So Much for the Bailout

On Monday morning, it looked as though Congress was going to pass the bailout bill, and the S&P 500 opened at 1,204. Here we are on Friday afternoon, and Congress has indeed passed the bailout bill; the S&P closed the week at 1,099. To get back to its Monday opening level, it would need to rise by 9.6%.

The bill, clearly, is not enough to turn anything around -- not the banking system, and certainly not the entire economy. If it does restore confidence in banks, it will do so slowly: don't expect the TED spread to tighten sharply on Monday. The best-case scenario right now is a long and painful recovery. The worst-case scenario starts with more financial-institution failures, probably in the insurance industry, and continues with a series of systemically-devastating falling dominoes, with the Fed and Treasury looking on powerlessly from the sidelines.

I don't know how it's possible to hedge against such a thing, but I do know that I wouldn't want to be in equities were it to happen. Stocks might have fallen a lot, but they're not yet cheap.

If you're looking for a safe haven in these difficult times, I think that bank deposits and CDs (use CDARS if you're over the $250,000 FDIC limit) are about as safe as you can get, and very liquid. ING Direct offers rates from 3.75% to 4.50%, depending on maturity: in real terms, you're preserving your capital.

Alternatively, you might be tempted to jump in to the stock market at these levels. In which case I wish you the best of luck. There's certainly a lot of upside there. But you have to have a strong stomach for losses and volatility. Whatever happens, I can guarantee you a bumpy ride ahead.

Comments

[raising4dau...:]

Wow! A bumpy ride in the stock market during uncertain economic times? With insight like that, SA should be charging for subscriptions.

2008 Oct 04 09:45 AM

[venividivici:]

America is hoplessly in debt and the government's answer to the credit crisis is to throw another $800 billion it has to borrow or print at the problem.
Virtually the whole of the financial sector, the car industry and the airline industry are insolvent but they are being kept on life support by the government because most of the major players are considered to be too big to fail.
It is virtually impossible to be elected to office in America unless you offer tax cuts and increased services. And that is because
Americans simply refuse to take any of the nasty medicine needed for the country to even start to dig itself out of this unholy mess.
As a result America and Americans get poorer by the day and that process will only accelerate into the future.
When I look at the stock market, it is clear that it's being driven by a lot of demented gamblers, some of whom do not give a toss what damage their actions cause as long as they can make a buck today.
America's future could hardly look darker.

2008 Oct 04 11:32 AM

[Crookedwood:]

The reaction of the market is great as it confirms the depth of he problem and that government is only part of solution. Bumpy ride ahead yes, and that leads to great opportunity. Buy and hold many good stocks. Manage the process by selling into the up days and continue to buy on the down swing. Three years from now you will be up 30%.

2008 Oct 04 12:40 PM

[longk:]

700B = unwarranted exposure of taxpayers to underwrite the failure of awful spculators and is opposed on principle

add 150B in pork, and it saves us all! i wish the the naysayers had just sold out their principles a little more cheaply and spared us another 150B of unfinaced debt.

2008 Oct 04 01:14 PM

[look closer:]

Felix, You will need to focus on improving your contribution in the future. For heavens sake, you haven't told us anything here, we read all this daily. Give us something to sink our teeth into -- even if it's only into your blind enthusiasm, this is like a sloppy joe, messy, ill-conceived and full of indigestion.

2008 Oct 04 06:24 PM

[Hedged In:]

I totally disagree -- I didn't know about CDARS, and that alone made this article worthwhile.

Thank you Felix!

2008 Oct 04 07:31 PM

[LarrySF:]

Why would legal reserve life and annuity insurance companies be the next in line? Can you defend your position considering their general account reserves?

2008 Oct 04 08:22 PM

[User 240862:]

Throw the rascals out!
Vote any third party, or write in a candidate of your choice!
The Dem/Rep-Rep/Dems should go the way; of Mexico's PRI!
"We The People" have forgotten that "We are the purpose; not D.C./NYC 'Aristocracy'!
Roy Stewart,
Phoenix AZ

2008 Oct 04 09:02 PM

[robert.b.fe...:]

Warren, Buffet offered some sage advice to be be brave when others are fearful and be fearful when others are brave. We all know that catching falling daggers by the handle is tricky business not for the faint of heart. Warren's advice seems to indicate that now is a time to be brave. He recently took large stakes in Goldman sacks and GE at very favorable rates. As a contrarian investor I'm bargain hunting albeit carefully. I'm not as bold as Warren and wouldn't touch Goldman Sacks sacks with a ten foot pole. However I am seriously considering initiating a position in GE. Current conditions are creating bargains so we may all want to start being brave.

2008 Oct 05 09:30 PM