Geithner Plans to Give the Federal Reserve Even More Powers

Treasury Secretary Timothy Geithner put on his best salesman suit today as he faced a Senate Banking Committee that proved largely sceptical to his plans to reform the banking and financial system.

If you read his prepared testimony you come away feeling that this whole financial mess was due to 'gaps' in the current system that nobody had authority to supervise. Geithner failed to mention how the Federal Reserve and the SEC were actively complicit in this catastrophe, instead the Fed is being rewarded with additional powers!

This will have the conspiracists jumping up with joy with another example of "create the problem, create the solution". The Fed will have control of the whole financial system, not just banking. It will have the task of "supervising the largest, most complex and interconnected institutions." Geithner claims, "You don't convene a committee to put out a fire." No, you employ the Federal Reserve, which is governed by... a committee. But as we know, the Fed is not really run by a committee but rather a consortium of private banks.

The Banking Committee is typically circumspect in its criticisms as all the fine details will be hammered out later, but having sat through a large part of the hearing the one near-unanimous voice of disapproval was the expanded role of the Fed. Under the gaze of the world's TV cameras these hearings are largely for show, so that Senators can appear to be human beings to their voters. However, the Federal Reserve Banks seem one small step away from a process started some 100 years ago to completely emasculate US government control of the country's money.

Under the proposed plans the Fed will keep its responsibility for monetary policy (something that should legitimately be with the Treasury - what does the Treasury actually do these days?) plus be the lender of last resort to any financial institution whose latest scam has back-fired but is "too big to fail."

Mercifully, the Fed's role in protecting the consumer will be taken away and a new Consumer Financial Protection Agency created. You could be forgiven for thinking that the Fed had no interest in the lowly consumer anyway, so I very much doubt they'd miss that onerous task.

There will also be a new Financial Services Oversight Council to bring together the heads of all of the major federal financial regulatory agencies to look into those financial gaps that have been so skilfully manipulated by the Fed. Nothing like building a gate after the horse has bolted, especially after all the hay has gone too.

But just in case you feel this is a purely American problem, Geithner has the consoling words that, "I see no conflict ... You see these [other] countries now moving in the other direction to give their central bank more power." Yes, I know, create the crisis, create the solution. Those few countries left that have not sold away their resources to 'independent' external central bankers just also happen to be those countries that are at war or are 'pariah states'.

Avoid the News, Find an Investment Strategy

The long-running Dalbar Financial Services study shows that funds routinely deliver bigger returns than investors actually get, because individuals only buy after a rise or sell after a decline. (MarketWatch)

What would also make an interesting study is to see how these decisions are correlated with the financial press headlines. True financial journalism is rare with most mainstream news happy to pump the market up and wish for better times when it dives. There is rarely any real analysis, especially on TV - you have to look online to find that.

All of this is in the context of the current market rally. Is this time to get back in? The simple answer is that, if you haven't done so already, then don't do it now! The S&P 500 is now sandwiched between its 200-day and 50-day moving averages. As the two indicators move towards each other there will come a crunch point. Is this a sucker's rally or the real thing? That will be the time to tell. Don't add to Dalbar's statistics. This is perhaps a good time to sit down and think of a real investment strategy. There are many strategies that work, you just have to find the one that's right for you, your level of assets and your time commitments. The worst strategy is to follow the news!

Gold Bugs Beat Bullish Drum

In recent years the gold bugs have beaten a bullish drum, especially during the dips in the rollercoaster ride. Having touched $1,000 again it has since drifted to $875. The uptrend support line is around the $750 level so no time to panic as yet.

But as Peter Brimelow says,"There is disturbingly universal expectation among gold-watchers that Federal Reserve monetary expansion must blow off into inflation." My concern too is that all this creation of dollars is actually masking the fact that so much dollar wealth has also been destroyed. If this is indeed the case then inflation will not necessarily take hold.

Gold markets are particularly prone to noise. Unlike stocks and bonds, gold yields no interest, and unlike crude oil gold is only marginally used as an industrial product. This means that profits of the buy-and-hold variety are only forthcoming in an uptrend. The other option is to just follow the charts and buy and sell accordingly. There are many large forces in this market that do not show their hand by writing newsletters. Look at the numbers, not the noise.

Ruff Rides the Rally with Caution

Ruff Times, edited by veteran Howard Ruff, is up 20.4% over the year to date through March, according to the Hulbert Financial Digest's count, compared to a negative 10.56% for the dividend-reinvested Dow Jones Wilshire 5000.

Ruff wrote recently: "The stock market has made a dead-cat bounce, even though the returns are spectacular for short-term investors, which I am not. The long-term problem with the stock market is two-fold: 1) its earnings will decline as business sags deeper and deeper into this recession which will depress stock-market prices; and 2) the price/earnings ratio (PE) is still way above the typical PE at the bottom of bear markets. The stock market will have its ups and downs and literally suck Wall Street investors into short-term rallies as they try to pick 'the bottom.'" (MarketWatch)

Ruff's conclusion: "Sell into these rallies. The stock market is toxic and will be for several years."

Well there's confidence for you! And this from a guy who's made 20% during the last year.

