It's a great time to be afraid

One trader I met in Texas, who specializes in energy finance, said he was pushed into a fearful posture by the complexity of the task ahead for the Treasury as it tries to implement the bill. He observed that Secretary Hank Paulson was expected to name a 35-year-old aide to run the program, and the companies rumored to be involved so far are experts in mortgage-backed securities and derivatives but not in valuing and selling mortgage loans.

It will be so difficult for the Treasury to set up all the monitoring and valuation systems, and get outsourced vendors in place with new contracts, that it will take much longer than the market expects to get the first dollar flowing to banks, and by then it may be too late. The longer it takes, the higher the costs will be. Making matters worse is that all this is happening during a change of presidential administrations. In this context, no wonder the trader was fearful it won't work and was selling on Friday.

The next few shoes to fall? The traders pointed to a looming disaster in municipal finance, where cities and states that have lost their backstop from troubled insurers are facing lower property- and sales-tax revenues from withering home values and shrinking consumer sales. They said they would warn investors to steer clear of muni bonds -- even though their yields are becoming incredibly rich -- until it is clearer that governments will cut spending enough to ensure payments won't slow.

Worries in the oil patch

And finally, because he specializes in refined petroleum products and sees the sales figures daily, Emilio said he suspects the accelerating global slowdown will slash demand for gasoline and heating oil to the extent that major U.S. refiners like Tesoro (TSO, news, msgs) and Valero Energy (VLO, news, msgs) may face the greatest financial challenges of their lives, potentially to the extent that the government will be forced to nationalize them.

He points to the sharp drop in miles driven in the United States; the $25 billion federal loan to automakers to develop more-fuel-efficient cars; and the massive, sophisticated new refinery being built in India that's expected to produce as much as 20% of world supply when it comes fully on line -- dwarfing the increasingly old-fashioned U.S. refineries. "There's just a lot more molecules coming into the gasoline pool from overseas," he said, "and that has to put our refiners in a bind."

In short, fear can be quite rational if exercised at the appropriate time. Right now is probably a good time to worry that any recovery from the credit disaster will not be swift, and may next have second-order affects that rip down muni bonds, refiners and more as the economy slows.

Yet it's trickier than that. Longtime readers know that I have highlighted the 960 level of the S&P 500 ($INX) all year as my target for a 2008 low, and that level was hit in overnight futures trading on Tuesday.

There's an opportunity now for a 300-point move higher in the S&P 500 as world central banks finally coordinate on huge interest rate cuts and smart traders with cash switch to the fear of missing such a major bear-market rally.

After the effects of that wear off, though, perhaps around the 1,300 level, don't be so quick to dismiss a renewal of concern gnawing at your conscience.

Meet Jon Markman at The Money Show

MSN Money's Jon Markman will be among more than 50 investing experts gathered in the nation's capital Nov. 6-8 for the fourth annual Money Show Washington, D.C. Just days after the election, this elite group will present more than 170 free workshops to help you prepare for changes in the political landscape. Admission is free for MSN Money users. To register, call 1-800-970-4355 and mention priority code 009554, or visit the Money Show Washington, D.C., Web site.

At the time of publication, Jon Markman did not own or control shares of any company mentioned in this column.

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