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15 August 2008

We are taking a vacation from writing and so the next post will be September_2. The Model Portfolio will be updated on Friday the 22nd and Friday the 29th.
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Thoughts

Gold is under $800 as the trading day begins. Oil is $113 and Asian markets were mixed overnight with European bourse indexes also mixed. Treasuries are firm. The Georgian/Russian imbroglio continues and clearly Russia is asserting its influence and staying in Georgia with the West not being able to do anything but spout words. The Baltic countries and Ukraine are next on Putin’s list. What was that about Bush looking into Putin’s soul and seeing it was good?
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Triple Witching ends today and then the unwind will occur on Monday with retail earnings to follow as the remaining items of the month on which traders can focus.
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Krugman’s column today in the NYT is an interesting read: http://www.nytimes.com/2008/08/15/opinion/15krugman.html?hp .
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Oil is down $3 at $111 and that is providing a floor on stocks. The Major measures were higher out of the gate but moved back to even after the first hour of trading. They are now moving higher in the second hour.
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According to the WSJ the two-year-old hedge fund ($3 billion at start) founded by Jonathan Wood, a former UBS AG trader, is down about 85% from its inception through July, according to a person familiar with the matter. Mr. Wood, known as an outspoken investor, has seen his investments in several high-profile casualties of the global financial crisis sour, including Bear Stearns Cos., Countrywide Financial Corp., and U.K. bank Northern Rock PLC. The fund's problems underscore a lesson for investors: Traders who perform well at banks don't always fare as well at hedge funds. This year has been tough for many money managers, particularly those invested in the financial sector and, more recently, commodities. Hedge funds were down 3.5% for the year through July, according to data tracker Hedge Fund Research. Mr. Wood generally takes a long-term approach to investing. His flagship SRM Global Master Fund holds large equity positions in companies involved in mergers, financial restructurings and other corporate actions. This year, the hedge fund was down about 77% through July, which comes on top of a roughly 34% decline last year, the person familiar with the returns said. From the fund's 2006 launch to the end of July, the S&P 500 index was down 3.3%. Mr. Wood's company, SRM Fund Management Cayman Ltd., is registered in the Cayman Islands, with offices in Monaco. (Our offices are Hinsdale, Illinois and Rolling Ground, Wisconsin.)

The phrase Past performance is not an indication of future performance comes to mind.
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We commented on the questionableness of Wells Fargo’s earnings at the time:

From this morning’s WSJ: Wells Fargo's stock is down just 10% over the past 12 months, a period that has blown up other banks' balance sheets and sent the KBW Bank Index down 36%. But it is time to rein in the optimism about Wells Fargo. Second-quarter results, posted in mid-July, showed that Wells Fargo's bottom line got a sizable boost from volatile trading income and a write-up of some mortgage-related assets. Investors shrugged, bidding Wells Fargo's shares up nearly 50% since then. But new financial disclosures, contained in a quarterly financial filing released Friday, bolsters the fear that Wells Fargo's earnings aren't all they are cracked up to be. The first area of concern is illiquid assets, termed "level three" assets, that the bank values mostly using its own estimates and models. As markets have dried up, more assets are being classified as level three. The illiquidity often reflects reduced demand. This usually leads to banks taking big write-downs on those assets. In the second quarter, Wells Fargo's holdings of level-three mortgages increased substantially, but the bank's write-down on those mortgages looked small. Level-three mortgages jumped $3.3 billion to $5.28 billion, but in the quarter Wells Fargo booked only a $43 million net loss on them.
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We bought more shares of Nvidia, Briggs & Stratton, Ericsson, and Sun Micro in accounts today. We are awaiting JDSU earnings next week to add to that holding.
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European bourse indexes closed higher. Gold dropped $20 to $792. Oil recovered from morning lows but closed down $1.33 at $113.75. The euro was $1.46 and there were 110 yen to the dollar. Treasuries gained with the two-year at 2.37% and the ten-year at 3.84%.
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The DJIA gained 55 to end at 11660. The S&P 500 was up 5 at 1298 and the NAZZ dropped 2 to 2452.

Breadth was flat and volume was summer Friday Triple Witching light.

Combined new highs about 150 and combined new lows were about 175.

Today was a draw.
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14 August 2008

Thoughts

Greenspan speaks and now nobody listens. As with prize fighter and baseball players there is a time to move on. But like Jack Welch and other former business leaders Uncle Alan can’t seem to leave the spotlight. Today in the WSJ Greenspan castigates the current powers for their rescue of Fannie and Freddie and offers other bon mots. Yawn.
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The Consumer Price Index rose 5.6% year over year in July and was up 0.8% for the month. Jobless claims were 450,000.
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Wal-Mart announced great earnings.
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The Russian/Georgian contest continues.
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Asian markets were mixed overnight with India the big mover down over 2%. European bourse indexes are mildly higher at midday. Gold was up $6 early on but as the NYC markets open it is down $7. Oil has a $115 handle and Treasuries are firm.
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Well, what do we know? The Financials are rallying today in the face of our diatribe against the powers for not reinstituting the naked short rule. For today at least we will take the egg in our face since our stocks are also rallying.

We bought Briggs & Stratton which was off 10% this morning and down 60% over the last 12 months and we also bought Ericsson the Swedish phone company and repurchased Nvidia in accounts. NVDA did not back off and we want to own so we now do.
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We also added shares of JDSU, Ciena, Sun Micro and Akami to some accounts. Sketchers made a bid for Heeley’s today and we think that one of the biggies like Nike or Addidas will eventually purchase Crocs. The purchase would be minor for them but major for Crocs remaining holders. With that idea in mind we bought a small amount of Crocs for accounts.
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We lost internet access for the afternoon.

