Monday, March 9, 2009

Monday: The Bull Prepares For Its Return

TUESDAY MARKET CLOSING: Strong gains into the final hour

I'm going out on a limb and tell you why a rally is beginning in the next 1-7 trading days. Also I want to say why you should take everything Warren Buffett says right now about the economy with a grain of salt.

Six Reasons the Stock Market is About to Pop a Wheelie and Turn Around:

1. This Thursday, The Geithner Gang at Treasury will consider letting financial institutions drop the Mark-to Market accounting procedures (and go back to GAAP accounting) that has caused many of these institutions' long-term assets to be valued far, far lower than their true value, even with their toxic assets. If this mark-to-market rule---which came as a part of the dreaded Sarbanes-Oxley (over-reaction) Act---is suspended even temporarily, you can expect the markets to power up and rally. This will also help the financial institutions get back a little of their incredible lost value. At my breakfast recently with Senator Bob Corker, on the Senate Banking Committee, he assured his constituents he was in favor of this change, sooner rather than later.

A vital ingredient for getting the economy back track is helping the battered financial institutions get their heads above water. Suspending mark-to-market for now is job one. That said, John Tamny who is one of the smartest guys I know, has another opposing opinion on MTM accounting. I happen to mostly disagree with John on this one.

2. Also this Thursday, The Geithner Gang is to consider reinstating the Uptick Rule which would no longer allow short sellers to short a stock while it's falling and even when they don't even own it. If this happens, and it needs to happen, the long buyers will replace the short sellers who've been dragging an already brutalized market down by shorting stocks they don't even own as they fall. We will indeed see the markets start to turn around and make a substantial recovery this spring.

3. Many stocks are making higher-lows on lower volume from their November 2008 lows, which means selling is petering out.

4. The mood of the country is unbelievably pessimistic. When you hear Warren Buffett say the economy is going over a cliff, you can bet he's out there excitedly buying up everything he can get his hands on. Conversely, when he says things are going well, he is out there selling like crazy. He's not the richest man in the world by following the crowd. He's always been a contrarian, and still is. Remember, even in desperately bad times, someone is making money on other people's fear and desperation and need.

The smartest money always moves back in when the herd is still quaking, during the darkest hours before dawn. The smart money will be moving in within the next few trading days, especially if The Geithner Gang does what it knows it needs to do, suspending mark-to-market and reinstating uptick. That doesn't mean the smart money won't place tight stops and keep close watch when they do. But they'll ride the bucking bronco long before anyone else will and be rewarded handsomely.

5. People get more optimistic in the spring as the days get longer. It's silly but true. This rally may not last forever, but it will be a substantial bounce which lasts well into the summer. That doesn't mean there will be no volatility in stocks. There will be. But markets will improve as our spirits lift for a while at least. This will more than likely be a bear market rally, but it will still be a rally.

6. And finally, markets have already factored in the incredible damage the Obama-Geithner Gang can and will do to the economy, at least for now. Markets are a leading indicator rather than a lagging one. And in case you've been living on one of the moons of Pluto, the investor class--which is almost all of us now---doesn't much care for the Obama pseudo-cures for the economy.

BTW, this doesn't mean I think the economy isn't still sick or that we're not in a long-term contraction. But a market rally will help stabilize the free fall and also help our spirits as we make our way through this mess. The key though is not letting government intervene too much. The economy will be much better off if The Geithner Gang gives it an aspirin instead of trying to put it on life support.

Do I hear an amen? Or just another bull! ?

Yes, yes, I know Charles Nenner was wrong on his timing. But what I wrote about here was Nenner's call. What I've written here is mine, with the help of one of the best and most conservative money men anywhere. Tom, and Jack too, along with Investors Business Daily and Kevin Kennedy at Coolcat Report, have taught me so much about markets and how they work over the past 6-7 years. And I am deeply grateful. When Tom says we're close to a rally, I listen. And I happen to agree anyway.

Photo WSJ Photo Journal