Staying Short Despite the Rally

The market has staged a nice two-day rally on the announcement of the new administration's economic team and fiscal stimulus plans designed to create jobs through infrastructure and energy spending. In addition, the government has bailed out yet another large bank by accepting unknown risks onto the federal balance sheet. However, two things have been overlooked in the enthusiastic reception of these announcements.

First, as nice as it is too know who is on President-elect Obama's economic team, it solves none of the current problems. There is a great deal of uncertainty about New York Federal Reserve Chief Tim Geithner in particular, as he has had a large role in the machination of the Fed since the current problems began. I also am a little bothered that the entire team comes from a theoretical background -- I would prefer to see someone who has actually run a business and sweated out a payroll or slowdown advising our new president.

The stimulus package, which will create infrastructure and green jobs, was welcomed by many, including myself, as I own and have been suggesting infrastructure stocks such as LB Foster (FSTR - commentary - Cramer's Take) and Granite (GVA - commentary - Cramer's Take) that should be beneficiaries of the measure. There is, however, the troubling question of exactly how we plan to pay for this -- many economists estimate that it could cost another $700 billion. With the deficit already projected at over a trillion dollars next year, I smell a tax increase in the oven.

Second, on Monday we saw housing prices fall and sales slow. The inventory overhang is still firmly in place and more homes are coming on the market every day. Prices fell 11% year over year, the largest decline since 1968. The National Association of Realtors estimated that a stunning 45% of homes sold last month were the result of distressed sales or foreclosures. Until housing improves, the crisis continues.

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At the time of publication, Melvin was long DOG, SH and FSTR and short TLT, although positions may change at any time.

Tim Melvin is a writer from Stevensville, Maryland, who spent 20 years a stockbroker, the last 15 as a Vice President of Investments with a regional firm in the Mid Atlantic area. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks. Melvin appreciates your feedback; click here to send him an email.