APPLY FOR YOUR PIECE OF THE BAILOUT!

If you want to apply for a few billion dollars, you can fill out this 2-page application for the TARP program. That's right, it's 2 PAGES LONG. This is like 10x shorter than my college application. Applying for billions couldn't be any easier!

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WHERE DID THE BAILOUT MONEY GO SO FAR?

Riiiiiiiiight here...

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WEEKLY TECHNICAL COMMENTARY (Oct 13-17)

THIS WEEK’S ISSUE:

• In-Play: The Global bailout – Countries Buying Stakes in Financials
• Market Commentary: S&P 500 ($SPX), NASDAQ ($COMP)
• Identifying Short-term Bottoms & Selling Climaxes
• This Week’s Economic & Earnings Reports

U.S. FUTURES (as of 7:00AM EST): DJIA (+4.56%), SPX (+5.58%), COMP (+4.99%)

HAPPY COLUMBUS DAY! Do people actually do something special today? I’m sure Christopher Columbus celebrated when he set foot on the New World. Likewise, longs will have reason to celebrate this week, but it’ll be a short celebration. Last week’s issue stated that we should see capitulation in the beginning of last week, however capitulation day came on Friday, towards the end of the week. Many times, technical signals are not very clear and may produce mixed results. Therefore, traders utilizing technical analysis must be flexible and adapt to the market situation we’re in. Currently, this is a trader’s market, not an investor’s market. Friday was our “special day” and we will get that bounce everyone was looking for. The technical aspects will be covered in the Market Commentary section.

IN-PLAY: THE GLOBAL BAILOUT – COUNTRIES BUYING STAKES IN FINANCIALS

While we’re in the process of planning our own bailout, Europe became next in line in the credit crisis. The extent of involvement in the CDO/CDS/MBS markets is across borders and without any bounds. I wouldn’t be surprised if Asia also takes a hit. We all know what’s happening in Iceland, and that’s exactly what the rest of Europe wanted to avoid. If you don’t know, Iceland is “seriously considering” going to the IMF now.

Therefore, over the weekend, developed nations all over the world pledged financial support amounting in the hundreds of billions of dollars. But it’s not free. These countries, including the U.S. will be taking massive equity positions in financial firms. The U.K. just became the largest shareholder in RBS and HBOS and will inject $29.2 billion in Lloyds TSB (total cost for all of this will be $63 billion so far). The French government created a 40 billion euro fund as they prepare to take stakes in certain firms. Germany and Italy are also creating their own bailout plans with Germany’s plan alone purported to be worth up to 400 billion euros.

The U.S. will be taking positions, the first ever since the Great Depression, in a coordinated plan of ownership in numerous financial institutions. Effective, the Federal government is the largest hedge fund managers in the world and other countries will receive that title. Should the government own such large stakes in public firms? At least they’re nonvoting shares, so the government can’t run these companies.

Most of the industrialized nations have also guaranteed all bank deposits. Germany, Iceland, and Denmark are guaranteeing all savings and CDs. Ireland is going one step further and guaranteeing banks’ debts. Many other countries have followed suit and the Federal Reserve issued a temporary order guaranteeing all bank deposits.

In addition the Bank of England, European Central Bank, and Swiss National Bank have all announced that they will conduct tenders of U.S. dollar funding at the 7-day, 28-day, and 84-day maturities at fixed rates for full allotment. The Bank of Japan is also considering a similar move. What does this mean? The developed countries are becoming the largest ATM machines in the world.

This massive assault on all fronts in a coordinated attack is the prefect step in the right direction. I don’t think people could really have asked for more given the short amount of time that the world had to make this decision. I will never forget 2008 as “THE” year. I hope we, as the whole world, can learn something from this mistake for the future, but human nature has proved otherwise.

MARKET COMMENTARY – SPX 899.22, COMP 1,649.51

The only real purpose of this week’s commentary is to confirm that we will bounce, starting today. I do not know the duration of the bounce, but it will be sharp, sudden, and in full force. Traders who did not go long on Friday will miss a considerable portion of the initial move.

There are three main items to look at in the above charts (S&P 500, NASDAQ): 1) the candle pattern, 2) volume, and 3) the Bollinger band width. We formed a doji, signaling indecision, or a white real body, forming a bullish piercing pattern. Both patterns are confirmed and back up by the strong volume that’s present in capitulations and selling climaxes. We’ve hit record volume. Notice how we opened and closed outside the lower band on the SPX and we opened lower, gapping down, on the COMP. Typically, a stock or index will return to its mean if it has been extended too far from its standard deviation.

This is a fair warning: This bounce will be short. Very short. It will give longs the opportunity to exit with a smaller loss than they have right now.

