Well, it seems that the US bailout package won’t do the trick by itself. The U.S. Treasury is reporting it may have to pump more than the planned $200 billion into Fannie Mae & Freddie Mac to keep the mortgage giants afloat. In fact, it appears that the numbers the Fed originally stated would be needed, to support these entities, was nothing more than a wild guess. According to the Washington Post, when the Treasury seized the firms, it said it had chosen the figures primarily to reassure investors who had been fleeing the companies. According to a recent Department of Treasury statement, “This number is unrelated to the Treasury’s analysis of the current financial condition” suggesting that there was no expectation the government would ever need to spend that amount. In other words, they had no idea how much it would take, and now it appears it will require much more than they ever dreamed. Now the US Automakers are screaming for help, but it appears unlikely they will get it during the lame- duck session. However, support of non-financial institutions was never contemplated in the bailout package, so where is that money going to come from when they have to provide another taxpayer handout to the automakers. Credit Card giant American Express has now asked for TARP assistance. Where will this end?

U. S. Treasury Secretary Henry Paulson has announced a new direction for the TARP money stating that the money will not be used to buy the troubled mortgages as originally planned, but rather plans on further capital injections into banks. Sounds a bit like bait and switch to me. Paulson has hinted at a problem that is lurking and that is the enormous risk consumer credit companies are bearing that has not even hit yet. The point is, don’t get lulled into thinking that the bailout is the markets salvation.

I recently read an article in Fortune magazine (November 3, 2008) by Shawn Tulley where he talked about the now reasonable stock valuations. He is correct, stock valuations have come back to reasonable levels, but he also points out that valuations may reach lower levels before investors can hope to win via a buy and hold strategy. Tully uses the Shiller P/E ratio to make his point. Robert Shiller, a Yale economist, developed the Shiller price-earnings multiples ratio using a 10-year average of inflation-adjusted earnings to calculate an adjusted P/E. That ratio has fallen from the highs in the 44 range in early 2000 down to around 15.7 now, not far from the pre-bubble average. But Tulley quotes Shiller as warning “There is a substantial risk that with all this economic turmoil, stocks will fall lower.” Studies of prior bear markets indicate that P/E ratios often times fall below historical averages before they can begin to rise again.

That is the precise reason you need to have a risk controlled investment strategy like we use at PMFM. Our model is designed to identify the times to be defensive and when to increase equity allocations. Currently our model is telling us risk levels are still high, but since we are defensively positioned and have cash on hand, when risk levels do improve we are in a position to take advantage of the more reasonable valuations. However, the market does not seem enamored with the bailout so we will wait until we see real risk reduction before we step back into the market. When the time is right our model will let us know.