Gold was down $20 at $811 and Oil lost $1.13 to $113.50. European bourse indexes closed higher and Treasuries were firm and the euro was $1.48 and the yen 110 to the dollar.
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The DJIA gained 83 to 11615. The S&P 500 climbed above the 1290 resistance/support/resistance and now support level to 1292 and the NAZZ jumped 25 to 2453.

Breadth was 3/2 positive and volume was summer light.

There were about 175 combined new lows and about 115 combined new highs.

The bulls stemmed the bleeding today.
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13 August 2008

Thoughts

On August 13 1982 the bear market bottomed and the bull market of the 1980s began. And on this day in 1998 Robert Bock, a Peace Corps volunteer in the Philippines who was serving in the same province as our daughter Christine, was shot to death by a drunken fellow who killed 10 other people too. Until the Iraq war, i.e. in peace time, the death rate of over 1% for Peace Corps Volunteers was greater than that of service folks.
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The SEC has seen fit to let the emergency order to enforce the short delivery rule expire. The delivery rule is still on the books but will not be enforced. The folks at the SEC have determined that naked short welling will not ruin the markets. We really thought the SEC was more market attuned and that they planned to continue enforcing the rule against naked short selling. Because they are not going to extend the rule we are selling our SPDR Financial position.

Shorting is not wrong and is necessary to an orderly market. But shorting stocks and not having to borrow allows bear raids on companies. Naked shorting leads to the anomaly of certain companies having more shares trading in the marketplace than are officially outstanding. But because brokers and hedge funds make money on gaming the system the SEC is wearing blinkers as it judges whether to enforce the rule. We now expect more carnage in the financial sector.
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Gold is up $7 in the early going and Oil has a $113 handle. Asian markets were lower by 2% overnight and European bourses are also lower at midday. Treasuries have a bid.
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Bulls dropped to 31% in the latest week and bears rose to 45% according to Investors Intelligence.
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NVDA announced a large stock buyback to go with lousy earnings and lower sales last night and the shares are up $1. We took our one day $1 profit and will look to buy back lower.
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We are selling stocks at the opening not because we want to but because the markets are going to go lower until the SEC wakes up and institutes an uptick rule and prohibits naked shorting. The fellow running the SEC is a former Congressman who never had an honest job.

We sold XLF, GE, Verizon, SBUX, UNFI, Sony, Yahoo and a bunch of stocks in our very large accounts. We did buy British Petroleum in accounts as an end of the Georgian conflict/oil recovery buy. BP is on its 12 month low and has bounced off this level before. Quick selling and buying is how we survived 2000 to 2003 and so far this year. The stocks we sold all were positive scratches except XLF (what else is new?) and as such are only opportunities surrendered.
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At noon investment banks Goldman Sachs, Lehman, Citi and Morgan Stanley were downgraded by Mother Merrill. The analyst would have downgraded his own Company also but then he would have lost his job. Joke. He can’t comment on his own company.
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Our tech guru suggests a move to 1330 on the S&P 500 after it touched 1250 this morning. We will welcome it as an opportunity to further lighten positions.
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To quote the Russian spokesperson: "A military depot full of battle tanks . . . was traced out and now necessary actions are being taken to demilitarize the zone," said Peskov. "When we really do not have any confidence toward the Georgian government . . . we cannot afford a dozen battle tanks standing next to South Ossetia." The new term for destroy is demilitarize. As John Stewart said last night, “War is God’s way of helping Americans learn geography.”
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Oil closed at $116.22 up $3.21. Gold was up $18 at $832. Treasuries were a tad weaker with the two-year at 2.48% and the ten-year at 3.95%. The euro was $1.49 and the yen 109 to the dollar.
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The DJIA was the trading vehicle of choice today for the big boys and girls and was much more volatile that the S&P 500 or NAZZ after the recovery from the morning sell off. With thirty minutes of trading left in the day the S&P was down 1, the NAZZ was up 5 and the DJIA was down 100 points.
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The DJIA closed down 110 at 11533. The S&P 500 lost 4 points to 1285 and the NAZZ dropped 2 to 2430.

Breadth was 3/2 negative on the NYSE and 5/4 positive on the NAZZ and volume was moderate.

There were combined about 200 new lows and about 115 new highs.

The SEC gave the day and the financials to the bears. Market internals were not as negative as the DJIA suggests.
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12 August 2008

Thoughts

We note with sadness at our loss, but with happiness for him, the passing of Rev Barnabas Lundergren of Marmion Abbey in Aurora Illinois. He was first our teacher and then a good friend to us for many years. We are thankful to have known him.
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Russia called off its war with Georgia but according to reports the war continues in areas. Hopefully for the folks affected it will end shortly. Russia made its points and demonstrated that although communism is gone the West has no good means of preventing Russia’s domination of its neighbors.
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Stocks are opening lower today and trading will be a good test of the rally. Asian markets were mixed small overnight with no large moves and the same is true for European bourses at midday. Oil traded with a $113 handle before recovering to $114 and Gold was down $12 in early trading. Treasuries are flat.
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Financial stocks are under pressure on a larger than expected large loss at UBS and reports that JP Morgan lost $1.5 billion dollars in this quarter on mortgages. Yesterday the glass was half full and today the glass is half empty. Or at least this morning the glass is half empty.
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The SEC short delivery rule expires tonight with no present plans to extend it. The hope is that hedge funds and traders won’t try to take advantage of the rule. Hope is just that.
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We are buying small in Nvidia Corp - for accounts in which we bought JDSU - ahead of earnings tonight. NVDA preannounced lower sales and earnings and a $200 million write-off a few weeks ago and the share price dropped 20%. The share price is down from $36 to $11 in the last 12 months and if the shares move lower or stay in the same territory after today’s report we will buy more around. The company has $3 a share in cash and no debt with a billion dollar plus cash flow and is priced at one times sales and 12 times depressed earnings.

