The Bailout Package Passes and Markets Fall | Fundamental Analysis

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The Bailout Package Passes and Markets Fall

Is the Worst Over? Is a Recession Coming? Is a Recession Here?

The U.S. House of Representatives voted today to pass the $700 Billion Bailout Bill that the U.S. Senate filled with pork and passed on over. So now what?

If this was a plan that everyone thought was going to do the trick and solve the credit crisis, wouldn't you think the TED spread would have actually responded positively to it and narrowed? I know I would. Instead, the TED spread is still wider than it was before the U.S. Senate or the House passed the bill.

ted-spread

Source: Bloomberg

If this was a plan that everyone thought was going to do the trick and solve the credit crisis, wouldn't you think the stock market would have actually responded positively to it and gone up? I know I would. Instead, the Dow Jones Industrial Average closed DOWN 157.47 points (-1.50%).

Folks, the worst is not over. Take a look at the letter 200 economists sent to Congress on Wednesday, 24 September 2008, and pay particular attention to point #3:

"To the Speaker of the House of Representatives and the President pro tempore of the Senate:

As economists, we want to express to Congress our great concern for the plan proposed by Treasury Secretary Paulson to deal with the financial crisis. We are well aware of the difficulty of the current financial situation and we agree with the need for bold action to ensure that the financial system continues to function. We see three fatal pitfalls in the currently proposed plan:

1) Its fairness. The plan is a subsidy to investors at taxpayers’ expense. Investors who took risks to earn profits must also bear the losses. Not every business failure carries systemic risk. The government can ensure a well-functioning financial industry, able to make new loans to creditworthy borrowers, without bailing out particular investors and institutions whose choices proved unwise.

2) Its ambiguity. Neither the mission of the new agency nor its oversight are clear. If taxpayers are to buy illiquid and opaque assets from troubled sellers, the terms, occasions, and methods of such purchases must be crystal clear ahead of time and carefully monitored afterwards.

3) Its long-term effects. If the plan is enacted, its effects will be with us for a generation. For all their recent troubles, America's dynamic and innovative private capital markets have brought the nation unparalleled prosperity. Fundamentally weakening those markets in order to calm short-run disruptions is desperately short-sighted.

For these reasons we ask Congress not to rush, to hold appropriate hearings, and to carefully consider the right course of action, and to wisely determine the future of the financial industry and the U.S. economy for years to come."

This bailout package is going to come up woefully short, and the long-term effects are going to be with us for some time. And let's face it, the current state of the economy isn't that great. We got a report this morning from the Bureau of Labor Statistics that the U.S. economy lost 159,000 jobs in September—bringing the grand total for 2008 up to 760,000 lost jobs. We're in a recession

So what's my point here? My point is we have no guarantee that this bailout package is going to do anything to lift the markets. In fact, after today' performance, it looks as if the bailout package will have little effect on the markets—except in the case of some financial stocks (see John's article).

As you are looking to get back into the markets, consider using Relative Strength as a tool to identify which sectors in the market are starting to recover the earliest.

Also, consider Diversifying into Other Markets using exchange-traded funds (ETFs).

On a funnier note, here's a great political cartoon representing what's coming.

economic-crisis