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Market Defies the Odds, Bad News


Street knows things wil get worse; doesn't care.

The Sideshow Begins

Yesterday, the Fed admitted it's afraid, but that it will valiantly fight the good fight:

"The Federal Reserve will employ all available tools to promote the resumption of sustainable economic growth and to preserve price stability. In particular, the Committee anticipates that weak economic conditions are likely to warrant exceptionally low levels of the federal funds rate for some time."

Bernanke is apparently prepared to do anything to get the job done. The question not asked during yesterday's euphoric move: Will "anything" be enough? For a while, it felt like the Fed was on the sidelines; now, it's a sideshow - it may even issue its own debt.

"The focus of the Committee's policy going forward will be to support the functioning of financial markets and stimulate the economy through open market operations and other measures that sustain the size of the Federal Reserve's balance sheet at a high level As previously announced, over the next few quarters the Federal Reserve will purchase large quantities of agency debt and mortgage-backed securities to provide support to the mortgage and housing markets, and it stands ready to expand its purchases of agency debt and mortgage-backed securities as conditions warrant. The Committee is also evaluating the potential benefits of purchasing longer-term Treasury securities.

"Early next year, the Federal Reserve will also implement the Term Asset-Backed Securities Loan Facility to facilitate the extension of credit to households and small businesses. The Federal Reserve will continue to consider ways of using its balance sheet to further support credit markets and economic activity."

Neither a Lender…

Last week, pundits said General Motors (GM) would file for bankruptcy (the kind were the gates come down for the last time) if the bailout didn't happen by Friday - and that the market would crash when faced with the loss of 3.0 million jobs.

I think we learned yesterday there are other fires in the economy that just might matter more. We need to get money flowing into the system again. Even the auto industry can't survive without the ability of would-be buyers to obtain credit.

But can banks lend money? Certainly banks saddled with toxic assets aren't eager to create more - even if it is for "altruistic" reasons. They will, however, become more inclined to lend as they shed mortgage-backed paper and other "toxic" assets. The only thing missing now is jobs - and job security. The street seems content to wait until late January for the job engine to be turned on, beginning with the so-called shovel-ready projects. The larger projects, however, may have to wait.

The market has already defied the odds to rebound to its current level, so an extended rally into the first quarter of next year will mean investors have discounted harsh economic realities. It's one thing to assume things will get better, something else to assume things won't get worse. I think the Street knows things will get worse - and it just doesn't care.
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