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15624 Lemley Drive
Soldiers Grove, Wi 54655
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Bud: 312-925-5248
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31 July 2008

Thoughts

More than a few hedge funds are wishing the end of the month came a few days sooner since the rally in financials has taken a bit of luster off returns for those short the industry.

Exxon Mobil reported lower than expected earnings (although a record) citing hindered refining margins (and maybe political considerations in that in times of high oil prices etc.). Exxon Mobil once again reported the largest quarterly profit in U.S. history Thursday, posting net income of $11.68 billion on revenue of $138 billion in the second quarter. That profit works out to $1,485.55 a second. That barely beat the previous corporate record of $11.66 billion, also set by Exxon in the fourth quarter of 2007.
*****

Motorola beat estimates on earnings and revenues and is up a bit in early trading. CBS was in line but dour with forward expectations.
*****

Asian markets were mixed small overnight except China which was down another 2.5%. European bourse indexes are higher at midday and Gold is up a few dollars while Oil has a $125 handle. Treasuries are flat ahead of Jobless claims.
*****

Advance GDP was up 1.9%. Where is the recession? Certainly the government doesn’t see one.

Unfortunately for those who lost them and for the markets Jobless claims were up to 448,000 and continuing claims were 3.3 million.
*****

Bristol Myers is going to buy the rest of Imclone, overpaying again because they don’t know what else to do. BMY is paying $5 billion for $200 million EBTIDA and hope. The hope part is the expensive part.
*****

Starbucks lost money this quarter for the first time taking write downs to close stores. We are going to buy the news. From news wires: Analysts offered mixed opinions on Starbucks Corp. after the coffee chain reported a third-quarter loss due to slow U.S. sales and restructuring costs. JPMorgan analyst John Ivankoe wrote in a note to investors that although the business could get worse in the near term, "we agree with current existing store focus (including many new products/initiatives), low risk new development, and major organizational restructuring initiatives." But other analysts were less optimistic. RBC Capital Markets analyst Larry Miller said the chain faces more competition and needs to reverse a trend in brewing coffee at home. "We think it's too early in the turnaround to get involved with Starbucks shares," he said in an analyst note. After the market closed Wednesday, Starbucks reported a quarterly loss of a penny per share. Excluding costs for closing 600 underperforming stores and other restructuring costs, the company earned 16 cents per share. Adjusted profit missed analyst estimates by 2 cents per share, according to a Thomson Financial poll. Starbucks also lowered its 2008 guidance and cut its plans for growth both in the U.S. and internationally. For 2009, however, Starbucks said it still expects profit between 90 cents per share and $1 per share. Analysts expect profit of 92 cents per share. Starbucks has been attempting to transform its U.S. business -- which has suffered from declining traffic and sales -- by closing the stores, cutting 1,000 office positions and introducing new products like Vivanno smoothie drinks. The company said in a conference call Wednesday night that the initiatives will produce substantial cost savings in fiscal 2009.
*****

GMAC, the auto and mortgage finance company majority owned by Cerberus Capital Management and GM, reported a $2.5 billion loss as vehicle sales plummeted and the housing slump boosted foreclosures. Residential Capital’s, the mortgage subsidiary of GMAC,  loss jumped to $1.86 billion from $254 million a year earlier as the decline in home prices accelerated.
*****

We are using today’s drop to add some stocks to accounts. We bought Starbucks and more CBS and SPDR Financial in many accounts. We also repurchased part of the Whole Foods we sold two days ago at the price we sold. The street seems to think that the court remand is a non issue. We added Yahoo to accounts as it dropped under $20.


*****

Oil ended down $2.57 at $124.20. Gold was up $10 to $922. Treasuries gained on the Jobless claims number with the tow-year at 2.51% and the ten-year at 3.95%. European bourse indexes were mildly mixed.
*****

There was just another 200 points mover on the DJIA today and today it was to the downside. The bears raided financials in the last hour and recouped a bit of their lost gains of the last few days. And commodity stocks were also under selling pressure all day. Other stocks we ignored.

The DJIA closed down 205 at 11378. The S&P 500 dropped 17 points to 1268 and the NAZZ was down 5 at 2325.

Breadth was 5/4 negative and volume was moderate.

There were about 220 new lows and 105 new highs. (Combined NYSE and NAZZ)

The bears won the day and with it the month and remain well ahead of the year.
*****

 

30 July 2008

Thoughts

Federal regulators on Tuesday extended through mid-August a temporary order banning a certain kind of short-selling of the stocks of mortgage finance companies Fannie Mae, Freddie Mac and 17 large investment banks. The Securities and Exchange Commission said the ban on so-called "naked" short selling will be in effect until 11:59 p.m. EDT on Aug. 12 and will not be extended. Short sellers make a bet that a stock's price will fall so that they can profit from it. They borrow shares of the stock and sell them. If the price drops, they buy cheaper actual shares to cover the borrowed ones, pocketing the difference. "Naked" short selling occurs when sellers don't even borrow the shares before selling them, and then look to cover positions immediately after the sale. The SEC order requires short sellers to actually borrow shares before selling them. SEC Chairman Christopher Cox said the order was also helping prevent potential "distort and short" manipulation of stocks, which occurs when rumors and misinformation are used to drive down the price of a stock that has been sold short. "In addition to continuing the existing order against naked short selling, the commission will continue exploring other remedies for the broader marketplace to further protect investors from 'distort and short' artists," Cox said in a statement.
*****

According to the WSJ: Mr. Cox has indicated that the SEC may propose rules "very soon" to extend the restrictions to all stocks that trade in the U.S. In its announcement of the extension, which came shortly after 9 p.m., the SEC said that following the Aug. 12 expiration, the agency "will proceed immediately to consideration of rulemaking which would become effective after public notice and comment" and would focus on the "broader market."
*****

Asian markets were higher overnight with India up 3%. China did not participate in the fun closing fractionally lower. European bourse indexes are higher at midday and U.S. futures are flat. So are Treasuries while Gold is down $9 in the early going and Oil has a $121 handle.
*****

Bulls are 30% and Bears are 50% in the latest Investors Intelligence reading.
*****

With the markets up big time in the early going and all the financials that we sold yesterday morning on fire we were thinking how humbling this business is. And then a trading friend called and asked if we were having fun. After a few expletives we said we are flummoxed and consternated and ready to hang it up. The markets have a way of humbling that is unmatched. Ah well, there is always tomorrow and tomorrow and we have our health and our family and friends and we live in the land of milk and honey and even with today’s rally we are still outperforming the S&P 500 by 13% this year and are even with it over the last three years so we must be doing something right. But it is frustrating...
*****

At 11am financials are well of their highs of the day and the markets have a roll over look to us. The DJIA remains up 100 points. What happened to the somnolent trading?
*****

Mother Merrill is on the hook for $3.9 billion on the $30 billion of CDOs it sold. It cannot participate in any gain. And these are the folks who want to manage your money?
*****

From the Chicago Sun Times: Friendly bantering between three Cubs fans and a White Sox fan at a child's birthday party turned nasty, then allegedly erupted into a brutal beating that cost a 32-year-old Gurnee man his right eye. Sox fan Robert Steele's eye was damaged beyond repair when an attacker wearing steel-toed boots kicked him in the face during the 2-year-old's birthday party, authorities said Tuesday.
*****

Sony is down 30% in the last month and 10% in the last day on disappointing earnings and we bought shares this morning at $37.50 in accounts that own Verizon. We also added GE with a 4.5% yield to accounts. All these adds are to own, not trade.
*****

Gold closed down $7 at $909. Oil gained $5 to $127. Treasuries were flat. The oil gain placed pressure on stocks and the financials were all over the place today but managed to close on their highs. European bourse indexes closed 1% higher.
*****

We added shares of J Crew to accounts as the share price dropped $1.50 on twice the normal trading volume. We noticed weakness in the shares price for the last two days. Our guess is that the drop is occasioned but a neutral rating form Goldman Sachs. The Goldman Sachs analyst sees a balanced risk/reward. The analysis sees attractive growth profile, controlled store growth, strong direct business, and solid management. Note risk stemming from continued macroeconomic pressures. At the beginning of the month a Citi analyst upped the shares from sell to neutral saying the apparel retailer has likely issued overly cautious second-quarter guidance. Since its first-quarter earnings report on May 29, shares have fallen 32 percent, partly due to a disappointing second-quarter outlook. However, Citi Investment Research analyst Kimberly Greenberger said there is upside potential to the guidance.

"We believe management's guidance is overly cautious and the second quarter is likely running inline to slightly better than expected," Greenberger wrote in a note to investors. June sales likely improved from April and May, she added. “If improving June sales continues into July, we believe there could be upside to management's cautious second-quarter earnings per share guidance," she wrote.
*****

Robert Marcin at realmoney.com writes: This is one of the most complicated markets I can remember in my career. Many stocks are down and cheap with solid fundamentals. These usually represent attractive longs. Also, sentiment is a bad as it gets. That also usually means a bottom.

Yet fundamentally, things are deteriorating with the potential to get much worse. The uber bear case has a spreading global recession and still expensive stocks in the case of a global economic meltdown. Therefore investors are shooting economically sensitive shares first and asking questions later. Bullet proof stories or defensive plays, i.e. expensive stocks are gaining at the expense of cheap ones. That makes life tricky for a deep value guy like myself.

I am limiting my bets in this type of market. I believe that the big bottom will come this fall on a deteriorating economy (no more rebate checks) and negative political sentiment from a democratic administration. In this environment, small/mid caps drop more than large caps, the VIX hits 35, and you hear "it's not too late to sell" from the talking heads on CNBC. At that point, I hold my nose and buy like crazy and pray I am not too early. Til then I stay more defensive than not.
*****

The DJIA gained 190 points to end at 11585. The S&P 500 rose 21 to 1384 and the NAZZ was only up 10 points to 2330. The financials rallied and tech didn’t.

Breadth was 2/1 positive on the NYSE and 5/4 positive on the NAZZ and volume was active at over 5 billion shares on the NYSE.

There were about 225 new lows and 120 new highs. (Combined)

The financial bulls are breathing a bit easier and the financial shorts are sweating.
*****

 

29 July 2008

Thoughts

Our prediction of a dull week was obviously wrong.  Last night we reconsidered our purchase of the Pro Shares Ultra Financials while taking our evening walk and this morning we sold UYG at a scratch loss. Too much risk.
*****

Mother Merrill surprised us and the street last night-although not some folks who sold the shares down $4 the previous two trading sessions-by announcing another $6 billion write-down and the sales of $8 billion in new shares which will dilute existing shareholders by 25%. We were surprised since John Thain, the CEO, had said just recently that no more equity sales were anticipated. Or at least that is what we heard although we are sure the language was couched for any eventuality.

In effect Mother wrote down $30 billion in CDOs to a value of $6 billion and then loaned a hedge fund 75% of the $6 billion to buy the CDOs. And the loan is non recourse to an entity that will have no other assets but the CDO and so Merrill remains on the hook for the amount of the loan if the hedge fund is not able to repay the loan from earnings on trading the CDOs. Merrill raised $8 billion by selling shares of which $3 billion were purchased by the Singapore government. But since Merrill had sold Singapore shares at $48 last December and guaranteed that buyer against loss, $2.5 billion of the proceeds of the stock sale went to reimburse Singapore for its losses. So much for high finance. By the way the CDOS that Mother Merrill sold are part of the CDOS that Merrill bought from Fifth Third in early 2005. Since Fifth Third still has CDOs that were returned to it by Merrill we decided to sell FITB again since we presume FITB will eventually have to mark the billion dollars plus in even sketchier CDOs that they hold down to zero also.
*****

Oil is down $4 at $120 and so the sellers are back. The major measures are 1% higher but Mother Merrill can’t turn green. AIG and Citi are also in the red column as other financials rally.
*****

We are using the rally to eliminate financials. We didn’t sleep last night and that tells us that we are too heavily invested. We are trying to get out of all our financials except the SPDR financial Index. With that in mind we sold the UYG, FITB, Marshall & Isley for losses and Old Second for a scratch. Our aggressiveness the last week turned a nice bounce in our accounts into a not nice give back plus. But that is what trading in a bear market will do and we want to take our medicine and have funds and chutzpah to fight another day. We are keeping our techs-except ADCT which we sold today since we have enough of a speculative position in Micron- and retailers and the income yielding telecoms plus CBS and will hunker for a while.
*****

The FTC won its appeal of the trial court’s ruling not granting a preliminary injunction to the FTC to prevent the merger of Whole Foods/Wild Oats. The appeals court remanded the case the trial court to reconsider granting a preliminary injunction against the merger. Since Whole Foods has sold 30 Wild Oats stores and closed 16 more as well as changing a number to Whole Foods stores we presume the lower court will say that Humpty Dumpty is already and pieces and can’t be put back together. But anything is possible. We sold Whole Foods for a scratch since another trial in this case will be disconcerting for management. It is strange that the FTC is not interested in opposing the merger of Budweiser and InBev the two largest brewers in the world but is intent on preventing WFMI/OATS. But such are the ways of the current administration.
*****

BKX at $60 and 1235 on the S&P 500 became support with today’s move. If the move holds this will be a higher low for bull traders than the low on July 15.
*****

At 1:42 pm there was an earthquake in Los Angeles. Why not?
*****

Oil ended down $3.06 at $121.60. Gold lost $9 to $918 and Treasuries lost ground as stocks strengthened with the two-year at 2.65% and the ten-year at 4.06%. The dollar was better at 108 yen and a euro was worth $1.55.
*****

Up big today regains all of yesterday’s losses plus. Who would of thunk it last night? Do some shorts know that the SEC is going to extend the no naked rule to all financials? Or are they just too cautious to take the chance knowing they can sell in the morning if not.

