Brothers and sisters, mourn with us… the American dream has perished
SEC bans shorting… Dan Amoss on what that really means for markets
Government announces biggest bailout in U.S. history… “hundreds of billions” of tax dollars to be spent
Fed injects nearly $300 billion into markets in 24 hours… with nearly no effect
Treasury installs guarantee behind all money market accounts
World markets boom… Chris Mayer on one economy looking “very cheap”
This morning, we hang our heads low in silence. The free market is dead.
After hundreds of billions in liquidity injections — a bailout of Bear Stearns, government takeovers of Fannie, Freddie and AIG — this morning the feds have taken intervention to a whole new level:
The SEC has issued a ban on short selling.
If you short any of a list of 799 stocks they published this morning, from today until Oct. 2, you will, effectively, be committing a crime. Seriously. And the SEC isn’t talking naked shorting or some other controversial method. No shorts, period.
Of course, every one of the 799 stocks has serious financial exposure or credit risk buried in its balance sheet. They are the stocks that should be shorted… run by management teams that deserve market bruises more than any others.
Forget about all that rhetoric the U.S. government has been spewing for years about spreading — by force, if necessary — liberty and free markets in Arab states. Forget all the finger wagging the Fed has been doing at Japan for its failure to let its big banks bust and get on with the normal operations of the market.
Don’t even think about the flimsy concepts for managing risk or the efficiency of markets. You will now bow before the “two young kings,” as we heard Paulson and Bernanke described on NPR this morning. O, the hypocrisy!
Apart from the extreme angina you must be feeling if you have even the remotest libertarian bone in your body, “this just throws sand in the markets’ gears,” says our resident short seller, Dan Amoss.
“Like most government action, it pays lip service to consequences. Convertible bond traders use short selling to hedge equity risk. After this ban, the price of convertible bonds will probably fall. Hedge fund managers use short sales to offset the risk in holding long positions. After this ban, fund managers will have to use other means to cut risk, which include selling off huge chunks of their long positions. Finally, at market bottoms, short sellers provide a huge amount of demand for stocks when they buy to close out short positions. Without this buying pressure, the market could possibly go ‘no bid’ at crucial peaks of fear.
“The problem is in the system for trade clearing. Brokers are taking orders for short sales and not locating the shares to borrow. If a broker cannot locate them, then it shouldn’t tell the short seller that it can execute the order. Since the broker doesn’t want to lose the short seller’s business, it probably executes short sales of ‘hard to borrow’ stocks anyway and hopes it can locate the shares in time for settlement. ‘Quant funds’ — the ones that use computers to trade millions of shares every minute — are lucrative brokerage clients. These funds are most likely to be the ones unknowingly requesting ‘naked’ short sales. The orders come in so fast that it’s hard for the broker to say no, we cannot locate those shares to borrow.”
“In my view, the SEC can solve the problem of naked short selling with better enforcement of rules that brokers cannot sell shares that they have little chance of borrowing.”
Is it such a coincidence that today is a quadruple witching day? Stock index futures, stock index options, single stock options and single stock futures all expire in unison today.
Want to roll over those puts on Washington Mutual? Better think twice, now that the government has guaranteed no one will sell WaMu short for the next two weeks. We defy you to uncover an incidence of government intervention in the markets as extreme as this in the entire history of the “land of the free.”
And they’re just getting started. Yesterday, word leaked that the Fed, Treasury and Congress were meeting to construct the biggest bailout in the history of the world.
A consortium led by Paulson, Bernanke and Pelosi has brewed up a plan similar to the Resolution Trust Corp. from the 1980s and ’90s. Under its current rendition, what Hank Paulson calls the “troubled-asset relief program,” the government would use tax dollars to buy up whatever distressed assets it sees fit… financial stocks, CDOs, subprime mortgages, etc.
Preliminary estimates to the cost of this plan exceed $500 billion, CNBC reports. Hank Paulson confirmed in a press conference that it would cost you “hundreds of billions.”
Reid, Cox, Schumer, Paulson, Pelosi and Bernanke in the same place… be afraid.
The motley crew is supposedly fast-tracking the legislation to become law as early as today, before anyone outside Capitol Hill gets a chance to speak up.
