by Phil - July 20th, 2008 8:15 pm
Ta-Da! And he sticks the landing!
I wasn’t worried, were you worried? OK, I was just a little terrified as the market tanked way below our expectations of holding 11,000 on the Dow and certainly we weren’t looking for 1,200 on the S&P, down 50 points from Monday’s open. The S&P isn’t supposed to jump up and down 4% in 2 days, that’s really not a healthy environment for 500 of our biggest companies. Way back in August of last year I warned that if our government pursues Asian-style Central Banking policies they will subject our markets to Asian-style market swings and look what we have now!
Bernanke did not listen to me then (Aug 23rd) when I said "The Fed can not, MUST NOT lower rates" and the Dow has dropped 2,500 points since then despite putting up brief rally highs in October (which we are down 3,000 points from). We have to get off this "quick fix, damn the consequences" attitude in this country and back to pursuing something that at least looks like fiscal responsibility. I see that Phil Gramm left the McCain camp so I’ll volunteer my services as the new economic capo di tutti cappo on the straight talk express. My name is also Phil so it should be less confusing for Mr. McCain, who seems to be easily confused.
Last weekend we were very frustrated with the way things were going and a lot of you circulated my post on "How to Save the Markets, the Banks and Housing Tomorrow" and I guess Email is slower than we think as it took all the way until Tuesday for my post to turn the markets around. Well, maybe it wasn’t just me but at least our conclusion was, if it’s all fixable then that means it’s not unfixable which means we could expect a nice turnaround despite the overwhelming doom and gloom that was coming from the MSM.
Last weekend, with oil at $145 and the Dow down another 200 points from where I had put my foot down on July 5th, it was very tempting to do a Cramer flip-flop and go all bearish but I actually REMINDED people what I said on July 5th, that oil would top out and the markets will recover BECAUSE I am a fundamentalist and there is nothing that GS, Whitney or Cramer are going to say that is going to make me panic out of positions in…
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by Phil's Favorites - July 20th, 2008 7:29 pm
How should policymakers respond to a financial crisis?:
Financial crisis resolution: It’s all about burden-sharing, by Charles Wyplosz, Vox EU: An old and familiar debate is back. Should taxpayers bail out the US banking system, quite possibly the British and European ones as well?
There are two standard views on the multi-trillion dollar question of who pays for getting us out of the financial crisis.
- One view is that the situation has become so desperate that ordinary citizens will in any case be paying a high price for the crisis; throwing money at banks right now might lower the overall burden by preventing a deep, protracted recession.
- The other view is that banks ought to be left hanging to pay for their sins. Governments ought to be worried about their taxpayers, not bank shareholders.
In fact, we don’t have that much choice.
Too big to fail: the Bagehot rule
It has long been a poorly hidden secret that large banks cannot be left to go bankrupt. Walter Bagehot, a 19th century economist and editor of The Economist, designed the solution that remains as relevant today as it was then. The Bagehot rule is that the central bank ought to lend freely to a failing bank, against high-quality collateral and at a punitive rate (see Xavier Vives’ Vox column).
The modern version of the rule adds that shareholders ought to bear serious costs and the managers ought to be promptly replaced. This is exactly what happened with Bear Stearns last March, where another bank, JP Morgan, was used as the conduit for the operation. The cost to the taxpayers was a $1 billion guarantee and a $29 billion loan to JP Morgan guaranteed by Bear Stearns assets. We don’t yet know if this was a taxpayer-financed bailout. If JP Morgan redresses the situation within ten years, the taxpayers will make a profit. If not, US taxpayers will have borne the burden. Bear Stearns shareholders were almost completely expropriated.
As the US economy keeps limping and the housing market deteriorates, most observers believe that there will be many more bank failures. Indeed, in early July, a large Californian mortgage lender, IndyMac, went belly up and was also subjected to Bagehot’s recipe. The possibility that some very large financial institutions, and many smaller ones, will follow provides urgency for the current debate.
The Larry Summers school of thought: Don’t scare…
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by Phil's Favorites - July 20th, 2008 6:50 pm
Mish on the new SEC rules. 
