As you know, a strong oppositional disagreement occurred in Congress last night causing the current Bail Out Plan to be on hold. This was bad timing as Washington Mutual collapsed last night with J.P. Morgan buying their assets.
What is now developing is a "confidence crisis" in our banking system, the Federal Reserve, and our Government. That means Congress has less time to act because the probability of panic break outs are increasing.
Panic and fear are reflected in the Volatility Index (VIX), so we will look at the VIX vs. the S&P 500 this morning and what it has been saying.
The VIX vs. the S&P 500 ...
Today's chart is as of 9:35 AM this morning ... 5 minutes after the open.
Note that the S&P 500 dropped below the July low (support) with the VIX moving up to 35. Above 30 is an important level for pit traders because every rise above 30 has signaled an interim short term bottom in 2008 ... except for this one.
Past levels of 30 this year saw a reversal back down on the VIX with the market bouncing up. This time, the VIX has not dropped back down and has remained above 30.
What's troubling, is that in spite of an expected bail out package approval yesterday ... the VIX is remained very high.
Something is very wrong about this scenario. If Institutional Investors thought that the Bail Out Plan was going to be a short term cure, they would have been taking advance positions for an upside rally. They didn't. That suggested that they didn't think the plan was adequate to solve the problem, or good enough to help unfreeze the credit markets.
The Fed., Treasury, and the Government have a huge crisis problem today. They have to start instilling confidence that is eroding faster than the ban-aids are appearing.
Politicians are truly in a "stuck position". Last night, it was reported that public emails sent to Congress were coming in 200 to 1 against bailing out the big Wall Street firms and sick banks.
Voters and the election: The election is near, and this consumer reaction is putting the fear of God into politicians as they realize that voters will be angry at the party that gets blamed for putting in a solution that they don't want. They will also be angry if a plan doesn't work, and angry if they don't act fast enough.
Congress is in a horrible squeeze with the credit markets and banks freezing up at the same time. The Libor-OIS spread, a measure of cash availability among banks, widened for the fifth day. This is indicating a breakdown of the inter-bank lending market ... and this is now starting to panic pit traders and Congress. Let's all hope that panic levels are contained with Congress bringing their emotions under control so they can work effectively together and in a speedy fashion.
