Bear Mountain Bull

That’s one way to ‘fight’ inflation – just drop a bunch of zeroes off the currency:

Zimbabwe announced Wednesday that it is knocking 10 zeros off its hyper-inflated currency — a move that turns 10 billion dollars into one.

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Central Bank Gov. Gideon Gono announced he was dropping 10 zeros from Zimbabwe’s currency, effective Friday. The move comes a week after the issue of a 100 billion-dollar note — still not enough to buy a loaf of bread.

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Gono acted because the high rate of inflation was hampering the country’s computer systems. Computers, electronic calculators and automated teller machines at Zimbabwe’s banks cannot handle basic transactions in billions and trillions of dollars.

Inflation, the highest in the world, is officially running at 2.2 million percent in Zimbabwe but independent economists say it is closer to 12.5 million percent.

Economist John Robertson said the new bills would soon be worthless since the rate of inflation continues to skyrocket. What costs $1 at the beginning of the month can cost $20 by month’s end, he said.

Aaack, 2.2 million percent vs. 12.5 million percent. Close enough for government work.

Another chapter in the struggling states saga:

With California’s cash dwindling and legislators still debating a new budget, Gov. Arnold Schwarzenegger eliminated 22,000 part-time and temporary state positions Thursday and ordered that 200,000 state workers receive the federal minimum wage.

His signing of the executive order had been expected since last week but stood as a stark illustration of the cash problem facing the nation’s most populous state. Schwarzenegger apologized to state workers but said he had no choice.

“Today I am exercising my executive authority to avoid a full-blown crisis and keep our state moving forward,” Schwarzenegger said. “This is not an action I take lightly.”

Lawmakers have yet to agree on a spending plan a month after the state’s fiscal year began, leaving California without the ability to pay for contractors, the higher education system and legislative employees.

	The Nasdaq failed in its first real attempt to take out last week’s highs.
	The Dow ends July right back where it started the month.
	Are we setting up for a repeat of February’s do-nothing?

Charts courtesy of StockCharts.com

Ho hum. Down 280, down 240, up 260, up 180, and down 200. That’s 5 of the last 6 days. How dull can this market get? Now where did I put that Dramamine…

Another day of complete wackiness. Things started out on the weak side, then got better, and the Nasdaq was kinda strong, and then… oh never mind. Just go watch a roller coaster.

For what it’s worth, here are the final numbers:

Treasuries were higher, pushing yields lower:
6-month: 1.85%    2-yr: 2.50%    5-yr: 3.23%    10-yr: 3.94%    30-yr: 4.57%.

Internals bounced around but finished red, with volume right around yesterday’s levels. Advances/declines were 3 to 5 on the NYSE and 9 to 10 on the Nasdaq, with up/down volume 1 to 2 on the NYSE and 3 to 4 on the Nasdaq. And you guessed it, more new lows than new highs: highs/lows were 26/53 on the NYSE and 39/71 on the Nasdaq.

The groups were widely mixed, with paper stocks (+11.5%), biotechs (+4.1% – more buyout news), airlines (+2.3%), homebuilders (+2.0%), HMOs (+1.2%) and hospitals (+1.1%) leading the winners, while the commodity groups turned right back around and headed up the losers’ column again: oil services (-4.2%), metals and mining (-3.9%), steel stocks (-3.6%), oil stocks (-2.8%), natural gas stocks (-2.2%), chemicals (-1.8%), gold and silver stocks (-1.7%), banks (-1.5%), REITs (-1.4%) and defense (-1.4%).

Energy prices slipped back from yesterday’s bounce. Crude fell a couple of bucks to $124.08/barrel, gasoline dropped back to $3.05/gallon and natural gas slid 11 cents to $9.14/mmBTU. The dollar index bounced right back from a big morning dip, finishing just slightly lower at 73.22. Gold came back off a morning gap up and posted just a slight gain, up to $913/ounce, but silver put in another strong day, finishing up 24 cents at $17.73/ounce.

