STRESS (TESTS)

I opened the month of February noting the malfunction in the stimulus approval process, and since then little has been done to assuage the number one concern for investors: the likelihood of stabilizing our banking system in short order. The only thing we now know for sure is that Treasury Secretary Tim Geithner is a policy eunuch; he’s not even allowed to lie on behalf of the administration any more. Viva Hank Paulson!

President Obama’s de facto state of the union speech earlier this week also did little to calm the investor class. Although I acknowledge its true purpose was to provide a badly needed booster shot of confidence, his track record of boosting the markets from the bully pulpit is eerily similar to GWB’s. The public’s appetite for soaring rhetoric and grandiose plans of a Liberal utopia will lose its potency soon enough. As I recall this country’s competitive advantage was its ability to empower anybody to become wealthier than what one’s station in life at birth would suggest. The 35-hour workweek is in France.

Closing the month the operative word is “no” as in: No, we’re not going to nationalize banks. However, this morning it’s pretty clear that Citi (C) is now essentially under the aegis of government protection despite the Bernanke comment-induced rally earlier this week. And even worse, we now have to wait 6-8 weeks for the bank stress tests to be concluded. Since the lack of available credit is centered on the health of our banks, waiting for an updated diagnosis should dim the probability of any noteworthy rally occurring prior to 1Q09 earnings season. Just say "no" to a rally, too, I guess.

This is a major problem because without building up a buffer of short-term gains, the market is at greater risk of another major selloff as the indexes are already perilously close to technically significant levels. With quarterly index figures being substantially lower than the prior one, the specter of an early close cannot be dismissed either.

What to do?  Without a no-compromise “stimulus” plan providing stimulus, deflation becomes a much bigger worry than I sense the consensus is anticipating. When deflation becomes a concern even gold is unlikely to do much other than lose its value at a slower rate than other asset classes. In the trading portion of one’s gold position I would take profits if one hasn’t already done so since it failed to break through $1,000/oz. Deflation is particularly scary for those carrying debt. Whether one’s financial condition is secure or not, paying down debt is really the best investment move to make right now bar none. On that note, I remain bullish on Treasuries as a safe haven (not TIPS!).  And by no means was I suggesting earlier selling off one’s core D-Day position in Au.