"Light is good from whatever lamp it shines"

Goldman Sachs, JP Morgan and Lehman in combination with the Fed have triggered quite a rally (roughly 600 points on the Dow) since the Bear Sterns announcement... I personally have unloaded my ultra shorts mid day Monday, and went long in my model Marketocracy portfolio. This took my gains up to the levels not seen since mid December prior to the MoneyGram fiasco...

But my MSN Strategy Lab's portfolio lagged big time due to the inability to submit trades in real time. The 18 hour submission lag has cost me roughly 5% in total return, or may be even more depending on the opening prices tomorrow... But right now this is not as important, as pretty soon my blog will get a new feature that would allow readers to see the positions with only a short lag.

One might ask how I managed to go from a "sell everything" mood on Sunday to "go long" on Monday? Here some glimpses into my logic:

1. My short term long bias did not change the underlying skepticism on prospects of the economy escaping the recession or on the fact that stocks aren't quite yet as cheap as they could be. I simply don't believe in giving my gains away for nothing, the tape clearly said that the sell off was over in the short term, so I did.
2. Dow has retested the 11,700 level three times and each time it bounced back with a 400 point rally. The first two tries failed to lead to meaningful gains, we'll see if this one is any different but the momentum raiders might just take it higher this time...
3. Fed engineered bailout of Bear during the weekend was a very significant event, much more so than the rate cut today. What it has accomplished is something more important - it might have just stopped (postponed?) the "run on the investment banks" domino effect by signaling to the market that while stockholders of the WonderLand entities should be worried about their net worth, the counterparties in any investment transaction with them shouldn't.
4. It has in effect promised the investment bank customers a free protection similar to the one enjoyed by customers of the regular bank with respect to their deposits (FDIC insurance).
5. I see several fundamental issues with this help in the long run- the main one being the simple fact that conventional banks not only pay for this insurance, but they are also subject to significant regulatory oversight and various leverage limitations. I think that when politicians realize the actual monetary risk to tax payers and the "softer" danger of "moral hazard" that Fed took on by guaranteeing BSC's bonds, more regulation in the investment banking world is now almost inevitable.
6. This will likely lead to lower leverage, higher expenses and lower profits in the long run. Balance sheets will have to shrink and with them so will stock prices. Investment banks had a nice rally today and one might argue Lehman is still oversold, but here is my prediction- during the next several years- stronger conventional banks like BAC, JPM, WB and WFC will outperform their investment banking peers.
7. Another reason I covered yesterday was the fact that VIX- volatility index has hit another high. And given the fact that it also considered an indicator of "fear", I felt that too many people thought prices are heading lower, so I had to do the opposite...It has declined 20% today so I will keep watching it like a hawk for any signs that we now have too many optimists again :) Long term pain is still very much an option.

8. One more reason for short term optimism is the upcoming IPO of Visa. Forget the whether the stock itself is expensive or cheap- fact of the matter is quite simple- it will raise billions of dollars in cash for banks which could have not come at a better time for most of them. It will also lead to large paper gains that could offset some of the write downs at least in the short term. Some of the large beneficiaries include JPM, NCC, WFC, USB, BAC

9. Fanny and Freddie regulatory caps are going to be adjusted in the short term. I don't think it is necessarily such a good idea- but the fact is politicians and opportunist are running the show right now, so it will happen-period. It is, however, still likely that FRE and FNM will require more equity anyway, but for now in light of the BSC bailout - their clients should feel safer- bailout is now a 100% guaranteed.

To sum it up- there are simply too many factors working in favor of the market speculators in the short term to stay outright short. I also think that Fed has made some moves that are surely will add significant "moral hazard" premium to the next bubble but for now- enjoy the relief :)

Stay safe, Vad