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Banks to Nationalize or Not to Nationalize

Stock-Markets / Nationalization Feb 23, 2009 - 05:46 PM GMT

By: Paul_J_Nolte

Stock-Markets To nationalize or not to nationalize, that is the question. Whether it is nobler in the mind to suffer the slings and arrows of (the markets) or to take up arms against the sea of troubles and by opposing end them. With a bit of poetic license we could easily rework the Hamlet's soliloquy to bring it out of the kingdom and into the banking system.

The market movements may actually force the nationalization by essentially making the stocks worthless, it won't take much more to just wipe out the last vestiges of ownership, clean up the books and reissue the banks back into private hands. On top of the banking issue, little in the way of economic news was heartening for investors, as even inflation came back a bit more than expected as energy prices rose last month. There will also be little to bolster investor confidence this week too, as housing data is scheduled for release, a revision (likely lower) for GDP and durable good orders. To die, to sleep – perchance to dream of a better market...ah there's the rub! Without resolution to the financial fix, the markets will continue in their perilous trading pattern.

It didn't take long for the 800-level to be broken and quickly get down to the important 750 zone. Only comments from the White House about keeping banks private gave stocks a minor boost on Friday in an otherwise forgettable week. Many of our indicators are pointing to a rally, however we have seen rather feeble rallies that begin well, but end poorly over the past three months that lead us to believe that any short-term rally should be used to reduce equity exposure rather than trying to guess a bottom in an ever increasingly emotional market.

While gains from current levels should be well above average, an investor is going to have to wait at least 3 it not 7 years to realize them. In the meantime, another drop of 15-20% is not out of the question. Leaving many investors looking like Wiley Coyote just before the decline, holding a sign: Is this trip necessary?? As much as we like the long-term prospects, the pain of the short-term loss may be more than many can bear. If the markets lose the important support around 750 on the SP500, we will further reduce equity exposure until we feel more comfortable that not only the markets look better, but also the financial system is being dealt with in a way to engender “normal” lending practices.

Commodity prices of all stripes have been declining for the past few weeks. The exception has been gold and silver – the harbingers of higher inflation. We don't believe higher inflation is right around the corner, in fact, deflation remains job #1 for the Fed today. While plenty of money is being generated (money supply is sky-rocketing) precious little is actually making its way into the economy. Much of it is being absorbed by banks and saved by consumers, two entities that are in real need of reducing overall debt. Until the economy functions normally and banks begin to seriously lend money, inflation is likely to remain a distant cry in the darkness. The bond model remains in negative territory, but is still close to generating another buy signal – we are keeping maturities relatively short at this time.

By Paul J. Nolte CFA

Copyright © 2009 Paul J. Nolte - All Rights Reserved.
Paul J Nolte is Director of Investments at Hinsdale Associates of Hinsdale. His qualifications include : Chartered Financial Analyst (CFA) , and a Member Investment Analyst Society of Chicago.

Disclaimer - The opinions expressed in the Investment Newsletter are those of the author and are based upon information that is believed to be accurate and reliable, but are opinions and do not constitute a guarantee of present or future financial market conditions.

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