Market Summary for July 14, 2008

Where is the confidence in our US dollar; in Bernanke’s ability to stem a financial crisis; or in the earnings statements of any financial institution?  Missing in action, that’s where.

Hank Paulson, the US Treasury Secretary, says they will buy equity in Fannie and Freddie, if needed.  Credit lines are available to the GSE’s, even though they don’t need to use them, according to all involved. The government spokespeople have said that the "proposals" for the GSE’s were, in large part, to simply calm the markets. These proposals didn’t seem to have a very calming effect on the markets today. The section about asking Congress to raise the national debt limit was a big mistake on their part.  The big joke is that Fannie Mae and Freddie Mac are publicly traded companies, at all.  They are, and always have been (in my opinion) backed by the US government.  Problems inside the GSE’s are nothing new (see 2006 story here) and that’s no secret.  But, whatever the "official" status of these companies, it still comes down to the Fed’s having to back them up.  How many more institutions can the government afford to "backstop?"  Regardless what some people may say, the US does not have an unlimited money supply to bailout everyone.  There are always consequences for every action taken, and some of those consequences can be devastating.

The Wall Street Journal is reporting the following:

FINANCIALS: MORE THAN 50 HEDGE FUNDS HAVE BEEN SUBPOENAED BY THE SEC REGARDING THE AGENCYS PROBE OF FALSE RUMORS - WSJ

False rumors?  Most of the rumors I’ve heard are about the terrible financial shape of the investment banks and other financial institutions.  These rumors are turning out to be true!  Is the SEC going to go after the banks themselves for issuing those now infamous "we are well-capitalized" statements, just before running out to beg for capital?  Do you believe the following statement from Washington Mutual?  Personally, I don’t.  Does my stating that opinion constitute a false rumor?  No.

 Washington Mutual (WM) has stated the following concerning their capital standing and liquidity position:
- The company recently raised $7.2B in capital and its tangible equity to total tangible assets ratio was 7.8% as of June 30.
-  The company significantly exceeds all regulatory "well-capitalized" minimums for depository institutions.
- In addition, WaMu has current excess liquidity of more than $40B and a national franchise with approximately $150B in retail deposits.

What I see is panic, not by traders/investors, but by those at the highest levels of government and in the financial institutions themselves.  And yet, the whole time they are pleading for calm from the rest of us, while they try and figure out how to extricate themselves from the disgusting mess they made. 

Where do we go from here?  We are in a wait-and-see mode right here.  This chart is for the last three months on the Dow Jones Industrials, and I hope it shows why it makes it hard to short an index OR go long.  Just as in a bull market, where overbought conditions can last a long time,  a bear market’s oversold conditions can stay that way for a long time, too.  An outright crash is still on the table.

 

 

 

 

 

 

 

ACCORDING TO EXPERIAN, UK BUSINESS FAILURES ROSE BY CLOSE TO 20% IN H1 OF 2008 - TELEGRAPH
- The failure were concentrated in the real estate, financial services and telecom areas.
- The report adds that more firms failed between April and June than in Q1.

That’s not good news.  Here’s what’s on tap for tomorrow.  Have a great night!

Earnings before the bell:  SCHW (Charles Schwab), ETN, JNJ, STT, USB   

Earnings after the bell:  CSX, INTC (Intel)

Tomorrow’s economic news includes the following: 

8:30amET:  June PPI;  June Advanced Retail Sales;  July Empire Manufacturing

10:00amET:  July IBD/TIPP Economic Optimism;  May Business Inventories

Updates on Market, Washington Mutual, Freddie Mac (4:00pm Market Close)

Market Close:  Quite the quick little dump there into the close.  The financials took a beating today and some other stocks are looking weaker now.  The Dow managed to to close above 11,000, but only by 51 points.  All in all a tame sell off.  The Banking Index ($BKX) and XLF are going into the toilet.  There’s talk that Lehman’s (LEH) is thinking of going private.  Yep, we have confidence.  I’ll have a fuller market wrap up a little later, need to look at some charts to post for you.  Hope everyone had a profitable day!

Update:  It’s a good thing the Fed’s injected confidence into the market today, otherwise who knows what it would have looked like.  Washington Mutual (WM) is getting crushed today.  It does surprise me (Ok, just a little) that the TRIN and VIX are not higher.  Oil is hanging out in the $145 area, no let up in sight.

Update:  All I can say here is that a lack of confidence in our government’s handling of this latest situation is evident in the markets today.  When you lose the trust in a relationship, any relationship, it takes a long time to get it back.  Bernanke, Paulson, et al, have screwed up.  All we can do is see how this plays out.  It ain’t lookin’ pretty so far.

Update:  White House says FNM/FRE have not used new government credit lines, and that the GSE proposals were made simply to calm a nervous market.  (Strike one, it’s not working very well)

FRE COMPLETES $3B BILL AUCTION RESULTS; $2B OF 3-MONTH SOLD AT 2.309%, AND $1B OF 6-MONTH AT 2.496%
- 3 month Spread over Treasury 69bps v 51bps average spread
- 6 month Spread over Treasury 43bps v 42bps average spread
- 3 month bid to cover ratio 4.16x v 2.98 prior
- 6 month bid to cover ratio 3.73x v 2.74 prior

Currency pairs are lower after these results, showing risk aversion coming back into the market.  It’s going to be a wild ride today, people.  Bernanke is said to putting together more new rules concerning mortgage lending, and President Bush is pushing for off-shore drilling.  Oil futures above $145 right now.

Pre Market - July 14th 2008

July 14th - The day that the French people stormed the Bastille Fortress and marked the beginning of the French Revolution.

Will today be the stock market’s own Bastille Day? A battle is a definite, but the outcome remains unknown in the short term. Futures up significantly, bond market remains ‘uncertain’ about the future, crude oil is spiking again, and gold is holding steady.

Our recommendation is to be in cash. If (and I emphasize the ‘if’) this is the catalyst for the next bear market rally there will be time to take a position to take some profits from it. There is no need to be a bottom fisher. Our view of today’s action is that it will be filled with much uncertainty and is likely to be a wild ride. My long term positions remains firmly bearish, short term I’ll be in cash to ‘wait and see’ what happens next. Lisa and I will not be taking any new trades today.

Earnings season kicks off this week and Bernanke speaks to the Senate tomorrow. The long term reality of the market remains focused on the economy, short term excitement is likely to be heavily shorted on any spikes.

Unless you have a suit of armor, a sword, and a strong shield I would stay out of today’s Bastille Day battle in the market. Let us wait to count the bodies that remain on the floor of the NYSE to determine who won today’s battle.