SEC Revisits Uptick Rules

The SEC is sheepishly back-peddling on the so-called uptick rule. Controversially, this rule was axed in 2007 after 70 years on the books. Unfortunately, the axing of this rule to mitigate short selling was also the cue for the worst bear market since the Depression. The uptick rule has nothing to do with disastrous corporate earnings, so I suspect this is another straw man held up as a scapegoat. However, red faces all around the SEC.

But is the uptick rule such a good idea? Just to muddy the whole argument the SEC has put up five different proposals for a 60-day consultation period. Whatever the outcome, any rule that tips the balance of supply and demand in one direction is not part of a free and fair market. If the idea is to increase stability and decrease volatility then perhaps having both an uptick and downtick rule would make sense. But looks like we're heading back to the days when pumping up stocks for no good reason is a great idea! The nightmare scenario for US stock markets is that they start to resemble their Japanese counterparts.

There are other ways to short stocks, such as using options. The real problem is from naked short selling, where someone sells a stock they don't actually own, as this effectively increases the apparent number of shares being traded. The SEC has proved itself completely useless at being a financial watchdog. Until wholesale changes are made, expect nothing more.

Analysts Clutching at Volatility Index

The CBOE Volatility Index, or VIX - which typically moves in the opposite direction of the S&P 500 - on Tuesday deviated from its norm and tilted mildly lower in a move one analyst attributes to a potential shift in the stock market's course, reports MarketWatch.

"Typically, if the S&P moves 3%, VIX will move 10% in the opposite direction And, when the VIX is stubborn, and doesn't move as much you'd expect, it is often forecasting a change in direction," said Randy Frederick, director of trading and derivatives, Schwab Center for Financial Research.

The VIX, a measure of the market's expectations of volatility over the next 30-day period, is often referred to as the fear gauge, but Frederick rejects the description.

"I don't like to use the term 'fear gauge' because then you're saying fear and uncertainty are synonymous. You can have uncertainty without having a lot of fear," he said.

Exactly, the VIX measures uncertainty rather than fear. It is still stuck in the 40s, which is moderately high and what traders would like is to see it back firmly in the low 30s or even 20s. Ultimately, earnings will determine a successful recovery, and on this front there has been some little-publicised activity as stock indices shed their most pathetic performers for new, and hopefully better, companies.

Keep a watch on companies about to enter the S&P 500 as the mere fact of being in the index means their share price increases as funds tracking the index have to buy the stock to balance their portfolio.

How Rich Countries Die

This is a brief overview of a book report on The Rise and Decline of Nations: Economic Growth, Stagflation, and Social Rigidities, by Mancur Olson at Philip Greenspun's Weblog. The full book review is fairly lengthy but well worth the read. Indeed the original book itself may have been better titled as "the Decline and Fall of Nations" as there seems little in it that is uplifting in the current situation, except perhaps a warning that many countries are going down a slippery slope towards permanently unproductive economies.

The main thesis is that Olson wants to separate productive and non-productive parts of the economy; something that traditional macroeconomics ignores. He sees government spending as largely unproductive. It does keep people employed but it is just a recycling of money taken from taxpayers and redistributed to activities that by their very nature do not yield a profit and hence do not contribute to economic growth and wealth.

The second attack is against the increased influence of special interest groups within developed economies. Olson sees both corporate lobbying and powerful trade unions as contributing to the decline of a nation's prosperity as they both seek to put their own interests above that of the nation. Surely, seeking a balance is what governments are there for, and yet once the lobbying becomes so ingrained it is almost impossible to find a politician untarnished by either corporate or worker support. The downward spiral of inefficiency and unproductiveness thereby continues as bigger and bigger government is need to monitor often conflicting market rules and regulations.

The book was written back in 1982 and Olson's thesis is that standard macroeconomic theory is basically useless in describing developed economies. Agreements between governments, companies and workers can work in rebuilding a country, as happened in Italy, Germany and Japan, but eventually such arrangements become negative in that they but the brakes on much needed changes demanded by new market conditions and new technologies. Just look at the US auto industry - both corporations and unions want to keep their cozy market and demand government bailouts rather than adapting to market changes ten years ago.

How does all this help an individual today? Well, the message is that if you wish to prosper then look for a new industry and a developing country. The mobility and flexibility of an economy unhampered by decades of nepotism may even be more important than the actual industry sector. Be flexible and mobile and smart!

One slightly depressing side issue is that Olson believes that people moaning about their political establishment should just ignore it and concentrate on earning more money. The special interest groups have significantly more funding than any individual, or even groups of individuals, and that the time wasted in seeking political solutions is better spent seeking personal economic solutions. Voting for change is an illusion - vote with your feet.

Jim Cramer Says "Depression is Over" - Laughing Stocks Rise

Megaphone mouth Jim Cramer is auditioning for a new job as Wall St clown. Below is a video with guru Jim announcing that the depression is over, the Federal Reserve are geniuses and that pumping over $1 trillion dollars into shell-shocked economies is going to be the Lazarus touch.



Now this guy is in serious need of his own oxygen tent as his own company lies on the slab next to his reputation. Calling a bottom every time there is a temporary minimum is just plain stupid. Everybody can do that. Eventually everybody will be right and ignore all the false signals. Selective amnesia means he can carry on being loud, but volume is no indication of truth.

