FED CUTS RATES BY 0.50% to 1.5%

Pray all you want!

Joint Statement by Central Banks

Throughout the current financial crisis, central banks have engaged in continuous close consultation and have cooperated in unprecedented joint actions such as the provision of liquidity to reduce strains in financial markets.

Inflationary pressures have started to moderate in a number of countries, partly reflecting a marked decline in energy and other commodity prices. Inflation expectations are diminishing and remain anchored to price stability. The recent intensification of the financial crisis has augmented the downside risks to growth and thus has diminished further the upside risks to price stability.

Some easing of global monetary conditions is therefore warranted. Accordingly, the Bank of Canada, the Bank of England, the European Central Bank, the Federal Reserve, Sveriges Riksbank, and the Swiss National Bank are today announcing reductions in policy interest rates. The Bank of Japan expresses its strong support of these policy actions.

Federal Reserve Actions
The Federal Open Market Committee has decided to lower its target for the federal funds rate 50 basis points to 1-1/2 percent. The Committee took this action in light of evidence pointing to a weakening of economic activity and a reduction in inflationary pressures.

Incoming economic data suggest that the pace of economic activity has slowed markedly in recent months. Moreover, the intensification of financial market turmoil is likely to exert additional restraint on spending, partly by further reducing the ability of households and businesses to obtain credit. Inflation has been high, but the Committee believes that the decline in energy and other commodity prices and the weaker prospects for economic activity have reduced the upside risks to inflation.

The Committee will monitor economic and financial developments carefully and will act as needed to promote sustainable economic growth and price stability.

Voting for the FOMC monetary policy action were: Ben S. Bernanke, Chairman; Timothy F. Geithner, Vice Chairman; Elizabeth A. Duke; Richard W. Fisher; Donald L. Kohn; Randall S. Kroszner; Sandra Pianalto; Charles I. Plosser; Gary H. Stern; and Kevin M. Warsh.

In a related action, the Board of Governors unanimously approved a 50-basis-point decrease in the discount rate to 1-3/4 percent. In taking this action, the Board approved the request submitted by the Board of Directors of the Federal Reserve Bank of Boston.

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Don't forget to try out the Free Trend Analysis. It's FREE, so give it a shot!

WEEKLY TECHNICAL COMMENTARY (Oct 6 - 10)

THIS WEEK’S ISSUE:

• In-Play: The Battle for Wachovia (WB)
• Market Commentary: S&P 500 ($SPX), NASDAQ ($COMP)
• Update: Russell 2000 Small-cap Index ($RUT)
• Update: NYSE/NASDAQ/AMEX New-Highs/New-Lows Index, CBOE Volatility Index (VIX)
• Currencies: U.S. Dollar Index ($USD), Euro Index ($XEU)
• Commodities: Crude Oil ($WTIC), Gold ($GOLD)
• This Week’s Economic & Earnings Reports

U.S. FUTURES (as of 6:00AM EST): DJIA (-2.59), SPX (-2.95%), COMP (-2.94%)

IN-PLAY: THE BATTLE FOR WACHOVIA

Haha…I posted Part 1 of the battle on a previous post on my blog (http://www.weeklyta.blogspot.com) so I’ll get on with the developments, which is part 2 of the comic. If this goes on for a while, I will create an entire comic strip to chronicle the event. It’s an exciting and educational way of breakdown something that’s extremely complicated.

What’s happening now is that on Saturday night, Citigroup (C) asked NY Supreme Court Justice Charles Ramos to issue a order blocking the sale between Wachovia (WB) and Wells Fargo & Co. (WFC). Citigroup’s claim is that WB breached the exclusive agreement (entire agreement found on my blog) between WB and C. C is seeking $60 billion in punitive and compensatory damages against WFC for interfering with the deal.

In response, WB asked U.S. District Judge John Koeltl to declare that the agreement between WB and WFC “is valid, proper, and not prohibited by a letter agreement between WB and C. Koeltl vacated Ramos’ order, however scheduled a hearing tomorrow (Tuesday) for all parties to present their case. This is a complicated matter that can last for a very long time since both WFC and C are large institutions with a lot of money, backing, and attorneys and neither party will back down without putting up a fight. What’s for certain is that both WFC and C has devoted considerable resources in terms of time and money to engage WB, therefore, both institutions have personal interest to get this deal done. The question is: Who will win?