The DJIA gained 250 points to close at 11385. The S&P 500 jumped 25 points to 1262 above 1260 resistance/now support and the NAZZ rose 52 to 2316.

Breadth was 3/1 to the good and volume was summer active and better than on the sell off yesterday.

There were 225 new lows and 75 new highs (combined NYSE/NAZZ).

The bulls fooled us and recaptured the gold baton for today.
*****

 

28 July 2008

Thoughts

Over the weekend we were at a wedding anniversary party. And the talk was not of Obama’s foreign tour or the woes of Wall Street. Rather the main topic of conversations was the picture of the 12 pound trout that was caught in an unnamed stream in our county that was on the front page of the local weekly newspaper.

We don’t know whether this anecdotal incident is specific to the land of milk and honey but we do think is adds a bit of perspective to both the present political and economic turmoil.
*****

Verizon announced earnings and revenues that were good but the stock is going to open a bit lower this morning. Overseas Asian markets were higher and European bourse indexes are lower at midday. Oil is $1 and change higher and gold is at $930 up $4 in early trade. Treasuries are flat.
*****

Our thought is that the markets may calm and assume summer doldrums inactivity for the next month or so with the Conventions and Olympics and non directional trading replacing the hyperactivity of the last month. Or maybe that is our wish.
*****

Except for diehard conservatives Krugman’s column is an interesting read today. If you are conservative save yourself the heartburn. http://www.nytimes.com/ and look for Krugman’s column under Opinion at the far upper right.
*****

European bourse indexes closed lower on the day by over 1%.
*****

We added Verizon with a 5% yield to accounts.
*****

At noon the DJIA is down 190 points. The selling has been consistent but the drop has been more erosion than a punch down. We don’t know what to make of it. We have done some small buying adding to financial positions in our very large accounts at 10% down levels from previous purchases. Volume is summer Monday light.
*****

We have confidence in the issues we hold but we find that we don’t in AIG or American Express because when they moved lower today we realized we are uncertain of them. And so we are selling and placing part of the proceeds in Ultra Financials ProShares (UYG) which is an ETF that invests in the DJ Financials and provides twice the upside and downside of the moves in that index. Its top ten holdings mirror the XLF but have different percentages. It is a volatile issue having traded at $75 and $14 in the last twelve months but no more volatile than AIG has been and we have more certainly in what we own. We also switched Wachovia holdings at a loss to the UYG. (UYG is down a similar amount as Wachovia in the same time period.) We want exposure to the volatile financials without concentrating specifically on one troubled money center bank like Wachovia or insurance company like AIG.
*****

Oil closed up $1.36 at $124.61. Gold was up $3 at $928. Treasuries were better with the two-year at 2.59% and the ten-year at 4.01%.
*****

The DJAI closed down 240 at 11130. The S&P 500 was off 24 to 1234 and the NAZZ dropped 46 to 2264.

Breadth was 2.5/1 negative and volume was light.

There were about 235 combined new lows and 70 combined new highs.

The bears control.
*****

 

25 July 2008

Thoughts

The stocks markets are in a quandary this morning. Durable goods orders were up 0.8% and ex transportation up 2%. That has bulls happy. But the action yesterday was scary and the markets still seem to go down easier than they go up with the movement down twice the movement up on volatile days. Given that today is a Friday the markets may just fade away into a summer weekend. That would make neither the bulls nor bears happy but it is summer.

We were waiting to buy stocks for a summer rally and we have done that. Now we just have to have the patience to let the rally come to us. Many of the shares we own have 4% plus yields. We didn’t buy for a one or two day trade although we did make a few.
*****

Asian markets were down 1% and more overnight as are European markets at midday. Gold is up $10 and Oil has a $126 handle. Treasuries are weaker on the durable goods number and U.S. stocks are going to open flat on that number after being lower in pre market trading.
*****

We just noticed on our screen that Yahoo has real time quotes on their regular financial website. They are free.http://finance.yahoo.com/q?s=axp
*****

New home sales were better than and the DJIA is now up 100 at 9 am after being lower on the opening. This is one screwy market.
*****

We bought Marshall& Ilsley at $14.45 in accounts that own Old Second Bancorp and also in those accounts we bought Wachovia at $14.60. We are adding some issues to our very large accounts today also.
*****

The oil seller showed up this afternoon and Oil finished of $2.21 at $123.28. Gold was up $7 at $929. Treasuries were weaker with the two-year at 2.70% and the ten-year at 4.11%. European bourse indexes were fractionally lower.
*****

The DJIA closed up 25 at 11375.The S&P 500 gained 6 to 1258 and the NAZZ rose 30 to 2310.

Breadth was 5/4 positive and trading was summer Friday light.

There were about 225 new lows and 95 new highs. (Combined)

Today was a tie but yesterday’s drop gave the week to the bears.
*****

 

24 July 2008

Thoughts

Today looks to be a glass half empty day after the rally of the last week. Some reality about the continuing crisis in banks is evident. Asian markets were mixed overnight but China did manage a 2% plus gain. European bourse indexes are lower by over 1% at midday and U.S. futures are indicating a mixed to lower opening. Gold is up $5 after dropping $25 yesterday and Oil has a $125 handle. Treasuries are flat in the early going.
*****

Jobless claims were 406,000 in the latest week which is not good.
*****

Ford reported an $8 billion loss for the quarter and National City a $2 billion loss. So what else is new?
*****

This excerpt is from this morning’s LA Times:
Customers of failed IndyMac Bank faced shorter waits and less confusion at branch locations Wednesday, but some depositors who closed their accounts encountered new hurdles when they tried to deposit cashier's checks at other banks. Sheryl MacPhee, 46, said she liquidated a certificate of deposit at IndyMac's San Marino branch Tuesday morning after a two-hour wait. She then took the check to a Washington Mutual branch in South Pasadena to deposit. MacPhee said a WaMu manager told her that under a new corporate policy, the bank was not accepting IndyMac checks. If a customer insisted on depositing the check, it could be eight weeks or more before the full amount would be accessible, she said she was told. "It seems to me that other financial institutions not accepting these checks are only furthering the panic," said MacPhee, a freelance writer from South Pasadena who deposited her check elsewhere. "Sure, IndyMac will give you a check, but what good is it if no other institution will accept it?" Officials at the Office of Thrift Supervision, WaMu's chief regulator, are investigating the complaints about the checks, agency spokesman William Ruberry said.

Lucky for Ms MacPhee that WaMu wouldn’t take the check since WaMu is probably the next domino for the FDIC to close down.
*****

Yesterday at this time (noon) we were smart. Today, not so much. The major measures are 1% lower with 4/1 negative breadth on the NYSE. Everything is lower including the commodity stocks that have been moving counter to the financials which are lower.
*****

We switched Marshall & Ilsley with a $1.50 profit to a double position in Wachovia. The sell was great timing the buy was not. We reduced the buy position in our large accounts at days end. We also sold some Merck to reduce the percent holding to more in line with our other large cap stock holding. We bought International Game, Fannie May and Financial Ultra ETF in our very large accounts.
*****

Oil closed at $125.49 up $1.05. Gold gained $10 to $925. Treasuries caught a bid as stocks sank with the two-year t 2.62% and the ten-year at 4.01%. European bourse closed on their lows of the day down over 1% across the continent.
*****

40% up moves are usually followed by 15% down moves and that is what occurred today in the financials. Tomorrow needs to be flat/up or...

The DJIA was down 283 points to 11350. The S&P 500 lost 30 points to 1252 below the 1260 support/resistance/support and now resistance level. The NAZZ lost 45 to 2280.

Breadth was 4/1 negative and volume was moderate which was the only good sign for bulls today.

There were 215 new lows and 85 new highs. (Combined NAZZ + NYSE)

The bears are naked shorting the financial indexes and they are back in the game on the winning side.
*****

 

23 July 2008

Thoughts

Back in 1980 famed oil man Bunker Hunt thought he had cornered the Gold and Silver markets. Gold was at $800 and silver was $50. Folks we selling the family silver for $20,000 an 8 piece place setting. Hunt was the richest man in the world. Then the powers at the futures trading exchanges changed the rules that forbid the opening of positions and placed limits on the size of positions. That these same officials’ were traders some of whom were on the other side of Hunt’s trades didn’t seem to bother any officials.  Within months Silver was back to $10, Gold $300 and Hunt was broke. And so it goes in the world of Finance where no matter how big a hitter you think you are the hidden forces of government and industry can change the rules at any time.

Last week the SEC at the suggestion of hidden voices said that it would begin enforcing rules on the books to compel delivery of shares sold short in fourteen stocks. In the last week those fourteen stocks are up an average of 40% in price and there is blood in the streets of Shortsville.

And now Congress according to Bloomberg is debating the following:

Congress may outlaw elements of oil futures trading that lawmakers found distorted demand and contributed to the 69 percent surge in prices in the past year. U.S. legislators are considering limits on the number of oil contracts an investor can hold and may increase disclosure requirements. Speculators such as Goldman Sachsuse the practices to bet on price swings, which may drive up prices, though they have no intention of taking delivery of underlying goods, lawmakers say. Proposals being debated this week in the Senate would bring prices more in line with demand, proponents say. Excluding the effect of speculation, oil would be around $80 a barrel, 38 percent lower than yesterday's price, according to Jesus Reyes Heroles, the chief executive officer of Petroleos Mexicanos. Critics say restrictions may interfere with the functioning of a $4 trillion annual market for crude oil. ``Americans are being taken advantage of not only by OPEC but by speculators right here in our own country,'' says Senator Ted Stevens, an Alaska Republican, referring to the Organization of Petroleum Exporting Countries. ``Historically, this has not been a bad problem. Only recently has speculation reached these unsustainable levels.''
*****

Asian markets were higher by 2% plus except China which can’t buy a rally this year. European bourse indexes are higher at midday by over 1%. Gold is down $5 and Oil has a $127 handle. Treasuries are weaker on the strong stock markets.
*****

Yahoo was OK with earnings. Costco missed and is down 10%. COST is the darling of the street and so this miss has the big boys and girls worried about other retailers. The big boys and girls are still playing their shorting games in the retailers since the powers in Washington don’t care.
*****

AT&T reported good number and the share price is up 5%.
*****

We added shares of American Express, AIG and Whole Foods to smaller accounts that didn’t own the shares. We also doubled our holding of Whole Foods in accounts that own it. We sold our Wachovia for a one day $3 gain. We bought more SPDR Financial and new positions in Old Second Bank, Fifth Third in accounts in which we sold Wachovia. Fifth Third and Old Second are to own, Wachovia was an anchovy.

ADC Telecom is at a new five year low this morning down 30% in price on lower than news and poor forward guidance. We bought shares at $10.15 in accounts that own Motorola.

In our largest accounts we bought a small amount of Vimware which is a technology high flyer. Well it was a technology high flyer having traded at $125 in the last year. We ought shares at $33 down $5 on the day. We also bought shares of EMC in those accounts.

We are buying Chico’s and Coldwater in accounts that own J Crew and Williams Sonoma in those that own American Eagle. Coldwater provided positive guidance a few weeks ago and we are buying the Chico’s betting that shorts in the stock will get nervous and cover.
*****

European bourse indexes close higher by 1% to 2% on Wednesday. Gold dropped $30 to $918 and Oil was down another $4 at $124.20. The magic sellers are still around even with the Gulf hurricane.
*****

The DJIA gained 30 to 11632. The S&P 500 was up 5 to 1282 and the NAZZ gained 22 to 2325.

