The Short Squeeze

In a bit of irony, the banning of shorting is causing pension funds, mutual funds, and other institutions that have large stock holdings are losing money due to the ban.
These companies are given a small fee for lending out stocks to be used for shorting, and with short restrictions, these companies are not receiving this income.

Further, as previously blogged, without shorting allowed, markets will move with greater volatility. And market volatility hardly is a confidence builder. This can be easily seen by reviewing China's stock market slide (click).

Without shorting, expect more volatility and a steeper decline. Remember, institutions can short, and the super rich can still short through "dark pools", so really we are talking shorting for people lower than billionaires.
UPDATE: 10/5/08 China is to allow shorting

(image source)

Revised Revised Bailout bill

The "bailout" will NOT solve the crisis, as previously blogged, the issue is of trust. If companies where properly valued, lenders would gain confidence to resume normal lending. This bill does zero to require companies to bring their accounting to International Accounting Standards. Further, the problem stemmed NOT from mortgages, but from mortgages that have not been "mark to market" in 8 years. Lawmakers are pushing to change the law AGAINST marking to market securities that currently follow this practice, in place since the last Great Depression. Without valuing assets using international standards, the issue of "trust" will get worse, not better.

To top it off, this bill will allow the USA to BAILOUT foreign banks. Yes, you read this correct. Banks based across the world can transfer assets into American divisions and use American Tax dollars to take ownership of bad debt. Further, Bernanke stated that he would recommend against a bill that specifically forbid USA dollars from taking ownership of foreign debt.

Congressman Brad Sherman of California clearly laid out that foreign debt purchasing will be allowed by this bailout.
One positive part of the bill is to raise the FDIC insurance from 100K to 250K, but as previously discussed the FDIC is near bankrupt, and that was before the WaMu failure. So keep in mind, aside from this bailout, more debt will be generated by FDIC covering losses.

The bottom line: This bill will NOT help the economy long term, but in fact hurt it. USA dollars will be used to pay off foreign debt and reckless corporations, who will be enabled to continue to act recklessly. And as the US acts reckless we risk losing world trust over the US governments valuation and US dollar, which in turn may crank up interest rates further adding to the cost of US debt service.

All of these actions are being taken to restore faith in the economy, when all it takes is to come clean and adopt international account standards. And that, of course, is the one action this bill will not implement.

So please contact your representatives and tell them, "There is no such thing as a free bailout" and vote NO!
Want a better solution? Check out Irelands version of a bailout, they did it right.

(image source)

What Next?

The bill may have failed today, but it doesn't mean it's dead. It could come back with some sort of twist. See blog entry here:

If the bailout doesn't occur
USA is facing a DEFLATIONary decline. This is similar to what occurred in the last Great Depression. Those with cash get rewarded, those in debt get pinched. Everyone feels effects through business contraction. Hyperinflation may still occur, but much farther out in the cycle.
Safest place to put money is in Federal Bonds. Not for years, but for next 6 months to a year. Cash will be king.

If the bailout does occur
Its difficult, the USA is still facing a DEFLATIONary decline, but could be trumped by hyperinflation. Interest rates rise, energy, food, and cost of living climbs. Wages don't keep up with inflation. Its tough to say how it plays out, since the US could still deflate then inflate.
Safest place to put money is still Federal Bonds, but be quick to flip into Gold, Oil, resources, to keep up with inflation. (Months later)

Either way
In either event, your finances should have long been out of the stock market. If you have only 10-20% loss, I still think best to move to safer investments. If down 50% or more, well, kinda hard to leave the ship. Still probably the best thing to do. In ANY scenario, do yourself a favor, take 25% of your stock investments and convert to federal bonds. In effect ,split the baby. If your investments double up in their losses, you'll be happy you got out. if your investments "make a comeback", you are still "in it to win it". Hedge your bets. Gold and other key indicators should spike hard up in times of panic, and collapse once that fear has passed. No matter what, do NOT act in a panic, that is almost always the WRONG action.

UPDATE:
Blogger Mish dissects whats next in more depth (Oct 3rd 2008)

Other News
FDIC enters into biggest loss sharing deal ever.
Australia and other countries call for the USA to pass the bailout. My Spin: The countries that want the USA to go bananna republic can pitch in and donate, or better yet buy stock in these financial companies.
The Fed pumped 630 Billion dollars into the stock market, as it dropped.
Moodys may downgrade Citibank's debt from AAA
As I previously blogged , India joins other countries to reduce lending to USA. If the bailout does pass, who will buy our 700 Billion debt? And how much more after that?
(image taken from here)

Bailout Bill failed

This bill could come back at any time, so the bill isn't dead. It failed 9/29/08, but could comeback again. Check how your representative voted.
Todays market tank 40% of the market collapse occurred before the vote. Also the Fed INJECTED 600 BILLION dollars into the market today, and we still collapsed. So apparently 700 Billion "given away" would not stop market decline.

