Economaton

Bear Stearns blew up, and the Fed is bailing them out. Their stock closed down almost 50% lower on Friday (and I picked up a few shares as a highly speculative bet.) What we have here is a form of corporate welfare — profits are private, and losses are socialized.

That is neither here nor there, however. Whatever the (lack of) philosophical merits of this system, so it is, and within it we must manage. Take a look at this weekly chart of the S&P 500. Despite the high volatility and the BSC blowup, we didn’t make a lower low last week on the S&P — though, ominously, other indices such as the NASDAQ Composite and the Russell 2000 did, and bounced back. (The Russell 2k even closed slightly up for the week.) I would have expected much more selling on the news of a major bank bailout by the government. That we didn’t close on a lower low is a positive sign.

I can see two possible interpretations of the weekly activity from January to March. Either we are looking at a double bottom setup, as I outlined last week, or we are looking at a triangle consolidation pattern. The upcoming Fed meeting will deal us a major wildcard.

Last week did not prove to be the conclusive decision-enabling test that I had hoped for; the market is still waffling. I bought a SPY put earlier in the week as insurance through the current decision period. This is not a long-term strategy, but it buys me a little more breathing room — and, as it turned out, vital breathing room. As each week goes by with no resolution up or down, the pressure builds, and the move will be all the more spectacular, whichever way it goes.

The market still hasn’t made any conclusive move, and I actually wound up slightly up for the week, on that put and on record high prices for gold and Euros. My long bets on financials stand; indeed, I slightly increased them by buying into BSC after Friday’s drop. This is, as I mentioned, a very small bet made with extremely speculative, pure risk capital. I think it is possible and even likely that I’m going to lose every penny I put into BSC; however, I’m getting great odds — if they don’t blow up and rebound, I’ll make a killing.

I’ve been pondering the secondary effects of this event. In particular, emerging market bonds were badly spooked by the Bear Stearns rescue. This does not appear to be linked to any particular relationship between Bear and these bonds, but rather to generalized investor panic. Notably, market interest rate benchmarks such as Euribor, Libor, and the AAA banking and finance rate didn’t increase substantially. I took the opportunity to buy some ETFs that invest in emerging market sovereign debt. Ideas here include TEI, EMF, and MSD, among others. If I had the cash, I would be buying emerging sovereign bonds directly. I invite you to post your own ideas here.

Interesting times to be investing.