The Oracle From Chicago Has Spoken

After a month of creating fear about the economy, financial system, and the stock market, President Obama finally gave the American People a pep talk last night in his State of the Union Address. While he was direct and honest about our turbulent times, he laced his speech with hope and encouragement for the future of the United States and its people.

Tough measures will be needed to stimulate this economy and fix the banking system but the cost of such measures will be painful for many years to come. This administration is prepared to spend as much money as it takes to revive the patient but it will also extract a lot of pain from the floundering industries. The auto companies will get financial help but it may only happen in bankruptcy. Banks will get more capital but the structure of those investments and potential future returns will be beneficial to the American Taxpayer. We may not get full Nationalization but the government's stake in banks will surely rise.

Yesterday's markets surged as the S&P was up 4% and the DOW rose 3.3%. The excitement by investors was bolstered by the testimony of Ben Bernanke to the Senate. Recent concerns dragging down stocks were related to the uncertainty of the Nationalization of banks. The Fed chief seemed to ease those concerns by indicating Nationalization wasn't necessary. He also gave some hope that the economy could see some improvement in 2010. There is enough cash on the sidelines coupled with short positions to quickly boost the markets and that is what we witnessed yesterday. Perhaps we get another day of that rally but in the end it is still "All About the Economy" and as Mr Bernanke and The President both bluntly indicated, the economy is extremely weak and getting weaker.

We remain cautious and liquid while searching for the tea leaves to become more encouraged about the housing market, auto industry, retail, and the financial system. The economy will bottom and the financial system will be fixed but it takes time. Investors have been too optimistic for too long and they will be too pessimistic for too long also. The key will be to recognize when stocks drop too much and when there is a light at the end of the economic tunnel.