The Fed to the Rescue of Investors & Consumers, Take Three

First the Bear Sterns bailout, then the bailout of mortgage giants Freddie Mac and Fannie Mae…and last night the announcement that the Fed was stepping up to the plate again and bailing out the world’s largest insurer, American International Group, Inc. (AIG; NYSE/AIG).

Why bail out AIG and not Lehman Brothers? In my opinion, simply because AIG poses a bigger risk to the already damaged economy. AIG provided insurance on $60.0 billion in securities related to subprime mortgages and over $400 billion on other fixed-income investments. If AIG went down, the instability to the financial markets and losses to individual investors and the end- consumers would have been too onerous to overcome.

For a loan of $85.0 billion, the U.S. government ends up owning 80% of AIG. In two or three years from now, most of AIG’s assets will be sold to pay off its debts…eventually liquidated. Goodbye to another big American financial institution.

So, where do we go from here? After all, everyone I talk to tells me their retirement savings are down substantially.

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Firstly, I’d like to say how impressed I am with the actions of the Secretary of the Treasury and with the Federal Reserve. They have been over-accommodating…helping clean up a mess that homebuilders, mortgage companies and Wall Street helped create because of Greenspan’s ridiculously reduced interest-rate policy.

(Please go back to my PROFIT CONFIDENTIAL articles of 2000- 2001, where I was so opposed to Greenspan bringing interest rates artificially low. My comments back then were that Greenspan should just let the stock market face a bear market [and let us get over it] instead of interfering with the “economic” nature of boom and bust. Look at the price we are paying now because interest rates were allowed to fall so low in 2004!)

I’m still amazed by the resiliency of the Dow Jones Industrial Average in that it fails to fall flat on its face. As the stock market (measured by the Dow) gets close to its July 2008 lows, it rallies…up 141 points yesterday.

The stock market is a leading indicator; therefore, I am watching both daily volume and direction very closely. Most interestingly — and something I feel not many are watching, in spite of all the problems in the financial markets and the economy — the Dow Jones Home Construction Index is up an astonishing 38% since mid-July 2008. Could the bottom of the housing market be behind us? Stay tuned.