BMB Note:   Not much new to talk about today. More thrashing, and today they decided to sell things off into the close, rather than ramp ‘em up. Go figure. The Nasdaq played a little bit of catch-up today after lagging yesterday, but even that was all given back by day’s end. The Dow dipped back below its ‘marker’ of 14400 but the S&P is still above 1260 – both indices have yet to take out last week’s highs. Lots and lots of questions remain.

Near term, I remain pretty neutral on this market. There is a lack of momentum in either direction, and I have a feeling that after the recent bounce up off the lows, we could be in for some sideways action, just marking time like we did back in February. For now, we have to respect the bounce and the follow-through day on Tuesday. But the very choppy action is not at all enticing, and my scans are producing next-to-nothing in the way of attractive opportunities on either side.

Longer term, I have no doubt that this bear market is not over, despite the bald-headed-one’s call of yet another ‘bottom’ yesterday – eventually he’ll be right (and eventually the Cubs will win the Series), but it won’t be this time. While we could trade higher off this bounce, it – like the others – will eventually crap out and we’ll head lower again.

How you choose to play things in the meantime is up to you (isn’t it always?). For now, I’ll be sitting back and watching as we roll out of July and out of earnings season, and into Fed week next week. The market will be all abuzz tomorrow morning for the monthly jobs report, but that’s really no more than noise at this point.

A new idea – not to ‘curb’ losses in the market, but to prevent them altogether.

From David Weidner:

Cox: That’s not what I mean. We put the rule in place to stop people from spreading nasty rumors and then trading on that information. And Ben and Hank sent me a list of their 19 favorite banks to put on the list. And would you believe it? It’s worked. Most of the stocks are up or haven’t fallen as far as they probably would have otherwise on bad news. Merrill Lynch & Co. is a good example. I thought about expanding it to all companies, but…

POTUS: But?

Cox: But I was getting a pedicure the other day and I thought, ‘Why not just short selling?’ What about ALL selling?’ Why not make a rule that prohibits selling a stock for a price lower than the last trade. We’d stop losses altogether. Everyone would make a profit. Unlike some of these other measures you’ve heard today, it wouldn’t cost taxpayers a penny. So, what do you think of the Cox No-Loss Sale rule?

Bernanke, Paulson, Geithner, Lukken: Mr. President –

POTUS: (holds his hands up) Hold on. Hmmm. Can we call it the Bush-Cox No-Loss Sale rule?

Cox: I think so.

POTUS: Do it. Effective until Jan. 19.

Don’t put it past ‘em.

An early dip was bought up pretty quickly, leaving the indices now mixed around the flat line, and A/D lines right around flat as well. The Nasdaq. which lagged all day yesterday, leads the way today.

In the groups, paper, biotechs, airlines, HMOs, homebuilders, computer hardware and semiconductors lead the green team, while steel, metals, oil services, oil stocks and natural gas stocks lead the losers.

Treasuries are higher, yields lower. Energy prices are lower. The dollar index is lower, though bouncing off its morning lows. Gold and silver are higher.

The futures and the dollar took a dive this morning when a few economic numbers came out – Barry’s got the skinny:

Across the board, this was simply a horrible, recession set of data:

Initial Jobless Claims:  448k. That’s the worst level since April 2003.

Q2 GDP: 1.9%, well below consensus of 2.3%.

Q4 GDP Revisions: Revised from +0.6 down to -0.2%; The first negative quarter (Don’t say we didn’t warn you).

Q1 GDP Revisions: Revised down to 0.9% from 1.0%

Note — I expect these revisions will get revised even lower in the future.

Durable Goods:

Consumer Spending: Despite $100 billion in rebate checks, consumer spending was up  only .56% — the bulk of which was (undercounted) food and energy inflation. Nominal spending for the quarter was 3%.   

Inflation: The personal consumption expenditure price index rose at a 4.2% annual rate.

Revisions: A major set of revisions, and nearly all were negative. The economy contracted in the last three months of 2007, providing the first negative quarterly GDP data. Q4 GDP 2007 was revised to a negative number from +0.6% to -0.2%. And, this is very likely to be revised even lower in the future.

Just nasty numbers across the board.

The government attributes the increase in jobless claims to some new data.

