The Market Takes Another Dump

My negative bias towards equities is playing out as predicted. The Dow Jones Industrials should dip below 7,000--if not this leg down, at some point in the near future. The markets are skeptical that the Obama administration and Congress can wrap their arms around this financial crisis, and that skepticism is well-founded. And Treasury Secretary Tim Geithner's recovery plans haven't exactly elicited confidence in the market place. I've been personally cynical throughout the election and inauguration process, and unfortunately, it's playing out as we called it--this stimulus plan is not stimulative for the economy. It will not create private sector jobs, but detract from private sector investment. If anything, it will dampen future growth for years, as our mounting national debt and bulging deficits will only lower our standard of living and increase our tax burden.

The good news is that investors who shorted for-profit education companies are profiting handsomely (no pun intended). Without going into details, these institutions will face mounting defaults on student loans, as graduates face an increasingly difficult job market. My unabashed take on it is that prospective students are better off attending community colleges, for a fraction of the cost of these educational institutes, and save themselves a $70,000 tuition bill upon graduation. The government is starting to figure this out, and is retracting subsidies for these student loans (as outlined in the latest legislation).

These stocks have had a nice counter-rally in the midst of an overall market decline, with the thesis that newly unemployed workers are going back to school to upgrade their skills. It's a reasonable thesis, but the problem is that indebted individuals are going into more debt by attending these schools with no job prospects in sight.

The over-arching reason these stocks are due for a huge decline (they are already starting to crack) is because corporate insiders are dumping these stocks, and locking in huge profits after the run up in share prices. Question: if the share prices of these companies are so attractive at these levels, why are insiders selling them in droves?

Is this the classic pump and dump? Who knows, but I'm not hanging around to find out. My out-of-the-money put options have increased in value nicely, and if these stocks gap down as I expect, we'll make triple-digit gains.

Hang on to your hat--these next few weeks will be trying as the markets continue to test new multi-year lows.