Shifting Risk

Euphoria returned to Wall Street yesterday as the Fed, in what I consider a desperate move to curtail the financial meltdown, let banks borrow money from the Fed using questionable assets as collateral.

The whole idea seems odd to me since banks were not able to liquidate their Subprime holdings in the open market place (no bidders) but now found a willing and able party (the Fed) to cough up some $200 billion in real cash. In other words, the Fed offered real money in return for illiquid, not sellable Subprime loans.

Yes, the assets pledged for the loans had to be AAA rated, but ratings these days seem to be questionable if not worthless. Given the fact that there are some $11 trillion in mortgages outstanding, this intervention does not appear meaningful at all. However, that did not matter to Wall Street, what mattered was the perceived solution to a problem. Up and up we went, with the Dow gaining over 400 points with most gains coming from short covering.

While that is an impressive gain for a day by any standard, it merely recovers the losses of the past 5 days or so. One day (or 2 for that matter) does not make a new trend although judging by some of the emails I received you’d think that happy days are here again. Let’s look at the major trends in the domestic and international market as represented by our Trend Tracking Indexes (TTIs):

Domestic TTI: -0.82%
International TTI: -8.68%

While anything is possible, there is no way that I would enter this market on the long side at this time. We’re still in bear market territory and, until the numbers change, I will hold my positions as stated. Day to day events should never be a basis for sound long-term investment decisions and, as always, I will let the market tell me when it’s time to make the next move.

For more on why interventions don’t work, see the WSJ blurb called “The Fed’s Hallelujah Rally.”