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Sunday, July 13, 2008



At the end of April when the S&P 500 surged to 1385 up 100 points in only 45 days, I wasn’t buying the turnaround and wrote the following:

“Only a significant amount of government stimulus could quickly turn this [economy] around, since the banks are not going to lend money to people with negative or little net worth even with improved balance sheets of their own.”

Unfortunately, I was right. On Friday, the index that is a huge part of many retirement portfolios closed at 1239. The good news is “a significant amount of government stimulus” is coming.

The federal government will become the insurance policy for Fannie Mae and Freddie Mac. The risk of default associated with any Fannie or Freddie security has significantly decreased. It probably isn’t enough for a rapid turnaround, as it does not address the systemic issue - homeowners defaulting on their mortgages, the action does show that the end could be closer than my original six to eight quarters. Banks should be more willing to lend at the margins sooner now.


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