Feeding The Bulls

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.

About Ulli Niemann

Ulli Niemann is the publisher of “The ETF Bully” and is a Registered Investment Advisor. Learn more

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