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Thursday, July 17, 2008

The Government Changes The Rules in The Middle of The Game

This is why I hate government most of the time.

According to Reuters, The U.S. Securities and Exchange Commission issued an emergency order on Tuesday placing restrictions on the short selling of shares of certain major financial firms.

Here are 19 stocks where no naked short selling is allowed from July 21 through July 29 (though they may extend it to 30 days):

* BNP Paribas Securities Corp
* Bank of America Corp
* Barclays PLC
* Citigroup Inc
* Credit Suisse Group
* Daiwa Securities Group Inc
* Deutsche Bank Group AG
* Allianz SE
* Goldman Sachs Group Inc
* Royal Bank ADS
* HSBC Holdings Plc ADS
* JPMorgan Chase & Co
* Lehman Brothers Holdings Inc
* Merrill Lynch & Co Inc
* Mizuho Financial Group Inc
* Morgan Stanley
* Freddie Mac
* Fannie Mae

Gee, I thought JP Morgan had blow-out earnings today … but apparently they’re so weak you can’t short-sell them. And yet Washington Mutual, which is swirling in a sea of failure rumors, is not on the list. I have no position on whether those rumors are true or false – it’s just that that if any stock is going to need protection from speculators, it’s WM. So is the government protecting weak stocks … or is it something else?

Have you ever seen anything so cockamamie? Either allow short-selling for all stocks or don’t, but picking out 19 stocks for special treatment is ludicrous. And while I appreciate they are trying to give the market time to find its footing, changing the rules like this could backfire and just put off the day of reckoning, making it worse. Let’s see what happens after July 29 (or after August 20 if they extend it)

As has been pointed out elsewhere, China had short sale restrictions on and it did not stop the Shanghai index from falling over 50%. Insolvency cannot be cured by short sale restrictions and some or even many of those companies may be insolvent.

The SEC’s list of 19, of course, is heroin for conspiracy junkies. But what if the conspiracy theorists are right? Check out this comment I picked up from Mish Shedlock’s blog, where savvyinvestor writes…

I would like you all to consider a market manipulation scenario which is becoming increasingly credible when you consider the moves in equities and commodities over the past 2-3 days. Let us suppose that Paulson went to his buddies at Goldman Sachs and worked out a deal: "We will give you the regulatory framework you need to make a killing; in turn, you bail out the financials."

So here's how it works. "Naked short selling" will not be allowed starting monday - why not today? Because they need several days to get the mother of all pump-n-dumps in place. To raise money, GS first dumps all its commodities longs. It dives into the targeted financials and begins accumulating massive numbers of shares.

Come Monday, you can short the stocks if you like - but you have to borrow the share first. And where are you going to borrow the share if Goldman Sachs' hedge funds have a lion’s share of the float? With no possibility of short selling, and a huge number of shares tied up so that buyers are competing for a much smaller share pool, the financials' shares skyrocket, getting back the last years' losses in a couple of weeks. Then GS dumps its shares, for profits in the hundreds of billions, Fannie raises its capital, and the crisis has been averted without spending a single taxpayer dime - but at the cost of swindling millions of investors who don't have the inside knowledge of how this scam is being worked or what the timing is.

XX Sean’s note -- That theory may not be correct, but it sure is interesting. Meanwhile …

As faith in bank bailouts dims, losses set to deepen

The nightmare scenario for U.S. economic authorities is here: confidence in their ability to rescue the country from a housing-led financial panic is now at its lowest level since the crisis began.

XX Sean’s note – and what about the U.S. dollar? Well, there are some pretty interesting developments there, too. The Financial Times reports that …

Sovereign funds cut exposure to weak dollar

Some of the world’s largest sovereign wealth funds are seeking to scale back their exposure to the US dollar in a sign of global concern about the currency.

One big sovereign fund in the Gulf has cut its dollar-denominated holdings from more than 80 per cent a year ago to less than 60 per cent, while China’s State Administration of Foreign Exchange (SAFE) has been looking to strike deals with private equity firms in Europe as a part of a strategy to reduce its dollar holdings.

In Other News


Oil Falls for Third Day as Slower Global Economic Growth Curbs Fuel Demand Crude oil fell for third day, the longest losing streak for a month, on speculation slower global economic growth is curbing fuel consumption.

Xx Sean’s note – still, the support I talked about yesterday seems to be holding, so far anyway.

