TARP keeps changing

Nick Massey
The Edmond Sun

EDMOND November 14, 2008 10:42 pm

— “We’re from the government, and we’re here to help” is an old, sometimes funny phrase that has been used a lot lately to describe the huge number of financial aid programs and bailout initiatives that seem to spring up almost daily. The TARP (Troubled Asset Relief Program) continues its amazing morphing process, as it migrates far from the original bill of goods sold to Congress.
The government is abandoning the centerpiece of its $700 billion rescue effort for the financial system and will not use the money to purchase troubled bank assets. Why? Because Treasury Secretary Henry Paulson finally has figured out what many experts previously stated: Buying troubled assets is “not the most effective way to use TARP funds.”
Instead, we are finding all sorts of new, unapproved and inefficient ways to spend the TARP. Everyone from GM to AMEX is lining up for some type of federal (read: taxpayer) bailout.
Perhaps we should create a new Latin phrase and call it TARPUS Interruptus. Columnist Jack McHugh recently said the TARP has been patched so often it should more properly be called the QUILT (Quietly Undoing Idiotic Leveraged Transactions).
October was the wildest month in the history of Wall Street. It didn’t matter what you owned. Everything got clobbered. It’s appropriate that it ended on Halloween with both scary and thrilling price movements.
October 2008 holds many stock market volatility records unlikely to be broken anytime soon. Let’s recap them: the largest single-day point decline (777 points), the largest one-week percentage decline (18.5 percent), the largest one-day trading range (1019 points, equal to the entire year of 2005), and the largest one-day point gain (936 points) in the 112-year history of the Dow Jones Industrial Average.
All these records were set in less than 15 business days. October was the worst month for the S&P 500 in 21 years. Yet the final week was the best week for the market in 34 years. As befits such a wild month, it was the most volatile in the 80-year history of the S&P 500.
One volatility measure is the number of days in which an index closes up or down at least 4 percent. In normal times, the market goes years without having even one such day. There were none, for instance, from 2003-07. There were three such days throughout the 1950s and two in the 1960s. In October alone there were nine such days.
It is often said the stock market is a leading indicator and discounts, i.e. prices in, what it perceives to be coming. So what is the market discounting? The market has now lost about $6.9 trillion dollars since the peak last year. This is almost 10 times the size of the $700 billion TARP program. This is seven times the value of all subprime mortgages that were in existence in the U.S. (around $900 billion) and six times the amount at the peak of the housing boom. All the mortgage debt in the U.S. amounts to about $11 trillion.
In other words, the stock market has now lost enough value to discount that 60 percent of the homeowners in the U.S. are going to default on their mortgage. I don’t know about you, but I have a hard time believing that 60 percent of the homeowners are going to default.
Looking ahead, I expect disappointing economic data to prevail and continue to spread to foreign economies and corporate revenues and earnings. I think that fourth quarter 2008 could be the worst of the recession, with a decline in real U.S. gross domestic product of between 3 percent and 4 percent. One silver lining to the economic picture is that it appears credit market conditions have improved somewhat, indicating that the systemic financial risks have shrunk.
However, the market likely has already discounted a severe recession and stock prices could rally in anticipation of an economic recovery by late 2009. We continue to believe that equity markets around the world touched an important market low in mid-October, and those lows likely are to be retested, a development that may have just happened.
I’m not trying to dismiss the seriousness of what has played out during the past couple of years and the need for transparency or reform, but losing $6.9 trillion in U.S. stock market wealth is more than a bit excessive. Warren Buffett recently said that “confidence in an economy is like oxygen; you don’t know how important it is until you run out of it.” The paradox is that as an investor, the best time to invest in the stock market are those very times that the stock market makes you feel like you cannot breathe.
Last Thursday saw the Dow move in a 900-point range again, in what some think could have been a major retest of the recent low and a major reversal. Time will tell if that is true or not. In any event, the volatility and uncertainty continues. In times like this, you need to know two important things. 1) What strategies are available to help protect your portfolio from further declines in the market? And 2) what strategies are designed to help provide income in these volatile times? If you don’t know the answers to these questions, you should be discussing it with your financial adviser. Thanks for reading.
NICK MASSEY is a financial adviser and owner of Householder Group Estate & Retirement Specialists in Edmond. He is also a frequent guest analyst on CNBC and Bloomberg. Massey can be reached at nmassey@thgaz.com.