Friday, September 19, 2008


The FTSE 100 is up 7+% this morning. The financial sector is up 17%!

The surprise is that basic materials are up 9%. Tech is the third sector, up 5%.

Gold is back down $50.

Negotiations on troops in Iraq are stuck. The UN 5+1 is meeting now about what to do in Iran. A bill in the congress to put a naval blockade around Iran was tabled. That does not mean that sanctions will not shut off supplies of refined oil products to Iran, and increase the risk of war.

In premarket trading, the bid ask on companies such as Merrill Lynch is up almost 20%. Yesterday Wachovia Bank traded $9.12 in the morning and it closed at $14.50.

Why are basic materials up so strong? Just as Generals fight the last war, stock investors buy last years stocks. A couple of days ago, a regular reader wanted to know if CAT is a good buy, he noted that it just made a 52 week low. I said, "Absolutely not"! CAT is a good company and it will go up in market rallies. However, monster machines are highly cyclical products. When a shortage of mining and construction equipment threatens to slow billion dollar projects, a used CAT will sell for double or triple its original price. When the demand goes slack, old machines will be cannibalized to keep a other machines running. Orders for machines can suddenly disappear. You do not want to buy on a 52 week low but on a 60 week low.

Basic Materials are the opposite of financial stocks but, again, investors are fighting last years war. The leading sectors in the months ahead will be financial stocks, consumer cyclicals and technology. The leading industries in those sectors will be companies that benefit the most from lower fuel prices.

A deal for the congress to lend US motor companies $25 billion to retool has prior agreement. Such a bill will be part of the goodies package offered up for a vote. Drilling, saving the autos, saving the banking system, and money for pet projects will all be part of the compromise offered. Incumbent representatives have a week to show the American people that they are doing the people's business. The fact that not a single appropriations bill has been passed, 10 days before the start of the budget year. This is a clear demonstration that politics has become more important than accomplishment.

The suspension of short sales, in London yesterday and in the USA today, is a way to say "not my fault". Suspension of free markets is a bad precedent to set; it will help the market in the short run but hurt much more in the long run. We will all pay a little bit spread out over years and years of paying in exchange for a short term bounce. Those in the know should be in the business of teaching rather than using such rules as a way of deflecting attention. McCain said that if he were president that he would SEC Chairman Cox. Cox responded that he would not listen to criticism while in the middle of a financial crisis, but a few hours later he suspended short sales.

The parallel situation is the shifting of blame by the congress in regard to the spike in oil prices. It was the congress that put US reserves off limits for the past 30 years, and it was the congress that pointed fingers at speculators. The reality is that speculators force markets to be honest. Speculators save consumers billions of dollars.

Of course, local politicians are quick to join-in the finger pointing during a crisis. After Ike hit, Roy Cooper, Attorney General NC, was quick to jump on service stations for price gouging, and to send notice to all of our children's school teachers. In America, we believe in freedom of the people until politicians can smell the chance to appear to be white knights. One of the best examples of harmful laws is price fixing or price gouging laws. Ironically, when OPEC joins to fix prices we get upset but it is OK when our Attorney General does it.

After a hurricane, ice is in great demand. By passing anti scalping or price gouging laws, the incentive of the free market to respond is smothered. In the absence of such laws, many a "speculator" would deliver truck loads of ice, some would travel many miles to get in on the opportunity. At first, the price would soar, increasing the incentive to bring more. The most valuable of commodities would be saved (perhaps including human life and limb). In short order, plenty of ice would be available. The price would plunge as the excess ice started to melt. Instead, victims must wait on bureaucrats to deliver what is needed, 10 days too late. The average price would have been lowered and the supply would have been increased.

Homeowners participate in the "short sale" market. We buy a home but then buy insurance to protect it. Selling short is as American as apple pie. Short selling, like oil companies, is an easy target for unknowing or unscrupulous media moguls and politicians. Politicians and their friends find it easy to shift the blame for high oil prices to oil companies. The reality is that Exxon has saved more consumers more money than any other entity on this earth.

Now that the turn is here, politicians are stumbling all over each other to show that they are doing something. For this reason, a drilling bill is likely to be passed. The bill to loan car companies $25 Billion will be passed. When I write that consumer cyclical stocks will be among the winners, I include Ford and GM. Still, the first part of the big turn is in banks, insurance companies and brokers.

One result of the turn in financial stocks will be a gradual growing in the availability of low cost mortgage money. Homes that are underwater will float again. Resort homes will go up 300% or more over the next 15 years. Equity invested will sky rocket.

Who knows how many bumps will be made between today and the actual passage of bills through congress. For my money, I still would like to see a clean drilling bill or no bill at all. I would not mind seeing the government shut down for the first few days of October. With elections so close, I suspect that a decent compromise bill will be reached.