RebelTraders

Working on tonight’s commentary. Check back later tonight.

The UK Times is reporting today that the Halifax Bank Of Scotland (HBOS) will announce tomorrow a disastrous attempt to raise capital. Less than 10% of the investors wanted to buy the share offering.

THE high-street bank HBOS will tomorrow admit to one of the most disastrous rights issues in corporate history when it concedes that as few as 10% of its investors took up its £4 billion share offer.

Its two underwriters, Morgan Stanley and Dresdner, will have to place £3.6 billion of shares over the course of Monday or Tuesday.

If they are unable to place the shares at the rights-issue price of 275p or above, they will be forced to take them on to their own balance sheets. […]

The full story can be found HERE

Aside from the declines in the technology sector it was a relatively boring day in the markets. Low volume with wild swings throughout the day. On the news front it was quiet as well. Quiet is a relative term as this has been a very news filled week with testimony from Ben Bernanke and Hank Paulson, the Fannie and Freddie fiasco, more losses from the financial institutions, IndyMac, and the ridiculous crusade against the short sellers.

We have some specific questions concerning certain sectors and indices. Over the weekend we will post the latest technical analysis of the indices and address the specific questions as well.

Today the FDIC released the following press release:

FOR IMMEDIATE RELEASE
July 18, 2008

Media Contact:
202-898-7192
angray@fdic.gov

The Federal Deposit Insurance Corporation (FDIC) has created a Web site that enables depositors at IndyMac Federal Bank, FSB, to verify whether their account is fully insured. The Web site also contains a link to FDIC contact information for customers with further questions about their accounts.

To utilize this service, the depositor must enter the account number to determine the account’s insured status. A depositor with multiple accounts at a failed bank must enter one account number at a time.

The FDIC would encourage customers to utilize this service if they have questions about their deposit status.

Link: http://www2.fdic.gov/dip/Index.asp

I went to the web site mentioned in their statement and I find it interesting that they have it set up with a "drop down" menu for selecting the FDIC seized bank. A drop down menu… hmmmm. I guess the list will grow.

See you over the weekend Rebels..

Today’s market close will be delayed a couple of hours. Please check back tonight.

The market opened like a soccer match. First this way, then back up the field the other way, and wait, back again the other way. Makes me want to grab some popcorn and just watch from the side lines 

Not much is happening… Resistance on the S&P 500 charts I highlighted in last nights posts are holding at this time. The weakness from the technology sector has put the brakes on the bear market rally, for now anyway.

The gains in the financial sector are too fast and have gone way too far. We look at this as some really great shorting opportunities coming up. I am simply amazed at the chatter coming from the media again. Any sign, no matter how slight it is they turn it into “this is the bottom” and start opening the champagne bottles to celebrate. Good grief! The economy is facing some of the most difficult challenges it has had to bear for many many decades. And it is not just one problem either. It is multiple issues all at once:

- The worst housing market decline since the Great depression

- Credit markets in deplorable condition

- Credit availability to average consumers has been restricted and tightened, or eliminated altogether.

- People have even been resorting to selling their cars to raise cash, but the used car market is in bad shape as well as resell prices have fallen drastically because their is no market for older cars that use more gas. Trade in values have fallen off a cliff.

- Cost of living has continued to climb which was already on top of a consumer having to use their homes as a “cash advance” machine to help pay their bills.

- Banks and Financial institutions got way over leveraged and greedy in the mortgage market by creating all sorts of ways to bundle up mortgages and trading them like they were baseball cards at a collectors convention. And suddenly their are no more conventions and no where for the cards to be sold. No demand = dropping prices. Residential and commercial mortgages should NEVER have been allowed to be turned into a twisted and distorted investment vehicle that banks and others could buy and sell in the markets. The system needs to go back to the traditional system of a bank issuing a mortgage and holding that mortgage, period. No more of this exotic asset backed securities crap.

- Health care costs are still rising

- Over the past 10 years the amount of money the average person has been able to save has declined steadily and is currently a negative savings rate.

