Fannie and Freddie are insolvent and the Treasury bailout plan
(the mother of all bailouts) is protection for Wall Street. Instead of wiping
out shareholders of the two GSEs, such a plan bails out shareholders, managers
and creditors at a massive cost to U.S. taxpayers.
Expect more of the
same as this crisis deepens.
Double-digit increases in gasoline prices
helped push up the consumer price index 1.1% in June, the fastest rate in 26
years. Inflation is gaining momentum, but I don't expect it to last long term.
We should see inflation peak in the next year.
Indy Mac Bank has gone up
in smoke.? This is the second largest bank failure in US history and the largest
such failure in over 23 years. Adding insult to injury, 10% to 20% of the FDIC's
insurance reserves have just gone up in smoke along with Indy Mac just as the
hundreds, and what may eventually turn out to be thousands, of bank failures
that are anticipated get started in earnest
The Securities and Exchange
Commission said Tuesday that it will try to limit so-called "naked" short
selling of shares in Fannie Mae, Freddie Mac and big brokerage firms. The SEC
will issue an emergency order stating that all short sales of shares in these
companies will be subject to a "pre-borrow" requirement, said Christopher Cox,
chairman of the SEC. This will last for 30 days, he said. The SEC is also
planning more rule-making focused on short selling in the broader market, Cox
said.
In a typical short sale, traders sell borrowed shares, hoping to
buy them back at a lower price and return them to the lender. The difference is
kept as profit. In naked shorting, a trader shorts a stock without first making
necessary arrangements to borrow shares. That sometimes means the seller fails
to deliver the stock to the buyer and the trade can't be settled, running afoul
of securities laws. Imposing a "pre-borrow" requirement on short sales of some
shares will force traders to make sure they have located securities before
putting on negative bets. That may limit the pressure on the stocks included in
the emergency order. In addition to Fannie (FNM) Mae and Freddie Mac (FRE),
Shares of primary dealers including Lehman Brothers - LEH:, Merrill Lynch -
MER:, Morgan Stanley - MS: and Goldman Sachs - GS: will be covered by the SEC
order, Cox said.
Every CEO in the U.S. of every public company should be
jumping up and down and complaining. Class Action lawsuits should be filed as
this is plain prejudice and corruption at the highest level.
But the rest
of us were thrown a bone. The SEC is also planning more rule-making focused on
short selling in the broader market, Cox said.
Hopefully this comes
about, and if the SEC gets enough complaints, maybe it will.
As per my
July 15th update we have got the reversal and up move in the markets as I
expected. I talked about a possible morning doji star formation. The major
indexes showed this pattern, although the S&P 500 did not display it
perfectly, the Dow did
Dow chart
As you can see on the chart, the
market gapped down on the 15th and we got a doji candlestick that day. The
'doji' signifies a day of indecision, but can be a strong reversal signal when
it forms with a gap down from the previous day. And the reversal is confirmed
the next day with the morning doji star formation. A good move to the upside,
above the doji candlestick.
The morning doji star is a very strong
reversal pattern and is seldom if ever wrong (95% plus correct). As you can see,
we have already seen 2 more up days after this signal. However, it does not
necessarily mean the market will go a lot higher, but in this market, it likely
signals we have seen the bottom in this recent sell off, and that bottom should
hold for at least a number of weeks or maybe a few months. Eventually this
bottom will be taken out as this bear market has further to go.
Gold and
Oil
Oil is behaving as I expected in my July 9th update, $145 as a
temporary peak and a correction to $125 was quite possible. Oil hit $129 on
Friday, after testing the $145 price area twice.
Gold chart
Gold
is also acting as I expected from my July 9th update. I expected the next move
to $960 to $975 which we have now seen. This confirms the new uptrend is still
intact. We are now seeing a consolidation of that move and the next move should
be a test of the old high over $1,000. I would not be surprised if we go through
this resistance area on the first test or move to that price range. That is when
I expect we will see strong moves in the junior golds, as we approach $1,100 and
beyond.
