The vote failed

Over the weekend, the announcement came that an agreement had been reached on the "bailout" plan for the financial services markets. The only thing left to do was to get it voted on by the House of Representatives today, and the Senate later in the week.


The markets opened weaker this morning as the world awaited the vote in Washington. As the vote was being tallied, it became clear that it was not going to pass. The markets rapidly sold off, falling over 700 points, but the slide quickly reversed as discussion turned to whether or not that meant the deal was dead. Well, for now, it looks like the deal is off the table.




The financial rescue plan is a needed measure to provide some breathing room to financial services companies. Contrary to popular opinion, this is not about rich Wall Street bankers getting richer, or even saving them. It's about bringing stability to a credit system that is on the verge of collapse. As things stand currently, credit has virtually dried up. Banks are not lending anyone, especially other banks. Consequently, business and personal lending through large banks has become pretty much non-existent.


The news was not taken well in the markets. At the end of the day, the Dow was down 778 points, the S&P 500 was off 8.79%, and the NASDAQ Composite lost 9.14%.

I was asked by a client earlier today "what, if anything, should we be considering as our next move?" With the market taking a hit like this, we have to revisit the fundamentals of our holdings. We sometimes hear "experts" saying that in volatile times that the fundamentals don't matter. We believe that in volatile times the fundamentals matter the most. Just because a stock has fallen doesn't mean it's a good deal, and by contrast just because the stock's price has held up doesn't mean we want to continue to hold it. In fact, we removed one of our core holdings from portfolios today. The company is one that's well positioned, but was fully priced and vulnerable to the downturn. We had good gains in the holding, and we wanted to protect those gains, lessen exposure, and raise cash with which to purchase other assets. So we sold the stock, and we're now looking for something with which to replace it.

We are going to see continued volatility as the uncertainty surrounding any financial services plan remains heightened. This volatility will change direction at some point, and gains will be made. In the meantime, we continue to manage the risks as we see them.

If you have questions, please feel free to e-mail us.

The Week in Review

It's been a long week...

Last Friday, the markets took heart that a fix was in the works. The proposal on the table was for the government to purchase $700 billion worth of assets from struggling financial companies. Bernanke and Paulson both spent this past week testifying first in front of one group of lawmakers, then another in an effort to persuade Congress to pass legislation approving the deal. Depending on who was speaking and (it seemed at times) the tone of their voice, the market swung one way or the other. The President even interrupted prime time television programming to weigh in on the matter.

Seemingly every politician did his or her absolute best to make sure that they got airtime. In many cases, they should have remained quiet, as their pontification did not help matters, nor even lend anything of importance to the discussion. John McCain and Barack Obama both flew back to Washington to lend their respective weight to the discussions.

Thursday afternoon, it appeared that a compromise had been reached, and the markets took a breather from their slide. The Dow Jones Industrial Average climbed 197 points.

Within hours, the deal was back off the table, and markets around the world went back into protection mode. This morning it was announced that Washington Mutual (WaMu), a bank founded over 100 years ago, failed and was taken over by the Office of Thrift Supervision (the Federal agency that regulates thrift savings companies). They then turned around and sold the company to JP Morgan for $1.9 billion, making it the second largest bank in the US.

Also during the week, Warren Buffet committed $5 billion to purchase perpetual preferred stock of Goldman Sachs, lifting the value of that company, and sparking some buying as some viewed his move as being a sign that companies might be selling too cheap.

As I type this, the negotiations for the rescue plan continue. As word leaks out regarding the talks, the market rises and falls. While having no clear indication where things might end up, this is much better than the way things looked this morning. In the pre-market action it appeared that the market was going to be down a few hundred points at the open.

At the end of the day, some sort of a deal will be reached. While I do not relish the thought of the government spending $700 billion, it should be pointed out that the media has spun this as a "bailout", implying that the money is being flushed down the drain, never to be seen again. This is not the case, at least based on the reports I've heard thus far. The plan is to purchase assets, not to just hand out money. While determining what those assets are really worth is going to be a difficult task, the purchase will be made at a discount to the intrinsic value of the assets. The assets will be off the books of the financial services companies, giving them some breathing room in terms of capital requirements, thereby stabilizing those institutions. The assets themselves are primarily mortgages and mortgage based securities. Assuming that they are purchased at a discount, merely holding them to maturity results in a gain, potentially a very large one. Even if a number of those mortgages default, there should not be a problem, considering that $700 billion represents a LOT of mortgages.

In closing, these remain trying times for our economy and the markets. We are monitoring the situation, and working to discern where risks may lie. While there are definitely opportunities to be had in markets like these, at present we are working defensively, seeking security rather than taking risks in extremely uncertain and volatile times.

At Evanston Advisors, we believe that communication is a vital part of our relationship with our clients. However, in our rapidly changing world, by the time we write and send out a letter, the content may be stale. As we have been thinking about ways to better communicate what is going on, one of our advisors suggested that we publish a "blog". For those new to this media, "blog" is short for "web log". Think of a blog as a journal that the writer allows an audience to read on a regular basis.

Our intent is to update the blog at least weekly, in an effort to provide our clients with some perspective regarding what's going on in the markets and the economy. As always, if you have any questions, please feel free to contact us.