As the financial bailout bill (we mean rescue bill) finally made it over the finish line in the U.S. House of Representatives today, investors are now asking themselves if this marks the bottom of the stock market. To us, this extraordinary legislation (we say trillion dollars because we include both the $700 billion in the Treasury Plan and the money already committed to Fannie Mae, Freddie Mac, etc.) will likely have the following benefits:

1. It will provide a transparent market (and a bid) for the complex mortgage-related securities that are sitting on the books of the financial institutions, thereby providing some much needed clarity on the value of those assets. Until now, investors have been largely discounting those assets to close to zero, whereas they likely have some value. The holders of such assets will benefit further if the proposed accounting changes are made to the current fair value accounting rules that require these assets to be marked-to-market.
2. It should end the panic in the financial markets regarding the stability of the banking system. Investor psychology has been decimated as numerous significant financial institutions have been leveled in recent months, causing many to lose faith in the system altogether. Although hard to quantify, there's no doubt that the investing environment will improve if investor anxiety is reduced.
3. With the restoration of confidence and the backstop from the Treasury, the credit markets should come back to life. In particular, over-night lending and money markets have been held hostage by the reluctance of institutions to lend short-term as they hoard cash for their own short-term liquidity needs (not to mention their increased perception of counterparty risk). In short, cash not sloshing around these markets is to credit as blood not flowing around the circulatory system is to the body.

Great, so it's all systems go then, right? Well, not exactly. This latest episode in the credit crisis is more likely just the peak of the excitement rather than the grand finale. There's at least one more act to go yet. Once capital markets return to working order, there is still the small matter of slowing global growth, not to mention recession-like economic conditions in much of the U.S., Europe and Japan. Lost in the hoopla of political grandstanding that has been taking place in recent days are several data releases that paint a fairly grim picture in both the U.S. (159,000 in job losses for September, the ISM Manufacturing survey clearly in recession territory, vehicle sales collapsing to 1993 levels, housing prices down 16.4% year-over-year, flat personal spending... we could go on) and the EU (consumer confidence falling to five-year lows, rising unemployment, both manufacturing and services surveys pointing to recession, retail sales contracting close to 2% year-over-year... you get the picture). The point being that this bailout package is great for stability and confidence, but it doesn't do too much for the underlying problems of a still-declining real estate market, a fading consumer sector and the ongoing deleveraging process (see Smells like tough markets - August 29th and Wanted: Liquidity... no reasonable offers refused - September 19th for more details).

So at the end of the day, once the dust settles, the bottom line (we couldn't come up with any more cliches) is that this legislation is positive, but not a cure for all that ails the economy. As our logician friends would say, it is a necessary but not sufficient step towards an economic recovery. It sets the table, but it doesn't grill the steaks.

While we still foresee tough markets in the coming months, that doesn't mean we're devoid of opportunities (particularly on the short side). One area that has been largely overlooked amidst the bailout is the large package of tax incentives directed at renewable energy that was tacked onto the bill. Lawmakers will extend the investment and producer tax credits for a period of several years that will finally turn the U.S. into a legitimate solar market and will direct significant funds towards carbon capture and storage, clean coal and gasification technologies, and biofuels (see our pieces Earth, Wind and Fire - June 27th and Lying in the weeds... and woodchips... and garbage - September 12th for a detailed look at the case for renewable energy).

In other news...

Remember when going to the game used to be fun? You were probably about 11 years old then, seeing your favorite athletes up close and personal, complete with the roar of the crowd and the always-enticing stadium food. Nowadays, you're more likely to notice the long lines, the frustrating parking lots, the price gouging at the concession stands and the uncomfortable seats. You can look past some of those problems when the team is winning, but what about the down years... or decades? Well the Stanford football program is trying to set a new standard. In short, if you don't have a good time at the game, they'll refund your money. Who would have thought that team owners could actually care about the fans?

I'd buy you some mortgage-backed securities, but not real mortgage-backed securities, that's cruel.