IDENTIFYING SHORT-TERM BOTTOMS & SELLING CLIMAXES

Finding a short-term bottom and predicting a bounce is a very skilled art. Below, we can see a 3-day chart of the S&P 500. In the initial stages of a plunge, the market will start to roll over slowly…sometimes way too slow. There will be numerous bull trap rallies that will quickly fade. You might know of recent days where a rally just completely died by the end of the day. This is because there is no serious buying pressure on the stock and there are still too many holders waiting to sell.

Next, we go parabolic or vertical. This is the “falling off a cliff” or “waterfall” stage. It doesn’t really matter what you call it, but if you can take a 6 inch rule out and put it against a chart and if it’s a straight line, there’s a good chance we hit this critical level called the selling climax. The end of the climax is marked by a capitulation spike. Why is it always a spike? Because people don’t calmly sell during a crash. They’re tripping over each others feet trying to be the first ones to sell before other investors drive their stock down. Makes sense, but that’s what happens when irrationality takes over and logic and sound judgment get thrown out the window.

This wave is formed when retail investors, always the last group to act, have completely washed out. They are desperately trying to recover as many pennies on the dollar as they can. What we saw on Friday were millions upon million of Americans dumping everything they own. They are the weak hands, and this phase shakes them out of the market. After all, the stock market isn’t a winning lotto ticket and investors need to be aware that it’s not a free ride. We now hit capitulation.

Capitulation is a psychological pattern. There are feelings of hopelessness, despair, depression (and others) will permeate market sentiment. Go talk to an ordinary person with little market knowledge, and I can guarantee you that they’re going to say something like “why would I want to buy stocks, they stink!” Most retail investors who just got crushed will not have the courage to start buying and this will go on for a long time. Think of this as a kid that burned his hand on the stove. He won’t go near that stove for a while.

At this point, retail investors are shaken out, there’s very little capital in play because more and more investors are ditching the idea of using margin, and most investors have lost real working capital (we lost $2.4 trillion last week alone!). After the decline, there is a lack of money at work in the markets, so it’s only natural to see low volume follow a spike in volume during the climax.

In the S&P 500 on Friday (chart below), you could see buying volume pick up and spike at the end of the day and this volume activity confirmed the price action (rally) that started in the afternoon. This extreme change in sentiment told me that something major will occur. When was the last time you had a 1,000 point range in a single day (on the Dow)? The markets were moving, and the price-volume relationship confirmed it.

The rally we will have will be a short reactionary rally. Why and how do I know this? Because after you lose trillions of dollars, where are you going to find the buyers to propel a rally? Every investor can pick up five jobs and work 24-hours a day and still not be able to come up with the lost capital in the same amount of time they lost it. Bull markets and sustained reactionary rallies are born from excess capital and having the financial ability to speculate in the markets. If you think we’re going to recover soon, stop dreaming.

THIS WEEK’S WATCH

• The tradable bottom in place starting today. Be ready to sell & sell short if an appropriate signal appears. This rally could last from one day to several days.
• Global developments on governments taking large stakes in financial firms and other world news
• Precious metals and their reaction
• A large number of earnings reports this week

Noteworthy Economic Reports: Mon. (none – Columbus Day)Tues. (ICSC-Goldman Store Sales – 7:45AM, Treasury Budget – 2:00PM), Wed. (MBA Mortgage Applications – 7:00AM, Empire State Manufacturing Survey – 8:30AM, PPI – 8:30AM, Retail Sales – 8:30AM, Business Inventories – 10:00AM, EIA Energy Status – 10:35AM), Thurs. (CPI – 8:30AM, Jobless Claims – 8:30AM, Industrial Production – 9:15AM, Philly Fed – 10:00AM), Fri. (Housing Starts – 8:30AM, Consumer Sentiment – 10:00AM)

Noteworthy Earnings Reports (planned): Mon. (STLY), Tues. (ADTN, DPZ, JNJ, PEP, CSX, ENZ, DNA, INTC), Wed. (ABT, KO, JPM, MV, PJC, STJ, WFC, DAL, EBAY, XLNX, LSTR, STLD), Thurs. (BBT, BBW, CIT, C, HOG, HSY, MEG, MER, NOK, NUE, RS, SHW, SON, LUV, UTX, WERN, WGO, CAL, DHR, GOOG, ISRG, PNC, AMD, COF, ESLR, GILD, IBM, LEG, SYK, TPX), Fri. (FHN, HON, SLB, SONC)

BLOG OF THE WEEK: FINANCIAL ARMAGEDDON! (http://www.financialarmageddon.com)

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SENATE PASSES BAILOUT BILL

WASHINGTON (AP) -- After one spectacular failure, the $700 billion financial industry bailout found a second life Wednesday, winning lopsided passage in the Senate and gaining ground in the House, where Republicans opposition softened.

Senators loaded the economic rescue bill with tax breaks and other sweeteners before passing it by a wide margin, 74-25, a month before the presidential and congressional elections.

In the House, leaders were working feverishly to convert enough opponents of the bill to push it through by Friday, just days after lawmakers there stunningly rejected an earlier version and sent markets plunging around the globe.

