Saturday, December 20, 2008

Back to Betting

Let's ignore the bailout and move on, as we knew that was coming. A few observations:

1. The Madoff scandal will cost an estimated $50 billion in losses. In January, on news of a French banker blowing $6 billion, the market opened down 700 points. This market threw the Madoff news onto page 2 behind the bailout.

2. The Fed is finished as a competent/respected institution. In his article on why the Fed has become obsolete, Jim Jubak points out:

"The Fed is supposed to care more about the soundness of the system as a whole than about picking winners and losers. But court papers in the Lehman Bros. bankruptcy case show that on Sept. 15 and 16, after declining to rescue Lehman, the Fed lent a Lehman subsidiary $138 billion so that the subsidiary, Lehman's broker-dealer business, could wind down tens of thousands of trades with other Wall Street companies in an orderly fashion. It appears that the Fed found it could move when the profits of other Wall Street companies were at stake. The Fed is supposed to be an impartial regulator of the financial markets, not a covert protector of strong institutions at the expense of weak ones. By compromising its impartiality, the Fed is also compromising its ability to lead an effort to build a new global financial system. "

3. The market gave back all of its rate cut rally within 3 days. As John Markman pointed out this week, the future earnings of S&P companies will be so bleak, the market will be forced to capitulate. He estimates new lows for the S&P between 550-700 next year. Ouch.

4. Gold cracked a 2-month high. Oil fell to a 5-year low. You know that I'm very bullish on gold. Do I think oil will go down to $25? Certainly possible. But will it stay below $40-$50 for a few years is the question. I don't think so. I'm actually waiting for the USO to break into the $20s before I go long however. I might hedge with both LEAPS out to 2011 and just straight purchase of the ETF in case demand destruction means a 3-5 year window before oil races back up.

5. Christmas comes early this year. Retail sales have been so sluggish that post-holiday clearance sales are happening today. Itulip recommends saving your money now as the next leg down is large retailers rapidly going out of business and forced liquidation sales with prices of 80% off.

Taking a break from our cheery analysis, I'd like to post my bowl confidence picks for the season. This year's games seem particularly difficult because so many mediocre teams are eligible. However, getting the big ones right is all that matters. I will post in order of confidence, not by bowl. My loyalty will be to my wallet as I'm picking against my alma mater.

34. (highest) Texas
33. Central Michigan
32. USC
31. Texas Tech
30. Georgia
29. E. Carolina
28. Alabama
27. Florida
26. Kansas
25. Florida St.
24. Boston College
23. Oregon St.
22. Iowa
21. Cal
20. Georgia Tech
19. Tulsa
18. Rutgers
17. Missouri
16. Nebraska
15. Boise St.
14. Rice
13. Air Force
12. BYU
11. La. Tech
10. Cincinnati
9. Troy
8. Memphis
7. Hawaii
6. Oklahoma St.
5. navy
4. Colorado St.
3. Buffalo
2. North Carolina
1. Nevada

1 comment:

Tiger Coach said...

It is troubling that a scandal as great as the Madoff con can go down right under the nose of Federal authorities. It is increasingly evident that Wall Street is suffering from a leadership vacuum. More importantly, dishonest business practices from accounting "liberties" like mark to market or outright extortion of our government with bailouts and loans has in many ways stripped Wall Street from the most basic element of human!

I am not so sure with OPEC's leverage on the market right now. In many ways, they will face the largest onslaught against oil that the world has ever seen, particularly from the number one consumer of oil the United States. OPEC in many regards MUST keep oil cheap in order to make Obama's efforts almost worthless. More importantly... the big picture suggests that countries with whom we trade oil on a regular basis many not be the ones to purchase our bonds... Jim Rogers could well have hit the nail on the head!!!