The next shoe to fall will be the dollar. Maybe not today, maybe not tomorrow, but some day the Fed's bluff will be called. China has gained some increased power in the IMF and World Bank due to its reserves. It has been calling for the dollar to be scrapped as the world's default reserve currency. This may happen slowly as the IMF issues more SDR loans. SDRs are bizarrely denominated in dollars but are a pool of currencies in which the dollar has a weighting of just 44%.

A renewed dollar slide may help US exports in the long term but the short term effect will be to stoke up inflation. The monetarist knee-jerk reaction will be to hike interest rates thereby trampling on the new shoots of an economic spring. It will, however, give Cramer the clown another go at shouting "Bottom!" For the moment, watch the key resistance level at the 200-day moving average.

G20 Agree on Global Stimulus

The G20 meeting in London ended with a nine-page communique setting out a number of financial stimulus commitments to try and halt the global economy sliding into depression.

The headline figure most sources quote is $1.1 trillion, but this is on top of $5 trillion already agreed by individual countries. The extra $1.1tr will come from global institutions like the IMF and the World Bank. Looks like a bit of shuffling the cards with reserve-rich countries lending to those close to bankruptcy.

However, what the meeting refers to as trade financing is a pathetic $200 billion. So what is the rest of the money for? Plugging black holes in banks worldwide?

All of this, however, begs one huge question. This is yet again gambling the future on expected growth, whilst ignoring all the toxic "assets" - better known as liabilities - and how to deal with them.

Just the regulated derivatives markets (ignoring the OTC trades) are worth some $700 trillion. Even a small 10% loss would dwarf this whole global stimulus package. Where was the solution to this potential earthquake?

Stock markets rose on the news.

How the Free Market Mortgage Bond Scam Works

This is a great little article by Michael Hudson about how the US government is un-freezing the credit markets by gifting money to the banks.

"Suppose a bank is sitting on a $10 million package of collateralized debt obligations (CDOs) that was put together by, say, Countrywide out of junk mortgages. Given the high proportion of fraud (and a recent Fitch study found that every package it examined was rife with financial fraud), this package may be worth at most only $2 million [...]" [Note also that without the possible fraud and the leveraging such CDO losses should be no more than the average real estate price fall.]

"The bank now offers $3 million to buy back this mortgage. What the hell, the more they bid, the more they get from the government. So why not bid $5 million. (In practice, friendly banks may bid for each other's junk CDOs.) The government – that is, the hapless FDIC – puts up 85 per cent of $5 million to buy this – namely, $4,250,000. The bank only needs to put up 15 per cent – namely, $750,000.

Here's the rip-off as I see it. For an outlay of $750,000, the bank rids its books of a mortgage worth $2 million, for which it receives $4,250,000. It gets twice as much as the junk is worth."

At that point it would also be interesting to see what the rules are about how much the FDIC gets back once (if?) those CDOs are untangled and any underlying assets realized. Of course, as I've said before, if the bonds were highly geared they could be worth less than zero.

Global Trade Collapsing

In the financial frenzy to drive the stock markets up and out of oblivion some sobering data made a brief but unwelcome visit. Taking data from the last five months, as the credit crunch intensifies, the decline in US exports is equivalent to an annualized rate of 49%. The drop in imports is a mere 30%.

The pace of the decline is unprecedented in modern times, economists say. "We doubt even during the Great Depression that trade collapsed with such ferocity," said David Greenlaw, an economist for Morgan Stanley.

The Great Recession, as the IMF calls it, has severed a crucial link in the global economy. U.S. consumer spending has been the main engine of growth for the whole world, but that spending was based largely on phantom gains in asset prices that were inflated by that cheap money from abroad that has now been disrupted. As such inflated asset prices were repackaged and resold around the world the collective debt - and collective pain - have been spread far and wide. (Marketwatch)

Talk of the real economy with real products and saving to spend all sound like a really severe hangover. As one commenter noted,"China has surpassed the United States in a key measure of high tech competitiveness." The Georgia Institute of Technology's bi-annual "High-Tech Indicators" finds that China has risen to 82.8 (out of 100) whilst the USA now sits at 76.1. America peaked at 95.4 in 1999 and has drifted lower whereas China has soared from a lowly 22.5 in just 10 years. No wonder Hillary Clinton went begging to Beijing.

If the economic landscape is changing let us hope it does so with small tremors and not one mighty earthquake.

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Are New Home Sales Rising or Falling? More Media Spin.

From the Census Bureau:

Sales of new one-family houses in February 2009 were at a seasonally adjusted annual rate of 337,000, according to estimates released jointly today by the U.S. Census Bureau and the Department of Housing and Urban Development. This is 4.7 percent (±18.3%) above the revised January rate of 322,000, but is 41.1 percent (±7.9%) below the February 2008 estimate of 572,000.

The median sales price of new houses sold in February 2009 was $200,900; the average sales price was $251,000. The seasonally adjusted estimate of new houses for sale at the end of February was 330,000. This represents a supply of 12.2 months at the current sales rate.

Barry Ritholtz has a problem, though: all the mainstream media trumpeted the monthly 4.7% rise without mentioning the annual 41% fall! Politics is obviously more important than economics. I agree with him. Most investors have now lived through two bear markets and should have learnt that being innumerate is not the path to wealth and prosperity.

