A whole slew of bad news? Is it the end of the rally or is it just a correction? Let me assess it for you.

No jokes today, no funny ideas, no mood to make too much small talk. On my flight back, I thought about things carefully. The markets have been on a wild ride this week and I have been wanting to think through carefully about the news flow thats been affecting the markets. The time away has not given me much time for anything and if you think the markets were turbulent, my work made this look like a piece of cake.

The market is going through the correction which I have been looking out for, but there is a feeling in my gut that tells me to think even more carefully and reassess the current situation.

As usual lets list down the events that has hogged the limelight over the past week.

1) Obama proposing to impose the bank tax which will lead to banks paying almost US$90 billion over the next 10 years. This to me is a total non event. $90 billion is a drop in the ocean considering the US deficit is already in excess of $12 trillion. Also the banks should not have too much problems in meeting these obligations given status quo, the big question is whether it will remain at status quo.

2) Obama proposing to shrink the banking system, this is something that was already predicted by the geniuses in PIMCO's New Normal outlook. Now Obama has decided that he wants banks to take less risk. Any bank that has depositary services will no longer be able to sponsor private equity, hedge funds and any proprietary desks. What does this mean? At first, I thought this was the key problem for the market, but as things in life go, things are never what they seem.

However lets assess this development before moving to the next one. By restricting the depository institutions from taking excessive risks is based on noble intentions but I really doubt that it is a practical move. Over the past 1 year, the banks have done very well in terms of results, exceeding analyst expectations quarter after quarter, mainly driven by trading gains from their proprietary desks. The banks have used the money injected by the Fed to take risks through their proprietary desks rather than lending it out. Cheap money used to derive better returns from trading in treasury bills, commodities. equities etc, has driven profits. Taking away the trading desks, profits are not going to be too explosive. Banks will have to revert back to their traditional models and make money through lending. That may not be a bad thing, however expect the banks to all be re-rated downwards and p/e multiples to shrink.

Without bank related prop desks trading in investment assets, expect markets to fall as assets in general may get re-rated like the financial industry. So in Obama's quest to build a financial system with lower risk, markets can expect to suffer in the short to medium term.

One possible positive that may come out from this change in regulation, is the spinoffs from banks that MAY (key operative word is MAY) be given to their shareholders in the form of shares or special dividends from the sale of their various non core businesses.

Moving on....

3) Ben Bernanke losing support for reappointment as Fed Chairman for a 2nd term. This is something that really bothers me. If Ben is not reappointed for a 2nd term, I believe that we could see a significant correction of up to 15% or even more. Why? Actually, due to some freak of nature coincidence or some people may refer to as fate, the appointment of Ben in 2006 could possibly be the blessing or silver lining to the financial crisis of 2007-2009. One of the leading proponents of the Great Depression, Ben earned the nickname of "Helicopter Ben" from his thesis and comments on the Japanese lost decade. His suggested solution to the Japanese Housing crisis was to print money and drop them from a helicopter to avoid a deflatonary scenario. That explains why he was the right man at the right place to do the right thing. Now we are facing the possibility of taking him off the job when things are just starting to look better. The question is, are they jumping the gun a little early? Remember, in 1929, during the Great Depression, the market crashed and in 1930, the market recovered 73% of its losses, however policy makers jumped the gun early and the market went on to retest the lows. History repeating itself? Thats what I am afraid of.

I know that Ben Bernanke has been the subject of much criticism but the fact of the matter is he was the only that believed in ultra loose monetary policy that helped flood the market with liquidity and profited all of us. Granted that this is a short term measure, but it is my belief that markets are built on confidence and he has brought confidence back into the markets and I am truly concerned about the possible appointment of someone else. Especially, someone who is in the mold of Paul Volcker would spell trouble for the markets.

Over the past 2 decades, Greenspan and Bernanke has given the markets what they wanted, support it, watch over it and created the "Greenspan put" and now the "Bernanke put". During Paul Volcker's reign, he did not care about the markets, he only had one mission, to control inflation and he is the one that managed to do it with no regard for how the market reacted. I do admit that in the longer term, a Fed Chief in his mold will be needed to curb inflation due to the vast amounts of money being printed, but this is not the time. An analogy I can provide to illustrate this situation would be like asking a lung cancer patient that is showing signs of improvement to start smoking and stop chemo before the cancer cells are fully removed.

Why did I mention Volcker? Isn't he too old to be of any influence? Little known to many retail investors, Mr Volcker was the mastermind behind point no 2. The new bank risk regulation was Volcker's baby and he is the one that is orchestrating everything behind the scenes. Now that is cause for concern. If they do appoint someone with Volcker's approval as Fed Chief, the market is in trouble. So the important issue to follow closely will be point no 3.

These are my initial thoughts and I want all my readers to know that I have always been a pessimist and may be a little too doom and gloom in this case. We also need to acknowledge that the new bank restrictions may not even past congress vote. I guess we will just have to wait and see....

I saw from a comment on my last post on the Gem stock I have found. I am sorry, but I have not been able to find time to write on it this week. I promise, it is coming soon. So sorry but the developments of this past week should be given a higher priority.

Best,

SVI