Senate Passes "Bailout" Plan

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• Bailout (oops I forgot - economic stabilization) passed in the Senate last night. The much more civil body came together in a bi-partisan effort to grant the administration the power to buy toxic mortgages from bank balance sheets. The hope is that they added enough sweeteners to the bill in order to coerce those opposed in the House to vote yes.
• It was a big yawner in the market yesterday or was it? The Dow traded down only slightly, but only after recovering from a 100 point loss. The Nasdaq ended up losing a little more than 1% of its value. Investors apparently ignored economic data that showed significant weakness in the economy. Instead the focus was on the economic stabilization bill in Congress. We are in full spin mode now and don't you dare call this a bailout.
• Oil seems to be the only market acting rationally. There the price of crude dropped below $100 on an unexpectedly big jump in crude supplies. The Energy Department showed that crude stocks grew by 4.3 million barrels. Analysts were betting on a rise or fall of 1.5 million. That's a pretty big miss. Yes, refineries were down due to hurricanes, but there is obviously some heady demand destruction going on here. The big question is when will OPEC step in? My bet is that only radical nations will push for a big stand at $100. Other countries will be thankful for the run and look to protect prices in the $60-$80 range.
• The SEC extended the short selling ban until the Congress passes the rescue plan. Many are claiming that the ban is having little effect other than to increase volatility and transaction costs. These claims are disingenuous as we will never know the impact on the market had there been no short selling ban. Of course you cannot prove a negative, but I suspect without the ban we would be looking at more bank failures and stocks down more than 10% from where we are. The short selling ban is working. Those opposed are only so because the gravy train of manipulation ended. It should stay that way.
• The Warren Buffet/Ayn Rand Show continued yesterday with a $3 billion investment in General Electric (GE). Following the same structure of his Goldman Sachs (GS) deal, the oracle of Omaha now owns perpetual preferred stock paying 10% plus warrants that can be exercised at a price below current value. I say again that Buffet is not your friend. He gets his while the common get the shaft of dilution and the reduced earnings from paying interest to Buffet. I say no deal if I am a common GE holder. A weak economy will pressure the stock lower in my opinion.
• Stock futures are lower ahead of economic data. Yes the economic stabilization bill passed the Senate, but now the market will focus unabated on economic data. Did you notice the auto sales numbers from yesterday? They were horrific. We can expect more of the same for the next few months as the full extent of the crisis filters through the entire economy. Most, me included, believe that stocks will rally once the rescue plan is signed into law. That said, it may be an opportunity to sell stocks as it is difficult to see how companies can grow at the currently expected rate given the pressures on the system. Next week we will see earnings releases for third quarter. Look for plenty of misses and lots of downward guidance.

by The Freshman |  10/02/08  |  Stocks: GE, GS,