Short-covering rally or the real deal?
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The Oil Indicator

Reader Mail

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The Oil Inidcator

So, on Friday I made the rally call.  The Dow Industrials were up 217 points. Now, after a conversation with TradeMaster strategist Jason Cimpl, I'm a little nervous about stocks following through.  

Jason believes Friday's rally was short-covering. His indicator? Oil.  

Oil prices fell Friday, while stocks rallied across the board. As you know I expect stocks to rally in anticipation of the stimulus bill and then next banking measure. It is my opinion that investors perceive these initiatives as help for the economy in recovering from recession. Not a cure-all, just help. 

If investors see light at the end of the tunnel, oil should rally too. After all, production has been cut. And despite growing reserves, oil will rally when it appears the economy will get back to growth.  

To Jason, the fact that oil traded lower while stocks rallied means that investors were buying to cover their short positions in anticipation of Geithner's bank bailout plan. And the fact that financials led Friday's charge lends some weight to Jason's argument. We'll see. 

Reader Mail

*****I spent part of the weekend going through your most recent comments and suggestions. The bank nationalization topic still generates the lion's share of mail. Here are some of the responses… 

*****S. Ravindra asks the all-important question about a nationalization plan for banks: Does the nationalization of these banks mean that US government will buy out all shares and delist the banks till the bank becomes healthy again before listing them back again?  

My understanding of what nationalization means is, yes, common stock would wiped out. Nationalizing the banks is essentially the same as privatizing any company, except it's the government doing the privatizing.  

In a privatization scenario, the group taking the company private usually makes a tender offer for all common stock outstanding. Investors sell because they know the stock will be cancelled.  

In this case, where we're talking about the government taking over, it would probably work a little differently. Fannie Mae and Freddie Mac are examples. Common stock wasn't cancelled there. But shareholder value is gone for all intents and purposes.  

Of course, if Fannie Mae and Freddie Mac were to be sold to private investors, common stock would be cancelled before the companies were brought public again.  

Now, it must be noted that the Obama administration seems to have taken the bank nationalization plan off the table. Despite most leading economists advocating nationalization as the quickest, cleanest solution, it sounds as if Obama wants to go the "bad debt bank route." I can only assume that the administration is keenly aware of the impact nationalization would have on common shareholders and they are trying to avoid that outcome. 

*****Steve writes: I agree with your recommendation to nationalize the "troubled" banks (Citi, BOA, WF, etc.). But with this recommendation, you should also recommend that shareholders consider liquidating their current ownership since a nationalization will most likely significantly reduce the value of their investment.  

Nationalization isn't my idea. I'm just trying to generate a discussion of the issue that will help us be positioned properly for the potential outcome. 

There are plenty of reasons not to own financials, and the potential for a nationalization plan to wipe out the common shareholders is a big one. I don't think it's a wager worth placing, but the Obama administration seems to be against nationalization.  

Still remember how it played out with Fannie Mae and Freddie Mac: Paulson said he was not in favor of nationalization repeatedly. And anyone who bought based on his hollow promise, like Legg Mason's Bill Miller, lost big when nationalization became the only viable solution.    

*****Neil P. writes: For those of you who think "taxpayers" should have ownership for footing the bill for the bank bailout, what you're saying is the government should own them. Please rethink your socialistic tendencies. 

In the purest sense, the U.S. government is "of the people and by the people." And if the taxpayer is the lender of last resort, then it stands to reason that some ownership is part of the equation. When a venture capitalist invests, he gets part ownership. When you own stock, you are a part owner.  

That's not socialism, it's capitalism. Because it's based on who has the capital. Clearly, right now, the banks don't have it.  

Socialism is based on the idea that society at large should benefit from the wealth creation within a country. The medium for doling out the benefits is the government.  

Now, rescuing the banks absolutely is for the benefit of our society. If they fail, we're up a creek. That's not socialism, it's survival.  

*****M. Schofield The free enterprise system clearly failed us and taxpayers will forever be paying for the irresponsibility of the so-called leaders of this industry. What would be so wrong with nationalizing the banking industry or at the very least highly regulating it. What's the old saying "power corrupts and absolute power corrupts absolutely". Let's not give these people the reins of power again. 

Some people blame the Democrats, some blame the Republicans. Some blame the mortgage industry, others blame the borrowers. The fact is, there's plenty of blame to go around. Greenspan and Fuld, Lewis and Paulson.  

Ultimately, it was a systematic failure. The system broke down. There will always be loopholes and greedy people will exploit them.  

I don't think it's the best use of resources to try to fix a broken system. Especially when you're leaving many of the people who broke the system in place.  

*****W. Goss wants more nationalization: I don't know a lot about Nationalization of Banking but what I read in Robert A Heinleins "For us the Living" definitely piqued interest…It was interesting that he wrote it during the recovery of the great depression. We aren't anywhere close to that (I hope) but what we're in is scary enough. Nationalization of our natural resources is another interesting concept that would be appropriate for discussion. 

As it now stands, much of America's natural resources are owned by the Federal government. Companies who wish to bring these resources to market have to lease the land and pay the government. 

I don't know the specifics of how these leases are awarded and how much money they bring in, but I've read plenty that suggests the process is quite corrupt.  

The U.S. is not Venezuela or Russia. There's no way we're going to simply nationalize our natural resources and give the companies that hold them the boot.  

But at the same time, there's no way to ignore the benefit that state-run oil companies have provided to countries like Mexico and Brazil.  

I would absolutely advocate that the U.S. create state-owned entities to exploit our natural resources in partnership with companies that have the technical know-how.  

Take the Alaska National Wildlife Refuge (ANWR) for instance. That's a federally owned parcel of land. Would you rather see Exxon buy the rights and make a huge oil find? Or would you rather see the U.S. government share in the profits? And please, try to get more creative than simply saying the Post Office stinks so the government can't do anything right.  

*****R. Watson brings up an investment idea we've discussed before: I'm thinking about buying some shares of the Las Vegas Sands and the MGM. What do you think about those purchases or should I hold on to my money? 

If there were ever any companies that live and die on consumer spending, these two are it. Eventually these two stocks will be good buys. But I don't think that time is now. 

Unemployment is still on the rise. That means people have less money to spend. And there's no telling when gambling in Vegas will make its way back in to people's budgets.  

Casinos have been canceling expansion plans and laying off workers. So they are making the necessary adjustments to account for declining revenues. That's good, but it doesn't mean the stock prices are headed higher any time soon. 

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Posted 02-10-2009 12:47 PM by Ian Wyatt