One bear's view: 'no more rabbits to pull out of the hat'

Bill Strazzullo had warned his clients against chasing any rally that might follow the Federal Reserve’s unprecedented steps to prop up the financial system in mid-March.

The veteran trader, a partner at the small financial advisory firm of Bell Curve Trading in Freehold, N.J., told me on March 21 that he was sure the credit crunch wasn’t over and that its effects on the economy were just beginning.

It looks like Strazzullo got it right. Bank and brokerage stocks are in meltdown mode again this month, and they led the plunge in the market on Thursday that slashed 358 points off the Dow industrials and left the index at its lowest since September 2006.

So, what now, Bill? He told me Thursday that he’s still longer-term bearish. But in the near term he thinks that this market sell-off could be reaching a crescendo. "I don’t want to be an aggressive seller here," he said.

He’s advising his clients with short sales (bets on lower prices) to take some of their profits, particularly in battered financial issues.

Some of the selling this week could be tied to end-of-quarter portfolio shifts by nervous investors. With the turn of the calendar page on Tuesday, that kind of selling pressure would end.

Still, Strazzullo doubts that the market is going to turn sharply higher anytime soon, even if it gets a dose of good news. For one thing, he notes that many investors who bought into the spring bounce -- and now are underwater -- may be eager to exit at the first uptick in prices. Once bitten, twice shy, after all.

It’s the fundamentals that really worry him, though. He sees the American consumer as severely strapped financially, a view that was validated by the latest consumer confidence report this week.

"Consumers have never been this insecure," Strazzullo said.

That may not be a novel thought, but I think it’s one that more people on Wall Street are just beginning to ponder.

As for new help for the economy or the markets from Congress or the Federal Reserve, "there are no more rabbits to pull out of the hat," Strazzullo said, echoing what even many market bulls will concede.

The tax rebate checks are spent. And the Fed is boxed in on interest rates: It doesn’t want to cut its key rate further, from the current 2%, because of inflation pressures and because policymakers know that another cut could devastate the dollar all over again.

Something else came to light on Thursday that I didn’t discuss with Strazzullo, but left me a little chilled: reports that the Fed is talking about loosening restrictions on private-equity firms that want to invest in banks.

Why do that? Obviously, because many loss-ridden banks, large and small, are desperate for capital to bolster their balance sheets.

Anything that helps keep the financial system from crumbling ought to be welcomed, you’d suppose. But remember: When the Fed began doling out hefty new loans to cash-strapped banks and (for the first time) brokerages in March, Wall Street figured, "Mission accomplished!"

Evidently not.

Comments

[Giff Beaton]

Now that the Fed is no longer in a position to bolster the market with cheap money, we will soon discover if the market can be expected to stabilize or rebound despite "perfect storm" conditions in the financial sector, astoundingly high energy costs and an unparalleled leadership vacuum. At this point it looks like we may need a silver bullet instead of another tired old rabbit.