PLEASE fax your Representatives to support those who voted against the bill, and demand those who voted for the bill to change their position.
If you live in NJ, I have made a list of representatives and their fax information.
The New Jersey Representatives that voted AGAINST the bill. Thank them!
Frank LoBiondo
(609) 625-5071
(202) 225-3318
Chris Smith
202-225-7768
609-585-9155
732-350-6260
Scott Garrett
(202) 225-9048
(201) 712-0930
(973) 300-1051
Bill Pascrell
(973) 523-0637
(202) 225-5782
Steve Rothman
201-798-1725
201-646-1944
202-225-5851
Donald Payne
(202) 225-4160
(973) 645-5902


The New Jersey Representatives that voted FOR the bill. Demand they change position if bill comes back!
Frank Pallone, JR
(202) 225-9665
Mike Ferguson
908-757-7841
202-225-9460
Jim Saxton
(202) 225-0778
(732) 914-8351
(609) 261-1275
Albio Sires
201-222-0188
201-617-2809
201-858-7139
732-969-9167
202-226-0792
See bloggers Mish and Denninger for similar posts

Bailout deal is "sealed"

The revised bailout may be somewhat improved over the previous proposal, mainly adding a review board instead of one person deciding the fate of 700 Billion dollars. However, it is still a bad bill and should be opposed, mainly since the taxpayer will take the WORST (read between the lines, 50% or more insolvent) debt in the industry onto the US government. And it compounds the USA situation by abandoning valuing assets "mark to market", as established during the last great depression! This is akin to valuing your house without looking at what houses in your neighborhood are selling at. This will further deteriorate trust in corporations valuations. Establishing transparency as described in my previous blog entry is the ONLY way to restore order. Unfortunately, it is looking like the deal is done, but it hasn't yet been voted into law! So time is crucial!

60 minutes had an interview with Paulson today, (click to watch) and the one thing that strikes me more than anything is how Paulson is sticking to the mantra "he didn't see this coming".
Clinton administration officials, economists, and bloggers like Mish, saw this coming in May 2006. Me and a friend saw this in August 2006. Paulson didn't see it as recently as Q2 of 2008.
If he wasn't smart enough to see this event, how can he be smart enough to help the world? I for one believe he knew fully the issues, since he was part of Goldman Sachs, one of the Financial institutions that created this issue. And he took office with the long term plan of helping Wall Street over main street. This is pure conjecture, but he has a single track record, helping financial institutions by removing their liabilities with government intervention.

I'll make a prediction now, if the US government continues to print cash, the US debt will start having issues as interest rates rise, and the dollar collapses, yielding havoc on USA main street. The world may turn against the US and walk away from it, like a junkie friend that stole one too many times. Canada of all countries, is joining the world condemning the USA's irresponsible actions. These other countries will unfortunately join the USA in it's death spiral, mainly from them following the USA lead and not being responsible for their own affairs.

I'll blog back to this entry if the government goes down this path, and you'll have to wonder, why didn't Bernanke, Paulson, or congress see this coming? The answer, they do, but "big money" greed outweighs the public good. And if the public doesn't rally against the bill, vote out the people who support it, then, democracy is working as it should, and the USA will reap what it sowed.

Please keep in mind and read my "printing Money" blog to be prepared to take some of your savings (10-35%) and put into resources or other country's assets (such as stocks in corporations in other countries) to preserve wealth. An EXCELLENT blogger for resources is Gary Savage, of The Smart Money Tracker. Throw him 100 bucks and you will get detailed daily information on resource trends.

For more information on this topic, see fedupusa.org, Roubini, Mish, NJ residents click here or watch the video below.

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(image at top taken from here)

Revised Bailout Bill draft

I'll update this post later with commentary.
The bailout details can be read by clicking here.

Highlights

• A five member oversight committee to be form comprised of:

1. The Chairman of the Board of Governors of the Federal Reserve System
2. The chairperson of the Board of Directors of the Federal Deposit Insurance Corporation
3. The chairperson of the Securities and Exchange Commission
4. Two members that are not an employee of the Federal Government or any State government having appropriate financial expertise in both the public and private sectors, appointed jointly by the majority leader of the Senate and the Speaker of the House of Representatives

• 700 Billion dollars, with initial installment of 250 Billion available when bill is made into law, additional money may be granted at will by notifying congress
• And a lot of "protect the people" "best interest of taxpayer", all fluff that cannot be legislated.

This is still a bailout, see my previous post on stop the bailout.
The Senate Committee homepage on Banking and Housing can be found here.

IRS & NJ Sherriff sales

This post doesn't technically belong on the topic of stocks/finance.
But since the primary driver has been collapse of bubble created from real estate, at some point buying real estate on the cheap will be a good investment.

Click for Map of NJ counties

NJ counties Sheriff Sales
Burlington
Essex
Mercer
MiddleSex
MonMouth
Morris
Somerset

These counties do not provide online lists, need to contact them.
Union
Ocean

Others:
Federal IRS Sales
Federal Department of Treasury Auctions

I'll post an update Sunday how the bailout is proceeding.
(Source of Photo)

Today's Humor Post on the Financial Bailout shows Bush's speech compare to Iraq War Speech

China to allow Shorting of securities, while USA continues to ban it

When you hear "capitalist", USA is a name that comes to mind.
And in capitalism structure, you are normally allowed to invest (who are we kidding, place bets) on any company or financial instrument in any direction. That is (until recently) the concept behind freedom and capitalism.

America has widely banned short selling (notice they didn't ban purchasing when the market soared too high), and as I have blogged before, China that doesn't allow short selling had their stock market crushed.

Now China is going to allow short selling for the first time in the history of their country. Why? To help balance the markets. As their market has gotten crushed (65% in a year), they have realized a one sided bet, isn't a bet. Its either all up or all down. You need counter-betting to stabilize the markets.

Bailout Up In Air; Rumors Deal Is Dead

CNBC news on bailout Accord Up In Air; Some Claim Deal Is Dead
I'm thinking tomorrow may be a big down day, especially going into the weekend. I wouldn't be surprised we go down hard tomorrow, and a lesser plan passes on the weekend.

