Tuesday, September 30, 2008

Of bargain hunting and CEO pay

Well, after yesterday's steep decline into the vermilion, stocks fared much better today. Phew! (Wipes slight perspiration from brow.) Both the Dow and the S&P 500 closed up about 5% each today, punctuating the highest close in six years.

But before you hop on to eBay to buy those designer boots with the affirmation that "everything is okay now," the stellar numbers today do not guarantee that we're free and clear of economic trouble.

Uncertainty still lingers. The lift in the market this afternoon mainly hinged on the fact that bargain hunters bought in big time to stocks that are trading at levels far below what they're worth. You know when you peruse a Macy's sale, and end up scoring an adorably gaudy giant lavender cubic zirconia cocktail ring for $20 when it was originally $80? Yeah, today's bargain-hunting investors hopped on that super-saver boat -- except with stocks and not cocktail rings!

Bargain hunters aside (pssst: now may be one of the best times to invest in the market with stock prices so low, or so says Suze Orman), the market also reacted positively today to news that the failed bailout proposal may not be entirely dead. The near-term fate of the market now largely hinges on investor optimism that the $700 billion bailout plan (which was shot down Monday by Congress) is still salvageable. The House reconvenes on Thursday, so it'll be interesting to see whether legislators will come to a timely decision on the bailout proposal and how much more the market might suffer if deliberations drag on.

In the meantime, the giant swings the market has made recently into positive and negative territories illustrates just how volatile and sensitive the economy is right now and how everything can crumble -- big time -- at a moment's notice.

And whether you're for or against the bailout plan (I'll leave that up to you to decide, I am but a financial scribe!), the current economic unease cannot simply be boiled down to CEOs who need their compensation packages reworked. David Forrest and Bill Mann over at the Motley Fool wrote a great post on their blog today that echoed what I wrote about yesterday. I think what they had to say is worth re-posting here:

"While the politicos in D.C. navel gaze and ponder how to win their next election, Rome is burning. You see, the markets don't care about your Senate seat or whether the 'fat cats' are going to get bailed out.

"What matters right now is that the credit markets are at a standstill. People can't borrow and businesses around the globe that rely on the short-term liquidity of the credit markets are being badly hurt. We won't hear about the brilliant entrepreneur denied her small business loan, but how about McDonald's franchises being denied credit to build new coffee bars, or General Motors needing to raise billions just to cover basic operating expenses? Retailers like Home Depot are closing stores, and apparel retailers like Macy's face their toughest holiday season in years. And airlines like Southwest and American Airlines parent AMR are cutting flights.

"Sure, you still see advertisements for mortgage loans, but have you tried to get one? A colleague of mine with an excellent credit rating made the attempt and was quoted 11% for a 30-year fixed mortgage with a 20% down payment. That's the equivalent of the "open" sign being left on, but the doors being locked. A survey conducted by The Association for Financial Professionals of many large-company finance executives found that the locked-up credit market has already caused them to stop hiring and to cease capital spending projects.

"The media isn't focusing on that so much (and shame on them). They'd rather focus the attention on raw-meat issues like limiting CEO compensation. As if that matters right now."

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