Breadth was 3/2 positive and volume was moderate.

There were about a combined 170 new lows and 135 new highs.

The bulls were weaker today but still won it.
*****

 

22 July 2008

Thoughts

Texas Instruments, Apple, Merck and American Express all missed last night and this morning Wachovia announced an $8.8 billion loss for the quarter. That has the major measures lower in pre-market trading although not off even 1% on the DJIA. If the bulls can hold today then the summer rally may ensue. If not, more testing of lows is in store.
*****

Asian markets were mildly lower overnight and European bourse indexes are 1% and more lower at midday. Treasuries have a small bid, Gold is up $10 and Oil down $1 with a $130 handle.
*****

Today should be interesting. Oil is dropping in early trading as the mystery sellers push oil down to help stocks.
*****

Stocks opened lower but are climbing back after one half hour of trading. The $4 drop oil seems to be helping. We wonder who is selling?
*****

We are buying today. Why today and not last week? What is different this time? What is different is that is that Goldman Sachs is now in charge of the U.S. economy. The Treasury secretary is from Goldman Sachs. The number two man at Treasury just left Goldman Sachs to go to the Treasury to deal with the crisis. Rubin at Citi is from Goldman. The fellow who took over at Wachovia last week is from Goldman. John Thain who is managing the crisis at Mother Merrill is from Goldman. These guys all made their fortunes together while they were at Goldman.

Goldman weathered the financial crisis and knows where all the bodies are. Oil is dropping for no reason other than there is a dedicated seller who wants to get the price down. Events don’t occur in a vacuum. The enforcement of the delivery rule on short sales is the result of thoughts from traders who know how the system works. There is an implied warning in that rule’s enforcement that the game is changing.  If the rule enforcement for the fourteen stocks doesn’t calm the shorting then the SEC may chose to make it a blanket enforcement on all stocks. After all, the rule is on the books. And if that doesn’t work we would guess that the uptick rule will be back. Shorting will still occur and stocks may drop but short attacks on stocks will be stopped.

Our buying doesn’t mean that we think that the economy is cured. If we did we would go all in. but we do think a decent rally is possible and the lows of last week may hold for a while unless some unforeseen event occurs. And $8 billion write-down at Wachovia this morning occasioned a 10% drop in the share price but the shares are now trading 10% higher than yesterday’s close. With a Goldman person at the helm at WB traders are betting that his friends in high places are at his back.

We bought Wachovia, Texas Instruments, Fifth Third Banks, Merck and repurchased American Eagle in many accounts plus more Financial SPDR and.

In our very largest accounts we bought the Regional Bank ETF, AIG, American Express, Sprint and Old Second Bank Corp.

We bought AXP, Wachovia, Merck, and Texas Instruments 10% or more below yesterday’s close. We don’t expect immediate gratification from these purchases and still have room to buy much more. We also purchased Marshal & Isley Banks, and added to our AT&T, Cisco and CBS in various accounts.

After the buys large accounts are 30% invested and medium sized accounts may be up to 25% invested. Smaller accounts by their nature vary.
*****

1260 on the S&P 500 is an important number and the markets have been trading slightly above and below it all day. With an hour left the major measures are even on the dye. The final hour awaits. Oil has bounced back and is now down only $2.50 on the day after being $5 lower earlier. That has given stocks a reason to pause and ponder.
*****

Oil ended the day down $3.63 at $128.20. The world didn’t end and so Gold reversed its early morning gain to close down $15 at $948. Treasuries were weaker with the two-year at 2.70% and the ten-year at 4.10%. European bourse indexes mixed.
*****

The big boys and girls decided to pop the markets in the final hour.

The DJIA closed up 135 at 11605. The S&P 500 gained 17 to 1277 and the NAZZ was up 25 to 2305.

Breadth was 2/1 to the good and volume was summer light.

There were a combined 200 new lows and 100 new highs.

The Bulls won.
*****

 

21 July 2008

Thoughts

Bank America reported better than and that has stocks looking to open higher. BAC’s financial report is a work of art. BAC says Countrywide will contribute to earnings this year although for the latest quarter Countrywide lost a net $2.5 billion which was not included in BAC’s quarterly report since they didn’t own it in the last quarter.
*****

Asian markets were higher last night with China up 2% and others up 3% and more. European bourse indexes are also higher by 1% at midday and U.S. stocks will open higher. Gold is up $7 and Oil has a $130 handle.
*****

Roche is purchasing the remainder of Genentech for $44 billion. It had the right to purchase these shares in 1995 for $4 billion but passed. It then bought shares in 2000 but has offered shares to the public over the past decade at much less than it is now paying. And so goes the world of high finance investment banking.
*****

Oil ended up $2.62 and $131.60. Gold gained $6 to $962. European bourse indexes closed mildly higher and Treasuries were flat with the two-year at 2.64% and the ten-year at 4.07%.
*****

The DJIA closed down 30 points at 11470. The S&P 500 was down 1 at 1259 and the NAZZ lost 4 to 2280.

Breadth was 2/1 (NYSE) and 5/4 (NAZZ) positive and volume was summer Monday light.

There were a combined 175 new lows and 75 new highs.

The bulls won the day by not losing it.
*****

 

18 July 2008

Thoughts

Google and Microsoft disappointed last night and are trading lower but above their initial reaction sell off of last night. IBM was down overnight but is now trading higher. Same with Mother Merrill in that it traded lower overnight but now is basically unchanged. Citi announced a loss of $2.5 billion and the street is happy with that number and the shares are up $2 at $19.

Asian markets were mixed overnight with India and China up over 3% and Japan lower with Taiwan down 2%. European bourse indexes are plus small and Gold is down another $7 in the early going. Oil is up at $131 and Treasuries are continuing to give ground.
*****

The mess that is out there in bank portfolios is now known- or maybe known. From this morning’s WSJ:

An amended complaint filed Thursday by the California attorney general related to a suit against Countrywide Financial Corp. sheds new light on the poor quality of loans the company was planning to sell to investors.

The new data provide a close look at 158,000 mortgages that had been slated for sale by Countrywide Homes Loans before last summer's credit crunch -- which was triggered by rising mortgage defaults -- turned investors away from mortgage-backed securities. Nearly 48% of nonprime loans and 21% of pay-option adjustable-rate mortgage in that portfolio were in some stage of delinquency or foreclosure as of April 30, according to the amended complaint, filed by California Attorney General Jerry Brown in state court in Los Angeles. Overall, more than 21% of all loans in that portfolio were in some stage of delinquency or foreclosure, it says.

These loans account for roughly 17% of mortgages held by Countrywide, says Dan Frahm, a spokesman for Bank of America Corp., which completed its acquisition of Countrywide earlier this month. Mr. Frahm added that 9.53% of all loans owned by Countrywide were 30 days or more past due as of the end of April.
*****

From the Financial Times of London:

Furious investors trash Karachi stock exchange
By Farhan Bokhari in Islamabad
>Published: July 18 2008 03:00

Investors upset over falling Pakistani share prices yesterday smashed the Karachi Stock Exchange's windows during protests that led to scuffles between market traders and share owners demanding the temporary closure of the stock market.

The KSE-100 index dropped by 2.7 per cent to close at 10,212.92. The index has plunged 35 per cent from a record high on April 21.

"I am upset because I am constantly losing money and there is no one ready to help me," said Naeem Jehandad, an equity investor in Islamabad, who said the value of his shares had halved in the past four months.

"For me, this is just a murder for my economic future," added Usman Khan, a lift operator who returned from the Middle East last year and invested his savings of Rs350,000 ($5,000, £2,500, €3,150) in the KSE.

"There is so much uncertainty all around that it has crept in to the stock market," said Shuja Rizvi, head of brokerage services at Karachi's Capital One securities brokerage house.

Last night a group of large investors and brokers set up an emergency fund to buy shares from small investors, many of whom were at the centre of yesterday's violence. The Rs3bn fund was mainly aimed at preventing a recurrence of the unrest, analysts said.

Razi-ur-Rehman, who chairs the securities and exchange commission, Pakistan's stock market regulator, said: "If we can get rid of distressed investors, that would help to stabilise the situation. The intention is to have an orderly fall rather than an abrupt fall."

The slump in investor confidence was accelerated by the weakening rupee, which dropped by 1.3 per cent yesterday on political uncertainty and an economic meltdown during Pakistan's transition to civilian-led democracy.

Pakistan's current account and fiscal deficits are unsustainable, inflation is at a three-decade high of more than 21 per cent, and foreign currency reserves have fallen below $11bn, more than $5.5bn under last October's record high.

Analysts said worries were mounting among Pakistanis about the government's campaign to get rid of President Pervez Musharraf. He has been credited with overseeing a five-year economic recovery that made the KSE one of the fastest growing emerging markets.

"The danger is that we could see our economic -success unravelling," said Salman Shah, former de facto finance minister. He said the government should act to tackle growing discontent over the worsening economy and internal security conditions and to stem further slide in investor -confidence.

The KSE's decline has also been fuelled by reports in the past week that the US, along with its Nato allies in Afghanistan, was considering putting more troops along Afghanistan's border with Pakistan to combat Taliban fighters crossing from the Pakistani side.
*****

European bourse indexes closed higher with Germany, England and France all up 1.5%.
*****

We are repurchasing the Financial Index (XLF) in accounts that own CBS. We realized this week that we shouldn’t own all three indexes because then we are multiplying our exposure with no diversification. The three we owned tend to move together. We want to acquire a position in financials over time but the exposure when we bought the three together last Friday was more than we realized and was a distraction, especially with the violent moves of last week. We now have a more realistic plan. We learned from our four day ownership the risk involved. Luckily we survived the ride with no losses. No harm no foul.

We are going to sacrifice the potential home run gained by correctly picking a beaten down bank like National City or Huntington Bank. We tried that in 1990 with the Texas banks and they all went bankrupt. And that bad experience led us to miss the move in Citi. This time we would rather buy the Index and take a larger position over time deriving the same profit from greater exposure in a diversified index. For example a 2% position in a depressed bank stock that quadruples over the next five years can be equaled by a 4% holding in an index that doubles over that same time period. Even if the index underperforms the individual stock the risk/reward favors the index at our age and risk level.
*****

Crude Oil settled at $128.88 down 41 pennies on the day. There is a tropical depression heading for the Gulf of Mexico but not even that was enough to rally oil into the close. There were probably some hedge funds that got caught in the short slaughter this week that needed to sell some oil to raise cash. Plus our darker side sees the hand of Central banks on the sell lever.

Gold was down $14 at $956. Treasuries closed flat on the day.
*****

At the bell the DJIA was up 45 at 11490. The S&P 500 was flat at 1260 and the NAZZ dropped 30 to 2280 as Google and Microsoft swooned.

Breadth was 5/4 negative and volume was light.

There were about 225 new lows and 75 new highs.

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

 

17 July 2008

Thoughts

JP Morgan’s earnings dropped 53% but that was ahead of expectations and the shares are up $2 in early trading. By the by, JPM beat the earnings consensus by taking lower loan loss reserves this quarter than last. Does that make sense? Short covering from yesterday is continuing this morning as shorts realize the SEC is going to enforce rules that have been on the books for 80 years. That short covering has markets looking higher again today and the rally is now in full bloom.
*****

Asian markets were higher overnight with India up 4% but China was fractionally lower. European bourse indexes are 2% to 3% higher at midday. Gold is down another $5 and Oil has a $133 handle. Treasuries are a tad weaker.
*****

Housing starts for June were higher and Jobless claims at 366,000 lower than expected.
*****

Xcel Energy  said Wednesday it is shutting off power and heat to an average 1,000 residential customers every week in Colorado for nonpayment of bills and expects to disconnect 72,000 customers in 2008 — a 33 percent increase over 2007. Xcel is based in Minneapolis. It’s Colorado’s largest utility, serving about 1.3 million customers — roughly 70 percent of the state’s population. The number of customers disconnected for nonpayment of bills is an indication of how they’re coping with higher energy bills and a rocky economy. Uncollected bills eventually are rolled into the rates paid by all customers.