A bit late, but the Dallas Federal Reserve board member Richard Fisher broke rank and spoke out against the bailout, stating "Bank Rescue Plan Would Worsen Fiscal Chasm'".

AIG has taken 45 Billion of it's total credit line of 85 Billion already. In total, institutions have borrowed from the fed over 267 billion dollars, up from last week total of 121 billion. Needless to say, the proposed 700 billion dollar bail-out isn't the whole story. Companies are using as collateral stocks, "undervalued" mortgages, and other toilet paper as collateral. I'm guessing the insiders had the scoop on the where the bailout was going and prepared for the next two weeks by loading up in cash.

Washington Mutual is no-more, as it has been now seized by the FDIC. I previously wrote that WaMu was next, after AIG/Lehman. The government will flip their assets over to JPMorgan, along with a piece of the 700 bailout I'm sure.

I'll try to add a humor post, reading my blog may make some people jump out a window. I don't look at what I write here as depressing, but informing. In any event, humor video today from the daily show.

Financial markets collapse is peanuts compared to US Bond Collapse

As I have blogged, many countries are viewing our printing spree as cause to distance themselves with American Debt. Providing the US government does pass the bailout, the next crisis may be the US Dollar collapsing.

There is now new reports (not just bloggers or tinfoil hat wearing people) that Asia is discussing how to staff a panic run of selling US Debt. Germany and England, Russia, China, and Japan are separating from America's debt. China today issued commands to not buy US debt. I believe China's move stems from smelling blood in the water, and they are trying to get political agenda deals while the lame duck, poor decision making president is in office. Asia does have its own bank problems, including an old-fashion bank run on Bank of East Asia.

The absolute worse scenario is passing the bailout bill and US Debt no longer purchased world wide. The US is a debtor nation, if this was to occur, best place to be will be shorting bond values or being in natural resources. (Gold, Oil, etc) Federal Bonds is still safest place, but not for years, for next 6+ months. If USA inflates, be prepared to flip out of bonds.

Update: BB&T company executive has written a letter to congress against the bailout.

Bailout Going into Final Draft

The bailout is going into final draft tonight, there is still time to react, see my previous blog entry. There is plenty of news, but I'm too beaten and tired to bother.

On a funnier note, video titled "MasterCard: Official Card Of The 2nd Depression"
On a scary note, some odd happenings involving the US Military apparently.....

Market Ticker Blog
I'm going to do something odd with tonight's post, redirect you to a different blog entry.
http://market-ticker.denninger.net/archives/590-FLASH-Fed-Speaking-Out-Both-Sides-Of-Mouth.html
On the page is a well thought out explanation of various topics on the bailout.
If the page can't be accessed, the video can be seen by clicking here.
(image Source)

Bankrupting America

If we bailout
If this bailout passes, our status of a debtor nation will become extremely problematic overnight.
Once we have shown we will not stop printing money, the countries that lend us money will require higher interest rates for the "loans" we require. This could spike immediately, causing companies to fail sooner, probably in other sectors not getting "Free money".

If we don't bailout
If the bailout doesn't pass, you can expect a cascade failure in the financial system quickly. Either way it isn't pretty. In anticipation that the bailout won't pass, or will take too long to get passed, the 3 month treasuries are seeing a panic run to them, interest rates are below 0.50%. Also for commercial paper, interest rates have risen to over 6%.

Money Markets are continuing to see a drain, and I'll remind those reading they are NOT insured by the federal government.

Safer place to be
In all directions, the best place to be in the "near term" is Federal bonds. 5K or so in cash on-hand can't hurt! There is just too much deflation right at this moment to be concerned over return on investment, the name of the game is not keep what you got.
We may see an immediate dollar collapse, and "imports' skyrocket over-night. That is a form of inflation, since the US is a major importer.


World Opinion
Europe and Asia have spoken out on the bailout, and as in previous blog entries, Russia, China, and Japan are separating from America's debt. Further Germany and England have stated they will not participate in the bailout process for the USA or in their own countries. Europe hasn't yet lowered interest rates, keeping a tight reign on inflation.

China is further pushing the agenda I mentioned before of using this time to transition America as world economic leader to China. I'm not 100% certain this will be the transition that occurs, but I do believe the USA will not emerge as financial world leader in the next decade. Since China has no debt, and is flush with American debt paper, they can use their financial position of power to push the USA debtor nation around.

Double inverse funds Broken?

In a previous blog entry, I mentioned double inverse funds as a way to "profit" from market instability. In the previous blog entry I mentioned that the ETF's where OK to hold for a day, a week, months, but not greater.
If you trade the double inverse funds (SKF, SRS, QID, TWM, etc) I wanted to point out how these funds are flawed. In my example. SKF, double inverse of the financial markets (IYG), hit a high of $210 in July 2008, while at the same time IYG hit a low of about $56. Only two months later, IYG hit a low of about $62, while SKF hit a high of $150. While IYG was about 10% from it's low, SKF needed 40% more value to hit $210. Also SKF traded for "3days" around 200, while $150 was a brief spike.
SKF's price issues occurred before SEC created new rules for short selling. Post 9/19/08, SKF is further impeded and has changed it's operation model (click here).
To recap, double inverse funds do typically move dramatically on a daily basis, but over time they do not come close to matching the underlying fund. Further, the government has shown they will "change the rules" and adversely affect these funds at will. The combination of both shows these funds cannot be held for beyond a day or two. And even then, probably better off shorting the "double long funds", since the pricing problems over time will work in your favor. Lastly ProShares could default on a fund (theoretically) at any time, while shorting index funds, this isn't possible. (such as IYG)

Stop the Bailout

Please take the time to contact your representatives to fax or email them to stop this bill.
As previously posted you can find your Senator or Representative by clicking here:

Easiest way to contact key government officials is through a web site by clicking here.