Another thing that is rarely cited are the confidence intervals. Quite simply, the more data there is the more confident are the headline figures. That 4.7% rise with a 90% confidence interval of 18.3% makes it almost meaningless, indeed the same Census Bureau wrote,“the change is not statistically significant; that is, it is uncertain whether there was an increase or decrease.” But that doesn't make much of a headline, does it!

Rally convinces some top performers - but not all

First the bad news: In his comment after the market close, Dennis Slothower of Stealth Stocks Daily explicitly cited Wednesday's last-hour rescue rally as cause for caution.

He wrote: "The intervention we are seeing in the markets right now is blatant and strong -- apparently hoping to convince J.Q. Public that the train is leaving the station. There is a strong and concerted effort by the Fed, the administration and their cooperatives to paint this tape higher and higher, without any pull back.

He continued: "The normal process of backing and filling has not been allowed to take a normal course, possibly out of fear that it will get out of hand and seriously challenge the new bear market low set on March 6th -- just a few weeks ago."

Slothower's point: "This kind of intervention often ends badly though, as no selling relief leads to a pressure point where eventual selling erupts into a volatile profit taking decline over a day or two that can quickly remove weeks of gains." (Marketwatch)

The other two newsletters cited seem to be building up some faith in this rally, but the above quotes have to be taken seriously. The manipulations are fairly obvious when one is looking at the markets as they happen. Interventions have to be cost-effective, so usually take place at crucial times of uncertainty... such as now.

Having rallied some 20% one could call this a new bull market - after all, a 20% drop signalled a bear market. The 800 level of the S&P 500 is important here. However, the 200-day moving average is still just above 1,000, so another 25% higher. The index has, however, broken above the 50DMA. I would wait for this level to be tested and, if holds, would be a weak buying opportunity.

AIG Directors Face Class Action

Activist group Freedom Watch said shareholders of American International Group (AIG) have filed a class action lawsuit intended to force directors of the group to pay themselves pay back the "bonuses, dividends and other perks" paid to themselves and other officials. The lawsuit also seeks to recover the losses of shareholders.
(MarketWatch)

This should be fun! Will be costly all round but should wipe the smiles off the faces of those incompetent and greedy executives.

Credit Union Times

Established in 1990, Credit Union Times is the nation's leading credit union news publication. It carries more paid advertising and more editorial pages than any other credit union publication. It is widely regarded as the paper of record for the credit union industry.

Published weekly, its main focus is to provide comprehensive, objective coverage of the latest credit union news. It also offers extensive on-site conference coverage, people features, statistical analysis and expert technology coverage. It also operates the only credit union news site (www.cutimes.com) that is updated throughout the day as news breaks. With a growing stable of products, including events, Webinars and custom publishing opportunities, Credit Union Times offers readers and advertisers many ways to get connected with the dynamic credit union industry.

NCUA Conserves U.S. Central and Western Corporate Credit Unions

The National Credit Union Administration Board today placed U.S. Central Federal Credit Union, Lenexa, Kansas, and Western Corporate (WesCorp) Federal Credit Union, San Dimas, California, into conservatorship to stabilize the corporate credit union system and resolve balance sheet issues. These actions are the latest NCUA efforts to assist the corporate credit union network under the Corporate Stabilization Plan.

The two corporate credit unions were placed into conservatorship to protect retail credit union deposits and the interest of the National Credit Union Share Insurance Fund (NCUSIF), as well as to remove any impediments to the Agency’s ability to take appropriate mitigating actions that may be necessary. Service continues uninterrupted at both U.S. Central Corporate Federal Credit Union and WesCorp, and members are free to make deposits and access funds.

Note that corporate credit unions do not serve consumers directly. They are chartered to provide products and services to the credit union system. These products and services will continue uninterrupted and there is no direct impact by NCUA’s actions on the 90 million credit union members nationwide. Credit unions that serve consumers remain very strong, with net worth exceeding 10 percent of assets, healthy growth in assets, membership, and loan portfolios despite the difficult economy.

I thought credit unions were largely immune from the financial crisis created by losses in leveraged products. Credit unions can come under stress from a large drop in the value of underlying mortgage assets. I will investigate further as to whether these corporate credit unions have been speculating beyond their remit, or whether this is indeed a consequence of sharply lower house prices.

Even Hot Air is Falling

Jon Stewart's scathing rebukes of the financial news network, one after another, on "The Daily Show" underline much of the public's anger toward Wall Street -- and CNBC, which many regard as the Street's virtual mouthpiece.

And with that, the network now has the challenge of convincing the public that it's serving as a watchdog for investors, and not the establishment lapdog that it's seen to be. CNBC long has sought to identify with the powerbrokers of the financial-services industry, believing viewers would find their opinions to be the most relevant form of news.

But CNBC has a big problem. Its upbeat approach has served it well in creating a buzz and building an audience. Now that millions of people have lost homes and jobs, the national mood calls for the leading financial network to change its strategy and reflect the gloomy sentiment. (Marketwatch)

As Jon Stewart chewed up Jim Cramer, the loud-mouthed CNBC poodle, he should also have included Larry "We believe that free market capitalism is the best path to wealth destruction" Kudlow, who is another shrill ranter who loves pumping up stocks but is as perceptive as a slug.