NVIDIA Corporation provides visual computing technologies designed to generate interactive graphics on consumer and professional computing devices in the United States and internationally. It operates in four segments: Graphic Processing Unit (GPU), Media and Communications Processor (MCP), Professional Solutions Business (PSB), and Consumer Products Business (CPB). The GPU segment comprises products that support desktop and notebook personal computers, and plus memory products. The MCP segment consists of NVIDIA nForce core logic and motherboard GPU products. The PSB segment offers professional workstation products and other professional graphics products, including high-performance computing products. The CPB segment provides mobile brands and products that support handheld personal media players, personal digital assistants, cellular phones, and other handheld devices. This segment also licenses video game consoles and other digital consumer electronics devices. The company markets its products to original equipment manufacturers, original design manufacturers, add-in-card manufacturers, system builders, and consumer electronics companies. NVIDIA was founded in 1993 and is headquartered in Santa Clara, California.
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We also bought small in JAVA at $10.77 which is the new symbol for Sun Microsystems after a reverse split last year. The company is valued at one third of sales and has a net $2 per share of cash on hand. The 12 month high was $25. And the shares are actually priced below their 2002 low.

Sun Microsystems develops products and services for the network economy. It provides network computing infrastructure product and service solutions worldwide under Java technology platform, Solaris operating system, Sun StorageTek storage solutions, and the UltraSPARC processor names. The company also provides solutions for various business and technical activities, such as software development, mechanical design, financial analysis, graphics, visualization, simulation, and education, as well as develops and sells silicon-based chips that facilitate networking, cryptography, and high-performance computing. In addition, it offers enterprise infrastructure software systems, software desktop systems, developer software, and infrastructure management software; data storage products and services, including tape storage products, such as libraries, drives, virtualization systems, media, and software; and disk system product line consisting of data center disks, network attached storage, enterprise archive system, midrange disks, workgroups disks, a boot disk, and disk device software. Further, Sun Microsystems offers support and managed services for hardware, software, and client solutions, as well as provides professional and educational services. It also offers component products, such as central processor unit chips and embedded boards on an original equipment manufacturer basis; and supplies after-market and peripheral products. The company's solutions are used in technical/scientific, business, engineering, telecommunications, financial services, manufacturing, retail, government, life sciences, media and entertainment, transportation, energy/utilities, and healthcare industries. It has strategic alliances with AMD, Fujitsu, and Hitachi Data Systems; and collaborations with Perago Systems, Progress Software Corp., Neil Young and Reprise/Warner Bros., and Samsung Electronics Co., Ltd. The company was founded in 1982 and is based in Santa Clara, California.
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The euro ended at $1.49. The yen was 109 to the dollar. European bourse indexes closed fractions lower and Gold reversed a bit of its losses but closed down $8 at $820. Oil finished the day in NYC at $113.26 down $1.18. Treasuries were better with the two-year at 2.45% and the ten-year at 3.93%.
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The SPDR Financials are down 6% today as JPM and WB are both down over 10% and we bought shares of XLF in many accounts to increase our financial exposure.
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This week is a Triple Witching and with option expiration on Friday the volatility mid week is expected. Which way the trades will go is the unknown. It sure hasn’t been a boring summer.
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They go up and they go down. Today they went down.

The DJIA lost 140 to 11645. The S&P 500 dropped 15 to 1290 (back at support - that was quick) and the NAZZ dropped 10 to 2430.

Breadth was 2/1 negative and volume was light.

There were 195 new lows and 125 new highs.

Welcome back bears.
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11 August 2008

Thoughts

From the Financial Times: An emergency measure protecting a select group of financial stocks from abusive short-selling expires on Tuesday, probably leaving at least a two-month gap before a similar rule, currently being considered, is imposed. The US Securities and Exchange Commission has said that it would not extend the rule preventing “naked” short-selling in shares of 19 key financial entities, including mortgage groups Fannie Mae and Freddie Mac, and big Wall Street firms that include investment bank Lehman Brothers. Instead, its staff is drawing up new proposals to guard against abusive short-selling in shares across the entire market. However, it is likely to be a couple of weeks before they are proposed, followed by a public comment period of at least 30 days. Several ideas are being studied, including the requirement that is at the heart of the emergency rule. Nevertheless, market participants say traders might not engage in “naked” short-selling in the intervening weeks.
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For the year, auto advertising dollars flowing to media outlets could decline by close to $3 billion, according to Sanford C. Bernstein & Company, to about $15 billon for the full year. Auto advertising peaked at close to $24 billion in 2004. Auto sales are at their lowest since 1993, according to Sanford C. Bernstein. According to the newspaper association’s own data, the share of newspaper advertising from automakers is shrinking rapidly: in the first quarter, auto advertising represented just 2.8 percent of all national advertising in newspapers. As recently as 2005, the figure was more than 10 percent each quarter.
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Asian markets were mixed overnight with Japan up 2% and China down 5%. European bourse indexes are higher at midday. Gold is up $4 and Oil has a $116 handle.
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Retailers are moving higher today. It almost seems as if the shorts think the SEC is going to institute a more restrictive short rule. After opening lower the major measures are in plus territory two hours into the trading session. Oil is under $114 and Gold is now down $16.
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We sold some WFMI to reduce position size in accounts in which we bought shares at $19.60 and then $18.60. With the money we bought JDSU ahead of earnings on the 20th with room to buy more and Crocs at $4.55 down from $70 and after earnings and forecast of break even for the year. The CROX is a spec and will not be added to.

We also bought United Foods in accounts at $17.60. Earnings come at month end and we will buy more if the shares sell off as they did last time. We had a nice trade in the shares a few months ago on the sell off and rebound.

