Sponsored By:

Don't be Trapped by Bear Market Rallies

March 19, 2008



If this were a simple liquidity problem, then the action that's been taken by the Federal Reserve and other Central Banks ($1.5 trillion worth) would have solved things -- but it hasn't. Instead, the Fed's actions have resulted in bear market rallies, followed by pullbacks.

If you still think we're dealing with a liquidity problem, consider the following:

1) Credit spreads -- the cost of buying credit is higher today than it was seven months ago.

2) Mortgage rates -- these are also higher today than they were seven months ago, even with all of the liquidity that has been pumped in by the Fed.

3) Corporate debt spreads for banks -- corporate bank debt is now paying a higher rate than what they can hope to get lending the money out, which is unheard of.

We are now experiencing the classic example of what George Akerlof described in "The Market for 'Lemons.'"

He basically said that, absent better information, it is perfectly rational for the buyer of an asset to assume that the assets offered for sale are lemons, i.e., the bad stuff.

This is why we're currently seeing the flight to quality in the way of Treasurys and other things that people can value, while the rest of the stuff is floating out in la-la land.

Well, at ChangeWave Investing, we are turning lemons into lemonade, so to speak, by taking advantage of some of these situations.

But until the financial institutions and politicians come out of denial and we get to the hard business of triaging the dead loans from the live ones -- and, unfortunately, moving about 1 million unqualified homeowners back into the apartments they can really afford -- we have more pain to go.

However, we don't need all of the pain out of the markets to get the "all clear" signal for stocks -- we just need to get about halfway there.

Don't kid yourself, the Bear Stearns takeover is not the last chapter in this story. We are at the end of the beginning.



Toby

P.S. The Fed is stepping up to the plate, but it can't fix the solvency issues that need to be worked out before we can start to see a turnaround. But, just because we're in a bear market, that doesn't mean your portfolio should go into hibernation. Try ChangeWave Investing risk-free for 90 days and learn how we're surviving and thriving in this tough market. Click here to join.

---

Tobin Smith is the founder of ChangeWave Research, the editor of ChangeWave Investing and ChangeWave Microcap Investor and a contributing market analyst for Fox News Channel. His market commentary can be found in the ChangeWave WaveWire and he provides more specific recommendations and advice through his ChangeWave Investing service. Click here to learn more about ChangeWave Investing.