Kicking Off The Stimulus Debate
Political Bickering & Wall Street
Dear Bottarelli Research Member,
While watching the Dow mover over 300 points higher last Thursday and Friday, it became obvious that Wall Street is in that uncomfortable and awkward position of being dictated by the actions in Washington.
On one hand, you have the Republicans — whose first stimulus plan was nothing more than wasted money. On the other hand, you now have the new Obama stimulus plan which fueled last week’s rally. But as this new plan attempts to get passed, you have leading Republicans warning that the new $800 billion economic infusion will lead to “financial disaster.” Specifically, Senator Richard Shelby of Alabama, the ranking Republican on the Senate Banking Committee, told CNN’s State of the Union that the country will “pay dearly” if it executes the President’s stimulus plan.
On the flipside, you have Lawrence Summers, head of the administration’s National Economic Council, who makes a good counterpoint. He says that the Republicans have lost all their credibility on this stimulus issue, telling ABC’s This Week that “those who presided over the last eight years -- the eight years that brought us to the point where we inherit trillions of dollars of deficit, an economy that’s collapsing more rapidly than at any time in the last 50 years -- don’t seem to me in a strong position to lecture about the lessons of history.”
In my humble opinion, neither plan will work. Personally, I see each stimulus plan as an attempt to drain out an Olympic-sized swimming pool by using a standard kitchen sponge. Just look at the current status of the banking sector, and you’ll see what I mean…
The government has already pumped $45 billion into Citigroup, but that $45 billion is only worth $19 billion today. These guys are destroying value faster than the government can pump money back in! To put it another way, consider this: Between them, Citigroup and Bank of America have $3.8 trillion in outstanding loans. But right now, Citigroup has a capitalization of $19 billion and Bank of American has a capitalization of $31 billion. In other words, the two largest banks in the country (if not the world) have $50 billion in value supporting $3.8 trillion in loans. Folks, that’s a lot of zeroes going in the wrong direction. Bank of American and Citigroup currently have leverage of 131 to 1. For every $1.00 they currently own, they have outstanding loans for $131.00. In my book, that’s nowhere near fixing our economic problems.
This concerns me because a large portion of President Obama’s $830 billion stimulus plan involves infrastructure spending, long-term energy projects, and aid to cash-strapped state and local governments. Very little addresses the financial sector. Until the financial system gets fixed, our economic troubles will persist. That’s why I remain very, very cautious about the current market conditions. In fact, my biggest fear is that this stimulus package gets passed, and it fails just as miserably as the first one. If this occurs, then the psychological implications could be disastrous. After all, you’ll have the Republicans spending billions without any effect, and the Democrats spending billions without any effect. If neither plan works, we’ll be in worse financial shape than ever before. And this could spark a market down-move like we haven’t seen in our lifetime. As I look at this situation, it could spark a 1,000 point market down-day. Now don’t get me wrong. I do not want this to happen. In fact, I hope that I’m completely and utterly wrong right now. But I have to call it like I see it, and by connecting a few dots, this is the sobering reality.
Now I admit, last week’s optimism about the stimulus package gave the major market averages a nice upside push, and this forced us to stop out our V February 50 Puts (V NJ) and our AZO February 125 Puts (AZO NE).Looking specifically at Visa, I’m utterly amazed that any investor believes that they’ll prosper during these economic times (no matter what they reported last week). But we’ll adhere to our stop loss and call the position closed, despite my desire to play another round of puts.
This leaves us holding the AEM March 60 Calls (AEM CL), which continues to look strong above the 200-day moving average. Maintain these calls for more upside.
I’ll be out with further updates as the day progresses. But until then…
Lock and load!
Sincerely,
© 2012 CSR Group, LLC. All rights reserved. Published in USA.
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Afternoon Update
Kicking Off The Stimulus Debate
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