Wednesday, March 18, 2009

The Latest Market Rally - Signs of a turn around?

Having been self-teaching myself investing lately, I have by extension grown to pay attention everyday to business news via CNBC. Last month of February, the Dow Jones bottomed out a 6876, a score it hadn't had since 1997. However for the month of march, it would appear to be slowly recovering, with the three day rally of last week (as of the time of this writing), restoring the Dow at a recent peak of 7571. What could attest to this market behavior? Could it be a sign of market recovery, or be merely a short run rally on account of some of the good news from the week of last?

Some of the attributes that may attest to the market's slow attitude shift would include the assurance by Bernanke (chairman of the Fed) that helped quell some of the pessimistic fear of the naturalization of banks. Talk of abolishing the Mark-to-Market rule that brought chaos to the books of many of these financial institutions, and the memo that was leaked from CitiGroup and Bank of America that they are still profitable has also aided in this. Bank of America for instance announced today (March 18th) that they in fact planned on being able to repay their TARP fund loan by the end of 2009 or early 2010, leading to a rally (which as an aside, led to this rookie investor making a profit in his practice portfolio, as I predicted that economic recovery would have to begin with real estate and financial sectors).

But is this really a long term recovery we are seeing? These market effects may be temporarily caused by the buy outs of Short Sellers in the market. Short sellers thrive on bearish markets, as they "borrow" a quantity of stock they speculate is going down, sell it, and then replace the borrowed quantity of stock after the stock price drops. If the price goes up against their bet, they are still contractually obligated to replace the stock they borrowed, whereby they would lose money.

Say for example you know that the price of your friend's used movie or videogame is $25, though in a week you understand that it will sell at only $15. You borrow the DVD from your friend, sell it for $25, and as the price becomes $15, you buy it back just as your friend is beginning to wonder what you've done with his disk. Your friend still has his DVD, but you just made $10. The risk you took was, had price of the movie actually gone up to $35 after you sold it at $25, you'd still need to replace the what you borrowed anyway, lest your friend discover what you were really doing with with his precious DVD and snap you in two as though you were a disk. You'd had lost $10.

Since the financial sector as experienced some unexpected good news as of late, this would account for a short term rally, as short sellers only profit on dying stocks, and must replace what they borrowed to protected their gains. However, President Obama still seeks his social programs and considers raising taxes on households above the $250k mark, and Nancy Polosi has begun speculative talks of starting a new stimulus package, which would no doubly lead to more pessimism of the future within wall street. Before this recession can truly, the sources of the Housing and Mortgage Crisis must be addressed. Mark-to-Market accounting must be forever done away with, and the policy mandate of Freddie and Fannie to promote indirect subprime Housing Welfare must cease.

Time will tell.

~David Morris~

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