But the banks and financial institutions saw an opportunity where there was loose Government regulation and they ran with it. Let’s hope someone wakes up and says “no more”. Time for the system to stop using the credit and homes of the average person as a means to leverage from and find more ways to make even more money from it. The interest that a bank earns on a mortgage should be all that is needed, but that was not good enough for them. They had to package them up and sell them for more profit. And then those were packaged once again and turned in other asset backed securities, and on and on.

With the housing market implosion all of these ’special’ securities that have been tied to mortgages are unwinding at a faster and faster pace. And much of it is STILL hidden away on the banks level 3 financial statements. This level 3 method of accounting for assets is the skeleton in the closet, they know what it is, but they don’t want the investment community to see what it is for it would destroy the financial statements of the companies if they had to bring those assets and put them on the books and mark them to current market prices.

It has to stop… level 3 accounting must be abolished. The only way FULL trust and confidence can ever be restored in the financial community is to have full and fair reporting. And the games of Wall Street with regard to the short sellers is just so idiotic and amounts to nothing more then Washington, D.C.’s attempt to “control” the free markets.

Ok, I’ll get off my soap box now. Over the weekend I’ll have some individual stocks for you to watch for potential trades.

Keep the comments coming Rebels! We love hearing from you. We know there are many many more of you out there reading but have not chimed in, don’t be shy! We are all here together as one big Rebel family…

A battle between Nasdaq and the S&P 500 in the pre market. Nasdaq is under pressure this morning with Google and Microsoft having missed on their earnings and on the other side of the street Citigroup beat the street’s expectations.

Citigroup CEO stated that they expect to see larger losses in the credit card portfolio going forward. But for now the everybody thinks Citigroup is great. Note: we are not part of the ‘everybody’ camp. Short term excitement in the financial sector will be just that in our view.

Options expiration day, watch out for wild swings today.

The following charts are that of the S&P 500 Index. Each chart highlights a different perspective in time and method of analysis.

Today was another wild day with a rally right out of the gate to only be quickly killed when the Philadelphia Fed data was released at 10:00am. It showed a continuing decline in the manufacturing industry with more layoffs and lower outlook for the future. That news sent the markets quickly and then they rallied once again. These bear market rallies can end in an instant.

And the bear market rally may have hit a big speed bump tonight when Google (GOOG) and Microsoft (MSFT) released their earnings and they were not liked one bit by Wall Street. Nasdaq and the S&P 500 futures dropped significantly upon the release of the news. At this time it appears that Friday’s open will be significantly lower. But, we are likely to see some extremely wild swings with options expiration put in the mix as well.

Merrill (MER) also reported and they experienced losses of $9.75 Billion is the second quarter. And it was not long before another CNBC reporter said that this must be the ‘kitchen sink’ thrown out the window. I have lost count of how many times the phrase "kitchen sink" has been reported by the media.  Merrill closed today at $30.79 and after they reported their significant losses they dropped to $28.65 in after hours trading. One other bit of news out of Merrill was that they have sold their prized stake in Bloomberg LP for $4.4 Billion. They must be having a hard time if they are having to sell their prized possessions to raise cash. I wonder how long it will be before we see office furniture and coffee pots for sale on Ebay from other financial institutions to raise capital.

Capital One Financial (COF) also reported and here again it was not a rosy picture. The CEO stated during the conference call that losses in just about all divisions of their business would see additional declines as the year progresses. What does their television commercial say "What’s in your Wallet?" I guess we should turn the tables and say to them "What’s in THEIR wallet?  Apparently less then they want.. ha ha

We are at the early stages of a possible bear market rally. A lot has happened over the past few days with the Fannie and Freddie catastrophe in the making, the incredibly stupid attack by the SEC on the ‘naked short’ issue, and wild price swings in the currency markets. It is enough to make ones head spin.

There was also a report today by the media that "we have left the bear market". They are referring to the magical 20% number that has been tossed around for many decades as the criteria for a bear market. The fact is we have been in a bear market since last November and we are still in that same bear market to this day. Bear market rallies do not negate the primary trend of the market which remains down.