Xcel’s 1.26 million natural gas customers are paying $13,034,237 every year to cover write-offs. Xcel’s 1.3 million electricity customers in Colorado pay $13,457,057 every year for unpaid bills, according to state regulators. During the first six months of 2008, Xcel said it shut off service to 36,000 customers, up 33 percent from the 27,000 customers shut off during the first half of 2007. Yet 85 percent of the 36,000 Xcel customers disconnected during the first half of 2008 had service restored by paying all or a portion of the total amount they owed the utility. About 80 percent of those who were reconnected paid the full amount they owed, said Xcel spokesman Tom Henley.
*****

Today and tomorrow are options and futures expiration days and that is also affecting the pricing of bank stocks as well out of the money options of two day ago are now in the money. Option call writers are being forced to cover their bad bets.
*****

We are repurchasing AT&T with a 5% yield and adding to Micron and Motorola. We are also buying CBS with a 6% yield. Our thought is that AT&T has a 5% yield which pays us for owning it and the dividend offers downside protection. The Motorola and Micron holdings were not large enough to make it worthwhile and even with the add it is only 1.5% in large accounts. We also bought Cisco $1 higher than where we sold it last week to have one quality tech stock in case this rally has legs.
*****

Oil was down $5 at $129.75. Gold closed off $2 at $958. Treasuries collapsed with the two-year at 2.52% and the ten-year at 4.03%. European bourse indexes closed 1% to 2% higher.
*****

The DJIA gained 207 points to end at 11445. The S&P 500 was up 15 to 1260 and the NAZZ gained 28 to 2312.

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

There were about a combined 265 new lows and 75 new highs.

The bulls won again.
*****

After the bell Google disappointed and the shares are off $60 but IBM’s earnings were better than although half of IBM‘s better than gain is from foreign exchange trading. Mother Merrill exceeded loss expectations and is trading $1 lower.  Microsoft was a penny light on earnings with better revenues and the shares are $1 lower. Citi announces in the morning and it should be an interesting day as options and futures expire.
*****

 

16 July 2008

The weight of this sad time we must obey,
Speak what we feel, not what we ought to say.
The oldest have borne most; we that are young
Shall never see so much, nor live so long.

The Duke of Albany, King Lear, Act V, Scene III

Thoughts

Wells Fargo announced 22% lower earnings and a $3 billion reserve for loan losses and then raised its dividend. That last action has the shorts flummoxed and the share price of WFC up 15% in early trading. And the rise in WFC shares was enough to place in bid in stocks futures. Unfortunately June CPI was up 5% year over year and 1.1% in June. Futures didn’t like that number and so the markets are now flat pre-opening.

Fifth Third announced a drop in earnings and raised its dividend in Quarter 1 when the shares were at $22. The shares of Fifth Third are now at $11 as on June 8 FITB cut by 2/3rds the dividend they had just raised. Now Fifth Third is much smaller than WFC and Warren Buffet is neither on its board nor does he won 8% of the FITB shares as he does at WFC.  We presume Buffet was privy to the dividend raising action. We don’t think it was prudent. But it makes a statement and that is obviously what WFC and Buffet (?) wanted to do.

Net charge-offs at WFC increased to 1.55% from 0.87% but dipped from the first quarter's 1.6%.  The San Francisco bank changed its policy on writing off defaulting loans in April. Instead of writing off a defaulting loan after 120 days, the bank now waits 180 days, potentially postponing a major hit to earnings. That doesn’t sound very Buffet like to us.

Wells Fargo is diversifying by bolstering its insurance and credit cards units. In May, Wells Fargo bought Flatiron Credit Co., which finances insurance premiums, and the bank has been building its credit-card business. Insurance revenue climbed 27 percent in the quarter to $550 million and credit card fees rose 14 percent to $588 million, the company said. How Wells Fargo is going to avoid the credit card write-offs that other banks are experiencing is a work in progress.
*****

Intel announced inline number last night and in line forward guidance and the shares are up 50 pennies. Cleveland Cliffs Iron with a market value of $10 billion is going to pay $10 billion for Alpha resources. Both companies were worth $2 billion each two years ago. The proposed merger is a paper for paper exchange and is an indication of the huge gains in the commodity era.
*****

Investors’ Intelligence has 27% bulls and 48% bears in the latest week which is similar to the previous week.
*****

Asian markets were mixed to lower overnight with China down 2.7%. Where are all the China bulls now? European bourse indexes are lower at midday. Gold is down $7 and oil is off $1.50 at $137 and change.
*****

The CEOs of Lehman and Bear Stearns are accusing Goldman Sachs of spreading nasty rumors about their firms and shorting stock in the process. The CEO of Goldman Sachs is shocked, just shocked by the accusations and promises to act swiftly and firmly if the dastardly accusations are true. And so goes the soap opera on Wall Street.
*****

The Wall Street Journal has a front page story about the emergency actions of the SEC to limit short selling. It is not until paragraph twelve that the article mentions the emergency action applies only to naked short selling and the article never mentions that naked short selling has been illegal since 1934. So goes news paper reporting in the era of the newspaper barons.

Another point that hasn’t been mentioned is that intuitional accounts like mutual funds and charities that own the shares in companies that are being shorted loan those shares to the short sellers because the institutions are paid a fee for letting short sellers use the shares for delivery. If those institutions refused to loan their shares the shorts would not be able to short stock. But the institutions are so myopic and unimaginative that they and the trustees who are supposedly making fiduciary decisions don’t’ realize that a concerted effort to refuse to lend to shorts would eliminate great deal of short selling. Where are CALPERS, and FIDELTY and FEDERATED?
*****

In reading the blogs and listening to CNBC we seem to be the only folks who think it is strange that Wells Fargo raised its dividend after it reported la 22% drop in earnings and a $3 billion increase in loan reserves with earnings helped by an extension of 2 months on recognizing defaults on mortgages.
*****

We sold JP Morgan at $33.20 today. It is up $2 on the Wells Fargo dividend raise news and the no naked short selling SEC dictum. Earnings come tomorrow and given that WFC is up $4 we are guessing that part of JPM’s earnings news is in this move. Moreover the shares traded under $29 yesterday and the markets still have not had the washout that is usually necessary for a trading bottom to be in place.
*****

Oil is down another $4 this morning as the Central Banks continue to work their magic. An hour and one half into the trading session the DJIA is up 140 points and the banks stocks are up 10% with Wells Fargo up 25%. That just shows what we know. But since there wasn’t a swoosh lower before the rally it is our guess that this is more short covering from folks fearful of what the SEC than real investment buying.

For the bulls it is important for this morning’s rally to carry though and end the day up 250 points or more.
*****

Some Federal Reserve policy makers in June said an increase in the benchmark U.S. lending rate ``would be appropriate very soon,'' minutes released in Washington today showed. The economic outlook made the ``timing and magnitude of future policy actions'' unclear to the full committee, the minutes said. Still, ``with increased upside risks to inflation and inflation expectations, members believed that the next change in the stance of policy could well be an increase in the funds rate,'' minutes of the June 24-25 Federal Open Market Committee meeting said without specifying when. The June inflation alarm came before renewed bouts of financial turbulence in July shaped Federal Reserve Chairman Ben S. Bernanke's views about growth risks. The chairman abandoned the FOMC's June assessment that the threat of an economic downturn had diminished in his testimony this week. There are ``significant downside risks to the outlook for growth,'' and ``upside risks to the inflation outlook have intensified,'' Bernanke said in semiannual testimony before the House Financial Services Committee today. The FOMC on June 25 left the benchmark interest rate unchanged at 2 percent, pausing after seven cuts that totaled 3.25 percentage points since September. Futures traders have priced in a 93 percent probability of no change in policy at the Aug. 5 meeting.
*****

SEC Chairman Cox is on CNBC saying naked short selling is not illegal. Say what? Maybe he should listen to his testimony from May 25, 2008 when he called naked short selling illegal: http://www.deepcapture.com/
*****

European bourse indexes rallied as U.S. stocks moved higher and oil dropped. Oil ended at $134.41 down $4 plus and Gold was down $18 at $962. Treasuries gave ground as stocks rallied with the two-year at 2.42% and the ten-year at 3.93%.
*****

The rally has arrived. Will it be a one day short covering wonder? Stay tuned.

We are non believers. Cisco, AT&T and Intel went nowhere today and Oil stocks tanked. We sold the Bank Indexes and Financial Index for a scratch gain that offsets the scratch losses of yesterday. We broke even-which is not as good as a profit but much better than the 20% loss in the financials that we had yesterday morning.

The DJIA gained 280 points to end at11245. The S&P 500 was up 30 points at 1245. The NAZZ jumped 70 points to 2285.

Breadth was 3/1 positive and volume was active a 6 billion plus on the NYSE.

There were a combined 580 new lows and 75 new highs.

The bulls are back.
*****

 

15 July 2008

I believe that banking institutions are more dangerous to our liberties than standing armies. If the American people ever allow private banks to control the issue of their currency, first by inflation, then by deflation, the banks and corporations that will grow up around [the banks] will deprive the people of all property until their children wake-up homeless on the continent their fathers conquered. The issuing power should be taken from the banks and restored to the people, to whom it properly belongs.

Thomas Jefferson, Letter to the Secretary of the Treasury Albert Gallatin (1802)
*****

Thoughts

Stocks are going to open 1% lower this morning but we have a feeling that Turnaround Tuesday may be at hand. The mood on Wall Street and CNBC has turned remarkable dour and even bear markets have good rallies. Of course yesterday morning’s 150 point gain in the DJIA may have been the rally for this week.

Asian markets were off with China down over 3% and India down almost 5%. European bourse indexes are 2% and more lower at midday. Gold is up $12 and Oil has a $146 handle. Treasuries are better.
*****

We love the former government officials- on whose watch all the problems occurred- coming on CNBC and giving their critiques of the current crisis. Where were they when?
*****

World markets are now down $13 trillion from their highs.
*****

We want to keep buying the Bank indexes on a scale down without increasing our overall market exposure. We are concentrating in financial issues as our thoughts are that until these stocks stabilize no other areas are going to markedly improve. And so we are selling AT&T, Cisco and Intel for multiple penny losses and bidding on another tranche of the Financial Indexes 10% lower than yesterday’s close.
*****

PPI was reported up 9.9% year over year June to June. Core PPI was up 3% year over year. Retail sales were up 0.1% and ex autos up 0.9%.
*****

Bush is now talking on the tube. The DJIA is down 160 points as he begins speaking. Don’t raise taxes and everything will be OK.
*****

With over 1700 new lows in early trading we are getting close to a temporary bottom.
*****

Crude Oil is down $8 a barrel as the Central Banks work their magic and stocks are rallying back and the DJIA is now down 50 points two hours into the trading day.
*****

The rally seems strained to us and we are going to sell the KBE, KRE, and XLF we purchased yesterday. All three were 8% lower this morning and are now at scratch losses from our purchase price yesterday afternoon. We know we are flipping but it’s that kind of market. The kitchen heat is intense.
*****

American capitalism relies heavily on the fiduciary duty concept to protect those who entrust their money to large and often distant corporations.
-- Senator Susan Collins, Congressional Record, July 11, 2002

Does she know something we don’t?
*****

From Bloomberg: Fannie Mae and Freddie Mac drooped in price again today as Moody's Investors Service cut the financial strength ratings of the biggest U.S. mortgage-finance companies and said credit losses jeopardize dividend payments. In cutting the ratings today Moody's cited the companies' limited ability to raise capital and the likelihood of rising credit losses. Washington-based Fannie Mae has slid 79 percent this year, and Freddie Mac, based in McLean, Virginia, has lost 84 percent in 2008. Hedge fund manager William Ackman said today he is betting against the stocks of both companies and said it would be a ``grave error'' for the government to buy Fannie Mae and Freddie Mac equity.

It would be especially bad for Ackman since he is short the shares.
*****

At noon the major measures are positive after being 1% lower in the early going. Breadth has improved from 8/1 negative to 2/1  negative. Volume is active and on track to exceed 6 billion on the NYSE.
*****

SEC Chairman Cox says that the SEC is going to issue an emergency order to enforce a law still on the books to enforce the rule on naked shorting of shares (selling shares not owned and which have not been borrowed for delivery) of Fannie and Freddie and primary dealers like Lehman. This rule has been on the books for years and says that if a person or entity has not arranged to borrow stock they can’t short it. The SEC has just never made and effort to enforce it. Duh. Now Cox says the SEC is issuing an emergency order to prevent naked shorting of those specific stocks. How about enforcing the rule for all stocks since it is on the books. Maybe Cox meant to say any shorting of Fannie and Freddie and primary dealers. We’ll have to wait until the emergency order is issued to see if he understood what he was saying. Yes, Cox is that dense. His previous experience was as a Congressman for 17 years.

