“We’ve been suckered again … or so it seems”

You might recall that we weren’t terribly fond of the $700 billion Troubled Assets Relief Program (TARP) which was hailed as a sure-thing emergency measure which would relieve the pressure on financial institutions and thaw out the frozen credit markets.

As usual, the government and its insider cronies lied to us. So far, about the only thing the money hasn’t been used for is taking bad mortgage assets off the books of institutions supposedly unable to make loans. We’d be rather annoyed, but for once the government might actually be getting something more right than wrong.

It appears that Treasury Secretary Paulson now feels that the original plan would have taken too much time (so why did you push so hard for it in the first place?) … The Treasury will instead buy stakes in banks and encourage them to resume more normal lending. Paulson also announced a new goal to support financial markets which supply consumer credit in such areas as credit card debt, auto loans and student loans.

Here’s the market’s opinion so far:

Down we go again for the fifth red day out of the last six. Support seems likely at 8250. But if that breaks, then 7750 is the next stop down. Stochastics RSI should drop well into the buy zone before a turnaround is likely here. We would also expect to see divergence between MACD and the price (and also On Balance Volume and the price) before a major, sustainable rally can occur.

Are They Scared or Smart?

We’re not exactly big fans of socialism, which is what this plan amounts to. However, if there’s going to be government intervention (it seems almost inevitable with Big Brother trying to save us from the world these days) this new idea sounds slightly more promising than buying toxic debt. As an equity holder, the government would be in a position to force the banks to operate as they had earlier promised in return for funds. There’s also a much better chance of the government earning a positive return on your money.

That got us thinking, though. If the banks aren’t making those loans, isn’t it because the risks seem unacceptably high to them? Are they finally learning some discretion for a change?

Or are they simply playing their cards close to their vest in the hopes that the money tree will be shaken for them again and again as needed? After all, the Fed seems powerless to punish banks who don’t lend as the government asked. Who’s actually in charge here?

American Express certainly understands how the game works. They want $3.5 billion in funding from that all-you-can-eat $700 billion buffet. Just like Goldman Sachs and Morgan Stanley, they’ve changed their status to a bank-holding company which now allows them to access government funds.

That move certainly isn’t doing wonders for their stock price, but since the lion’s share of the bailout funds will probably be spent on perks and bonuses for upper management and other favored insiders (AIG got away with it, after all), they’ll probably just ask for more next week.

Cash Prizes in the Demolition Derby

Besides credit card companies, the auto industry is also begging for handouts. Democratic congressional leaders want Congress to consider "emergency and limited financial assistance" for the auto industry under that $700 billion bailout measure.

Hey, with a chart like this, surely they could use a couple hundred billion, right?

And so everyone wants a free handout now. How long before every company in America feels they deserve a share of the pie?

We’re sorry to say that the ultimate outcome will be that only companies that have the most influence with Washington will get what they need, making the government now the dominant arbiter of who lives and who fails. Free markets are apparently an anachronism. Government knows best, and they’re quite happy to spend your money in an endlessly futile effort to prove it.

Another Day, Another Dollar

Dollars (and debt, for that matter) are about the only thing America makes that’s going up right now. The dollar’s demonstrated amazing strength despite the highly dollar negative actions of the Fed and Treasury.

Here’s the US dollar index which measures the dollar against a basket of key currencies including the Euro, yen, pound, Canadian dollar, Swiss franc and Swedish kroner:

Quite impressive, especially when you consider how every other chart in this report has looked.

So does the market really like US dollars that much, or is there something else at work?

From what we’ve been able to determine, USD appreciation is a short term phenomenon due to the repatriation of US investments abroad. Financial companies are trying to raise cash by any means possible. So they’re selling off their foreign currencies and buying back dollars, which additionally puts the squeeze on foreign borrowers who now have to repay USD debts in more expensive dollars.

This won’t last forever, though. In fact, the party might be over already. The government has added so much debt in the last few years (up to and including the massive bailout package) that dollar devaluation is highly likely.

There’s also the Japanese and Chinese who are already looking to reduce their already massive USD holdings during a period where the USD is overvalued.  Russia plans to reduce their USD exposure too. The days of dollar hegemony are almost certainly numbered. 

Is Anything Going to Go Up in the Long Term?

Before you get too depressed, history shows the stock market fares better under Democratic Presidents. Here are some helpful statistics we’ve found:

• Ned Davis Research has discovered that since 1901, the S&P rose an average 7.2% under Democratic presidents vs. 3.2% under Republicans.
• Ashraf Laidi of CMC Markets U.S has determined that out of the 10 years of negative stocks performance since 1970, seven occurred during a Republican-controlled White House as compared to only three under Democrat control.
• Bespoke Investment Group tells us that the S&P 500 rose 14.7% percent on average in the last seven periods when Democrats had complete control of U.S. political power.

So there you go. Everything will be fine now, right?

Good investing,

Nick Thomas
Analyst, Oxbury Research