Government unleashes orgy of stimulus

The SEC has changed the rules and short sales of financial stocks are no longer permitted. If the rally in the financial stocks fails, it will be catastrophically confidence destroying. I find it hard to believe it was shorts crushing the financial stocks. Frankly there just isn’t that much short money relative to the amount that buys stocks. Hedge funds make up 10% of the market – they are far more than 10% of the volume but most hedge funds still carry a long bias. Trust me… there were guys that owned the stocks selling them too.

The Treasury is insuring money market funds. The fact that they felt it necessary to insure them is terrifying as it means the egregious credit speculation of the last decade threatens to undermine even dollars that were not put at risk – savings account dollars.

Congress is trying to rush a package together to create a Resolution Trust–type fund to stick full of bad paper. Effectively, the government is going to create a gigantic off balance sheet warehouse for banks. The plan seems to call for the government entity to buy bad paper on the cheap from struggling financial institutions, leaving the banks and brokers hobbled by billions upon billions of dollars of write-downs but solvent. Over the next several years, the government will in turn try to extricate themselves from the positions. Preliminary estimates put the cost of the bailout at a trillion dollars.

Though the stock market is up several percent since news of these actions were leaked to the media, the severity of these issues and the fact that these problems will fester and linger in the coffers of the government suggest to me that recovery will remain elusive. If the government buys these obligations for 10 cents on the dollar, they’re going to be happy to sell them for 20 cents on the dollar. Credit values have collapsed and are being locked in at depressed levels. We are going to be unwinding the excess of the last several years for several years.

There will be no v-shaped recovery here. Earnings estimates are going lower and growth will be harder to come by.