Summary of Weekly Petroleum Data for the Week Ending July 11, 2008

U.S. commercial crude oil inventories (excluding those in the Strategic Petroleum Reserve) increased by 3.0 million barrels from the previous week. At 296.9 million barrels, U.S. crude oil inventories are near the lower boundary of the average range for this time of year. Total motor gasoline inventories increased by 2.4 million barrels last week, and are in the upper half of the average range. Both finished gasoline inventories and gasoline blending components inventories increased last week. Distillate fuel inventories increased by 3.2 million barrels, and are in the upper half of the average range for this time of year. Propane/propylene inventories increased by 1.0 million barrels last week but remain below the lower limit of the average range. Total commercial petroleum inventories increased by 7.5 million barrels last week, and are near the bottom of the average range for this time of year.

XX Sean’s note – so, higher prices at the pump are definitely having a deeper effect on consumption. Top of Form

And here's what they were expecting: Analysts surveyed by Platts expect that U.S. crude stockpiles decreased by 3 million barrels last week. They also expect a decline of 1.1 million barrels in gasoline inventories and a buildup of 1.7 million barrels in distillates.

Crude Awakening

If this document is accurate, it means that Simmons was right on the money. What's worse, the details are even more discouraging: as the chart on the right shows, what little production increase the Saudis can sustain is all in medium and heavy crudes. Production of light crude, preferred by most refineries, actually decreases by 200,000 barrels per day between now and 2013.


Ice shelf near collapse

Scientists are warning that an Antarctic ice shelf the size of Northern Ireland is on the verge of disintegration, even though it is the middle of winter. The shelf, near the base of the Antarctic Peninsula, had not been expected to collapse until the early 2020s.

Xx -- Sean's note: In other news, the outlook for storms in the tropics (hurricane weather) is weakening. It looks like we can rest a little for the next few days after an extremely active July 16th......the Florida disturbance dissipated, 94L's window of opportunity may have closed, and the SW Caribbean area will go inland. Hooray for us!


China's Economic Growth Cools to 10.1%, Adding Pressure to Slow Yuan Gains

China's economy grew at the slowest pace since 2005 in the second quarter, prompting speculation the government will slow the yuan's gains to protect export jobs.

China's First-Half Vehicle Sales Growth Slows to 19%

XX Sean’s note – US car makers would kill for 19% growth. And this is an interesting line in the news item: “vehicles are becoming affordable to more people in China because of the country's 10 percent economic growth rate and price cuts triggered by rising competition. The proportion of people owning vehicles in China is also only equal to that seen in the U.S. in 1925 and in the U.K. in 1950.”

Private cars to be on Beijing streets on alternate days

Car owners in Beijing will have to remember the last digit of their licence plates and the day of the week before taking their vehicles out on the streets from Sunday as traffic management gets into top gear for the Olympics next month. According to an odd-even number traffic control plan devised by the local authorities, private vehicles will be allowed on the streets on alternate days. If a car with an odd numbered licence plate is allowed to ply Sunday, those with even numbers will get the opportunity the next day.

XX Sean’s note – this may weigh on global oil demand and prices going forward. I thought Beijing would wait until the games started to begin their “license plate bingo” but apparently they’re starting early. They’ve closed down over 100 polluting factories, too.


May Factory Sales Gain More Than Five Times Forecast on Energy, Metals Canadian factory shipments rose 2.7 percent in May, the biggest one-month gain since March 2007 and more than five times as much as anticipated, as sales of petroleum and coal products surged.


U.S. Consumer Prices Climb Most Since 1991; Homebuilder Confidence Slumps

U.S. consumer prices surged 5 percent in the past year, the biggest jump since 1991, just as households struggled with falling home values and the credit crunch. Spiraling expenses for food and fuel spurred the increase in June, the Labor Department said today in Washington. The cost of living rose 1.1 percent from May, more than forecast and the second-largest rise since 1982.

`Misery Index' in U.S. Advances to 15-Year High as Inflation Accelerates

Misery hasn't had this much company in more than 15 years. The jump in consumer prices reported today by the Labor Department means the so-called Misery Index, the sum of the unemployment and inflation rates, is the highest since President Bill Clinton took office in January 1993. The measure, created by Arthur Okun, an economics adviser to President Lyndon Johnson, rose to 10.5 in June from 9.7 in the prior month.

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