WEEKLY COMMENTARY - Sept 29 - Oct 3

THIS WEEK’S ISSUE:

• In-Play: $700 Billion Bailout – Deal Reached!
• In-Play: Short-Sellers Report Holdings
• In-Play: Citigroup (C) & Wells Fargo (WFC) Bid for Wachovia (WB)
• Market Commentary: DJIA, S&P 500
• Update: CBOE Volatility Index (VIX)
• Update: NYSE & NASDAQ Hew Highs-New Lows Index (NYHL, NAHL)
• This Week’s Economic & Earnings Reports

U.S. FUTURES (as of 6:15AM EST): DJIA (-1.61%), SPX (-1.80%), COMP (-1.99%)

IN-PLAY: $700 BILLION BAILOUT – DEAL REACHED!

It’s about time! On Sunday, Congress and the White House reached a tentative deal (still needing to be voted on) on the $700 billion bailout. To remind you of the times that we are living in, this bailout is the largest financial bailout in U.S. history. You will never forget this time in our financial history. The plan could provide $250 billion immediately, $100 billion if the president saw it necessary, and the last $350 billion subject to Congressional approval. This means that the full $700 billion may not come for a very long time and both the President and Congress may disapprove of the additional funding. In my opinion, Congress fully understands the implications of putting $700 billion in taxpayer’s funds at risk; therefore, the full amount will not be risked.

Still, $700 billion will not stall the inevitable recession we are about to face. Unemployment is projected to hit 7.5% by the end of 2009, housing prices have yet to stop declining (the root of the MBS/CDO problem), and consumer spending is further restricting. I view this as a compromise between furious taxpayers on Main Street who do not wish for a Wall Street bailout and the Federal Reserve and Treasury’s repeated warnings of “total failure” if action did not occur. A recession, or if you don’t believe we are in a recession – the stock market, cannot be “forced” to improve. This is a natural part of the business (market) cycle. The excesses of our incompetence and the last traces of hubris must be eliminated prior to making a full recovery. That is the nature of any market cycle.

Here are the key provisions of the bill:

• The bill would be disbursed in stages. The authority to use the money will expire on December 31, 2009.
• The assets would be bought at “market value”. I have a hard time believing this as market value for the most toxic real estate assets still cannot be determined. Taxpayers may breakeven or make a profit if the assets appreciate (housing prices must improve for that to happen). If the government overpays for the assets, resulting in a net loss, they may be able to recover the majority of the principal on the open market once they sell the securities.
• If a net loss is evident, the bill requires that the financial industry make up the difference. This will be determined in 5-years, after the bill is enacted.
• The Treasury will have the right to take ownership stakes in participating companies. The firms willing to participate are still to be determined. I and a friend on Wall Street (SB) believe that many of the financial firms will not need to want to participate in this program. Well-capitalized firms have little inceptive to participate.
• The government may purchase non-performing assets directly from banks, giving the government more flexibility in modifying the terms of the loans.
• The Financial Stability Oversight Board (FSOB)and a congressional oversight panel will be established to oversee the program. The FSOB will include the Federal Reserve Chairman, SEC Chairman, FHA Agency Director, HUD Secretary, and the Treasury Secretary. The congressional oversight panel will consist of 5 outside experts appointed by the House and Senate.
• The treasury will establish an insurance program to insure against losses. The risk-based premiums will be paid by the financial industry. This includes MBS’s purchased before March 14, 2008.

The House is expected to vote today and the Senate is expected to vote later this week, or as early as Tuesday.

You and I will patiently wait. If you don’t watch CNBC, this week will be a good time to turn on the tube.

IN-PLAY: SHORT-SELLERS REPORT HOLDINGS

Short-sellers, mainly hedge funds, will have to disclose their short positions to the SEC today. The holdings will reveal the number and value of securities sold short for each day of last week. Although the SEC has good intentions to fight naked short-selling, this presents several problems:

• Other short-sellers may follow and add positions that the funds already have in place. Although this does not apply to financial stocks, this will put pressure on stocks in other industry and sector groups. This could result in an artificial short squeeze for buyers who wish to bet against the funds.
• Hedge funds are most likely to shift their strategies. This presents a special problem for short-biased or short-only funds which have to disclose their entire strategy. With hedge funds providing 25% of the markets liquidity, this will cause a major disruption.
• This puts additional pressure on managers and their staff who must fill out a form that includes short positions placed in the beginning of the day, intraday short positions, and the number and value of the shorted securities at the end of the day.

This information will remain private for two weeks, after which it will be revealed to the public.

IN-PLAY: CITIGROUP (C) & WELLS FARGO (WFC) BID FOR WACHOVIA (WB)

Wachovia, the 6^th largest U.S. bank with $40 billion in deposits, is currently locked in a bidding war between Citigroup (C) and Wells Fargo (WF). If WB fails, this would be the 2^nd largest bank failure in U.S history, tied with Continental Illinois National Bank in 1984. This would mean that the top 3 largest bank failures in the U.S. would all have taken place in 2008. But, let’s not speculate.

