A fairy tale

September 19th, 2008  by Lou Muddaris

Closing Data

Dow Jones up 410 @ 11,019	NASDAQ up 100 @ 2,199	Gold Dec 08 up 46 $897
Oil up .11 @ 97.5	FTSE down 32 @ 4,880	Silver up 1.0 @ 12.7
Copper down 42 @ 6771	Lead up 24 @ 1,794	Zinc down 8.5 @ 1,687
Aluminum down 6.25 @ 2,443	Nickel down 315 @ 16,555	Tin down 845 @ 16,885

A fairy tale

Once upon a time a few years ago in a far, far away land called America, John and Jane Doe were very poor and wanted to buy a nice house. They asked Mr Mortgage Broker to help them. Being a nice man, he gave them as much money as they wanted and said they will only have to pay a little bit back but did warn them that could change. Everybody was happy, Jane and John got their lovely house and Mr Broker got extra money!

A few months later, Mr Bank was very angry with Mr Broker as Mr and Mrs Doe had lied about how little money they had and hadn’t been given any money back. But he also thought it doesn’t matter as house prices always go up. He knew his friends Fannie, Freddie and Mr Whizz Investment Banker in New York would make it all better!

These nice clever people called these horrible loans a special name(CDO) and made it look nice and sold it to Mr Investor. Now, Mr Investor thought these pieces of paper are very cheap and were very happy as Mr Whizz always knows best!

Meanwhile, Mr Whiz saw these horrible pieces of paper go more horrible so he had to hide them as Mr SEC and Mr Audit will be very angry; IDEA! I’ll make up another name for my company in the Cayman Islands, that way Uncle Sam won’t smack me! We don’t want anybody to know about this, especially Uncle Sam.

Then suddenly the happy days became sad days when Mr Hedge Fund heard about all these naughty things and smacked Fannie, Freddie and Mr Whizz Kid Investment Bank very hard and even took all their money away! Now Mr Investor was also very sad as he has lost a lot of money; there’s only one thing for it he thought! Lets all go to kind Uncle Sam he will make it all better.

Uncle Sam tried to help but it was just too much money to give to everybody. So poor Mr Lehman was hurt along with all his other friends including his big brother Mr Merrill.

And we all lived unhappily ever after…

Back to reality

We are opening 140 higher on the back of the Dow Jones rallying over 400 points; its biggest one day rally since October 2002 which significantly saw the birth of the bull market.

Reasons to be positive

1. Treasury Paulson is in negotiations with Federal agencies to re-establish the Resolution Trust Corporation (RTC). This was originally set up in 1989 to bail out the Savings and Loans institutions and could be used to bail out financial institutions. The Treasury will in effect buy underperforming securities and toxic debts. It is a major backstop. The only question is who would be entitled to dump toxics and at what price. This announcement saw the Dow Jones rally 350 points in the last hour.
2. U.K banned short selling….the Hedge Funds won’t be pleased. Also the SEC is tightening up on short selling in the U.S.Also Lloyds Bank and HBOS (think CBA and NAB x10) are merging. They own BANK WEST and they could be now a take over target as Lloyds has consistently rejected any Australian exposure.
3. The 5 major Central Banks pumped an unprecedented $200bln into the money markets causing spreads to narrow and encourage banks to be less risk adverse when lending in the inter-bank market. This is key as it was the cause of the stock market collapses.
4. All the recent Government selective bail outs have just caused more uncertainty; markets hate uncertainty. Its a bit like prescribing panadol for a brain tumour! The establishment of the RTC is major surgery!
5. Today’s headline in the Courier Mail; “ BLACK MARKET”. For the past 3 days they have headlined the apparent indiscretions of 3 Brisbane Bronco’s!  I’ve seen it happen so many times before, such headlines signal the bottom!
6. As we highlighted in yesterday’s Fox Report things are finally looking cheap!

Volatility

Now this is one thing we can guarantee.

Tonight in the U.S we have “Triple Witching Hour”. This is when options and futures expire. The effect is that traders/hedge funds manipulate prices to gain on their strike price positions.

I’m just glad it’s nearly the weekend! TGIF!

Quote of the day: “If you lend somebody $20 and you never see them again it was money well spent”

Contact your Freeman Fox Stockbroker on 07 3031 9960 or 1800 003 369 Ext 7.

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