Weather the Worsening Storm

As a natural-born financial chicken who goes to great lengths to avoid what Ben Graham used to call a permanent loss of capital, I am naturally attuned to signs of a fox in the farmyard. My sense of caution has been growing in recent days. I had begun to see some signs of a possible market bottom, but those seem to be fading.

Although some stability seems to be returning to the credit markets, there is not a lot of lending going on at any level. Monday's market action is of great concern to me. The first factor was that the initial rally did not hold. The news that China was acting to reignite growth in its economy should have sparked a rally that held and gained throughout the day. Not too long ago, the psychological lift from an announcement that the world's most populous nation was taking actions to increase its spending would have been enormous.

The second reason for increasing caution on stock prices is that I am getting a sense that the bailout is not working. In fact, it appears to be developing into a worst-case scenario. It is not making loans available to consumers or small business. The banks are simply taking the money and reinforcing their balance sheets. They are buying other banks with taxpayer-provided dollars.

The deal with AIG (AIG - commentary - Cramer's Take) has been reworked, almost doubling the cost to the government -- the price tag has swollen to $150 billion. So far, it is the single largest private bailout in U.S. history. It is not just the insurance business, either. The government is taking equity stakes in major banks. It is now equity holders in the financial industry it's supposed to oversee and regulate.

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At the time of publication, Melvin aas long DOG, although positions may change at any time.

Tim Melvin is a writer from Stevensville, Maryland, who spent 20 years a stockbroker, the last 15 as a Vice President of Investments with a regional firm in the Mid Atlantic area. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks. Melvin appreciates your feedback; click here to send him an email.