From Bob Hoye:

According to textbook nostrums this credit contraction should not only not be happening, but it shouldn’t be so violently encompassing. The problem is that the revered “lender of last resort” has been on a bender of last resort. Moreover, recklessness was built in with the notion that manipulating interest rates and currency depreciation would always be beneficial. Both theory and practice have been reckless, but the belief in the system accumulated to the point that with such perfection there was no risk and participants leveraged up accordingly. The unwinding of unsupportable positions has been ugly and if the past continues to guide, it is not over yet.

However, there is something policymakers could do to end the contraction right now. All they have to do is get all participants in the credit markets to behave as recklessly as they were two years ago. This, of course, is impossible now that the street has discovered risk. Eventually the public will discover just who have been the real agents of risk all along.

It will take some time and a lot of pain before the public demands un-manipulated currency.

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This contraction seems to be fitting Austrian School theories, as well as the model provided by five previous outstanding eras of asset inflations since the first big one in 1720.

Once a mania goes through the period of soaring prices against the inverted curve and then the curve reverses to steepening there is no record of the senior central bank preventing a severe contraction. Maybe, as the saying goes, “this time it is going to be different”.

Doubtful.

More words of advice from Mr. Practical:

The big picture is this. For the last twenty years the Federal Reserve has used the banking system to expand the credit base of the economy. They kept interest rates low to encourage borrowing. Beginning in 2001 and 2002 the Federal Reserve went into overdrive, driving real interest rates negative and thus encouraging massive speculation in credit. The result is a money supply six times normal relative to GDP but more importantly one bloated with debt with virtually no relative savings to support it.

The system is now broken as evidenced by the TAF facility: the very definition of this is “the financial system has no more capital left and the TAF is the only way the Federal Reserve can get capital back in the system.” So the Federal Reserve has taken bad debts in exchange for capital onto their balance sheet. This makes them very nervous. It’s not a far fetched thought to believe that the new SEC rules were specifically implemented to drive financial stocks up in order to allow them to raise capital through stock offerings. The capital would make it more probable that these banks are eventually able to take the bad debt back from the Fed. This serves as a warning to those who are tempted to fall for this and buy financial stocks on these secondary stock offerings.

Again, we hear from apologists that banks selling stock will “heal” the system. But again that’s not how it works. It only transfers wealth from one part of the system to another because wealth is not being created. There’s no production, only transfer. It’s a hallmark of deflation that companies sell stock. That is deflationary. People have to use cash to buy stock. So cash goes from investors who have less cash to buy things with, to banks who use it to write down debt. But the point is banks selling stocks to investors reduces liquidity, it does not increase it.

The government’s strategy is to buy time. It always is. Time allows it to slowly drain wealth from the poor/middle class and re-distribute it to the rich who own the financial system. The only important thing to me and what I think Minyanville is all about is to try to help people not be one of them.

As risk grows, lower yours. Stay out of risky assets. Stay out of debt. Don’t be tempted by the trading types. All their little “tells” sound good but they don’t work in a market like this. Don’t bottom fish unless you have excess capital you’re willing to lose. There will be opportunity at some point, and you’re going to want to have savings when that occurs, but it’s far from here and you will know when it happens. You’ll be able to find an investment where the returns are adequate to low risk. Today we only have returns subject to very high risk (possible high returns or possible negative returns versus high risk).

Risk is high. Keep yours low. Be patient.

New York joins California in having to address serious budget problems.

Some pretty tough talk from a Democrat governor in a Democrat state – from Mish’s site:

In a rare, brief televised address, Gov. David A. Paterson announced on Tuesday afternoon that he would call the Legislature into an emergency session on Aug. 19 to address what he called an economic and budget crisis confronting New York State as a result of plummeting revenues and rising costs.

The new governor avoided any mention of new taxes, instead arguing forcefully for austerity. He said he was calling on the Legislature to reduce the size of the state workforce; cut agency spending; reduce property taxes for homeowners; aid New Yorkers with the soaring costs of home energy; and even consider public-private partnerships that would take over state assets.

He vowed, “We will cut spending. Government will learn to do more with less.” He called for help from business and labor leaders and New York’s representatives in Washington to support him.

