Monday, September 29, 2008

Confidence Game or Confidence Crisis?

The US House of Representatives just voted down the $700B “Wall Street” bailout bill. The US markets reacted in predictable fashion: the Dow Jones Industrials closed down -778, a drop of nearly -7%, while the S&P 500 index closed down -106, a drop of nearly -9%. Prices on US Treasuries soared as investors looked for a safe haven.

Even though the legislation had been hammered out between Dems and Repubs in marathon weekend sessions, enough of each party defected to the “nays” to defeat it. Predictably, there is predictable finger-pointing on both sides, each blaming the other for the failure.

My friends, though the bill was widely vilified as a bailout of Wall Street banks and bankers on the backs of US taxpayers, it could have gone a long way toward helping Main Street too. When Wall Street investors lose confidence in the game, they take their chips off the table. When Main Street investors lose confidence in the game, they line up at their local bank. The largest bank failure in US history occurred last week for that very reason – more than $16B of deposits had fled Washington Mutual in less than two weeks.

Now what?

Congress will try again, although at this point it is unclear if that will happen now, after the election, or be delayed until the next Congress. Someone has probably opened a book on this in Vegas already.

Until such time as this is addressed by our elected officials (as opposed to our selected officials – Paulson and Bernanke, et al), here is what I know:

· The FDIC still stands behind bank deposits up to $100,000 per depositer. Be sure you don’t have more than $100k in any one bank. You can view the rules at http://www.fdic.gov/

· The Treasury put up $50B last week to insure money market fund assets for the next 12 months. The $1 net asset value is safe for the time being. If you are concerned about this, switch your money market fund to one that invests solely in US Treasury obligations.

· Markets do come back. If the Dow can plunge -778 points in one day, it can rise +778 points in one day. For all of the gyrations the week of September 15th when Lehman Brothers filed for bankruptcy, the markets actually finished up for the week. If you needed the money in the near future, it wouldn’t be in the markets anyway, right? Right?

· In the near term, markets are likely to be choppy.

· Neither of the Presidential election campaigns can be counted on to add any sanity, but are more likely to use events to try and score with voters.

· I’m keeping the sensitivity dial on my BS detector set on HIGH – I suggest you do the same.

· Stay invested, stay diversified.

Questions? kimm@sweetwaterinv.com

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