Thursday, July 16, 2009

CIT DOA; Liquidity Injections Rally Market?

The 'Helicopter Economics Investing Guide' is meant to help educate people on how to make profitable investing choices in the current economic environment. In addition to the term helicopter economics, we have also coined the term, helicopternomics, to describe the current monetary and fiscal policies of the U.S. government and to update the old-fashioned term wheelbarrow economics.

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The market had a great rally yesterday with almost all asset classes going up. This started a few days ago with the Goldman Sachs (aka Government Sachs) rally. Morgan Stanley beat expectations this morning. The Goldman rally took place BEFORE the good news was released and if yesterday was at least partially a Morgan Stanley rally, it happened before the news came out also. Don't worry though, the government announced many times last week that it was going to crack down on illicit speculation in the markets. If you had trouble not laughing when reading that last sentence, it's not surprising. There is no need to write parody, when you have the mainstream media reporting news like that.

The lack of memory on the markets part seems to be truly amazing. The no longer in existence Bear Stearns was about to announce good earnings in March 2008. The only thing that prevented it from doing so was the company went under before it could tell the world how much money it was making. This would seem to indicate to anyone with even the most minimal thinking ability that the earnings of these big Wall Street firms are meaningless. But hey, this happened last year. Traders, like government officials, don't let themselves get bogged down with the past. After all, it's not like history repeats itself.

It would not be unreasonable to assume that the market is rallying so much in the last few days because a lot of money is being pumped into the financial system. That the U.S. dollar is going down, while everything else is going up (a common pattern in market rallies since the beginning of June) supports this view. Now what could possibly be behind that? Probably the imminent failure of CIT, a lender to one-million small to medium size businesses. After giving CIT $2.3 billion in TARP funds, the U.S. government has decided to pull the plug. CIT is apparently not too big to fail (meaning that it doesn't have a lot of former alumni in highly placed positions in Washington, D.C.). Treasury Secretary Tim Geithner, part of the tweedledum and tweedledumber team of Geithner and Bernanke, is personally handling the situation.

If there is any historical analogy to CIT's failure it is the Bank of United States, actually a local New York City bank despite the name, failure in December 1930. This bank lent to lots of small and medium size business, but only in the New York metro area, whereas CIT lends nationally. The Fed refused to bail out the Bank of the United States and thought the repercussions would be minimal. Instead, the demise of the Bank of the United States set off the first of three major waves of bank failures that lasted more than two years and which wiped out a large part of the U.S banking system. But that was back in the 1930s when U.S. financial officials didn't have the slightest idea what they were doing. Instead today we have ever on the ball Fed Chair Ben Bernanke who in March 2007 said, "the problems in the subprime market would only reduce somewhat the effective demand for housing” and then followed that up in May 2007 with “given the fundamental factors in place that should support the demand for housing, we believe the effect of the troubles in the subprime sector on the broader housing market will likely be limited”. Bernanke saw no potential ill effects on the broader economy right up until June 2007. A few weeks later everything fell apart.

NEXT: Bank Profits Soar Even Though Business is Bad

Daryl Montgomery
Organizer,New York Investing meetup

This posting is editorial opinion. Like all other postings for this blog, there is no intention to endorse the purchase or sale of any security.

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