The Federal Reserve and the Treasury are involved in facilitating the deal and both remain adamant about not providing public capital in guaranteeing WB’s assets or taking over WB, unless the company deteriorates more rapidly.

Shares were down 15% on Friday, after-hours. I don’t expect both Citigroup and Wells Fargo to pay close to WB’s closing price of $10 on Friday.

MARKET COMMENTARY -- INDU 11,143.13, SPX 1,213.01

There are two things that are important for this week: 1) the direction of the triangles that are forming in the market and 2) volume. Notice the symmetrical triangle in the DJIA and the ascending triangle in the S&P 500. Just because we made a higher short-term low does not mean we are out of the woods yet. Any breaks above of below the triangle’s boundaries should be considered.

Observe the volume since the short-selling ban occurred. This is amazing. Hedge funds make up over 25% of the trading volume in the markets and if you get rid of a primary aspect of their trading (in financials), then it is no surprise that the volume has completely dried up. A well-functioning and liquid market should see increasing volume, not volume that is cut more than half! Volume has increased on Thursday and Friday, however, they still remain at ‘average’ levels. This is very discouraging because trading activity has dried up to point where it has discouraged many participants in the market. If there is a rally, it cannot and will not be sustained with volume at these levels. Volume confirms price action – that’s a fact!

UPDATE: VOLATILITY INDEX (VIX)

I want to point out the significance of the VIX at the stage it's in. The VIX is actually consolidating in a high-and-tight flag pattern. If you check the past 3-years, you'll see that the VIX has never done this. This means that the fear is still at elevated levels and probably won't be coming back down anytime soon. This pattern indicates that a breakout higher should occur imminently. But, the bailout could change all of this and the flag pattern could breakdown, sending the VIX into the 20s, but I doubt it. Note any bounce off the 15-day MA.

The VIX is likely to hit the 40s again and stay there.

UPDATE: NYSE & NASDAQ NEW HIGHS-NEW LOWS INDEX (NYHL, NAHL)

What’s important here is that the NYSE and NASDAQ issues are still making new lows! In fact, we’ve continued to make new lows all last week while the short-ban was in effect. We did get a slight rebound as I mentioned in last week’s commentary, but it was only temporary. As the market consolidates in their respective triangle formations, we should see both NH-NL indices remain steady at this level; however, I do not expect many new highs to be hit. On Friday, only 9 new highs were made on the NYSE and NASDDAQ (total) and 263 new lows have been hit. This is a clear indication that the market will most likely make a new low.

Remain vigilant and be aware of any sudden changes in these two indices. The market cannot rally if the ratio between new highs and new lows is only 3%! Be a realist, not an optimist or pessimist, and make note of any increases or decreases in the number of issues making new highs or new lows this week.

THIS WEEK’S WATCH

• House and Senate vote results on the bailout package
• NYHL & NAHL indices
• VIX – possible breakout to the upside
• This week’s economic & earnings reports

Noteworthy Economic Reports: Mon. (Personal Income, Personal Spending, PCE Core – 8:30AM), Tues. (S&P/Case Schiller HPI, Consumer Confidence – 10:00AM, NAPM – 9:45AM, Weekly Retail Sales – 7:45AM), Wed. (Total Vehicle Sales, Weekly EIA Energy Inventory – 10:35AM, Weekly MBA Mortgage Applications – 7:00AM, Challenger Job Cuts – 7:30AM, ADP Employment Change – 8:15AM, ISM Manufacturing – 10:00AM, Construction Spending – 10:00AM), Thurs. (Initial Jobless Claims – 8:30AM, Factory Orders – 10:00AM, Monster Employment Index – 6:00AM), Fri. (Unemployment Rate - 8:30AM, ISM Non-Manufacturing Composite – 10:00AM).

Noteworthy Earnings Reports: Mon. (CC, SCS, WAG), Tues. (PBG), Wed. (BLUD, ATU, MU, ZZ, WWW), Thurs. (STZ, MAR), Fri. (FDO).

BLOG OF THE WEEK: GROOVINATOR STOCK BLOG! (http://www.groovinator.blogspot.com)

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THE REAL REASON FOR THE RUSH?

Financial Armageddon made an excellent post on the Fed's financial situation. This outlines it perfectly:

One of the questions that has come up in connection with this week's scramble to pass a $700 billion bailout package for the beleaguered financial sector is: Why the rush? Why not take some time to fully explore the risks, discuss the financial, economic and political ramifications, and figure out ways to minimize the cost to taxpayers?

Although those in charge have attributed their sense of urgency to fears of an imminent seize-up in financial markets, it is conceivable that policymakers could have applied a few more of the band-aids they have been using prior to now so that the issues and prospective outcomes could be examined more fully in the harsh light of day.

