Tuesday Morning – Big Ben in London

Bernanke is speaking this morning in London, a rare event for a major policy lecture.

This is coming on a morning where the European markets were off about 2% ahead of his remarks and US futures were also pointing down before the 8 am EST speech so it will be interesting to see what, if any, impact he has. “Fiscal actions are unlikely to promote a lasting recovery unless they are accompanied by strong measures to further stabilize and strengthen the financial system,” Bernanke said.  “More capital injections and guarantees may become necessary to ensure stability and the normalization of credit markets.”

Bernanke’s speech indicates he sees further government aid to the U.S. financial system as essential to an economic recovery. The Fed chairman recommended three approaches on troubled assets. Public purchases of the bad assets are one possibility, as was originally planned Paulson’s Troubled Asset Relief Program.  The government could also agree to absorb, in exchange for warrants or a fee, part of the losses on a specified virtual portfolio of troubled assets, he said. Regulators used that method recently with Citigroup Inc.  Another measure “would be to set up and capitalize so- called bad banks, which would purchase assets from financial institutions in exchange for cash and equity in the bad banks,” he said. Finally, efforts to reduce preventable foreclosures “could strengthen the housing market and reduce mortgage losses” and increase financial stability.  The Fed chairman said the U.S. central bank still has powerful tools to influence growth and prices.

So get ready for TARP II, which Bernanke seems to be indicating will do everything TARP I was supposed to do before Paulson took the money and used it for completely different things than he told Congress he was going to.  This comes from Bernanke at the same time as Bush is asking Congress for the second $350Bn from TARP I, presumably trying to get that money before Congress remembers we already had a TARP program that was going to do what Bernanke is proposing.  Quantitative Easing is now being tossed around as policy, QE essentially translates as flooding the market with dollars to spur growth.  Have I mentioned I like gold lately?

While Ben is speaking the Euro is trading back near it’s lows against the dollar as the ECB is seen as being behind the curve in adjusting their monetary policy.  I’m not sure how NOT giving money away makes you the irresponsible one but that’s the tone that is being set in the currency markets.  Of course it’s all about fear – by tossing Trillions into the system the Fed is easing the fear that the US financial system will collapse as they seem clearly hell-bent at preventing that at all costs.  Trichet has not given European investors the same warm-fuzzy feeling that Bernanke is giving to US investors.  Not that this is really doing anything for our own financials as the XLF is heading back to it’s November lows as fear of the unknown earnings grips the market once again.

We like XLF as a bet against the long-term collapse of the US banking system and you can buy that ETF for $10.80 and sell the March $10 puts and calls for $2.90, which is a net entry of $7.70 if called away at $10 (up 29%) or an average entry of $8.85 if it is put to you on March 20th, an 18% discount off the current price.  As more of a gamble, we also like the UYGs, a 2x ETF that tracks the XLF and is back below $5 at $4.71 (was $65 in October 2007).  While we don’t expect it to go back to it’s highs, it won’t take much improvement in the financials to rally this one so we like scaling in at this price (it may go back to $3.50 on a spike down where we’d really like them) and holding it naked or selling the March $5 puts and calls for $2 to drop the net to $2.71 (called away with a near double) or a $3.85 average entry (an 18% discount). 

This is what we mean when we do our hedged entries for bottom fishing – we’re comfortable picking up some of our top stocks here as we have quite a bit of leeway to the downside should the market fall further.  Our biggest problem in our first round of sales was that we were getting everything called away from us and, despite the great profits, we didn’t want to give up the positions but it sure does give you comfort when the market is falling to have these hedges!

On the International scene, Japan got us off to a really poor start this morning with the Nikkei falling to the 5% rule after coming back from a holiday.  China’s trade data showed continued slowing with both imports and exports sharply lower, sending both the Hang Seng and the Shanghai down near the 2.5% rule (it’s the same as the 5% rule actually).  Bombay stabilized and the Baltic Dry index continued to climb so somebody’s buying something…

Europe is coming back just a bit after Bernanke’s speech, down about 1.5% now with miners and bankers leading the decline.  Both Germany and the UK are coming up with additional stimulus plans and we wait on the ECB to announce their widely-expected rate cuts.  Both Tesco and Metro (big EU retailers) warned of a very tough 2009 and that’s keeping a lid on that sector, along with everything else in Europe.

Tech will have a tough morning as Broadpoint cut ratings on 10 companies including YHOO, AMZN, GRMN, DELL, NILE and CSCO so any move back over 30 on the Qs will be a good sign that we’re getting tired of selling tech this week.  We’re ready for the Obama rally and started picking up our Bottom Fishing Plays around 8,500 yesterday – perhaps a little early but you have to start somewhere… 

I really felt like I was swimming against the tide in yesterday’s member chat as I insisted on being bullish as we broke below our supports but the selling seemed panicked and overdone and I’m sticking with that theory until I see real evidence that our markets should be priced at a 40% discount to last year’s prices.  Yes, AA was terrible but they already told us earnings would suck but INFY came in with a beat this morning and we have CBSH tomorrow and JPM and BLK on Thursday and that should firm up our picture of the financials but it will be too late to buy XLF and UYG by then if I’m right!