think everyone is holding out for that 4%?
denninger is saying get ready for a strong bear market rally, click on link for charts:
Posted by Karl Denninger at 06:58
Bad (United States) Bank (FDIC/Treasury)
Oh boy.
Markets, guys and dolls, markets.
Obama's administration is supposedly going to announce in the next few days a "good bank / bad bank" scheme to supposedly "take the bad assets" off bank balance sheets.
They are apparently going to do two things that will lead to severe longer-term problems for our economy and Treasury:
* They intend to use a model approach to valuation (as opposed to the market) AND
* They intend to assume in that model that the government can borrow very cheaply over a long period of time in that model.
Does anyone remember how well it worked out when we "assumed" that home prices would never go down?
Well, this is just about that stupid, but it is apparently what they intend to do, this time intentionally (well, ok, last time was intentional too) overpricing "assets".
When (not if) borrowing costs move upward for the government this will produce an unfundable federal debt. And no, The Fed cannot "cap" interest rates for any length of time without immolating itself.
Therefore, down the road this is going to be insanely destructive, and probably not far down the road either - I suspect the market will figure this out in a few months and then the wheels will really come off.
This move has caused me to gain considerable confidence that my SPX 500 target (that is, S&P 500 trading at 500) will be reached sooner rather than later, and perhaps a lot sooner.
There are some hints out in the press that the one way they could do this in a reasonable fashion might be on the table - that is, have the FDIC run the "bad bank." While this has its problems the good news is that it would place control with the people who can come in and SEIZE said banks down the road if in fact the "good side" isn't really so good, leading to an RTC-style solution that actually will clear the market.
If and when that RTC-style solution is enacted (seizing the banks) you can bet it also will crash the stock market, because such a move instantly zeros the equity (stock). While this sounds horrible it actually isn't - it's good, because that will mark the end of the credit problem - the bad debt will be flushed along with the underwater banks, the banking system will be preserved and remain functional, the losses will be known and the economy will trough and be able to recover.
Oh, it will also flush the worthless executives - both on the boards and in the corner offices.
Because a true RTC-style flushing of the "vendors" of the trash will produce an equity market implosion you can also bet that "they" will avoid doing it for as long as is humanly possible. Only when the FDIC (if they wind up doing this) run out of money and have to go to Congress or similar will the proverbial brown stuff hit the airmoving device.
In the meantime you can bet this move will produce a major "rip your face off" rally in the financials and thus in the broader market here and now. That's a lock and I'll eat my WSJ if it doesn't happen.
So this leads one to question - where are we headed in the markets?
Here's my answer in the short term (next week to next month or two):
In Technical Analysis terms in the very short term (next few days) we are almost certain to go after that oval on the chart, which is the 61.8% "retrace", or movement backwards, from the latest plunge. This targets 890ish.
We might get there as soon as today, especially if The Fed says something that the market likes (and it probably will.)
In the intermediate (next couple of months) term I suspect we're headed for one of the three ovals in this chart:
That's a long way up.
I especially like the first oval, as it is the coincidence of a material retrace of the entire plunge from last year, a 161% retrace of the most recent plunge and strong overhead chart resistance around the 1,000 level. Above there the air gets kinda thin, but one must not ignore the fact that 50% and 61.8% retracements are the "most popular", with both of those winding up MUCH higher - another 10-15% up - before we put in an intermediate top. Between the two I favor the 50%, with chart overhead coming into play along with the (not shown on this chart) 200 day moving average, which is up around the 1150 level (and falling, which means we'll likely run into it around 1100.)
Don't mistake this for a new bull market. It's not, although I'm expecting plenty of people to call one really, really soon, likely as soon as we break out of this trading range and clear 900. Those who have been foolish enough to be aggressively short looking for "new lows tomorrow" (and there have been a lot of them) are about to get it in both holes, and when they capitulate prices will be driven even higher.
For a while.
My view? This is a great trader's market. There's plenty of money to make off this move, and when people figure out that this won't work in that all it has done is trade one bad set of models for another and the only real solution is to seize some of these banks the collapse will be equally impressive. In the meantime I enjoy the opportunity to ride this sucker up and get massively short at a better price.
If you're not someone who plays short, watch those levels in the second chart, and when and if they're hit consider raising lots of cash.
Consider the risk:reward profile - if we get just to the first marker, you will have seen a 30% rally from the bottom and about 16-17% from last night's close.
What upside are you missing if you hop out and there is a magical unicorn that appears and saves the world before you are certain that's the case and re-join the party? Another 5, 10%?
On the other hand if we ping there and collapse by half you're fixing to lose half your portfolio - again. That's a 66% loss from the top, which is really going to hurt, especially when you only had to lose 1/3rd and just watched the market ramp - and you didn't sell into it.
If I figure out the triggering event for "realization" I'll try to post it - hopefully before the collapse really gets going.
If you're wondering how sure I am on this plan being the catastrophe that I'm predicting, let me put it this way:
Either there's some sort of "gotcha" in the leaked plans and Steve Liesman and CNBC are being used as a stooge in the government to set up a rally on a false premise, OR this is a catastrophe "as implemented" down the road.
Either way the outcome is the same; we're arguing only about time.
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