We will probably see the bill pass by the weekend and with it will come a short term renewal of confidence that may boost equity indexes back to important levels of resistance at the 50, 100 and 200 day moving averages. Overall, this is very bad news for the average citizen and their children who will foot the bill of the worthless paper that’s traded for cash. US debt may face a downgrade as a result, causing further disruptions in credit markets and weakness in the dollar as foreign investors seek to diversify their money in safer investments.
Wall Street would have us believe that the rally is going to last, the bottom is in and today’s action with the Dow up at the high around 300 points shows us that certainly there is some positivity around the notion that the government will be the universal backstop to bad debt and other associated instruments. Meanwhile, Washington Mutual’s stock is plummeting 30% at the lows of the day as the company struggles to survive. If no one buys them, they will surely fail and cause another massive disruption. Isn’t Washington Mutual the last savings and loan bank that has public stock?
We see equity indexes behaving as though the carry trade is back in full effect now. As the Yen weakens against the US dollar, we see funds pouring in to the S&P futures. It’s a simple way for the Japanese central bank to support American market stability, while at the same time positioning their exports to be more attractive to American consumers. Everyone wins, right? Not if the rally is predicated on the notion that relief is within reach, which as of now it seems to be.
Remember that the SEC’s short selling ban expires October 2st and nearly 1000 companies will be open game for short sellers again unless the SEC creates new policy to address short selling. October also brings the height of the ARM option loan resets to higher interest rates. We could see a large spike in foreclosures and further deterioration of mortgage backed securities. There’s also the fundamental question of where valuations should be if we do return to a stable market. Most traders would probably agree that given the deleveraging necessary to return to sustainable balance sheets, asset values are poised for further deflation.