He added, “It is time for New York and other governments to cut up our credit cards. The era of ‘buy now and pay later, and later’ is over. The faster we address this crisis, the faster and stronger we will emerge from it.”

Era of ‘buy now and pay later, and later’ is over

New York is the second state in five days to declare a fiscal emergency. See Schwarzenegger Announced Intention To Slash State Workers’ Pay Till Budget Passes for more on the crisis in California.

The most stunning thing about Paterson’s announcement is how rational it is. He is not begging Washington for handouts, asking for higher taxes, or praying for miracles.

This is pretty stunning too: In June 2007, the 16 banks that pay the most on their business profits remitted $173 million to the state treasury. “This June, just a month ago, they sent us $5 million — a 97 percent decrease.”

Hmm. I guess New York doesn’t have quite as easy of a time ‘raising capital’ as does the Federal gov’t.

“If this is the level of elementary due diligence we can expect after the most atrocious mortgage blowup in history, what will it take to scare people into doing their jobs?”

Go check it out. You’d think people would have started to clean up their act after all we’ve seen up to this point. Apparently not. And the government thinks they can ‘fix’ this by making more money available.

Are we trading against Hank Paulson?

Yes. And against George Bush, Ben Bernanke, Chris Cox, the Congress, and most of Wall Street too.

It sounds like the passengers are whining about there not being enough lifeboats:

The American Bankers Association said Wednesday that it was concerned that the SEC did not signal protection for other at-risk financial firms; most analysts have singled out Wachovia Corp. (WB) and Washington Mutual (WM) in particular as examples of what claim is the SEC’s “selective protection” strategy.

“We are disappointed and deeply concerned about the decision of the Securities and Exchange Commission to extend the emergency order banning the short selling of 19 financial stocks without including all publicly-traded banks,” said ABA president Edward Yingling in a press statement.

“ABA is concerned that those market participants that are actively involved in executing short selling strategies will focus their naked short selling strategies on those publicly traded banks and bank holding companies not covered by the order.”

“Free markets” are fast becoming a distant memory.

I think the rally attempt hit an oil slick this morning – then got a lot of ‘help’ in the final hour to regain its footing.

The market has been taking advantage of recent weakness in oil prices, and it attempted to make another run up out of yesterday’s follow-through day. But the winds shifted this morning as oil reversed up off the lows, and blew the early gains right back in the market’s face. Things looked like they might be headed for a completely red finish at midday, but the end of the month is at hand, so the bulls found it necessary to step in and push things right back up as the afternoon wore on, including a classic final hour ramp job that pushed the Dow up more than 100 points in less than 20 minutes, and then 40 points in the last five when things sagged a little.

I told you to have the Dramamine handy.

Here are the final scores, on a day when the indices were all over the place:

Treasuries finished right near flat:
6-month: 1.88%    2-yr: 2.62%    5-yr: 3.36%    10-yr: 4.04%    30-yr: 4.64%.

Internals were green, then red, then various combinations of the two, and finished green again. Volume was right around yesterday’s levels. Advances/declines were 20 to 11 on the NYSE and 5 to 4 on the Nasdaq, with up/down volume almost 7 to 3 on the NYSE and 4 to 3 on the Nasdaq. And despite the Dow jumping 450+ points in two days, we’ve still got more new lows than new highs: new highs/lows were 36/40 on the NYSE and 44/71 on the Nasdaq.

The commodity groups turned things around for a day, and joined the financials on the leaders list for a change: oil services (+6.1%), oil stocks (+5.8%), natural gas stocks (+4.6%), metals and mining (+4.6%), chemicals (+3.5%), steel stocks (+3.2%), brokers (+2.5%) and banks (+2.4%). The airlines (-4.9%) and homebuilders (-1.6%) led the losers.

Energy prices rebounded with a vengeance. Crude came off morning lows and finished up more than 4 bucks, at $126.77/barrel. Gasoline rose more than a dime to $3.13/gallon, and natural gas got back 13 cents to $9.25/mmBTU. The dollar index was flat at 73.30. Gold and silver both put in strong reversals of their morning lows – gold still fell back by a few bucks, slipping to $907/ounce, but silver’s strong move pushed it to a gain of 18 cents on the day, up to $17.49/ounce.

