Bailout…Inflationary or Deflationary

First, it is always important to decide whether you are an investor or trader or some combination of the two.  We believe that very conservative investors, lets call them Level I conservative investors, should have been totally in cash or preferably T-bills, since May 19th when the S&P traded at 1440, that was a high water mark for this stage of the bear market. Another point is coming up in the next few weeks, right now we think the point is 1341 on the S&P, when conservative investors maybe termed Level II conservatives should lock everything up in T-bills.  For those with a trading bent the current market should offer opportunities as long as one keeps position size modest. 

As to the title of today’s post, the markets have initially provided a inflationary take on the bailout. Gold and Oil have gone up, and bonds have declined while the stock market has gyrated.  It would seem to us that the ramifications of a bailout, especially as the details are being debated, are not all that clear.  If the Fed creates money as it seems to have been doing last week, that is inflationary, if it sell bonds to foreign entities, that would seem to raise interest long-term interest rates and be deflationary.  Most likely they will do some combination of the two, maybe we will see how good Bernanke is at the combo.  At any rate it seems to us that either approach will keep upward pressure on long-term interest rates.

For today, with the debate just getting started, there should be trading opportunities. S&P’s between 1190 and 1210 should be buyable for a pop.  Gold and Oil are expensive and up at our reistance levels.  Bonds and the dollar are getting a little cheap.   

7:37 AM CDT

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