Extricating Market Uncertainty | Fundamental Analysis

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Extricating Market Uncertainty

Friday, 19 September 2008 10:10 Written by S. Wade Hansen

We learned today that bailing out individual firms was just not going to get the job done. The crisis we're facing in the global financial markets is systemic. It is bigger than any one firm. With that thought in mind, the U.S. Treasury and the Federal Reserve have taken matters into their own hands, and investors on Wall Street are loving it. Here's the short list of the huge steps Henry Paulson and Ben Bernanke have orchestrated:

- A call for the U.S. Congress to authorize the Treasury to use hundreds of billions of dollars to take toxic debt off of financial institutions' books

- Tapping the $50 billion in the country's Exchange Stabilization Fund to insure money-market mutual funds

- A short-term ban on short selling financial stocks

- An $85 billion bail out of American International Group (AIG)

- An increase in the Fed's swap lines with other central banks to $247 billion to inject U.S. dollars into the global system

The problem with trying to bail out one firm at a time (or not bail out firms, as was the case with Lehman Brothers) was it didn't remove the uncertainty from the markets. It simply delayed the total market collapse as investors sat around wondering which firm would need a bail out next.

Markets hate uncertainty. And since nobody could trust a word any of the leaders of these large financial companies were saying as they tried to assure investors that they were well capitalized and so on, the markets continued to pound down on financial stocks.

Today, the markets finally got what they were looking for. If Paulson and Bernanke get the approval they are looking for, it will be bail outs all around (with the U.S. tax payer picking up the tab of course).

Not surprisingly, the companies whose stock is benefitting the most from all this are the financial companies. Take a look at the charts of Bank of America (BAC), Citigroup (C) and Washington Mutual (WM). Each of these companies have seen a 20+ percent increase in their stock value in one day.

Of course, the market as a whole loved the announcement of the WE WILL SAVE EVERYBODY bail out as well. The S&P 500 jumped a full 3.3 percent in the first 5 minutes of trading today.