Market Anniversary, How to Invest Today, Short Selling Ban Ends, Credit Crisis #1 Victim, and More!

  • One-year anniversary of the bear market… The 5 totals the damage
  • Breakneck volatility on Wall Street… Byron King on how to manage your portfolio
  • John Williams on the market’s “controlled crash,” and the likely economic outcome
  • Short selling ban ends, markets open up… Dan Amoss on how history will judge the SEC action
  • And you think the U.S. has it bad… the biggest victim of the credit crisis so far

  Today, we mark the anniversary of the U.S. market’s all-time high. Just a year ago today, investors euphorically pushed the Dow to a lofty score of 14,164. Today, barely 9,300. Same with the S&P 500, down about 37%.

But while this bear market has been painful for some… it could be a lot worse:

According to the Dow Jones Wilshire 5000 “wealth meter,” the bear market has destroyed some $7.4 trillion in investor wealth. That’s more than the combined annual GDPs of Japan and the U.K.

  Volatility was truly neck snapping in yesterday’s stock trading session in New York.

Seriously, look at that. Down 2%, up 4%, down 4%, up 5%, then down another 2-3%. If you’re a day trader, oy… you are a brave soul. The market was clearly conflicted over the world’s central banks’ coordinated rate cuts yesterday. In the end, we suppose not enough had actually changed.

The Dow took a 2% hit. The S&P fell a little over 1%, the Nasdaq a little less.

  “Before you do anything precipitous,” suggests Byron King, our energy and resource investor, “like sell your last stocks and stuff the cash into your mattress — let’s ask a few questions.

“If you sell out now, what price will you get? A low price, right? So if you sell now, you will leave a lot of value on the table. That is, most things in the world of energy and resources are underpriced compared with their intrinsic value.

“I don’t care how bad the market looks just now (and it looks awful). Go out and try to find an oil field somewhere, or build an oil refinery, or find an ore deposit and build a mine. Can’t do it, can you?
“So if you sell out now, just be aware that you will be getting a relatively low value. You will be leaving long-term value behind. If that’s what you want, then that’s what you ought to do. Just understand the point.

“So this brings us to the Outstanding Investments thesis. Energy and resources are getting scarcer and ought to become more valuable going forward. Hey, too bad the world financial system is busted. But that just means that there’s an opportunity to buy good stuff really cheap. No, I’m not saying that you ought to go out and buy stock with both arms or back up the pickup truck and start shoveling. You need to be very cautious right now. But don’t panic, either.

“Sell if you need to sell. Buy if you want to take on the risk. We’re in for some rough economic times. But unless world population starts to die off fast or people develop a taste for living low and being cold a lot, the energy and resource plays are still going to work over the long haul.”

  “The U.S. stock market has been experiencing something akin to a controlled crash,” says John Williams of “What the Fed and Treasury are unlikely to accomplish in saving the system includes any long-term artificial prop for the U.S. equity markets, as well as any long-term artificial support for the U.S. dollar.

“The Fed also cannot prevent an already ongoing and deepening recession or a continued, significant upturn in inflation. From Mr. Bernanke’s standpoint, concerns as to containing inflation or stimulating the economy are but secondary or tertiary to concerns as to preventing systemic collapse.
“The Fed and administration will do anything to prevent a systemic collapse, the risk of which is as great a threat to national security as any the United States has faced in recent times. Accordingly, the Fed and Treasury will continue to create and spend any money necessary, to bail out any entities threatening stability, to twist any arm and to manipulate any market, medium, statistic or commodity price… The cost of this systemic salvation, however, remains higher inflation in terms of prices for goods and services.
“If the underlying system does not start to stabilize soon, almost any government action might be placed on the table. Such action could include anything from a banking holiday, and/or an all-inclusive FDIC guaranty, to some form of nationalization of the banking system.”

  Indeed, the U.S. Treasury Department is considering taking ownership stakes in private U.S. financials. One of many stipulations in the bailout bill allows the Treasury to inject cash directly into banks that ask for it. In return, the law gives the Treasury the right to own shares of that bank as collateral. Best we can tell, the Treasury is allowed to buy as much as banks are willing to sell.

Secretary Paulson and his brood threatened this action after the U.K. government implemented a similar plan yesterday. The Brits announced that banks there can receive a total of $87 billion in emergency capital in return for preferred shares. The Italians followed suit themselves.

  The Fed gave AIG an extra $37 billion today. AIG blew threw that first $85 billion in less than a month, and evidently needs a whole lot more.

