Tuesday, February 24, 2009

Will this Week be a Buying or Selling Opportunity?

Tonight President Obama will address Congress and later this week, Treasury Secretary Tim Geithner is expected to release more details on the bank bailout plan. Sooo....the big question is: Will the markets rally or fall after these speeches?

As I've written before, I have a very poor record in predicting the market direction after a major event. Most recently, I took an "opposite" approach and predicted the markets would advanceafter Mr. Geithner's press conference on February 9, 2009, even though my instincts said market decline. Well, my instincts were correct that time, increasing my percentage of wrong predictions.

This time, I'm going with my instincts and predicting that the markets will fall after their respective speeches. Here are the reasons:

  1. Insufficient Details. I expect the speeches to be big on vision, high on inspiration and low on details. That will scare investors since there will be no clear understanding on how seemingly opposite results can be achieved simultaneously. For example, the stimulus bill just passed seems to be loaded with pork and deficit spending. At the same time, President Obama plans to cut the deficit in half by 2013, through the magic of technological efficiency. The concept of "then a miracle occurs" is not sufficient detail for the stock market :-)

  2. Not Addressing the Real Problem. Just about everybody acknowledges that the root cause of the problem are toxic mortgage securities that continue to decline in value. However, very little has been done to eliminate the toxic securities, i.e. have the government buy them. I expect the speeches will continue to have actions that do everything but deal directly with these toxic assets.

  3. Bigger Government. I expect President Obama's vision to include bigger government, including more health care, more wealth transfer, and more green, under the guise of more effective and efficient use of resources. The stock market will probably remember the efficiency with which government just made the transfer to digital broadcasts on February 17, 2009.

If the speeches follow the outline above, I expect the market to fall and it will be a buying opportunity. However, Messers Obama and Geithner can include a detailed plan that is viewed as having potential to return to economic growth, I expect the markets will rally, offering me a selling opportunity to exit my investments in financial stocks.

For more on Ideas You Can Use, check back every Tuesday for a new segment.

This is not financial advice. Please consult a professional advisor.

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