Unless, of course, there is more to it than what our leaders are admitting to. In "Brad Setser: Extraordinary Times," the London Banker blog suggests the pressure for a rapid-fire solution stems from the precarious financial position of the rescuer-in-chief: the Federal Reserve.

Brad Setser has a fascinating insight to offer in his newest post, Extraordinary Times:

In the last two weeks — if I am reading the Federal Reserves’ balance sheet data correctly — the Fed has:

Increased “other loans” to the financial system by around $230 billion (from $23.56b to $262.34b);

Increased its “other assets” by about $80b (from $98.67b to $183.89b);

Increased the securities it lends out to dealers by $60b (from $117.3b to $190.5b);

That works out to the provision of something like $370b of credit to the financial system in a two week period. And that is just what I saw on a cursory glance.

The most that the IMF ever lent out to cash strapped emerging economies in a year?

$30b, in the four quarters through September 1998 (i.e. the peak of the 97-98 crisis).

The most the IMF ever lend out over two years?

$40b, in the eight quarters through June 2003 (this covered crises in Argentina, Brazil, Uruguay and Turkey)

This is a very real crisis. The Fed’s balance tells a story of extraordinary stress. I never would have expected to see the Fed lent out these kinds of sums over such a short-period.

Financial Armageddon's Response:

Excellent and timely, Brad. I’ve been speculating all week that the pressure being used on the Congress to pass the Paulson Plan is the threat of Fed illiquidity. As of two weeks ago, the Fed had lent out more than $600 billion of its $800 billion balance sheet Treasuries against crap MBS collateral.

The Paulson Plan would have allowed the banks to unwind the repos putting the Treasuries back in the Fed, get cash for the crap MBS, and get more Treasuries from the issues financing the $700+ billion funding of the Plan. As a bonus, the Paulson mark-to-maturity price becomes the implicit Level 3 price for capitalisation of all the firms and banks in the system, giving them some breathing room to stay in business. Everyone wins except the poor American taxpayer.

The Fed is very close to being illiquid. That is the fear factor we are seeing at work, and the reason no one will discuss why the bailout is needed - only emphasise the urgency.

BUSH SPEAKS ON THE $700B BAILOUT

[ Video ]

THIS IS WHAT THE U.S. IS DOING:

(Courtesy of UpsideTrader)

LOL! Who's that?

You're kidding me, right? This sounds like something I read out of David Einhorn's book:

Yahoo! Finance -- Bernanke suggested buying the assets at a "hold-to-maturity" price, which would be based on an estimate of what the securities would eventually be worth as payments came in over the years. (That's right, it's all assumed)

"If the Treasury bids for and then buys assets at a price close to the hold-to-maturity price, there will be substantial benefits," Bernanke said. "First, banks will have a basis for valuing those assets and will not have to use fire-sale prices. Their capital will not be unreasonably marked down."

In contrast, if banks use existing "mark-to-market" rules that require them to value the holdings at what similar securities have recently sold for — in some cases pennies on the dollar — it could make the whole bailout futile because it would hurt many banks' balance sheets, causing some to fail. "This creates something of a vicious circle," he said.

------

Marked-to-marked = market value of a security. That's the equilibrium between a buyers willingness to pay and the seller's price. So, Bernanke wants to give these securities an "assigned value" and completely disregard market value. To avoid fire-sale prices, we'll just give them a value. Isn't that wrong?

This also means that Bernanke is suggesting that the Federal Government purchase these fake-valued securities at a disproportionately higher price, well above market value (or true value). What does that do to the taxpayer?

But, this doesn't mean I don't support it. It may be highly necessary for this to go through unless we want 1929 again.

WEEKLY TECHNICAL COMMENTARY - Sept 22-26

THIS WEEK’S ISSUE:

• In Play: The $700 Billion Bailout? No! It’s the $1.8 Trillion Bailout!
• In Play: The Global War Against Short Sellers
• In Play: Goldman Sachs (GS) & Morgan Stanley (MS)
• Market Commentary: S&P 500, NASDAQ
• Sentiment Indicators: HYAD, HYHL, NAAD, NAHL, AMAD, AMHL, CBOE VIX
• This Week’s Watch: Economic Reports & Notable Earnings Releases

U.S. FUTURES (as of 5:30AM EST): DJIA -26 (-0.23%), NASDAQ -3.30 (-0.26), S&P 500 -1.50 (-0.09%)

IN PLAY: THE $700 BILLION BAILOUT? NO! IT’S THE $1.8 TRILLION BAILOUT!

In a historic and unprecedented move, the Treasury is trying to push a $700 billion plan to absorb toxic mortgages and other assets (or liabilities if you want to call them) from financial institutions to save the U.S. financial system. This is considered by many to be the “Mother of All Bailouts”. This may help the banks, but the billions in bad mortgage debt simply do not disappear, it is merely transferred from “them” to the taxpayers (you”). It seems unfair, but the alternative in allowing the non-performing assets sit on these banks’ balance sheets seems far worse. Already, we have seen the largest financial institutions fail or get bailed or bought out including Bear Sterns, Lehman Brothers, Fannie Mae (FNM), Freddie Mac (FRE), American International Group (AIG) and Merrill Lynch (MER).