We’re not sure exactly where all that money went, but we know the company spent around $440,000 for an executive retreat to the St. Regis resort last month. While Rome burned, 100 of the company’s top selling insurance agents and AIG execs enjoyed spa outings, golf and catered banquets… on the taxpayer dime.

   We mentioned the other day the national debt clock in NYC had ran out of digits. $10,000,000,000,000 after all, is a lot of debt. Heh… nothing some quick thinking and a big sticker couldn’t fix:

  The dark art of short selling is legal again this morning. As nearly 1,000 financial stocks once again became exposed those ruthless “bear raids,” the Dow opened… up 125 points?

Oh… nevermind.

  “The hue and cry is, ‘The shorts did us in,'” Jim Chanos commented this week. “But the narrative doesn’t fit the facts. In an age of e-mails, instant messages and voicemails and the paper trail they leave behind, if there is a group of people spreading rumors that they know to be false, Inspector Clouseau could pull this one in," he concluded, with a nod to the Pink Panther.

  “When historians study this period in financial history,” notes Dan Amoss, “we’re likely to discover that the SEC’s disastrous decision to ban short selling had the effect of destroying many hedge funds that had been making sound fundamental trades (with far too much leverage, in hindsight).

“Since these funds couldn’t sell short many stocks as a hedge, they were forced to liquidate many sound long positions. So in recent weeks, I’ve seen valuation anomalies that I never thought I’d see in my career — for example: oil service, coal and fertilizer stocks with sound fundamentals selling at 3-4 times earnings.

“Also, the financial stocks were hit during the short selling ban, because fund managers who wanted to buy into the sector couldn’t ‘pair trade.’ Pair trading involves buying a stock you like and selling short a stock you don’t like in the same sector. Now that hedge funds can pair trade in the financial sector, we’ll probably see an increase in the speed at which we differentiate the winners from the losers.

“Insolvent banks need to be shut down or and/or absorbed into stronger banks as soon as possible to restore some sense of trust in the banking system. With a stock market that’s now less manipulated by the government, this healthy process can pick up speed.”

  Iceland might go down as the ultimate victim of this “credit crisis.” The Icelandic government has now nationalized the country’s three biggest banks.

Why? Icelandic banks appeared no worse off than other overextended lenders around the world. But the Icelandic financial sector had assets and liabilities 8-10 times larger than Iceland’s gross domestic product. Hence, the 30% single-day drop of the country’s currency, the krona.

“And that peg to the euro that the Icelandic government announced on Tuesday?” notes Chuck Butler. “It was dropped yesterday, because the peg to the euro at 131 could not be defended. Trades were going off at 340 krona per euro… It’s a bad situation — hopefully, a white knight will step in to help here. Unfortunately, banks around the world (except the few mentioned above) have their own problems to deal with right now.”

So far, the only “white knight” to come to Iceland’s rescue has been, of all nations, Russia. The Russian government is reportedly sending over a $5.5 billion emergency loan, possibly more to come.

Jobless claims backed off their seven-year high this week. The number of Americans filing for new claims for unemployment fell 20,000 last week, to a seasonally adjusted 478,000. While that’s historically high, it’s an improvement from the previous week, which rivaled the wave of job losses after the Sept. 11 attacks.

  Strangely, despite U.S. interest rates dropping to 1.5%, the dollar has managed to hold onto its recent gains. The greenback has stood still in the last 24 hours. The dollar index is still around 81.

  Gold has taken a breather today. With the momentary absence of fear in the stock market and the dollar at a standstill, gold has shed about $25, to $885.

Oil remains at yesterday’s levels, around $87 a barrel.   Gas prices shed another 4 cents a gallon overnight. The national average has now retreated to $3.40, down 71 cents from the July all-time high. Still gas is 23% more expensive than this time last year, while oil prices are up only about 10% in the last 12 months.

  “More pure bulls$*t from the short sellers,” writes a reader. “They put all that liquidity into the market when they cover. Well, we never hear those schmucks talk about all the liquidity they took out of the market when they sold. If these idiots had any brains, they would just shut their mouths. They should at least be honest and say they like destroying anything they can to make a buck. Better than those lies they come up with about doing the rest of us a favor by ruining our investments.”

The 5: Alas, you’re a victim of your own lack of imagination. Pity you should allow the mainstream media to pollute your judgment like that.

Thanks for reading,

Addison Wiggin
The 5 Min. Forecast

P.S. We ran into Barack Obama at Union Station yesterday… thought you’d like to see:


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