At worst the tax cuts will validate current market valuations, says Tom Essaye. At best they’l...
Paulson Bailout Sets Up Bull Run
12/12/2007 12:00 am EST
Mark Leibovit, editor of VRTrader.com, says Treasury Secretary Paulson’s plan to keep homeowners from defaulting will help prop up the fragile markets and lead to new highs.
Plunge Protection Team (PPT) commander, [Treasury Secretary] Henry Paulson, has devised a plan to prevent as many as 1.2 million people from losing their homes by freezing interest rates on subprime adjustable-rate mortgages. Without the interest rate freeze, subprime borrowers will face an average mortgage increase of 26%, or $400 a month, which could have busted the US housing bubble.
There is no limit to the PPT's intervention schemes, and it's changing the rules of the mortgage market in midstream, to prevent a bear market at all costs. Never before have we witnessed so much “hands on” intervention in the stock market—the former bastion of free market capitalism!
But don't let this statement infer that I am in disagreement with their move. I am not! The worldwide financial crisis is in part due to former Federal Reserve chairman Alan Greenspan's overreactive series of rate hikes that caused the housing market to burst and create a credit crisis. The bottom line is Paulson and [Fed chairman Ben] Bernanke are trying to rectify Greenspan's gross miscalculation. Bernanke will back up Henry Paulson by printing more money and driving Treasury yields lower.
More than 30% of American borrowers with subprime adjustable-rate mortgages are behind on their payments before their loans reset higher, and reset mortgage rates will affect about $450 billion of subprime loans by the end of next year, according to bond research firm Credit Sights. Yet from the stock market's point of view, what matters most is liquidity, liquidity, liquidity—Fed rate cuts, and the timely pullback in oil prices, thanks to the CIA's deflation of the Iranian war premium.
Short term, we might see the markets digest some of the recent gains. [As of last week], the Standard & Poor’s 500 [was] up over 100 points from its November 27th low and the Dow Jones Industrial Average was up nearly 1,000 points—[which led me to] “ring the register” on some of our long index positions.
I don't see Tuesday's downside reversal as the beginning of any extended downtrend. The next major support is around 1450 in the S&P 500, then 1420, but I feel the 1450 area should be the maximum downside. Any correction is a buying opportunity, especially if accompanied by more “bad news.”
Overall, I am looking for new all-time highs in all the major stock indexes next year, with the S&P seeing the 1,650 area. There are still enough disbelievers out there, so I feel confident in this prediction. As you know, I tend to feel uncomfortable when other “so-called” market-timers chime in alongside me. If that occurs, I reserve the right to alter my forecast.
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