However, if you look at the total amount of taxpayers dollars going into stabilizing the financial crisis this year, we’re talking nearly $2 trillion! Here’s the breakdown:

• $700 Billion – Treasury to purchase toxic mortgages and other non-performing assets from financial institutions.
• $50 Billion – To guarantee principal in money market mutual funds.
• $10 Billion+ – Treasury purchases of mortgage-backed securities (MBS) in September. More to come.
• $144 Billion – In additional MBS purchases by FNM and FRE. Limit $850 billion. FNM’s portfolio currently holds $758.1 billion and FRE holds $798.2 billion.
• $85 Billion – AIG bridge loan giving the Fed a 79.9% controlling stake in the firm.
• $87 Billion – Repayments to JP Morgan (JPM) for providing financing to underpin trades with the now bankrupt Lehman Brothers. In response to the Fed & Treasury’s stand against providing public funds to consummate a deal.
• $200 Billion – $100 billion capital infusion for FNM and FRE by the Treasury.
• $300 Billion – Provided to the FHA to refinance failing mortgages into new, reduced principal loans with a federal guarantee as part of the housing bill.
• $4 Billion – Provided to local communities to purchase and repair abandoned homes due to foreclosure.
• $29 Billion – Financing for JPM’s takeover of Bear Sterns. The Fed takes $30 billion in non-performing assets as collateral.
• $200 Billion – Currently outstanding loans to banks through the Fed’s Term Auction Facility. Recently updated to allow loans of 84 days in addition to the original 28-days.

Total: At least $1.8 trillion!

From Interfuidity:

The Fed's "balance sheet constraint" is not a hard limit. The Fed can circumvent it. But that doesn't mean that the size of the Fed's balance sheet is not important. Consider this:

“The easiest would be to ask Treasury to issue more debt than it needs to fund government operations. As investors pay for the bonds, their cash moves from bank reserve accounts at the Fed to Treasury accounts at the Fed. The Treasury would allow the money to remain there, rather than disbursing it or shifting it to commercial banks who, unlike the Fed, pay interest. Because the shift of cash out of reserve accounts leads to a shortage of reserves, it puts upward pressure on the federal funds rate. To offset that, the Fed would enter the open market and purchase Treasuries (or some other asset), replenishing banks’ reserve accounts. The net result is that the Fed’s assets and liabilities have both grown but reserves and the federal funds rate are unaffected. This wouldn’t cost Treasury anything so long as it doesn’t bump up against the statutory debt limit. The loss of interest on its cash deposits at the Fed would be roughly offset by the additional income the Fed pays Treasury each year from the interest on its bond holdings.”

It's only true that this operation doesn't cost the Treasury anything if what the Fed buys with the excess cash pays as much as the Treasury's cost of borrowing, and there is no loss of principal. But if the Fed uses the cash (directly or indirectly) to buy or lend against market-shunned securities, then the Treasury is only made whole if those securities perform, or the loans against them are repaid. If the market is irrationally shunning these securities, then the Treasury will eventually break even. But if the securities turn out to be worth less than what the Fed lends or pays, taxpayers might be forced to eat the loss.

For the most recent update on the Fed’s Consolidated Statement of Condition of All Federal Reserve Banks, visit: http://tinyurl.com/fohhe.

IN-PLAY: THE GLOBAL WAR AGAINST SHORT SELLERS

At the time of this writing, there are 10 countries that have either issued additional warnings, restricted short-selling of certain securities, or banned short-selling outright for vary durations.

Most of you already know that the United Kingdom banned short-selling in financial issues. This remains in effect until January 19, 2009. The measure may be extended to ban short-selling in other sectors. You also know that the U.S. banned the shorting of 799 financial stocks, which ends on October 2 unless the ban is extended.

Did you know that some financials were excluded?

• For example: CIT and AXP
• Conglomerates with large financial divisions were excluded, such as GE.

Did you also know that the list included some “typos”?

• Included in the list: 4 delisted stocks, a biotech, and a Nigerian aviation company.

After the U.S. markets closed on September 19, the Ontario Securities Commission (OSC), supported by the Canadian Securities Administrators (CSA), issued a temporary order to ban short-selling effective until October 3. The following financial securities are affected:

• Aberdeen Asia-Pacific Income Investment Company Ltd. (FAP)
• Bank of Montreal (BMO)
• Bank of Nova Scotia (BNS)
• Canadian Imperial Bank of Commerce (CM)
• Fairfax Financial Holdings Ltd. (FFH)
• Kingsway Financial Services Inc. (KFS)
• Manulife Financial Corp. (MFC)
• Quest Capital Corp. (QC)
• Royal Bank of Canada (RY)
• Sun Life Financial Inc. (SLF)
• Thomas Weisel Partners Group Inc. (TWP)
• Toronto-Dominion Bank (TD)
• Merrill Lynch & Co, Canada Ltd. (MLC)

Jean St-Gelais, Chair of the CSA and President & Chief Executive Officer of the Autorité des marchés financiers (Québec) stated:

“The CSA is supportive of the action taken by the OSC today, other jurisdictions in the CSA will be taking similar action today, or in the coming days.”

