occurred to me at about 3:59 that Lehman can't lose from here on out. The stock is under $8. And despite being pumped all the way to $20 in recent weeks on relentless "client notes" from Bove and Kass, there may be a saving grace. Just using Bear as the precedent, which actually did collapse and receive a bailout, shares never hit 0 and eventually evened out at $10. If that's the worst case scenario (I'm pretty convinced the government is going to bail them out if necessary), then a pop to $10 gets you over 25% and if they stay afloat, Bove and Kass may be proven correct. Disgusting but true.

Also true, I've officially given up on this government. On Friday morning we were a mere 300 points from the July lows, yet some of my options had literally lost over 100% from their highs. On 300 points. We are witnessing some of the largest criminal acts in history with these bailouts. We have in one weekend added a minimum of 11% to our national debt and potentially created a $300 billion tax bill to save companies that even G.W. said needed more regulation 6 years ago. Bush said that. It's true.

So, what I'm saying is, I tried to get out today like I did on 3/17. I tried to secure what around 3:50 would've been an 11% profit on the year. Didn't happen. I'm not a day trader, I'm a PA with patients. None of my asks went through. Maybe it will be for the best. But after 7:30, when Lehman trots out their lies and CNBC has an 80-panel review of how the worst is behind us, we might see another 300 point gain tomorrow, and I'll be in trouble.

I have no faith in this market's ability to underperform. Paulson has put a floor on it that we've never seen in capitalism's history. I believe Jim Rodgers summed it up best. "America is more communist than China is right now. You can see that this is welfare of the rich, it is socialism for the rich… it's just bailing out financial institutions."

While there are some sane minds left such as Fuchs, Fleckenstein, Jubak, and Forsythe, I don't believe we're dealing with reality anymore and that investors such as ourselves can catch a large break. Our confidence has seen us through a rough year to the upside and even though I've advised on trades that have produced up to 800%, I'm neither a trader nor a millionaire. I don't have the funds to invest in every idea I've suggested, but I think most of them this year have been good ones. I will look for an opportunity to take positive gains against the backdrop of a 20% market decline over the last 10 months, reload, and avoid professional opinion like the plague. I am encouraged by thoughts such as this. "The long-term ramification is we could possibly be in stagflation--rising inflation and the slow-growth economy," says Kathy Boyle, president of Chapin Hill Advisors in New York. "I don't think this is good news. I'm not sure why the market is reacting this way. If they're taking this as a sign that the government is going to step in and save other institutions, they're wrong." And further encouraged by the mass switch from equities to bonds by huge hedge fund managers like Falcone.

It would be sweet irony if the biggest bailout in history, underpinned by "welfare for the rich," would lead to the biggest bond run and bear market in recent memory. We can only hope and live to invest another day.

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