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Timothy Geithner fails to kick a goal

 As the football season looms, last Wednesday’s early morning disappointment starring Obama’s high profile recruit — Treasury Secretary Timothy Geithner — failed to kick a goal in front of a global audience of supporters.

And Wall Street responded shedding over 4 per cent on key market indexes.

This was like a big sporting event for money watching fans. In my case, I was up early and beamed my remote control onto American business TV and instantly got the news that Geithner and for that matter President Obama had failed.

Well, to be fair, they had failed on the first and all-important test — the Dow Jones index was down over 300 points before the market closed.

The day before, I was asked on Sky Business how important the day was? Many saw it as a pivotal opportunity for the new US administration to show the world that the Yanks were tackling the core problem — the malfunctioning US banking system.

I used the analogy that it was a big game and Geithner was effectively lining up to take a kick at goal. However, I said, this is not a shot in front of the posts but one from the sideline — it was a tough one. And he sprayed it.

Of course, the whole event played into the hands of the short-term trader. This was a classic “buy the rumour, sell the news” opportunity and the short-term traders and the fund managers trying to recover their losses took the chance to take profit.

In the previous week, the Dow Jones put on 334 points to finish at 8,270 and 217 points of this came on the day when the USA copped its worst jobs report ever. There has definitely been an appetite to buy and reluctance to head where the charts say the market should go.

Lance Lai from ACE Capital Trust says the S&P 500 is headed towards the 740 level and only a spate of market surprising news to the upside would encourage the weight of money to force the market up.

It was encouraging that the Aussie market did not over-dramatise Geithner’s poor shot at goal with the S&P/ASX 200 only down 14 points to 3,474.

Bankwest’s chief economist Alan Langford summed up the view from the Street.

“Wall Street voted with its feet on Tuesday night by chopping another 4.6
per cent off the Dow in response to the new US Treasury Secretary’s eagerly
anticipated announcement on the ‘details’ of Washington’s latest attempt to
unfreeze debt markets,” he says. “But the perceived lack of details was the main
reason cited for the sell-off on an equity market that had been tentatively
looking for a floor in recent weeks.”

The key take out is that the people who determine the direction of share prices, our portfolios’ values and our super funds’ returns, want to know how credit markets are going to be pushed closer to pre-sub prime conditions. That’s why the Geithner revelations were to be more important, at least to the market, than the fact that Obama had virtually a Congress green light on a $US789 billion stimulus package.

If the market can see a believable bank fix up strategy, which will see toxic assets removed from bank balance sheets at an acceptable price to the banks and the US taxpayer, in company with the stimulus package, then we might see a committed turnaround in market sentiment to the high side.

Anton Tagliaferro, the founder of Investors Mutual and a highly regarded market watcher, thinks Australia is well placed with the 4 per cent interest rate cuts and $42 billion stimulus package to benefit from a more positive Wall Street.

“The Americans are in a mess,” he told me on my Money Makers program on Sky Business. “But we need to see credit markets, particularly in the USA, improve.”

Alan Langford’s take on Geithner’s poor shot at goal offers battle weary long-term investors and super members some hope.

“Despite Wall Street’s retreat in response to the latest plan, key debt
market risk premium spreads continue to retreat, but nevertheless remain
well above ‘normal’ - whatever that is the post-sub-prime mortgage era,” he said. “The
3 month USD LIBOR over OIS spread not only has fallen by almost 300 basis
points since its immediate post-Lehman crisis peak, but just as importantly
has tracked in a narrow range of 8 basis points since it dropped back below
100 basis points on the 12th of January.”

On my program, Tagliaferro rang the bell to indicate that we’re around the bottom of the market slide but he warned it was only a tinkle. There could be ups and downs but it’s looking like a bottoming process as long as a credible credit market touchdown happens.

Published on: Tuesday, June 09, 2009

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