"There is Always an Easy Solution to Every Problem -- Neat, Plausible and Wrong." -H.L. Mencken

As the housing bubble and credit crisis accelerates, the Politicians, Federal Reserve, and the US Treasury wants to help fix the problem. The Federal Reserve in March “bailed out” Bear Sterns. The Fed agreed to provide a $30 Billion “non recourse loan” to J.P Morgan secured only by the worst tranche of Bear Sterns’ mortgage debt. This is not in fact a loan. If it were, J.P Morgan would be required to pay it back, but no such requirement (unless J.P. Morgan itself fails). Instead of a loan, this is a “put option” which protects J.P Morgan from losses on the collateral, regardless of J.P. Morgan’s own financial status. The effect of the Fed’s guarantee is not to protect the public, but to protect Bear Sterns’ bondholders.

The deal is being defended on the notion that the global financial system would have “failed” had Bear Sterns, not been rescued. But the orderly transfer, netting and settlement of financial contracts is precisely what Title IX of the Bankruptcy Act of 2005 was written to facilitate. In effect, the Federal Reserve and the Treasury decided to ignore existing law and provide a bailout to the benefit of Bear Sterns’ bondholders at public expense.

The clear historical role of the Federal Reserve has been to manage the composition of Federal liabilities (by varying the mix of Treasury securities and monetary base, currency and bank reserves-held by the public). The recent transaction is a dangerous break from that role, in which unelected bureaucrats are committing public funds to facilitate private business transactions and selectively defend the holders of corporate securities. Only Congress has the Constitutional right, by the representative will of the people, to commit public funds. The Bear Sterns deal is a dangerous precedent and a dilution of Congressional prerogative. Even worse, it indicates to risk seeking mismanaged financial institutions that they do not have to face the consequences of their erroneous acts.

Over the next six months there will be other financial institutions that will fail. Do the taxpayers bail out the whole mess (estimated to be $1 Trillion)?

Congress would like to have a Mortgage Rate Moratorium fixing interest rates for two years, and/or forgiving a portion of the principal on these sub-prime mortgages. Good idea. Let the taxpayers pay for this mess too. We now live in a world with high risk, without anyone taking responsibility stupidity and greed. Expect one thing next year - higher taxes, and higher rates of inflation.

I have attached 3 Graphs that indicate that we are clearly in a Recession and that Stock Market is in a Bear Market. Many pundits have expressed the belief that the worst is over for the Stock Market and Economy. I do not share this belief. The Market has had some rallies over the past two weeks which made headlines. Looking closer at these market advances indicate huge short covering, and very selective buying. Hardly the action required to end the Bear Market. The fact is, that selling pressure (supply), as measured by the Lowry Research Corporation (www.lowryondemand.com) is still very high. Selling pressure measures the supply of stock for sale. Historically there have been rallies in primary bear markets that can last 2 days to 3 months. It is my opinion that the market has lower to go.

The bear market will not end until stocks are undervalued. Currently in my opinion, stocks are still overvalued. The S&P 500 carries a PE Ratio of 20.71 times and a dividend yield of 2.02%. Does this valuation and yield sound like good value to you?

So we wait. The next six to twelve months probably will be very boring, with only unpleasant surprises coming. The good news is that the Olympics are coming this summer (assuming the US are allowed to go), the Baseball season has started.