Applying new rules/greater protection to a select list of financial companies, besides being unfair to the non-protected companies, seems possibly unconstitutional, an element of all this that is somewhat troubling — maybe I can find an analysis on that aspect. - Ilene
Many banks are bitching about the new SEC rules on shorting. On the off chance you are new to the story, it’s time for a full recap from the beginning.
Complete Chronological Recap
In case you are just tuning in, the most pertinent of the above is Tossed To The Dogs? where I said…
Where is Washington Mutual (WM)? Wachovia (WB)? Were they tossed to the dogs?
What about Corus Bank (CORS), Bank United (BKUNA), National City Corporation (NCC)?
It is beyond all belief that naked short selling is affecting Goldman Sachs (GS) more than Washington Mutual, Wachovia, Corus Bank, Bank United, and National City Corporation.
Now that the complete background is out of the way, inquiring minds may wish to consider SEC Short-Sale Rule Gets Negative Reviews.
In a letter to Mr. Cox [the SEC chairman], the American Bankers Association, a trade group that represents the interests of 8,500 banks, said it fears short sellers will now focus on banks not covered by the new rules, many of which are already big targets of short sellers.
"The emergency order could further exacerbate a loss of confidence in the safety and soundness of this country’s banking industry," the ABA wrote, as it called for an expansion of the order to including stocks of banks and bank holding companies.
The Financial Services Roundtable, an organization that represents 100 of the largest U.S. financial companies, also asked the SEC to extend the order. It wants to have all financial-services companies covered in the second week.
Only one company, Deutsche Bank AG, is on both the SEC’s protected list and the NYSE Euronext’s threshold list. Deutsche Bank has been on the threshold list for the past six trading days; however, that may have been triggered because of low U.S. trading volume, compared with its global trading volume. A Deutsche Bank spokesman declined to comment. Because these stocks are so widely traded, it’s possible they are subject to abusive trading and the firms still…
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by Phil's Favorites - July 20th, 2008 4:44 pm
A little different perspective, from the bear-side of the market place battle.
Lots of interesting, amusing and musical links situated within.
Courtesy of Minyanville, by Todd Harrison, founder and CEO of Minyanville.
Imagine a bearish rebel leading an uprising against bovine rulers at the end of the 13th century. He’s standing on the battlefield, ax in hand, staring at thousands of angry soldiers of the establishment across the way.
His hungry, tired troops won many battles the past year against a superior army, no small feat given how outnumbered they were. They fight for their right to short, believing free markets are the cornerstone of capital structure.
“There’s a difference between us,” says Boo Wallace sitting on his trusted mount addressing the bovine leader, “You think the people of this country exist to provide you with positions. I think short-positions exist to provide those people with freedom.”
The bovine were unimpressed, laughing to one another as they openly mocked the bears.
It was almost as if they knew something, almost as if they had a secret weapon.
Boo, wearing blue war paint across his face, returned to the beleaguered bears anxiously awaiting their marching orders. His eyes met theirs, the tension mounted. Some of them, bruised and bloodied the past few days, turned without talking and started to walk away.
“Ay, fight and you may die,” he says as they turn back to face him, “Run, and you’ll live… at least a while. And dying in your beds, many years from now, would you be willing to trade all the markets, from this day to that, for one chance, just one chance, to come back here and tell the establishment that they may take our shorts, but they’ll never take… OUR FREEDOM!”
The bears cheered and pumped their sharp, homemade weapons in the air. After years of financial Prima Nocta, the time had come to make a historic stand. They looked from side to side at their bearish brethren, knowing some of them wouldn’t make it.
They also knew that, no matter what, some of them must.
As they raced across the field towards their destiny, they heard a strange sound above. 
They turned to see multiple Sikorsky UH-60 Black Hawk assault helicopters approaching on the horizon, firing high-grade missiles and shooting twin M60D 7.62mm machine guns.
“What the…?” Boo said to nobody in particular, “This is the thirteenth century. They haven’t even made the Black Hawk yet!”
As the angry bovine mass approached, Boo realized he’d been trapped. The enemy of…
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Philip R. Davis is a founder Phil's Stock World, a stock and options trading site that teaches the art of options trading to newcomers and devises advanced strategies for expert traders...