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Tuesday, September 23, 2008

The Dead Cat Bounce II

Lats week I wrote about the rebound in shares, in response to the US bailout of the financial system, being a "dead cat bounce".

It would seem that I was right.

Shares in London and Asia have fallen sharply, as doubts grow about whether the $700BN bailout will work. At the time of writing:

-The FTSE is down 2%
-The CAC down over 1%
-The MSCI index of Asia-Pacific shares (excluding Japan) down 2%
-The Dow down over 3%

The package proposed by Henry Paulson, US Treasury Secretary, is expected to face opposition from members of Congress about how to pay for the plan.

Additionally, other American industries outside Wall Street have begun to ask for similar assistance; eg bans on short-selling have been requested by car and real estate companies.

Senator Richard Shelby, the leading Republican on the Senate Committee on Banking, Housing and Urban Affairs, said in a statement yesterday that the proposal was "neither workable nor comprehensive".

"I am concerned that the Treasury's proposal is neither workable nor comprehensive, despite its enormous price tag. In my judgment, it would be foolish to waste massive sums of taxpayer funds testing an idea that has been hastily crafted, and may actually cause the Government to revert to an inadequate strategy of ad hoc bailouts.

Given that markets have recently taken confidence in the prospect of government involvement, I believe Congress must immediately undertake a comprehensive, public examination of the problem and alternative solutions rather than swiftly pass the current plan with minimal changes or discussion. We owe the American taxpayer no less
."

That is all very well, but the issue is one of confidence. A lengthy review will sap the confidence and destroy the financial system before any "cure" is discovered.

I noted last week:

"The actions taken may well soften the blow from the fallout of the sub prime crisis. However, the market cannot be bucked. There is a massive repricing of risk being undertaken which will negatively impact the share prices of financial institutions and, by definition, their willingness and ability to take on risk.

No matter what governments do this repricing will happen and the effects will be felt by everyone, from the CEOs of the leading banks to the ordinary man in the street seeking credit to buy a car or home.

The market will not be bucked. The surge in share prices is in effect a dead cat bounce, not a long term rally
."

The bailout will not stop shares falling, but it will stop the world wide financial system from collapsing by giving it a much needed boost of confidence.

Testing times require bold measures.

Now is not the time for dithering and navel gazing.

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