Wednesday, October 01, 2008

Congress' Trying Times

If at first you don’t succeed…add tax breaks to legislation for assurance of passage. That’s the tactic Congress is now using to push through the ill-fated $700-million Wall Street bailout plan.

If you sold the markets short on Monday, you were brilliant. If you bought stocks on Tuesday, you look like a freakin’ Genius…

The Dow Jones Industrial Average closed not too far from its apex for the day, up 485 points to 10, 850, for a gain of 4.7%. If you’re keeping score for the month, the Dow lost 6% during September.

The S&P 500 Index gained back 58 points, or 5.3%, although it’s performance for September also resulted in a loss--of 9.2%.

The Nasdaq Composite made up 99-points to 2,082.3, worth 5%. But, for the month, the Nasdaq sustained steepest loss last month, shrinking in value by 12%.

Think about this, ladies and gentlemen:
The markets lost between 7 and 9% on Monday, depending upon the exchange. Yesterday, market participants made between 4 and 5%--buying back about half of what was lost.

How did they do it?
They bought when everyone else was selling.

Do not let this crisis of credibility blind you or paralyze you. Yes, there are problems to be dealt with—for my part, I would rather Congress get out of the way and allow Darwinian economics to purge the weak and infirm from the financial gene pool.

There have been a lot of comments made about how if the banks aren’t “saved,” financial calamity will ensue. It might, too, for those who are over-extended and over-leveraged. Pay attention to which kicked dog is yelping loudest. As Marketwatch noted, “On average, representatives that voted for the Wall Street bailout package received more campaign contributions from financial firms, by a 2-to-1 margin, than members who voted against the bailout." There have been comments that the United States is going to enter a second, Great Depression if the bailout plan isn’t enacted. The people who are telling you that have a stake in the game.

There are several important differences between the conditions that existed just before The Great Depression and now: Unemployment then was 25%; it’s barely 6% now. Banks failed then because there was no insurance for depositor; your money is guaranteed up to $100,000 per depositor by the FDIC—and one of the terms of the new-and-improved plan may hike that to $250,000.

(In Ireland yesterday, the government stepped in and guaranteed all depositors, dollar for dollar, 100%.)

One major difference from then and now: the collateral held then was real; much of it today is only on paper—and much of that is onion skin, not robust vellum.

By the way—Loren Steffy has an excellent piece in today’s Houston Chronicle examining how Jesse H. Jones played a part in the salvation of Capitalism in the ‘30’s—it’s a recommended read.

No matter what Treasury does—buy up skanky loans to re-peddle elsewhere, or simply recapitalize banks—there will have to take place a purging of the system from the financial binging that has been going on for the past two years.

Should you be freaking?
Should you be concerned—yes—and you should pay close attention to what goes down, because we’re all going to have to live with it for many years to come.

One area to be watching closely: Credit Card Debt.
Depending upon whom you ask, that’s going to either be the next, great implosion in the financial sector—or at least will result in huge adjustments in terms for all of us.

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