Feeding The Bulls

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Treasury Secretary Geithner fed the bulls yesterday by announcing the details of his latest plan to stimulate the financial system.

Much already has been written about it as the particulars are being dissected in any possible way.

The markets took this as a positive development and off the races we went with all major indexes gaining sharply.

As always, Mish at Global Economics provided some valuable insights as to this new spending plan in “Geithner’s Galling (and Dangerous) Plan For Bad Bank Assets.” If you’re not interested in all the gory details, here’s a summary about five misconceptions:

* The trouble with the economy is that the banks aren’t lending. The reality: The economy is in trouble because American consumers and businesses took on way too much debt and are now collapsing under the weight of it.
* The banks aren’t lending because their balance sheets are loaded with “bad assets” that the market has temporarily mispriced. The reality: The banks aren’t lending (much) because they have decided to stop making loans to people and companies who can’t pay them back.
* Bad assets are “bad” because the market doesn’t understand how much they are really worth. The reality: The bad assets are bad because they are worth less than the banks say they are.
* Once we get the “bad assets” off bank balance sheets, the banks will start lending again. The reality: The banks will remain cautious about lending, because the housing market and economy are still deteriorating. So they’ll sit there and say they are lending while waiting for the economy to bottom.
* Once the banks start lending, the economy will recover. The reality: American consumers still have debt coming out of their ears, and they’ll be working it off for years.

What it comes down to is that another $1 trillion or so will be poured down this bottomless sinkhole for which the next few generations get to pay as the taxpayers are on the hook for 93% of this plan’s obligations.

Since we do not any influence over the outcome, we have to focus on the effects as far as the market is concerned. Over the next few days, we will see if there will be any follow through to the upside or if this rally is limited in scope.

While our domestic Trend Tracking Index (TTI) is still 5.09% away from signaling a new Buy, we nevertheless have to be prepared to act should this trend continue. Entering via our hedge position is only the first step to gaining market exposure conservatively. We will become more aggressive once the trend line has been crossed to the upside.

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Comments 1

  1. While I am not averse to taking some calculated risks, with the market; I sometimes get in and get out within a couple of days, with options, although I’m not a day trader (I just don’t think that way of trading makes too much sense or money, personally). This market seems very dangerous to me. I’m out, basically, until I get more clarity about it.

    My ego, and all of its analytical tools, thinks that what we’re going through, now, is a bear market rally, but it doesn’t really matter what my ego thinks; what matters is what the market does. I’ve learned, if I get back in, to flow with the “river,” not against it, and that’s what I’ll do, again, later, when there is more safety. Right now, the “river” is too rough upon which to ride, for me.

    Patience is a virtue, in an unpredictable time like this, I think. You can lose big-time by rushing into the dangerous territory of the market, right now. I’ll watch, as the bulls and the bears fight it out, for a while. Then, I’ll watch the waters of the “river.”

    Along with patience, humility is also a virtue, in times like this, I think. Again, I need to put my ego aside about predicting the future and come to grips that I really don’t know what the outcome of what this fight between the bulls and the bears is going to be, even though my ego thinks the bears will win for a fair amount of time.

    What matters much more is how the “river” flows. I’ve got to put my ego aside and remember, continually, the way the “river” flows is the only thing, in the end that counts. I think it’s better to wait and see which way the “river” is flowing, a little longer, and live to trade another day, rather than to drown in the undercurrent.

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