Charts to follow shortly…

Some market humor:

REPORTS Q2 $0.54 V $0.44E, R $18.40B V $16.55BE
- Q2 ROE 7.0% v 22.0% y/y
- Q2 Tier-1 capital ratio 9.1% v 8.4% y/y
- CEO Jamie Dimon said, "Our expectation is for the economic environment to continue to be weak - and to likely get weaker - and for the capital markets to remain under stress. We remain conscious that since substantial risks still remain on our balance sheet, these factors will likely affect our business for the remainder of the year or longer.
- Retail Card Services provision for credit losses $2.19B v $1.67B q/q sequential and about double year over year.

Headlines can be misleading… CNBC is reporting the JP Morgan news as though it is wonderful. But the facts are that JP Morgan’s profits fell 53% from this time last year. Like we have been saying for many months, the big Wall Street financial institutions have lost one of their largest money makers which was the mortgage market. Without the mortgage market shuffle (buying and selling mortgage assets for profits) the investment institutions have lost a substantial ability to generate profits.

INITIAL JOBLESS CLAIMS: 366K V 380KE; CONTINUING CLAIMS:  3.166M V 3.180ME
- Prior Initial Jobless Claims no revision from 346K to 348K
- Prior Continuing Claims revised from 3.202M to  3.203MM

————————————————–

JUN HOUSING STARTS:  1.07M V 960KE; BUILDING PERMITS:  1.09M V 965KE
- Prior housing starts revised from 975K to  977K
- no revision to Prior Building Permits
* Increase in Housing Starts attributed to change in New York City construction codes effective July 1 which added back to the survey 126K units.  Ex-the Northeast,  Housing Starts would have been down about 4% rather than up 9.1%

A change in how data is reported is the reason for the headline gain. The devil is in the details!

Pre market futures are up and the market appears that it will open higher. We are not chasing or swing trading this move yet. Too many pitfalls remain that could take this bear market rally and reverse it in an instant.

We are seeing some wild movements in the S&P futures this morning. Very difficult to gauge where the market is going today. The headline news of the morning was the large increase in the Consumer Price Index (CPI). We had been saying for months that the Government data was incorrectly reflecting ‘real world’ economic factors for the average person. Today’s increase in the consumer inflation data is the beginning of Government data catching up to actual impact of the economy on you and I.

Today is part 2 of the Ben Bernanke show. Today he speaks to the House of Representatives beginning at 10:00am EST.

Earnings today:

Before the Open: ABT, AMB, ASML, DAL, DSL, GCI, HST, NITE, LSTR, LUFK, MI, MTOX, VIVO, MERX, NTRS, ORCT, PJC, STJ, WFC.

During Trading Hours: AMR, CBSH.

After the Close: ADS, CAVM, CCK, DTLK, EBAY, HOKU, KMP, KFN, LHO, PLCM, RECN, SSW, TER, TBI, UFPI, XLNX, YUM.

Occasionally I make the request that more of our readers chime in and let us know you are out there. If you are a reader of our site please say hello to us, let us know you are out there and share with us your thoughts.

The first thing I want to address tonight is the statement made today by Christopher Cox, Chairman of the Securities and Exchange Commission (SEC) at the Senate hearing. Mr. Cox stated that he will issue an emergency order to "Protect Investors" from what is called "naked short selling".

SEC Enhances Investor Protections Against Naked Short Selling

FOR IMMEDIATE RELEASE
2008-143

Washington, D.C., July 15, 2008 - The Securities and Exchange Commission today issued an emergency order to enhance investor protections against "naked" short selling in the securities of Fannie Mae, Freddie Mac, and primary dealers at commercial and investment banks.

The SEC’s order will require that anyone effecting a short sale in these securities arrange beforehand to borrow the securities and deliver them at settlement. The order will take effect at 12:01 a.m. ET on Monday, July 21. In addition to this emergency order, the SEC will undertake a rulemaking to address these issues across the entire market.

"The SEC’s mission to protect investors, maintain orderly markets, and promote capital formation is more important now than it has ever been," said SEC Chairman Christopher Cox. "Today’s Commission action aims to stop unlawful manipulation through ‘naked’ short selling that threatens the stability of financial institutions. We will continue our vigorous commitment to investors by working within the SEC and in close cooperation with our regulatory counterparts to promote the continued health and vibrancy of our markets."

