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Mark's Market Blog

9-29-08: Tarp's first vote

By Mark Lawrence

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The $700M bailout is about to get it's house vote. It's uncertain it will pass. It will get a senate vote on Wednesday; this too is uncertain. The bill itself is worded rather loosely, it's unclear how Paulson will choose to implement it. The basic idea is that mortgage-backed securities are currently "trading" at about 1/3 face value. Paulson and co. believe their long term "value" is more like 2/3 face. Now the question is what is he willing to pay? 1/3 face, to get the taxpayers best value, or closer to 2/3 face, to help re-capitalize the banks? My bet would be around 1/2 - 2/3 face, coupled with stock warrants. Paulson wants to inject cash into the banking system and have the government take on their worst risks. He's not in this to make us money. There will also be some interesting executive compensation limits, it's unclear how those will be enforced. Markets hate uncertainty, so everything is down and cheap and dropping. I currently have limit orders in on GM at $9.55 (22% of their '08 high) and Google at $395 (52% of their '08 high). I expect both will be triggered today.

The GM bailout loans have passed, it only remains for Bush to sign it. He will. Terms of the loan are that anything the loan is used on must be at least 25% more fuel efficient than the current average for comparable models. This means GM will get cheap money to build their new $375M engine plant (1.4 liter engines for the new mini-chevy and the Volt generator), they'll get money for the entire Volt operation, and they will no doubt leverage this into their new truck and SUV hybrid projects. An electric truck makes all the sense in the world: DC electric motors produce full torque at zero RPM. That's why diesel / electric train engines have been the norm for 80 years. Call me a stone-age thinker, but I'm a big believer in the american truck: our construction industry lives on them, and moms everywhere love their SUVs. They will want to keep buying them if the cost of operation can be lowered. It can and will. There's no good reason a big SUV can't get 25 mpg city and highway.

I continue to think Chinese stocks are being artificially propped up, and that the buys in foreign stocks will be better in a couple months. Time will prove me prescient or moronic. Or both, we mustn't preclude the most likely outcome.

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