There Is a Better Way Than the Bailout

[The following is excerpted from Bill Cara's Daily Report]

I want to see this bailout bill defeated and better solutions put into place. A Resolution Trust Co 2 could be established immediately. I want independent and objective high-profile people to make such important decisions – not the Treasury Secretary and the Fed.

If you wonder why I feel so strongly about this, ask yourself why IndyMac, WaMu and Lehman were taken over and Fannie (FNM), Freddie (FRE) and AIG (AIG) were saved. This is Wall Street backroom stuff and in-your-face politics. It is all evidence the capital markets are not free and I will express my views that more intervention by the people who caused this crisis and who stand to benefit is the last thing America or the world needs.

There is a better way.

When I look at the lips of Senators Obama and McCain moving on this issue, I know they are bought-and-paid-for by Wall Street. It makes me sick there isn’t a candidate who will stand up for the people.

In any case, traders like me get over it. This weekend, I shall add to my list of 36 candidates for purchase in the new Bull market.

As you know, my portfolio weightings are 40% long stocks, 40% short puts, and 20% gold and silver stocks. If the market tanks following this weekend, or on Friday if the House votes during the market session to reject the bailout bill, those short puts may get exercised unless you carefully select deep out-of-the-money strike prices. If you do get goldminer stocks put to you, you ought to continue to hold those.

The latter point is important because if there is a market shock in the days ahead, the required action by monetary authorities will be so extreme that ultimately gold prices will soar. So, if you do have to raise cash, do so in the defensive stocks that get put to you.

If you do get stock put to you, you would immediately have to sell some of that stock, but you will end up with a portfolio that has a lower cost basis. On the other hand, if the market rallies hard through next week and beyond, you can hold those short puts to expire worthless, meaning your income is significant. You can then roll over the cash into more short puts or some new long stock positions, depending on your need for income.

But avoid Treasuries and also corporate debt unless it is well backed and carries a convertible feature.

Yes, I am bullish, and yes I am conscious of the economic and financial perils facing the world today. With respect to the latter, I cannot ignore the extreme actions being taken in coordinated fashion by international finance ministers and central bankers.

As a pragmatist, I do not bet against these interventionists. If this were a free market – but it’s not – my DJIA/NASDAQ target of 10000/2000 would likely be exceeded on the downside. But the market is controlled, and we need to deal in realities.

Have a good day. I know I will. In fact, I put on my bathing suit to start this report and will finally now get to spend some time on the beach before the market opens. If you happen to be at Cable Beach Sandals Resort, you can wave. I’ll be the swimmer with a happy face about 100 feet to your left.

Comments

[woodsey:]

"Old Japanese saying: 'Be happy in your work'."

2008 Oct 03 11:26 AM

[engprof:]

". . . about 100 feet to your left"--yeah, but some of us are further left from there and still moving. I'd like to understand how those short puts work because I do not see anything replacing the stock market as a source of capital development in the foreseeable future. What could replace it--real estate?--Huh. So those of us who have just plodded through with worrisome long positions need to get smarter fast.

2008 Oct 03 01:25 PM