The Commission’s emergency order, pursuant to its authority under Section 12(k)(2) of the Securities Exchange Act of 1934, will be effective at 12:01 a.m. ET on July 21, 2008 and will terminate at 11:59 p.m. ET on July 29, 2008. The Commission may extend the order to continue it in effect thereafter if the Commission determines that the continuation of the order is necessary in the public interest and for the protection of investors, but for no more than 30 calendar days in total duration.

# # #

The securities identified in the Commission’s order:

Company                                                Ticker Symbol(s)

BNP Paribas Securities Corp.         BNPQF or BNPQY

Bank of America Corporation          BAC

Barclays PLC                                      BCS

Citigroup Inc.                                      C

Credit Suisse Group                         CS

Daiwa Securities Group Inc.           DSECY

Deutsche Bank Group AG               DB

Allianz SE                                           AZ

Goldman, Sachs Group Inc             GS

Royal Bank ADS                               RBS

HSBC Holdings PLC ADS               HBC and HSI

J. P. Morgan Chase & Co.               JPM

Lehman Brothers Holdings Inc.     LEH

Merrill Lynch & Co., Inc.                   MER

Mizuho Financial Group, Inc.         MFG

Morgan Stanley                                 MS

UBS AG                                              UBS

Freddie Mac                                      FRE

Fannie Mae                                      FNM

http://www.sec.gov/news/press/2008/2008-143.htm

Ok, so what is going on here and why the emergency order? We feel that this action is nothing more than a diversion by Ben Bernanke and Hank Paulson, and they have roped in Chairman Cox to play along. There are already rules and regulations on the books with regard to naked short selling. Today’s emergency order in my view was nothing more than an attempt to make the public think that the problems with the banks are a result of ‘market speculators’. Similar to the recent talk that oil prices were all a result of speculators, this order is nothing more than an attempt to make the average person think that the losses in their 401K’s and IRA accounts is a result of market speculators and people who short stocks.

Ben Bernanke and Hank Paulson know the real story. They know that the losses that banks and financial institutions have been suffering are very real and very likely to be much worse than what has been reported so far. Stock prices have been declining because of a lack of confidence in the companies and their ability to continue to making profits. Bernanke and Paulson are attempting anything and everything they can to save the financial system from complete failure and they are now attempting scare tactics and a public relations campaign to shift the blame of bank failures to ‘market speculators’.

This is complete nonsense in my view. I wonder how long it will be before Ben and Hank enlist the military to fly blackhawk helicopters over anyone who speaks the truth about the economy, housing implosion, and the credit implosion. Because the SEC already has rules and regulations to restrict naked short selling there is no need for an emergency order. So it is obvious that this is clearly a public relations campaign to shift the blame to the stock market participants for all the problems. Perhaps Bernanke and Paulson hope that this order will scare people holding shorts in the market to cover, irrespective of whether they are naked shorts or not.  But the main purpose of this order in my opinion is to make the American public "think" that the problems with the banks are all due to actions within the stock market alone. They are attempting to re-direct the anger of the general public who have lost lots of money in their investment accounts from Washington to Wall Street. And that is simply wrong!

The general media does not understand what naked short selling is. So their coverage of this will be distorted and confusing. And the result will be exactly what Bernanke and Paulson want… make Wall Street "speculators" appear as the bad guys for everything wrong in the banks. Even those in the media who should know better are getting it wrong. In a Bloomberg article they say:

July 15 (Bloomberg) — The U.S. Securities and Exchange Commission will limit the ability of traders to bet on a drop in shares of brokerage firms, Freddie Mac and Fannie Mae as part of a crackdown on stock manipulation, the agency’s chairman said. […]

(full article here)

Notice how their opening paragraph is misleading. It says the SEC will limit the ability of traders to bet on share prices dropping. This is NOT what the emergency order is about. The SEC can’t stop people from shorting stocks, it is a perfectly LEGAL and normal part of how Wall Street has worked since the beginning. But the media is distorting the facts so the general public who does not understand the facts will put the blame of their hardships on hedge funds, traders, and anyone else who is shorting stocks in the normal fashion. Naked short selling is NOT allowed, but it still occurs. But naked short selling is not the problem nor is it the reason for the banking troubles. Washington just wants YOU to think it is.

