Sorry – there will be many fewer Updates over the next two weeks and I will be unable to answer your emails in a timely fashion.

Debates

McCain did a good job . His campaign was bleeding and Obama had taken a 4 to 5% lead in most polls. Clearly weaker on domestic issues he showed extensive knowledge of foreign policy. The (right wing ) WSJ scored the debate a victory for Obama on domestic issues and for McCain on foreign policy. This was the best I’ve seen McCain debate. Best line something like this "I’ve looked into Putin’s eyes too and I saw KGB." His focus was clearly on staying in Iraq till we win. He tried to paint Obama as inexperienced. Almost an impossible task since he chose Palin as his VP.

Obama did a good job . Again the best debate yet for Obama. Best line – "You act as if the Iraq war began in 2007 not 20003… You thought we would be greeted as liberators with garlands of flowers" (might not have quote exactly right.) Obama clearly showed he had the knowledge, depth of understanding, and character to be President. In this way the debate was much like the Kennedy/Nixon debate and the Reagan/Carter debate. Folks wondered wether the new guy (Kennedy and Reagan) had the stuff it took to be president. Think Obama passed this test with flying colors.

Mistakes/Blunders – Lots of press on McCain’s inability to look at Obama and what seemed to many as a condescending, mean attitude. He even looked away when he shook his hand at the end of the debate. Obama was too nice and failed to deliver any big knockdown blow. He had built up an argument that because we focused exclusively on Iraq – all these other problems arose – No Osama Been Forgotten, Taliban stronger, US further in debt because of war, Iran stronger, more dependent on foreign oil, etc. but when asked "Are we safer now" gave a weak answer. Obama should have used the opportunity to nail McCain with a series of reason why we are weaker.

Great Format – America won

Rescue/Bailout Plan

It is almost more important that there be a broad consensus on this plan than the plan itself. There’s a lot of panic and fear that is driving this financial meltdown. Credit market’s did momentarily freeze last week (see chart of 3 Month Treasury Bill) and the whole lending system could have shut down if it were not for the AIG rescue/bailout. The Fed alone has already injected $1.5 trillion dollars into the monetary system to keep it afloat.

American’s and the world need to feel confidence on whatever plan comes out of congress and if it passes by a narrow margin it simply will not work because too many ego’s will be fighting against it 40 days before election. Everyone has their own idea. Reality is we are in uncharted waters. What seems to be holding the credit markets around the world together is the hope of a unified plan coming out of congress. Paulson and Bernanke (two smart guys – moderate Republicans) have created a framework that has been debated for a nine days.

Why trust Paulson and Bernanke over Republican, Democrats and many economists? Because they are less concerned with ideology and have a greater understanding of the depth of the problem and the inner workings of the credit market. You should be feeling stampeded like a cow going over a cliff and remembering the WMD, bull about Iraq. CNBC, the financial channel is fear mongering a meltdown if it looks like no broad consensus happens on a rescue/bailout plan on Monday.

However, psychology, fear, panic are driving the credit and stock markets right now. They are hanging on because of the hope of a unified plan coming out of congress early this week The unprecedented move to eliminate shorting has helped the stock market, but the credit markets are barely hanging on. WaMu’s collapse indicated that there is a big run on banks quietly happening across the USA. Major investors are taking out all uninsured funds (funds over FDIC insured limit – $100,00) See CNBC’s Jim Cramer editorial "Dow 8000 "

The doom and gloom of CNBC and others is hopefully overstated, but there is an understandable sense of urgency.

Is a tentative deal happening? YES says one left wing source that quotes Republican’s lead negotiator Senator Gregg and Paulson. See link

There are 435 members of congress – the closer you get to that number the better the chance that panic and fear will fall and the plan will work. The better the chance the we will have only a short recession instead of something far worse. If over 100 members of congress oppose this plan then lots of the fear and panic will remain. The closer to 400 yes votes the better. 50 No votes would be disappointing , but manageable.

Best Advise

Being out of stocks is best. Make sure your $ are FDIC insured and money markets are SPIC insured. Think Cramer has a valid point and there are a few "super banks" banks on Wall Street that are raking in the $ from this crisis. Money is being taken from smaller banks and being put in the super banks, gold, and short term treasuries.

Obviously there will be a big rally if it looks like some sort of bipartisan solution has been agreed on by most Dems and Reps and both major presidential candidates support it.

The more yes votes coming out of congress the more $ I’d nibble back into the market.

Stocks

Index  % Change  Volume

Dow  +1.10%  up

NASDQ  -0.15% up

S&P500 +0.34% down

Russell2000  -0.13% –

US Market

Technicals mean nothing right now. Volume is below average. The stock market is NOT YET AGAIN in panic mode. The hopes of a bailout plan seem to be holding both CREDIT and stock markets together

Chart of the benchmark S&P 500

Chart of the Russell 2000

Chart of the NASDQ

Chart of the Dow

How Close is Credit to Freezing UP?

The 3 Month Treasury Bill is the barometer that gives some indication of the level of panic out there. It shows the rate below 2.00% (Fed rate) people are willing to pay to have a safe place for their $.

It may also be compared to LIBOR rates that are rising (2.49% one month ago to 3.21% now) Adjustable mortgage rates and a lot of other credit is set to LIBOR. So the increasing spread between LIBOR going up and 3 month T Bond so low is at best alarming.

The 3MTB rose +16.90% yesterday to 0.83% Last week’s low when credit froze it was 0.01%. See chart What analyst are universally saying is that the 3 MTB is moving higher in hopes of a rescue/bailout plan.

3 MTB chart

THIS IS THE CHART TO WATCH TO TELL IF CREDIT MARKETS ARE FREEZING UP.

All the below charts are relevant, but what’s happening to Paulson/Bernanke rescue/bailout is driving the markets.

OIL no longer RULES

Chart of oil (WTIC)

The Dollar

Inverse relationship to oil prices.

Chart of Dollar

The VIX

Chart of VIX.

Short Term Outlook – It certainly looks like stocks are going to rally if there is a bipartisan rescue/bailout plan.

NB – Warren Buffet is buying. He is buying companies at a discounted price. He did this because he believes congress will "do the right thing."

Mea Culpa – I misread the WaMu bailout and predicted a bigger fall in bank stocks. Hopes of a bailout plan are keeping stocks afloat.

AS ALWAYS DO YOUR RESEARCH BEFORE INVESTING

Long Term Outlook – Cautiously Bearish
Technicals – Not too relevant right now
Fundamentals – financial mortgage transparency problem is far far far far far far far far far bigger than anyone thought. But there is hope in a bailout plan, especially one that has broad support. Thing are looking up right now if this story is accurate , See link
(Caution – this “Outlook” is based on US equities and while US markets greatly influence other markets it is not necessarily the outlook for recommended sectors.)

People feel like we are in a recession. The actual strict definition – 2 quarters of negative GDP growth has not occurred. How bad the recession will be is be is the major question.

Asset Allocation/Recommended Sectors (long term)

* 85% to 100% Cash

* 10% US Index Funds
UWM (2x what Russell 2000 does) & QLD (2X what the NASDQ does)

*5% Emerging Markets
EEM (emerging markets)

Chief Strategy – Buy the dips of trending sector You have to have a strong tolerance for risk and belief that the bailout will work to jump in now.
Changes to Bottom Line Section Bolded

As Always Do Your Own Research Before Investing

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