Mish's blog is targeting key senators to try to gain support for stopping this bill. For more information see here:

CONTACT the US GOVERNMENT TODAY!

The US government represents the people, only if the people participate.
Need some motivation? Watch this video.

According to recent estimates, the USA will have a debt of about 11.5 Trillion dollars with these bailouts, not including the "debt" (classified as assets) from Freddie Mac and Fannie Mae. This number results in about $39,000 of government debt for every person in the USA.

NJ Senator Fax information:
Lautenburg
12022284054
19736398723
18563388936

Menendez
18565461526
12022282197
19736450502

Bailout discussed Today

While congress talks to Bernanke and the most powerful treasurer in US history, Paulson to consider the bailout, the main blog I read and its related web site, "fedupusa" was picked up by newspapers.
Street Insider
Yahoo Biz
PR-Inside
Financial Times London
CNBC

Evolving Financial Distress or Recovery?

If you read my blog regularly, you'll know my answer to the title of this blog entry.

Today the DOW plummeted over 372 points, which is about an even of a wash as you can get with Friday's "surprise" gains. There are various reasons why the market melted, the primary reason I still believe is for market makers to settle their option trades from Saturday in a favorable way.

In any event, root cause doesn't matter, the last 6 business days have been as volatile as you can get. Some interesting news developments:

• Lehman bond holders to lose 110 Billion dollars
• Money Markets suffering huge cash outflows, to the tune of 197 billion dollars last week alone. I have blogged in warning of this, Money markets are NOT insured. Congress has before it treasury to guarantee up to 50 billion in money markets, but as you can see, thats a drop in the bucket. Best place is to put your money in Federal Bonds. While on this note, I have blogged before, the government will gaurantee 100K per person, and I do believe that is bankable. But it can't hurt to have enough cash to support your family for a month around for a while. And I don't trust Municipal Bonds.
• To my amazement, Democrats in Congress want something back for a bailout, in the form of equity in companies taking free money. I doubt this will stick, Bush and Paulson want companies to get cash free and clear and stick the debt on the taxpayer. If history is an indicator the Republicans will band together, some Dems will fraction off, and the bill will pass without government getting some sort of "payback" for the bailout. For the big money to get their way, I'll guess stocks will crack down hard, scare the Dems into line.
• US dollar got crushed as a result of bailout announcement. This is inline with my previous blog prediction/entry. Jury is still out, since the bailout is not yet law. The dollar could bounce and gold melt if the bailout is reduced or eliminated. If the bailout does become law, expect imports, oil, gold, and therefore inflation to rise. Still may have a snap-back deflation before inflation. Rough waters on this topic.
• More anti-bailout news pieces are being published, this is just window dressing for the inevitable bailout to come.
• The no-short fever is catching, countries around the world have banned or restricted it. The federal government added 40 more companies today, with more to come. As I previously blogged, China doesn't allow shorting (ever) and their stock market plummeted 65% in the last year. Clearly shorting is not the root of all evil. Seeking Alpha has a good article exploring short selling. Typically under this government, the connected don't need to obey laws, if you are well connected, with plenty of money, you can still short by using "Dark Pools" through big financial institutions. So the mega rich can still short. The law counts only if you have under billions.
  
• GM's quality as a debt issuer cut to CCC. By the time the USA bails out the banks, investment companies, and mortgage companies, I hope there will be something left to bailout GM. Atleast they produce a product.
• Germany and Britan refuse to take part of the USA Bailout Proposal. And to boot, they are suppoting moving away from the USA the controller of world finances. I wrote this on my blog too as next step. And I'm shocked these countries aren't for printing money and doubling their countries debt. They better get with the program, or Bush will....oh...he is out in 4 months.
• Bailout will benefit Goldman, and Morgan not future companies in trouble according to Bank of America.

We'll see what the next few weeks holds. Please take care of your financies, be prepared, and don't dive into stocks because they are "cheap". The can always get cheaper.

Last two Independant Investment Banks gone!

Goldman and Morgan applied to become bank holding companies.
Of course now that Goldman is to become regulated by Fed, there isn't any conflict that Henry Paulson, former president of Goldman Sachs, also heads the treasury...
Well, I guess independent Investment banking is dead in the USA. So much for how critical it was to keep these entities around to spur investment. I suspect once the taxpayer pays Morgans and Goldman's debt, they will ask to revert back to an investment bank. Wow in 7 days the last 4 big investment banks have either been bailed out or changed their status as investment banks. Wonder if other companies can apply to become a bank holding company to get a piece of the bailout action. I think I'll email what remains of Bennigans.

Goldman and Morgan face challenges for profit, since this change will result in leverage reduced to 12 instead of 30-40.
UPDATE: Mitsubishi to buy stake of Morgan Stanley

Bailout doublespeak discected.

Two items Sunday night,
First
Henry Paulson was head of Goldman Sachs until appointed to Treasury in June 2006.
This video is a bit.....sarcastic? The first video may not be neutral, but it is much more factual and informative than popular media spin. NYTimes has a mainstream criticism article.

http://www.fedupusa.org/node/52

The second video offers a solution is in-line at a high level with my previous recommendations posted here. The video does go into more detail.