For a complete description of naked short selling see this explanation on Wikipedia.

Now on to the market technical’s. Pick a chart, any chart. And it will most likely look as if has been through a war. The market has continued to decline even with technical indicators screaming that a bounce is due. Many technical indicators are at a point where a bounce in the market can be expected however the confidence in the economy continues to weaken further and has kept any bounce at bay. The long term outlook for the market continues to be bearish. The short term is very difficult to predict here. It is at these kinds of extremes in the technical indicators that a rapid and strong bounce can take place at any moment,  and it can also be a pre cursor to a violent and sharp sell off.

Our recommendation at this juncture is to stay on the side lines. Unless you are an experienced day trader it is safer to not try and swing trade the market at this time. Preserve your capital. We anticipate a large move coming in the broad markets soon, we just can’t say which direction it will be yet.

Technical’s and fundamentals are at war right now. 

One Senator was willing to stand up for the American people today at the hearing with Ben Bernanke, Secretary Hank Paulson, and SEC Chairman Christopher Cox.  Irrespective of the political party that Senator Jim Bunning of Kentucky belongs to, Washington needs more people like him.

Secretary Hank Paulson in my view will go down as one of the worst Treasury Secretaries in US history.

Click on image to be taken to video.

Last Friday the new Operating Officer of IndyMac Bank (who was appointed by the FDIC) said the FDIC takeover would be a "non event". He also stated that come Monday morning it would be ‘business as usual’.

In California where IndyMac Bank has their retail banking offices it has been anything but business as usual. Reports of police having to be called in, fights breaking out in lines, and people being turned away unable to get their money.

If this is a sign of what is to come as more banks fail then I don’t hold out much hope for the FDIC to manage anything.

Global markets sold off overnight on continued concern that the United States banking system in in dire trouble. S&P futures took an elevator ride down to the basement overnight before bouncing a bit at 7am EST but are still down significantly. Financial stocks are once again taking hits in the pre market as additional warnings are being circulated about various banks from analysts.

Financial analyst Meredith Whitney of Oppenheimer who has been ’spot on’ with her analysis of the banks made this call this morning on Wachovia Bank (WB)

OPPENHEIMER CUTS WB TO UNDERPERFORM FROM MARKET PERFORM
- Opco’s Whitney says outlook for shareholders is ‘bleak’

Lack of confidence continues to build worldwide in the ability of the United States Government to handle the banking crisis. IndyMac Banks’ collapse is most likely just the beginning of bank failures in the months ahead in our view. If things are allowed to continue as they have been, and if the Government attempts to artificially inflate housing prices this problem WILL fester and explode into a much larger problem. The housing market must be allowed to correct normally through the simple supply and demand process with the resulting normal price discovery process.

Only in this manner can the problems equalize and a balance be achieved. Banks and financial institutions caught in the middle by having leveraged themselves way too high is simply just too bad, they must fail. No bail outs, no tax payer rescue plans. Bad companies fail all the time and these institutions should NOT be given any special rights. Good companies are rewarded, bad companies are punished and go out of business.

Producer Price Index (PPI) data:

*JUN PRODUCER PRICE INDEX M/M: 1.8% V 1.4%E; PPI EX FOOD_ENERGY M/M: 0.2% V 0.3%E
- PPI YoY:   9.2% v 8.7%e
- PPI Ex Food_Energy YoY:  3.0% v 3.2%e

TABLE: JUNE PRODUCER PRICE INDEX DATA
                                                       JUNE      MAY      APRIL

PPI, Finished Goods                  1.8      1.4       0.2
PPI, Ex. Food, Energy                0.2      0.2       0.4
Energy                                          6.0      4.9      -0.2
Foods                                            1.5      0.8       0.0
Consumer Goods                       2.3      1.8       0.1
Residential Electricity               0.8      0.6       1.2
Residential Gas                         6.6      3.8       5.4
Gasoline                                     9.0      9.3      -4.6
Home Heating Oil                    12.4      8.0       2.2
Drugs                                         -0.1      0.2       0.7
Autos                                          2.2     -1.0       0.4
Tobacco                                    0.0      2.2       0.1
Capital Equipment                   0.3      0.1       0.4
Intermediate Goods                2.1      2.9       0.9
Ex, Food, Energy                   1.3      2.0       1.2
Crude Goods                           3.7      6.7       3.2
Ex. Food, Energy                  -0.2      5.0       7.9

General Motors (GM) announces the elimination of their dividend, cuts in bonuses for executives, the raising $15 Billion of capital by selling certain assets, and job cuts. All in the attempt to stem further losses at the big auto giant. Pre market action on GM stock has been mixed. At this moment it does not look like GM went far enough to make investors comfortable.