Cox, in his testimony, also said that the SEC is revisiting the whole short selling area. They must be reading our stuff. We don’t think shorting should be banned. We just think the old rule should be re-imposed. To remove any short selling would be a benefit in the short run but a detriment in the long run. But that is what the Exchanges did back during the Bunker Hunt gold and silver panic of 1980. The one who runs the game can always change the rules.
*****

The watch that Paulson is wearing at the Senate Finance Committee hearing looks like it could set off missiles to bomb Iran.
*****

The Head of the Federal Home Loan bank of New York is on CNBC saying that the Feds are going to lock up rumor mongering short sellers and throw away the keys.
*****

Stocks are trading above and below breakeven and it looks like the final hour will call the trend for the day and probably tomorrow. Intel reports earnings after the bell today and may affect the market’s mood for good or ill. So far there has been a bunch of trading with no resolution although the selling this morning and the 1700 plus new lows suggest at least a temporary bottom may be in.
*****

Oil finished down $6.50 at $138.80. Gold finished down $2 at $972 after being $12 higher during the morning’s selling spree. Treasuries reversed as stocks gained with the two-year at 2.39% and the ten-year at 3.85%. The euro was worth $1.58 at the close, after making a new low of $1.60 versus the euro, which was double the value eight year ago when the euro was worth 80 pennies. The pendulum swings and it will eventually swing back. Most of Europe closed over 2% lower.
*****

There were 10% and more down/up share price moves in many stocks today. We were going to buy the financial indexes on 10% lower moves and that is what we did yesterday. And then today when the indexes moved down another 8% we realized that we had to expand our parameters to 15% to 20% down. That is why we lightened our positions when the indexes moved back to scratch losses from yesterday’s purchase prices. These markets are dynamic and it doesn’t pay to have fast rules. The more folks keep trying to call the end to the sell off or the end to the commodities bubble the less likely they are to occur. We still perceive folks wanting to make money or make it back rather than worrying about preserving the capital they have left.

They sold the banks into the close as BankAmerica looked punk all day.

The DJIA lost 100 to end at 10960. The S&P 500 dropped 14 to 1215 and the NAZZ gained 3 to 2215.

Breadth was 2/1 negative and volume was very active at over 7 billion on the NYSE.

There were over 1750 new lows and about 66 new highs.

The bears held serve.
*****

 

14 July 2008 Bastille Day

We celebrate today because we would guess that our French ancestors were not part of nobility.

Go to http://www.youtube.com if you haven’t yet heard Le Marseillais today.

Thoughts

Doubt is not a pleasant condition, but certainty is absurd.

Voltaire

The rabble short sellers mounted the ramparts but unlike in France in 1789 Uncle Sam repelled those with an announcement on Sunday evening by Monsieur Paulson of the Treasury that Freddie and Fannie will be saved by hook or crook. With that news the shares of both stocks are up 25% this morning as short sellers scramble to limit losses or lock in still sizable profits.

Stocks are going to open higher in celebration of the rescue. We would remind a similar rescue and rally rescue occurred in March during the Bear Stearns fiasco. A rally has been in the cards but $4 gasoline and layoffs galore still are extant in the economy.
*****

Budweiser is returning to its European roots as InBev and BUD agreed that $70 per share was a proper price for the King of Beers.

Yahoo said no thanks to a new offer by Icahn and Microsoft and Boeing was given a second chance for the Ai Force Tanker contract.
*****

Asian markets were lower except China which gained fractionally. European bourse indexes are higher at midday and Oil has a $144 handle with Gold unchanged as the trading day begins.
*****

Freddie offers $3 billion in three and six month notes this morning and the need for this offering to be successful was the reason for the scramble to affirm the implied government guarantee.
*****

Late Friday the Office of Thrift Supervision announced the seizure of Indy Mac Bancorp because it was insolvent. We were amused by the story on the wires because of an attributed quote that we have highlighted:

IndyMac Bancorp a prolific mortgage specialist that helped fuel the  housing boom, was seized Friday by federal regulators in one of the largest bank failures in U.S. history. The Pasadena, Calif. thrift was one of the largest savings and loans in the country with about $32 billion in assets. It now joins an infamous list of collapsed banks, topped by Continental Illinois National Bank and Trust Co., which failed in 1984 with $40 billion of assets. IndyMac specialized in Alt-A loans, a type of mortgage that can often be offered to borrowers who don't fully document their incomes or assets. The company sold most of the loans it originated but continued to hold some on its books. As defaults piled up, IndyMac's finances deteriorated. The bank will be run by the Federal Deposit Insurance Corp., a federal regulator, and will reopen Monday. In a written statement, the Office of Thrift Supervision, which regulated IndyMac, said "the immediate cause" of the failure was statements made by New York Democratic Senator Charles Schumer. Mr. Schumer in late June publicly raised concerns about the bank's solvency."Although this institution was already in distress, I am troubled by any interference in the regulatory process," said OTS Director John Reich.

Mr. Reich had the responsibility to oversee IndyMac during all its mortgage lending of the last few years and wasn’t perceptive enough to know that the stuff they were issuing was toxic. To blame someone else for the failure of IndyMac when OTS was the regulator is ridiculous. By the way, IndyMac is spinoff from Countrywide Financial which remains one of the main culprits of the mortgage crisis. Countrywide was acquired by BankAmerica in one of the more perverse mergers of the century.
*****

From www.dictionary.com

Word of the Day for Monday, July 14, 2008

cupidity \kyoo-PID-uh-tee\, noun:

Eager or excessive desire, especially for wealth; greed; avarice.
*****

Freddie traded at $11 up from $7 in pre market trading this morning but now the markets have opened and FRE shares are at $8.50. The same trading action is occurring in Fannie. We don’t know what it means but there must be some doubt on the street as to the commitment of the Treasury to the common stock.
*****

Fifteen minutes into the trading day financials are giving back most of their opening gains and Morgan Stanley and Wachovia are both negative. Wachovia is the next shoe that traders are watching. On Friday WB announced the hiring of Treasury Secretary’s right hand man at the Treasury Department as CEO. We would guess that Wachovia’s Board wasn’t friends in high places to help them get through the mess they created.
*****

The Glass/Steagall Act (no bank underwriting) and the Securities Act of 1934 (no shorting on downticks) were passed to cure the ills of the 1920s. One major action was to take away the underwriting functions of banks to remove the risks that underwriting and selling securities entails. Another important consequence was to prevent short selling on downticks.

The SEC said on Friday it is going to look into rumor mongering causing stocks to go down. The horse is out of the barn. The fault lies with the SEC and Treasury for negating the value of the 1933 and 1934 Acts (that worked well for 80 years) by allowing banks to underwrite securities. The ability to underwrite securities allowed the banks to make huge profits by underwriting mortgages and now is forcing them to realize bankrupting losses from those same mortgages. The repealing of the 1933/34 Acts is the reason the banks have all those bad mortgages on their books and off their books in SIVs for which they are liable. And shorting on downticks allows hedge funds to raid financial stocks and force their prices lower. The problem is in the rules changes not the rumors. Duh!
*****

Legislation passed by Congress authorizing deposit insurance and prohibiting commercial banks from owning full-service brokerage firms. Under Glass-Steagall passed in 1933, these banks were prohibited from investment banking activities, such as underwriting corporate securities or municipal revenue bonds. The law was designed to insulate bank depositors from the risk involved when a bank deals in securities and to prevent a bank collapse like the one that occurred during the Great Depression. The original separation of commercial and investment banking had already significantly eroded when, on November 12, 1999 the Financial Services Modernization Act of 1999 was signed into law, repealing parts of the 1933 Glass-Steagall Act and the 1956 Bank Holding Company Act and effectively allowing banks, brokers, and insurers into each other's businesses. Basically, the 1999 Act allows banks to affiliate with securities firms and insurers through a holding company structure and permits nationally chartered banks to engage in most financial activities through direct subsidiaries. While provisions of Glass-Steagall continue to restrict banks from most underwriting activities and securities firms from taking deposits, these restrictions apply only to the banks and securities firms, not to their Financial Holding Company affiliates and are, therefore, technical.

Note that the uptick rule on short selling was eliminated in July of last year. The markets topped in October of last year.

SEC Eliminates Short Sale Price Tests

As discussed in the July 3, 2007 Alert, effective on June 28, 2007, the SEC eliminated the short sale price restrictions ("tick tests") of Rule 10a-1 under the Securities Exchange Act of 1934, as amended. The SEC also amended related rules to prohibit self-regulatory organizations ("SROs") from maintaining price tests and eliminate order marking requirements that applied to transactions relying on exceptions from the tick tests. The SEC release formally implementing these changes indicates that they do not affect other amendments to Regulation SHO also approved by the SEC in June 2007, but not yet the subject of a formal release, that tighten close-out requirements for failures to deliver on short sales by eliminating certain grandfathering provisions with respect to securities that become threshold securities (i.e., are put on a list of those hard-to-buy securities that occasion a high number of failures to deliver) and make other related rule changes.

History of the Tick Tests. The tick tests were implemented by the SEC nearly 70 years ago to restrict short selling in a declining market. Although the core provisions of Rule 10a-1 have remained virtually unchanged, in response to changes in the securities markets, the SEC has over the years created exceptions to, and granted numerous instances of exemptive relief from, its restrictions. Requests for exemptive relief from the tick tests have increased dramatically in recent years in connection with increased automation in the securities markets. Under Regulation SHO as in effect prior to the tick tests' elimination, price restrictions applied to different securities trading in different markets and generally only to large or more actively traded securities. In some cases, price tests would apply (or not) to the short sale of a given security based on where a trade was executed.

Pilot Program Suspending Price Tests for Certain Securities. In 2004, the SEC enacted Regulation SHO, which established procedures for an SEC program to suspend price tests temporarily in order to assess whether changes to short sale regulation were necessary "in light of current market practices and the purposes underlying short sale regulation". The SEC conducted a pilot program during which price tests were suspended with respect to certain securities selected by the SEC from the Russell 3000 index (and, with respect to after-hours trading, the Russell 1000 index) because they were deemed relatively less susceptible to other sources of manipulation based on their capitalization and liquidity. The pilot program was undertaken to obtain data on the impact of short selling on market volatility, price efficiency and liquidity and to decide whether to remove price tests or to impose them with respect to additional securities. The SEC received four completed academic studies on the effects of the pilot program and held a public roundtable discussion in September 2006. All of the studies generally supported the removal of price tests. (See the June 29, 2004 Alert for a discussion of the adoption of Regulation SHO and the pilot program and the September 26, 2006 Alert for a discussion of the SEC roundtable on the pilot program.)
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The academic studies are no substitute for the real world.
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This article at Bloomberg is worth reading: http://www.bloomberg.com/
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We sold Sprint since it is too far above its low to hold as the markets are trying to decide whether to hold the rally.
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The DJIA was up 150 points in the first 10 minutes of trading and is now up 40 points after 90 minutes of trading.
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Two hours into the trading day stocks are now negative. Hold on.
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Three notes from Diane Swonk Chief Economist at Mesirow Financial:

  1. Fed acts:

    Early reports that the Federal Reserve was in talks with Fannie and Freddie in order to open the discount window to government-sponsored enterprises remain unconfirmed. A Fed spokeswoman (I think Greenspan's old sidekick, Michele) has denied the talks with Freddie and Fannie, and Treasury Secretary Paulson is not giving much to go on.

    Clearly, the Fed and the Treasury are trying to figure out some sort of a plan to stabilize market concerns on Fannie and Freddie. Whatever that plan is, it clearly is not yet ready for primetime. Unfortunately, this has been the hallmark of communications between the Fed, Treasury and financial markets for some time.

    The Fed is clearly under pressure to stretch its authority as lender of last resort. Also, this move likely requires four additional votes by the Board of Governors. Ben Bernanke will not have the required Board votes for emergency actions such as the one rumored this afternoon, when Mishkin vacates his seat on the Board on August 31.

    The Fed seems to be learning faster than its cohorts at the Treasury, but a shortage of staff at the Treasury is clearly showing. This administration has never treated economists very well, and we are all now paying the price.

    All I can say for sure is that the collateral damage of a Fannie and Freddie collapse is much greater than the risks implicit in the Bear Stearns meltdown. Something will be done to minimize risk to bond holders. Not too many people in DC care much for the outcome for shareholders, though. Remember, bond holders include a wide array of private and public institutions, including foreign central banks, who view agency debt to be as safe as Treasury debt.

  2. Fed tries again:

    The Board has granted Federal Reserve Bank of New York the authority to lend to Fannie Mae and Freddie Mac, should such lending prove necessary. This is in addition to the swapping of securities for treasuries offered by the Fed to Fannie and Freddie earlier in the spring. Once again, they made the announcement before Asian markets opened.

