497? What, the Dow Industrials can’t crack 500 points?
I’m kidding, of course. That was some impressive rally. The biggest one-day rally since October 28, 2008. And on the heels of Geithner’s re-hashing of Paulson’s bank bailout plan, too.
In Monday’s Daily Profit, I wrote that most economists thought Geithner’s Public-Private Investment Program was an important step in freeing up our banking system to start lending. The smattering of opinion that was available Sunday night seemed to be positive.
By Monday morning, it was decidedly negative. Here’s a quote from Paul Krugman from the NY Times:
"…the real problem with [Geithner’s] plan is that it won’t work. Yes, troubled assets may be somewhat undervalued. But the fact is that financial executives literally bet their banks on the belief that there was no housing bubble, and the related belief that unprecedented levels of household debt were no problem. They lost that bet. And no amount of financial hocus-pocus – for that is what the Geithner plan amounts to – will change that fact."
His views are shared by other notable economists including John Galbraith and Mark Zandi.
But analysts and strategists are saying that the Public-Private Investment Program, as it’s apparently called, could work. Or at least it will help. PIMCO’s Bill Gross has said he will participate in the program, as will Blackstone Financial. Others will no doubt volunteer to buy toxic assets at discount prices with Treasury money in the hopes that they’ll recover some value over time. What do they have to lose?
The ultimate irony may prove to be that nothing helps these assets increase in value more than being sold.
*****Of course, what the economists and strategists think about Geithner’s plan is one thing. It’s what investors think that counts. Judging by the explosive rally, investors like it. So much so, in fact, that we may have an extended rally on our hands.
I hope everyone took advantage of the opportunity to buy Graham Corp. (AMEX:GHM) last week. We’re finally seeing oil services stocks confirm the recent move in oil prices.
Oil prices are now closely tied to economic growth. But there’s also OPEC to deal with. Supply cuts can affect prices.
Now, oil services stocks are dependent on oil companies for growth. If Exxon-Mobil (NYSE:XOM) isn’t spending, then oil services won’t move up. So the moves in oil services suggests that oil prices are moving more in concert with economic growth than with OPEC. And that, in turn, suggests that investors are buying in anticipation of economic recovery.
*****It seems clear to me (after talking with TradeMaster technical analyst Jason Cimpl) that we have a strong rally on our hands. And it could last for a few months.
Now, one of the hallmarks of a bull rally is that it doesn’t come back for buyers. In fact, that’s one of the things that keeps it moving higher. The market will show weakness enticing shorts and potential buyers that lower prices are coming.
Then, when the dip is short-lived the shorts have to cover, which sends prices higher. Buyers who want lower prices get sick of watching the market run higher and are forced to buy at higher prices.
That’s exactly what happened to us when this rally started. I recommended a few stocks just before the rally began. Then, I recommended selling at the first peak, in anticipation of a dip. It never happened and we watched those stocks move higher.
I don’t want to make that mistake again. So I recommended Graham Corp. last week. And I want to recommend another stock today, as the market looks to be moving a bit lower.
Homebuilders are so beaten down, I think there’s a good chance for more upside here. And with a close yesterday at $1.48 a share, Hovnanian Enterprsies (NYSE:HOV) could return a quick 20% to 30%. Try and catch it around $1.30 a share on the early going today.