I'm glad a prime-time American TV programme has exposed the scam that is CNBC. I rarely watch it, preferring the slightly more subdued reporting on Bloomberg, which also has far better analysts.

This is a lesson to just not trust the financial press. People really must try to understand that this is a casino in which the odds are against them. Unlike a casino, there are some good times in which everybody is winning, but when the losses start happening your chips will start to dwindle. The public financial press is not there to help you, it is there to make money for itself. Try to find an independent voice who will teach you how to make your own judgements, not pump and dump stocks leaving you clueless as to what just happened.

I have no sympathy for Cramer, Kudlow and CNBC. Cramer's week also got worse as when Thomas Clarke resigned as CEO of The Street.com Inc., the online financial news site co-founded by Cramer. Oh well, looks like even hot air is falling in this bear market.

SEC Considers New Uptick and Short-Selling Rules

The Securities and Exchange Commission plans to consider whether to reinstate the controversial "uptick" rule or consider other short-selling regulations at a meeting on April 8, the agency announced Friday. (Marketwatch)

The uptick rule, which was removed from the markets in July 2007, allowed short sales only if a preceding trade boosted a company's stock price.

For anybody who believes in free markets - or at least in fair markets - this is yet another illustration of how rules distort behaviour. If this new uptick rule passes then we will be back to a new bubble scenario. For fairness there should be an uptick and downtick rule. This would allow for more orderly moves in either direction. The rule is stated in terms of price movements rather than volumes so it is feasible if the price is moving downwards to do small up trades followed by large down trades. Fairly simple but obviously too fair for the SEC.

As the news item also mentions other short-selling measures this will be a political move rather than a purely technical one.

As Credit Crisis Eases Why is the Economy Still a Mess?

After unveiling one plan after another to fix the seized-up credit markets, the Federal Reserve can claim some success in reviving lending for key groups of borrowers, reports Marketwatch.

It can't say the same of meeting its overriding goal - restarting economic growth.

Loosening up the commercial-paper market has allowed big companies like General Electric to sell bonds. Lending dollar-based funds to foreign central banks probably helped drive down the benchmark rate for many mortgages and commercial loans. And intervention in money-market mutual funds likely prevented a financial shock from turning into catastrophe.

But one year ago this week, when it guaranteed J.P. Morgan's takeover of Bear Stearns to stave off global financial chaos, the Fed embarked on a series of unprecedented interventions into private capital markets.

That marked the first and highly controversial step of lending money to broker-dealers from its discount window, putting them on similar footing with commercial banks. And over the next year, it repeatedly widened its role as a lender of last resort, accepting more illiquid securities as collateral for loans and buying corporate debt straight from companies.

So much talk of the "moral hazard" of propping up failures has largely disappeared. Consumer credit continues to contract and the Blue Chip survey of economic forecasters is predicting the worst recession since World War II.

"The problem has become more fundamental than liquidity," said Michael Feroli, U.S. economist at J.P. Morgan Chase & Co. "It's moved on to more of a solvency, capital problem."

So we're finally seeing the real problem emerge, which is that many companies are just plain broke. I've been saying this since this financial crisis started. Leveraged products can not just lose you money but can also lose you money you haven't got. What were balance sheet assets could turn into liabilities. And the Federal Reserve is doing its job of protecting its members - the banks.

A program to lend dollar-denominated funds to foreign central banks, through what's known as swap lines, has helped depress Libor, the London Interbank Offered Rate. The 3-month dollar LIBOR has fallen to 1.32% from a spike of 4.8% last October.

And one of the Fed's programs to prevent a catastrophic run on money-market funds seems also to have done its job. On Sept. 19 it launched the AMLF - shorthand for Asset-backed Commercial Paper Money Market Mutual Fund Liquidity Facility.

"The AMLF has been the single most successful government intervention to date in the financial crisis," said Peter Crane, editor and publisher of Money Fund Intelligence.

The Fed says it's also made headway in the mortgage market, where rates have slid after its late-November announcement that it would buy $600 billion in mortgage-related bonds. Fixed-rate mortgages due in 30 years are about 1 percentage point lower than they were in November, according to Freddie Mac, although they have started to rise in recent weeks.

Success for some of these programs has created high expectations for the Fed's latest program, the $1 trillion Term Asset-Backed Securities Loan Facility, or TALF. That plan aims to jumpstart issuance of securitized credit-card receivables, auto loans and student loans.

It's considered an important response because of the role institutional investors played in the past several years in extending credit.

"We need to support the primary banking system in the country, but we also need to support what [Treasury Secretary] Tim Geithner calls the shadow-banking system - the securitized market, which has really gone silent," Miller of T. Rowe Price said.

Bernanke has described the Fed's policy as a "credit easing" designed to increase the supply of credit to households and businesses, thereby restoring "economic prosperity as quickly as possible."

Programs to help the interbank-lending, commercial-paper and mortgage markets are working, he has said, as evidenced by lower Libor, commercial paper, and conforming mortgage rates.

But for the broader goals of reinvigorating economic growth, the Fed's efforts have come up short so far.

"The Fed can create liquidity, they can't create solvency," Mueller said. "They can't take a bad loan and make it into a good loan."