Second.
My prediction on Monday being a crash may, unfortunately, be correct. Also, printing cash may yield a dollar crash as I blogged, as per this Bloomberg article. At a minimum Monday is looking to open up down big. Root cause? Options expired Saturday, and its a grab for cash by financial institutions who are allowed to short. The industry did something similar on January 22nd with co-ordination by the Fed. That day we opened down big, then around 10 am announcement was made to "save" the markets.

UPDATE: Press drumming up story that public is mad about bailout. Yea, give this token press as the politicians pass the bill in record time.

Bailout comments, part Deux

The NY Post confirms my blog post from Saturday that USA was about to see Financial armageddon. However the piece reads as an after-the-fact spin to justify the actions taken than true reality. In any event, still some facts here showing how close the USA was to collapse. And by no means are we secure from it not occurring.

The wording of the proposed bailout has been released, and for unprecedented emergency spending bill, it is very brief. No need to elaborate details, better to just give broad power as section 8 reads "Decisions by the Secretary pursuant to the authority of this Act are non-reviewable and committed to agency discretion, and may not be reviewed by any court of law or any administrative agency." Any surprise here? This administration has discovered that the founding fathers where wrong in designing the government with three branches, to create a system of checks and balances. The true path to a successful government is to run the government by Imperial Presidency, and barring law review by the courts or congress. If this occurred in a different country, the US papers would cry power grab, here this will be spun as necessary and warranted.

Further, Henry Paulson is resisting any language that is attached to help the end-consumer, the taxpayer. All the benefit is targeted at corporations. So much for doing this for "the welfare of the taxpayer". Not that I agree with either arguement, but it is an example of the blatant doublespeak occurring.

To add further salt on the wound, Paulson supports foreign banks dumping their debt on the USA. This will be possible due to the language above giving him absolute power. Why stop there? Expand the USA to cover all losses in any business Paulson sees fit. After all, we don't want companies to recognize losses in a capitalist , socialist, or communist society. The USA got everyone covered!

As of now, nothing has passed into law...yet. So there is still time. If you disagree with USA covering debt of corporations in USA and the world, granting full undesputable power to dish out money as one person sees fit, please CONTACT your CONGRESSMAN TODAY! Easiest way is through a web site by clicking here. Alternately, you can find and contact your Senator or Representative .

Otherwise, sit back, relax, the government will pay for the debt incurred today by increasing taxes on your future earnings for decades to come. When the next president raises taxes significantly, remember, that president isn't at fault, we are for allowing it to happen today.

UPDATE: The bailout has been revised to allow bailout of any asset, at discretion. Getting closer to my statement of "cover losses in any business".

Bailout comments

Bailout Rant
Back in August 2007, Bush said there would be "no bailout for pinched homeowners". At that time I told a friend of mine, that means they already decided to bail everyone out. Bush through his entire administration has always told blatant lies upfront. At least Bush is consistent.

Today Bush has asked for 700 Billion more, and to raise once again, the national budget deficit to 11.3 Trillion dollars. NOTE: This does NOT count the 6+ trillion dollars of FRE/FNM, since that isn't on the books as debt since "it will be paid' in the future.

I have had people question why isn't this good? Well for one thing look at the history of countries, any government that engages in socialist bailouts has not had a good run afterward. Japan's bank bailout in 1990 resulted in a 10+ year recession. (9/21/08, article comparing US to Japan) Between Thursday and Friday, the 13 year treasury note's interest rate went up by 1000%. Yes, you read that right, interest rates spiked 1000%.
But in fairness, the treasury note was unusually low going into Thursday since the financial world was crumbling, and the flight to safety meant the treasury note didn't need to pay any interest, it was the place to be in the collapse that was occurring. This illustrate how close the US was to a great depression type crash. Unfortunately, we may have changed trajectory as the US prints money, as I feared (and I wish I believed then) Thursday AM.

Also gold reacted with a spike of about 15% in just two days.

News still coming in, will try to write Sunday. BTW, some banks failed announced on Friday, Ameribank is one, but don't worry, the US printing presses are in overdrive.

So what does this all mean?
If the US government goes through, and at this point, I suspect they will, to bail everyone out in sight, we will have sealed the fate of this country to enduring a long recession, and have inched closer to an all out depression. Why? Cause there is no "free" way of getting out of debt. If the financial market makers are bailed out, it WILL manifest elsewhere. Interest rates likely to start rising as the USA bonds likely become downgraded from AAA. Our national 11+ trillion dollars in debt will quickly escalate and strangle/tie the governments hands. Taxes will be raised, job loss increased, and yes, more home owners will lose their houses. But the "good news" is the banks will be able to unload those houses to the government.

The US must pay for the debt incurred, and someone has to take the hit.

THIS IS STILL NOT A good time to buy financial stocks, or for that matter much else. What is a good time to buy is tax free federal bonds. Why tax free? in the year to come, higher taxes are almost guaranteed. The big question for Gold/Oil is will we still deflate before inflate. Jury is out, but if we follow Japan, still deflate first, which means Gold will go down. Consider a buy under 650, and a definite good purchase at under 500.

