Too big to fail. No, I am not talking about Fannie Mae and Freddie Mac; nor do I mean Washington Mutual (in the interests of full disclosure, TCI does not recommend investing in those stocks even at these distressed levels).

What is too big to fail is the U.S. economy. It’s getting weaker by the day as a result of hurricane-force winds of dual crises: financial and energy.

The Federal Reserve and the Treasury Department have decided to all but bail out the mortgage giants Freddie and Fannie, steps they would never have taken had not their possible collapse further endanger our very fragile economy. These steps have been deemed unprecedented, but were they really that unthinkable after the March bailout of Bear Stearns? The markets cheered today’s action for all of about 10 minutes before rethinking the move. Investors then spent the rest of the day bailing out of any financials with exposure to the mortgage market.

One simple and direct measure regulators can take to prevent widespread panic would be to raise the amount of bank deposits covered under FDIC insurance.

If the right steps are taken, and when financial panic recedes, this market will be ripe with buying opportunities. In the meantime, the rest of the economy is in the better shape than the financials. The task the Fed has on its hands is to prevent the ailing financials from taking the economy down with them. We think the Fed can still prevent the slide.Read more...

Stocks rallied last week, and it was a good rally. Even transports, while still below their last high, staged a healthy advance that brought them within 5% of the high. In fact, the only real laggard was energy, which has been under a lot of pressure lately (much, much more on this below, dear Reader, which you won’t want to miss).

Looking ahead, our indicators remain favorable. The election cycle suggests 2007 will be a good year. All that is lacking is for transports to surpass their last high, which would be a clear signal that the bull market will continue.

Of course, we must confess that one of the factors supporting the market recently has been the sharp decline in oil prices. Last week, crude fell below $53 a barrel. It seems we were premature in expecting much higher oil prices by now. Oil has received a lucky reprieve this winter. At any rate, we don’t feel too badly for not having foreseen this. If you’re going to be wrong, it’s safer to have been overly-pessimistic than the opposite.

The good news is that lower oil prices have driven our Long-Term Master Key well into positive territory. As you may recall, every recession since 1973 has been preceded by a sharp uptrend in oil prices. Today, without that move in oil, we are unlikely to see a recession. And without a recession, stocks are unlikely to correct by more than 5-7%. So the market looks to be in good shape.Read more...

In the past seven days, our indicators have improved slightly. The needle on our Master Key has moved into moderately bullish territory at 1.5. The credit for this belongs to the good performance of rank and file stocks, plus a little slip in industrial commodity prices.

Ben Bernanke gave his first testimony to Congress last week, in which he said pretty much what everyone expected him to say. Consequently, everyone seemed pleased. He portrayed himself as an inflation fighter, despite his reputation for loose money policies. And he even managed to dodge the controversial issue of raising taxes as a possible solution to government deficits.

The financial community in particular gave Bernanke high marks. They were relieved to see that his speech had little impact on the economy or the markets. But then, why should the economy dance to his tune, when Bernanke’s Federal Reserve is no longer the most important bank in the world.

China’s central bank holds the real power in the world today, as we’ve said before. With China’s dollar reserves approaching $1 TRILLION, it’s their monetary policies we should be watching. China can use its huge reserves to buy or sell U.S. Treasury bonds. And it’s long-term Treasury bonds that determine the course our economy will take.Read more...