Batman [Paulson] & Robin [Bernanke] Batman: "It's time to get set, Robin. It's almost oda wabba simba." Robin: "It's almost what?" In a July 24, 2008 article, Commodity Breakdowns Warrant Defensive Action, I wrote the following based on the ugly look of the chart of financial stocks (NYSE: XLF): Trend Change Signaled In our 3rd October email alert we wrote: "The Fed expanded its balance sheet by $254B during the one-week period ending 1st October, which follows a $204B expansion during the preceding week. As a result, the Fed's balance sheet has grown by almost 50% within the space of just two weeks. This, we believe, is unprecedented." While sitting on large cash positions, it is prudent to take some time to examine the big picture. Markets all over the world and the vast majority of asset classes remain firmly in downtrends. Powerful countertrend rallies are to be expected and are overdue. Countertrend rallies can last weeks or months. They will come at some point – we should not let them take our eye off the bear-market ball. We are far from having significant evidence that a lasting bottom is in place. The Bailout Bill “Money is the lifeblood of the economy.” This famous saying is easy enough to remember, yet how much easier is it to forget it when asset prices are pushed to unreasonable extremities. Consumers and investors alike are now being reminded of the veracity of this statement in a big way as the money panic rages on.

As the country and the financial markets struggle to both understand and swallow the need for a $700 billion bailout of the financial system, the impact of using taxpayer money to fund such a bailout could have repercussions beyond the credit markets. The money will have to come from somewhere, i.e., taxes and/or deficit spending. As such, the potential flooding of the economy with money, and a further possible lowering of interest rates, could create increases in inflation. While this will affect nearly all areas of the economy, it could once again provide a catalyst for raising energy and commodity prices. In fact, just recently Barclays predicted that commodities will in fact revive their sharp and historic correction over the summer, and are simply in a normal correction stage rather than a change in demand (see Bloomberg article). If it is true that demand will stay strong, or at least will not collapse due to a global slowdown, any increase in deficit spending, lowering of interest rates, and further devaluation of the dollar could certainly be bullish for commodity prices. But of course, this depends on the strength of the global economy, which will depend to some degree on the handling of the credit crisis - in yet another illustration of the myth of decoupling.

 

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Treasury Secretary Hank Paulson should have heeded the words of Al Capone who said, "You can get much further with a kind word and a gun than you can with a kind word," when he addressed Congress this week.  How we got here is not going to be debated in this article.  Wanting or not desiring the bailout is not today's topic either.  What is important is what course of action should you take with your investment portfolio should this bill pass in almost any format if it is finalized. Yesterday's testimonies before legislators were informative, but didn’t leave anyone in a good mood on Wall Street. The markets had rallied early and then slowly faded into negative territory the longer the discussions droned on. One headline stated that legislators were more interested making headlines versus headway. HERE’S THE TAB All eyes were glued on senate testimony today which should have featured an optimistic Turnaround Tuesday. But, no, as such it was a flop despite some intraday attempts to rally. The only thing that reversed course today was profit-taking in gold and oil. What’s the problem? No one can get their hands around the bailout deal or its ramifications.