We also added shares of Barnes Group at $22.20 to some accounts. We want to buy more around but it is thin trader.
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Barnes Group manufactures and distributes aerospace and industrial products. It operates in three segments: Barnes Aerospace, Barnes Distribution, and Barnes Industrial. Barnes Aerospace segment produces precision-machined and fabricated components and assemblies for original equipment manufacturer turbine engine, airframe, and industrial gas turbine builders worldwide, and the military. It also provides jet engine component overhaul and repair services for various turbine engine manufacturers, commercial airlines, and the military. In addition, this segment also supplies designated aftermarket parts for the life of the related aircraft engine program. Barnes Distribution segment distributes maintenance, repair, operating, and production supplies, as well as provides inventory management and logistic services. It also offers replacement parts and other products, including fasteners, electrical supplies, hydraulic components, chemicals, and security products to small repair shops, railroads, utilities, food processors, chemical producers, and vehicle fleet operators. Barnes Industrial segment manufactures high-precision punched and fine-blanked components used in transportation and industrial applications; nitrogen gas springs and manifold systems used to precisely control stamping presses; retention rings that position parts on a shaft or other axis; reed valves, which are custom-engineered components used in compressors; and injection-molded plastic-on-metal and metal-in-plastic components and assemblies used in electronics, medical devices, and consumer products. It also distributes die springs and nitrogen gas springs, and mechanical struts and standard parts, such as coil and flat springs. In addition, this segment provides engineering solutions, including product design and development, product and material testing, and rapid prototyping. The company was founded in 1857 and is headquartered in Bristol, Connecticut.

Insiders own 20% of the shares which at one half their 12 month high. The company pays a 3% dividend and is selling at one times sales and 11 time earnings.
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At 1pm the DJIA was up 125 points but then gave back most of the gains into the 2 o’clock hour.
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Oil finished down 36 pennies at $114.85. Gold dropped $32 to $832. European bourse indexes closed higher. Treasuries were weaker with the two-year at 2.56% and the ten-year at 4/03%. The euro was $1.49 and the yen was 110 to the dollar.
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Both presidential candidates and the current President want to drill offshore and in currently restricted areas to produce more oil in the U.S. Is that so the oil companies can ship more oil out of the U.S? From Reuters:

A record 1.6 million barrels a day in U.S. refined petroleum products were exported during the first four months of this year, up 33 percent from 1.2 million barrels a day over the same period in 2007. Shipments this February topped 1.8 million barrels a day for the first time during any month, according to final numbers from the Energy Department.

From Hullabaloo.com: most of you who are reading this know that we are dealing with a world market in oil and that this whole argument is brain dead. That's one of the reasons why it's so depressing to have "drill, drill, drill" be such a success. But it seems to me that this would have been a good line of attack against McCain and/or Obama, even though it's equally stupid: "why are the oil companies selling off our good American crude to foreign countries when we need it so badly?"
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Rally Monday faded in the last hour but programs in the last fifteen minutes made the day positive but limping.

The DJIA gained 47 to 11781. The S&P 500 was up 9 to 1305 and the NAZZ gained 26 to 2440.

Breadth was positive and volume was light.

For the first time in the rally new highs exceeded new lows with a combined 195 new highs and about 190 new lows.

The bulls held on to win the day.
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Extra reading from http://www.taylormarsh.com/  HISTORY: On Georgia, Russia, and South Ossetia

 by Mark Allen Haverty

The United States being as new as it is in the greater scheme of things makes us think of wars being based on relatively recent matters – after all, all of ours are. Europe of course shows us over an over again that the roots of wars run very deep, often centuries of hatred. An assassination might have launched World War I, but the reasons behind it were ages old hatreds. That war never really ended, either, with the Treaty of Versailles doing little more than clamp down some of the hatreds temporarily – most erupting just decades later in World War II, others taking nearly a century to boil over, such as the former Yugoslavia and the current situation in Iraq.

TM articles of interest:
"The Pipeline War: Russian bear goes for West's jugular"
Dangerous Game
Georgia: oil, neocons, cold war and our credibility

The ethnic hatreds and feuds of Eastern Europe and Central Asia follow a similar pattern, with centuries of hostilities kept under wraps by brutal dictatorships, with the rage boiling over in to violence with the yolk of oppression finally removed. With the fall of the Soviet Union, rather than working together to advance mutual goals, too many of the peoples of this former empire have instead chosen to try to once again kill one another.

The conflict boiling over in South Ossetia today is far from a new one. A Persian people surrounded by ethnicities with nothing in common with them, Ossetians have found themselves trapped for centuries between the Russians and Georgians. In 1801, the swallowing of Georgia by the Russian Empire would temporarily reunite Ossetians under one rule – albeit not their own – and conflict would be stifled, for now.

With the fall of the Empire, the tensions would flare up again, and rival Communist forces would use the two sides to fight their battles, with the Menshevik Georgians facing uprisings from 1918 through 1920 in the region now known as South Ossetia, with the Ossetians receiving support from the Bolsheviks. In 1921, Georgian independence would come to an end, with Ossetians being a contributing force to this, as they would aid the invading Red Army. If the Ossetians could not be free, neither would the Georgians.

The reward for the Ossetians would be a modicum of their own autonomy, as the Soviets would carve out the South Ossetian Autonomous Oblast for them, although autonomy under Soviet rule is far from true autonomy. Still, this semi-independence would last until 1990, when the Georgian SSR would dissolve it, shortly before the Georgian SSR itself would dissolve, transforming in to the Republic of Georgia, which officially declared its independence from the USSR on April 9, 1991.

Before declaring their independence, Georgians would first declare war on the Ossetians. Conflict would continue from January 1991 through June 1992, with the result being over 1,000 dead and approximately 110, 000 refugees. [i] The result of the war would be the creation of a semi-autonomous region of South Ossetia within Georgia, operating as a de facto state of its own, with peacekeeping forces consisting of Russian, North Ossetian (which, technically, would also be Russian), and Georgian forces.

