Market Update – Emergency Economic Stabilization Act of 2008

Good evening to all.

If you actively follow the markets, then this has been a weekend filled with high drama for you. I know it has been for me. I have attempted to follow the developments surrounding the ‘bail-out’, ‘rescue bill’, ‘buy in program’, ‘TARP’, or as it is known tonight, the Emergency Economic Stabilization Act of 2008.

Congressional leaders appeared before the media this evening, in what could have been confused as an Academy Awards acceptance speech, thanking the other members of their party for all their hard work.

What began as a 3 page document submitted by Hank Paulson, has now grown into 110 pages, and has a new name. I am still reading the entire document, but irrespective of the additional content, the plan maintains the core component:  the authorization to use $700 Billion of taxpayer funds to purchase ‘distressed’ assets.

The bill now goes before the full house for a vote, and that is likely to take place tomorrow. The entire bill in its final form can be found at the following links:

(Documents require Adobe Acrobat Reader)

• Emergency Economic Stabilization Act of 2008
• Summary of Emergency Economic Stabilization Act of 2008
• Section-by-Section of Emergency Economic Stabilization Act of 2008

The core objective of this bill, as originally submitted by Hank Paulson, is unchanged.  Which is why I remain very concerned about the long term implications this bill may impose upon the greater economy. There are some disturbing parts of this bill that are highlighted below.

SEC. 128. ACCELERATION OF EFFECTIVE DATE.
Section 203 of the Financial Services Regulatory Relief Act of 2006 (12 U.S.C. 461 note) is amended by striking ‘‘October 1, 2011’’ and inserting ‘‘October 1, 2008’’.

Section 128 changes the effective date of a bill passed in 2006 which will now become effective this week. The part of that bill being rushed into law is as follows:

“Federal Reserve Banks are authorized to pay banks interest on reserves under Section 201 of the Act. In addition, Section 202 permits the FRB to change the ratio of reserves a bank must maintain relative to its transaction accounts, allowing a zero reserve ratio if appropriate. (emphasis added) Due to federal budgetary requirements, Section 203 provides that these legislative changes will not take effect until October 1, 2011.”

A zero reserve ratio sounds to me like a time bomb for the financial institutions and it remains to be seen how this plays out. But I must say this is concerning to me.

SEC. 132. SUSPENSION OF MARK-TO-MARKET ACCOUNTING.
(a) AUTHORITY.—The Securities and Exchange Commission shall have the authority under securities laws (as such term is defined under section 3(a)(47) of the Securities Exchange Act of 1934 (15 U.S.C. 78c(a)(47)) to suspend, by rule, regulation, or order, the application of Statement Number 157 of the Financial Accounting Standards Board for any issuer (as such term is defined in section 3(a)(8) of such Act) or with respect to any class or category of transaction if the Commission determines that is necessary or appropriate in the public interest and is consistent with the protection of investors.

Suspension of mark-to-market accounting is a bold and dangerous move, in my opinion. This basically removes any valid method of placing a true value on anything. How is anyone to properly gauge the true financial health of any institution, with this kind of measure?

The reaction in the futures market, at the time of this writing, is negative. S&P futures are at 1205 (Friday’s close 1214). Many media analysts claimed that the market would experience a ‘relief rally’ on the news of the bill moving forward. So where did the relief rally go? Was the impact of this bill already priced in the market? Could it be that more people are realizing what this bill could mean for the broader economy? Or, are people just waiting for it to become law before jumping in?

No matter the short term reaction of the market, we remain bearish on the long term outlook.

I was going to produce a new video this evening with updated charts, but you must forgive me as I am slightly under the weather, and my voice is not what it should be. The two most important charts I will be watching, to gauge the market reaction, is the S&P 500 and Gold. I will also be watching the currency markets and credit spreads.  For the overall market impact, it will be the S&P that most traders will be carefully watching.

 

  

Late news coming off the wires tonight…

REPORTEDLY AN AUSTRIA CENTRAL BANK OFFICIAL SAID THAT HE BELIEVES SOME CENTRAL BANKS ARE MULLING GOLD; SAYS CENTRAL BANKS WITH NO GOLD RESERVES COULD BE BUYERS.

That is an ominous sign if factual.

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