Money market funds are now guaranteed by the U.S. government, too. Secretary Paulson announced this morning that he’ll insure public money market funds for the next year — for a fee, of course. The Treasury has created a $50 billion fund to back up this nearly $4 trillion market. As we mentioned yesterday, there’s been a run on money market funds this week, as some of these famously stable funds revealed exposure to the financial sector.
That’s too bad for Putnam Investments. The famous $12 billion Putnam Prime Money Market Fund was forced to shut down yesterday after investors stormed the gates and withdrew in waves. According to iMoneyNet, some $89 billion raced out of money market funds yesterday alone.
“I’ve never seen anything like this,” said an astounded Vanguard founder John Bogle. “I’ve been through 10 bear markets, in this business for 57 years, and I’ve never seen this.”
So really, is it any surprise stocks had their best day in six years yesterday? If this week produces anything, it’s a series of charts we won’t soon forget:
That sudden spike happened precisely as rumors of the government’s new “Resolution Trust Corp.” hit the wire.
And this morning — with the rumored support of the government, guarantee of money market funds and the ban on short selling — the market skyrocketed at its open. The Dow opened up 350 points.
Stock indexes around the world are simply booming. India and Taiwan closed up over 5%. South Korea shot up 4.5%, with Japan not far behind, at 3.5%.
We especially note major indexes in China and Hong Kong… up a stunning 9.5%, the biggest move in seven years. Aside from the wave of euphoria blanketing the globe, the Chinese government took several specific steps of its own to prop up domestic equities. For starters, it lifted a 0.1% tax on share purchases that was installed during last year’s boom. The Chinese government also ordered its sovereign wealth fund to begin buying shares of state-owned banks. Heh… that oughta fix everything.
And Lord knows Chinese investors aren’t complaining… the Shanghai Composite is down 70% from its October high.
“Russia looks cheap,” notes our value investor, Chris Mayer. “The Russian stock market now trades for about eight times 2009 earnings. Russia is the cheapest of the big emerging markets — cheaper than China, Brazil and India — although all of these markets are down quite a bit, as I’ve shown above.
“Eric Kraus, who runs Russia’s Nikitsky Fund and has been long ensconced in Russian markets, runs off the usual roll call of worries about investing in Russia: ‘Some mixture of “threats to property rights,” geopolitical pressure, the decline in commodity prices, political worries, etc.’ But he also points out that ‘Russian performance has been in line with the BRICs [Brazil, Russia, India and China]. It has done slightly less well than Brazil, ex aequo with India and far better than China.’
“He believes the ‘Russian equity market is now massively oversold and unarguably a buying opportunity in the long run.’”
Chris recently gave his Special Situations readers his thoughts on when and where to invest in Russia… click here to learn more.
Sickly, the Fed’s $180 billion injection into world markets yesterday is back-page news. Banks around the world weren’t lending to each other, for damn good reason. So the Fed unleashed a wave of cash, flooding the world with cheap money. Here’s the breakdown:
Ironically, this injection did little to nothing in terms of the U.S. stock market. Stocks here in I.O.U.S.A. perked up only once word leaked of a modern-day RTC. We can barely keep track of the money the Fed is pumping into the system… as we write this morning, we learn another $100 billion was injected yesterday, after the $180 billion early Thursday morning.
The Lehman Brothers bankruptcy might costs New York over 30,000 jobs, Gov. David Paterson suggested this week. Lehman employed 27,000 worldwide, and we’ve heard more than one employment expert suggest that for every single bank or brokerage job lost, 1.5 jobs are lost in industries meant to support them — lawyers, administrators, accountants, marketers, bookies and coke dealers, for example.
Banks and brokerages generate 1 out of every 5 tax dollars collected by the state of New York.
For reasons we truly cannot explain, the dollar rallied yesterday too. After falling as low as 77.4 Thursday morning, the dollar index is up a point and a half as we write… to around 79.
Gold’s been a wild ride. After its record surge Wednesday, gold continued to rally yesterday. Spot prices reached as high as $920 before a dramatic retreat after-hours yesterday. This morning, you can score an ounce for $860.
