Bailout / TARP Abandoned

Here goes another I told you so. The bailout money allocated to buy distressed assets was abandoned by the Treasury Department. I wrote here early, that this program was flawed for so many reasons. The biggest reason: "There was no way they could value the bad assets, manage them, or dispose of the assets correctly!!!"



Fundamentally I agree with the fact that a bailout is needed but I have noted that the government needs to address both the supply and demand side of our economy. On the Supply side, I don't mind the Treasury department injecting cash into banks but I do think that one of the strange things is that but private investors like Warren Buffet are brokering better deals then the GOVERNMENT is. Part of the problem is no oversight or poor oversight because these banks are not lending to the public! This would begin to address the demand side, however the banks are getting the cheapest money ever made available and using it to MAKE INVESTMENTS like buying other banks...SEE PNC Bank's acquisition of National City.


What the Government Should Require:

- All common stock dividends should be taken away
- Force banks to lend to consumer
- Punitive terms of the banks (firing managers)
- Goverment must get Main Street bank on their feet through mortgage adjustments, incentives for homebuyers to acquire homes, addressing unemployment, and some sort of stimulus (tax cuts/credits)



Where do we go from here:

The markets will continue to trend lower for remain in a trading pattern. When I first spoke of actions to take to address the direction of the markets I recommended most folks get a majority of their money out of the market and into bonds. Then the Dow Jones Industrial Average (basket of the 30 large stocks representing the US economy) was trading around 9000 and my guess was that we would head lower and test recession like lows. The last time we could compare lows like this was in roughly 2002-2003 when the market hit lows of roughly 7700 (I believe). My assumption is that this will be the prudent time to begin to reallocate your portfolio back into the market. Again that is an assumption because I don't really think that this last time can be effectively compared to now. We are facing a local recession, rising probability of a global recession (in most areas except for China), and if these conditions exist we could be facing a depression due to deflationary pressure. This could be the one area that I initially got wrong...I thought we would be facing inflationary pressures or rising costs but that appears to be far down the line. Right now deflation is running wild and that is evident is the sharp decline of prices across the board. Gas is down from $4.00 to now roughly $2.00 and everything is falling with it, stocks included. If this trend continues deflation could lead to an extended recession and Dow 7700 may not even be a legitimate floor for the market.