While a semblance of peace and semi-autonomy were established, it was not enough for the South Ossetians, who voted in 1992 for independence and who have continued to press for it. A second referendum, monitored by international organizations, saw 95% of the populace vote in favor of secession from Georgia. However, there were questions about the legitimacy of this vote, based on the lack of involvement by ethnic Georgians.

In fact, many Georgians, along with a minority of Ossetians, participated in counter-elections, forming an opposition government to the opposition government already operating within South Ossetia. Neither government has received international recognition, but many Ossetians had seen the newer of the two, led by Dmitri Sanakoev, who had formerly been a minister within the initial breakaway government, as a further interference by Georgians in their affairs and a puppet government of the Georgians. Georgia did itself little good in this regard by later giving semi-recognition to the latter of the two governments, dubbing them the “Provisional Administrative Entity of South Ossetia.” As the International Crisis Group observed, “The establishment of Dmitri Sanakoev and his alternative power centre in the Georgian-administered areas in the zone of conflict is alienating the broader Ossetian constituency.” [ii]

After recognizing the government more friendly to their cause, Georgia attempted to use the carrot rather than the stick in attempting to rein in the South Ossetians. Georgia would invest heavily in the development of Kurta, the capital of the Sanakoev government, during 2007, with $10 million in Georgian funds going towards shops, a movie theatre, and a hotel. [iii]

The trigger for the latest violence is not anything occurring in the Caucasus but in the Balkans. As Kosovo pushed for independence, Russia, which opposed such a move due to their historical alliances with Serbia, warned that what was good for Kosovo would be good for other areas as well. Former Russian President and current Prime Minister Vladimir Putin has stated, “If people believe that Kosovo can be granted full independence, why then should we deny it to Abkhazia and South Ossetia?” [iv] The Russians warned of this again in February, as the Russian foreign ministry released a statement saying, "We will, without doubt, have to take into account a declaration and recognition of Kosovo independence in connection with the situation in Abkhazia and South Ossetia.” [v] Further angering Russia were overtures from NATO that they would welcome Georgia in to the organization. This move, which Russians felt was an intrusion upon their sphere, led to a further supporting of separatists within the breakaway regions of South Ossetia and Abkhazia. [vi]

Minor skirmishes kicked off the beginning of August, and Russia began allowing refugees from South Ossetia to evacuate into North Ossetia on Sunday, August 3. By Friday, over 2,000 had done so. [vii] By Thursday, these minor skirmishes became a bombardment of Tskhinvali, the capital of the separatist government, by Georgian forces, and a ground invasion on August 8. While Georgian forces early on would take the city, the tide turned quickly.

By the end of Friday, joint Russian/Ossetian forces would retake Tskhinvali, with Georgian President Mikhail Saakashvili stating that 150 Russian tanks had crossed the Georgian/Russian border. As far as the Russians are concerned, they acted to defend citizens that have become more likely since 2006 to carry Russian passports than Georgian, and who were under an unprovoked attack by the Georgian government. To the Georgians, this violation of their border by the Russians is tantamount to a declaration of war by the Russians, and they are calling for international support.

Conflict became more severe on Saturday, and there are significant civilian casualties mounting in South Ossetia and, to a lesser degree, Georgia proper. The BBC reports that Russian and South Ossetian officials are reporting at least 1,400 dead, the majority civilian, while there are around 37 – 50 dead civilians on the Georgian side.

Why now has this erupted as it has? Clearly, the provocation for the conflict comes from the Georgians, but it is doubtful that the Russians do not welcome it. The Georgians likely felt that the presence of Prime Minister Putin, considered the “true” head of the Russian government, at the Olympics rather than in Moscow might make the Russians less likely to respond. In addition, there is some belief that the Georgians might have thought they had the support of, at the very least, the United States, if not all of NATO, in pacifying the rogue region. What reason did they have to believe this? American forces have been operating within Georgia for months now, helping to train Georgian forces. Georgian military have been participating as one of the states in President George W. Bush’s “Coalition of the willing,” and they have 2,000 soldiers currently in Iraq. The United States has significant interests in Georgia, both in having them join NATO and also the significant oil pipeline that runs through the state, allowing the United States and other Western states to pump fuel through the Middle East without Russian or Iranian involvement. [viii]

Further, the Georgian government has lobbyists in highly important positions. How important? Try Randy Scheunemann, Senior Foreign Policy Advisor to Senator John McCain, the presumptive nominee for the Presidency.

 


Sources:

[i] On the Front Lines in the near Abroad: The CIS and the OSCE in Georgia's Civil Wars, S. Neil Macfarlane, Third World Quarterly, Vol. 18, No. 3, Beyond UN Subcontracting: Task-Sharing with Regional Security Arrangements and Service-Providing NGOs (1997), pp. 509-525

[ii] Georgia’s South Ossetia Conflict: Make Haste Slowly International Crisis Group, June 7, 2007

[iii] Georgia tries diplomatic approach to lure back Ossetians, International Herald Tribune, August 16, 2007

[iv] Why Georgia's enclaves would love to follow, but will probably fail

, The Economist, November 27, 2007

[v] Russia warns of Kosovo repercussions, International Herald Tribune, February 15, 2008

[vi] Q&A: Violence in South Ossetia, BBC.com, August 8, 2008

[vii] Refugees Flee to Russia to Escape War in the Caucasus, Deutsche-Welle, August 10, 2008

[viii] US has political, economic stake in far-flung spat, Associated Press, August 9, 2008

 


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8 August 2008

Thoughts

8/8/08 8:08AM and we just ate. And yes, the Olympics begin today.

UBS is going to buy $20 billion, Mother Merrill $12 billion, and Citi $7 billion of auction rate securities from clients. And as these financial behemoths announced their settlements with the respective governing agencies they all said they were buying back the securities to do the right thing for their clients. And if you believe that they all have other exotic securities with no risk that they would like to sell you.

