Slogging Through; Foxes in the Henhouse

Here’s a quote that sums up the way stocks have been trading better than anything else I have read. It’s from Diane de Vries Ashley, who’s a managing partner at Zenith Capital Partners. She said: "There’s a semblance that there’s not a solution but a working and workable means by which to plow your way out of this…[t]here’s no magic solution. It’s a slog. If you have a market that is reacting well to the kind of slog they see, hallelujah." 
A slog. That’s perfect. Paulson has attacked the toxic asset problem from a couple angles now. Of course, none has been a perfect solution. Balance sheets at many banks are still overwhelmed by deteriorating assets. 
But since Lehman, we haven’t seen any more collapses. And that certainly would have happened if the Treasury weren’t throwing money at the problem. 
Fed Chief Bernanke has dropped interest rates to all-time lows. He’s made trillions available in short-term lending and he may even start buying Treasuries on the open market. 
His efforts haven’t returned a sense of normalcy to the credit markets. But it’s safe to say lending would be even more stagnant without these efforts. 
And you can criticize Obama’s stimulus plan as much as you like, but there seems little doubt that his promise to create a few million jobs has helped investors shrug off increasingly bad employment numbers. 
*****Is anyone surprised that the bank rally was a one-day wonder? Slogging through helps, but it’s not a cure all. And there’s still a lot of debate about how to deal with banks’ toxic assets. 
The "bad debt bank" plan may sound like the cleanest way to do it. But the bad debt bank will need to be funded. And then there’s the issue of how to value the toxic debt that needs to be removed from balance sheets. 
You may recall this was a key sticking point in Paulson’s original TARP proposal. You can’t just let the banks decide what they should get for those assets. And there’s a lot of risk to the entity that eventually owns them. 
For instance, how will they be disposed of? Supporters of the bad debt bank casually say "sell them off." but who in their right mind (other than Bank of America, Citigroup, Lehman, Bear Stearns, etc.) is going to buy them, even at pennies on the dollar? 
*****I’m starting to lean toward the nationalization idea. Because in this case, you accomplish two important things. One, you create oversight for the current management. Let’s face it, current management teams at many of these Wall Street banks are the ones who got the country into this mess to begin with. 
They got greedy, lost sight of risk and over-leveraged their companies. I, for one, don’t think it’s wise to allow them to find their way out of this mess. That’s putting the foxes in charge of the henhouse. It’s clear they are not beholden to the interests of their shareholders. 
Second, the taxpayer may actually see a reward for the risk we’re being asked to assume in bailing out these companies. If toxic assets are bought with our money, the likelihood that we’ll get that money back seems pretty slim to me. 
However, if the banks are nationalized, then at least the taxpayers can potentially benefit as the clean assets are resold to private investors.  
It should also be clear that the "let them fail" solution is not a solution at all, just an angry reaction. Letting the banks fail means far worse than just tough times. It leads to an unprecedented level of wealth destruction and could lead to outright Depression. Yes, I’m talking about your investments and wealth. The damage won’t be contained to the fat cats on Wall Street. In fact, they might get through such an event relatively unscathed. It’s the middle class that would suffer the most if the banks were just allowed to fail. 
*****Regardless of the eventual solution, these banks will never resemble their former selves. Or, to be more specific, their stock prices will never get back to former levels. I won’t tell to sell out if you’re holding, but by all means, don’t buy them. 
*****We’ve watched the US Oil Fund (NYSE:USO) drop in the $28s Wednesday and today. Both times, it has bounced. At the risk of sounding redundant, USO can be bought in the $28 range and sold in the mid-$30s for trading purposes. 
I’m still waiting for Graham Corp (AMEX:NYSE) to hit $9 for a trade. It closed there January 20 and bounced strongly. And it got there January 26 on an intra-day basis and bounced again. 
And I’m still irritated that I didn’t recommend taking profits on Emergent Biosolutions (NYSE:EBS) last time it hit $26. But I’m confident that there will be a next time. This stock is still being bought by funds.

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