Daily Investment Interpretations

October 3, 2008

2008-10-3  The house passed the now-$800 billion bailout bill today, and the stock market fell. After rising more than 300 points before the bill was signed, the Dow ended the day down 157.47 points at a new low for this bear market 10,325.38. The Nasdaq fell 29.33 points to a new bear-market low of 1,947.39. The S&P 15.95 to its new bear-market low of 1,099.23. Go figure! The VIX closed at the very high level of 45.14. This is clearly a financial crisis of epic proportions. While this bailout package is projected to avoid an utter collapse of the world's economic system, no one is tipping it to avoid a further fall in housing prices or a reduction in the severity of the gathering recession. All anyone can say is that it would be worse without this.
    A few weeks ago, the insurance giant, American International Group (AIG), was rescued by the Federal Reserve with an $85 billion loan in return for a controlling interest in the company. Now the company has spent $61 billion, with $54 billion for collateral (in other words, partial payments) on its debts, and will soon be seeking more money. $61 billion is a pretty high burn rate for a few weeks' time. There's an estimated $46 trillion ($46,000 billion) in credit default swaps out there, though they certainly aren't all owned by AIG. Still, only a few trillion dollars owed by AIG would surely tax the Fed's ability to pay (if that's what's really what AIG must cover). And AIG is only one of the perps. There are the various banks, brokerages, and insurance companies who may soon be bellying up to the Fed's loan window, not to mention major manufacturers like Ford, GE, and GM. What we're seeing so far may only be the beginning.
    It's been hard to know whom to believe in this market malaise. so far, though, the pessimists have called the market trend correctly. 
                                                    (To be continued tomorrow)    
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Rotten Economics and Rotten Teeth - Richard H. Serlin
The Problem Is Still Falling House Prices - Feldstein - WSJ.com
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