The complete inability of the banks to offer any solution to their current problems, other than to have the taxpayers pay for their bailout is the best case for some form of government intervention.
Nationalization is a disgusting word to me, but even I have reached the point of believing something needs to be done to pull us out of this mess.
Bankers have always been a strange group to me. They are the first and loudest to scream about welfare and people taking responsibility for their actions, and they are the first and loudest begging for a bailout from a situation they are responsible for creating, at least in part.
These people absorbed the entire first half of the TARP money and made no appreciable change in their lending. They have acted as if the TARP money is theirs and not the taxpayer's.
They created and bought mortgage-backed securities they knew were garbage and expected the U.S. Government to make good on them. It's another form of welfare.
It's hard to believe the best and the brightest didn't know what they were buying, with other people's money, of course.
The obvious solution to this problem is to have the banks work openly with mortgage holders and rework these problem loans, sell off the garbage, take the loss and get this show on the road.
They haven't done this because I believe they have no ability, or lack the willingness, to see beyond the balance sheets and recognize that this is a unique situation. The solution requires imagination, creativity and stepping beyond the normal banking parameters. Bankers are not known for their creativity.
Bankers cannot solve the banking mess. They have offered no solution other than to wait.
The best proposal, with the greatest probability of success, looks like this: a government group takes over the asset base of the zombie banks. The group separates the good assets from the bad, values them as accurately as possible, sets up a sale mechanism similar to the Resolution Trust Corporation to get something for the dead wood and then turns the cleaned up operation back to the bankers.
The banks take a loss, but the good assets become available to be used as reserves for lending. We can finally stop guessing and actually know exactly what we have.
There is money to be made in this nightmare, but you'll have to do your best imitation of not thinking like a banker to take advantage of it. Here's my recommendation.
There appears to be no way banks, or their stock, will recover from their current situation unless something radical is done. If the limited intervention concept wins, and I think it will, we will see bank stocks drop to something similar to an AIG scenario, the stocks will be near worthless until there is a resolution of their balance sheets and asset woes.
So the obvious play now is to short or buy puts on individual bank stocks or the S&P Select Financial Spyder ETF (XLF). Yes, I know, they are already in the toilet, but take a look at the XLF puts for Sep 09 or Jan 10 and you'll see some real profit potential.
Also, JPM and WFC have not been immune to the beating the markets have been handing out lately. While these are the two banks with the smallest problems, they are not immune to the coming slaughter. There is lots of room for a downside play here.
If the markets react as they always have, we will have a period of severe bleeding following the government intervention, which is why this strategy will work. This should be followed by the usual waiting period to allow the street to adjust to the change and then I see a big upward move in what I call "resolved banks." Time frame? 18 to 36 months.
How do you make money now? Look further out than the end of your nose, imagine what we could do to turn this mess around, and don't sit around waiting for the government to send you this month's welfare check.
Keep your eye on the horizon.
Steve
[Ed. Note: Steve McDonald has dedicated years of study to the bond market. His expertise is in showing investors how to generate stock market gains without taking stock market risk. And for a select group of investors, Steve has agreed to share his secrets of success... and his top bond recommendations. Click here to learn more... ]
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Yosemite Sam Stepped Over the Line...Wearing a Bungee Cord
By Christian Hill
As Rick Pendergraft mentioned in Monday's article, the Dow faced a critical support level at 7197.49. Unfortunately for us, by the time most of you had read Rick's article that morning, the market had collapsed down below that important mark.
On Monday, the Dow closed at 7114.78
Then Tuesday morning came, and Ben Bernanke assured us all that the recession will end later this year.
The market promptly jumped 236 points yesterday, and shot right back through the 7200 level on the way back up.
Right now, we may just be seeing a snap-back rally, and after a day or two, the slide may resume.
If that happens, and we once again break down below the 7200 level, where do we go next?
That's a good question. As Rick pointed out, the next level of support is way down at the 4000 level, a 45 percent haircut from where we are now. That means the Dow will have fallen over 60 percent YTD if we hit that mark in 2009.
Yikes.
It also means that the slow trudge back up, whenever that happens, will face yet another resistance level. That means the market will have to work even harder to get back to its' previous lofty levels.
Needless to say, it was a disappointing day for the market to surrender the 7200 level so easily. It was somewhat encouraging that it bounced right back up through it during the huge rally yesterday.
So here's how you can play this. If the market does indeed drop back down in the next few trading sessions and re-tests the 7200 level and holds, go long the Diamonds (DIA).
If it falls through the level again, the bears will be in charge and the best way to make money is joining them. As I mentioned last week, you can play the whole market by shorting the Diamonds (DIA). It would have made you a nice gain over the last week.