The rapid expansion of the Fed's balance sheet has prompted some critics, such as Philadelphia Fed President Charles Plosser and others outside the Fed, to warn that the central bank is overreaching. Critics worry the central bank is taking on too much credit risk and say its intervention in private markets threatens a cascade of negative, unintended consequences.

Looking at all these Fed plans the scenario unfolding becomes clearer. Toxic debt is being turned from private hands into public ones that will ultimately be paid for by all taxpayers. The companies that constructed various debt instruments are frantically trying to plug up the losses on their books with help from the Fed. However, the ultimate borrowers, the mortgage holders, credit card holders, auto loan holders etc, are going to take the fall. Just look at the difference between mortgage rates and LIBOR rates. Mortgage rates just have not come down so the lenders are hoping to make a lot of money here that they can use to offset other losses. With job losses rising the individual is going to be bled dry.

Protect any wealth you still have. Also, calculate if you are going to be in trouble repaying debts any time soon. Just as the moral hazard associated with bailing out companies is in the rear-view mirror so it should be for individuals. Do whatever you can not to get sucked in further... for I fear this is going to go on a lot further.

Nikkei marks lowest close in at least 24 years

Japanese shares gave up early gains to end lower Monday, with the benchmark Nikkei 225 Average marking its lowest closing level in at least 24 years as investors sold down financials and pharmaceutical shares amid a weak economic outlook.

The Nikkei ended 1.2% lower at 7,086.03, the lowest finish in a data series dating back to 1985, according to FactSet. At its latest close, the Nikkei is less than a fifth of its all-time high of 38,915.87, which it touched nearly two decades ago. The broader Topix index slipped 1.5% to 710.53.

MarketWatch.

Like I said, all that froth about the US markets hitting a 12-year low was just filling space.

Look at what the bankers are saying: we are going through a process of de-leveraging. If companies were de-leveraging profits that wouldn't be so bad, but they are winding down losses - leveraged losses - which means many more companies are still hiding the fact that they are bankrupt.

Current Dividend and Yield Plays

"Here are several keys to "right-sizing" dividend and yield plays. You should focus on debt-to-equity, interest coverage ratio and return on assets vs. return on equity. You'll want to seek low debt-to-equity, high interest coverage and high ROA vs. ROE.

A final additional crosscheck is earnings-per-share stability. Does your investment candidate possess high EPS stability? Stocks that score well here are usually defensive, more stable consumer staples plays." (read whole article)

OK, that lost me a long time ago! This is one reason I prefer to analyse macro investments such as indices and commodities - I just wasn't born to be an accountant! However, what the above jargon points to is investing in high grade bond funds.

"Last year the Lehman Aggregate bond ETF (AGG) turned in a fantastic 5% vs a negative 38% for most risky assets, running the gamut from commodities, domestic equities and junk to emerging market equities. A similar level of stability and performance can be expected this year."

Yes, that makes sense now! Hopefully the fund manager will have done all the previously mentioned calculations and have avoided the junk most liable to default. When your bank account is likely paying less than 1% per annum then 5% is a dream.

And if, like me, you thought Lehman Bros was flushed down the toilet some months ago then note that the ETF still exists but is in the safe hands of Barclays Global Fund Advisors - what a relief!

A technical roadmap of the current landscape

Consider that for a true bull market to emerge, the S&P needs to clear its 200-day moving average. Yet even a casual glance at the chart above [in article] points to a serious problem. Namely, the S&P currently holds more than 300 points under its 200-day, or fully 43% lower.

Looking ahead, the solution to this problem won't be that the S&P rallies to meet the 200-day, but rather, the 200-day needs to drop to meet the index. Based on a rough back-of-the-envelope estimate, this rendezvous is at least five months off.

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The Dow and the S&P have already edged under the 2002 lows, market sentiment is unusually complacent, and the traditional leadership groups remain technically wounded.

That means capital preservation remains the first objective -- and while trading rallies will emerge -- further technical repairs are needed before reconsidering a near-term bounce.

from A technical roadmap of the current landscape.

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As I have said before, for those astute investors with a bit of time to look after their own investments the single most valuable long-term indicator is the 200-day moving average. There are no signs that any stockmarket is going to suddenly lift off and breach this indicator. Whatever the froth in the financial news, wait for that 200DMA to slowly drop. I mean, at the moment even the 50DMA is dropping so there is much more sense going short than long.

One interesting this is that the last two drops this year have not seen the VIX rise anywhere near what we saw last year, peaking in the 50s rather than the high 80s. The author suggests this is a sign of complacency and that the last lingering bulls have not yet been throttled out of the market.

Position yourself now for $300 a barrel oil

Human beings are a predictable bunch and we tend to wait until things get to a painful crisis mode before taking drastic action. My question is why does it always have to get to that point?

Take the most recent run-up of oil prices, when crude hit $147 a barrel and gasoline was trading around $5. As prices reached nosebleed levels, the general public was in a great deal of pain and they acted accordingly. There was an outcry for more alternatives, more refineries, conservation, infrastructure investment etc. Everything from clean-coal technology to nuclear was on the table.

Fast forward to today, with crude prices at around $38 and gas back below $2, and it's a very different picture. No pain means no gain in solving the problem.

