S&P 500 Index 5min Chart

S&P 500 SPDRs 5min Chart

Treasury Secretary Timothy Geithner released more details on the toxic asset plan and several large investors said they would of course participate in the free money hand out. Also existing-home sales increased in February boosting market sentiment. The result was a huge rally taking in one move the retracement of the previous 2 trading days, the 50 day SMA in the S&P 500, the downward trendline from the early January top and the 800 resistance level.

As things stand now the Financial Sector and in particular large banks may be the best investments forward. The Federal Reserve has created an environment where banks make money just by existing. Today we can safely add that the toxic asset plan will clean their balance sheets. The result is a risk free investment on healthy money-making banks that at some point will generate large wealth for their shareholders. This situation will not change as long as the Federal Reserve maintains near-zero interest rates. Federal Reserve Chairman Ben Bernanke has stated that near-zero interest rates will be the norm for a long time. Thus explaining today’s rally in the Financial Sector. I am clueless as to why the rally was broad-based. This will undoubtedly ease credit overall but the economy will still take years to recover and inflationary fears will ensure that the Federal Reserve will act promptly and decisively to counter any economy overheating thus ensuring that any future growth will be slow.

The only problem I can see in this mini-essay is the answer to the following question. At what price the banks will be willing to sell their toxic asset?. If at a price below current markdown levels then the thesis of a healthy well capitalized banking sector fails but so does the Government plan to ease credit. If at a price consistent with markdown levels then the danger of future shareholders dilution still hangs around and will ultimately depend on how quick does the economy recover and on how well management does in each bank. If at a price above markdown levels then it will serve to capitalize the banking sector without nationalizing it (isn’t this ultimately the aim of the administration?) thus resulting in the scenario pictured in the above mini-essay and the outcome I see most likely.

S&P 500 Index Daily Chart

S&P 500 Index 5min Chart

S&P 500 SPDRs 5min Chart

Rally continues. S&P 500 at the 800 resistance/support and 50 day SMA levels. Next target is a bit muddier but centered at the 850 level then the 920-9450 range.

S&P 500 Index Daily Chart

Federal Reserve Press Release

Release Date: March 18, 2009

Information received since the Federal Open Market Committee met in January indicates that the economy continues to contract. Job losses, declining equity and housing wealth, and tight credit conditions have weighed on consumer sentiment and spending. Weaker sales prospects and difficulties in obtaining credit have led businesses to cut back on inventories and fixed investment. U.S. exports have slumped as a number of major trading partners have also fallen into recession. Although the near-term economic outlook is weak, the Committee anticipates that policy actions to stabilize financial markets and institutions, together with fiscal and monetary stimulus, will contribute to a gradual resumption of sustainable economic growth.

In light of increasing economic slack here and abroad, the Committee expects that inflation will remain subdued. Moreover, the Committee sees some risk that inflation could persist for a time below rates that best foster economic growth and price stability in the longer term.

In these circumstances, the Federal Reserve will employ all available tools to promote economic recovery and to preserve price stability. The Committee will maintain the target range for the federal funds rate at 0 to 1/4 percent and anticipates that economic conditions are likely to warrant exceptionally low levels of the federal funds rate for an extended period. To provide greater support to mortgage lending and housing markets, the Committee decided today to increase the size of the Federal Reserve’s balance sheet further by purchasing up to an additional $750 billion of agency mortgage-backed securities, bringing its total purchases of these securities to up to $1.25 trillion this year, and to increase its purchases of agency debt this year by up to $100 billion to a total of up to $200 billion. Moreover, to help improve conditions in private credit markets, the Committee decided to purchase up to $300 billion of longer-term Treasury securities over the next six months. The Federal Reserve has launched the Term Asset-Backed Securities Loan Facility to facilitate the extension of credit to households and small businesses and anticipates that the range of eligible collateral for this facility is likely to be expanded to include other financial assets. The Committee will continue to carefully monitor the size and composition of the Federal Reserve’s balance sheet in light of evolving financial and economic developments.

Voting for the FOMC monetary policy action were: Ben S. Bernanke, Chairman; William C. Dudley, Vice Chairman; Elizabeth A. Duke; Charles L. Evans; Donald L. Kohn; Jeffrey M. Lacker; Dennis P. Lockhart; Daniel K. Tarullo; Kevin M. Warsh; and Janet L. Yellen.