The Fed’s About Face

My apologies for yesterday – I was bedridden with flu and fever. And today I’m still getting legs under me, so I’m going to be brief. 

On Monday, I recommended taking profits on Graham Corp (AMEX:GHM). It appears you should have been able to get around $11 a share for it for most of the day. And that’s good because the stock is sinking below $10 today. 

It’s been my contention that oil prices will remain range-bound for the foreseeable future. And the 60 Minutes story I relayed on Monday supports that belief. If oil’s move to $147 was based on more speculation (and manipulation), than it was on true supply and demand issues, then it’s going to be a while before enough demand returns to push oil prices significantly higher. 

*****Overall, retail sales fell 2.7% in December. That’s more than double the 1.2% estimate Wall Street was clinging to. Amazingly, when auto sales were stripped out, retail sales fell 3.1%. Even though auto sales were down 22% from a year earlier, there appears to have been a slight uptake in December. I have no idea how to account for that. 

*****The Fed is coming full-circle, now wanting to try another strategy to remove toxic assets from banks’ balance sheets. I’m sure we all remember that was the original goal for the $700 TARP funds. But the Treasury backed off that idea because it couldn’t figure out how to do it, instead suggesting that recapitalizing banks was a better way to go. 

But recapitalization isn’t working either. So Bernanke is back to advocating that toxic assets either be insured or simply removed from balance sheets. This could be accomplished by outright purchase with taxpayer dollars. The government could also take them on in exchange for warrants. Or, funds could be set up to purchase the assets. 

Either way, this goes to show that our financial system is far from being repaired. And there’s no telling how long it will take to restore confidence in our lending system.

The longer these toxic assets are allowed to remain on balance sheets, the more this financial crisis starts to resemble Japan’s banking problems from the 1990s. Rather than let banks fail, Japanese banking officials allowed banks to remain essentially insolvent. They were “walking dead” – unable to lend and sucking up government funds that could have more effectively used elsewhere. 

*****You may recall in the January 5 edition of Daily Profit, I pondered the possibility that we’d see some kind of Inauguration rally, as optimism for Obama’s presidency spilled over into stock prices. I also noted that the Dow was up against resistance around 9,000. 

Resistance clearly won out, the Dow has been down ever since. But now, the Dow Industrials will be sitting right around support at 8,000 when Obama is sworn in on Tuesday. Maybe we’ll see a little upside for stocks then. 

It should be noted, though, that the economic problems facing President Obama are growing every day. And unless he’s got some ideas that he hasn’t shared yet, any rally for stocks is likely to be fleeting. 

*****We’ll be opening registration for Ian Wyatt’s $100,000 Recovery Portfolio video conference to the public on Friday. So if you want to attend, you should reserve your seat now. I’m putting up $100,000 of my own money to show individual investors how to reverse their losses from 2008 and grow their wealth in the future. We’re kicking it off with a special Video Event on January 22, 2009 at 6 pm ET. It’s completely free, so if you’d like to attend, here’s the LINK.