Another Attempted Rally
Gary Kaltbaum is an investment advisor with over 18 years experience, and a Fox News Channel Business Contributor. Gary is the author of The Investors Edge. Mr. Kaltbaum is also the host of the nationally syndicated radio show “Investors Edge” on over 50 radio stations. Gary is also editor and publisher of “Gary Kaltbaum’s Trendwatch”… a weekly and monthly technical analysis research report for the institutional investor. If you would like a free trial to Gary’s Daily Market Alerts click here or call 888.484.8220 ext. 1.
I do not pretend to be H&R Block, but I do believe I have a knack for snuffing out shenanigans in the financial community. Thus… I must talk Merrill Lynch
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PowerRating) again. Out of the box, I must say that John Thain is making Enron look pretty good right now. Is that harsh? Not to me. I believe Merrill has been misleading Wall Street for months, culminating in the laughter we have just seen. Think about it. Merrill reported earnings just days ago. In the conference call, Thain said, “Right now we believe that we are in a very comfortable spot in terms of our capital.” Fast forward, ok walk forward just a few days and all of a sudden Merrill has to raise another $8.5 billion… another $8.5 billion! I believe they are now above $50 billion. This non-disclosure very simply breaks every law of disclosure, but as usual nobody says a word. Thus more crony socialism. But that is not the biggest issue here. The biggest issue is the structure of these new “deals!”
A company by the name of Lone Star is buying the “stuff” for 22 cents on the dollar. But Merrill is financing a whopping 75% of the almost 22 cents. Lone Star is putting up only .055 cents with Merrill lending the other .165. What gives? Oh yes… Merrill gets to move $30.6 billion dollars of bad paper off of their books.
This paper was carried at a value of $11.1, meaning there was almost $20B in prior write downs.
After the deal, Merrill’s exposure drops from $19.9 billion to approximately $8.8 billion.
First problem: since Merrill is financing 75% of the stuff, don’t they still own 75% of the stuff. After all, who loses if the price keeps going down? If there is a default, guess who owns the stuff?
Second problem: what does this lovely deal really do for Merrill? Oh yeah, they get to move stuff off the books while keeping the liability. What is wrong with this picture? And I haven’t even started about the $8.5 billion raised… the nonsense continues! John Edwards may have been right. There are 2 Americas when it comes to the financial world with most all continuing to ignore the misdeeds. I would be in jail several times over if I handled my company in this fashion.
Now, on to the market!
Tuesday was a potentially very important day. The stock market followed through on a new rally as OIL PRICES again dropped precipitously. This bullish signal occurs after a major index hits a low and then experiences a big gain with volume higher than the day before. There is a direct correlation between OIL PRICES and the market since the market’s lows. Keep in mind…here is the line I say every time a follow through day occurs: Every bull move the market has ever had started with this characteristic but not every follow-through led to a new bull market. It is now time to build a watch list of leading stocks that have shown great relative strength during the bear phase and hopefully find them breaking out of bases on heavy volume. If none show up, this will tell you everything you need to know about the market. In past weeks, I have told you about the BIOTECH/MEDICAL/TRUCKERS but that has been about it for leadership. I will need to see more. The biggest moves on Tuesday were reserved for the areas that were hit the hardest and just trying to make up lost ground. Be patient…take your time because if this is for real, leadership will show up. You cannot hide bull markets just as you cannot hide the bear markets. The one thing I do at this point is to get off the short side…meaning any inverse ETF… whether market based or sector based. If this remains a bear market, I can always revisit. Keep in mind, the last follow through day in March lasted about 8 weeks and was very narrow with only a few COMMODITY-based areas leading. I suspect we will need to see the important OIL commodity continue to come in for the market to really get going. Lastly, please do realize that in the past 2 days, the DOW is up 20 points… S&P 4 points and NASDAQ 9 points. That is how spastic things have been. Do not believe for a second this is going to be easy.
Disclaimer: The opinions expressed herein are those of the writer and may not reflect those of Wunderlich Securities, Inc. or any of its affiliates. The information herein has been obtained from sources believed to be reliable, but we can not assure its accuracy or completeness. Neither the information or any opinion expressed constitutes a solicitation for the purchase or sale of any security. Any reference to past performance is not to be implied or construed as a guarantee of future results.