Its now official, the $700 bailout will go through with some modest changes from what was previously expected.  Oversight, the amount of money and the automotive industry were all tough topics in the discussion to write this bill.

The bailout bill was quick to denounce companies that are leaving CEOs with “Golden Parachutes” of cash that could be better spent on a failing corporation.  The bailout will not cover banks and other institutions that are paying CEOs large amounts of money to head the companies into failure, instead those banks will not be able to access the funds.

The automotive industry pounced on the opportunity to get $25 Billion of government money that would be used to back the debt of the big three automakers in the United States.  The argument is that if the US government can bail out the banks to eventually help out the consumer, keeping these automakers in business will help keep employment numbers up while helping out the basis of any economy; the manufacturing sector.

One big plus for the American people is the necessity for requests for future capital.  The $700 Billion will not be allocated in its entirety.  Instead, the government will collect capital in three phrases in order to limit the amount the Government pays for these assets and to limit the risk of overweight purchases in a very small and select number of financial institutions.  One large problem with the bill is the lack of consistency thus far in bailouts.  Bear Stearns was left to rot but then sold with a $30 Billion government guarantee, then you have Lehman Brothers which was left to go bankrupt, Freddie and Fannie Mac that were backed up entirely and AIG which thus far has received billions in loans after making a deal with the US government.

Effectively moving the money between the new reserve to the level where it can be invested to guarantee US mortgage debt and other bad investments will be the trickiest part.  To balance out a freshly created $700 Billion in money supply plus an already large yearly deficit of almost $800 billion per year, something will have to be done soon.  A $1.5 Trillion outlay both on the current deficit and the creation of $700 Billion in new money adds 15% more to the M3 money supply in just one year.

The chance that the US will see even a portion of the $700 Billion back is minimal.  Likely, most banks will take the cash to cover their bad debts and be worthless as they have no credit or capital to make loans though their balance sheets are clean.  For this plan to work, more bailouts would have to follow along with huge inflationary steps to bolster money supply to the point where $700 Billion is a drop in the bucket.  Simply, to get all of the $700 Billion back, the US government will have to continue with inflating the currency, doing so of course will cost the US dollar even more.

As the price of oil drops from its all time high of $147 per barrel, OPEC is taking steps to cut production to keep the price of oil above $100.  It acted yesterday to reduce its overall output by 500,000 barrels.  Though 500,000 barrels doesn’t seem like much, the margin between the amount of oil produced and oil consumed is only around 1-2 million barrels per day.  A daily cut of 500,000 barrels will prop up the oil markets even as China and India slow down.

OPECs price targets slowly get higher as the price for oil reaches the levels they wish to see.  Used to be that a $60 price target was high enough, then $80 and now the OPEC alliance is searching to keep the price of oil at $100 per barrel.  No one can blame them, they have the power to manipulate supply to level s that are obscenely profitable.  OPEC does have a delicate balance to maintain, if they allow oil to reach levels that is too high for the current market, they face the problem of being ousted by alternative energy possibilities that will put a damper on oil purchases and eventually consumption.

The job of OPEC is to move oil policy through the members it represents.  Many countries are happy to each produce lesser amounts of oil if it means higher prices.  Cutting back on oil production will inevitably bring higher prices, but possibly a reduction in oil revenue.  If oil cuts grow too big, the problem is that oil revenue would drop even as OPEC receives more per barrel.  Many of the countries represented by their oil reserves have little income source other than oil production. Without ever increasing oil revenues, these nations would be broke, bankrupted by debts and other expenses and no income source to offset expenditures.

Saudi Arabia and the UAE are a couple of the OPEC nations that have taken their oil revenues to invest in other interest.  Saudi Arabia and the UAE have made huge investments in their resorts and made their nations a destination spot for the world’s travelers.  This is one way to invest the proceeds in a way that helps their local economy and moves their income from a commodity based economy to something more service oriented.  While oil may not be here 40 years from now, the business of luxury and overindulgence in the service sector will still be around.

Often in the media we hear of the current economic situation compared to several points in history.  Whether it’s the 1987 stock market crash, the 1992 housing bubble, 1970s stagflation and the infamous great depression there needs to be some clarification on the terms used by analysts and pundits alike on the current state of the economy.

First of all, because an analyst says it does not make it true, though a culmination of analysts generally do.  There is a problem with the majority of people in the media who make comments about the market, they’re all pumping their own funds and what they perceive as the general market performance going forward.  When analysts were screaming $200 oil and $5000 gold it is likely that their own positions were set to take profits at $140 a barrel and $1000 per ounce.  Analysts always overshoot, because even when the market goes up they’re right and they like to bring attention to their cause.

Analysts have a vested interest in what the rest of the market does with their money.  When Goldman Sachs comes out with a price target of $45 on a particular stock, they’re shooting for $40.  Its just the general rule of thumb that analysts are pumping up a stock and taking profits far before their targets.  Its how the market works, otherwise there would be thousands of funds out there that have bought stock that they will never ever sell, or at least not within even a 4-5 year horizon.  Though analysts may be uppity and calling a buy on a stock with a high price target, just keep in mind that they’re in business too and happy to make the extra buck.

Worst since, and worst ever is a huge difference.  The worst housing market since the great depression sounds awful, but it means that the housing market is performing its worse SINCE the great depression, not during and not before.  Surely there have been plenty of localized housing booms and busts that have been forgotten by history never to be touched again.  Its becoming common to hear that the housing market is the worst since the depression and that might be so, but the fact remains that these are “shock tactics.”  Throwing the phrase great depression in any analysts opinion immediately makes it more catchy.

Look past the rhetoric and what we’re hearing on TV and pick up quality names.  Holding a few commodity stocks to balance out the inflation game and getting rid of low profit margin stocks will shore up your portfolio against even the largest of recessions.