Beware the bear market rally: Kohler

If you’ve been wondering whether it’s a bear market rally or a new bull market, this morning’s spurt on the strength of the “rescue” of CIT should answer the question.

Stocks are running on pure optimism at the moment but the fundamentals still look weak, especially in the US.

CIT is a lender to SMEs in the United States that was allowed to convert to a bank holding company last year and was given $2.3 billion from the Troubled Asset Relief Program (TARP). It believed that would solve all its problems, so that it wouldn’t have to fix its securitisation-based funding model.

The firm tried to line up with the big guys to get some funding through the Federal Deposit Insurance Corporation, but last week that supplication was turned down.

So it was back to the old weekend bank deathwatch and the exhausted Sunday night deal – this time with bondholders, not the Government. The bondholders, represented by the same investment bank and law firm that learned some hard lessons representing General Motors bondholders, have put the CIT board on a spit and roasted them.

They are coughing up $US3 billion to get CIT through to its next debt maturity in September, and in return they get full security PLUS 10 percentage points over Libor. This is a rescue?

Compare that to Goldman Sachs, which got full access to FDIC-backed funding, $US10 billion from the TARP and $US13 billion out of the AIG bailout.

The last of those, by the way, is the worst: Goldman played a craps game called AIG credit default swaps, lost its shirt as it should have, and then had its losses made up by the US taxpayers. Nice work if you can get it.

Now the stock market is running on the return to health flowing from the proprietary trading of the robber barons of Wall Street, who started the crisis in the first place.

And in the case of CIT this morning – not even that. It’s just the pulse of a brain-dead patient on a ventilator, although it’s true that while there’s life there’s hope.

And CIT’s problems won’t help the liquidity problems of America’s SMEs. Last night the Commerce Secretary, Gary Locke, said the Government was worried manufacturers faced a cash crunch that would send many out of business.

It’s impossible to know whether the March lows will be re-tested – maybe not – but a new bull market on the strength of investment bank trading profits and the near-collapse of another bank? I don’t think so.

Correction: Yesterday I wrote that Deena Shiff is the CEO of Telstra Wholesale. She’s not: Shiff now runs Telstra Business. The head of Wholesale is Paul Geason.

This article first appeared on Business Spectator.