Trojan Horse - 9/8/08

Yesterday's bail out of Fannie Mae and Freddie Mac by the Treasury was yet another TROJAN HORSE for the bears. One of the key observations of sentiment trading is that strong emotional patterns tend to repeat themselves. I see this as entirely behavioral in nature. For more on this, read Joseph Ledoux' The Emotional Brain.

So basically, on 9/2, we had a gift of oil cratering below $110. The market had been fixated on the meme that LOWER OIL, HIGHER STOCKS. The sell-off proved that this was just not true. The implication of the sell-off is that GLOBAL DEFLATION is the real problem. All you need to do is to look at the 5-year US treasury yield trading below 3.00% to get a sense of how threatening the deflation clouds are.

So, the point is that the TROJAN HORSE trade will be a feature in this new BEAR phase.