At 10:00am US EST Ben Bernanke, Secretary Hank Paulson, and SEC Chairman Cox will be speaking before the US Senate to discuss the economy and the markets. Also, President Bush is scheduled to hold a press conference at 10:20am to discuss the economy.

Be prepared for any ’stick save’ which might turn the market around in the short term. When there is this much political gabbing at the same time then it means they may be prepared to offer the market a piece of candy to calm it down. But, unless the Government stops trying to artificially inflate housing prices then we are in for even worse conditions ahead.

Watch the XLF, is near a strong support region which could provide a technical bounce. However we need to remind you that in this environment where fear is very high and confidence in waning it is very possible that support regions are of no substance to the market. Today remains as either a severe sell off or a wild bounce.

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.

In a move that was clearly aimed at preventing a market crash on Monday (or at least hoping it would prevent one), the Treasury Department issued their plan for Fannie and Freddie just moments before US futures trading began. In a rare Sunday announcement, the Treasury and the Federal Reserve issued a statement about how they will provide capital to Fannie Mae and Freddie Mac (see previous article for details).

It reminds us of the Sunday evening back in March, when the deal was announced on the Bear Stearns implosion. They issued their statement before trading began in the Asian markets, hoping to stem the bloodshed in the global markets. Tonight’s announcement clearly tells us that the conditions with Fannie and Freddie are much worse than they have admitted publicly. We have been writing about the dire situation with these companies, even though the official stance by the US Government has been ‘all is well’. The point is, if all is well, then why such drastic action this evening to provide these companies with a channel for funds? Hank Paulson says this move is to ‘restore confidence’ and the funds would be available should they need it. It is our view that they do need these funds. Otherwise, there would not have been high level Government meetings all weekend long devising a plan to provide a direct channel between Fannie and Freddie and our wallets.

How will this plan be perceived by the markets? Will it be successful? Is this only the first step to a full nationalization of Fannie and Freddie? If the plan backfires, then nationalization will be next. And what would make it backfire? If the housing market continues to decline (which we believe it will) and Fannie and Freddie have to continue rolling over the ‘loans’ they get from the Fed, then the issues facing Fannie and Freddie will be nothing compared to what could come next.

Initial market reaction to the news was a rise in S&P futures from 1240 to 1252. The US dollar index rose slightly and gold has held relatively stable. It is the price of gold that has me most concerned, for if confidence was truly felt to be ‘restored,‘ I would have expected to see some selling in gold. However, this has not happened yet. The rise in the S&P futures has a long way to go before the US markets open tomorrow and a lot can happen between now and then. Traders need time to digest and analyze this information. At this time the market is set to open higher tomorrow, but it is very important to mention that this news is being interpreted differently by many people. Some think it is a short term fix, some think it will lead to further erosion of the entire housing market, and many just don’t know what to make of this action yet. So the market may very well open higher tomorrow and then quickly sell back down. The scenarios for the market tomorrow are many.

Hank Paulson said that any credit line or stock investment ‘would carry terms and conditions to protect the taxpayer’. Until we know what those terms are, the risk to the economy is not fully known. Going back to the Bear Stearns bail out:  the Government took possession of $29 Billion in collateral from the now extinct Bear Stearns company.  We don’t know the risk to the US taxpayers, because the portfolio of that collateral is ‘classified information’. So no one, except for the Federal Reserve, Hank Paulson, a few members of Congress, and the President know what the taxpayers have paid for. You and I are left in the dark intentionally. Will the terms and conditions for this new bail out be kept ‘classified’ or will those of us paying for this get to know what it is?