Let me be clear, though. That problem hasn't gone anywhere. $300 crude is not far off.

While the global recession and credit crunch have severely impacted global demand for energy, it's only temporary. The problems propelling oil prices to $147 haven't gone away. The patient is, at best, in temporary remission.

from Position yourself now for a barrel of oil at $300.

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Well, you can read the rest of the article yourself. The cynical bunch of MW commentators think this has been planted to move oil up a bit - seems to have succeeded. Pricing oil in dollars is itself distorting of its global value. However, if one prices oil in terms of grams of gold then oil currently looks very very cheap. As both oil and gold are currently priced in dollars by charting the cost of a barrel of oil in terms of gold removes the dollar curency from the equation.

Five Rally Killers and How to Survive Them

We could see stock market rallies in the near and long term. And I think the best thing to do is to sell those rallies, because the economy is going to serve up a big ol' heaping plate of white-hot doom at least through 2012.

Force #1 - The Banking Crisis Will Drag On

The International Monetary Fund keeps raising estimates on bank losses, but even its recent estimate of $2.2 trillion in losses is probably way behind the curve.

Force #2 - Real Estate Crisis is Nowhere Near a Bottom

Home prices follow income. Incomes are going down, and we are in a deflationary spiral now. I expect we'll see both incomes and home prices fall into 2012.

Force #3 - Americans Are Unwinding Their Debt

Consumer spending -- which accounts for 70% of total economic activity -- has fallen for two quarters in a row. We've seen periods where consumers reduce debts before. These "unwindings" last for about 10 quarters on average.

Force #4 - State Budgets Are Going Bust

At least 46 states from Maine to California faced or are facing shortfalls in their budgets for this and/or next year. Unlike the federal government, states cannot run deficits when the economy turns down; they must cut spending or raise taxes to balance their budgets. This adds another twist to the vicious downward spiral in consumer spending.

Force #5 - The Slump is Truly Global

The synchronized collapse of credit bubbles in Ireland, Spain, Greece and Portugal could lead to those countries defaulting. Eastern Europe looks even worse. Meanwhile, the economic engines of the world -- China, Japan, Germany and so on -- are misfiring badly. There is no growth engine at the present time to pull the U.S. or global economies out of their slumps.

In sum, the combination of a worsening banking crisis, real estate crisis, great unwinding of debt, state budgets imploding and a global slump means more downside.

I think the world is facing a crisis on a level unlike anything since the Panic of 1873, another period that saw a global real estate boom become a bubble and then burst hard.

The Panic of 1873 continued for more than four years in the United States and for nearly six years in Europe. And after a brief recovery, we slid into another depression. That's a real lost decade. And it's a darned good reason to sell any rally.

Stock doom and gold bloom.

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Cheery stuff, but wise not to get sucked into the "buy stocks now as they are so cheap" mentality. On the upside the writer suggests gold and silver, especially if banks start to buy them as reserves. Although the metal itself does not yield any interest a good fund of miners and refiners will also bear some dividends.

He also suggests dollar index funds but I'm more cautious of that. Interest rates do not have much further to fall so that bond prices cannot go much higher. So as soon as rates rise or the dollar value falls anyone holding Treasuries is looking at a pathetic yield and falling prices.

A Trading Strategy for a Flat Market

The possibility exists that the stock market in March will go neither up nor down, needless to say.
It's also possible that it will go nowhere, trading in a narrow range and ending the month at more or less the same level at which it began.

Well, duh. Of course. So what?

But it is surprising how few of us devise our trading strategies with that possibility in mind. Ask a group of investment gurus to offer a trading strategy for March, for example, and almost all will base their recommendations on a bold forecast of a big up or down move for the month.

Whether it's human nature or not to overlook sideways markets, they are a fact of life. And, at least according to some analysts, we may very well be entering into such a period now --late in a bear market but not yet ready to begin a brand new bull market.

Perhaps the most spectacular example of sideways action in U.S. stock market history came between 1966 and 1982. The Dow Jones Industrial Average first rose above the 1,000 mark in January 1966, and yet still traded at that same level in the latter part of 1982 -- more than 16 years later.

In, and out, like a lamb?

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This goes back to the article that there are 20-year cycles that are quite noticeable when looking at stockmarkets from, say, 1900. There are 20 years of growth followed by 20 years of going nowhere. From a long-range perspective those lean years just look dull and flat. But living within one of those periods, as we are probably doing now, those bear market lows look very painful and depressing.

All the talk of bottoms becomes even more meaningless as any real bottom could well be followed by a few years of sideways movements. Having a good strategy for sideways markets is the best advice at the moment. The same strategy will also catch the next bull market - when it happens - but is not wholly dependent upon it.

This is why a buy-and-hold strategy only makes sense if your time horizon is at least 20 years, otherwise it is an easy but costly way to invest.

The New Term Asset Backed Securities Loan Facility Program

A new lending program from the Federal Reserve and the U.S. Treasury could generate up to $1 trillion in loans for small businesses and consumers, the government announced Tuesday.

The Term Asset-Backed Securities Loan Facility, or TALF, will provide its first loans March 25, the government said. The Fed announced the program involving asset-backed securities, also known as ABS, in November, then unveiled an expansion last month, but the highly anticipated program was delayed.
Companies or investors interested in participating will apply to the Fed on March 17.