When WB signed the agreement with C to sell their banking operations, it was noted that if WB did not sell part or all of their operations, they risked seizure by the FDIC the very same day. Therefore, the ultimate loser in this battle is WB with possibly only days to survive. In any case of failure, the FDIC would step in as it has done many, many times this year.

The most important section of the letter agreement between WB and C is the following paragraph:

"In consideration of the foregoing and other good and valuable consideration the receipt and adequacy of which are hereby acknowledged. Wachovia hereby agrees that, during the period commencing on the date hereof and ending on Exclusivity Termination Date (Oct 6,2008), Wachovia shall not, and shall not permit any of its subsidiaries or any of its or their respective officers, directors, employees, investment bankers, attorneys, accountants, consultants or other agents or advisors ("representatives") to, directly or indirectly. (i) solicit, initiate or take any action to facilitate or encourage the submission of any Acquisition Proposal, (ii) enter into or participate in any discussions or negotiations with, furnish any information relating to Wachovia or any of its subsidiaries, assets, or businesses or afford access to the business, properties, assets, books or records of Wachovia or any of its subsidiaries to, otherwise cooperate in any way with, or knowingly assist, participate in, facilitate or encourage may effort by, any third party that is seeking to make, or has made, an Acquisition Proposal....."

However, many people argue that the letter agreement is non-binding. I am neither an attorney nor do I have inside information on the matter but it appears that this case is not clear cut. I do agree with the fact that the deal between WFC and WB may be the best for shareholders given that the deal goes not require government assistance, keeps WB intact, and benefits taxpayers. Ultimately, shareholders and regulators will have to approve of any deal and that cannot take place during litigation. What everyone can agree on is that a deal must be consummated quickly. This has once again placed uncertainty in the markets in a time where we don’t need any more uncertainty.

According to the Wall Street Journal, C and WFC may “carve out” WB with C taking WB’s northeast and mid-Atlantic branches and WFC taking southeast and California branches to reach a compromise. No deal has yet been consummated at the time of this writing.

MARKET COMMENTARY – SPX 1,099.23, COMP 1,947.39

The market continues to decline, hitting new lows 2-3 days out of the week. As I mentioned before volume must confirm price action. Once the short ban on financial stocks began, volume on all exchange got cut in half. This past week we are again seeing volume increase on the down days and volume decrease on the up days, which is bearish. This has occurred many times and I have stated this many times in previous commentary. The start of a major rally and the subsequent confirmation days must be confirmed with volume. With the short ban in place, that is extremely difficult to do.

I would like to point out that we may see a short-term low, marked by a capitulation day sometime this week. I am looking for a major gap down at the open today possibly followed by a sharp decline. If a sudden and sustained rally does occur and closes near its highs, then it is time to go long. I am advising all short positions to be covered during the weakest first hour of today’s trading. This is in support of the major oversold levels in several technical indicators, mainly the slow stochastics. This will be corrected soon.

The SEC stated that the short ban will be removed 3 business days after the bailout plan is signed into law. This could be Wednesday or Thursday, depending on the time in which the SEC decides to remove the ban. We should see a marked increase in volume on Thursday and Friday as a result, giving the market the opportunity to act in an undisrupted manner.

As for support levels, the 10,000 level in the DJIA is key support in 2005, the S&P 500 must hold the 1,000 level which is a key level in 2004 and the NASDAQ must hold the 1,900 level which is a key level in 2005.

UPDATE: RUSSELL 2000 SMALL-CAP INDEX ($RUT)

I’m adding the Russell 200 ($RUT) in a separate section to highlight the importance of the index this past week. Below, the chart on the left is a 5-year chart and the one to the right is a 10-year chart:

The significance is that the RUT broke out of its consolidated reactionary rally on Friday and hit a new low. The RUT is the last remaining index to decline to the levels of the DJIA, SPX, and the COMP. Looking at a 10-year chart (to the right), we have a long ways to go for the small caps. The larger capitalized stocks took the first hit in 2008 and it only makes sense for the small-caps to follow suit. Due to their smaller size, small-caps face a greater risk of a sharper decline in the next few months. Also note that the other 3 indices started their 3^rd primary leg down and the RUT only started it’s 2^nd primary leg. This divergence will soon be corrected and I expect the RUT to take the largest hit in the next few months of all indices.

