New Bull Run or Not?

Yesterday the Dow and NASDAQ surged ~4% after the Fed agreed to loan $200B to banks.

What the Fed did was to temporarily buy the crap loans that banks are holding. Instead of owning loans with a street value ~40% of paper value, the Fed lets the banks have pristine US Treasury bills at face value.

This allows the banks to overstate the value of their assets and to continue doing business as usual - at least for 28 days. In reality, the Fed will probably push the replay button in 28 days.

Simply put, the Fed has bought the crap loans that are weighing on the banks, freeing them from the normal obligations. The fact that this is happening right before a major tax payment is due and right before the end of the quarter is very deliberate. It actually lets banks limp along for at least another quarter or 90 days.

To give it a 1-2 punch, the Fed will also lower rates in a few weeks.

The Market loves this. The Fed is signalling that they will continue to keep consumers spending instead of going in default. This mainly delays the day of reckoning, but it will in fact help many consumers. The wave of foreclosures and defaults will still happen, but it will be a bit less severe and be further out in time. Moreover, if the exports can surge, maybe the situation won't be as bleak.

So that's the question: will this limit the recession's severity. Answer: somewhat, but the damage is already done.

The liquidity being injected is really just shuffling money around. Consumers won't buy new things, they will either pay off debts or re-finance them. Folks don't need more things. The belt tightening has already taken hold.

But it helps, at least for another quarter.

Ultimately, the stock market will rise and fall based on the US economic performance. Exports are growing, and imports are slowing (although the rising cost of gasoline hides that fact). But exports are growing in value: corn and wheat prices are surging, so the value of what we sell is more. That doesn't lead to massive hiring and buying more cars.

A few weeks ago I reviewed the trade data and found a spike in agriculture and chemicals. Other than that, things are only fair. I nfact, a lot of companies are lowering guidance.

So if the idea is to give folks a loan while we wait for the cheap dollar to export our GDP higher, well, that isn't going to work and the reality will be clear in 3 months.

I think euphoria for 30 days (late April) and then earnings reports will signal problems. That's why I'm sticking with our long term puts. The timing was horrible, but that's why I bought 9 months out - because these kinds of moments happen. Just as crashes will inevitably happen as well.

One thing is clear - the stocks I chose to go long on have resurged, and that's a good thing for the stock picking model.