Thursday Morning

We have a special political post of the week now so I will draw no conclusions from the following:

John McCain has gained considerably in the polls and the dollar is pulling back, oil ($118 pre-marked) and gold ($820) are flying up and the markets are tanking.  Speaking of tanks, Russia is rolling theirs into Georgia as they prepare to formally recognize the independence of the two breakaway republics, who they will be offering "long-term aid" to. 

A senior Russian general said Russian troops are setting up a "buffer zone" around South Ossetia with eight military posts in Georgian territory. Russia’s military also wants to enforce a no-fly zone over the area for Georgian planes, said Anatoly Nogovitsyn, deputy head of Russia’s general staff, at a news briefing. The moves would further undermine Georgia’s sovereignty.  Georgian authorities, meanwhile, said Russian forces are building what appears to be a permanent checkpoint outside the strategically important Black Sea port of Poti.

Meanwhile, U.S. and Iraqi negotiators reached agreement on a timetable that calls for American military forces to leave Iraq’s cities by next summer as a prelude to a full withdrawal of combat troops from the country, according to senior American officials.  Hopefully the troops will be coming home and not heading off to the Russian Front…   Speaking of Russian Fronts, our RSX play is going well (territorial expansion is good for Russian commerce) but let’s watch them closely in case the market gets spooked again so tight stops on at least half of those calls after yesterday’s great gains.

As I said yesterday, although we expected it and although Goldman planned it, a bounce in crude back to $130 could not come at a worse time (tanks use a lot of gas!) and we did not make our market levels yesterday so a lack of resolution for the GSE’s and the rest of the financial markets will give us no real escape from the downward pressure the markets are under.  The financial markets are under such a prolonged attack (see last night’s post) that the Fed had to call CS to ask if there was any truth to yesterday’s rumor that they were pulling a line of credit from LEH (there wasn’t). 

When the Bear Stearns crisis erupted in March, Lehman and other Wall Street firms criticized the SEC for not responding more aggressively to rumors that essentially caused a run on the bank, forcing Bear’s emergency sale to J.P. Morgan Chase & Co. At the time, Fed officials called at least two major banks rumored to have stopped trading with Bear and were told that wasn’t true.  The Fed has more standing to intervene as a result of its move after Bear’s collapse to allow securities dealers such as Lehman to borrow from the central bank on much the same terms as commercial banks. That was one of the broadest expansions of Fed lending authority since the 1930s, but few Wall Street firms have used the lending facility.

FRE is under similar attack and we added into yesterday’s losses (also detailed in last night’s post) and came up with a couple of offsetting spreads that profit from a further decline.  I still think the whole thing is nonsense and there is no way FRE and FNM are failing but it’s very tough to sit on the position while it’s under this kind of attack.  Let’s remember that this round of attacks started on the weekend of August 2nd, as Nouriel Roubine predicted (in Barron’s, surprise) that there would be $2 Tn in bank losses and then Whitney, GS, Cramer and the usual pack of hyenas conducted a blitzkreig on the financials that Monday.  In all that time, not one word has come out of the Fed or the administration in support of that market.  Leadership – NONE = Confidence – NONE….

Asia had no confidence this morning and the Hang Seng plunged 539 points, slamming into the 2.5% rule and was outpaced by India’s 3% slide and the Shanghai Composite’s 3.6% fall.  The Nikkei was the star of Asia, falling just 0.77% and it was banks, banks, banks that led the declines.  PTR took a huge 3.7% hit and SNP dropped 6.3% as rising oil prices imperiled margins.  Energy user Huaneng Power went limit down (10%) and Huadian Power was not far behind, falling 8.4%.  Recent IPO, China Southern Locomotive also went limit down – all in all, a real mess on the mainland as the Olympics wind down and people wonder "what’s next."

Semis fell, shipbuilders fell, builders fell, property companies fell…  We may be upset about our market but it still looks better than Asia at the moment.  10 Million workers have gone on a one-day strike in India as government workers and bank employees protest rising prices and the Leftist party withdrew their support of the government in protest of a deal in which the US is giving India nuclear technology.  The trade unions said they would plan for more strikes in coming days if the government doesn’t heed their demands

Huge story affecting the casino stocks is a possible change in Beijing’s policies toward travel as the government "might make it harder for mainland Chinese to visit the one part of the country where gambling is legal."  China’s government has previously taken incremental steps to limit visitor numbers from the mainland in an apparent effort to cool Macau’s scorching economic growth and keep inflation in check. According to the report, the central government might soon allow mainland Chinese to visit Macau only once every six months. Current rules allow them to visit once every two months.

According to the WSJ: Casinos in Macau will soon feel the effects of a second and different rule set by the territory’s administration. Starting Sept. 1, mainlanders who visit Hong Kong will no longer be able to travel freely from Hong Kong to Macau, an hour’s ferry ride to the west, according to Macau public-security officials. Nearly 8.2 million of the 27 million people who visited Macau last year traveled there from Hong Kong.

Europe is down about a point ahead of our open (so far).  There was a terrible plane crash in Spain and they have the Russia thing, which is exacerbated by the US/Poland missile deal and, of course, banks and financials are leading the declines other than IKB, who hit that magic 10 cents on the dollar mark the hyenas are aiming for and are being taken over by Lone Star, who happened to have a little cash on hand for just such an occasion.  The UK is shaping up to be a total disaster and the government is running out of options as the country is fairly certain to be in a recession at this point.

The US economy is skirting along the recessionary line as well but we’re still over it as Jobless Claims fell 13,000, just about in-line at 432K and last month’s figure was revised down 5,000 to 445K.  Over 400,000 is considered recessionary but, just like a stock hasn’t really broken resistance because it briefly pokes below support, you can’t call a recession based on a spike in claims.  At 10am we get the Leading Economic Indicators Report, which is expected to be down 0.3% for July and the Philly Fed for August is expected to come in at -13.4, terrible but up slightly from -16.3 in July.  I find this very interesting as last week’s NY Empire State Index for August was up 2.8 vs the down 5 that was expected and that gave the markets a huge boost but that was almost a week ago so we can’t expect traders to remember that.

That’s all the data we’re going to get this week so it’s all up to Bernanke, who gets the last word tomorrow as he delivers the keynote address at the Economic Policy Symposium in Jackson Hole.  The topic is (drumroll please):  FINANCIAL STABILITY!

I don’t need Bernanke to tell me that we have much more financial stability than the MSM would have us believe.  Fear sells papers, war sells papers, misery sells papers – it’s a recession (or near one) and big corporations need to sell papers so what do you expect.  William Randoph Hearst once plunged this country into war in order to boost newspaper sales and Rupert Murdoch now controls a media empire that would make Hearst weep with envy but at least they pulled that ridiculous article from last night that acted like the regualr note auctions that were being held in September were some kind of crisis for the GSEs.

I’m not bullish but I’m also not ready to panic – tempting though it may be…   We’re opening low and things look very ugly, everyone is telling us we’re going lower and oil, at 9:20, is now up over $119.  Same old, same old on the whole and we’ll have to start covering a little deeper and adding some puts but we’ll also be picking up some bargains as this too, shall pass.