Recent developments are of concern:

• Credit markets remain tight even after bailout plan announcements.
  
• Foreign banks continue to experience similar problems to their U.S. counterparts.
  
• Bailout plan lacks sufficient detail to calm markets in the short-term.
  
• Bailout plan should pass, but still needs to be voted on this week.
  
• Bailout plan allows SEC to alter accounting rules – very concerning.
  
• Legislators continue partisan politics and bickering.
  
• Talk of U.S. dollar intervention has surfaced increasing the odds of more interference with the “free market” system.
  
• Early indications by U.S. stock futures are negative.
  
• In pre-market trading, Wachovia shares have been down as much as 65%. The Feds have stepped-in this morning to engineer a deal with Citi.

This is not a time to panic. This is simply a time to continue to protect capital. We already have a very high percentage of our assets in cash, but even a small exposure to risk cannot be justified given the fragile state of the financial and credit markets. There are too many unknowns on too many fronts to properly assess the risk/reward ratio of most investments. At the moment, it is simply not worth the risk to participate. Last night, I read/scanned the entire 110 page draft proposal of the bailout legislation. I was not impressed. It remains extremely vague. Taxpayer “protections” appear to be more symbolic than well-defined and effective. The financial markets continue to purge bad debt and punish poor management of risk despite policy makers’ best efforts to rewrite the laws of supply and demand. While it is difficult to look to the future, recent events will help significantly reduce speculation in all markets. As a result, we are moving closer to a day where valuations and fundamentals will again become relevant. This is good news for the vast majority of market participants, including us. Excellent investment opportunities will again present themselves at some point in the future. Our main task now is to stand aside and remain patient as more bad debts and bad investments are removed from the system. Many assets remain illiquid and overvalued on balance sheets. This is not the end of investing, but the market’s natural way of telling us fundamentals and valuations remain unfavorable for the time being.

It will be important to see how the markets behave in the last hour of trading. A down day and weak close for stocks will signal markets are not convinced the bailout plan will be effective in the short-to-intermediate run. The early read by the markets is not good. A close on the S&P 500 below 1,206 would send more negative signals.

The text below is taken directly from Bloomberg stories dated Monday, September 29, 2008:

European governments stepped in to rescue Bradford & Bingley Plc, Fortis, and Hypo Real Estate Holding AG as tremors from the U.S. credit crisis reverberated around the world.

The U.K. Treasury seized Bradford & Bingley, Britain's biggest lender to landlords, while governments in Belgium, the Netherlands and Luxembourg threw an 11.2 billion-euro ($16.3 billion) lifeline to Fortis. Germany guaranteed a loan to Hypo.

The interventions exposed how fallout from the crisis that drove Lehman Brothers Holdings Inc. into bankruptcy and prompted a $700 billion U.S. bank-rescue package has gone global. It also added urgency to negotiations among European policy makers as to how they deal with banking collapses.

"The precarious global environment means the weakest links in Europe are now falling," said Mamoun Tazi, an analyst at MF Global Securities Ltd. in London. "If banks continue not to lend to each other we'll see more failures."

Stocks tumbled in Europe and Asia and U.S. index futures retreated as bank bailouts accelerated and the $700 billion plan to rescue American financial institutions failed to unlock money markets.

The euro interbank offered rate, or Euribor, rose 10 basis points to 5.24 percent, the biggest jump since June, the European Banking Federation said today. Singapore's benchmark rate for three-month U.S. dollar loans rose to the highest level in eight months.

The increases show central-bank attempts to breathe life back into money markets haven't succeeded, even after U.S. lawmakers agreed on a $700 billion plan to remove tainted assets from bank balance sheets. The ECB said today it will make additional funds available to banks through the end of the year in ``special'' auctions. The central banks of Japan and Australia added more than $20 billion to money markets.

"The root of the banking story is in the money markets, which are still in awful shape," said Padhraic Garvey, the Amsterdam-based head of investment-grade debt strategy at ING Bank NV. "Banks are dealing with central banks for liquidity purposes, but are very careful about dealing with one another in this environment, which effectively means that the interbank wholesale-money market is not working."

A growing number of currency traders and strategists are starting to speculate that finance ministers from the world's biggest economies will join to support the dollar.

Volatility in currencies is the highest since 2000, when the so-called Group of Seven nations last intervened in the foreign-exchange market. The dollar weakened 2.5 percent on a trade-weighted.

Chris Ciovacco
Ciovacco Capital Management