Bull in a China Shop

The FOMC Statement will show that not much has changed since August 12^th.

The Fed will still recognize that growth remains constrained by ongoing job losses, sluggish income growth, and tight credit. Businesses are still cutting back as evidenced in the rise is empty office space.

The Committee will still indicate that policy actions in place will gradually contribute to a resumption of sustainable economic growth in a contest of price stability. The drags on this scenario are found in the growing categories of bad loans in the FDIC Quarterly Banking Profile, and with the lack of job growth with hours worked stuck at a record low.

The FOMC will leave the federal funds rate at zero to 0.25%, which to me questions the Fed’s confidence, and leads to the re-inflation of asset bubbles on the weak dollar carry trade.

The quantitative easing in place will be allowed to sunset as 2009 draws to a close. The Fed will purchase up to $1.25 trillion of mortgage-backed securities and $200 billion of Fannie and Freddie debt. So far the tally is $862 billion of MBS and $125 billion of agency debt.

The purchase of US Treasuries will total $300 billion when this program ends at the end of October. If the Fed adds to or extends these programs it would be another sign that they lack confidence that their policy is working.

The FDIC Witches Brew to Replenish the Deposit Insurance Fund

The Deposit Insurance Fund is in arrears by approximately $3.7 billion dollars on the closure of 49 banks so far in the third quarter. With more than 3,000 banks overexposed to Commercial Real Estate Loans, 37.5% of all banks are unhealthy. The FDIC won’t tell us the names of their 416 Problem Banks.

With FDIC Chair Sheila Bair panning the “too big to fail” concept, would someone name the healthy banks that could be asked to loan the FDIC money. All the bigger banks have toxic loans off balance sheet. Banks know the underlying problems and for so-called healthy banks to bail out risky banks, will only dilute the problems in the banking system. With 500 to 800 banks headed for failure, the FDIC should swallow its pride and borrow from the US Treasury, which they will eventually have to do anyway.

Bankers are worried about two more assessments that the FDIC has authority to do and these will total just $10 billion, which will not be enough to get through the tsunami of bank failures to come anyway. Borrowing from the US Treasury is another bailout, but it’s a worthy one that protects taxpayer deposits of up the $250,000 in each and every bank.

The Deposit Insurance Fund dipped below regulatory guidelines in June 2008, and it has five years to get back to standards. It will take taxpayer money to allow this to happen. It’s the nature of “The Great Credit Crunch” continuing through 2011.

The weekly Chart for the Dow reflects the Bull in the China Shop given overbought readings. Chart Courtesy of Thomson / Reuters.

The Bull in the weekly chart for the Dow has become extremely overbought with a MOJO reading of 9.3 on a scale of zero to 100. My annual pivot is 9,750 with annual resistance at 10,012. The Bull has entered the China shop and we will soon find out what’s broken including China.

Treasury Secretary Geithner said that it’s the first time the US economy has seen growth in eighteen months. Let’s look – Was Q2 2008 eighteen months ago – I don’t think so. Wouldn’t it be refreshing if our Banking Regulators told us the truth?

Disclosure: I Hold No Positions in the Stocks I Cover.

Comments

[conceptwizard]

If Bernanke increases the Fed's debt monetization scheme of $300B that is scheduled to end in October, the Chinese and Mr. Market will be very unhappy. The dollar will tank further; gold, oil and commodities should surge. This action should actually force bonds lower.

If Bernanke refrains from further debt monetization, US dealers will be holding the bag and the short-term outlook for bonds would be negative.

Bernanke will soon be forced to choose between saving the dollar and bonds or stocks.

2009 Sep 23 08:36 AM

[ksmithdc]

Interesting comment from conceptwizard.

2009 Sep 23 09:08 AM

[Old Trader]

"The quantitative easing in place will be allowed to sunset as 2009 draws to a close. The Fed will purchase up to $1.25 trillion of mortgage-backed securities and $200 billion of Fannie and Freddie debt. So far the tally is $862 billion of MBS and $125 billion of agency debt."

In a not so small change, the "up to" was dropped from the statement "The Fed will purchase up to $1.25 trillion of mortgage-backed securities......", so QE is till definitely on the table. Yesterday, I posted on my instablog something that caught my eye, via Morningstar regarding the whole MBS thingy...

2009 Sep 23 07:14 PM

[ebworthen]

Well done.

Key terms:

"Empty office space"

"Fed purchasing mortgage backed securities"

"MOJO"

and

"Treasury Secretary Geithner"

Put those pieces together and it becomes a shattered tea cup.

2009 Sep 23 09:31 PM

[Asbytec]

"The FOMC will leave the federal funds rate at zero to 0.25%, which to me questions the Fed’s confidence..." As it does mine. It can explain our rally, but is not a green shoot.

"It’s the nature of 'The Great Credit Crunch' continuing through 2011." Agreed. This is no ordinary, simple recession.

2009 Sep 24 09:31 PM

[Asbytec]

Love the title of this article, by the way. :)

2009 Sep 24 09:32 PM