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Market Commentary - September 24, 2008

Large stock market volatility has continued for a second consecutive week.  It is all understandable, given the speed of the shock waves that have hit the financial markets and potentially the economy in the past two weeks. Major US financial institutions, many with a century plus of history, have seen their businesses change dramatically overnight. Some have disappeared. The simple cause was too much risk, for which they finally paid the price. But other banks face similar losses on their risky loans. The question is whether the remaining losses, if not addressed quickly, will leak out and significantly damage an already weakened US (and global) economy. This is the crux of the current national debate over the proposed $700 billion government bailout of the financial system. Preventing severe damage to jobs, incomes, and consumer spending is being set against the unattractive option of taxpayers potentially paying heavily for the bad decisions of private companies. Most analysts believe clearing the banks of their old bad loans is crucial to giving them the stability for a fresh start to lending and supporting the needed recovery in housing, employment and general business activity. But for the average worker and taxpayer, their connection to the banks’ problems has so far been hard to see. However, experts point out that last week’s losses in large investors’ money market funds should be a red flag for small savers of the consequences of the government doing nothing. While not a good answer, it may be the better of two bad choices, given the growing concerns over the short-term stability of our financial system.

The situation remains fluid as Congressional members argue the ramifications of such an unprecedented and hastily constructed bailout. Compounding the problem is the perceived need for action before the coming extended Congressional election recess. The unprecedented nature and size of the package will probably produce changes to the initial Treasury plan. Among the important details being weighed are:

  • Assignment of eventual oversight and accountability for running the program
  • Prices to be paid for the packages of bad loans
  • How and when the taxpayers can recoup some monies
The sharp swings in world stock markets these past several days reflect how critical global investors believe a timely solution is.  Markets will continue to reflect the uncertainty until more details are finalized.  For investors, the best result may be a program to reestablish needed short-term stability while buying enough time for the private sector to provide the longer-term investments. Warren Buffet’s recent investment in a leading investment bank is seen as a strong endorsement of what the bailout’s eventual outcome should produce.

Prepared by:

Martin J. Cosgrove, CFA, Director of Investment Research
Research Department/ING Advisors Network

The views are those of Martin J. Cosgrove, CFA, Director of Investment Research, ING Advisors Network, and should not be construed as investment advice. All information is believed to be from reliable sources; however, we make no representation as to its completeness or accuracy. All economic and performance information is historical and not indicative of future results. Investors cannot invest directly in indices. Please consult your financial advisor for more information.

While diversification my help reduce volatility and risk, it does not guarantee future performance.

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