Bailout Would Still Mean a Fragile US Economy

By: Paul_J_Nolte

Pre NO Vote Commentary - Wall Street's hopes and prayers have been at least partially answered, as the leaders have agreed on a bill that will be introduced into the House this morning. $250 billion now, another $100 if necessary, then the final $350 would have to go through Congress. What is left out of the bill is some real assistance to the economy and actually opening the loan process. The removal of the bad loans does nothing to the balance sheets of ailing banks as the equity has already been written down; the mere buying just removes the asset and does not add any equity back into the bank.

Not surprisingly, the early line from Wall Street is rather muted. Back at the economy, the durable goods orders hit the skids, as the loan crunch is beginning to spill over into the “real” economy. Jobs are the next up on Friday and based upon all the layoffs already announced and done, we could see over 100,000 jobs lost in this report. The quarter will be ending on a weak note and if past is any prologue, October could be the month that actually kills the bear – but not before some scary trading that could push the markets lower still before the clouds part. October will also kick off the quarterly confessional with the beginning of earnings season. Should be interesting as the combination of a slow economy and tight lending could be deadly.

An interesting week in the markets to say the least, as both the NYSE and OTC markets suffered their worst week (in net decline terms) since early March. On the NYSE, it marked the fourth consecutive net losing week and in each week, the net number of decliners was more than the prior week. Many of our daily indicators are nearing buy territory, however the weekly data remains a ways away and has turned lower and recovering with the market recovery since July.

The markets could be setting up for a lower overall price, but better technical conditions that would serve as a “divergence” that gets market seers excited. If we look at the longer-term monthly data, it would point to an “ultimate” bottom sometime in the first or second quarter of next year – assuming that the current decline continues to unfold. As daylight hours begin to fall, anxiety grows. Any market rally that ensues from this point should be used to lighten equity holdings. While October can kill a bear, this one is merely celebrating its first birthday.

Bond investors should be excited about the bailout plan, but not that it will line your pockets with any new found wealth. While the bond model remains in buy territory, indicating yields should fall from here, the bailout package means that the Treasury will be issuing more bonds in the months ahead to shore up their very battered balance sheet – ultimately putting pressure on yields, forcing them higher as supply is likely to be well ahead of demand. Depending upon how the plan is being received – well and yields rise, poorly and yields decline. Longer term, we believe the economy will win out and with a still fragile economy (and likely poor economic data on Friday) we still believe rates are destined to go lower over the weeks ahead, even though they may rise initially on the bailout plan getting passed.

By Paul J. Nolte CFA
http://www.hinsdaleassociates.com
mailto:pnolte@hinsdaleassociates.com

Copyright © 2008 Paul J. Nolte - All Rights Reserved.
Paul J Nolte is Director of Investments at Hinsdale Associates of Hinsdale. His qualifications include : Chartered Financial Analyst (CFA) , and a Member Investment Analyst Society of Chicago.

Disclaimer - The opinions expressed in the Investment Newsletter are those of the author and are based upon information that is believed to be accurate and reliable, but are opinions and do not constitute a guarantee of present or future financial market conditions.

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