The following article is an excerpt from ETFguide's ETF Profit Strategy Newsletter, a members only publication.

Until Wednesday evening, coming to a bailout agreement has been as elusive as catching ice cubes in hot water. The question is will the "mother of all bailouts" be able to buoy the equity markets represented foremost by the S&P 500 (AMEX: SPY) and Dow Jones (AMEX: DIA)? The $700 billion bailout (if approved by the House Of Representatives) won't be more than a drop of water on a hot stone.

“Quality can’t be rushed”

My father always used to say: “Quality can’t be rushed”. Just as good wine needs time to age and mature before it is presented to the public, any bailout strategy would need time for proper consideration from all angles before approval and presentation to the taxpayer.

The bailout is necessary (and therefore flawed) because it is the forced REACTION to a trend that the government (SEC) failed to curtail in the first place, rather than a preventative, voluntary ACTION to channel this trend in the right direction. The added time pressure will result in a rushed outcome with further unwanted and unexpected side-and ripple effects.

Why throw good money after bad?

The bailout is designed to benefit primarily financial institutions and by extension the entire U.S. economy. By the most conservative measure, financials have already lost 50% of their value. The Financial Select Sector SPDRs (AMEX: XLF) is down 51% (from high to low). How much more is there to lose? The downside potential is limited (see chart below).

How about protecting sectors of the economy that haven’t fallen apart yet? The Consumer Staples Select Sector SPDRs (AMEX: XLP) with companies like Procter & Gamble and McDonalds have held up well. Imagine this; Bloomberg reported that Bank Of American refused to extend further finance aid to McDonalds with their McCoffe campaign.

The Consumer Discretionary SPDRs (AMEX: XLY) have suffered a 33% loss. Companies like McDonalds and Walt Disney would benefit from some extra support to the tune of several hundred billion dollars. In the case of financials, why would you throw good money after bad?

Japan, a warning example

I know in theory, brilliant minds like Bernanke, Paulson and others believe that infusing the nation’s ailing banks with cash, will revive the ailing credit market. The Fed has auctioned off hundreds of billions in loans already, with no results. Credit is tight and banks prefer to hold on to their money, they know they will need it.

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Japan has been dealing with the same problem for over a decade. From the Nikkei’s 1989 high of 38,916 the index has fallen as low as 7,831, almost 80%. None of the many government stimulus packages made a dent. Japanese banks (in general) hold on to their money like it’s going out of style.

Perception drives the market

Even though the “bailout committee” understands how important perception is to the fate of the equity markets (thus the rush on a decision), they underestimate the crucial role perception plays in the credit game. Yahoo reported via its Tech Ticker that a classic “run on the bank” killed Washington Mutual.

Customer’s perceived WaMu as unfit to safe-keep their money, a self-fulfilling prophecy that proved true, realized through a materialization of perception. Any smart bank that gets to exchange toxic loans from precious cash will want to hold on to it to protect against a “run on their bank”.

Banks hoping to raise cash through the proposed auction model “cash for toxic mortgages” might be in for a surprise. Until now, it has been close to impossible to value the bad debt on bank’s balance sheets. An auction might brutally expose how little those phony mortgage backed securities are worth. The auction might be a can of worms much better left closed and untouched.

The mother of all problems

True to form, the media and governing body of the U.S. have left an even bigger problem largely "undiscussed". How big is this problem? It is a $50 - $60 trillion problem. How big is $50 trillion? If there was such a thing as a million dollar bill, it would take 50,000,000 one million dollar bills to get $50 trillion. In comparison, the gross domestic product (GDP - the total value of ALL goods and services produced within a country) of the United States is $12 trillion.

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If you could earn one dollar per second, it would take you 1,585,500 years to earn $50 trillion.

The SEC has now promised to crack down on this "new" problem - credit default swaps. If the SEC is about ready to tackle credit default swaps, it's about time for credit default swaps to blow up (the SEC is notoriously late).

We will discuss the credit default swaps - which is what drove AIG into the hands of the government - in an upcoming issue of the ETF Profit Strategy Newsletter.

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