    This move really looks more like a band-aid than a fix. I don't think we are done with dealing with Fannie and Freddie yet. I've just returned from the National Governors Association Centennial meeting in Philadelphia, where I spoke for the Economic Commerce committee. The consensus of the multitude of DC liaisons there is that Congress needs to guarantee existing Fannie and Freddie debt, not future debt, and cut shareholders off.

    NOTE: This move was approved by the five-member Fed Board in DC, which drops to four members in August when Mishkin vacates his seat. The Fed will have to change its charter to take emergency actions such as this (if they really work), or not get them done when membership on the board dips to four!

  3. Bank Failure in California

    IndyMac represents the second largest bank failure in history. Chicago's own Continental Bank, which failed in 1984, was the largest.

    IndyMac suffered a run on reserves after Senator Chuck Schumer called the bank's solvency into question a month ago. (We can thank Congress for adding to the panic many already feel about our financial system, which has now created a self-fulfilling prophecy in the case of IndyMac.)

    The bank will reopen on Monday with FDIC insurance funds under the new name IndyMac Federal Bank. Regulators plan to have the bank privatized again within 90 days.

    This is not the only bank failure this year, just the largest (and the one with the most press). Bernanke warned that more were to come. I fully expect the FDIC to make all investors whole, even though FDIC insurance is technically designed to cover only up to $100K per account. The reason is simple, the Fed can't risk the collateral damage associated with spooking the nations most conservative of investors - those who make deposits into the banking system.

    A couple of observations:

    • If you have more than $100K in any one account, it does make sense to split those holdings into separate accounts at different banks. Banks need to be prepared for this. We don't need a run on banks to withdraw funds!
    • Consolidation in the banking industry will accelerate sharply as the Fed moves to encourage consolidation of weaker institutions into stronger ones.
    • The most solvent of banks should make moves NOW to reassure their clients of their solvency to preempt withdrawals.
    • With regard to Fannie and Freddie:

    • The treasury and Fed are clearly in talks with Fannie and Freddie.
    • The ideal solution would be for Congress to limit its guarantees to existing debt, squeeze shareholders out of these institutions, and force them to move forward in a more sensible way. We would all be better off if Fannie and Freddie weren't as large as they are today, and if the market functioned more on its own. Indeed, at least a portion of the subprime debacle can be attributed to the excesses that the existence of these agencies encouraged in the financial system.
    • Investors in debt in these agencies need to be made whole, as the collateral damage of not doing so would be too great and devastating to endure. Going forward, however, it would be much better if investors stopped thinking of the debt these agencies issue as comparable to treasuries, because it is NOT!
    • It's always darkest before the dawn and a new day is coming...but not tomorrow.


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FNM, FRE, and Lehman are now negative on the day after being up 30%, 28% and 20% respectively in the first ten minutes of trading today. That is volatility. We are going to sell a few retailers, CHS and AEO. We are adding another tranche to our Bank/Financial Indexes (XLF, KBE, KRE which are down 8% on the day after being up 8% on the opening.
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Just like 1990/91:

11:54AM National City halted, news pending $3.20 -1.21:  

11:59AM National City issues statement in response to market rumors; NCC is experiencing no unusual depositor or creditor activity.  NCC issues the statement in response to market rumors. "National City is experiencing no unusual depositor or creditor activity. As of the close of Friday's business, the bank maintained more than $12 bln of excess short-term liquidity. Further, as a result of our recent $7 bln capital raise, National City maintains one of the highest Tier I regulatory capital ratios among large banks." (Stock is currently halted)
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Banks are going broke and Bush is going to lift the drilling ban on the outer continental shelf to solve the crisis. Are these guys in touch with the problems in the economy or what?
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90% of the folks trading this market and probably 90% of hedge fund jockeys were not trading the markets at the time of the 1987 Crash.
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European shares advanced Monday on a flurry of deals and rumored deals, overshadowing U.S. government support for mortgage lenders Fannie Mae and Freddie Mac. Gold gained $12 to $972 and Oil was up 10 pennies to $145.30. Treasuries were flat. The dollar fell with one dollar buying 106 yen and a euro will cost $1.59.
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Stocks rallied in the last hour but couldn’t hold and the major measures closed lower on the day. Financials closed near their lows.

At the bell the DJIA was down 45 at 11055. The S&P 500 lost 11 to 1228 and the NAZZ was down 26 at 2212.

Breadth was 2/1 negative and volume was active for a summer Monday at 4 billion shares on the NYSE.

There were about 1000 combined new lows and a combined 75 new highs.

The bears won the day.
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11 July 2008

Thoughts

Open your ears; for which of you will stop
The vent of hearing when loud Rumour speaks?
I, from the orient to the drooping west,
Making the wind my post-horse, still unfold
The acts commenced on this ball of earth:
Upon my tongues continual slanders ride,
The which in every language I pronounce,
Stuffing the ears of men with false reports.
I speak of peace, while covert enmity
Under the smile of safety wounds the world:
And who but Rumour, who but only I,
Make fearful musters and prepared defence,
Whiles the big year, swoln with some other grief,
Is thought with child by the stern tyrant war,
And no such matter? Rumour is a pipe
Blown by surmises, jealousies, conjectures
And of so easy and so plain a stop
That the blunt monster with uncounted heads,
The still-discordant wavering multitude,
Can play upon it. But what need I thus
My well-known body to anatomize
Among my household? Why is Rumour here?
            Rumour, Henry IV, Act 1 Scene1
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Hank Paulson may get his wish over the weekend that one or two brokerages go belly up. It was nuts for the Treasury Secretary (Paulson) and former Fed member Poole to pour gasoline on the smoldering fire that is our financial system.

Be that as it may today will be interesting. Yesterday we had written a few lines about the Crash of 1987 that we eliminated at the end of the day. These are the lines:

As Don always said, markets never crash off the top. Back in 1987 the markets dropped about 10% from a new high made in the spring of 1987 and then climbed back up to make another higher high in August of 1987. The markets then dropped 20% from that high into October 1987. The week before the crash there was a strong up day with no follow through. Then there was a collapse on Friday.

Folks are always calling for a Crash. It has been 21 years since the last one. But in a way 1974 was more insidious because the down markets never seemed to end. At least with a crash you get to a point where you can recognize value and that if the economy is going to eventually recover there are stocks worth buying. When there is a slow evaporating of prices with no real climax the investment decisions become much more difficult.
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Well enough doom and gloom talk. The Cubs are in first place, the prince and princess are coming today for a four month stay and the land of milk and honey received a much needed rain yesterday. Oh, and we are all in cash.
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On the other hand a large washout this morning may lead to a rally that salves the wounds. Fannie and Freddie are going to open at a price that has been cut in half from yesterday’s close as the NYT followed up with a dour story that builds on the dour story in yesterday’s WSJ. When the  media discovers a problem it is always too late to matter but they sure do enjoy turning the knife day after day. By the by, FNM and FRE have lost $100 billion of market value this year.

Asian markets were lower overnight and European bourse indexes are lower at midday. There was and is not panic selling in either of those markets, just the slow dribbling lower of the past few months. Oil has a $147 handle and Gold is up $10. Treasuries have a bid.
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InBev raised its bid to $70 for Budweiser.

And GE reported in line earnings – excluding special items, of course.

Goldman dropped Cisco from it is special buy list.

Citigroup sold its German business for $7 billion.
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It’s nice how a scary market can quickly change the thoughts of laissez faire officials:

U.S. Treasury Secretary Henry Paulson said federal regulators are backing Fannie Mae and Freddie Mac, the biggest providers of financing for U.S. home loans, in ``their current form.''  ``Today our primary focus is supporting Fannie Mae and Freddie Mac in their current form as they carry out their important mission,'' Paulson said in a statement today. ``We are maintaining a dialogue with regulators and with the companies.''
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The markets are down 15% this year and 25% from their highs. Fannie and Freddie are blowing up today and the DJIA is down 250 points. We are going to do a little buying. We are buying to hold for the long term which we said is a week to a bit less than our lifetime. Since we are 65 we think we have a least a few years left in our lifetime. If we don’t we won’t care what happens with stocks anyway.

We are taking relatively small positions - with room to add - if today is the beginning of the cataclysm instead of the end of the sell off and the beginning of a bear market rally.

We bought the KBE (major bank index),  ( regional bank index), XLF (financial index), American Eagle Outfitters, J Crew, Whole Foods, AT&T, JP Morgan, Intel, Cisco, CBS, Motorola, Micron, and Chico’s.

We bought about one third of our normal purchase amount of each stock in accounts so we have plenty of room for more downside. But all these stocks are least 20% below the prices at which we wished to be able to purchase them six months ago. (AS in, if they go to such and such a price we are going to buy.) We know the financial world is different than it was six months ago but these are not fly by night companies and all will be here on the other side of the tunnel.

 JP Morgan is back to the price it was when Jamie Dimon took over. J Crew is back to the price it sold after its initial offering two years ago. The bank and financial indexes are down over 50% from their highs. Whole Foods is on third of the price folks paid for it a year and one half ago. When they finish integrating Wild Oats they will be in great shape. Intel and Cisco are down 40% and 50% respectively from 12 month highs. Motorola has $3 per share in cash. And Chico’s and Micron are the only speculative stocks in the bag.

At day’s end the most any account (except the smallest) will be invested will be about 20%.
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Jim Cramer is on TV saying that he knows the President has changed his position and now believes that Freddie and Fannie should survive. He says Freddie turned and recovered most of the day’s losses when the President changed his mind. Far Out. If Cramer knew a lot of other folks knew too. The stock was trading at $4 and it is now at $8. This is called rescuing the market. Someone in the administration told Cramer. If the president changed his mind an announcement should have been made. We guess the republican laissez faire doctrine only counts when markets are rising.
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Oil closed up about $3 at $144.78. Gold gained $23 to $965. Treasuries were flat when the markets rallied in the last hour and one half. The two-year ended at 2.43% and the ten-year at 3.93%.
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After the shorts covered for the weekend into the final hour and their buying pulled the average averages up to down 75 points, bull traders who didn’t want to be long into the weekend did their selling but the DJIA held to close better by one half than the days lows. Today’s trading was positive for the near term.

At the bell the DJIA was down 128 points at 11000. (And today was 7/11 so it may bring luck.) The S&P 500 lost 14 points to 1240 and the NAZZ lost 20 to 2240.

Breadth was 2/1 negative and volume was active at over 5 billion shares.

There were over 1200 combined new lows and 75 new highs.

The bears won the day the week the month and so far the year.
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10 July 2008

Thoughts

Jobless claims for the week last were 358,000 down 58,000 but way too many. U.S. foreclosure filings rose 53 percent in June from a year earlier and bank repossessions increased the most since RealtyTrac began collecting data in January 2005 as deteriorating property values forced more people to give up their homes. One in every 501 U.S. households lost the home to foreclosure, received a default notice or was warned of a pending auction, RealtyTrac, an Irvine, California-based seller of default data, said today in a statement. Bank seizures rose 171 percent.

Nay, take my life and all; pardon not that:
You take my house when you do take the prop
That doth sustain my house; you take my life
When you do take the means whereby I live.

            Shylock-- The Merchant of Venice
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And a busy morning it is friends. Dow Chemical is paying $18 billion, an 80% premium over last night’s closing price, for Rohm & Haas. Dow must be calling the top in the energy markets since petroleum is the feedstuff of many chemical processes and the rise in the price of oil has been impinging earnings big-time. Warren Buffet is investing $3 billion in the deal by purchasing DOW shares.

General Electric is considering spinning off its entire consumer operation not just its appliance division. That means they can’t get a bid but need to get the division off the books before their earnings report so they can treat the lousy results as a special item.

The WSJ has a front page item on the demise of Fannie and Freddie with a comment from Treasury Secretary Paulson that the Government should guarantee the two against failure. And last night former Fed Member Poole said that both companies are insolvent. Now he tells us. Why didn’t he say something when he was a fed member? Oh, he was part of the club then.
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Asian markets were mildly lower overnight and European bourse indexes are lower by over 1% at midday. Oil is unchanged at $136 and Gold is up a few dollars.

U.S. stocks are opening higher on the Dow Chemical/Rohm & Haas takeover news. Stocks opening higher are not positive for the bullish case.
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We have been saying that the markets remind up of 19734-1974 and the first Oil shock. Folks have been saying that the markets need to rally here because bearish sentiment is so high. Those two disparate thoughts meld together in the following observation by Helen Meisler of realmoney.com confirming.

