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Finally, a bailout package is being prepared for a vote in Congress next week. Earlier today, the Democrats and the Republicans hammered out an agreement that both could live with, which means that a compromise was met that leaves both sides wishing for a slightly better deal favoring their own candidate in the coming election.

The price tag remains $700 billion, an amount that includes $250 billion immediately, $100 billion upon the president’s signature and $350 billion in additional funds to be made available upon the oversight committee’s approval. But, there is still a large unknown and that is the percentage of book value, which will be paid to the financial companies in order to purchase their toxic assets. Since the markets are entirely illiquid for this paper, the normal process of price discovery is futile. In a liquid market such as Microsoft shares to give but one example, the heavy constant trading volume ensures that the bid and ask prices are continually refined and truly represent the value of Microsoft shares at any point in time during the normal trading session. The paper referred to in the media as toxic assets are usually related to, or derivatives of, mortgage-backed securities. Inasmuch as trading of these instruments has ceased a long time ago, attempting to reach agreement on the market price of this paper has been nearly impossible.

The government has an extraordinary opportunity to pay a substantial fraction less than book price thus improving the probability that a profit could be derived at some point in the future. While the firm holding the paper has an incentive to sell it to the government for a price approaching book price, its motivation to improve its balance sheet and liquidity is ultimately stronger.

Financial institutions will also have the prospect of buying insurance against the decline in value of questionable assets and in this initiative as well, the government body set up to administer this program will be in a position to profit from the situation. Presuming that the premium will be priced in accordance with the risk involved, the government stands to gain on the sale of these premiums.

Whether all of these initiatives work is of course, the $700 billion question. The immediate injection of $250 billion will increase the Treasury’s needs and increase the deficit. The dollar will decline, as foreign investors will be disinclined to invest in dollar-based investments due to the massive increase in the supply of those dollars. Such an environment will favor gold and we certainly saw that in the last couple of weeks as investors not knowing who or what to trust, embraced the shiny yellow metal causing explosive upward moves in the process.

Technically Speaking

Markets dropped and then rebounded partially this week but ended the week with significant losses. All of the major markets saw declines with the broader markets such as the Dow Jones Industrials and the S&P 500 performing relatively stronger than the tech sector where losses were deeper.

Volumes were generally lower than the previous week’s but resolution of this dire situation is unlikely to unleash bullish sentiment leading to a reversal of the on-going slide in equities. On the contrary, a sell-the-news attitude might prevail leading to a new downward leg as the economy shows signs of worsening.

New Buy Recommendations (in order of preference):

None.

New Short Sales

None.

Stock Positions to Sell/Exit:

None.

Portfolio Comments:

New stops have been added in bold to the list while others have been modified. Those that have blanks are being carried unstopped for now. Please see our complete list of stops in the table below.

List of Current Stock Recommendations:

Action Ratings. The following is the legend for designating immediate action
for our stock recommendations. The first is B, meaning the stock is timely
to buy but the case for doing so right here is not overwhelming. Either the
stock may have gotten ahead of itself and may be vulnerable to a retracement or
else the stock has been performing disappointingly but may simply be
regrouping. B+ and B++ indicate stocks for which there is a technical case
to buy now, with plusses adding weight according to how many there are, up
to a maximum of two. Stocks rated H are ones to hold, awaiting confirmation
to buy more or to sell. SELL, of course, means what it says. It seldom pays
to override this designation. In the case of stocks held short, the rating is S where positions should be retained. S+ and S++ indicate stocks for which there is a technical case to add to the positions with plusses adding weight similar to long positions. The maximum number of plus signs is 2.

N.B. There are no longer restrictions on foreign stocks held in Canadian retirement savings accounts.

New stops in BOLD

* Stop on a closing basis

** Buy if above entry price

*** Split-adjusted price