We bet that, in a few months, auctions for auction rate securities will resume and work. How else will these banks get rid of the bonds they bought back? And yes there are new suckers born every day. The securities won’t be called auction rate securities. The suckers may not be that dumb. Maybe the term will be covered bonds, endorsed by the Secretary of the U.S. Treasury.
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Russia and Georgia, the country and not the state are shooting at each other. Now that Russia has oil revenue it can throw its money away on war.
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Obviously, stocks didn’t break out to the upside yesterday and so there is more work to do.
*****

Asian markets were mixed and China dropped 4.4%. At some point the drop in the Chinese market is going to matter. The drop (crash?) already has been a calamity to those rushing to buy last October who have lost over 60% of their investment if they were buy and hold folks.

European bourse indexes are higher small at midday and U.S. futures are flat in early trade. Today may be a summer Friday. That would be a novel experience for this summer.

Oil has a $117 handle (down $2) and Gold is also lower by $7. Treasuries are unchanged as the trading day begins.
*****

Fannie Mae lost $2.54 a share in the second-quarter as it booked $5.35 billion in credit-costs from boosting loss provisions and charge-offs. FNM cut its dividend to five cents a share which will save the company $1.9 billion in capital through 2009. Fannie said that 2008 will be its peak year for credit-related expenses and that it plans to cut annual operating costs 10% by the end of 2009, increase its guaranty fees and manage its balance sheet to conserve capital.
*****

McCain and Obama are on track to receive -- and spend -- nearly $1 billion between them this political season. In 2004, candidates Mr. Bush and Sen. John Kerry, along with their parties, spent about $675 million collectively on their campaigns.
*****

Oil is now down $4 (John McCain is one powerful fellow, all he has to do is suggest offshore drilling and.... or see Krugman’s take on the subject http://www.nytimes.com ) and the DJIA is 150 points higher after 30 minutes of trading, so much for a quiet day. Financials are leading the way up as they led the way down yesterday. Retailers also have a bid and Commodity plays are sucking wind.
*****

The euro has dropped to $1.50 today. A week ago it was $1.60. that is a huge move. The yen was 110 to the dollar up from 98 a few months ago.
*****

Akami was trading lower this morning as the markets moved higher and we added shares to accounts.
*****

In the spirit of sell when you can, not when you have to, we eliminated Motorola and Sprint. MOT is up 25% from our purchase price and Sprint has been rising recently on Fridays in anticipation of a weekend bid and falling in the early part of the week. We didn’t like the action after we purchased it and are using the Friday pop to get out with a minor gain.
*****

Oil ended down $5 at $115. Gold dropped $25 to $8440. Treasuries were flat with the two-year at 2.50% and the ten-year at 3.96%. European bourse indexes closed the week higher.
*****

The S&P 500 closed above 1290 resistance (not yet support unless there is follow through Monday) that ii failed at yesterday. To accomplish that close on Friday is a first for the rally off the July 15 lows. The DJIA was down 40 on Monday, up 320 on Tuesday, up 40 on Wednesday, down 40 on Thursday and up 350 on Friday, just a typical somnolent summer week of trading.
*****

The DJIA closed at 11700 up 300 points. The S&P 500 gained 30 to 1296 and the NAZZ jumped 58 to 2414.

Breadth was better than 2/1 positive and volume was brisk.

There were about 225 new lows and 125 new highs. (Combined)

The bulls won the day and the week.
*****

 

7 August 2008

Thoughts

AIG announced a huge loss and the shares are off $4 or 20% in early trading. Jobless claims were up 7,000 to 455,000 for the latest week. Those two items have the major stock measures in a funk and socks are going to open lower. That may set up a rebound to break though the 1290 level on the upside and continue the rally. More likely is that the 1290 top on the S&P 500 will remain resistance and stocks will retreat towards the bottom of the range.
*****

Asian markets were mixed small overnight and European bourse indexes are mostly higher small at midday. Gold is up $8 and Oil has recovered to the $120 level. Treasuries are flat.
*****

We added more CIEN down 10 % from last buy to a few accounts. We also increased American Eagle positions in some accounts.
*****

At 11am the DJIA is down 140. The DJIA was down 150 points as the markets opened and then tried to rally but never made it to better than down 75 points. We are going to raise cash and hope we are wrong. We sold Cisco, Merck, Texas Instruments and Intel for profits and up on the day.
*****

It really is amazing the screwy things financial companies did in the credit boom of the last five years. We hear folks bemoan that government never does anything right but the government has never made as many bone headed decisions as major financial corporations did over the bull run.

As another add on to Citigroup’s myriad problems today the bank agreed to buy back more than $7 billion in auction-rate securities and pay a $100 million fine to settle U.S. regulatory claims it improperly saddled customers with untradeable bonds. Citigroup will repurchase securities from individual
investors, charities and small- and mid-sized businesses by Nov 5, New York State Attorney General Andrew Cuomo said in a statement today. It must also take steps to ``expeditiously provide liquidity solutions to all other institutional investors,'' he said.
*****

Oil closed at $119.81 up $1.23. Gold lost $3 to $880. Treasuries were better. European bourse indexes closed fractionally lower.
*****

The DJIA lost 220 points to end at 11435. The S&P 500 dropped 23 to 1266 and the NAZZ was down only 22 to 2355.

Breadth was 2/1 negative on the NAZZ and 3/1 on the NYSE and volume was active.

There were 215 new lows and 75 new highs.