The Fed's program is designed to make a profit in the long run through interest and fees. To manage the growth in the Fed's balance sheet, the Fed and the Treasury will ask Congress for legislation to give the Fed additional powers.

The program will stimulate the economy by circumventing traditional credit channels that are now blocked up, the government said. With banks unable or unwilling to lend, even the most credit-worthy customers are finding credit hard to obtain.

"Issuance of consumer ABS has remained near zero since October," the Treasury said, adding that the stress in the market for extending credit to consumers "is one of the causes of the deepening recession."
"The program could represent a turning point for the economy and the financial markets by jump-starting lending in critical areas," said Tony Crescenzi, chief bond-market strategist for Miller Tabak & Co.

New lending program targets consumers, business.

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I still don't understand why the Fed and Treasury don't use those companies thay have semi-nationalised such as Freddie Mac to bypass the credit freeze? Is that too simple?

It's unlikely that Monday marked the end of the bear market

The Dow Jones Industrial Average dropped 300 points Monday, extending the bear market even further and taking the stock market down to levels first seen in the spring of 1997, a dozen years ago.
You'd think that the ensuing fear and panic would be more than enough to bring about the capitulation that contrarians have been waiting for before forecasting that the bear market was at or near its end.
But you'd be wrong.

Might this bear market nevertheless bottom out without capitulation taking place? To gain insight into this question, I analyzed all bear market bottoms since 1965, using the definition used by Ned Davis Research, the institutional research firm.

Incredibly, I found that, on average across these past bear markets, sentiment hit its lowest point 15 calendar days prior to the actual day of the bottom. That's impressive -- very few other market-timing indicators come this close.

Contrarian analysis of new market low.

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However, this average of 15 days hides a maximum delay of 112 days. Hulbert's own HSNSI is now 234 days since it hit its low. All of this suggests that trying to judge data on very few points is liable to create huge errors, or it shows that the final leg down is still to happen.

Bernanke: Large fiscal deficit unavoidable

The enormous fiscal budget deficit is unavoidable to help the economy recover, Federal Reserve Board chairman Ben Bernanke said Tuesday. "We are better off moving aggressively today to solve our economic problems; the alternative could be a prolonged episode of economic stagnation that would only contribute to further deterioration in the fiscal situation," Bernanke told the Senate Budget Committee. Congress is holding several hearings Tuesday on President Obama's $3.6 trillion budget blueprint for fiscal year 2010Bernanke said recent economic indicators indicate "little sign of improvement" in the economy. The rising number of workers filing for state unemployment have moved higher "suggesting that labor market conditions may have worsened further in recent weeks," he said.

Bernanke: Large fiscal deficit unavoidable.

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With the FDIC close to insolvency at what point does the US Treasury become bankrupt? Yes, they can keep printing money. I think at this point it is not yet inflationary because it is filling in huge monetary holes, but when it becomes so, and when interest rates start to creep up and bond prices fall then I think we may see real pressure on the US dollar.

The Bear Market End is Near... Maybe

A veteran bear says the end is near -- the end of the great bear market. But we're not quite there yet.

In its latest issue, Growth Fund Guide draws elaborate technical parallels with the 1929-1932 bear market. In the short run, it concludes that this year's decline "could last for many more days." But not forever.

Putting the stock market in a longer perspective, Growth Fund Guide says,

"Since its October 9, 2007 high, the DJIA has appeared to us to be in the process of continuing the major bear market that began in early 2000. Recent price action seems to suggest that we could see one or more declines and advances that could rhyme with [the 1929-32 bear market] ... history is suggesting that that a meaningful low in the U.S. market is most likely to take place within the last six months of 2009 or sometime during 2010."

How "meaningful?" Elsewhere, GFG makes it clear: "When we look for a possible low for super bear market, history points to the 18 month time period after June 2009."

In other words, it's the big one. And it's close in time, although Growth Fund Guide offers little hint as to how close it is in terms of stock prices.

From The end is nigh -- and that's good.

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So we could actually be looking at 2011 before the end! Although remember that the end of a bear market is not necessarily the start of a bull run!

I still think that this analysis of 20-year cycles has much going for it.

How Low Can It Go? Comparison of the Dow Jones to Japan's Nikkei Index

A comparison of the Dow Jones Industrial Average today to Japan's Nikkei Index leading up to and after its peak in 1989. There are a lot of similarities and some differences. What do they mean?

How Low Can It Go?

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Interesting article and good to see some analysis. I have often warned against taking any notice of the finance media's love of pumping up stocks. The nightmare scenario for the major indices is that they follow the path of the Nikkei - down some 80% from its peak.

The article overlaps the Dow and Nikkei taking the zero point at the peak of both markets. The Dow bubble was partially pricked by the dotcom crash, so that its rally was less spiked than the Nikkei. However, we are approaching a critical period where either the Dow (and other US markets) continues to slide as the Nikkei has been doing or the analysis starts to break down and we see a concerted effort globally to get the economy growing again.

I know, these seem like obvious either/or options but it is wise to see how far history can be a guide. It is particularly useful as an antidote to the gushing press who see the slightest rise as a cue to con people into buying more stocks. Things can get worse!