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The continuing saga of the bailout for the Big Three automobile manufacturers, which collapsed in the Senate this week amid disagreement over union wages, culminated in a White House announcement on Friday morning that TARP (Troubled Asset Relief Program) monies would be used for emergency funding to support GM, Ford and Chrysler.

Now depending on the level of confidence one has in the government, this is either a good thing or a bad thing. TARP funds were initially intended for financial institutions so that they could sell some assets of dubious quality to the Treasury Department; these assets are those often referred to as sub-prime "toxic" waste. The hope is that these illiquid assets (there’s no market for these assets) backed by mortgages would, over a period of time, appreciate in value and that a viable market for trading these products would develop.

In mid-October, the Treasury Secretary, Henry Paulson, announced that there would be a change in focus of TARP. Since the funds being pushed to the financial institutions were not serving to unclog the tightened credit conditions, the new program would see the Treasury Department receiving equity stakes in the banks in return for the assets purchased. The theory behind this idea was that by increasing the capital bases of these financial institutions, the banks would be far more enthusiastic to initiate new lending thus unclogging the credit pipe. Furthermore this strategy allowed the taxpayer to share in any potential gains (or losses) in the institutions’ stock prices.

Unfortunately, these first two initiatives were not entirely successful so on November 25, Treasury Secretary Paulson announced a new strategic thrust in the use of TARP funds. The Treasury Department would allocate $20 billion toward the asset-backed securities market supporting car loans, student loans and credit card debt in the hope that by directly supporting consumers, the financial institutions would be more inclined to loosen their purse strings.

Friday’s announcement is somewhat of a surprise since TARP funds governed by the Emergency Economic Stabilization Act of 2008 are to be specifically directed toward financial institutions. Since we are talking about auto manufacturers and not financial institutions, a change in legislation might be required for these funds to be used in a rescue of the Big Three. According to the Government Accountability Office (GAO) however, the language in the legislation would allow loans to be made to these three companies.

Regardless of the legality of deploying these funds for the automakers, there are nevertheless questions regarding the competence of government departments that are constantly changing their strategy as one failure follows another.

Technically Speaking

The tech-heavy Nasdaq twins were the strongest of the major indices this past week posting gains of more than 2%. The broader markets meaning the Dow Jones Industrials and the S&P 500 settled mixed with marginally higher prices for the S&P while the DJ-30 eked out a very small loss leaving it virtually flat on the week.

Stochastics on the daily charts are unanimous however with all these indices falling from overbought levels. As such, there is the strong potential for equities to be under pressure early in the week. The presence or absence of a bailout for the auto industry is akin to the 800-lb gorilla in the room though. If we presume that a deal is made, the chances are good that markets will move a significant amount either higher or lower depending on sentiment. Certainly on Friday we saw evidence of that "significant move" with the mere announcement of a White House plan to throw them a lifeline causing stocks to rebound from substantial early losses. This reaction might be an example of buying the rumor and is often resolved when traders sell on the news.

Taking a wider view of stocks, we see that the weekly stochastics are now rising from those oft-discussed oversold conditions. By rising away from that point, there is a strong potential to expect a continuation in the current rally. Gold is one of those sectors benefiting from both the rise in equities and the fall in the value of the US dollar. With the benefit of hindsight, we see that we were perhaps a little too inflexible regarding the stop losses set for those equities.

New Buy Recommendations (in order of preference):

The strategy to build and refurbish infrastructure announced by President-elect Obama has rekindled interest in stocks that could benefit from this scenario and we are finding some interesting charts in the sectors of cement and steel. Though we sense that this is a bear market rally, these stocks could appreciate significantly in the short term.

US Steel Corp. (X)

Steel Dynamics (STLD)

Arcelor Mittel (MT)

Texas Industries Inc. (TXI)

Eagle Materials Inc. (EXP)

All of these stocks were severely battered and are quite low compared to their prices at the beginning of the summer. However all have proceeded to bottom in October and have crafted rebounds after the November lows were touched. More importantly, the rises in their prices has occurred in conjunction with strong volumes pointing to some interested investors.

All of these stocks gapped higher on Monday and their gaps remained open through Friday with the exception of EXP. Stochastics on their daily charts are often overbought but their weekly charts display a long period of oversold conditions, which are just now being resolved.

New Short Sales

None.

Stock Positions to Sell/Exit:

We were exited from our short position in ARO.

Portfolio Comments:

New stops have been added in bold to the list while others have been modified. Those that have blanks are being carried unstopped for now. Please see our complete list of stops in the table below.

List of Current Stock Recommendations:

Action Ratings. The following is the legend for designating immediate action
for our stock recommendations. The first is B, meaning the stock is timely
to buy but the case for doing so right here is not overwhelming. Either the
stock may have gotten ahead of itself and may be vulnerable to a retracement or
else the stock has been performing disappointingly but may simply be
regrouping. B+ and B++ indicate stocks for which there is a technical case
to buy now, with plusses adding weight according to how many there are, up
to a maximum of two. Stocks rated H are ones to hold, awaiting confirmation
to buy more or to sell. SELL, of course, means what it says. It seldom pays
to override this designation. In the case of stocks held short, the rating is S where positions should be retained. S+ and S++ indicate stocks for which there is a technical case to add to the positions with plusses adding weight similar to long positions. The maximum number of plus signs is 2.

N.B. There are no longer restrictions on foreign stocks held in Canadian retirement savings accounts.

New stops in BOLD

* Stop on a closing basis

** Buy if above entry price

*** Split-adjusted price