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