The Bailout Fails

The bailout was back – for about 24 hours or so. But last night the US House of Representatives voted against socialising its financial crisis. The score was 205 for, 228 against. Despite Hank Paulson’s confidence, all those foot-notes added to the bailout over the weekend came to nothing.

And now we have a serious panic. You can expect two things to happen.

Firstly, it’ll be a bad, bad day on the Aussie market. You’d be forgiven for going back to bed, reader. The Dow Jones had its worst day in history, falling 7%. Commodities are down too. Last we checked, oil was down around US$10.52. Metals and other commodities are following it down. Resources and the Dow Jones are the two biggest drivers of the Aussie market on any given day.

Secondly, credit markets are about to come grinding to a spectacular halt. Forget buying ‘good’ banks that seem undervalued. They’re about to become even more undervalued. Money market rates will soar as lending comes to a standstill.

It leaves the Federal Reserve and Treasury largely helpless. Unless a new plan goes through the American political system quickly, US banks are stranded. The only other weapon the Fed has against a crisis of liquidity and solvency is interest rates. It can lower them further.

It’s disastrous for the US economy. It’s inflationary too.

Gold Soars 4%

So it’s not the least bit surprising that gold is shining. Yesterday’s question (gold or undervalued resource companies?) has an answer. Bullion is up US$28 per ounce. Our technical commodity analyst Gabriel probably didn’t expect to see such a quick return on his view from yesterday.

But the US dollar has fallen about 2%. Who wants to own a country with falling interest rates and a plummeting stock market? Fewer and fewer people each day. Gold is rising as an alternative to the dollar. It’s as simple as that.

Cash Becomes More Valuable than Ever

Firstly, understand that this week will be a panic. The Dow Jones was still falling when trading finished yesterday. Don’t expect it to recover a day later.

We mentioned the possibility of leveraging gold gains with shares yesterday. We take it back. This changes the game. Shares are an endangered species this week.

But a lot of good businesses are about to become cheap in Australia. Otherwise safe, long-term investments will lose double digits today. The Street is covered in blood this morning. There’s going to be a lot of opportunity out there.

There’s one thing common to good companies at the moment – cash, and lots of it. When credit dries up, you need cash to stay alive. In Australia, the companies heaviest with cash are the miners.

For that, we’re sticking to our Diggers and Drillers strategy of Three Ps. Good partners, an undervalued project and experienced people.

The partners are now the key factor. Without financing, some mining projects will never see the light of day. The ones that eventually survive this credit contraction are about to go into the bargain bin with everything else though. Cheap.

You should expect companies with those Three Ps to rise in the long term. This week (probably today) they’ll cheapen by double digits. Maybe 20% or more. Rio Tinto (ASX:RIO) was already under $100 before trade opened. It’s cheaper by the time you’re reading this.

But how far will the overall market fall? Today, expect something huge. Tomorrow, Gabriel will be forecasting the Aussie market’s technical slide for the rest of the week. And today, here are his thoughts on how the high-yielding Australian currency will fare against the low-yielding yen.

This article is written by Allan Robinson from Money Morning. Money morning is a website that aims to give you intelligent and enjoyable commentary on the most important financial stories of the day, and tell you how to profit from them.