Critical support is at 600 in 2005, which I expect it to break. Afterwards, the 500 level in 2004 is the next target area. At this point, given the sharp decline in the past two days, I expect the RUT to decline in a sudden, volatile and erratic move. Expect considerable selling in the small-caps in the coming weeks.

On the head-and-shoulders pattern, every technician views a pattern slightly different from other technicians. In the 5-year chart (to the left), I view the pattern drawn by the blue lines. Others may consider the purple lines. In either case, there is no disagreement that the pattern has now been reached due to break in the necklines.

UPDATE: NYSE/NASDAQ/AMEX NEW-HIGHS/NEW LOWS INDEX, CBOE VOLATILITY INDEX (VIX)

Below are the New-Highs/New-Lows Indices for the NYSE, NASDAQ, and AMEX. Notice that we are still hitting a lot more new lows than new highs. On Thursday, we hit 5 new highs and 778 new lows and on Friday, we hit 4 new highs and 1076 new lows. This gap is getting wider and wider, killing the chance for a major recover that certain people are still preaching about. Charts do not lie and they paint a very clear picture of what is going on in the markets. This is an undeniable truth in technical analysis. Notice how the AMEX fell the sharpest – most companies on the AMEX are small-to-micro caps. These indices must improve for any confirmation of any type of rally.

I stated in the previous commentary that the VIX will breakout and stay elevated in the 40’s level. This has held true. This is a high-and-tight flag that formed, and these patterns have extremely high reliability and a low-failure rate. These patterns are one of my most favorite patterns to look out for. The VIX is currently consolidating between 40 and 47, however, there is concern as the pattern is overextended. I do expect a bounce in the markets this week and also a slight pullback for the VIX. The fear level remains elevated now that Europe and Asia are the next regions to fall amid the credit crisis.

CURRENCIES: U.S. DOLLAR INDEX ($USD), EURO INDEX ($XEU)

Focus is placed on the U.S. Dollar and the Euro because of the significance of the levels they are at. The USD made a new high and I do expect consolidation, if not a breakout higher. The XEU is testing support. On long-term charts, it appears that the USD will be heading higher after forming a higher low and the XEU will be heading lower. These trends can remain in place for many months unless there is a great and sudden shift in global macro factors affecting both currencies. Both currency indices use the 50-day as support (USD) or resistance (EUR) and make note of their guiding pattern.

COMMODITIES: CRUDE OIL ($WTIC), GOLD ($GOLD)

Just like the XEU (Euro Index), commodities such as oil and gold are testing support levels. Oil follows the 40-day MA and gold follows the 20-day MA as of now. Make note of their respective support levels and react to any clean and full breakdowns. A low-risk trade would involve waiting for a confirmation day of any bounce or a continuation of the decline.

THIS WEEK’S WATCH

• Make note of any intraday reversal and rally into the close on either Monday or Tuesday to make capitulation day. Expect the market to gap down considerably in the morning.
• Pay attention to the VIX
• Note successful or failed tests in support/resistance for the USD, XEU, Oil, and Gold
• Be aware of the notable economic and earnings reports below

Noteworthy Economic Reports: Mon. (ICSC-Goldman Store Sales – 7:45AM, Consumer Credit – 3:00PM), Tues. (MBA Purchase Applications – 7:00AM, Pending Home Sales – 10:00AM, EIA Energy Status – 10:35AM), Wed. (Chain Store Sales, Jobless Claims – 8:30AM, Wholesale Trade – 10:00AM, EIA Gas – 10:35AM), Fri. (Import/Export Prices – 8:30AM, Int’l Trade – 8:30AM, Treasury Budget – 2:00PM)

Noteworthy Earnings Reports (planned): Mon. (AEP, IDT, VOXX), Tues. (PAR, AYI, AA, ZZ, YUM), Wed. (COST, LNN, MON, RT), Thurs. (RBN, SABA), Fri. (GE, HST, SLAB)

BLOG OF THE WEEK: HEADLINECHARTS BLOG! (http://www.headlinecharts.blog.com)

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.

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.

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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

BLOG OF THE WEEK: TRADING GODDESS STOCK BLOG! (http://www.tradinggoddess.blogspot.com)

Would you like your blog featured here? E-mail me: JCLee84@hotmail.com

THIS MARKET IS F***ING RIGGED!

There, I said it! Market manipulation at its finest. This is truly unbelievable.

