Has the Bailout Helped?

The market did hold.

This one, we have to give to the bulls.  Yesterday at 2 p.m., after the margin sellers were finished doing their thing, the buyers took off and ramped up the market. 

Volume was huge, with NYSE Composite volume at 7.2 billion, the fourth heaviest of the year. 

However, breadth was a mere 1.75:1 on the upside, at least according to Bloomberg. It seems that huge buying in financials and consumer stocks were met with huge selling in industrials and commodity and energy stocks. One would want to see breadth at 9:1 on the upside or higher to be ragingly bullish. 

Bank stocks broke out of their near-term range but ran right into resistance when the Bank Index [BKX] hit 73.2.  Banks have to break through here.

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Small cap stocks – which I am short – were up, but not as hard as the broad market.  At this point, until there is further evidence, it appears that small caps are tracing a top before heading lower. 

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The behavior of the VIX was not also particularly comforting.  The VIX did drop yesterday, but it was higher until a half hour before the close, even though the Dow was up 240 points at 3:30 p.m.

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If investors are embracing this move, why was the move in the VIX so tepid and the upside volume relatively weak?

The bailout is positive and was inevitable.  However, one should not get too enthused. Yesterday’s move lowered mortgage rates by 0.50%, which is certainly good, but does not dramatically increase affordability for home buyers.  Home prices have to continue to fall or incomes have to significantly rise until homes are affordable again. 

And there is still a ton of housing supply out there.  That did not go away yesterday.

One of the biggest positives of the bailout – apart from removing some systematic risk in the banking system – is that it averts a crisis amongst foreign bankers (the bailout, by the way, is not being universally embraced).  The bailout stems a buyers strike on agency debt, which was beginning to happen as shown in the most recent TIC data.  Had foreign buyers started dumping agency debt en masse, mortgage rates could have spiked, imperiling the economy further. 

The economy is still anemic, but we have to be careful when assessing the market relative to the economy because stocks bottom before an improving economy becomes apparent.  Is that happening now?  I don’t think so but we must not be so dogmatic and rigid in our thinking to dismiss that the economy has not bottomed here. 

I am trying to stay open-minded about this move.  As I said yesterday, to become more positive, I want to see follow-through this week.  For the moment, I am doubtful.

Comments

[Steven Hansen:]

somebody still has to explain to me how this bailout made the economy stronger. i get it would be disaster if fannie and freddie failed. obviously somebody thought things are getting worse and fannie and freddie needed a backstop.

2008 Sep 09 04:53 AM

[SW Richmond:]

The markets reacted positively because the markets have been roundly socialized...for the investor class. Privatization of profits, socialization of losses. This is the "good bank / bad bank" model going forward. Keep the good stuff, shaft the taxpayer with the bad stuff.

Shameless, illegal, immoral, and done at the point of a weapon...classic textbook socialism. The "investor class" has revealed themselves to be the "robber class". And the government is in their pockets, along with my children's future incomes.

F*ck this.

2008 Sep 09 09:44 AM

[Socialism c...:]

No!! It has not. It amounts to the pulling of the fire alarm lever...every homeowner with negative equity is now running for that exit, since banks will now give it to them...being backed by the Treasury now. This was the dumbest and most unfair thing to do since...um...the federal income tax. Our government just keeps growing and taking another bite out of our freedoms...this time it is economic freedom. We have traded free-market capitalism for short-term $$. We should have let those who bought at too-high pricing take their own hit. The penalty is now going to hit us all in taxes, loss of free-market principles, and particularly those who did hold off on home purchases to wait for what they saw as a needed pricing correction...that is now *not* being allowed to happen (hand raised here).

I'm am more than slightly miffed at our government and its new-found dose of socialism!! :( :( *|---

2008 Sep 09 03:25 PM