It is ironic that the Government has been calling "shame on you" to lenders that have been providing mortgages without properly checking the facts. They have also been saying that the American people need to fully understand loan documents before they sign them (referring to how some people feel they were duped into mortgages they couldn’t afford).Yet, here we are being forced into paying for something that the US Government won’t even divulge the details of, and we are being forced to "sign the check" blindly, on the faith that the US Government is doing the right thing.

I don’t know about you, but I want to call my bank and issue a "stop payment" on that check.

FEDERAL RESERVE:

Release Date: July 13, 2008

For immediate release

The Board of Governors of the Federal Reserve System announced Sunday that it has granted the Federal Reserve Bank of New York the authority to lend to Fannie Mae and Freddie Mac should such lending prove necessary.  Any lending would be at the primary credit rate and collateralized by U.S. government and federal agency securities.  This authorization is intended to supplement the Treasury’s existing lending authority and to help ensure the ability of Fannie Mae and Freddie Mac to promote the availability of home mortgage credit during a period of stress in financial markets.

——————————————

Statement by Secretary Hank Paulson:

- Fannie Mae and Freddie Mac play a central role in our housing finance system and must continue to do so in their current form as shareholder-owned companies.
- Their support for the housing market is particularly important as we work through the current housing correction. GSE debt is held by financial institutions around the world. Its continued strength is important to maintaining confidence and stability in our financial system and our financial markets. Therefore we must take steps to address the current situation as we move to a stronger regulatory structure.
- In recent days, I have consulted with the Federal Reserve, OFHEO, the SEC, Congressional leaders of both parties and with the two companies to develop a three-part plan for immediate action. The President has asked me to work with Congress to act on this plan immediately.
- First, as a liquidity backstop, the plan includes a temporary increase in the line of credit the GSEs have with Treasury. Treasury would determine the terms and conditions for accessing the line of credit and the amount to be drawn.
- Second, to ensure the GSEs have access to sufficient capital to continue to serve their mission, the plan includes temporary authority for Treasury to purchase equity in either of the two GSEs if needed. Use of either the line of credit or the equity investment would carry terms and conditions necessary to protect the taxpayer.
- Third, to protect the financial system from systemic risk going forward, the plan strengthens the GSE regulatory reform legislation currently moving through Congress by giving the Federal Reserve a consultative role in the new GSE regulator’s process for setting capital requirements and other prudential standards.
- I look forward to working closely with the Congressional leaders to enact this legislation as soon as possible, as one complete package.

——————————————-

The New York Times reports:

[…]As part of the plan, the administration will also call on Congress to raise the national debt limit[…]

Full NY Times article HERE

 

We are monitoring the markets for reaction.

Late last night the New York Times broke a story that the Bush administration had escalated their discussions on what to do about the problems facing Fannie Mae (FNM) and Freddie Mac (FRE). The article raised the possibility of these two companies becoming nationalized. What that means, if it were to ever happen, is that the US Government (and all of us tax payers) become responsible for nearly $5 Trillion worth of mortgage paper. Just the ‘thought’ of that happening sent the futures tumbling in the overnight hours and created our sell off this morning.

Throughout the day we had statements from all kinds of people. Hank Paulson said their focus is on backing Fannie and Freddie in their "current form". So was he saying the Government will not nationalize them? Then their was a statement that hit the media that was claimed to have been made by Ben Bernanke saying the Federal Reserve will create an emergency ‘lending window’ for Fannie and Freddie. But later the Federal Reserve denied that claim. Also during the day were statements from Fannie and Freddie who said they are ‘well capitalized. All of this action had the markets not knowing which way to go. It was one of the strangest days on Wall Street that I have seen in many years. As a matter of fact I have printed the intra-day chart of today’s S&P 500 trading and have placed it up on the wall in my office for this will be one to remember.

What is next for Fannie and Freddie? The companies say they have no problems, but the market thinks there is a problem and a big one at that. The stock market is the final arbiter of any matter. The stock market is the collective knowledge of millions of people. It is that collective knowledge that determines the final price for any stock. And what the collective knowledge is saying is that Fannie and Freddie are in big trouble.