What is the point of having fundamentals or technicals when the gov't now exerts its hand into the financial markets? It's useless. I can give you all the analysis, charts, and everything else I can, but it won't mean the slightest difference, would it? I wonder what they have planned next??? The foolishness must STOP!

The World's Largest Hedge Fund Managers:

WEEKLY TECHNICAL COMMENTARY - Sept 8th - 12th

THIS WEEK’S ISSUE:

• In Play: Fannie Mae (FNM), Freddie Mac (FRE)
• In Play: Hurricane Ike
• Market Commentary: S&P 500, NASDAQ
• After Earnings Review: HRB, HOV, JOSB, BTH
• This Week’s Watch: Economic Reports & Notable Earnings Releases

IN PLAY: FANNIE MAE (FNM) / FREDDIE MAC (FRE)

UPDATE: The New York Stock Exchange (NYSE) announced that the common and related preferred stock of Fannie Mae and Freddie Mac will be halted news dissemination during the pre-market and available to all markets for trading at 9:30am (EST) on the morning of Monday, Sept. 8, 2008 due to U.S. federal regulators action related to Fannie Mae and Freddie Mac. After consultation with the FHFA, Treasury and the Securities and Exchange Commission, we feel that this decision will allow investors to digest the news that has been disseminated over the weekend, to interpret the news and the analysis that will be generated on Monday morning and to evaluate the resulting aggregate supply and demand. All markets will be free to trade both FNM and FRE as of 9:30am (EST), Monday, Sept. 8, 2008.

UPDATE: Standard & Poor's and Fitch Ratings on Sunday cut the ratings on preferred stock of troubled housing finance companies Fannie Mae and Freddie Mac to junk status after dividends were eliminated in a takeover by the U.S. government. The preferred stock ratings dropped to "C" from "BBB-minus," according to the S&P statement. It was the second cut by S&P in less than two weeks.

After-Hours Action: On Friday, September 5, FNM fell 21.9% to $5.50 and FRE fell 20.8% to $4.04.

Over the weekend, The U.S. Treasury announced a bailout plan for Fannie Mae (FNM) and Freddie Mac (FRE) that is supposed to meet three objectives: market stability, mortgage availability, and “taxpayer protection”. The conservatorship will not eliminate common stockholders (as of Sunday evening), and will place preferred holders second in case of complete loss. Common and preferred dividends have been eliminated, effectively immediately. The Treasury has also agreed to temporarily purchase GSE mortgage-backed securities. New investments by the Treasury will begin later this month. CEO Daniel Mudd of FNM and CEO Richard Syron of FRE have been replaced by Herb Allison (FNM), former vice chairman of Merrill Lynch and David Moffett (FRE), former vice chairman of US Bancorp.

Under the plan, the Treasury will purchase $5 billion of mortgage-backed securities for both FNM and FRE. In addition, the Treasury will receive $1 billion in new senior preferred stock with a 10% coupon from both firms as “compensation” for providing support. The Treasury will also receive warrants representing 79.9% ownership in both firms. The Treasury does not expect to exercise the warrants since the exercise cost is less than $1 per share. For both firms, if liabilities exceed assets on their balance sheets, the Treasury will inject new capital following each earnings report and the first round could be as soon as within 60 days of the September 30^th report.

Here’s my take (and the views of many others) on the situation: If the warrants are exercised at the full 79.9%, then the value of the common stock for both firms could be wiped out. Since the preferred holders come in second under this plan, they’ll take a massive hit if loses continue their momentum, not to mention the elimination of dividends (which could make them nearly worthless now). The message that the government is sending is that even though they announced that they won’t bailout additional firms after Bear Sterns, they just bailed out not one, but two, at the same time. This leads you to believe that although the Treasury is taking steps to building confidence in the market, investors should be aware that all public statements made by government officials are prepared and designed to exhibit confidence, regardless of how bad the news really is.

The largest shareholders of FNM and FRE. Mutual fund Dodge & Cox owns approximately 69.4 million shares in FNM and Legg Mason Capital Management owns 79 million shares in FRE. In addition, the top 5 major holders in both firms total well over 200 million shares. FNM currently has 1.07 billion shares outstanding. FRE currently has 647 million shares outstanding.

