After a really bad week, the DOW Jones Industrial Average (.DJI) recovered on Thursday and Friday closing down only 50 or so points for the week. This is rather odd given the current strength of the market after the Trump rally. It reminds me of a week like the one when Lehman Brothers filed for bankruptcy protection, Merrill Lynch was acquired by Bank of America and AIG was bailed out by the government. Last week did not end miserably low because investors have gained confidence in the market after years of government efforts to rescue banks from their financial debt, but how long can the rally last?
There were talks about bringing in a system similar to the Resolution Trust Corp (RTC) in 1989. I was only 2 when that happened and needed to look it up to get a better idea of it. From how it looks like now the government will put in about half a trillion dollars into a system through which private wealth managers would purchase bad-debt instruments for the government. The government would hold onto these instruments for a few years, until the economy recovers and then sell these for a profit.
According to James Warskoff, a consumer debt expert with Ovation Credit, this kind of a resolution ultimately helps banks from avoiding writing off bad debt, by instead selling it to the government at a discount. The question for you and me is, who is going to pay for this? The government cannot just print money and will get all this money from the tax payers. Even though this sounds crappy for us tax payers, I believe this is good for us in the long-run. These deals that the government is making are great deals. The government is acquiring assets at a good price and should make a good profit off of these in the long run. The money will hopefully come back to us once the economy is doing a little better.
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Another step the SEC took last week was to ban short selling on several financial stocks. This move was adapted by several countries globally as well. This is to keep investors from manipulating prices and driving down stock prices.
This brings me to wonder about where the market is headed? For short-term, I think the market will do fairly well for a few days, however the overall situation is still really bad. I think the correction in housing prices isn’t complete yet, and the values will still go down more. We might even be hit with other unexpected pitfalls such as widespread credit card defaults. I will be looking to unload my stocks in the next few days (if the market does well), and then wait for the market to drop again, when I will buy again.
I just want to end by saying that these are scary times, but I am glad to be around to understand and learn from these. I am going to be following the happenings around me very closely and will continue to write about what I see and learn.