PPIP and the 500 point rally..

Today Tim has unveiled his long-awaited (much in the lines of Paulson Plan) to remove bad assets from the books of the banks. This PPIP is intended to take the legacy assets off the balance sheets of the banks, and there by help the banks raise their capital levels and start lending. This program ensures that the private sector is particpated in the buying along side the public sector (backed by and over looked  by FDIC, Treasury and the Fed). This 'program' is supposed to generate a buying power of about 500Bn, with a potential to expand to about 1T. The program will allow banks to identify which assets they wish to sell, FDIC will do an analysis, leverage will not exceed 6 to 1 in debt to equity ratio, and it will include eligibility for all sizes of institutions.  Pools will then be sold to the highest bidder and financing is provided via an FDIC guarantee.  Then the private sector partners will control and manage the assets until final liquidation. 

On teh face of it,  this might seem to be a real good deal for the banks( it might as well be), but I have my doubts. Well, I base my argument based on te response to last week's TALF program. Of the 200Bn plan that was announced, the bids recieved were only of 4.7Bn. Also, the crux of this PPIP  is to set the price for the assets, which is THE million dollar question. If I am an investor planning to but the assets from the banks under PPIP, I would try to pay as less as possible (though FED will lend me money to lever  up my investment 6 to 1, my 16% investment is in the first lein of losses), and that woudl force the banks to write down the remainig assets to the new price, (assuming banks are very much carrying the assets at above market prices) - and more write downs lead to more losses, and more troubles for banks. Say, if I am FORCED to buy the assets at a price above the market price, well, the banks benifit. And, I and the tax payer will benifit as long as my return is more than the cost I paid (maane, the loans turn out to be good loans and paid up in time). But in this environment, I guess it is a hard bet to make. However, What I think as the actual intention of the FED is to CREATE a market for the assets, and FORCE the banks ( as Private Investors) to bid for the assets (of other banks) at a price above the mark, and eventually drag the value of all the assets along. If what I speculate is right, well, I am screwed, as I am short the market. And C and BAC will make an amazing investment decisions even at these prices.  

Oil, after a long time has hovered around $53 dollars. I agree with Pickens in his call that Oil would reach $60 and be at $70 by this year end. Well, it is not that the demand for oil is going to ramp up, but that the pace with which the rig count is droppping is far more worse than the demand itself. U.S. Rig Count down 41 from last week at 1,085; down 699 year over year. Canadian Rig Count down 61 from last week at 159; down 169 year over year. The US Offshore rig count is 43, down 4 from last week; down 14 year over year. If this trend continues, I guess, OPEC would not even have to think about cutting the production to jack up the prices.. Btw, I own commodity etf, in this environment where Dollar devaluation seems inevitable, it is better to invest in 'inflation' trades.

Song: "Everybody's changing" - Keane (This band is known as "the band with no guitars", coz of its heavily piano-based music)

Mood: "Why do I push the things till the last minute"