Equity markets in the United States and across the world rose Thursday and this morning as the Federal Reserve and the other major central banks injected billions of dollars into the global financial system in an unprecedented move to stabilize the financial markets. The stock market soared as word spread that the government was also preparing a more long-term solution to the credit crisis. There are also restrictions on short sales and guarantees of money market funds.

The good news with the recent intervention by the Federal Reserve and the other central banks is that this is a tremendous amount of financial and monetary power being applied. Usually, true disasters like the Great Depression or 1973-74 Bear Market occur when the central banks fail to recognize the problem early or a mistake is made. The Fed clearly recognizes the problem, and Chairman Ben Bernanke, because of his obsession with Fed mistakes during the 1930's, is unlikely to repeat these errors.

There is also global coordination among central banks to resolve this. History has shown in the 1930's and 1970's that it is not wise to "Fight the Fed." Even if large stocks, such as the S&P 500, continue to lag Treasury Bills in terms of total return, small cap stocks can rally in this loose monetary environment. This occurred in both the mid 1930's and the late 1970's. This has been documented in my book, Follow the Fed to Investment Success. It also occurred in the early 1990's when we last experienced a credit crisis similar to this.

Continue reading Government intervention and the credit crisis: The good news and the bad news

Government intervention and the credit crisis: The good news and the bad news originally appeared on BloggingStocks on Fri, 19 Sep 2008 12:23:00 EST. Please see our terms for use of feeds.

Those investors/readers who are of the persuasion that the U.S. stock market is about turn the corner should heed the words of caution from legendary banker Bill Seidman.

"There's always a chance of a large bank failure," Seidman told Newsweek. Seidman chaired the Resolution Trust Corporation, the federally-created liquidator for the last banking crisis in the 1980s.

Keep an eye on the big banks

A large bank failure would quickly extinguish what little momentum the market has established from mid July to early August, during which the Dow Jones Industrial Average has risen from about 10,850 to 11,734. Economist David H. Wang said he will not attach a more-positive descriptive to the 884-point move, because he "doesn't want to create unreasonable, and unjustified, expectations."

"First, our technical analyst friends would say the recent move up is still well within the range of a bear market correction," Wang said. "Second, from a fundamental standpoint, we still have major headwinds."

Continue reading Rising Dow, or Pyrrhic Dow?

Rising Dow, or Pyrrhic Dow? originally appeared on BloggingStocks on Sat, 09 Aug 2008 12:40:00 EST. Please see our terms for use of feeds.