The Acuvest Letter
The importance of the effect on markets by the announced financial bailout precludes any responsible analysis of many of the markets we follow, therefore the commentary this week will concentrate exclusively on financials.
Overview: The continuing rhetoric emanating from Washington and the latest announcement of a massive bailout are the latest attempts to correct a failing U.S. economy. I believe this bailout, while many view as necessary for the stability of the economy and to afford lenders and banks to finally rid themselves of the massive amount of bad loans, is the culmination of a program began some years ago. The following may be disputed by some but history cannot be changed to suit the current “crop” of political hopefuls.
Let’s put the current situation into perspective.
When Paul Volker, the predecessor of Mr. Greenspan refused to allow banks to reduce their reserve requirements, the new Chairman of the Federal Reserve, Mr. Greenspan, in conjunction with then President William Jefferson Clinton, suggested a relaxation of both reserve (liquidity) requirements and borrower requirements. This was signed off on by President Clinton. This allowed banks to lend more freely. Coincidental with the relaxed balance of asset to liability standards was the gradual explosion of capital available for lending. The failure to concurrently require and control lending volume, underwriting standards and the maintenance of proper reserve levels consequently contributed to the current failing economy. It is without regard to these facts that comments are forthcoming placing the blame when history has already dictated where the blame should be placed.
Once again, for the pundits politicians and other “snake oil salesmen”, “Those without jobs will lose their homes, those with jobs seduced into believing they could own a home with little or no money down at sharply lower than prevailing interest rates should be allowed to continue making those artificially reduced payments under a lender moratorium on rate adjustments. There is no other solution and for the Federal government to assume all those bad loans at the taxpayers cost and allow the lenders to go their “merry way” is, in my opinion, a real crime. Now for some actual information that my readers can use.
Interest Rates: December Treasury bonds collapsed on Friday right through trailing sell stops closing at 118 05/64ths down 3 21/64ths as capital flowed back to equities on the announcement of a massive bailout by the Federal Government of mortgage holders. The program, if approved, could amount to hundreds of billions of taxpayer dollars to bailout stressed banks and prompt a meteoric increase in the national debt. What the proposers of this bailout fail to take into consideration the increase of costs for Medicare and Social Security payments to baby boomers planning to retire. Look for continued pressure on treasuries and the U.S. dollar if all the elements of the proposed package are passed by what I consider a “foolhardy” Congress. I see new buying opportunities in bonds once the reality of the costs of this bailout sink in and are somehow tempered. For now just watch the “fireworks”.
Stock Indices: The Dow Jones Industrials closed at 11,388.44 on Friday gaining another 368.75 points added to Thursdays gain. The euphoria tied to the proposed massive bailout by the Federal Government is, in my opinion, erroneously translated to mean a new round of economic growth. Highly unlikely since nothing has changed as relates to corporate earnings, the burgeoning labor problem where over 440,000 first time unemployed workers are reported every week. At some point the reality of 3.5 million defaulted mortgages and car payments along with credit debt will provide a sobering reality and the economy will continue to decline. Hedge your equity positions now. Investors have been granted a “stay of execution” in my opinion.
Currencies: The December dollar index closed at .7794, down 12.5 points against gains in the Euro of 62 points to 1.4443, the British Pound 133 points to 1.8272 but losses in the Swiss Franc of 51 points to .9102 and the Japanese yen 253 points to .9415. Our expectation, thanks to what I consider an “historic blunder” by Washington will provide for wide price swings and I suggest the sidelines until some clarification as to the exact number of the “bailout” emerges.
John L. Caiazzo
Tel: (951) 693-9600 Fax: (951) 693-3170
Website: www.acuvest.com E-mail: futures@acuvest.com
Information provided is from sources deemed to be reliable but not guaranteed. Futures and Options trading involve a high degree of risk and may not be suitable for everyone. John Caiazzo is a registered commodities broker with over 45 years experience in investments and opinions are his own and not of the Futures Commission Merchant he introduces his clients to.