Shorting Stocks
On a different note, to clear up the banning of short selling. In China it is illegal to short sell. Chinese Shanghai stock market plunged over 65% in less than a year. When you don't allow shorting, stocks go higher than they should. When stocks collapse, they gain speed quicker since there was no counter balance in the market. Bank stocks soared Friday. Are they REALLY that good of a buy? Wachovia as an example, fair to say a "troubled" bank, their stock went from 10 bucks to a high of 24 on Friday. If your 401K mutual fund is buying at this price, does that give you confidence that it is a good buy?

Also notice, no one complained when the stocks became over-valued by leveraged speculation, but a witch hunt ensues when stocks are re-valued lower by shorting. Kinda like bookies only taking bets on the Giants, in a Giants-Jet game. When everyone is cheering for the same team, it may seem like a good bet, but it's hard to judge how good of a bet it is without an opposing force to gauge by. And to further put salt in the wound, Market Makers can STILL SHORT stocks. Kinda like the bookies allowing to bet on Jets only, but no one else.
If this situation was described as happening "in country XYZ", most people would comment stay away from there. Slap the USA in front and somehow it become legitimate. Time will tell.

All stops pulled, the bear market is over....

The bear market is NOT over, it may change shape. The fundamentals of the world economy has NOT changed.
But first, let me explain why the stock market will rocket.

The US will setup a fund to buy distressed mortgages
The United Kingdom banned short selling of financial Thursday.
The United States banned short selling on 799 companies Friday. (but allowed by financial companies)
The US will guarantee Money Market Funds.
NEWS FLASH: SEC Order, Selling uncovered calls or buying pus in bank, financial, or insurance stock is restricted
I shorted the SHOE COMPANY DECK today, but required "approval code" from my broker. Thats how panicked the market is. The Dow is up less than 400 points, this is looking like a disaster! It should be up 1,000 points!

What will happen is this:
The market will soar, beyond imagination. Dow 12,000 is NOT out of the question. (TODAY even!)
I personally think we may open down big Monday, but don't count on it. If we crash, the ban on short selling will in effect allow the remaining financial institutions to profit from the fall, but barring the common person from doing so. Quote "Given the options expiration Friday, options market makers will be exempted from the short-sale ban until midnight Friday, provided their short sales are for bona-fide market making or hedging activities in the affected stocks, the SEC said."

If the "bear" market is be over, but for all the wrong reasons. We may hyper-inflate now.
If the government is to buy distressed mortgages, how will it be funded?
My fear is printing money (click for previous link).

In any event this is the final play, there is NOTHING left the government can do.
So either we crash, (Monday) soon, or the bear is over since the world's largest financial safety net was created today.

In any event, the USA as we know it will be may be changed as we socialize everything in sight.
I'll write more over the weekend, probably Sunday night.

UPDATE: 10:45 am, dow is lower than the open. Not a good sign for the market. I still think its possible to go higher, but DOW 12,000 is not possible I believe. I am leaning now towards all out crash Monday. But impossible to know until then. If you are in stocks TODAY IS A GREAT DAY to get out NOW. Worst case, you "miss" stocks going up 10% in the next 6 months. More likely case, you "miss" stock market down additional 30% in next 6 months.

Update: DOW soared over 700 points in two days, ending at DOW 11,388 EOD Friday, 9/19/08

US Government taking desperate measures to "create" money

Today the US government did some "creative" measures to raise more capital, but by doing so may undermine confidence in the US government . They are on a borrowing spree,using new creative auctions to create money.

Governments are coming dangerously close to just "print" money. This action still has the facade of creating money using instruments, such as bonds. They "sell" the debt and turn it into cash. If the government resorts to the next step, print cash, this may result in "Hyperinflation".

The US government is coming close to changing the financial problems on wall street into the US government insolvency. The current rhetoric is "just this one time". Well, we have heard this over and over again during the last year, and the government continues to lie to everyone.

The solution is simple, fix the accounting, and come clean. Go back to basics, make USA businesses once again the gold standard in trustworthiness on their balance sheets.

To everyone that I have said, don't put your money into Oil, Gold, or stocks, this may be about to change. I still have a hard time recommending buying stock ticker "GLD" for gold, or "USO" for oil, since we are in a deflationary collapse. But that could change if the government prints dollars without using the bond market to do so. With continuing US debt creation at record pace, the world may run from our bond market in fear, triggering the government "an excuse" to just print money.

If we hyper inflate, stocks may turn from worth 2 dollars, to worth 2,000 dollars a share. But your big-mac will cost 100 dollars. (exaggeration example) If this occurs, its complete destruction for USA way of life.

The complete debacle of the US handling the financial crisis reminds me of the last great depression. In the last Great Depression, it can be argued that it was a transition from Britain as world economic force to America. If America continues to act irresponsibly, I believe we will see a transition from USA to China as world financial leader. China made a proposal to "calm financial" by moving off of the USA as financial standard. Even without China, I would assume this was to occur, as USA loses its credibility. But China may have enough fiscal clout to pull it off. And if we balk, China can blackmail the USA with US debt obligations.
UPDATE: 9/29/08 Mish's thoughts on the topic

What to do?

CONTACT your CONGRESSMAN TODAY! Easiest way is through a web site by clicking here. Alternately, you can find and contact your Senator or Representative . Tell everyone you know to contact congress to stop the FED from creating "special money". Tell them enough with the bailouts, enough trying to avoid companies from collapsing. This is suppose to be a capitalist country. In capitalism companies win and lose. Let capitalism take over and have companies insolvent fail, stop the US Taxpayer from "buying" companies in distress.

