The Financial crisis: Toxic Assets or Bargains?

The Stress Test results from Banks yesterday proved one thing to me, these toxic assets may not really be as bad as everyone has claimed they are. How else could the Banks pass the Stress Tests yesterday for the most part. It wouldn't make sense unless these tests were a farce. I just can't believe that the best minds devised a test that was meaningless. Could it have been flawed for our benefit? Positively, it could have been. But with the whole world watching, I doubt it.

That means that the recent purchases of foreclosed homes by bargain hunters may have staved off a more precipitous drop in housing prices. The additional benefits from the Treasury and Fed coordination of the lowest interest rates in years have given some the bargain of their lifetime.

I have been wondering why the stock market hasn't been beaten up even more than it had. And I was also wondering why it has gained so much recently and why does this crisis not resemble the 1930's stock market crash. Well, like it or not, I believe we are moving at a pace so much faster than those of the 1929 Stock market crash and the following years of the Great Depression. In my view it is all because of Technology and the Internet. Communications happens now 24/7 where back then many didn't realize what had happened until it was affecting them directly or their neighbors. I am reminded for the rapidity of information regarding our recent scare over the Swine Flu. But the messages by the media to cover your mouth when you cough, to wash your hands throughly, may have helped ease this illness in ways we can't imagine.

With instant communications and the instant gratification this generation has come to expect, we all want to be over with this and move on with our lives. Yes many got very scared and drove to protect themselves financially, but many others are apparently over the crisis and as long as they are employed, they see enough signs to suggest they can get back to their old ways. Whether this bears out, only time will tell. One thing seems certain, these toxic assets appear to have been undervalued and since most of them are based upon real estate, there may be some terrific bargains out there. What attracts me to that idea is that real estate is a hard asset. And if we are on the path to recovery as many believe, then inflation must be around the corner from all the cash infused to save the banks and the financial system.

How has this affected my thinking about the stock market? Well we should be able to see very soon whether we are going to recover back to the Dow 10,000 and above by watching the 200 day Moving Average line. If we can get above the 200 day Moving average on Indexes like the Dow, S&P 500 and the Nasdaq Composite Index, we may recover much more quickly than many are expecting. The 200 Day Moving average on the Dow, crosses the axis at exactly 9,000 today. It crosses the S&P 500 at 957 and it crosses the Nasdaq Composite Index at 1740. We have been over the 200 day MA on the nasdaq the past 2 out of 3 days. The Dow bear market that started on September 3rd, 1929. didn't make it back to its highs until 1954!! The Dow closed yesterday at 8,409 and the S&P 500 closed at 907.

I have a hunch that this time it will be much quicker. We may look back at this time in 10 years and wonder why we acted either so afraid we missed a once in a life time opportunity or were so confident we took advantage of this situation. To me this infers you must be nimble and question yourself and your actions daily, in the face of new information and ever changing circumstances.

UPDATE:

News just out: The unemployment rate just came out for April and it is now 8.9% nationally, up from 8.5% in March. I had expected 9.0% or over.

Market review and outlook for week of April 6th, 2009

The market is down at the time I am writing this today. However, given the Unemployment rate rose to 8.5% for March the markets are taking the news remarkably in stride. The Dow yesterday went over 8,000 for a brief time and closed at 7,978 while the S&P closed at 834.

As I stated last week on March 28th, and I quote, "So what's ahead for the week of March 30th? I am overall still optimistic on the market. Many see this as a Bear Market rally and can't see the Dow and S&P 500 going much higher. While I agree that this is still a Bear Market rally, I do believe we can go as high as 9,000 on the Dow before we pull way back again." I also said this, "I am hopeful this coming week of staying above the 50 day Moving average, but as I have cautioned before, if you are trading, pay attention as this market can go in either direction very quickly. One indicator next week will be the Unemployment rate and we already know it won't be good. But it is a look backwards..." It seems this latter statement regarding the Unemployment was close to what has transpired today. I don't see any change from that view.

The Put to Call ratio went to a high for the week of 1.14 on Monday, but since has dropped to about 0.72 today. The VIX Index is also quiet now at about 40. It seems to me that shortly those who are Short on this market are going to wake up and see the markets rise and finally have to cover giving the market its next surge back up to stay well above 8,200 on the Dow and 850 on the S&P 500. The markets are not going to sprint to above 9,000 anytime soon. But we will steadily gain a few percentage points at a time over a week's duration. It will help return some confidence to markets and to the Consumer eventually.

I believe this uptrend will take us into the summer months and we will remain within the range of 8,000 to up to 9,300 until September and October when we all will know if the strategy to get the Banking system and economy back on it's feet. If we haven't by then, the markets will retreat and retest the lows at the 6,400 level. So if you think we are going to eventually make it, then it is time to start buying back into this market with fresh funds, as watching from the sidelines is going to feel like a huge missed opportunity.