Wednesday, January 28, 2009

Morning update/ Market Thread 1/28

Good Morning fellow rocketmen,

Word of an “aggregator bank” came right after the close on CNBS yesterday and the futures have been on a moon shot ever since. The XLF is up huge (over $10), C, BAC, and all the “bad banks” are way up this morning. To learn more about the concept of an aggregator bank, please read my article Aggregator Bank Concept… Who Are We Helping?.

This move obviously breaks the market up and out of the range it’s been in and the SPX is already up to the 50% retrace level just under 867. The 61.8% is at 882.

In a nutshell, taking the bad debts from the banks and placing them in a taxpayer owned bank will, in fact, very much help the banks. Look for the rocket ride to continue for some time. How high? It could go quite a ways, but remember that a lot of the move was priced in last night. Does it make survivors out of what was certainly the walking dead? Perhaps, maybe. Should you jump in and own banks for the long term on this news? Perhaps, maybe – do you feel lucky? As in Las Vegas/ casino lucky? Let me ask you this? How do the banks make money going forward, which business model works? Does this remove all their leverage and derivative risk? It helps them, no doubt.

But here’s the problem… it does NOTHING, ZERO, NADDA to help those behind the debt. The debt does not go away, it is simply transferred to the taxpayer. Will this help the underlying economy? NO, it makes the math worse, not better, so enjoy the rally while it lasts, the end of this rally could very well be your last opportunity to exit the market at these elevated levels (no telling when it ends, probably at least a week, maybe three weeks or even a couple months… but please refer to this article, this is simply a pause in the bear market by almost all Elliott Wave counts that work Wave B... What a Wonderful World!).

If you look at this 10 day chart of the SPX you will see a rising wedge… note where the top of the wedge is, the futures are already there. All the short term stochastic readings will be overbought, so be careful in here, we are likely approaching a short term top in here somewhere… perhaps it runs to the 875 level on an overthrow of the wedge, but we’re getting into some resistance in here. If this is the beginning of wave ‘c’ up of wave B (as McHugh suggests), then we are likely to work our way higher over the next few days and possibly even weeks. That said, we could just be finishing up wave 4 and could roll over hard in the next few days – this is still a trader’s market, not a buy and hold market.

This bad bank concept is being sold as doable based on the belief that the government can finance those bad loans at a lower interest rate than the banks and can therefore “pay more than they are currently worth!!” Boy, does that sound like an outright holdup to me… a lie of epic and criminal proportions. Rates cannot and will not stay at present levels forever… in fact, the more of this that they do, the higher and faster rates will go up. This increases the risk and leverage of the government – rates will follow, count on it. A very large percentage of that debt will be defaulted – now instead of the banks taking their losses, they are simply moved to the taxpayer who is already debt saturated. Thus, the bad bank concept is meaningless except to the bankers who win, and ruinous to America and her people, you. It further entrenches moral hazard in the extreme and goes against everything capitalism and free enterprise stand for.

Enjoy the rally while it lasts, raise cash