After the Bailout
Growth Report


Have You Seen This?

Have You Seen This?

                                   After the Bailout          

I can’t help but wonder if Monday’s bailout vote would have been different if the Dow Industrials were down 770+ points before they started the roll call.


Members of Congress that voted against the Paulson Asset Management plan seemed to be responding to political concerns. Apparently Capitol Hill phone lines were clogged with angry voters. And voting with President Bush isn’t the best career move these days.


Most in Congress agree that doing nothing will certainly lead to higher unemployment and foreclosure rates (and more angry voters). They wanted the bill to pass, but didn’t want to be on record as having voted for it.


I suppose that’s understandable. Whether you want to blame the Democrats and Nancy Pelosi for undermining the vote, the fact remains that the American public wasn’t sold on the bill. First of all, the word “bailout” is poor marketing. It gives the impression that Paulson and Bernanke simply want to help their banker buddies. And frankly, the terms of the bill didn’t do a lot to dispel that perception.


Bernanke argued against setting salary caps on CEOs who sold impaired mortgage-related assets to the government. And the plan to buy these impaired assets at above-market prices smells of cronyism.


                    Marking to Market: Fair Value Accounting


Over the last couple of days, the issue of “marking-to-market” is getting a lot of attention. Financial institutions are required to mark their assets to the market. They have to value their assets according to the price they’d fetch on the open market. Since nobody in their right mind would buy anything that even remotely looks like a mortgage backed security, those assets have to be carried on the books as a huge loss.


Makes sense. I can’t claim my house is still worth what it was 3 years ago. And I sure can’t adjust my brokerage statement to reflect what I think a stock should be worth. To let banks value their assets at anything other than what they can sell them for is utterly ridiculous.


Don’t get me wrong. I see the point. If banks can value their assets at a higher level, they suddenly have enough capitalization to raise their creditworthiness. Then they have the ability to sit on these mortgage-backed assets until the market (hopefully) improves.


The only problem with this is it’s not reality. It’s wishful thinking. And any move to suspend mark-to-market accounting is a sin of the exact nature that got us into this mess. Namely, that there’s no downside risk.


                                    Nothing but Downside


So Congress goes back to vote on some new version of the bailout plan Thursday. And given Monday’s record-setting decline for the Dow, I suspect Congress and their constituents are a bit more amenable to passing the bailout bill. I just hope Congress avoids the real bailout issues, like suspending mark-to-market accounting, and instead focuses on truly helpful measures like increasing FDIC insurance limits and expanding unemployment benefits.


Traders certainly seemed to be hopeful. On Tuesday The Dow took back more than half of its Monday losses. But it’s still going to be interesting to see what happens in the wake of a passed bailout bill.


It seems a pretty good bet that stocks will rally further, at least in the short term. But it’s hard for me to get fundamentally bullish about massive government intervention. The dollar is enjoying a little return to faith rally. But ultimately, $700 billion coupled with the massive amounts of cash being made available by the Fed seem more than a little inflationary.


And while we might stave off disaster, there are still fundamental problems with the US economy that won’t be fixed by helping banks with their mortgage related credit problems.


                                   Where’s the Money Going


Monday was a very interesting day, trading wise. While the total point losses were huge, some sectors did very well. Biotech and alternative energy rallied strongly. Both sectors are about as far from mortgages as you can get. But they do depend on investment, which is a little incongruent.


In any event, Pacific Ethanol (Nasdaq:PEIX) shares shot up from $1.30 to $2.08 in the final 30 minutes of trading. Of course, it gave most of it back on Tuesday.


Beacon Power (Nasdaq:BCON) and Quantum Fuel Systems (Nasdaq:QTWW) made a similar late day jumps only to fall back. Only Ocean Power Technologies (Nasdaq:OPTT) managed to hold its gains.


In the biotechs, Altus Pharmaceutical (Nasdaq:ALTU) and Helicos Biosciences (Nasdaq:HLCS) gave back their Monday afternoon gains.


Gold prices have been extremely volatile. But not much has changed with the miners, which means they aren’t doing well. Oil prices seem to be highly correlated to the bailout plan. Traders appear to believe the bailout will mean stronger economic activity and hence more demand for oil.


Now I hate to keep saying the same thing over and over, but I’m still a big fan of the MLPs. I first mentioned these stocks in my column on September 17. One of the stocks in the free report I offered, Eagle Rock Energy (Nasdaq:EROC) opened at $10.41 that day. 2 days later it closed at $13.75.


Today, Eagle Rock closed at $10.53. Now, I’m not going to predict another 32% run in two days. But I won’t be surprised to see it move higher when the bailout bill passes.


Also, my special report is still available here.


Best regards,


Ian Wyatt

Chief Investment Strategist

Growth Report


Posted 09-30-2008 5:15 PM by Ian Wyatt


traderdad39 wrote re: After the Bailout
on 10-01-2008 2:12 PM

Hey Ian, really like the term Paulson Asset Management plan. In essence, that's what this is becoming.

I'm not real keen on the government taking over the market (though they already did it with Freddie and Fannie, AIG, and to an extent Bear Sterns), but at this point we really need a guiding hand.

Definitely right about the political game here. Seems like Pelosi killed it right before the vote. She's smart though. By my reckoning she had one of two agendas in mind:

Force fence sitting Republicans to vote against it and when the economy goes further south she's got a strong pitch for the elections.


She knew this was a tough sell for may Congressmen so she poisoned it going in by giving them a reason to back out knowing that the market would collapse on the news. Then people would start calling to complain about their 401(k)s and pension funds and would push through this legislation.

Really, either way she wins.

I don't like her, but respect her smarts.