In the 1973-74 bear market, the Dow Jones Industrial Average was in a trading range until the summer of '74. Sure, it was down 20% when it was around 800, but it really hadn't broken badly from that level. Sound familiar? 've boxed off the early summer on the chart. We currently have 47% bears, an extreme for the past few decades, but in the summer of '74 when we broke down from that 800 level on the DJIA, the percentage of bears soared. By mid-August, they were at 69.6%. Now that's extreme! But forgetting that number, note that for nearly two or three months the bears stayed high and the market went down, relentlessly, another 25%. The bears were actually right for that final leg down.Of course, we didn't have a VIX back then. Heck, we didn't even have options back then! But you can see why an orderly march down is simply a trend, not a bottom, despite how stretched my indicators are. No panic, no bottom. The Chinese have an expression that is centuries old (I ask my Chinese readers to forgive me if I don't get this exactly correct!) that translates to something like this: "Chaos creates opportunity." Note I said centuries old. They didn't have a VIX when they came up with that expression, but they knew that in severe dislocations there is opportunity, but without dislocations there is not a unique opportunity.
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U.S. Treasury Secretary Henry Paulson said he's been assured by the regulator for Fannie Mae and Freddie Mac that the two government-chartered mortgage companies have enough capital. The Office of Federal Housing Enterprise Oversight ``has made clear that they are adequately capitalized,'' Paulson said in prepared testimony for the House Financial Services Committee. Paulson said he is counting on Fannie Mae and Freddie Mac, which own or guarantee about half of the $12 trillion in home loans, to help revive the U.S. housing market. Fannie Mae shares tumbled 13 percent yesterday in New York to the lowest level in almost 14 years, and Freddie Mac has fallen 70 percent this year in New York Stock Exchange composite trading. ``Fannie Mae and Freddie Mac are also working through this challenging period,'' Paulson said. ``They play an important role in housing markets today and need to continue to play an important role in the future.''
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We were watching a documentary about Dennis Koslowski of Tyco infamy who is in now in jail. His infractions were penny ante when related to the decisions made by the CEOs of most major banks in the last ten years. In China the CEOs would have been executed by now. In the U.S. they have retired with $50 million cash (not their company’s stock) and a watch.
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Zion’s Bancshares tried to sell $200 million of preferred shares yielding 9.5% to raise capital that they said they didn’t need. Who pays 9.5% to borrow money that they plan to loan at 6%?  Only in America. Anyway, Zion was only able to sell $47 million to retail customers. No institution wanted to by the stocks at that yield. We were interested to find out who the charlatan underwriters of the preferred sold to retail investors were. To our surprise Zion sold it to customers of their own retail brokerage firm. Now the buy may turn out to be wonderful; but no institutional investors wanted it. If that isn’t self dealing we don’t know what is.
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Approaching noon retailers are on sale today while financials are finding a bid and Freddie and Fannies are, as they say in the business, stabilizing at lower levels.
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European bourse indexes closed 1% to over 2% lower on the day.
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Oil popped at the end of the trading day to gain $5 to $141. Gold was up $16 on the day at $945. Treasuries were flat with the two-year at 2.42% and the ten-year at 3.83%.
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And the bulls now say, “Whew! Maybe that uptick rule for short selling was a good thing. Maybe the SEC was nuts to get rid of it. The downturn began at the same time the rule was repealed. Do you think those folks back in 1933 knew something?”

The ones who had any money left did.
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Who cares about Sumner Redstone? Or Barry Diller? David Faber is paid a million dollars a year by CNBC to interview these guys? Who cares?
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J Crew and Whole Foods are at beginning investable prices and we purchased less than 1% positions in each for a few of our large accounts and the Model with the idea that these two companies could eventually become 5% long term holdings, long term being longer than a week and less than a lifetime.
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The mo-mo commodity stocks rallied a bit today and were the only play that worked for traders and even there folks had to risk a lot of bucks to make a little. Financials couldn’t hold their gains as Lehman was under pressure all day and Fannie and Freddie slipped lower late in the session. GM made a new low for the last 50 years. GE announces in the morning and should be the focus for at least a minute or two.

The DJIA closed up 80 points at 11230. The S&P 500 gained 9 to 1254 and the NAZZ was up 23 to 2258.

Breadth was flat and volume was active at 4.5 billion on the NYSE. NAZZ volume remains light at around 2 billion.

There were about 775 combined new lows and 60 combined new highs.

Bulls win! Sort of.
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9 July 2008

Thoughts

Happy 42nd anniversary to our better half.

“What shall Cordelia speak? Love, and be silent”.

 

Today is important for stocks in that they need to close with a flourish in order to suggest a sustainable rally. The jury is out as the trading day begins. Asian and European markets were up overnight following the rally in U.S. stocks yesterday.

We didn’t think the rally was all that strong but many gurus disagree with our take. In early trading today stocks opened higher but are now trading mildly lower. This type of action is positive for the bulls as long as the close is positive.

Gold is flat and Oil is up $2 with a $137 handle. Iran announced it had fired some long and short range missiles. The announcement was a shot across the bow.

Alcoa which is always the first DJIA stock to report each quarter said that revenues were down 7% and earnings down 24% versus last year’s quarter. But that was better than and gave a positive tone the early futures trading. Perception is not reality.
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From CM: Bernanke and Paulson speak before House tomorrow at 10:00 EST. After Bernanke said yesterday he will extend lending facilities to dealers after year end, market took that as a sign that as long as the FED is being so accommodative, chances of any sort of tightening before year end was greatly diminished. I believe that the last thing the FED wants to do is paint themselves into a corner, so I would expect tomorrow’s testimony to be on the hawkish side. The FED can still raise rates to bolster the dollar and help diminish inflation expectations, as well as be accommodative to the banks and dealers who need ST financing. Market still pricing in a 25 bp tightening by end of year.
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Crude oil inventories in the latest week were down 5 billion while gasoline inventories were higher than expected. Oil remains up $1.50.
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UBS and RBC raised questions about capital spending and its effect on Cisco and analysts from both companies lowered their price targets but not their ratings and the shares are off over $1. And that is a real drag on the DJIA as Intel joins the down. Financials tried to rally and haven’t been able to hold but the commodity complex is higher. That may be good news for the mo-mo boys and girls but it is not for the value bulls who have been calling for a bottom. There are three hours left in the trading day and that is lifetime.
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With an hour left in the trading day the DJIA is down 150 points. The bulls have an hour to rescue themselves from this mess.
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Oil finished at $135.60 down a few pennies on the day. Gold was up $5 at $928. Treasuries rallied with the two-year at 2.39% and the ten-year at 3.83%. European stocks closed their day before U.S. markets tanked and were 1% and higher on the day.
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There was no rally in the last hour and stocks closed on their lows for the day.

At the bell the DJIA was down 240 points at 11146. The S&P 500 lost 30 to 1245 and the NAZZ dropped 60 to 2235.

Breadth was 2/1 negative and volume was brisk at 4 billion shares.

There were about 400 combined new lows and about 60 combined new highs.

The bears are back after a one day hiatus.
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8 July 2008

Thoughts

No, no, no, no! Come, let’s away to prison.
We two alone will sing like birds i th’ cage.
When thou dost ask me blessing, I’ll kneel down
And ask of thee forgiveness. So we’ll live,
And pray, and sing, and tell old tales, and laugh
At gilded butterflies, and hear poor rogues
Talk of court news; and we’ll talk with them too-
Who loses and who wins; who’s in, who’s out-
And take upon ’s the mystery of things,
As if we were God’s spies; and we’ll wear out,
In a wall’d prison, packs and sects of great ones
That ebb and flow by th’ moon.

King Lear, Act 5, Scene 1
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Attention Fed Shoppers—the discount window will remain open until further notice for sub prime owners who need to lay off risk on the Fed.

The Federal Reserve may extend securities dealers' access to direct loans from the central bank into 2009 as long as emergency conditions ``continue to prevail,'' Chairman Ben S. Bernanke said.      ``The Federal Reserve is strongly committed'' to financial stability and is ``considering several options, including extending the duration of our facilities for primary dealers beyond year-end,'' Bernanke said in a speech to a conference in Arlington, Virginia. Bernanke also endorsed proposals to set up a federal liquidation process for a failing investment bank. The Treasury should ``take a leading role in any such process, in consultation with the firm's regulator and other authorities,'' he said.      The comments reflect the Fed's assessment last month that financial markets ``remain under considerable stress,'' even after the Fed started the unprecedented lending programs in March. Bernanke at the same time is aiming to address criticism that the Fed's loans to Wall Street may encourage more reckless lending, sowing the seeds of future crises.
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And with those comments this morning Bernanke again doused the fires in the markets as Asian and European stocks fell overnight on worries about the financial system. U.S. futures will open flat. 200 points down in the early going would clear the air for a rally.

Oil has a $138 handle and the interesting drop in the price of oil the last two days as stocks have fallen suggests that there are forces at work to dampen speculation. The reality will prove the point if oil drops to the $100 level over the next month.
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A Lehman analyst placed fear in the wallets of Fannie and Freddie shareholders yesterday when he said that they would have to raise $75 billion in capital to meets accounting requirements. Coming from someone at Lehman which has its own capital problems the markets ignored the irony and pounded the shares lower. We wound guess that he selloff was engendered by the short sale on downticks but then that is an old battle that has been lost.

Fannie and Freddie’s debt have always traded with the implicit backing of the Federal Government but the common equity has never had the backing. So the question becomes whether the Fed and Treasury would let Fannie and Freddie file bankruptcy and wipe out the common shareholders. Since none of the Bush crowd own shares or have an affinity to either entity we know they wouldn’t but the Fed and Treasury and Congress would have to measure the too big to fail against the disruption in the marketplace that would occur from such a filing. There are $4 trillion in Fannie and Freddie debt in money funds and that debt is in almost every money fund in the country. While there is little question the eventually the debt would be honored the market pricing mechanism would probably lead to many funds breaking the dollar in the short run unless the SEC granted an exemption.

And so it just gets more interesting and the reality dawns that in today’ financial system there is really no safe place to hide.
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The S&P 500 is trading at the same level it was in 1998.
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At 10am Oil is now down $5 and $10 form last Thursday’s high. Gold is down $12 and the mo-mo stocks are taking it on the chin. But since the opening the major stock market measures have been levitating slightly above and below unchanged on the day.
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European bourses reversed slightly into their close but still lost over 1% across the continent.
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Piper Jaffray recently surveyed over 5,000 teenagers and their spending habits. The results suggest teen spending is expected to drop nearly 20% year over year. Surveyed parents signaled that they would reduce spending on their teens by average of 28% year over year.
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Gold lost $7 to $922. Oil ended down $5 and change at $136.22. Treasuries were better with the two-year at 2.44% and the ten-year at 3.88%. The yen was 107 to the dollar and one euro was $1.56.
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Treasury Secretary Paulson in a speech today promotes covered bonds as a way to help homebuilders. Definition: Covered bonds are debt securities backed by cash flows from mortgages or public sector loans. They are similar in many ways to asset backed securities but covered bond assets remain on the issuer’s consolidated balance sheet. Essentially, a Covered Bond is a corporate bond with one important enhancement: recourse to a pool of assets that secures or "covers" the bond if the originator (usually a financial institution) becomes insolvent. This enhancement typically (although not always) results in the bonds being assigned AAA ratings. Sort of like the old first mortgage bonds of railroads secured by specific assets.
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With an hour to go in the trading day the DJIA is up 125 points. If this rally fails the markets are in super big trouble.
*****

The rally held and all is well in La La Land for the night at least. We would guess that the bulls will be able to build on this day since so many were calling for it. We remain in cash.

The DJIA closed up 150 points at 11382. The S&P 500 gained 21 to 1273 and the NAZZ jumped 50 tp 2295.

Breadth was 2/1 positive and volume was brisk at almost 5 billion shares.

There were about a combined 800 new lows and 50 new highs.

The bulls turned the tide for today at least.
*****

 

7 July 2008

Thoughts

Stocks are due for a rally and it may begin this week. Last Friday Asian markets were mixed with Shanghai up 2% and Hong Kong down 2%. European bourse indexes were 1% lower. Oil traded at $145 and Gold lost $13. This morning European bourse indexes are mildly higher and Asian markets rallied strongly overnight with Shanghai up 4.5% and Hong Kong recovering its Friday losses. Gold is down and Oil is lower with a $142 handle as the treading day begins.
*****

GM is going to fire a bunch more people and try to figure out how to raise money. UBS reported better than expected results due to a $3 billion tax credit.
*****

On Thursday the European Central Bank raised its lending rate to 4.25%.

