I swore to myself I would drop the subject after Tuesday’s rant about the rally Bernanke bought with a $200 billion auction/liquidity injection. Sometimes though - and thanks to Henry Paulson this time - the need for a reality check presents itself.

In short, I think the Fed Chairman and the Treasury Secretary need to talk to each other at least occasionally…especially when we’re being boinked around this pinball machine we’re calling a credit crunch.

Though this glosses over some detail, here’s my basic beef today….on Tuesday Bernanke made it easier for lenders to make loans; on Thursday, Paulson made it harder. Back to square one, though the market once again liked what they heard (even without really understanding what they heard).

I’m not going repeat my “Why, Bernanke?” speech again - just click here if you missed it. Then, come back to today’s Bernanke. Feel free to make yourself a drink before you do either though…you might need it.

Treasury Secretary Paulson unveiled 20 pages worth of recommendations today….recommendations for the lending industry to get themselves out of the mess they created for themselves (or us). He had help though - a bunch of help from Washington’s top minds (which may not be saying much).

If you want to read all the details, click here. Being the nice guy that I am, I’ve assembled the best of the worst highlights here. The quotes from the WSJ Online story are in quotes. (Brilliant, huh?) My responses are in bold and parenthesis. I have some final ranting to do once we’re through with the list.

• “Treasury Secretary Henry Paulson, unveiling a 20-page set of recommendations from the top-level President’s Working Group, blamed a “dramatic weakening” of underwriting standards for lower-quality home loans for helping trigger turmoil in credit markets.” (Oh - is that what it was?)
• “In a speech at the National Press Club, Paulson appealed to banks and other lenders not to stop issuing loans and implied they should cut back on dividends paid to shareholders if necessary to raise capital. “We are encouraging financial institutions to continue to strengthen balance sheets by raising capital and revisiting dividend policies.” (OK, lemme get this straight…banks are supposed to focus on making better loans, but are supposed to not stop lending? Furthermore, are lower dividends going to inspire investment in already-shaky stocks? Hope there were no IPOs planned in the arena.)
• “Paulson said state and local regulators need to toughen oversight of all mortgage originators. Sloppy lending practices including loans made to homeowners with no requirement of proof of income, are widely blamed for a soaring tide of foreclosures, especially among subprime mortgages held by people with the shakiest personal credit.” (Here’s an idea…don’t bail ‘em out. Cut the fat by attrition.)
• “Paulson said credit rating agencies need to make sure that securitized credit issuers — like those who issue mortgage-backed securities — “perform robust due diligence of originators of assets that are securitized or used as collateral for structured credit products.” (Isn’t that what they’re supposed to do in the first place? It’s a sad day when the government has to mandate common sense.)
• “The report said various government bodies had worked on the recommendations for more seven months and that Paulson and Federal Reserve Chairman Ben Bernanke had “huddled” for half a day early this month to review the details.” (LOL! It took a committee to determine all this? Moreover, it took seven months for the committee to write 20 pages of ‘don’t make dumb decisions’? I could have done that in about seven minutes. As far as Bernanke and Paulson chatting for half a day…a whole half a day to coordinate a nationwide government effort? Maybe that’s the issue right there.)

Final Thoughts

Don’t get me wrong - it’s not like Bernanke and Paulson are completely undermining each other….but their efforts aren’t exactly aligned. What kills me is how they both did nothing for so long, and now they’re tripping over each other trying to make a dent. We went from underkill to overkill in a span of three days.

I have to think they’re both fighting for their jobs now. If a Democrat (read ‘Obama’) gets in, I think you can kiss both Paulson and Bernanke goodbye at the earliest opportunity. They’re both about a year late to the party….in true Greenspan form.

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Bulls make money, bears make money, pigs get slaughtered. That’s why I suggest you go ahead and play defense again with the gold (or gold futures) trade we recommended waaaaayyyy back on December 24th. Gold futures reached $1000 today…about 22% above where they were back when we first mentioned the breakout. Though the near-term target - based on the Fibonacci extension level - was and is 1029.80, the chart’s starting to look a little over-extended. Better safe than sorry, especially when it comes to protecting profits. So…

Let’s scoot the stop level up from 951 (as suggested on March 3rd) to 962.50. That’s about the floor we saw for most of last week.

No matter what, if gold gets to 1029 before falling back to 962.50, take your profits then.

It’s so easy to follow the crowd when a stock or future is rising, but the best traders usually sell it when everybody else is clamoring for it. These same guys (or gals) are more than happy to buy what nobody else seems to want. What’s that got to do with anything? By the time we see trades at 1029, the hype could be huge, but the buyers could be completely tapped out. You don’t want to be left holding the bag when the bottom falls out; sell into strength.

Are you a subscriber to the Small Cap Network newsletter? If not, you’re missing out on some great trading ideas and exclusive market commentary. To sign up, just go to the top right corner of any page of our website. You’ll be joining thousands of other subscribers who have already benefited from our news and views.