Time and time again, the old wisdom proves true. This week brought two seasoned adages to mind. First, it’s not the news, but the reaction to the news that counts. And second, the sharpest rallies tend to come in to bear markets.
We saw this on Tuesday with Wachovia (WB:NYSE), another battered and beleaguered bank. Wachovia reported a whopping $8.86 billion loss -- not chump change in anyone’s book -- and yet the stock soared 27%.
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What’s Wrong With This Picture?
If there’s any evidence that hope still springs eternal in the hearts of investors, this is it. Wachovia has a market cap of $36 billion as of this writing. It also has $62 billion worth of troublesome home equity loans on the books. What’s wrong with this picture?
Existing home sales fell to their lowest levels in a decade on Thursday. And yet, thanks to Fannie and Freddie trouble, mortgage costs are marching ever higher. JP Morgan reports that credit troubles are spreading to higher income earners. Bailing out the broken system could run anywhere from $25 billion to $100 billion. And this is the backdrop against which sad-sack lenders catch a bid?
You can’t fight city hall, and you can’t fight the emotions of the crowd. But you can wait patiently and profit with a timely strike once the frenzy wears off.
Your humble editor is skeptical that this latest financial rally will turn out to be anything of substance... except another shorting opportunity when the time is right.
When the financials really do turn the corner, chances are we’ll hear the sound of crickets, not the sound of cheers. True market bottoms tend to follow the form of T.S. Eliot’s “The Hollow Men.” They arrive not with a bang, but a whimper. And they’re almost never called by the likes of Barrons and The Wall Street Journal -- this must be the turn, hooray! -- on the very same day.
Oil Takes a Breather
In other news, oil is finally backing off a bit -- for the time being, anyway.
So what are the factors leading to oil’s short-term drop?
John McCain says we have George Bush to thank. On Wednesday, McCain told a town-hall meeting audience that the president’s lifting of a ban on offshore drilling was the reason for crude’s swoon. (On reading the news, your editor became temporarily confused... Was this another shot of oddball McCain humor in line with “Shut up, you little jerk” or “Bomb, Bomb Iran”?)
We’re more inclined to think it’s a lot of little things... many of them spelled out in a Taipan Daily from two weeks ago, “What If the Price of Oil Implodes .”
Like a hundred tiny paper cuts, all the factors began to weigh on crude. (Follow the link above to see them spelled out.) Then you have other bits of food for thought, like a new report from the U.S Geological Survey showing there could be 90 billion barrels of oil in the frozen arctic.
Select Asian ETFs Look Like a Buy
If you’ll forgive the indulgence of a self-quote, two weeks ago I said this:
Because there is so much concern... because so many are wringing their hands over Asia's high-priced-energy troubles... a big drop in the price of crude oil could turn depressed Asian markets into a coiled spring.
Or maybe think of it like a strong but struggling hiker, laboring to carry on with a backpack full of rocks. If crude falls sharply, the backpack suddenly gets lighter. Gloom lifts and a second wind returns.
With that “coiled spring” image in mind, take a look at ETFs for the following countries: China (FXI), South Korea (EWY), Taiwan (EWT) and India (IIF).
There are other factors going on here besides oil. India, for example, recently saw some very bullish political news. But rest assured that falling crude is fueling this shift.
If the crude oil express is no longer a one-way ticket to inflation oblivion, then Asia can breathe easier... and Asia’s rapidly growing economies can get back to the business of exports and building up domestic demand. Again it’s not the news, but the reaction to the news that counts. And that makes Asia look good for a trade.
Warm Regards,
JL