BMB Note:   The morning reversal in oil looks as though at least some sort of near-term low has been put in place for crude oil, and if that’s the case, it could put a dent in the hopes of those that were hoping that stocks could continue to ride the glide in crude. Other commodities, including the precious metals, reversed up along with crude, and look like they may have put in near term lows here as well.

I think what happened in the commodities today is similar to what happened in stocks two weeks ago. Prices reach down to a certain point, and eventually some of the short sellers decide to start taking some profits. Once that move gets rolling, other shorts have to run for cover, and a big reversal is born. So, in a way, the shorts help to provide some price support on the downside – which is why the SEC recent war on the short sellers is disturbing, and could, if taken too far, have a significant destabilizing effect in the long run (now that I think about it, I haven’t heard them complaining about the ’shorts’ driving oil prices down, have you?).

If crude oil digs in its heels here, and the market continues its recent inverse correlation with the price of crude, things could get even more interesting than they have been of late. Many of the indices failed at last week’s highs early today, but the late ramp has them testing those areas again. So this rally attempt, supposedly confirmed with yesterday’s follow-through day, is by no means dead yet – but if oil prices refuse to cooperate any further to the downside, then certainly some speed bumps will have been put up in the rally’s path.

Proceed with caution, and keep an eye on your mirrors. The road is very narrow and rough, the crosswinds are stiff, and the government is changing the road signs almost hourly. I’ll trade small or not at all.

TBP on the SEC:

Now if only, as Bill Fleckenstein mentioned last night, there was some sort of agency charged with making certain that publicly traded companies didn’t simply lie all the time about their financial circumstances and prospects. While its nice to have an agency — I forget the name — that’s in charge of stopping naked short selling and rumor-mongering. Perhaps we could expand its authority, and even empower it to publicly traded companies as well!

Yeah. If only.

But when the regulators and the financial companies are on the same team…it’s like those frustrating movies where the city is run by bad guys, and the corrupt cops are in their pocket. Oh wait, I might be thinking of the UN…

Gary Kaltbaum has a few things to say about Merrill’s little games, and some comments on yesterday’s ‘follow-through day’:

I do not pretend to be H&R Block, but I do believe I have a knack for snuffing out shenanigans in the financial community. Thus… I must talk Merrill Lynch (MER) again. Out of the box, I must say that John Thain is making Enron look pretty good right now. Is that harsh? Not to me. I believe Merrill has been misleading Wall Street for months, culminating in the laughter we have just seen. Think about it. Merrill reported earnings just days ago. In the conference call, Thain said, “Right now we believe that we are in a very comfortable spot in terms of our capital.” Fast forward, ok walk forward just a few days and all of a sudden Merrill has to raise another $8.5 billion… another $8.5 billion! I believe they are now above $50 billion. This non-disclosure very simply breaks every law of disclosure, but as usual nobody says a word. Thus more crony socialism. But that is not the biggest issue here. The biggest issue is the structure of these new “deals!”

A company by the name of Lone Star is buying the “stuff” for 22 cents on the dollar. But Merrill is financing a whopping 75% of the almost 22 cents. Lone Star is putting up only .055 cents with Merrill lending the other .165. What gives? Oh yes… Merrill gets to move $30.6 billion dollars of bad paper off of their books.

This paper was carried at a value of $11.1, meaning there was almost $20B in prior write downs.

After the deal, Merrill’s exposure drops from $19.9 billion to approximately $8.8 billion.

First problem: since Merrill is financing 75% of the stuff, don’t they still own 75% of the stuff? After all, who loses if the price keeps going down? If there is a default, guess who owns the stuff?

Second problem: what does this lovely deal really do for Merrill? Oh yeah, they get to move stuff off the books while keeping the liability. What is wrong with this picture? And I haven’t even started about the $8.5 billion raised… the nonsense continues! John Edwards may have been right. There are 2 Americas when it comes to the financial world with most all continuing to ignore the misdeeds. I would be in jail several times over if I handled my company in this fashion.

