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Anyone who was worried that the stock market had taken leave of
its senses should have felt greatly relieved after yesterday’s
733-point drop in the Dow Industrials. Added to the plunge from the previous
day’s fleeting high at the opening, the Indoos have now given back 1264
points of their ill-gotten, 1900-point gain from Monday’s low. Could it
be that Wall Street isn’t so crazy after all?
Some have attributed the latest bout of selling to scary numbers
from the retail sector, others to the mounting specter of recession-or-worse,
or even to the prospect of the left-most member of Congress becoming our next
President. But we’d like to think investors are focused on the more
immediate, and worrisome, matter of what will happen next week when insurance
payments on several hundred billion dollars worth of Lehman default swaps
come due. As the Wall
Street Journal noted yesterday, ‘No one quite knows who
owes what and if they’re good for it.’ Indeed. Small wonder,
then, that Paulson and Bernanke have been working so feverishly on the final
details of their latest handout to the banks — a $250 billion
‘injection,’ as it is being called. (We will have more to say
about this in the days ahead, and if you’d like to receive Rick’s Picks
commentary free each day by e-mail, just click here.)
$250B
Divided by 9
The $250 billion will be apportioned among nine banks, and
although this sum would have been considered a big number just two months
ago, these days it is just pin money — an indeterminately small, and
presumably ineffectual, handout coming from who-knows-where. Our take is
that, spread among the nine banks, it won’t be enough to cover even
three days’ worth of bad news from the banking sector, much less the
psychological cost of buying calmness until Election Day.
Some had thought the market’s 1000-point rally the other
day signaled a return of confidence that would buoy the markets for another
two or three months, We differed, and said the respite would probably last
just a day or two. Despite yesterday’s selloff, we’ll give bulls
the benefit of the doubt for the time being, since it’s always possible
that another monster short-squeeze is lurking to dismember however many bears
survived the historical run-up from Friday’s bottom.
‘Lend,
or Else!’
On the lending front, Paulson has taken the concept of
‘pushing on a string’ to the threshold of absurdity. This
economic metaphor refers to a condition in which borrowers are too tapped out
to borrow, even at relatively low nominal rates. Paulson has warned the banks
in no uncertain terms that they will have to start lending out that $250
billion with reckless abandon. But suppose there are no takers? This is what
we foresee happening, and perhaps it is yet one more reason why stocks have
faded so quickly after their spectacular display of exuberance a couple of
days ago.
Rick Ackerman
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by Rick Ackerman
Rick Ackerman is
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