Two Events Boosted Stocks Today.

Analysis: Two events boosted stocks today (that's besides them being in an oversold state which we've talked about for the past week or so). The first was the discussions arising in Washington about taking many of the bad assets out of banks and putting them in a central bank likely managed by FDIC. The 2nd was the Federal Reserve's announcement concerning interest rates this afternoon.

The "good bank/bad bank" concept has been discussed almost since the banking sector fell apart this fall. The toxic assets on financial firm balance sheets can be swept under a rug owned by the federal government. Banks would stop having huge losses and would be able to stop raising new capital. Better balance sheets means more likelihood of banks lending money to businesses and homeowners.
The hardest question is placing a value on these assets. Apparently some of this paper is so exotic that it could be worth just a few cents on the dollar. But presumably there is enough value in this paper overall that putting it on the balance sheet of the Federal Government is a better solution than letting it continue to fester. Presumably the government has the time and the ability to park this stuff until a better day.

According to 24/7 Wall Street, "The greatest fiction about a bad bank is that it keeps the government from nationalizing the banking system. While the Treasury is not likely to take outright control of any of the banks which would sell it assets, the issue remains of what the government gets for that service. Some of these asset pools carry nominal values in the hundreds of billions of dollars. Even the largest US banks like Citigroup (C) and Bank of America (BAC) have market caps below $50 billion. Buying paper that is worth a sum which is much greater than a financial firm's market value begs the question of why the taxpayer does not get most of the equity in these companies for taking most of the risk. Is the bad bank a good idea? Probably. But, the value equation of how America's largest financial firms pass their assets to the government is almost certainly going to work in the favor of the banks and against the interests of the Treasury."

Irregardless whether it happens or whether taxpayers are getting a good deal. this news was enough to send the financial sector up about 15% today.

The 2nd piece of news was that the Federal Reserve said it would keep intact its current policy of record-low interest rates. The central bank also said it's prepared to buy U.S. Treasuries "if evolving circumstances indicate that such transactions would be particularly effective in improving conditions in private credit markets." The Fed said the economy was weakening, but that it still expected a recovery in the second half. The Fed said it was worried about deflation. The Fed said it would continue to flood the financial system with money. The Federal Open Market Committee kept its interest rate target in a range of zero to 0.25%, as expected. Many Fed watchers believe that rates may stay close to zero for more than a year.

The Fed's actions today indicate that deflationary concerns trump future issues of inflation. They also tell you that they want money to come off of the sidelines and get back into all of the channels of the financial system. They have again indicated they will do what they gotta do to strengthen the economy. As Jim Cramer said today, the Fed by their actions is saying "you're making a huge mistake by betting against us".

Anything the Fed can do to stimulate lending to businesses, for mortgages, for cars etc should ultimately be good for the economy. "Cash is trash" is what they're saying. That doesn't mean that the markets are likely to take off to the moon (although anything is possible), but it is again a "No Mas" moment. A line in the sand that should at least continue to put a floor under equities as they start the long slow process of rebuilding trust and value into the system. Or again as Cramer put it today. The Fed is working with investors right now not against them.