Yesterday was one of the best chances traders had to make money in quite a while. And, once the markets realise the Fannie/Freddie bail-out is not the magic bullet they hoped, it could be a while yet before we see another rally like yesterday’s.
And what happens? The London Stock Exchange has to suspend trading because its computer systems are down. It’s the financial equivalent of an ice cream van breaking down on the only hot day of the year.
Here’s a quick timeline of the last 48 hours:
- Sunday — The US Treasury announces it will, in effect, nationalise troubled mortgage firms Fannie Mae and Freddie Mac
- Early Monday — The Asian markets rally hard on the back of this news
- A bit later on Monday — European markets open, and join in the fun. In London, the FTSE 100 soars 200 points in the first hour of trading. Banks and home builders lead the charge. Over 270 million shares are traded in this one hour. That compares with 617 million for the whole of the previous Monday
- Monday, 9.07 BST — traders begin experiencing problems carrying out trades
- Monday, 9.15 BST — all trading suspended
- Later on Monday — US markets open and, like (most of) Europe and Asia before them, they surge
I suspect not. I suspect traders and investors were so desperate for a psychological boost, they latched onto something everyone knew was going to happen anyway. Probably most knew the rally was phony. But they also reckoned (rightly, as it turned out) that the market as a whole would react favourably to the news from the US — despite the fact that it was wholly anticipated.
If enough people buy stocks because they expect a rally, it becomes a self-fulfilling prophecy. Markets are always driven by sentiment. That is especially true in these volatile times.
Profit Hunter’s Manraaj Singh agrees. As he wrote to his subscribers yesterday:
"We have seen markets rally at every suggestion of a government bail-out of the US financial sector throughout this crisis. Just think back to March when the Fed provided $29 billion of financing for JP Morgan’s bail-out of Bear Stearns."
Manraaj reckons the roots of the crisis persist:
"The latest bail-out has given markets a big psychological boost. But it still doesn’t tackle the systemic risk within the financial system. To do that, the US government would have to take clear steps to buy up most of the dodgy debt floating about in the US financial system"What we’re seeing here is just another dead cat bounce."
There are other reasons to be cautious. One indicator we like here at Fleet Street is the Baltic Dry Index. The Baltic Dry Index tracks the movement of freight shipping rates. As such it gives an indication of the state of world demand for goods and raw materials.
The Index has been falling since June. Yesterday it continued its downward trend. Real economies are still facing all the same problems they did last week. Yesterday’s stock market exuberance can’t hide that.
Any optimism right now should, at most, be cautious optimism. And pretty soon I expect it will be relegated back to mere caution.
Two reasons to get ready for a uranium boom
Garry White, our commodities man, is bullish on uranium. A recent article of his carried the simple headline Buy Uranium Now.
Today, two items of news provide further evidence for a forthcoming uranium boom.
They come from India and Russia" and, to be honest, they scare me a little. Especially the Russian story!
"They’re not really going to do this?" I asked Garry.
"You don’t think it’s a good idea?" he replied.
"Well" what if it sinks!"
"Well," he said, "they seem confident. From our point of view, they’re going to do it. And it’s a bullish sign for uranium."
Find out here what the Russians are planning, why it’s good news for uranium investors and, most importantly, how you can play it"
Until tomorrow
Ben Traynor
Editor
Selected article:
Garry White on why India and Russia could spark a boom in uranium.
The Daily Reckoning — This story is breathtaking!
"Taxpayers take on trillions in risk," says the headline in yesterday’s USA Today.
"You can call it a bailout, you can call it a safety net or you can call it a rescue package," the paper quoted a research director at Argus Research, "but the bottom line is the American taxpayer is left footing the bill."
The story is breathtaking. Staggering. Dumbfounding. But there it is — the biggest nationalization in history. Freddie and Fannie finance 3 out of 4 new mortgages. And now, the mortgage industry depends neither on willing buyers and sellers...nor on willing lenders and borrowers...but on the US government. The Land of the Free has put its housing under the control of the state! Yes, there is still plenty of room for private initiative and private decision-making. But, ultimately, millions of Americans now depend on the US government for the roofs over their heads.
You can read the Daily Reckoning in full here.
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