Feb

11

 On February 10th, Treasury Secretary Timothy Geithner presented the details of the Administration's bank rescue plan. The new program includes government spending and private-sector involvement. It provides for buying toxic assets from banks and supporting consumer and small business lending. The aim is to get private investors to buy up the toxic mortgage related assets. Everything looks fine except that the markets plunged almost 5% after the speech in heavy selling. Bank shares lost more than 10%. We know that markets over-react, that the crowd sometimes is not able to make rational decisions, but what we saw today was a real fiasco after the world wide expectations of the first Administration's steps. Hopefully they will be more successful in the next weeks, but today's market reaction was nasty. The plan was deemed by analysts to have lack of transparency and lack of detail. How the plan is going to be implemented was not said and may be investors fear the nationalization of the banks that would wipe out shareholders (shouldn't have it happened already?).

As an agent of change, the new Administration has not offered a striking debut. This is for sure. I think it's important to understand why the strategy was so poor. Was there a lack of details on purpose? If yes, there had to be a good reason and this might be reassuring somehow. One could say they have a good plan and clear ideas, but they have decided not to describe them in detail now. Might this be related to the approval process of the stimulus package? In this case, it was a great buying opportunity. But if the lack of details was there because there are no details yet, well, I think the markets have a good reason to be scared. Everybody now is thinking of what the President said: "The time for talk is over, the time for action is now." And critics are already saying that he won the campaign and now it's time to lead. In this context, the speech given by Geithner today is a false note in the concert of statements received in the past weeks. I do have trust that the Administration will manage to restore trust and confidence, and revive the conomy. The world is looking at the US with great hope (too much?). Hopefully today it was only an episode of failed communication strategy and not the lack of the financial stability strategy.

Victor Niederhoffer comments:

One must always remember the beaten favorite routine with the next time out winning at much more favorable odds by indirection. "Boy, dont work him so hard at 4 to 5 unless he's a clear winner," and also, the bond and stock vigilantes who like to force the forces to do the right thing through going down when they might waver.


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