The Next Arrow

*****What Could Go Wrong? 

Stock Summit 2008: Profits After the Fall was a big hit last night. Turnout was great and I thought TradeMaster strategist Benson George did a great job sharing his outlook and investment strategies with the audience. 

If you missed the event, don’t worry – you can view the replay HERE. 

It’s fairly long, around 40 minutes I believe. But it’s packed with useful information and strategies for investors of all levels. 

*****It seems that a lot of people in the financial media are worried that this Madoff Ponzi scandal has the potential to further damage Wall Street’s credibility and send investors running for the exits faster than they are now. 

In what I can only guess is an attempt to reference The Blob, TheStreet’s Cramer called the Madoff scandal "…a gigantic green mass on the screen and its heading right for the psyche of this frail market." 

I’m curious what you think. To me, investors will always be vulnerable to the con man. But fortunately, con men are somewhat rare. I’m much more worried about the regulatory breakdown that lead to the sub-prime debacle, or the outright incompetence on display in Detroit for years. 

Crooks come and go. It’s the systemic threats to the U.S. economy and financial system that worry me most. How about you? 

*****Some in the financial media are trying to chalk today’s decline up to Madoff. That seems like a stretch. More likely it’s the drop in manufacturing that’s a result of automakers cutting back production and the status of their bailout. 

Of course, checking in with the Dow components might help identify the source of the weakness. And it turns out it was financials dragging the Dow Industrials lower. Citibank, Bank of America, American Express and JP Morgan were down between 3.9% and 7.5%. 

Still, the Dow Industrials are smack in the middle of its trading range. But volatility has been declining and that’s a good thing, for now. 

*****The FOMC makes an interest rate decision later today. Most economists think a half-point cut is coming. That would leave rates at a half-point. That’s an all time low, not that it really matters. 

Banks won’t lend to anyone. Even credit scores in the 700s are turned away or pay high rates. Some at the Fed say it’s a liquidity issue. They believe the billions injected into the system haven’t offset balance sheets enough for new lending to occur. Others say that there aren’t enough creditworthy borrowers. 

They’ve got a point. When households lose nearly $3 trillion in wealth in a 3-month span, creditworthiness takes a hit, too. 

Unfortunately, as home values continue to fall, that $3 trillion may become $4 trillion. Or $5 trillion. We don’t know how bad the economy will get before it gets better. But we do know interest rates are having little effect. 

*****The first paragraph of the Bloomberg article says the FOMC is preparing for one of the biggest experiments in its 94-year history — using its balance sheet as a policy tool. 

Bernanke has said it’s time to consider using the second arrow in the Fed’s quiver. That’s the "provision of liquidity" arrow. Maybe the Fed will buy Treasuries. Or maybe the Fed will start doing direct loans to businesses and even consumers. 

What could go wrong? 

Remember the first arrow, interest rates, is supposed to provide liquidity, too. That hasn’t worked. Will buying Treasuries work? Maybe. But it seems like direct lending would get to the heart of at least one of the web of problems facing the U.S. economy. 

I don’t have any specific evidence and I’m not focused on any particular problem. There just seems to be a disconnect right now. Investors are cheering the auto bailout and rate cut, but these are just band-aids. The deeper problems seem to be persistent.