Mystery Trader

With all of the money the government has been dumping into banks, brokerage firms, insurance companies and other financial institutions, financial stocks were bound to bottom out some day.

That day may have come Monday after the government came to the rescue again, providing $326 billion to save CitiGroup. Citi, which was above $55 at the end of 2006 and as high as $22 as late as early October, had slipped to almost $3 a share as the extent of its losses from mortgage-backed derivatives came to the surface.

Citi shares shot up and closed at $5.95 Monday on news of the government bailout, and the stock market loved the Citi news and the economic team announced by President-Elect Obama, recording its second big up day in a row. Financial stocks such as J.P. Morgan Chase, Bank of America and many others led the way up. The financial sector is a long ways from marking predicted moving average crossovers to the upside on VantagePoint charts, but the first signs of an upturn are visible and bottoms may be in place.

But while enjoying the short-term euphoria from government injection of funds into financial firms, keep one thing in mind: The piper will have to be paid eventually. Unless the financial system has a complete meltdown, any recovery in markets will likely come with higher inflation rates and other consequences that will have as much of an impact on investment accounts as the recent stock market slump.

It’s a mystery, even to the Mystery Trader, looking at today’s global financial crisis and proposed bailout targets . . .

 

Why are some firms deemed to be worthy of saving and others are not?

Why AIG and not Lehman Brothers? Or Bear Stearns?

Why not help General Motors (GM), which did not cause the financial mess?

Why toss billions of dollars to the investment banking giants, which did, with their cesspool of toxic derivatives?

Why toss good money after bad to help GM, which created many of its own problems over the years and is, in reality, already bankrupt?

Why does anyone think that giving the government a piece of the company would solve the problems for GM and other automakers when the government, with little or no accountability, is probably the worst manager of all?

Why does anyone think begging for bailout dollars would end with GM and the other automakers?

Is GM worth a flyer with the price below $3 after trading above $90 a share a few years ago and above $40 a little over a year ago? Maybe gamble with a $4 GM December call at 50 cents or sell a put with the idea that the government may decide GM is too valuable to fall?

 

A while back analysts were talking about $2.40 a pound as the “line in the sand” for copper futures. That was the vicinity of copper’s 2007 low and a long way down from the peak of $4.27 a pound in May.

 

When global economies were riding high on housing demand, appliance and vehicle sales, export demand from China and elsewhere and record prices for crude oil, gains and most other commodities, copper seemed to have its lofty perch pretty well fixed in this bullish crowd. After all, copper is the commodity with a Ph.D. in economics – as copper goes, so goes the economy and the stock market, or vice versa.

 

Lately and suddenly, however, that direction has been nearly straight down for everything. Copper moved through the $2.40 low as if it were butter and is now making a push for the October low around $1.62 – less than half its price just two months ago. Tuesday’s low was only a few cents above the October low. Will that be the line that holds?

 

If not, what’s next? As prices of some other commodities have revealed recently, it is no surprise when markets overshoot a target. Copper could drift on down to $1.50, a psychological support area and scene of a small congestion area in 2005. VantagePoint traders should be watching how copper prices respond at this double-bottom area for early clues about the future of copper prices . . . and the economy.