Over the last 12 months bear market rallies have duped global investors. I doubt any rally that follows the passage of the Paulson plan this week will be any different. That’s because credit indicators remain stuck in the mud.

In my eyes, this bail-out is necessary. Without it, the rapidly deteriorating confidence we’ve seen lately will probably morph into a massive credit-induced crash. It’s totally naïve to believe another outcome is possible. The markets, however, don’t like a bailout installment plan, proposed by Congress last night. Paulson prefers to throw everything at the crisis right away.

One positive development about this bail-out, which is basically what Jim Rogers calls “Welfare for the Rich,” is that it should allow troubled banks to dump distressed mortgage-backed securities into RTC II or the second version of the 1990s Resolution Trust Corporation. This will go a long way in alleviating bank credit stress and opens the lending spigots again. It’s not a surefire prescription to economic health; many companies will dump these toxic securities into the lap of the American taxpayer as most of these instruments eventually stay depressed with little or no bids.

For the lack of a better adjective, these securities are “garbage” and unlike the first RTC in 1989 where real assets were depressed (e.g. real estate), this pool of securities is really comprised of trashy securities with very little organic value. The synthetics representing mortgage-backed securities are going to have a very hard time finding a market among larger players.

I’ve got to wonder if these securities are so cheap then why haven’t any prominent hedge funds or private equity funds taken the plunge yet? What about Warren Buffett, a deep-value investor? The market knows these securities are almost worthless; it’s a con-job believing the taxpayer will really ever make a dime on this deal.

But while one segment of the market finally gets unclogged by this gargantuan bailout, others will remain stressed. The bail-out will not help the trend in unemployment, housing, corporate earnings or rising individual and corporate defaults. Each of these markets continues to deteriorate in late September. A bail-out won’t help.

I continue to carefully track the TED spread, a key interest rate indicator. The TED spread measures the difference between 90-day Treasury bills and 90-day LIBOR rates. This rate started the day near an all-time high of 3.00% -- dangerously elevated and suggesting we’re nowhere near the end of this credit squeeze. While stocks remain highly volatile and fluctuating like a yo-yo since last week, the credit markets are deteriorating. This, despite the fact the market has already discounted the bail-out bill.

Since the onset of the credit crisis in late July 2007, we’ve experienced three big stock market rallies (September, March, July) and one credit market rally (March). Each of these rallies turned sour, ultimately leading to sharply lower values. These were not rallies to buy but rather great opportunities to sell stocks amid a brief counter-trend bear market rally.

So what will finally trigger a “buy” signal? That’s a subjective question because every analyst or investor looks at different indicators. For me, it’s all about interest rates. I’d like to see LIBOR rates plunge, the TED spread compress and oil prices head below $100 a barrel. In the absence of these three key indicators I’d continue to sell into any market strength.

Have a nice weekend. See you on Monday.