All of this stems from Financial Ground Zero actions, spiraling out of control.
UPDATE : 9/22/08, Bloomberg Article indicates similar sentiment.

AIG Crisis Done, Next WaMu

US Federal Government trying to find someone to buy WaMu

Russian Stock market halted, after collapsing 10% in 1 hour

International Monetary Fund states worst of financial crisis still ahead

Libor Interest rates jump biggest % in 9 years

Fed PAID (aka looong term loan) JPMorgan 87 Billion to "buy" Lehman. Drop in the bucket compared to Financial Ground Zero. But once again, taxpayers are paying for everything, it's open season.

As I have previously reported, the FDIC is running out of funds. No surprise here. NOTE: The Government WILL print money, so FDIC will ALWAYS pay 100K insurance.

Complete utter rumor, Morgan Stanley may be seeking Bank to merge with. I normally wouldn't report such rumors, but recently, rumors often have some truth behind it. If Morgan merges, USA will have gone from 5 USA born, independent investment banks to one, Goldman Sachs. And Goldman has a good ally, Paulson.

The government failed to regulate across the board, instead of doing their job, congress will start the witch hunt for the evil-doers. This is a joke, since basically everyone participated in the unsound financial practices. I may have disdain for execs taking billions in bonuses and within a year leading the company into failure. But in fairness, the situation was systematic and country wide. The failure was poor fundamentals starting with the government allowing "asset 3" being off the books, and allowing debt being valued on computer models rather than open market trading. Both are textbook root causes of the last Great Depression. The government should mandate a US history test before individuals can serve.
The real witch hunt, which hasn't started, is mass lawsuits on companies like Moody's for mis-representing risk. (Disclosure, I am short Moody's)
UPDATE: 9/29/08 Goldman Sachs profited significantly from AIG bailout. I wonder if Paulson hesitated by the conflict......

AIG gets Federal Backing

As always plenty of news, but the spin will likely be up for next few days as the latest crisis is being averted.
AIG get 85 billion dollar loan from the federal government.
As usual, the bailout effectively puts taxpayer money at risk while protecting bad investments made by A.I.G. and other institutions it does business with. From my understanding, the government will effectively own AIG through it's stock.

As I said in a previous rant, once US has taken on over 15 trillion dollars in liabilities, adding 100 billion here and there is peanuts. The US could "assist" 15 companies at 100 billion each and increase the debt by only 10%.

The stock market may rally on this news, or perhaps the stock market will eventually realize that once the government buys/owns a dozen major financial institutions, that it won't be good for business. To date, 11 banks, Fannie, Freddie, AIG, and "Fed interest" in Bear Sterns as well as many companies by providing cash for "questionable" assets and stock as collateral.

But for now, its good news, as the next debacle is delayed for another day. And the bottom is not in long term. All of this government intervention will not play out to another boom in the economy.

I believe that interest rates will rise due to all the debt creation, which of course, will hit the common person. Just maybe not today. This is also setting up a potential pattern where Hedge Funds may systematically take companies out to the woodshed, profit from their demise, and have the government cover the debt.

Black Monday(?)

Market tumbles over 500 points today. The Fed meets Tuesday, and it is possible the Fed could announce something surprising to staff off the fall. However, "rate cuts", "another bailout" and other types of stick-saves is played out, so it would have to be a new approach. Perhaps changing the short-selling limits for leveraging, etc.
We are "once again" on-board for a stock crash. 500 point is significant, but it isn't an out-of-control all out crash. Notice in the graph below we are about the same location of the recent low, but still a far cry from valuations back to 2003.

If there is a stick save, stocks may go up a day, week, but not a month. The cat is out of the bag finally, and there is systematic risk in the system including Lehman, AIG, WaMu, and weakness in other institutions.

This week is still anyone's guess. One thing I have had people ask is, are we about to see Inflation with the free credit by the government? I believe no in the near term. We will see massive deflation. See blogger Mish's explanation by clicking here.

Today's Events Highlights

• DJIA (the Dow Jones Index) lost 4.4% in one day
  
• Lehman stock tumbled down to 0.21 cents.
• BAC lost 21% of their stock value, after announcing Merrill purchase
• PIMCO & Vanguard biggest losers of Lehman Collapse
  
• AIG credit rating lowered, further putting pressure on AIG
• AIG allowed to "borrow from itself". NOTE: I must refrain from commenting on insurance companies moves.....
  
• WaMu Credit rating cut
• Hewlett Packard to cut workforce by 24,000 over next 3 years
  
• Industrial output down 1.1%, autos down 11.9% for August
  
• DEBUNK myth: Warren Buffett is not pursuing AIG

Financial Ground Zero Continues

• Lehman brothers Bankrupt
• 
• Lehman Bankruptcy filing can be seen here. Lists creditors and amounts. Notice CitiBank has 138Billion in exposure.
  
• China cuts lending rates.
  My Spin: China is NOT going to save the world in the near term. China cutting rates indicates they too, are slowing down. This ontop of their stock market plummetting over 50% from its high over the course of this year.
• AIG costs have doubled for insuring debt (per CNBC)
  
• AIG will recognize financial impact from Lehman failure
• National Union, an AIG company, is ordered to increase it's s bond
  
• SEC to act against short sellers. Notice SEC doesn't act on these companies lieing every single day for last 9 months to everyone that they are sound. Lets attack the people who know they where lying , and let the people responsible for leading their companies into bankruptcy.
  

