Monday, September 29, 2008 2 comments ++[ CLICK TO COMMENT ]++

Big Sell Off On Failed US Government Bailout...Could Be A Short-Term Bottom

Needless to say, big sell-off in the market due to the US government voting down the bailout. Note that the sell-off is with short-selling bans of many of the key stocks on the exchanges. The market could have plunged even further if short-selling was allowed. This could be a short-term bottom but don't rely much on my short-term calls...

(source: The Wall Street Journal,; powered by

Although it was a surprise to me and the market, I guess it was always possible that the US government bailout would be voted down. If people like me, who has almost all his wealth invested (my net worth is very low though,) were skeptical, it's even harder to get the politicians on board. I am actually OK with the bill that was finalized. It's nowhere near perfect but it did address my two concerns: (i) immense power for the Treasury, and (ii) penalties for mistakes. The New York Times reports the final vote as the following:

The vote against the measure was 228 to 205, with 133 Republicans joining 95 Democrats in opposition. The bill was backed by 140 Democrats and 65 Republicans.

I am actually surprised that the Republicans voted down this bill. I would have thought that any failure would be due to Democrats but George Bush is a lame-duck president and does not have much influence anymore--even within his party. This bill will pass, in one form or another. Both presidential candidates support the bill, and it shifts a chunk of the spending to the next administration so it isn't as monumental as it seems. It'll get modified and re-submitted but it will only be a partial solution to the current financial crisis. Anyone expecting the bailout to save the markets are going to be dissapointed.

Having said all that, we may be near a short-term bottom...

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2 Response to Big Sell Off On Failed US Government Bailout...Could Be A Short-Term Bottom

September 29, 2008 at 5:43 PM

Hope of organized and sustained government intervention is what kept the market up (sort of) after the Lehman collapse. That hope is basically gone. I would expect a further fall, especially for US indices which are starting to look more and more overvalued.

My guess, but I'm not so good at predicting short term movements either, is a drop by at least 20% from here for the major US indices over the next few weeks. That might make the House reconsider, if not, well how does 30% dwon from here sound?

Honestly I never expected they would be insane enough to do this, Dutch main index now down over 40% from last year and falling fast, I see the US indices doing something similar. Investors need hope, and equity investors are often happy with just a little bit, but
I see no hope in the short term.

If the doomsters are right and corporate credit dries up over the coming months, all that "Financial Armageddon" talk will suddenly not sound so hyperbolic.

September 29, 2008 at 11:08 PM

I don't see the market dropping another 20%. Maybe some select markets in foreign countries or some select sectors but not the whole market. I can see it fluctuating wildly--up and down 10%--but don't see a continued decline.

If the market needs government intervention to keep it from crashing--that's what you are implying--then you better not own anything. That's nothing more than investing on pure speculation. I have an inverse fund that benefits from a decline but I am still long other stocks based on long-term merits rather than the expectation of government intervention.

I think the bailout will pass but I still maintain my view that it will only have a minor impact. It is more effective if they funnel money to the homebuyers with problems (but not those who clearly can't afford to own homes) or to those banks with capital shortage.

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