Chris Lau - Seeking Alpha

Thursday, October 02, 2008

Assessing the U.S. Economy After Any "Bailout"

The $700B bailout is hogging the news headlines and is, quite frankly, a distraction. This plan will not save the housing market nor prevent the likelihood of the U.S. entering a recession. Still, some plan is required to restore confidence in the banking system. The free market cannot function without a frozen banking sector.

Here are some recent figures illustrating economic health in September:
  • ISM Manufacturing Index was 43.5 (down from 49.9 in August) - a figure below 50 represents a contraction
  • Unemployment benefits +1,000 last week to a seasonally adjusted 497,000, above expectations for a 475,000 increase (highest seen since Sept. 11, 2001)
The wild trading swings over the past week will make any technical analysis less than useful. Volatility reached significant highs, meaning the direction of the stock market is neither in an up- nor down-trend.

On a more positive note, the US dollar is holding previous rallies. This suggests that foreigners are still willing to place their money in US treasuries. Commodity prices (gold and oil) fell significantly, which may have helped propped the USD.

The USD traded above the $78.08 level. This level now represents a support price.

GE represents the health of the US economy. If it is reaching multi-year lows, that cannot be a good sign of strength:

No sector has been safe in the last few massive sell-offs. It is disturbing that the commodities sector did not hold up, nor did gold.

Cash is king, but a rescue plan that causes inflation will cause its value to deteriorate. What does the investor do next? It's best to first monitor the details of rescue plan before making assumptions.