In addition, numerous broker-dealers, have taken large positions in preferred stock. JP Morgan recently reported that its $1.2 billion investment in FNM and FRE preferred shares lost 50% of its value now at $600 million. Hedge funds, such as William Ackman’s Pershing Square Capital Management, has greatly benefited from shorting shares earlier this year. I have a copy of Mr. Ackman’s July 2008 plan to “Save Fannie and Freddie” in PowerPoint and will be happy to distribute if e-mailed: JCLee84@hotmail.com.

In Asian trading, at the time of this writing, the Nikkei 225 jumped 3.4%. The Korean Kospi jumped 5.4%. Hong Kong’s Hang Seng jumped 4%. Singapore’s Straits Times jumped 3.9%. Australia’s ASX 200 jumped 3.9%. Taiwan’s Stock Market is up 5.6%. All mainland Chinese indices were down. Currently, all European indices are up 2-4% on the news. The consensus is that the world has agreed positively with the Treasury’s plan for a bailout.

U.S. futures (at the time of writing) are up 2-2.5%. The Dow futures are up 227 points, up 2.02%, the S&P 500 futures are up 31 points, up 2.5%, and the NASDAQ futures are up 34.25, up 1.94%.

I expect massive selling on the morning hours for both stocks from institutions, forced liquidation/margin calls from long hedge funds, and retail selling all across the board. There is a distinct possibility that FNM and FRE could be halted during trading hours due to the possible inability for the NYSE specialist to balance the large number of orders at the open since pre-market trading has been halted by the NYSE. Expect considerable volatility throughout the day for both FNM and FRE. If shares fall below $1, especially for FRE, the NYSE will most likely halt the stock. However, that also runs the risk of the Treasury exercising its warrants. Long or short positions should not be placed until the “dust” clears and the Treasury releases more details on the new plan.

I expect the major indices to hold their gains for the short-term due to the fact that most of the uncertainty surrounding both FNM and FRE has been solved and traders see the sign as news that the housing recovery may soon be in place. The reality is that the housing recovery will not come quickly and I expect the recovery to remain at a very slow place and to continue into all of 2009 as excess supply remains yet to be neutralized. If a sell-off does occur in the major indices and forms a bearish gap up, then the rally is effectively over.

Pay attention to more news that is expected to be released during pre-market hours.

IN PLAY: HURRICANE IKE

Hurricane Ike is projected to hit the Gulf of Mexico on Wednesday, currently with sustained winds of 120 mph. NYMEX crude oil is currently up nearly $2 to $108.20, at the time of this writing. Expect volatile trading in oil and natural gas for the entire week.

Keep an eye on this one: http://www.nhc.noaa.gov/

MARKET COMMENTARY -- INDU 11,628.06, COMP 2,414.71, SPX 1,292.20, RUT 737.60

My outlook on this week’s market is entirely unknown and even though a breakdown occurred due to the negative employment situation (unemployment rose to 6.1%), the future outlook is uncertain. Therefore, I have no opinion whatsoever. The breakdown can be easily negated if buying momentum is sustained throughout the day today. As mentioned, a bearish gap up, with a large intra-day sell off, will be considered a continuation of a new primary downtrend. Otherwise, the rally will still be intact, regardless of the previous employment situation report.

I won’t be profiling the DJIA this time since the chart is very similar to the S&P 500. As you can see, the rally in both indices have broken down, more so with the NASDAQ. The volume trend remains the same where the volume on down days still exceeds the volume on up days. Make no mistake; we are still in a bear market, regardless of the potential 3-4% move today.

This is the first (of many) times where I will state no opinion on the likelihood of a week’s market outlook. No one will know what will happen at this point but today will set the tone for the rest of the week and will either confirm a downtrend or confirm a one-day reversal back to the upside, keeping the rally intact. There’s no sense or point in trying to predict the direction for this week.

AFTER EARNINGS REVIEW: HRB, HOV, JOSB, BTH

For complete analysis on the profiled companies, please visit: http://www.seekingalpha.com/author/john-c-lee.

H&R Block (HRB) – On Wednesday, September 3 after-hours, H&R Block Inc. (HRB) reported a Q1 ‘09 loss of $0.41 per share or $132.7 million on $339.6 million in revenue vs. a loss of $0.93 per share or $302.6 million on $381.2 million in revenue a year ago. Analysts expected a loss of $0.35 per share on $378.3 - $381.2 million in revenue, missing both earnings estimates and revenue targets. Tax Services increased 7.7% to $75.3 million vs. $69.9 million a year ago. Shares were down about 3.5% after-hours and the previous session’s close marked the highest that HRB’s stock traded at since November 23, 2005 when it hit $26.66.