The bears rebuffed the bulls at important resistance. Joe Granville was on CNBC and he said he turned bullish on July 15 when the NYSE recorded 1300 lows. Joe is a good technician.
*****

 

6 August 2008

Thoughts

Whole Foods disappointed last night and is 20% lower. We have been in and out of the company since the $40 level down from $70. Under $20 we are staying in and will be buying more today. We trust CEO Mackey and think suspending the dividend and reducing store openings is prudent. WFMI acquired several years’ worth of store openings in the Wild Oats merger and they need to consolidate that buy.

Cisco didn’t disappoint and is higher this morning on a relief pop.

Sprint lost subscribers, but the number was less than expected. With write-downs there was a loss and the shares are back at the $7.70 level.
*****

Hong Kong was closed overnight because of a typhoon and the rest of Asia was higher with Japan up 2% and China up 1%. Gold is up $4 after yesterday’s $20 drop and Oil has a $119 handle as the trading day begins. Treasuries are flat. European bourses indexes are mixed.
*****

Investors Intelligence had 34% bulls up from 30% and 43% bears down from 50% in the latest reporting period.
*****

We added shares of Whole Foods on the predictable sell off this morning. In the coulda market we woulda waited for the sell off to repurchase the shares we recently sold and bought back.

We bought shares of Sprint in accounts that own GE. We also added more GE to accounts.

And we bought Rite Aid at $1.30 in accounts that own Micron. At that price the shares are like buying an option on the company. There is the risk of bankruptcy but as we mentioned the last time we owned the shares at much higher prices 30% of the common shares are owned by a Canadian drug store company (Jean Coutu) that took shares valued at $5 in return for stores they sold to RAD. With their 30% ownership we would have someone fighting for the interests of equity shareholders if bankruptcy occurred. We are not making a major bet but the upside is much greater than the downside. at these prices and thus justifies the speculative risk.
*****

Oil ended the day at $118.31 down 55 pennies and Gold gained $1 to $886. The yen was over 109 to the dollar and the euro is back down to $1.54. European bourse indexes closed higher and Treasuries were flat with the two-year at 2.55% and the ten-year at 4.05%.
*****

The major measures absorbed morning selling and managed to close higher on the day. A breakout on big volume tomorrow is what is needed to keep this rally going.

The DJIA gained 40 points to close at 11655. The S&P 500 was up 5 at 1290 and the NAZZ rose 30 to 2380.

Breadth was 5/4 positive and volume was light.

There were about 195 new lows and 105 new highs. (Combined)

The bulls held serve.
*****

 

5 August 2008

Thoughts

Stocks are strong out of the gate as the bulls are in a moving mood since the bears weren’t’ able to break their spirit over the past week. The Fed announcement comes at 1:15pm and until then the bulls look like they plan on romping.

Oil was a couple of dollar lower in early trading and now has a $120 handle. Gold is at $884 as commodities take it on the chin. Treasuries are flat ahead of Fedspeak.
*****

Cisco earnings come after the close as do Whole Foods.
*****

Asian markets were mostly lower overnight with China down another 1.5%. the Shanghai index is now at 2600 down from 5500 in October last year and the question now is whether it is basing or getting ready to break though long term support to the downside. India was up 3%.

Europeans bourse indexes are higher by 1% and more at midday in celebration of Société Générale not having earnings as bad as expected.
*****

We bought Akami and Hologic in accounts in which we bought VMware yesterday. Akami share price is down $10 in the last week to $23 on disappointing earnings. Akami provides services for accelerating the delivery of content and applications over the Internet. Hologic share price is down $5 in the last week to $18. Hologic develops, manufactures, and distributes diagnostic and medical imaging systems for serving the healthcare needs of women.
*****

Fed leaves rates unchanged and continues to worry about inflation. The DJIA was up 210 points at the time of the Fed announcement at 1:15pm.
*****

European bourse indexes closed better with many more than 2% higher and Oil was down $2.87 at $118.45. Gold dropped $24 to $883. Treasuries were unchanged on the short end with the two-year at 2.55% and weaker longer out with the ten-year at 4.01%.
*****

The DJIA gained 325 points to close at 11610. The S&P 500 tacked on 35 to 1284 and the NAZZ jumped 65 to 2310.

Breadth was 2/1 to the good and volume was active at 5 billion on the NYSE.

There were about 220 new lows and 120 new highs. (Combined NYSE and NAZZ)

The bulls won the day.
*****

 

4 August 2008

Thoughts

Financials are opening loser and the major measures in negative territory as the trading day begins. Asian markets were lower overnight with China down 2% and in bear territory. The Shanghai index ahs retraced more than 60% from its October 2007 high. China was the had to own market of 2006-2007.

European bourses are mostly lower and Gold is at $906 with Oil sporting a $125 handle.

HSBC said earnings were down 28% on mortgage write downs in the U.S. and the CEO said conditions in the lending markets are the worst they have been in several decades. He still plans on taking his bonus though.
*****

The first of the major homebuilders filed Chapter 11 over the weekend. WCI, of which Carl Icahn is Chairman, filed after it said it would not be able to refinance $1.8 billion in debt coming due. Icahn will eventually come out smelling like a rose since he will figure out how to participate in the bankruptcy but folks who followed his lead and bought common shares in a me too following of Icahn will lose their investment. Several years ago Icahn offered $22 a share for the entire company.
*****

The Fed meets tomorrow.
*****

Corporate executives strike again. From the WSJ:

At a time when scores of companies are freezing pensions for their workers, some are quietly converting their pension plans into resources to finance their executives' retirement benefits and pay.

In recent years, companies from Intel to CenturyTel  collectively have moved hundreds of millions of dollars of obligations for executive benefits into rank-and-file pension plans. This lets companies capture tax breaks intended for pensions of regular workers and use them to pay for executives' supplemental benefits and compensation.

