Treasury Secretary Timothy Geithner finally laid out his plan to rescue the trouble banking industry. Before we look at this, it is important to understand the “shadow banking system”.
The shadow banking system is all non-bank lenders such as investment banks, structured investment vehicles (SIV), hedge funds, monolines, etc.
These entities became critical to the credit markets underpinning the financial system, but were not subject to the same regulatory controls.
Further, these entities were vulnerable because they borrowed short-term in liquid markets to purchase long-term, illiquid and risky assets. This meant that disruptions in credit markets would make them subject to rapid deleveraging, selling their long-term assets at depressed prices.
This is the heart of the problem as Industry analysts estimate that the nation’s banks are holding at least $2 trillion in troubled assets mostly residential and commercial mortgages.
Will this program jump start the economy by rescuing the banks?
THE PLAN
The Public-Private Investment Program will purchase real-estate related loans from banks and securities from the broader markets. Banks will have the ability to sell pools of loans to dedicated funds, and investors will compete to have the ability to participate in those funds and take advantage of the financing provided by the government."
" The funds established under this program will have three essential design features. First, they will use government resources in the form of capital from the Treasury, and financing from the FDIC and Federal Reserve, to mobilize capital from private investors. Second, the Public-Private Investment Program will ensure that private-sector participants share the risks alongside the taxpayer, and that the taxpayer shares in the profits from these investments. These funds will be open to investors of all types, such as pension funds, so that a broad range of Americans can participate."
" Third, private-sector purchasers will establish the value of the loans and securities purchased under the program, which will protect the government from overpaying for these assets."
For more on Geithner’s plan investors can read Geithner’s article in the Wall Street Journal here.
CRITICS
The critics of this plan argue that while banks will largely be able to get bad debts off of their balance sheets to prevent them from being declared insolvent, this doesn’t guarantee that banks will be quick in lending again.
“ The Obama administration is now completely wedded to the idea that there’s nothing fundamentally wrong with the financial system — that what we’re facing is the equivalent of a run on an essentially sound bank. As Tim Duy put it, there are no bad assets, only misunderstood assets. And if we get investors to understand that toxic waste is really, truly worth much more than anyone is willing to pay for it, all our problems will be solved.
To this end the plan proposes to create funds in which private investors put in a small amount of their own money, and in return get large, non-recourse loans from the taxpayer, with which to buy bad — I mean misunderstood — assets. This is supposed to lead to fair prices because the funds will engage in competitive bidding.
But it’s immediately obvious, if you think about it, that these funds will have skewed incentives. In effect, Treasury will be creating — deliberately! — the functional equivalent of Texas S&Ls in the 1980s: financial operations with very little capital but lots of government-guaranteed liabilities. For the private investors, this is an open invitation to play heads I win, tails the taxpayers lose. So sure, these investors will be ready to pay high prices for toxic waste. After all, the stuff might be worth something; and if it isn’t, that’s someone else’s problem.
Or to put it another way, Treasury has decided that what we have is nothing but a confidence problem, which it proposes to cure by creating massive moral hazard.
This plan will produce big gains for banks that didn’t actually need any help; it will, however, do little to reassure the public about banks that are seriously undercapitalized. And I fear that when the plan fails, as it almost surely will, the administration will have shot its bolt: it won’t be able to come back to Congress for a plan that might actually work.
What an awful mess.” Paul Krugman, NY TIMES.
You may want to also listen to noted economist James Galbraith’s opinions.
TECHNICALLY SPEAKING
With the help of the Fed and the Treasury, the bulls have managed to push stocks above the major market indexes’ 50-day moving averages.
This may seem like we are at the beginning of a new bull market but technically speaking that is just not the case. You must view this as any other bear market rally that could without notice end and trap investors, viciously.
If we look at the primary trend in the stock market there is nothing bullish about the primary trend. The monthly ranges for all the indexes are still making lower highs and lower lows. The 50-day and the 200-day moving averages are still descending and the gap between the 50-day verses the 200-day moving average is so huge it would take months if not a year or more before the 50-day can trend above the 200-day.
For the S&P 500 to even test the monthly middle Bollinger Band line at 1223 is just not in the cards in the near term.
The McClellan Summation Index for the NYSE is at -553 and the OTC is at -738, so we clearly remain in bear market territory and as such, investors still need to view bear market rallies as apt to fail.
As strong as today was, new lows on the NYSE actually climbed higher than Friday’s – a jump from 40 new lows to 75 new lows.
Let’s look at the intermediate-term cycle.
The surprise move by Bernanke last week and today’s move by Geithner has invoked a powerful short covering squeeze.
Today’s move now has the S&P 500 index testing its weekly middle Bollinger Band lines.
We closed today within 10 points of this intermediate-term resistance level.
Furthermore, we are now approaching resistance at the back test of the wedge formation that formed in the upward slope of November through January. This suggests that most of this intermediate-term move is played out.
At best the November/April favorable time period has largely produced a sideways trend. The six to nine month cycle is now overbought again with the stochastics at %K 82 and %D 79 according to the Fidelity Select Family Stochastic Oscillator and by mid-April, the next major down leg is likely to be set up.
Sell in May and run away is very likely to happen this year as investors realize there is no improvement in corporate earnings on the horizon this year, despite the efforts of the Fed. How far can stocks go up if there is no signs of an up turn in corporate earnings?
First quarter earnings are about to begin their appearance in just nine more trading days and before that another jobs report. Hasn’t the market already discounted earnings? We’ll see. The gravity of the situation is still before us.
In the meantime, the short-term cycle is extremely extended as measured by the daily stochastics and the McClellan Oscillator, so this is no time to be chasing the bulls with the 50-day moving average still descending, despite one day above this resistance level.
No comments:
Post a Comment