Oil is steady today, at $100 a barrel.
“I am no big fan of George Soros,” writes a reader, “but his observation that the financial industry ‘has taken up too big a share of the world’s resources… when it becomes once again regulated, it will be less profitable’ has the clear ring of truth. Inasmuch as America has become the land of ‘financial services,’ that ring is also ominous. Thanks to Uncle Sam, we are all investment bankers now, which cannot be good.
“Somebody in the U.S. tech/energy sector better find the Next Big Thing in the next few years. Make that the Next Big Things. We are going to need a lot of them. Maybe the Fed will get in the startup business. Might try giving some of that ultra-cheap money to people with a few good ideas.”
“After blowing over $900 billion of taxpayers’ money trying to bail out the crooks,” writes a reader, “Paulson’s new plan is to spend a few trillion to buy all the bad stuff off of banks. As a taxpayer, I would like to get a lil sumthin’ out of all this spending. So I came up with my own bailout plan to help the economy.
“My plan: Since the clowns have their hearts set on spending trillions of taxpayers’ bucks, why don’t they just pay our mortgages off for us? That would bail out their rich buddies, plus free up lots of cash for us consumers to buy more stuff we don’t need. Hell, the banks could even raise our credit card limits in order to further enslave us. Seems like a win-win to me. But first, let me see if I can leverage my house by 30 or 40 times its value.”
The 5 Min. Forecast
P.S. The one resounding question is… who is going to pay for all this stuff. Everyone keeps saying the taxpayers… Jon Stewart jokingly told the audience on The Daily Show the other night, “Congratulations, you now own an insurance company”… but is that really true? Where are my shares?
Following the enormous cost of this bailout for Wall Street’s most egregious violators of decorum, the federal government still has to figure out how to pay for a global war on an ethereal foe, rebuild the 100-year-old infrastructure of a continent-wide economy, fund the retirement of the largest cohort in the history of the U.S. population… and provide health care to them at a time when they’re living nearly 30 years longer than when the programs meant to pay for them were established.
“We can’t pay our bills now,” Sen. Kent Conrad, chairman of the Senate Budget Committee, points our in our film. The questions we raise in I.O.U.S.A. never make it past to the floor of press conferences… never get asked of the candidates for president or the House. Where, we ask, among a chorus of bystanders is the outrage?
You can catch the film in the following places this weekend:
Atlanta —- REGAL —- Hollywood 24 —- @ N. I-85 —- Chamblee, GA
Chicago —- AMC —- Pipers Alley 4 —- Chicago, IL
Dallas —- CINMRK —- Legacy 24 —- Plano, TX
Dallas —- CINMRK —– Tinseltown 17 —- Grapevine, TX
Des Moines Omaha —- AMC —- Oak View 24 —- Omaha, NE
Miami – Dade County —- AMC —-Cocowalk 16 Theatres —- bCoconut Grove, FL
Kansas City —- AMC —- Town Center 20 —- Leawood, KS
Kansas City —- CINMRK —- Cinemark 20 —- Merriam Merriam, KS
LA – LA-Orange County —- CINMRK Century Stadium 25 Theatre —- Orange, CA
LA – LA-Orange County —- REGAL University Town Center 6 Cinemas —- Irvine, CA
LA – LA-West Hollywood —- LEMMLE —- Sunset 5 —- West Hollywood, CA
New York – NY-Manhattan —- REGAL —- E-Walk 13 —- New York, NY
New York – NY-Manhattan —- LESSER —- Quad Cinemas —- New York, NY
Philadelphia —- REGAL —- Riverview Plaza 17 —- Philadelphia, PA
Philadelphia —- REGAL —- Warrington Crossing 22 —- Warrington, PA
San Francisco —- CINMRK —- Century Centre 9 —- San Francisco, CA
Washington DC —- REGAL —- Fairfax Towne Center 10 —- Fairfax, VA
Washington DC —- REGAL —- Ballston Common 12 —- Arlington, VA
Next week, we open in Seattle… check your local listings.
P.P.S. The book arrives in warehouses at Amazon.com and Barnesandnoble.com on Oct. 6.