If that’s the case, we’re talking about a possible 12 agencies to follow the OSC (Ontario):

• Alberta Securities Commission
• British Columbia Securities Commission
• Manitoba Securities Commission
• New Brunswick Securities Commission
• Newfoundland & Labrador Dept. of Gov’t Services – Consumer & Commercial Affairs
• Northwest Territories Registrar of Securities – Legal Registries Division
• Nova Scotia Securities Commission
• Nunavut Registrar of Securities – Legal Registries Division
• Prince Edward Islands Securities Office – Consumer, Corporate & Insurance Division
• Quebec Autorité des marchés financiers
• Saskatchewan Financial Services Commission
• Yukon Territory Superintendent of Securities – Community Services

In addition, 5 European countries, Australia and Taiwan also joined in on the fight.

Germany announced that they have halted short-selling in the following financials:

• AAreal Bank
• Allianz
• AMB Generali
• Commerzbank
• Deutsche Bank
• Deutsche Boerse
• Deutsche Postbank
• Hannover Re
• Hypo Real Estate
• Munich Re

This ban by the German Federal Financial Supervisory Authority is in effect until the end of the year.

The ban for the US is in effect until October 2, October 3 for Canada, and January 16 for the UK.

Ireland banned the shorting of four of its financials:

• Bank of Ireland
• Allied Irish Banks
• Irish Life and Permanent
• Anglo Irish Bank Corp.

The Irish Financial Regulator also requires positions of more than 0.25% of the issued share capital be disclosed every day starting on September 23 at 3:30PM.

In the most dramatic move against short-sellers yet, the Australian Securities and Investments Commission (ASIC) banned short-selling of all listed shares. The ASIC noted: there was a risk that if Australia didn’t follow with its own ban that there would be a risk of “unwarranted activity” in the Australian market.

France’s AMF stated that they will take similar actions as they increase monitoring of short-selling as well as deliver a warning against naked short-selling. Switzerland also issued a warning against naked short-selling on its SWX exchange in Zurich. Portugal’s CMVM announced that they will incorporate similar “extraordinary measures” against short-selling. It is possible that most or all European regulators will follow the Committee of European Securities Regulators’ (CESR) extensive efforts to limit or ban short-selling.

Taiwan banned short-selling of 150 stocks for two weeks, effective until October 3. The securities are listed on the Taiwan 50, Taiwan Mid-Cap 100, and Taiwan Technology indices. Short-selling is banned when they trade below the previous session’s close!

If you want my opinions on why this ban is stupid and ridiculous, you can read the previous posts on my blog at: http://www.weeklyta.blogspot.com.

IN-PLAY: GOLDMAN SACHS (GS) & MORGAN STANLEY (MS)

I was getting skeptical this weekend because we haven’t heard any “dramatic” financial news yet. But I spoke too soon when I realized that nearly the entire world has taken steps against short-sellers. But on Sunday, Goldman Sachs (GS) and Morgan Stanley (MS), the two largest (and last) independent investment banks (I-banks) changed their status to becoming a Bank Holding Company.

I did mention in my previous newsletter that without consumer deposits, investment banks face considerable pressure in the condition that they are in. This is the reason why Bank of America (BAC), JP Morgan (JPM), Citigroup (C), Wachovia (WB), and Taunus Corp., collectively the top 5 largest BHC's, have all been able to survive. Now the last members of the I-banking elite have joined their ranks.

A BHC must directly or indirectly own or control 25% or more of a U.S. bank. Under Regulation Y, GS and MS are now under the Federal Reserve's supervision, increasing regulatory oversight as well as reducing the amount of debt these two firms can take on in the future.

From the NYTimes: In its statement, Goldman said that it would become the nation’s fourth-largest bank holding company, with its small existing deposit-taking units to be rolled into GS Bank USA. Morgan Stanley will convert its Utah industrial bank into a deposit-taking national bank, to be called Morgan Stanley Bank.

Typically, new or smaller banks adopt BHC status due to its flexibility, allowing the BHC's to easily raise capital, issue stock, and acquire banks and other entities more so than I-banks. The chance of failure for GS and MS are very slim given the additional backing from the Federal Reserve. Therefore, the WB-MS deal may not even be considered.

Here's the best article (NYTimes) on the details following the announcement so far: http://tinyurl.com/3w55hj.

For more updates regarding Bank Holding Companies, visit: http://www.weeklyta.blogspot.com.

