Who will bail out the Bailout?

The Fannie/Freddie Mae bailout won't work. Paulson is trying to get permission for the Treasury to shore up equity in Fannie and Freddie, while at the same time saying, "no bailout for shareholders." Excuse me, but if there's no bailout for shareholders, then what's to keep the stock from going to $0? How will Fannie and Freddie raise money to cover their losses and survive until the housing market gets better if the stock is at $0? How will they raise money in the bond market when their liabilities exceed their assets (i.e., they are technically insolvent, as former Fed governor Poole observed last week)? No one will lend bond money when there's no collateral.

While it could be argued that a bailout is necessary to break the vicious cycle in credit deflation and falling housing prices, the costs of a bailout are almost as great as the benefits. It's the same as literally trying to pull yourself out of quicksand by your bootstraps.

The government can force the taxpayers to bail out the housing market, but the problem is that there are almost as many homeowners as taxpayers. It's like trying to borrow from yourself to get out of debt.

However, from a trading standpoint, the bailout may improve investor perceptions, at least long enough to raise some money and put off the day of reckoning. This thought made me check the market today with the idea of closing Fannie and possibly the homebuilders on a steady rally, even if they were painfully higher then last week's close. Unfortunately, today the market was too indecisive to inspire me to make a decision. I'm going to wait for a day with a clear direction. Fannie could jump 50% and I'd still have a 50% gain. I don't think that will happen, though. They jumped nicely today, recovered into positive territory, and ended down again. The VIX doesn't show enough fear to buy for the sake of buying, yet. It would have to approach 35 for that. Also, my short position keeps getting smaller and smaller. It's about one-third of the size it was at the beginning of June, and having already taken huge profits prematurely in June, my risk in suffering a strong rebound day is not as great as the potential gain I see from further volatility in the market.

The market is not showing the fear that it should with the credit crunch coming back worse than ever, despite all the Fed's machinations. The market is finally showing that the banks won't be able to raise money. NCC, -17%, WaMu, -35%, Wachovia, -13%, BAC, -7%, etc., etc.

These banks will fail or stop providing credit very quickly, probably by the end of the year. NCC is ten times as big as IndyMac, which will cost the FDIC $4-$8 billion. The FDIC doesn't have $40 billion. The dollar has only suffered a small slide compared to the sinkholing it will suffer when NCC is seized and closed. I believe they are next because of the Fed's action last week of rewriting their equity raising contract. Either way, they won't be able to raise any new money.

I'm thinking of what to short in preparation for the bank failures. Retail, anyone? How 'bout Coca-Cola (KO) with a p/e of 19? How do they get a p/e of 19?

What do I buy in preparation for the dollar's next plunge? I was thinking about CLF or DUG or POT, but they're rebounding, not showing any deflationary fear. With the market only down 45 today, it's clear that traders are just shifting into new sectors.