Market Update - October 1, 2008

 
'MAIN STREET RESCUE'   NOT  ' WALL STREET BAILOUT'
 
 
The last time we communicated with you, it was after "TWTWTW."  Well, it seems like the saga is continuing.  Just when it seemed that we might be coming to a conclusion of this episode, Congress decided to begin Episode II.  What follows is our latest summary and update of where we are currently.
 
As a result of the House's failing to pass the "Rescue" bill, the markets reacted on Monday with a massive sell off that pushed the Dow index down by 777 points.  Tuesday, the Dow rebounded with a rise of 485 points on optimism that Congress will pass the rescue package once a few elements are fine tuned.
 
Credit markets came to a virtual standstill on Tuesday as loans for any reason were almost impossible to get.   The LIBOR (London Interbank Offered Rate) rate soared to 6.88%, the highest differential ever above the Fed funds rate.  This is almost 5% above the Fed funds rate of 2%.  
 
LIBOR is the most common rate used for borrowing between banks worldwide.  Think of it this way:  you have a HELOC (home equity line of credit) with check writing.  You went out to make a purchase or a home improvement and you used the checks attached to the HELOC.  You believed that your interest rate was 7%.  After Tuesday, one of two things would probably happen:  1) your check would bounce because your bank would pull your line of credit (OH, SORRY ABOUT THAT), or 2) when you receive your loan statement, instead of being charged 7%, your rate has been increased to maybe 20% (WOW).  Could the bank do that to you?.......you betcha.  More than 300 trillion dollars in loans worldwide are pegged to the LIBOR rate including student loans, mortgage loans (adjustable), small business loans and lines of credit.
 
It is believed that the Senate will pass the legislation tonight (Wednesday), and then the House will reconvene for a vote on Thursday.  It is also believed that the House will vote positively this time because of two major items:
 
  • An increase in the FDIC insurance limit has been added to the bill, and
  • The House should realize how critical this bill is after the credit markets froze up on Monday and Tuesday
 
In fact, a group of 122 of the most respected economists in the U.S. sent a letter to Congress urging them to pass the legislation.
 
I could write for many more pages citing the problems the U.S. will encounter if this bill is not passed.  Suffice it to say that Warren Buffett stated that we are facing an "economic Pearl Harbor" if this bill is not passed.
 
WE NEED THIS BILL TO BE PASSED.  Only then will stability return to the credit and financial markets.
 
From the beginning the MEDIA portrayed this bill as a "Bailout of Wall Street".  It actually is a "RESCUE of Main Street".  Hopefully this is now sinking in with Congress.
 
DO THE RIGHT THING CONGRESS................PASS THIS BILL.
 
We know this is a really scary time for all of us.  We are monitoring the situation very closely.  The pain we are feeling will not go away overnight.  The medicine required is the passing of the bill.  Only then will the healing process begin.  But the patient will never start feeling better without taking the needed medicine. 
 
We will be in touch on a regular basis until the healing process is well underway.  As always, feel free to contact us at anytime.  It is difficult to meet and/or call all of you during this crisis.  In the meantime, we are hoping these email updates will help you through these challenging times.  We have much more confidence that we will get legislation this time.
 
 
Sincerely,
 
Edward J. Kohlhepp, CFP®, ChFC                               
Edward J. Kohlhepp, Jr., CFP®, MBA

 

Market Update - October 10, 2008
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Kohlhepp Investment Advisors, Ltd.
3655 Route 202, Suite 100
Doylestown, PA 18902
Phone: 215-340-5777
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