MARKET COMMENTARY -- SPX 1,255.08, COMP 2,273.90

Following the news regarding the ban on short-selling, the S&P 500 rallied almost 100 points to close at 1,255.08. If you look at the charts below, you can see the power spike that occurred on record-level volume. The index is still in a primary downtrend and has met resistance at the 50-day MA and was unable to penetrate above it. Today’s trading action and more importantly, the close, will determine the most likely direction for the market this week, provided that the Fed/Treasury does not disrupt the markets.

The gap up may be characterized as a breakaway gap, but in this case, it looks more like an area gap. Breakaway gaps start new trends in the direction of the gap and area gaps have a greater than 90% chance of filling within one week. Therefore, today’s trading will determine the type of gap.

Notice the divergence between the S&P 500 and the RSI and MACD. This divergence leads me to believe that the market will continue higher for the short-term. There is a high likelihood that the market will act in the direction of the divergence, whether positive or negative. In addition to the 50-day MA acting as present resistance the primary trend and the August short-term highs act as upcoming resistance areas. Thereafter, a failure at the 200-day MA is higher likely.

The NASDAQ has bee doing quite well compared with the other indices as it has attempted to hold its March and July lows. On Friday, the NASDAQ formed a bearish gap up which can be characterized as a breakaway gap on record volume of nearly 4 billion shares traded. A breakaway gap signifies that the index (or security) opened at a certain point but sold off throughout the day to close well below its open. This typically signifies that the selling may continue into the next day. Like the S&P 500, today’s action will determine the market’s likely outcome for this week. The only difference is that the NASDAQ may fill its gap and move higher.

Note that the RSI remains level but a positive divergence exists on the MACD. The NASDAQ could not hold at the 50-day MA and faces additional resistance at around 2350, 2400, and 2460 as well as the 200-day MA, which I expect it to fail.

The market’s previous response to an announcement by the SEC regarding short-selling fueled a short-term rally beginning on July 18. This rally lasted for about 1.5 months. Visit: http://www.weeklyta.blogspot.com for more technical-related analysis.

Sentiment is more important now that ever for the short-term. Some are used to confirm price-volume action, and others are noted for any divergences. Below are the NYSE, NASDAQ, and AMEX Issues New Highs-New Lows (NH-NL) and Advance-Decline (A-D) lines. Typically, the A-D lines follow the market. However, the NH-NL lines (in the right column) are the most important. Notice that after the 700 point Dow and 100 point S&P 500 rally more and more stocks are still hitting new lows! In fact, new-lows on the NYSE and the AMEX have hit parabolic vertical status, comparable to falling off a cliff. I expect this line to rebound gradually. Keep a watch on how these indicators change throughout the week.

How do you use the indicators? HeadlineCharts (http://www.headlinecharts.blog.com), one of my most favorite blogs for sentiment, provides an example for the NYSE/NYHL. Notice how there is always a spike before a short-term bottom is reached?


The VIX indicator is my personal favorite. We recently hit the 40+ level, not seen since mid-2002. Notice the spikes in the VIX:

We recently hit the 40+ level not seen since mid-2002. By this time, the previous bear market was already about 3/4^th’s finished. This is NOT to say that this bear market is over. All bear markets are different and previous readings for the VIX should not be used as a crystal ball but as a measure of how we stand now compared to the past. The VIX is making long-term higher-lows signaling that the VIX is indeed likely to hit at least the 50 level. In my opinion, there is still a bullish group of folks, albeit small, that believe we have finished this bear market. Let me remind you that a bear market cannot end unless there is overwhelming and undeniable widespread pessimism. We have not reached that level yet.

THIS WEEK’S WATCH:

• $700 Billion bailout plan approval
• Market response to the global short-selling ban
• Goldman Sachs (GS) & Morgan Stanley (MS)
• Currencies, Treasuries
• Economic Reports and Earnings Reports listed below

Economic Reports: Mon. (None), Tues. (Richmond Fed Manufacturing Index, House Price Index, Weekly Retail Sales – 7:45AM), Wed. (Existing Home Sales – 10:00AM, Weekly EIA Energy Inventory – 10:35AM, Weekly MBA Mortgage Applications – 7:00AM), Thurs. (Durable Goods Orders – 8:30AM, Initial Jobless Claims – 8:30AM, New Home Sales – 10:00AM), Fri. (Q2 GDP Final – Personal Consumption, Price Index, Final Core PCE – 8:30AM, Consumer Sentiment – 10:00AM)

Noteworthy Expected Earnings: Mon. (AZO, KMX, COMS), Tues. (LEN, FUL, FDS, CPRT, WOR), Wed. (NKE, PAYX, BBBY, RHT), Thurs. (RAD, CHTT, SCHL, TIBX, ALOG, MKC, TXI, RIMM), Fri. (JBL, AM, KBH)

Contact: John C. Lee // E-mail: JCLee84@hotmail.com // Website: http://www.weeklyta.blogspot.com

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