The last three weeks have leaped frog the previous as the new all time head scratcher. We finally got to Friday and the House’s vote on the bail out bill. The market was up 300 Dow points as the votes needed to pass ticked across the TV screen. The moment the bill passed the market began careening and ended up down 157 points. Not a good sign for the coming week.
According to some very informed players, former GE CEO Jack Welch and Warren Buffet among them, the bill was necessary to unclog the credit markets so banks could comfortably lend to businesses and other banks. This will hopefully be the initial data point that leads us out of the recession the government says we are not in. It appears to have brought some socialistic dynamics into play with the government having more control than most capitalists would prefer.
What was most galling about the process was the pork attached to the bill. The way we look at it is pork, greed, self-serving stances, and conflicts of interest are what got us into this mess. So not only are we going to put the solution into the hands of those who are responsible for the crisis, they are attempting to solve the crisis with the same tools and methods that got us into the crisis! How do they look at themselves in the mirror in the morning? Probably no eye contact?
If this series events does not get the American public out of their seats and demand changes, we think we as a country are doomed to a drawn out and painful process of becoming not a super power quicker than we thought we would. It is fascinating that this crisis and spotlight on our elected officials has come at the height of an election cycle. The sad reality is that one; we are responsible for the perverted playing field Washington has become and two; every country deserves the government they get. Accountability and responsibility are what is called for, pointing fingers is pointless. There we got it out and we're off the soap box.
Many who follow the banking industry closely are saying there will still be several more failures. This does not bode well for consumer/investor confidence. Trying to fix a major break in the financial system and instill confidence is a tight rope even the Wallenda’s would avoid. Even if the bail out works fairly well, the long term muddling through recovery we have mentioned several times this year appears as more of a probability. That is not a backdrop for a new bull market.
The good news is that October has been famous for bottoms in the stock market, the bad news is that we are still in the first week. We thought that the short selling rules would put a bottom into the market and it did, for two days. In our view the next bullets the policy makers will load into the chamber will be the reinstitution of the uptick rule (aimed again at short selling) and a collective effort of the world’s central bankers in cutting interest rates and attempting to re-inflate. Wait a second, isn’t that what got us into trouble in the first place?
We listened to several pundits say this week that it is too late to get out and now is the time to buy. These are the same guys that sensed no danger over the last year and after listening to their advice all we can say to them is “I have no more money to buy with!” Their cavalier advice about other people’s money we think is irresponsible. Many of them represent mutual fund companies or brokerage firms that have no choice but to sponsor optimism for the long term in order to create more sales of their products. Chances are their products are less appealing if they talk about the problems in the current environment. In our business it is call “selling your book” meaning you are talking positively about assets that you currently own. It is always a good idea to know what “book” the talking head you are listening to represents.
The odds that retreating to the lows of 2002(another 20+% down) have increased in the last few months. The reaction Friday afternoon and the collective vulnerability we see in the major sectors adds to those concerns. This is a good time to have a conversation with your financial advisor about your strategy going forward. Now the question is can this week top last week?
PS We have heard some rumors that the alleged manipulation that has gone on in the stocks of our financial institutions has ties to terrorism. If it is true the regulators better be at the top of their game, because that strategy appears to me to be much more effective than toppling a few buildings.
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