Market Prospects: Bailout Vote

It has been a busy time for all of us managing investments.

The events of this week hit two subjects where we have some special expertise.  That does not mean, of course, that we will be correct, but our odds are better than most.

With respect to the so-called "bailout" vote, we expect that a winning coalition has finally been forged.  Barring some surprising new events, we expect the latest variant of the Paulson Plan to pass the House on Friday, after passing the Senate today.

We expect that this will be a bullish event for the market, especially for specific sectors.  These include sectors that we have highlighted in our TCA-ETF reports, like regional banks (IAT).  It does not mean that traders on the sidelines should act right now.

We have Friday's employment report, for example, and that will be announced before the House vote.

There will be plenty of time to analyze how this will be implemented.  An important element is the SEC move to adjusting fair market valuation to reduce reliance on mark-to-market when the market is completely illiquid.  We have been all over this problem, something that led to a death spiral for financial firms.  A search on our site shows about 80 hits, with almost nothing on MSM sites until the last week or so.

Those who did not understand how FAS 157 was an important contributing cause to the credit problem are still in denial.  There will be excellent opportunities for those who grasp the significance of the changes.  More later.

For the record, this is the first time we have predicted passage of the legislation.  We shall see.

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  • gaius marius October 2, 2008  
  • Jeff October 2, 2008  

    Gaius – I commented at David’s site, and I’ll get around to writing more here.
    David is a valued expert on many subjects, so the question is how he is helping us here. He has a viewpoint that people who hold illiquid securities have to face the consequences. He does not seem to appreciate that many businesses, including most banks, do this by definition.
    I have suggested that he engage specific people who show why this does not work. They are holding the security to maturity and getting the cash flow. That is not how their holdings are marked. Some regulator tells them that they must raise more capital. Meanwhile, the Street puts a bulls-eye on them.
    Most importantly, I see no vision of a solution in his comments.
    My hope is that he will take another step to help us on these fronts.
    A good question, as usual.