The financial blame game is in full effect. The US Treasury is getting ripped to pieces in the media by opportunistic politicians. What a joke. I am not on that bandwagon at all. I sit on the opposite end of the spectrum as I think Hank Paulson has been near perfect during this credit crisis. As far as I’m concerned there are only two men to blame for this crisis. The first is Bill Clinton who repealed one of the most important pieces of legislation in this nation’s history, the Glass-Steagall Act of 1933, a move which has caused the breakdown of the entire residential mortgage investment sector. The second man is Alan Greenspan who urged widespread use of zero money down ‘exotic mortgages’ to coax Americans into homes that they could not afford. So if you want to play the blame game, stay away from the current administration and research the source of our problems.
Considering the intense throttling that we have dealt with since the SEC ended their temporary enforcement of naked short selling on August 13th, Mr. Paulson has managed to turn the weakness into a strength almost overnight. There have been casualties. But they were necessary. A crisis of this magnitude could never be resolved without capitulation and I applaud the administration for allowing this process to occur as quickly and as orderly as possible. It’s scary to think where we would be without Hank Paulson. His experience as CEO of Goldman Sachs (GS) gave men like Jamie Dimon of JPMorgan (JPM) and Ken Lewis of Bank of America (BAC) the confidence that he could successfully orchestrate the consolidation of the industry.
There is no doubt that Hank Paulson has too much power to decide which institutions survive and which fail but fortunately for us, he has chosen wisely. Whether this was all part of a master plan or if he has adapted along the way might never be known but I suspect he has had a plan. We all saw where this crisis was headed. We all knew that housing prices weren’t going to bottom until 2009. We all knew who had the weak balance sheets. The consolidation within the financial system was inevitable. What is remarkable is that it’s all happened so fast. Those ruthless short sellers and annoying mark-to-market transparency rules have actually done their job. By resolving the issues of Bear Stearns, Countrywide, Indymac, Fannie Mae, Freddie Mac, Lehman, Merrill Lynch, AIG, and now Washington Mutual there won’t be any more dumping of mortgages or forced asset sales. The weak balance sheets have been firmed up to endure the remaining housing correction. The pain of September has solved our problems.
So why am I bringing all of this up about the Treasury Secretary? Because a clear understanding of what he has done over the last month shows us where this market is headed. On October 1st we’ll all look back and say, what in the world just happened?! And then we’ll start buying up stocks as we realize that our problems are in the rearview mirror.
Lagging indicators like employment won’t matter anymore as the market looks forward to recovery. The record amounts of cash that are sitting on the sidelines will jump into the market. The US dollar will continue to rise as the world applauds the speed at which we worked out our crisis. Foreign investors will jump into US equities as a result. This international money will boost our multiples to levels that we didn’t even see during good economic times because of the prolonged weak dollar.
I know it’s hard to envision such a scenario during a week like this one, but Hank Paulson's deft moves have set the stage for a sustainable market rally; something we haven't had since this mess began over a year ago. Take it from a guy who just last month took on industry titans Boone Pickens and Goldman Sachs for their status quo oil calls (check it out at www.lonepeakportfolios.com). People thought I was crazy for suggesting oil could reach $90 a barrel this year but look what happened on Tuesday. It only took one month.
Now I’m calling for a sustained market rally because of the orderliness and speed of Hank Paulson’s financial consolidation. Take a step back from the consolidation turmoil and you'll realize how much better off we are. Market volatility may continue through the rest of the month as the dirty work gets completed but this bottom is different. Investors should take note of the structural improvements and begin averaging into the market (IVV).
Disclosure: Looking to buy S&P 500 calls