History has proven to be correct just about every time when it comes to massive sell offs of a stock. We only need to look at recent events to see this like with Bear Stearns, Ambac, MBIA, and today IndyMac Bank. The facts are that Fannie and Freddie hold nearly $5 Trillion of mortgages and mortgage backed assets. It is a fact that foreclosure rates are rising at an alarming rate. It is a fact that home prices are still declining and numerous projections put the declines continuing as far as into 2010. It is a fact that the credit markets are not functioning properly at all. And it is a fact that the values of these mortgage backed assets are declining. So who is right? Fannie and Freddie, or the market arbiter?

Aside from the trading action in the stock market today was another important development. And that was in the bond markets. Typically bonds and treasury notes are the "flight to safety" trade. Meaning that when money gets pulled from the equities market there is a surge of money going into the bond market. Like a stock, when more people buy the notes the price of those notes goes up. But associated with the bonds is their yields, and the yield moves inversely to the price. So what happens is when the stock market goes down so do the yields (because people are buying into the bond market). What was witnessed today was yields rising even with the equities market going down. This signals something very bad. It says that as money is coming out of the stock market it was also coming out of the bond market. This can be for only one reason, declining confidence in the US Financial system as a whole.

If the selling in the bond market escalates it will raise the yields and subsequently just about anything tied to interest rates will rise as well. Everything from credit card rates to mortgage rates would be impacted. And that is a situation that would be disastrous to an economy already that is already in terrible shape. It would further erode the housing market, increase the cost to use credit, and push the economy down much further. Ben Bernanke says he has studied the Great Depression and is fully aware of how it happened. The man is really starting to scare me. I have to wonder with all the knowledge of the Great Depression he has if he is re-enacting it in his policy decisions. I sure hope not.

The action in the bond markets today signaled potential danger. If foreign governments decide to start selling some of their holdings of US treasury notes then the bond market could crash, sending the yields up much higher. Keep an eye on the 10 year note yield (symbol $TNX). Should that keep going up it says money is being pulled from the bond markets. With the announcement tonight that IndyMac Bank has failed and has been taken over by the FDIC we have to wait until Sunday evening to determine the impact to the markets because the futures market was closed at the time of the announcement. The stock market remains extremely oversold on a technical basis so we are really in a state that is difficult to gauge at this time. If the market takes the IndyMac news badly then we may very well see substantial selling again. And we also have the Fannie and Freddie situation to monitor.

I will have charts and additional commentary over the weekend.

BREAKING NEWS

It is now official. IndyMac Bancorp (IMB) has failed and is being taken over by the FDIC immediately.

US Banking Regulators Close IndyMac Bancorp; FDIC Takes Over

Last update: 7/11/2008 6:15:33 PM
By Tom Barkley
Of DOW JONES NEWSWIRES

WASHINGTON (Dow Jones)–IndyMac Bancorp Inc. (IMB) became the biggest retail bank to fall victim to the U.S. mortgage crisis Friday, as regulators shut down the Pasadena, Calif.-based savings bank.
The Federal Deposit Insurance Corp. said it will take over operations of the bank, which is fifth bank to fail this year.
It also ranks as one of the largest banks to go under, with assets of $32 billion ranking only behind the demise of the $40 billion Continental Illinois National Bank & Trust Co. in 1984 - not accounting for inflation. Continental Illinois was the first bank considered "too big to fail" by regulators.
Even when considering inflation, it’s likely the biggest since the savings-and-loan crisis of the late 1980s., according to Bert Ely, president of the consulting firm Ely & Co.
The failure of IndyMac, the country’s ninth-largest mortgage lender last year, was widely rumored after the bank announced earlier this week that it was laying off half its workforce and halting mortgage-origination activity.
The FDIC set up a bridge bank to handle the dismantling of IndyMac, an unusual move that some analysts had anticipated given the size and complexity of the bank.
"It’s just too big to deal with overnight in this situation," said Ely.
A similar process was used to manage the failure of Superior Bank FSB of Hinsdale, Ill., in 2001, which had $1.8 billion in assets. The FDIC typically lines up a buyer to take over the deposits, as well as some assets, of a failing institution.
The new institution, IndyMac Federal Bank, will open for business Monday and be run by the FDIC, it said in a release.