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Archive for the ‘Government Bail-outs’ Category

Have you heard of CIT Group?  CIT is a company that lends money to about 1 million small and medium size businesses and has about 40 billion dollars in debt. They are a pretty big player in the lending business, a company mired in debt, a company on the verge of collapse. 

In the event they fail, there could be some pretty significant repercussions throughout the financial system.  Of course, they are not on the same scale as the Lehman Brothers. However, with a financial system on shaky ground, who knows what would result in the collapse of a large lender.  So, a company in trouble should be no big deal.  After all, President Obama is in the bail-out business and hasn’t had a good bail-out in a while now. 

No, not this time.  Poor little CIT doesn’t meet the too big to fail test.  President Obama stated that it had set “high standards” for granting aid to companies and leaving private investors as the one alternative to avoid collapse.  Wait a minute, excuse me while I settle down from that good laugh I had while writing. 

Since when does this administration have standards?  They still think that GM is a good business model.  So will CIT go into bankruptcy if Big Brother doesn’t lend them a hand?  Of course not, because Big Brother is going to lend them a hand.  The secret is that they are going to do it behind closed doors.  Yes, this is what is happening to our taxpayer dollars.  Roughly 7 of their big bondholders are in talks to cough up 3 billion or so to place another band-aid on the festering wound. 

Where do you think that these bondholders get their money?  With the banking system pretty much nationalized, the money easily funnels from the Government through these banks to these troubled companies.  Obama can keep his “high standards” and no problems to deal with in the financial sector.  They have been running the same system with AIG since that major entity was nationalized.

Price Levels

Let’s take a look at price levels. Last week I warned that things were looking bleak for the market.  As soon as I wrote the warning and hit send, the market turned around and put in a big week.  So does that mean we are out of the woods in the near-term?  Well, last week was the one week out of the month that we have options expiration.  Options expiration can be a real dramatic week either positively or negatively.  It is misleading to see the results of options expiration as what is really occurring with the market.

The next significant price level we are looking at is 956.  The S&P 500 has entered into a price level “zone” (over 940) and now we will really see what this market is made of.  Any strength carrying the S&P 500 over 956 could indicate that we are heading towards 1000.

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Just like that the market in one single day went right up into the zone of the price levels that we have been talking about over the past few weeks.  The S&P 500 finished yesterday’s market at the price level of 822 (between the 800 and 825 price level).

No doubt about it…yesterday’s rally was extremely strong.  Yes, I will have to admit that yesterday’s enormous rally added more credence that we are in the midst of a significant bear market rally that could be with us for more than just a few days.  At the same time, there are a few caveats.  If that is the case, it is probably more than half of the way completed as far as percentages go.  With the exception of a powerful bear market rally in 1929, most major bear market rallies go up between 25% and 30%.  This bear market rally has gone up roughly 21% thus far.

The market took off on the news that the Obama administration has the solution to the banking crisis.  The problem is that all of the Government-based solutions are more illusions than solutions.  There are so many problems with this solution that will just create unintended consequences.  All of the bad debts that banks hold didn’t just all of the sudden disappear with the announcement of this plan.

In order for this plan to work, the banks will still have to realize these losses, which is something that they have avoided thus far.  The Bush administration tried this approach last fall.  They didn’t go through with it because they couldn’t figure out the details.  It appears that we are not much further down the road from that initial attempt to solve the banking crisis last fall.

The worst part of this program is that taxpayers will ultimately get stuck with the bill once these mortgage backed securities lose their value.  One other item of note is that there are roughly 2 trillion dollars of these bad or toxic investments that the banking system owns.  This program only covers 1 trillion dollars of those bad investments. 

 

It looks like to me that the Obama administration is nationalizing the banking system without calling it nationalization. 

 

So what are the price levels to watch now?  Anything over 840 to 850 is stock market positive, anything below 800 would be a concern, and anything below the S&P 500 price level of 741 would be very bearish. 

 

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