Now, on to the market!

Tuesday was a potentially very important day. The stock market followed through on a new rally as OIL PRICES again dropped precipitously. This bullish signal occurs after a major index hits a low and then experiences a big gain with volume higher than the day before. There is a direct correlation between OIL PRICES and the market since the market’s lows. Keep in mind…here is the line I say every time a follow through day occurs: Every bull move the market has ever had started with this characteristic but not every follow-through led to a new bull market. It is now time to build a watch list of leading stocks that have shown great relative strength during the bear phase and hopefully find them breaking out of bases on heavy volume. If none show up, this will tell you everything you need to know about the market. In past weeks, I have told you about the BIOTECH/MEDICAL/TRUCKERS but that has been about it for leadership. I will need to see more. The biggest moves on Tuesday were reserved for the areas that were hit the hardest and just trying to make up lost ground. Be patient…take your time because if this is for real, leadership will show up. You cannot hide bull markets just as you cannot hide the bear markets. The one thing I do at this point is to get off the short side…meaning any inverse ETF… whether market based or sector based. If this remains a bear market, I can always revisit. Keep in mind, the last follow through day in March lasted about 8 weeks and was very narrow with only a few COMMODITY-based areas leading. I suspect we will need to see the important OIL commodity continue to come in for the market to really get going. Lastly, please do realize that in the past 2 days, the DOW is up 20 points… S&P 4 points and NASDAQ 9 points. That is how spastic things have been. Do not believe for a second this is going to be easy.

We said we’d likely see some testing to the upside, and that’s what we’ve got so far this morning. The indices remain well into the green, though pulled back from their highs. A/D lines are firmly on positive ground as well.

A mixture of stuff leads the way: airlines, disk drives, oil stocks, banks, oil services, brokers, semiconductors.

Treasuries are lower, yields higher. Energy prices are flat following the weekly crude inventory report. The dollar index is slightly higher, gold and silver got a morning smashing for the umpteenth time.

It’s not just the banks that are in need of raising capital:

The Bush administration gave details Wednesday on how it plans to borrow the billions of dollars it will need to cope with the soaring budget deficits.

Those plans include raising $27 billion by selling a new 10-year note and a new 30-year bond at the regularly scheduled quarterly auctions to be held next week. The government needs to borrow $171 billion during the current July-September quarter, the second highest quarterly borrowing total on record.

The increased borrowing needs reflect the exploding federal budget deficit which is projected to more than double in size this year and to hit an all-time high of $482 billion in the 2009 budget year.

It’s hard to believe that people are still willing to buy our bonds… If they ever decide they’re no longer willing, good night.

The Fed’s pawn shop is now seeking prime real estate for a permanent residence. From Calculated Risk:

From the Fed: Federal Reserve announces steps to enhance the effectiveness of its existing liquidity facilities

Actions taken by the Federal Reserve include:

• Extension of the Primary Dealer Credit Facility (PDCF) and the Term Securities Lending Facility (TSLF) through January 30, 2009.
• The introduction of auctions of options on $50 billion of draws on the TSLF.
• The introduction of 84-day Term Auction Facility (TAF) loans as a complement to 28-day TAF loans.
• An increase in the Federal Reserve’s swap line with the European Central Bank to $55 billion from $50 billion.

In light of continued fragile circumstances in financial markets, the Board has extended the PDCF through January 30, 2009, and the Board and the Federal Open Market Committee (FOMC) have extended the TSLF through that same date.

Emphasis added.

The PDCF program – that allows investment banks access to the discount window – was set to expire in September. The credit crisis continues …

Apparently not everything is ‘fixed’ yet.

The SEC has extended the ‘emergency’ rule on naked short selling, but I expect there to be more changes – and more permanent ones – down the road.

For instance, I have almost no doubt that the uptick rule will be reinstated, and it may be even bigger and badder:

Cox last week told Congress the agency may also force investors to disclose “substantial” bets on falling stocks and reinstate a version of the so-called uptick rule, which barred short sales of stocks when prices are falling.

The uptick rule, implemented after the Great Depression and scrapped last year, allowed short sales only if a preceding trade boosted the stock price. The SEC is studying whether increasing the uptick increment, such as to a nickel or dime, might be more effective, he said.