Technically, HRB broke out and has drifted up ever since. I expect some consolidation in this area. Support is at $24.10.

Hovnanian Enterprises (HOV) – On Wednesday, September 3 after-hours, Hovnanian Enterprises (HOV) reported a Q3 ’08 loss of $2.67 per share or $202.5 million on $716.5 million in revenue vs. a loss of $1.27 per share or $80.5 million on $1.1 billion in revenue a year ago. Excluding pre-tax land charges of $11.7 million, the loss would amount to $87.7 million. Analysts were expecting a loss of $1.57 per share on $703 million in revenue. Shares were down $0.65 or 8.4% to $7.10 in after-hours trading and should gap down today.

Technically, shares have declined ever since HOV hit its high on 7/20/2005 at $73.40. Shares now sit at 2002 levels when the housing market began to pick up. For the long-term, HOV is a buy for investors who wish to hold for at least two years. HOV appears to have stabilized and is forming a multi-month/year rounded-out bottom. For the short and intermediate-term, HOV will most likely trade in a neutral-range for many months to come.

Jos. A. Bank (JOSB) – On Wednesday, September 3 intra-day, Jos. A Bank Clothiers (JOSB) reported Q2 earnings of $0.48 per share or $89 million on $152.7 million in revenue vs. $0.44 per share or $8.2 million on $134.3 million in revenue a year ago. Analysts were expecting $0.45 - $0.46 per share on $147.4 million in revenue, beating both earnings and revenue estimates. Share broke out at 2PM, up $2.93 or 11%, to close at $28.69 on 2.2 million shares.

Technically, JOSB has been trading in a neutral-bound range of $20-$31 for 10 months. JOSB is making higher lows, bullish. In addition, the breakout intra-day when earnings were announced penetrated the $29 resistance level and is continuing to head higher. The next level of resistance within one-year is at $31.50. JOSB should have no problem reaching that level in the short-term.

Disclosure: The author holds a short-term long position in JOSB.

Blyth (BTH) –On Thursday, September 4 pre-market, Blyth Inc. (BTH) reported Q2 earnings of $0.08 per share or $3 million on $236.8 million in revenue vs. earnings of $0.08 per share or $3.2 million on $234.9 million in revenue a year ago. Excluding items, BTH earned $0.09 per share vs. $0.16 per share a year ago. Analysts were expecting $0.15 per share before items, on $236.7 million in revenue, widely missing expectations. Shares gapped down opening at $13.74, declined sharply, but recovered during the day to close at $12.07, down $3.81 or 24%, on 937,000 shares traded (3x the average daily volume).

Technically, BTH formed an ascending triangle following the 25-day MA, which is usually bullish, however, BTH formed a breakaway gap and is testing support at $11.80. BTH also cut through the 50-day MA and will act as resistance if a dead cat bounce occurs. Risk/reward does not favor either long or short positions at this time. Shorts should look for a weak pullback and longs should wait until BTH shows signs of bottoming out and higher lows.

THIS WEEK’S WATCH:

• FNM and FRE, the entire financial sector
• Hurricane Ike, Crude Oil, Natural Gas, Exploration/Drilling/Refining industries

Economic Reports: Mon. (Consumer Credit - 3PM), Tues. (Pending Home Sales – 10AM, IBD/TIPP Economic Optimism, ICSC-UBS Weekly Retail Sales – 7:45AM, Wholesale Trade – 10AM), Wed. (Weekly MBA Mortgage Applications – 7AM, Weekly EIA Energy Inventory – 10:35AM), Thurs. (Trade Balance – 8:30AM, Import & Export Price Index – 8:30AM, Initial Jobless Claims – 9AM, Treasury Budget – 2AM), Fri. (PPI – 8:30AM, Advanced Retail Sales – 8:30AM, University of Michigan Consumer Confidence – 10AM, Business Inventories – 10AM).

Noteworthy Expected Earnings: Mon. (none), Tues. (PBY - B, JWA – D/2:30PM, KFY - D, PAY – D/1:30PM, SHFL - A, OXM - A, AVAV - A), Wed. (STEI – D/10:00AM), Thurs. (CPB - D, KKD - A, PNY – D/2:30PM), Fri. (none).
Key: B – Before Market Open, D – During/Intra-day, A- After-hours.