The monthly Employment Report said that 60,000 jobs were lost in June and Initial Jobless Claims exceeded 400,000 for the first time in a long time. The DJIA gained on Thursday while the NAZZ and S&P 500 were lower.
*****

From the British newspaper The Independent: With Americans cutting back on luxuries, and the price of transport rocketing, the so-called “Vegas vacation” is facing the axe. This week, as the nation celebrated Independence Day, major hotels were taking stock of a fall in all-important room occupancy rates from their usually impressive 95 per cent levels to nearer 80 per cent. ... More worryingly, new figures showed gambling revenue has also dropped – a further 3 per cent this month – starting a price war between worried firms anxious to lure punters back. Hotel rooms, which last year averaged $130 each, now go for less than $100
*****

It is a wonder to us that 80% of the rooms are being used.
*****

The DJIA is up 100 points in thee first half hour of trading. For a sustained rally a large drop in the morning with a reversal higher at midday would be better.
*****

The Case for Capitulation
by Helene Meisler

RealMoney.com Contributor
7/7/2008 9:09 AM EDT

For those of you who keep asking me why we need capitulation before we can have any sort of decent rally, I ask you to take a look at Thursday's action. In the past when we have been this oversold, any little piece of good news -- or even news that's not as bad as expected -- such as the employment number or the ECB's commentary we had on Thursday, would have rallied the market and rallied it hard, even if it appeared to be a one-day wonder.

http://secure2.thestreet.com/cap/prm.do?OID=005966But that was not the case. Instead, we got a rally attempt that failed to hold on. I don't need the VIX and I don't need options ratios to tell me that means there are still plenty of folks sitting out there waiting to sell stocks on any rally. Or worse, buy 'em on any dip.

When you get real capitulation, it's because everyone who wants to sell has sold. Once they have sold, it's easy to rally because there are no sellers above. It's as simple as that. But when there are sellers above, we get action like we had on Thursday.

What was most disconcerting about Thursday's action to me was the ISE call/put ratio was quite high at 150%. In a down market, readings that high should be unusual. But that has not been the case in this decline. For example, June 25 saw a reading of 161%. Notice on the chart of the S&P below what the action on June 25 was -- it's the red arrow. You can clearly see there is no wall of worry, but rather a slope of hope still out there.

I know the Investors Intelligence readings and the American Association of Individual Investors readings show the same bearishness as we had at the March lows. And gosh, now CNBC has declared this an official bear market, as has Barron's. Yet the folks who are actually putting money to work might be talking bearishly, but they are acting like bottom-fishers.

It is true that almost every one of the indicators I follow is stretched to excess. If that is the case for my indicators, then you have to figure it's the case for everyone else's as well, and that's the reason everyone is waiting on that elusive rally.

So I will remind you that we are oversold enough to rally and we even had fewer stocks making new lows on Thursday vs. the March lows (a very positive divergence), but I think I'd rather wait for some capitulation, or at least an oversold rally that relieves some of the downside pressure and then comes down again.
*****

We read that over $11 trillion in market values around the world has evaporated since October 2007.
*****

Two hours into the trading day the major measures remain higher but can’t put on a push because financials are in the red.
*****

At three hours into the day the major measures are now all lower with the DJIA off 50 points.
*****

European markets closed before the nose dive in the U.S. markets. The European bourses were all up 1% and more at day’s end.
*****

Fannie Mae and Freddie Mac both are dawn 20% today and Goldman Sachs is 6% lower. Fannie and Freddie plunged in New York trading and their credit-default swaps rose as concerns grew the two largest U.S. mortgage-finance companies may need to raise more capital to overcome write downs and satisfy new accounting rules. The new FAS 140 rule that seeks to stop companies keeping assets in off-balance sheet entities may force Fannie Mae and Freddie Mac to bring mortgages back onto their books, requiring them to put up capital, Lehman analysts wrote in a note to clients today. Fannie Mae would need to add $46 billion of capital and Freddie Mac would need about $29 billion, the Lehman analysts wrote. The companies will probably get an exemption from the rule because it would be ``very difficult'' for them to raise that amount of capital, the analysts said.

The failure of the financials to join the rally this morning has disappointed the bull traders. The major stock measures are now down 1% and more and oil is coming off its $4 drop to be down only $2.
*****

Market mavens continue to call for a capitulation bottom. If the sell off today continues to the close and stocks open a couple of hundred points lower in the morning then there could be a trading rally. But it will only be a trading rally that recovers the losses of the last week. We see nothing on the horizon to prevent lower prices ahead. Most everyone is still looking for profits and while they may be worried visions of gains and motivation of greed prevail.
*****

Oil finished down $4 at $141.28. Gold dropped $7 to $926. Treasuries were better with the two-year at 2.41% and the ten-year at 3.91%. The yen was 107 to the dollar and the euro equaled $1.57.
*****

The DJIA was up 100 points out of the gate this morning and then dropped to down 150 points at 1pm before rallying to up 20 points ten minutes before the close.

At the bell the DJIA was down 65 points at 11223. The S&P 500 lost 12 to 1250 and the NAZZ dropped 2 points to 2245.

Breadth was 3/2 negative at the bell and volume was active.

There were over 1100 combined new lows and less than 50 combined new highs.

We have no idea who won the day. Last hour rallies in this kind of market are not a positive.
*****

 

2 July 2008

Thoughts

The markets close at noon tomorrow and we are taking the morning to go sign up for Medicare – Hooray! And so we are taking the rest of the week off to enjoy the holiday. The next post will be Monday July 7.
*****

Asian markets were lower overnight but European bourses have reversed the down trend and are higher at midday. Gold is down $10 and Oil has an unchanged $141 handle. Treasuries are lower in price higher in yield.
*****

U.S. stocks opened higher as financials are trying to rally. After an hour of treading though the major measures are flat. Today is an important trading day from a trend standpoint since tomorrow will be light and the big boys and girls can have their fun with the limited liquidity.
*****

Investors’ Intelligence reported 31% bulls and 44% bears which from contrarian bent suggests that some type of rally is in the cards.
*****

The Yahoo/Microsoft soap opera is on again as the WSJ suggests that MSFT is trying to enlist Time Warner and News Corp. to join in breaking up Yahoo. Large egos are involved.
*****

Starbucks is going close 600 stores and let up to 12,000 folks go. It is time for them to retrench.
*****

Mother Merrill placed a sell on GM and mentioned the nasty bankruptcy word.
*****

According to the Federal Deposit Insurance Corp., $45.4 billion of the $631.8 billion in construction loans outstanding at the end of the first quarter were delinquent. When banks announce second-quarter results in coming weeks, they are expected to report sharp increases in loans that builders can't repay. Banks are also facing intensifying pressure from federal and state regulators to deal with the problem loans on their books. WSJ
*****

Treasury Secretary Paulson - of Goldman Sachs is shorting subprime to its customers fame- is saying that financial institutions must be allowed to fail. He says we (whoever we are) must reduce the perception that a bank is too big or too connected to fail. He may want to reduce the perception but the reality is that some banks and brokers are too big to fail. Paulson wants to have orderly failures. Say what? Do these guys really know what they are reading and saying?
*****

At 11 am it looks like the shorts who were leaving early for the weekend covered their financials and now the markets are meandering in negative territory as the short covering buying in the financials has faded.
*****

European markets closed lower.
*****

We posted a new Prairie Populist.
*****

Full speed backwards: Faced with a surge in the number of proposed solar power plants, the federal government has placed a moratorium on new solar projects on public land until it studies their environmental impact, which is expected to take about two years. The Bureau of Land Management says an extensive environmental study is needed to determine how large solar plants might affect millions of acres it oversees in six Western states — Arizona, California, Colorado, Nevada, New Mexico and Utah.
*****

The Employment Report for June is announced in the morning and there will be some trading around that number which is expected to be grim. Same store retail sales will also be announced.
*****

Oil ended up $2.85 at $143.80. Gold was up $2 at $946. Treasuries ended with the two-year at 2.58% and the ten-year at 3.96%. The yen was 105 to the dollar and one euro was worth $1.58.

U.S. Steel dropped 10% today and Potash was down 5% as the momentum names were sold with a vengeance. RIMM down 6%, First Solar down9%, Mittel down 10% and Apple down 4% are a few more.
*****

There was no rally today as the DJIA dropped 166 points to close at 11215. The S&P 500 lost 24 points to 1266 and the NAZZ dropped 54 points to 2250.

Breadth was 2/1 negative and volume was active.

There were about 730 combined new lows and 105 combined new highs.

The bears are in control again.
*****

 

1 July 2008

Thoughts

Once believed to be recession-proof, casinos are proving to be highly vulnerable to the economic downturn, which is striking the industry at a bad time. Las Vegas is entering its lethargic summer season and a boom-time frenzy of grand expansion plans and private-equity buyouts has left casinos laden with debt.

And so goes the story in the WSJ this morning about the slowdown in gambling in Las Vegas. As with ever rising home prices, the myths of eager lenders and builders are meeting reality.
*****

Asian markets were lower overnight with India and Shanghai both down over 3%. European bourse indexes are 2% and lower across the continent and that has U.S. futures down almost 1% pre-opening. Gold is up $11 and Oil is again touching $143. Treasuries have a bid.
*****

The WSJ also has a story today about folks in Abu Dhabi paying millions of dollars to buy vanity license plates.

"Everyone has a nice watch, a nice car," says Abdullah Al-Mannaei, organizer of the city government's monthly auction of desirable numbers. "It's not enough to just have a Ferrari anymore."Hundreds of men in starched robes descend on an opulent hotel here to vie for the most distinguished digits. Earlier this year, Abu Dhabi businessman Saeed Khouri made headlines and the Guinness Book of World Records when he paid $14 million for the tag simply sporting a "1." His cousin, stockbroker Talal Khouri, paid $9 million for "5" -- the second-largest sum ever paid for a license plate. Abu Dhabi is hardly the first boomtown to be swept up in luxury license plates. Hong Kong has had a thriving auction for years, while high-rolling Russian executives have gone to great lengths to secure custom tags.

The media suggests that Iran will retaliate against the U.S. if Israel bombs. It would be much easier for Iran and militants to retaliate against the Arab Emirates and especially Abu Dhabi. With the billions being thrown away in that country building gambling casinos and million dollar vacation homes it seems to have missed that attention of the media that Abu Dhabi is a short missile trip across the Persian Gulf for Iranian retaliation.
*****

The DJIA and S&P 500 are both down about 15% since 6/30/07.
*****

Stocks opened lower with the DJIA down 100 points in the first five minutes. The measures then rallied back to even but are floating along in negative territory after the first hour of trading.
*****

One of the large secrets that the media and regulators don’t want to talk about is the fact that many money funds -not the one we own- are actually worth less than a dollar. That is because some of the investments that these funds own are in illiquid securities related to the subprime debt fiasco. This news is the tip of the iceberg and management companies are either going to have to step up and rescue the funds or mark them to market at some point. The reality is that folks buying these funds now are paying too much and folks selling them a receiving more than they should. And this has been going on since January.

Money manager Legg Mason said late Monday that it expects to take $155 million in charges against earnings as it moves to shore up its money-market funds. Legg said it has reached a deal to pay up to $240 million into three money-market funds managed by a subsidiary if they lose money on the sale of asset-backed commercial paper securities. That deal will cost Legg $90 million after taxes, or 64 cents per share, in the quarter that ends June 30. Legg (NYSE: LM) also expects another $65 million in after-tax charges related to previous support of money-market funds, including the cost of buying securities from those funds, the company said. It's the most recent hit Baltimore-based Legg has taken to the bottom line to keep its money-market funds from losing money on securities affected by the mortgage market upheaval. The company said the agreements deal with the same securities Legg has already agreed to support in other funds.
*****

The ISM Manufacturing index rose to 50.2 last month after a 49.6 reading in May, on a scale where readings over 50 represent growth. This is the first time in five months the index has been above 50.
*****

GM sales were down 8% in June while Toyota sales were down 11%. Ford sales were down 28%. The street had been expecting GM sales to be down over 20% and the GM news is actually allowing stocks to rally a bit from DJIA down 150 points at 12.30pm.
*****

Oil ended up $1.30 at $141.30. Gold gained $14 to $942. Treasuries were weak with the two-year at 2.63% and the ten-year at 3.99%. European bourse indexes closed down 1.5% and more as did Mexico and Brazil.
*****

With over 1100 combined new lows this morning as the DJAI was down 150 but the markets struggled to positive territory at the end of the day in active trading.

The DJIA gained 33 points to 11385. The S&P 500 was up 6 points to 1287 and the NAZZ turned positive to gain 12 points to 2270.

Breadth was 3/2 negative and volume was active.

The bulls regained serve late in the day. They need to follow through tomorrow.
*****

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



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