The practice has drawn scant notice. A close examination by The Wall Street Journal shows how it works and reveals that the maneuver, besides being a dubious use of tax law, risks harming regular workers. It can drain assets from pension plans and make them more likely to fail. Now, with the current bear market in stocks weakening many pension plans, this practice could put more in jeopardy.
*****

From realmoney: Factory orders increased 1.7% in June, a percentage point more than expected, and May's gain of 0.6% was revised to a 0.9% gain. The "strength" was because of increases in orders for nondurable goods, which was the missing portion of this report (data on durable goods were released on July 25). Orders for nondurable goods increased sharply for a fourth month, increasing 2.5% and bringing cumulative gains for the past four months to 10.8%.

The increases in orders of nondurable goods are the result of price increases: of the roughly $6 billion increase in orders of nondurable goods, $3.8 billion was for petroleum and coal products and $1.6 billion was for chemical products. Some of the roughly $360 million increase in orders for food products almost certainly was because of prices, too.

Even if there were strength in factory orders, some of it need be dismissed because of the impact of income tax rebates, which is forcing factories to raise output in order to replace sold items. The only good news is that by boosting factory output, the rebate checks have helped keep incomes from being weaker than they would otherwise be by keeping more people employed than would otherwise be the case.
*****

Citi reported its first loss since at least 2005 on credit-card securitizations, signaling that risks may be growing in a business that generated $3.5 billion of revenue in the past three years. Citi lost $176 million in the second quarter packaging card loans into securities, the company said in an Aug. 1 regulatory filing. The New York-based bank completed fewer deals and was forced to mark down its own $9 billion stockpile of the debt instruments and other stakes the company amassed while selling them to investors. Citigroup manages about $202 billion of credit-card loans worldwide, about $111 billion of which have been turned into securities and sold, according to the filing. Delinquencies on the securitized portion have jumped by 16 percent since the end of last year to $2.16 billion as of June 30, Citigroup said. The firm's results may portend similar losses for rivals.
*****

Strong consumer electronics results and demand in emerging markets continued to boost semiconductor sales, with June figures up 8% from a year ago.

The semiconductor-chip industry is driven by sales of consumer products such as personal computers and cell phones. Though higher energy costs have lowered disposable income, consumer electronics spending has been holding up, as June's results show. The Semiconductor Industry Association said higher energy costs have had "little impact" on growth in sales of electronic products so far. During the month, sinking prices for memory continued to restrict revenue gains. Excluding that segment, semiconductor sales would have increased 12% on the year, according to SIA. SIA said price attrition caused a 6% decline in total memory sales despite sharply higher unit sales.
*****

Obama must be reading our posts. He wants to release 70 million barrels of oil over six months from the Strategic Petroleum Reserve to bring down oil prices. We agree but our idea is to release even more over a year’s time. Let’s see how the reserve works and whether the oil from the reserve can enter the distribution system easily. In fact let’s find out if the oil is really there.

Obama’s comments are given as the reason for the $4 drop is the price of oil this morning although we think the drop is the result of the mystery sellers returning ahead of the Fed meeting tomorrow.

The oil drop rescued the stock markets which were headed south with the DJIA down 100 points. At 11 am the DJIA is back to the positive side.
*****

The action last week was negative but outside of the financials we thought the breadth numbers were OK and there didn’t seem to be any panic selling. Maybe the markets need panic selling to clear the air but we doubt that will occur until autumn. We continue to expect a rally into Labor Day.
*****

We added shares of VMware to larger accounts and shares of EMC to accounts that own Cisco. EWC is majority owner of VMware and the shares of VMW have fallen from $100 per share in the nutty days of last year to $35 per share. That is still expensive but the company is on the cutting edge of software that expands the use of computers. Any more explanation is more than we can explain. EMC owns 86% of VMW and there is talk that some large company is interested in EMC for its VMware subsidiary. REMC surprised with better than earnings a couple of weeks ago but the shares sold off on news that VMW had missed analysts’ estimates.
*****

Oil closed down $3.92 at $122.18 and Gold was down $13 at $904. Treasuries were flat and European bourse indexes were fractionally lower.
*****

The DJAI closed down 42 at 11283. The S&P 500 lost 11 to 1250 and the NAZZ was down 25 at 2285.

Breadth was 2/1 negative and volume was light.

There were about 265 new lows and 90 new highs. (Combined)

The bears won today.
*****

 

1 August 2008

Thoughts

The Monthly Employment Report showed a drop of 51,000 folks employed. The unemployment rate rose to 5.7% from 5.5% as more folks stopped looking for jobs. This is truly an immeasurable amount of folks except if you happen to be one but the markets need numbers to trade on and this is the biggie of the week. Before the number Stocks were flat. Asian closed mixed overnight with India up 2%, China up 1% and Japan down 2%. European bourse indexes are mixed at midday and Oil has a $122 handle with Gold down a couple of dollars. Treasuries are flat.

After the number U.S. futures moved higher indicating an up opening and at least a few minutes of rising share prices.
*****

GM announced a $15 billion loss including $9 billion on special items. Ouch.
*****

Elan/Biogen’s Alzheimer’s drug caused two more brain illnesses and Elan is back down to under $10 after trading at $30 on Monday. Biogen is down $15 on the news. The value of Fidelity Investment's massive 15% stake in Elan fell more than $900 million after the bapineuzumab data were presented. Based on Elan's after-hours swoon Thursday, the value of Fidelity's Elan investment fell $1.5 billion. Even for Fidelity, that's a lot of money.
*****

The last two years the markets have bottomed around this time of year before rallying into at least October. In 2006 the rally continued until January. Last year the rally ended on October 31.
*****

The rally on the Employment Report lasted about ten minutes.
*****

Stocks were lower most of the day but the major banks and many financials rallied into the close.
*****

At the bell the DJIA was down 51 at 11326. The S&P 500 dropped 7 to 1260 and the NAZZ lost 15 to 2310.

Volume was active and new lows were twice new highs.

The bears won the day.
*****

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



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