How Sick...

7am How sick is this market when we are looking at an early rally because of the Citi news. For those who don't know, the word is that government will convert their preferred shares to common shares (C) and not fully nationalize the company, effectively wiping out common shareholders. Who is looking at this news and saying "Whew... time to buy some Citi."? We own stocks because the companies behind the stocks earn money and create shareholder value. Citi won't make money for the foreseeable future. If they return to profitability in the future, it will be nowhere near anything we have seen. Why is anyone buying this stock?

We are probably looking at something like the European model of nationalizing banks. RBS and Northern Rock were taken over in chunks. Citi and Bank of America (possibly others) will probably either be taken over in a similar way or the government will do something that is an effective nationalization without using the actual word. There are enough people in the country that are loathe to see true nationalization that the government will avoid the word. But at the end of the day, nationalization will and should effectively happen.

On an optimistic note, there are some things that are looking positive for the economy. Oil is in the process of bottoming. Demand is starting to stabilize and supply is coming out of the market. It isn't poised for another bubble-like takeoff, but it is starting to bottom. I mentioned buying the Double Long Oil ETF (DXO) in December to take advantage of this. It is down big on a percentage basis from where I initially recommended it, however I am sticking behind that pick. I bought the ETF as an investment, not a trade. It is not time-sensitive.

Why is oil demand positive for the economy? Oil is an important gauge of overall economic activity. As more things get produced and more people consume, more oil is needed. If oil is starting to bottom and we are seeing more supply and demand equilibrium, that is a positive sign for the world economy. It is economics 101 (the government needs a serious lesson in this) when supply and demand (without government involvement) meet, price is discovered. Oil is not the only indicator to watch for good economic health, but it is a good sign so far.