A bad bank “solution”?

News has been circulating that the US government / FDIC / Treasury wants to create a bad bank to absorb the toxic assets of US institutions that are on the verge of insolvency.

I have two questions for the new administration:

1) Wasn’t this the very idea that inspired the “Troubled Asset Relief Program” or TARP? The last implementation of a “TARP” did anything but buy troubled assets. It seems as though $350B+ of Treasury funds were thrown to the wayside for a temporary relief in the credit chaos that was building.

2) Hasn’t the Federal Reserve become the de facto “bad bank” with its massive balance sheet of troubled assets? Is there a reason to create a second, US government-backed version of the same concept? If so, how does this quell the problem of bad risk management by the failing institutions?

There comes a time when the path least explored may be the most logical. We are reaching a threshold whereby future generations are having their potential prosperity sacrificed to save a financial infrastructure that is paved with greed and selfish intentions. Banks should not be given limitless liquidity in the name of short term stability.

A bad bank facility is by no means a solution and I feel that there is little chance of success. Hopefully I’m wrong and the US economy can be stimulated, but from what I’ve researched central planning is rarely successful. The worst part is those in most need of help have largely been ignored, which is both immoral and absurd. How can we regain the confidence of the consumer if they are being left out in the cold during the worst financial storm since WW2 if not the Great Depression?

Meanwhile, traders are liquidating US government treasuries and buying gold and silver. Clearly the “smart money” has an idea that inflation should be feared looking forward.

Fed fractionalizes funds rate to market cheer

The stock market cheered the US central bank’s historic interest rate cut today, surging nearly 5% on the S&P 500 back above 900 to 911.82. The rate cut, combined with continued quantitative easing in Treasury bonds was evident in today’s trading, with a flood out of US dollars in to commodities and other currencies as well as bond yields dropping sharply.

The implications are clear. Inflation will begin in some measure of time, whether it is days, weeks or months. We can see traders already preparing by taking long positions in anything that stands to benefit from the dollar’s fall. Near term we could see the US dollar index fall as low as 72, retesting its prior lows and further confirming the head and shoulders pattern. Commodities and currencies remain attractive buys.

Auto bail out talks break down

Talks in the US Senate to create a compromise in the auto bail out bill have failed. The US futures, Asian and European equity markets are taking a large hit. The S&P 500 is below 850 pre-market, meaning if we open that way the support level has been breached. Car makers, industrials and energy companies are taking a big hit. These are unprecedented times with big news every day. Keep your eye on the markets!

US dollar index showing head and shoulders

The US dollar index is forming an all too familiar pattern.  This is certainly a result of wreckless monetary policy turning deflation in to a potential stagflationary situation. At this point we recommend purchasing commodities (DYY is a good ETF because it is 2x leveraged and well diversified) and other currencies while there are reasonably priced opportunities.  We like the Euro and Yen for this trade.

US dollar index

US dollar index shows head and shoulders pattern

The courageous may consider purchasing commodities stocks as they will likely participate, but the future of the equities market is not necessarily certain as the recession is deepening.  Today’s unemployment claims were higher than the expected 525k at 573k.  That is a very bad sign that the worst is far from over in terms of how many layoffs we can expect.

Commodities surge

Commodities have had tremendous strength for the past few days along with commodities stocks seeing money pour in. This is a potential trend worth watching and it is continuing pre-market today.   I will have more detail in a later post.

Nasdaq one day chart: head and shoulders

We are seeing confirmation of a head and shoulders pattern on the NASDAQ composite. This pattern is potentially very destructive to the rally that has taken place thus far. If you are still long this market, a stop slightly below 880 on the S&P or 1550 on the NASDAQ composite is wise, as that seems to be the only level holding back a collapse of the uptrend.

Watch this trend closely because the weekly chart on the NASDAQ composite shows the same pattern forming, meaning we could be retesting our lows in short order if it traces out the right shoulder and breaks below the neckline.