Market Response to Geithner'sToxic-Assets Plan

On Monday, March 23, the market closed up a remarkable 497 points in response to the government's unveiling of a new plan that would create a public-private partnership to buy up toxic-assets from troubled banks. Purchasing these assets would allow the banks to take these toxic-assets off their balance sheets and as a result, increase financial stability. The market responded positively to the plan, moving up throughout the day.

The plan allows private investors put as little as 10% of their money to purchase these assets, whereas the Treasury would contribute the remaining 90%. The market's broad-based rally is a reflection of the investor-friendliness of the plan. The risk for the private investor is minimal because he can walk away from the investment if the value of the assets falls further.

Furthermore, there was additional supporting data that make the rally legitimate and not just a bear rally. According to Reuters, existing home sales unexpectedly rose 5.1 percent in February, which is the largest increase since July of 2003. What makes the rally so strong is that it was broad-based. The Financials led the way but at the end of the day, all 30 of the stocks in the Dow and 98 out of 100 in the Nasdaq were up.

Since then, we have seen the market move higher consistently with supporting positive economic data. While I remain cautious about investing all at once, this could be the beginning of a turnaround.

Image source: http://img.timeinc.net/time/daily/2009/0902/tim_geithner_0210.jpg

Rally Extends

The Dow Jones is back above the 7,000 level and the rally that began last week is extending into this week. The S & P index rose more than 10 percent last week and today marks the sixth straight day of upside. While it may be tempting to jump back into the market all at once, I suggest investing in small increments. We will most likely see a correction to the 6,500 level before we move up again. The fundamentals of the economy have not changed, which is why this rally seems overextended. Build a list of companies you like and invest in each cautiously.

To hedge against the risk of the market reversing itself, purchase gold. Gold around $900 is cheap considering its demand in this market as a safe-haven. All of the measure being taken by the government in addition to the very low interest rates will eventually start to have an effect on the market and create a slightly inflationary environment in which both gold and oil should benefit. ETF's such as GLD and OIL are the best ways to track and invest in the performance of these commodities.

How Much Lower?

For the first time in 11 years, the Dow Jones has fallen below a benchmark level of 7000. There is no bottoming action and despite all the efforts of the government, the outlook is not much clearer. At these prices, it's hard to take your losses and sell because a bounce is inevitable. On the other hand, it's also tough to watch your investments deteriorate slowly. Take today's levels into historical perspective. The Dow was at the same levels as it is now in 1995. Subtract inflation over that time period and you have ridiculously cheap stocks. Warren Buffet today said that our best days are ahead. Have a mindset for the long-term and stay out of companies that are vulnerable to the credit situation. Invest in sure things and don't make any speculations whatsoever. Three years from now, you will look into hindsight and be glad that you did the opposite of what everyone else is doing: buying into panic.