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Help for financials may hold opportunities

Advertisement At the moment, the only fundamental on the minds of traders is whether or not the U.S. housing market will stabilize anytime soon. If we want a blueprint for the stabilization time frame, you might look at the Resolution Trust Organization, which was formed in the early 1990s to bail out the U.S. trust industry. It took a year after that bailout to get the financial markets rolling and two years after the bailout for the U.S. to climb out of that recession, leading to the stabilization of house prices. Thus, we may get a real rally around the time of the Vancouver Winter Olympics in 2010. Of course, time is the one positive the U.S. government plan brings to the table. Assuming that the U.S. taxpayer ends up with a basket of bad real estate, the government can presumably take a measured approach to unwinding this newfound portfolio. That makes this bailout an investment in the U.S. government balance sheet rather than an extension of debt. The risk, of course, is that a new president/Congress decides to intervene politically, on the basis that we “must keep Americans in their homes.” In which case, all bets are off. In terms of the politics of home ownership, it won’t matter who sits in the White House. It will come down to how much mileage a new president can get by keeping homeowners in their homes, regardless of economic considerations. And the risk is real, because we have precedents for home ownership glad-handing. Make no mistake, it was the politics of home ownership, not economics, that got us into this mess in the first place. Therefore, as we don’t know the potential political risk, we again come back to the options-writing strategy, one that provides benefits if we see more of the same — that is, a volatile environment going nowhere but having possibly established a near-term bottom. The benefit will be getting paid to hold volatility in a trading range environment, that is, one in which there is heavy resistance at higher levels and strong support at lower levels. IE << PREVIOUS PAGE | 1 | 2 Read other news from our Research Section