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Gambling on Geithner

Posted by: Ben Levisohn on March 22, 2009

In the age of TARP, TALF and other acronyms, government action is the market wild card. For this week’s government intervention, Treasury Secretary Timothy Geithner is expected to announce details of Treasuries plan to purchase toxic assets. And one way or another, the markets will be on the move.

But trying to play react to the government can be deadly. Last week, the Federal reserves sent the market into a tizzy when it announced it would spend over $1 trillion if necessary to buy long term Treasuries and restore the economy. The Standard & Poor’s 500 had been testing a key resistance level around 780, when the Federal Reserve made its announcement. As the news broke, traders pushed the S&P 500 through 780 as if it were cotton candy and the market a swarm of hungry kids at the amusement park, pushing the market as high as 803. The ride was over however by the end of the week. By Friday, the S&P 500 settled in at 768, still 13.6% above its March 9 close of 676.53, but lower than the close the day before the Fed announced its plans for quantitative easing. It’s enough to give an investor whiplash.

So how about ignoring the government altogether?

I talked to Savita Subramanian, Quantitative Strategist at Merrill Lynch, about the market’s rally on Friday and her advice is to stop trying to play the wild gyrations, but instead to find a safe entry point. To do so, she relies on market indicators, data that give a sense of the overall health of the market, that show momentum has shifted from the downside to the upside. For instance, she looks at earnings visibility – the ability to accurately gauge corporate earnings – as measured by analyst estimates. (If analysts tend to agree, that’s bullish. If not, it’s bearish). She also looks at share buybacks to determine if “the smart money” is bullish and bearish. And at the bottom and at last week’s top, they still said the same thing: wait. “All of our indicators are deeply negative,” she says.

That doesn’t mean investors should stay out of the market. Some sectors actually do have strong and visible earnings. They’re still in the defensive sectors – consumer staples and health care. But Subramanian is also starting to see opportunities in the large, blue chip tech companies that are flush with cash. “The old technology companies that have cash look attractive,” she says. “They have ability to weather a liquidity crisis.”

For investors who feel they have to jump in at every sign of an up-tick, Subramanian says not to worry. “Typically you see a fundamental earnings recovery that persists for a cycle a couple of years,” she says. “It’s hard to miss.”

Reader Comments

The Mad Hedge Fund Trader, San Francisco, CA

March 23, 2009 3:53 PM

I’m sorry I’m late getting my comments out today, but I had to get my application in to manage the Treasury’s latest $1 trillion bailout program. They’re due April 10, and I wanted to get mine in ahead of Black Rock’s and PIMCO's. I only have to show $10 billion in assets under management and the ability to raise $500 million. For this, the FDIC will effectively lend me interest free long term loans to buy all of the toxic assets I want at deep discount prices with 6:1 leverage. I’m sorry, but I can’t resist those “heads I win tails, you lose” trades the Feds are offering, hence the rush. This certainly takes nationalization of the banks off of the table, and makes those buyers of Bank of America (BAC) two weeks ago at $2.50 look pretty smart. The government has now shot its wad, and there is really nothing else they can do now but sit back and pray until the $3 trillion in stimulus/bailout/reliquifying they have committed to starts to work.


March 24, 2009 4:51 PM

What a great deal this new Treasury plan (toxic asset purchase - Public/Private Partnership?) is for the select few bandits that helped create this problem in the first place. If I understand this correctly, the US government puts up half the money to purchase this garbage paper at 30 – 50 cents on the dollar, in “partnership” with 6 or less hand picked Wall Street piglets. Then the FDIC will further fund these bandits at a 6 to 1 ratio (thereby allowing these “privileged few” to purchase these “assets” at 4 cents on the dollar, face value). Later on (is there a timeline for the non-recourse loans?), if the “privileged ones” decide that they either don’t like the investment or the value drops below their miniscule investment, they are allowed to walk away “scott free” leaving the taxpayer with the debt and the bad paper. Yet, if the "investments" increase in value, the government and the "chosen ones" split the profit 50-50. I don’t know what they are smoking in Washington these days, but I would love that kind of partnership arrangement! Is anyone really going to be shocked when, after this administrations’ term, Obama, Geithner and all the other cronies involved in this crapshoot, end up with jobs, BONUSES and stock options from Wall Street firms? In Canada Triple P (Public Private Partnerships) stands for corruption, theft, incompetence, mismanagement and a GREAT deal for the PRIVATE entities, really just a newly discovered way for the thieving politicos to pre-feather their post-politic nests. Hope you have better luck with them than we’ve had.


Nicholas Quarmby
Vancouver, B.C.

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Bloomberg Businessweek’s Ben Steverman focuses on the latest moves in financial markets and emerging trends in stocks, bonds, and funds, always with an eye toward giving readers a better understanding of the sometimes confusing and often chaotic world of money. Standard & Poor’s senior index analyst Howard Silverblatt will also provide his take on companies’ finances and the markets. Voted one of the “Top 100 Finance Blogs” in 2007.

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