The Government May Finally Get It Right

Friday was the most volatile day I have ever seen in the market and fear reached it's all time peak. Mr. and Mrs. Main Street were anxious as they called their brokers to investigate whether it was time to sell their 401Ks. Volume on the stock exchanges soared and the indices plummeted. This is what we called for on Thursday night. We are clearly close to capitulation and Friday probably represented the lows of the market. Volatility will persist and it wouldn't be surprising to see a rally of 700 to 1000 points in the DOW one day next week.



The problem is it is still all about the economy and the credit crisis. The passing of the government bailout plan and the injection of much needed liquidity around the world has not renewed any confidence in our financial system. On 9-29-08 we wrote "We Need A New Plan" which called for direct injections of capital into financial companies to stabilize the banking system and rebuild the capital bases of those institutions. It appears that this is the new focus of the government bailout. The government should focus on three key companies which seem to need help in confidence. They are Morgan Stanley, Goldman Sachs, and Citigroup. Others will also need capital infusions but those three have swooned and need to be stabilized. Such an injection will likely result in a major stock market rally.

Trouble won't be over as it will take two to four years for the economy to flush out the excesses of leverage. Expect weak earnings reports for a while and negative GDP for a few quarters but eventually the United States will move back on a path of growth as long as the global financial system avoids catastrophe.