Stock Market Information

Well it appears that the markets were pleased at the news that the Federal Reserve was ready to create an entity that will pick up on the bad debts on a number of banks. Questions remain though as to how this will play out exactly, and what the consequences will be for the government, which is already running at a fairly steady deficit clip each year.

In addition, there’s still other banks out there that could go under. Washington Mutual, for example, is looking for a buyer, but seeing as it’s balance sheet appears to be nothing shot of a train wreck, it may be tough for them to find anyone else but the government willing to step in and give them the capital they so desperately need. This event could trigger another sell off in an already volatile market. It should be noted, however, that there is a historic precedent here:

The report of a broader government bailout proved more reassuring to investors than moves before the opening bell Thursday by the Federal Reserve and other major central banks to inject as much as $180 billion into global money markets. The moves were an attempt to keep the credit crisis from worsening; the Fed added another $55 billion in overnight loans Thursday.

But it was only the prospect of a more comprehensive vehicle to sweep up bad debt that emboldened investors. Congress established the RTC in 1989 to buy $394 billion worth of real estate, mortgages and other assets of hundreds of failed savings-and-loan institutions. The corporation operated for several years disposing of the associations’ assets, and then went out of business.

You don’t have to tell me that it’s bad out there. I know, as I’ve watched the Dow drop precipitously over the last few days by a stunning margin (500 points Monday and..as I write this, an additional 340 points today) that there’s plenty of blood in the streets. But let’s put this into perspective. Sometimes the volatility that the market inevitably goes through can, and does, work to your advantage. How?

Bear markets help to bring the concept of risk to the forefront of our minds. It helps us remember why it is we’re long haul investors, why we want to use the stock market as a tool to invest successfully. T-bills have a good chance of outperforming the stock market this year, but we still know that historically speaking, stocks will easily outperform the mighty t-bill in a battle over the course of decades. That’s what keeps everyone from putting their money into stocks, however. The volatility keeps many investors away, and in doing so strengthens the long term returns that the markets provide.

It also helps to remind us as to why we can’t hope to time the market. Do you think you could have foreseen this drop? Did you have the foresight to know that financial institutions like Bear Stearns survived the great depression but couldn’t seem to pull through the subprime collapse and subsequent credit crisis that followed. Very few people, be they individual investors or professionals, saw this one coming a mile away, even if it feels like they should have in retrospect.

So take heart, if you’re a long haul investor, that this too, shall pass.

When looking into potential opportunities and insight into the state of the markets, it’s best to go to some of the tried and true sources of knowledge. Like him or hate him former Fed Chairman Alan Greenspan does know a lot about the economy. His outlook in a recent interview is a sober reminder of just how far down we may still have to go before to see the light at the end of the tunnel.

The Fed Chairman recently appeared for an interview on ABC, his outlook on the economy and potential recovery was fairly dire:

“Oh, by far,” Greenspan said, when asked if the situation was the worst he had seen in his career. “There’s no question that this is in the process of outstripping anything I’ve seen and it still is not resolved and still has a way to go and, indeed, it will continue to be a corrosive force until the price of homes in the United States stabilizes. That will induce a series of events around the globe which will stabilize the system.”

He also predicted that it’s likely we’ll see another big financial institution go down by then. He wouldn’t speculate as to who, but there’s no shortage of potential candidates. Personally I’d say Washington Mutual, but we’ll just have to wait and see. Greenspan also touched on Federal spending, saying that the federal deficit was beginning to spiral out of control. Tax cuts have historically been met with equal reductions in spending, which wasn’t the case when the Bush tax cuts were put into place. The deficit has ballooned significantly as a result. He said that the tax cuts that McCain will keep in place have no chance of succeeding without a “massive reduction” in spending as well.