Ominous Signs From the Beige Book

Don't let Wednesday's 41 point gain in the Dow Jones average fool you. There was plenty of evidence that the bear market is far from over and that this is at best a bear market rally that is likely to be short-lived. I have a couple of longs that are too cheap to care about, but for the most part, I have stayed on the sidelines. I am hoping the rally continues for a day or two so I can begin to buy put spreads on some I've recently discussed.

Ideally, we'd see a short-covering rally in the big investment banks and brokers, particularly those that issued lot of mortgage-backed securities. I still think that Clayton Holdings' (CLAY - commentary - Cramer's Take) decision to cooperate with federal investigators could result in huge fines and increased liabilities for these financial firms.

And that might hammer their stock prices yet further. Some of the names that come to mind include Lehman Brothers (LEH - commentary - Cramer's Take), Bear Stearns (BSC - commentary - Cramer's Take) and Merrill Lynch (MER - commentary - Cramer's Take). If we see a rally in these names, I will be buying put spreads to establish short positions in the stocks.

Beige Book Blues

The beige book was released giving us the fed's view of the economy. Terrible does not even begin to cover it. Eight of the 12 Federal Reserve Districts reported economic slowing. All 12 expressed caution or concern about business prospects over the next several months. In the majority of regions, retail activity was sluggish. Auto sales remained slow nationally, and hiring trends remained somewhat bleak.

The New York, Philadelphia and Atlanta districts all reported hiring freezes and layoffs. Those three districts are part of the I-95 corridor where almost half the U.S. population resides. As was the case in the 1970's, energy prices were adding to shipping and transportation costs even as economic activity weakened, with most manufacturers and retailers unable to pass the costs onto consumers. Loan demand remained weak across the board and many banks are reporting tightening credit standards.

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At the time of publication, Melvin did not hold any positions in the stocks mentioned, 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.