Between Merrill & Lehman evaporating, in a weekend US went from "big 4" investments down to only "2" (Goldman, Morgan). That is a 50% cut in investment banks in the US. Bear Stearns went down last year, so in a year from 5 to 2. The blog world has it the Federal government "FORCED" BAC to buy Merrill. Talk about living in a socialist country! If true, Capitalism is under attack in the US.
Looks like a big down day. I was about 4 weeks early on this prediction, but it looks like its hear now. :(
Let's hope the leaders institute transparency and lead the market to rebuild confidence in this shell game going on. Unfortunately, if they haven't done it now, I wouldn't hold my breath. Sit tight on you Federal Bonds.

Additional Spin: NJ Governor on news stating need for immediate action by fed. My spin is NJ may have too much to lose as recent events. I still recommend Federal Bonds over state bonds.

Major news on Lehman, AIG, Merrill, WaMu, and Fed

What a weekend, it's my 40th birthday and I was given an amazing amount of over-the-top news to save the financial markets. I am having a hard time grasping at this point how far the government will go, and when will it end.

Highlights of events:

• Barclay's walks away from buying Lehman Brothers
  Wall Street prepares for Lehman to go bankrupt.
  Stocks will have a rocky week!
• AIG asks government for 40 Billion dollar "LOAN"
  NOTE: Generally speaking, on Insurance companies, my blog will report facts and I'll hold my tongue on spin.
• Estimated 24 billion to bail out Washington Mutual by Government.
  WaMu is still aflot, but rumblings continue
• Federal Government to accept "stock" as collateral for the discount window.
  Absolutely over-the-top unprecedented in Fed's 95 year history. I guess the feds will now accept losses for private companies fraud mortgages collapsing and the stock market. Maybe next Government can take merchandise inventory to help retailers as collateral. I assume this was done to help AIG, Lehman, and WaMu.
  
• Bank of America to buy Merrill Lynch, for about 29 dollars a share, 70% higher than closing price on Friday.
• UBS to take additional 5 Billion dollar write down.
  My Spin, Does anyone believe thats the last write down for UBS?

WOW, what an explosive weekend. Monday is anyones guess, 9/15/08 could be "Black Monday" when the market starts to crash. Or maybe the Lehman uncertainty is tempered with the "good news" Merrill Lynch is bought out, and the government now takes stock as collateral.

If the market is "smart" it will see taking stock as collateral by the Fed as pure desperation and not welcome it. On the other hand, now the government will have a vested interest in the market going up, so maybe they can change the rules, perhaps ban stocks lowering their price.

I dare not speculate what this week holds. If you want speculation, watch this video on today's events. But hang on, it will be a wild wild wild ride. Do NOT believe the bottom is in no matter what! All moves are desperation moves, not something to rejoice over.

It's All about Lehman

The financial news this weekend seems to be focusing on Lehman brothers. There are many other major issues developing, such as AIG, WaMu, and bank issues starting to appear as a result of Freddie and Fannie deal last weekend.
The spin seems to indicate Lehman is bankrupt, and the government is pressing hard for this to be resolved by 6pm Sunday, to head off Asia markets opening down hard on jitters.
The general theme seems to be , and I quote:
"Unless something is settled, it's going to be a bloodbath Monday".

The sharks are in the water, and Merrill Lynch is next up on the sacrifice block after Lehman is taken down in the next two days.

So a recap: Lehman failure imminent, next up Merrill and WaMu, followed by smaller banks and rumblings at AIG. Just 11 days ago the spin was it's a good time to get into financials since it's cheap. Believe a blogger with no financial gain over the talking heads, it's not a good time, and it will not be for the next 12 months or more, but it is a good time to get Federal Bonds.

Lehman Bailout announced, WaMu Next.

The Government is "arranging" (aka, paying/incentive-fying) a bailout of Lehman through a consortium. Having companies bailing each other out is following the blueprint to repeat Japan's 10 year recession. In the end it may avoid a depression, although Jim Cramer now thinks we risk one. If USA can avoid a depression, with all these actions it's sure to have a longer recession, hopefully not as long as Japan's 10 year recession. In any event, why the heck is the government "arranging" bailing Lehman out, when Lehman bonuses for 2007 was almost 6 BILLION dollars? Those execs should be smart enough to handle their own business. Perhaps if Lehman had paid 10 billion in bonuses, maybe they would have better management.

Next bail out is lining up, as Moody's has cut Washington Mutual credit rating cut to junk. The picture reflects my opinion of WaMu Execs trying to get millions in April 2008 with losses mouting over 1 billion, resulting in only 5 months later near bankruptcy for the company. I am not surprised of WaMu's issues, but I am shocked that Moody's cuts a rating of a company to junk BEFORE it fails! In another two years, Moody's may start cutting ratings ahead of the internet, stock price, and general consensus.
Maybe the execs at Leh and WaMu can spin it to get what they deserve for such good work.


Next rumblings is insurance industry, and I hope I'm wrong. Looks like AIG is leading the pack with cost of insuring their debt jumping 30%.

The growth industry in the US is to take a good company, do money shell games (fraud), award Billions in bonuses, walk away and have taxpayer cover the losses. Freddie Mac, Fannie Mae, IndyMac, Bear Stearns, Countrywide, Lehman, and WaMu execs can start a how-to seminar tour. Unfortunately, a shrinking industry is trusting America's financial stability and debt, as Japan is slowly joining the ranks of China and Russia in avoiding USA debt.
UPDATE 9/22/08, Lehman is bankrupt, and execs get 2.5 billion in bonuses.