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Government Bailouts & Government Lies
“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.
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./p>
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.
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
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
Disclaimer: The views and opinions expressed in the research published are those of the individual companies and writers and not necessarily those of Investorideas.com®, or any of the industry sector portals . At the time of publication, writers may hold positions in the stocks or companies mentioned.
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