Plan for the Rest of the Day

For those who have been around a few weeks, you know I've been selling off my Ultrashort ETFs each Friday afraid of government interventions and or bailout rumors or whatever. I'm actually going to change that policy this weekend (which will probably lead a historic Federal government bailout solution with my luck), but with the markets breaking down and the S&P heading for a retest of January lows I want to keep all my insurance.

In fact, I bought back in the past 30 minutes, 75% of the short exposure I sold off first thing this morning into the selloff, since the market rallied for no good reason other than "Fed cut hopes", and I was able to buy back positions I had just sold 1 hour earlier for a 6-8% discount. I continue to be amazed we rally on "hopes for Fed cuts"....the same Fed cuts destroying our dollar, creating huge bubbles, and not helping much of anything except buoy hope in equity investors. But people are trained to cheer Fed cuts no matter what, so their instinct is to buy. We were also extremely oversold, so this (ahem) rally, basically let people remount shorts at more attractive levels in my opinion. Short of falling very hard this afternoon (to S&P 1270), I just don't see myself letting go of much of this insurance.

Frankly, I am trying to think of the long run and how we get out of this mess, and I don't see any real solution outside of a Federal bailout of the mortgage business where they literally take the loans onto taxpayer's books. Why the Fed is not pressing for full and total disclosure of the "black box" financials is beyond me - we lack transparency even though people claim we are the most transparent system in the world - not in financials. So either the Fed is asleep at the wheel, because without transparency no one is going to trust each other (I wrote this last August, so it's not a new theme), or the Fed knows what is on the books and doesn't want it exposed. Either way it is bad. The fact our country allowed and in fact encourages financials to have off balance sheet accounting is truly astounding considering this is how Enron hid their problems from the world. There is so little regulation in the industry that greases the world's engine, it amazes me. And instead of coming down on hard on the banks to open up their black boxes, we continue with these iterations of kicking the can down the road.

I am only awaiting the next credit acronym I've never heard of to pop up. Also we now seem to be on the first edge of municipalities running into trouble - I thought this would happen in later 2008 as tax revenues from housing began decreasing (but cities/state refuse to cut budgets or benefits for state workers) but due to the credit freeze up, we are seeing the first wave of issues there as well. Again, it's a huge interconnected web and as the tide goes out, we are seeing a lot of the "ugly" below. How corporations are forced to cut back on jobs but governments continue to hire (with huge long term entitlements to boot) is beyond me...

Last, where exactly is all the insider buying by bank executives since they are such a great value? I've been asking that for months each time a pundit tells me the "great value" in financials. Why does no one from the inside who knows what is going on seem willing to buy their own stock? That tells me everything I need to know. While these financials will have oversold rallies, we seem set to see some bankruptices down the road, if we continue down the same path we are at now with the total freezing of certain credit markets. The inability to offload "junk" to their "loyal customers" is really a huge problem.

So while the equity guys cheer the same Fed cuts (don't they ever learn) - we have some truly dangerous situations being created - I have no point of historical reference to look at so trying to game the outcome is impossible. The problem is no one has any historical reference for what is happening now. All I see is kicking the can down the road. And at times while we kick - the equity markets rally. But this feels suspiciously like early January to me... a lot of lemmings gathering near the cliff edge.

So equity markets will remain at constant risk until something (I'm not sure what) changes. Without housing prices stabilizing, it's all up in the air right now... and from what I am reading foreign governments can only own so much of our financial institutions so I am not sure where we go to raise more capital once we reach the limits. Very few here have that type of money....except the Fed.

Until then, I have popcorn in hand and await the epic battle of the "Invisible Hand" versus market realities we will see at S&P 1270. Should be a doozy.

EDIT: Just read Bush is supposed to address the nation on economy at 2 PM. Might screw up my plan - i.e. free mortgages on us! You just never know ;)