Isn’t is somewhat ironic – and disturbing – that many of government’s actions were last tried back in the days of the Great Depression? IIRC, that didn’t work out so well at the time…

Mish comments on Paulson’s covered bond caper:

First off, I like the idea of covered bonds. Over time they could allow for a somewhat graceful unwinding of Fannie Mae and Freddie Mac. See Nature of the Fannie Mae Bailout for more on this idea.

In addition, forcing banks to keep responsibility for the loans will encourage far sounder lending practices than the current originate and securitize model, especially after the debacle we are in with Alt-A and subprime loans.

However, note that the maximum LTV is 80%. How many people have 20% down payments? The second problem is that banks are capital impaired and selling off assets. How likely is it for those same banks to be taking on additional debt? The answer is not very.

Finally, the credit crunch is not going away anytime soon. The general idea at many banks right now is We’re Saying No To Almost Everybody.

So while covered bonds are a reasonably good idea in a sea of horrid ideas, they simply are not going to do much to alleviate any problems in the mortgage markets, anytime soon. What politicians should do is give this market time to develop but politicians never want to wait.

And no dessert – Bennigan’s and Steak and Ale.

Update:   And Mervyn’s goes Chapter 11. This has been rumored for a while now.

We were speaking of thrashing…

From Chart Swing Trader today:

…if you are playing this market perfectly, congrats because I’m guessing you are in the minority. Up, down, up, down – we are in an extremely choppy period right now. To give you an idea, here are the past six days on the Nasdaq – up 24, up 22, down 45, up 30, down 46, up 55. That’s crazy and hard to make sense of. If you are a day trader or scalper, then you are probably loving it right now. Everyone else is probably sick of this.

I’ll cast my vote for the ’sick’ team.

Barry digs a little deeper into Merrill’s CDO shuffle – can you say “owner financing”? I knew you could:

An active trader pointed us to this very familiar looking off-balance sheet shenanigan found in the following paragraph regarding Merrill’s CDO Sale.

Direct from yesterday’s press release:

“On July 28, 2008, Merrill Lynch agreed to sell $30.6 billion gross notional amount of U.S. super senior ABS CDOs to an affiliate of Lone Star Funds for a purchase price of $6.7 billion. At the end of the second quarter of 2008, these CDOs were carried at $11.1 billion, and in connection with this sale Merrill Lynch will record a write-down of $4.4 billion pre-tax in the third quarter of 2008.

On a pro forma basis, this sale will reduce Merrill Lynch’s aggregate U.S. super senior ABS CDO long exposures from $19.9 billion at June 27, 2008, to $8.8 billion, the majority of which comprises older vintage collateral – 2005 and earlier. . .

Merrill Lynch will provide financing to the purchaser for approximately 75% of the purchase price. The recourse on this loan will be limited to the assets of the purchaser. The purchaser will not own any assets other than those sold pursuant to this transaction. The transaction is expected to close within 60 days.”

Let’s take this apart:

• Merrill appears to be moving $30.6 billion dollars of bad paper off of their books.
• This paper was carried at a value of $11.1, meaning there was almost $20B in prior related write downs. 
• After this transaction, Merrill’s ABS CDO exposure in theory drops from $19.9 billion to $8.8 billion (hence, the $11.1B number).
• The $6.7B purchase price relative to the $30.6B notational value is 21.8% on the dollar

However:

• Merrill is providing 75% of the financing –- and MER’s only recourse in the event of default is to retake the CDO paper back from the buyer.
• While Merrill hopes to be made whole, the reality is they still have potential exposure to these ABS CDOs via the financing;
• Actual sale price = 5.47% on the dollar

Less than five and half cents on the dollar? That’s an even cheaper sale than originally advertised.

What this transaction actually accomplishes is getting the paper — but not the full liability — off of Merrill’s books.

How very Enron-like !

The accounting games just never end…

I see the current level as sort of a “50-yard line” for the S&P – with the recent low and high as the ‘goal lines’ at either end.

Chart courtesy of StockCharts.com