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Mark's Market Blog

9-19-08: Credit Tightens, SEC Bans Shorts

By Mark Lawrence

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Well, the entire financial crises is over, stocks are now on a permanent track upwards, teenage virginity is back in vogue, bin laden has agreed to surrender, and the french are going to pay off their WW II debts.

Wednesday night the various banks dumped $180B, and the markets opened up on Thursday. By 12pm est they were back where they closed the night before and sinking, by 1pm est they were a percent or so deeper into negative territory. So, the government took more action. First the treasury dept. leaked "off the record" that Sec. Treas. Paulson was talking to congress about a new RTC. This is a Resolution Trust Corp, a new government entity made just to buy mortgages from the banks, hold them for a year or two until the foreclosures are done and the value of the mortgages is known, then sell them. This is the same thing that was done during the S&L crises in the early '90s. That announcement pulled stocks up, but by 3pm was wearing off and the stocks were sinking again. Next, at 3pm they simply announced that there were talks and plans being made. The markets picked up 3% on this announcement and closed up. There have been $509B write downs to date on sub-prime mortgage based securities, and it's estimated that this is about half the problem, so this proposed RTC will wind up injecting $1T into the markets, and costing the taxpayers some unknown percentage of that $1T. Terms are still being discussed about the prices that will be paid for these securities, and the future selling prices are of course completely unknown.

Last night after the markets closed, the SEC published a list of 799 financial stocks where short selling was forbidden until further notice (short selling means sell shares you don't own, then buy the shares 30-90 days later at a lower price and make money on the deal as long as the stock continues down). Also last evening, Pelosi announced that there were talks with the White House on another round of stimulus checks, and that the $25B federally insured loans for Detroit would likely be passed within two weeks and funded almost immediately. At midnight est, the Chinese government announced that they too had had enough, and they were buying shares to prop up the chinese market, and also ordering their largest companies to buy back their own shares and those of their subsidiaries. So much for capitalism.

Today US markets are up another 4% on all this, and Asian markets are up 10%. Everything that was in my "buy" band is now well above it. I'm personally up 8.5% for the week on the stocks I've bought, but I was stupidly anticipating more downward motion and had only bought about 10% the stock I intended to buy on this downturn. If this is the end of the bear market, then in the last two days we've made up almost 1/3 of the climb back to previous highs, that is 1/3 the total profits - as I've said, the bottoms of bear markets are very steep and narrow, the opportunity requires that you just hold your nose, close your eyes and jump off the cliff. I knew about this, but I wasn't thinking it would all happen in five days. Perhaps the chance to make big money on buying depressed indexes is now past.

The RTC thing will mostly free up banks and credit markets; add in the Freddie / Fannie bailout and the mortgage market should be cleared quickly. So financial stocks are way up today. Banks like Washington Mutual that were on life support and sinking fast suddenly have new life. The stupidly projected housing turnaround will quickly result in improved car sales, the $25B cheap loan package means plenty of money to tool up for more light cars, so GM and Ford are up too.

Where does this leave us? We still have nearly 10% of the houses in this country either in foreclosure or behind on payments; we still have 10-12 months of houses on the market with less than half the total foreclosures done to date; we're still headed into a recession; we still don't know how much heating oil will cost in February or gasoline will cost in June; we still don't know if we're buying a new hybrid truck or SUV next year or if we're waiting three years and buying a plug-in Prius. Somewhere around $2.5T has been or will be added to the money supply world-wide this year, you have to believe that is going to have inflationary effects. China already has an 8.5%-10% inflation rate and is sinking into recession (who remembers the word "stagflation?"), and the US inflation rate seems to be about 4% this week, and, after a $1.5T injection of cash, you gotta figure rising. But all the guys on Wall Street are breaking out the champaign and singing "Ding, Dong, The Bear is Dead."

This week's S&P:

This week's GM:

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