And the currencies seem to be recovering this morning too, from the recent go around in the ring with the risk aversion campers. The currencies (except yen), were last seen yesterday up against the rope, doing their best imitation of the rope-a-dope.

But… This morning… The markets are just giddy about two pieces of data from Europe… First, German Investor Confidence as measured by the think tank, ZEW, beat the forecasts, and came in at the highest level in 3 years! That’s right, not since 2006, as German Investor Confidence been this high… For those of you keeping score at home… The Confidence Index number soared to 56.1 from 39.5 the previous month! WOW!

Last week, I told you how the German GDP had posted a positive number, and therefore the economy had exited the recession. I don’t believe the German economy to be “out of the woods” yet though… There are still things that go bump in the night that could very well drag the economic growth down… But for now… The Eurozone’s largest economy is basking in the sun of not only exiting a recession but a strong Investor Confidence report.

The other piece of data that has the risk takers fighting back for ground that was lost last week, was the U.K. inflation data that printed at 1.8%… Now, that sounds pretty low right? Well… You might recall that the Bank of England (BOE) had forecast a fall to 1% of inflation in the 3rd QTR… The other thing that makes 1.8% more robust than it looks is that the BOE has an inflation target of 2%, so… It’s knocking at the door of 2%, eh? Can you hear me knocking? On the window… Can’t you hear me knocking? On the door…

So… As I said it “seems” that the currencies are fighting back… But the move has been smallish in nature, but at least the euro has gained back the 1.41 handle, and the Aussie dollar has gained back the 82-cent handle, and so on, and so on…

The TIC’s data for June that printed yesterday was quite strong… For Long-Term Treasuries, that is… The short end got ambushed and was so weak that the positive for the Long-Term Treasuries was wiped out by the selling on the short end…

This probably all those people that bought short term T-Bills last year in what they thought was a “flight to safety”… I’m sure they exited with some red in the numbers… They basically gave the Gov’t a loan, paid the Gov’t for that loan, and lost money… Great “flight to safety” I’d say… NOT! Safe Haven? What Safe Haven?…

There’s no information right now about what games the Gov’t played in these figures… I think that for now though we can believe in our heart of hearts that they are playing games, which means the question at heart is… When the Fed winds down their buying of Treasuries, what happens to yields… And in turn what happens to borrowing costs… And finally the economy. My opinion? It won’t be pretty… But neither will the monetizing of debt that the Fed keeps performing… So, it’s a case of pick your poison… I would prefer the quantitative easing / monetizing of debt to stop, and let’s take our lumps on the economy that the Gov’t has been so hell-bent in attempting to stop… Get it over with, and live to see another day, rather than prolonging all this bad stuff…

For instance, last week, I read an article that talked about how the Big Banks are still in trouble… That just stinks! See what I’m talking about here? If they had been told to close their doors a year ago, we would be probably be pulling our selves out from that mess now… But nooooooooo! Instead the Gov’t spent hundreds of Billions of dollars to prop them up, and a year later, they still have problems! That just stinks!

So far this year, and I know, these aren’t the Big Banks, but ones that have caused significant damage to the funds of the FDIC, there has been 77 banks close… 77 Banks folks! One of the banks that closed was sold to another bank, but with the Gov’t guaranteeing that the buying bank didn’t experience any losses… Well, that would be a big wouldn’t it? If the closed bank didn’t have losses, it wouldn’t be getting closed! My friend and excellent writer, David Galland, had this to say about these back door deals for closed banks…

“Note that bit about the government “agreeing to shield acquirers from certain losses on assets of the failed bank.” This sort of guarantee has become a popular backdoor way for the government to deal with various elements of this crisis, without the more overt method of writing a check to cover losses or, heavens forbid, actually letting the equity holders bear the brunt for having made a bad investment in a poorly run bank.

Instead, the government jiggers things to hand off the good assets of a bad bank to one of their buddies, while agreeing to shift the liability for the poor assets onto the backs of taxpayers – with the IOU due and payable at some point down the road.”

OK… Back to me… I would not want to go on from that last note without mentioning that EverBank who sponsors this letter, and is my employer, which is not taken lightly, is enjoying a very good run of deposit growth and earnings growth. We just posted the 2nd QTR numbers, and I’ll have them to give to you, as soon as the marketing people give me the details. I understand that they are quite good, once again!

The other piece of data that printed yesterday was the NAHB Housing Market Index, which printed a digit higher than the July print of 17… So, 18 is the index number, what does that mean to us? Well, first of all, the Index represents a survey of Home Builders of Single-Family detached homes, and is comprised of three surveys… 1. Present Sales 2. 6-month expectations 3. traffic of buyers. The index has a range between 1 and 100, with 1 being bad, and 100 being excellent… A figure above 50, suggests that survey participants are seeing good economic conditions for Home Sales.

So… Now that we’ve learned that in class today, who can tell me what an index reading of 18 represents? You, over there in the corner, please take the IPOD ear-phones out of your ears and answer the question! Yes… It means we have a LOOOOOOOONNNNNNGGGGG time to go before we get back to 50…

Today we’ll see Housing Starts data for July… And Building Permits for July… These too will probably show a small uptick in activity, but nothing close to what it should be. And… Let’s also keep in mind that the problem we have with Housing in this country is that we have a GLUT of inventory, and it continues to grow, given the record number of foreclosures that I talked about last week… So, what good does it do to have these two pieces of data print strong? Sure, somehow the builders are finding the money to keep building and employing people, but, I just don’t see why that’s a good thing overall… Given… The glut of inventory.

I just wanted to recap what we’ve seen in the past week… A very weak Retail Sales figure, that was supposed to be inflated with the Cars for Clunkers program sales, and was not! And we saw a huge drop in Consumer Confidence… No wonder stocks have taken it on the chin the last two trading days… And… You have to wonder where all those economists are now that claimed last week that the recession had ended! Ended? Over? It’s not over until we say it’s over!

Speaking of foreclosures… I would have to think that these days, these days I sit and think about all the things that I forgot to do, for you… No wait! I have no idea where that came from, well actually I do know who sang it, but I mean that I would just start typing that! UGH! Runaway fat fingers! Any way… I do think that these days, all those unemployed people that were losing their jobs all winter and spring are now having problems… That’s a sad thing, folks… Something that might have been at least delayed with savings… But, recall back to before this financial crisis began, savings rates in the U.S. had gone negative! That’s sad too… But has been turned around now that everyone sees how important it is to have a war chest of savings… Let’s hope we don’t ever get to the negative savings rate again!

At home, I use ATT-U-Verse which means my news when I log on, comes from YAHOO! Last night I logged in, and saw this on the front page of news items… So… I just had to click into it to see what it was all about…

“A USA TODAY/Gallup poll found that 57% of Americans think President Barack Obama’s economic stimulus either had no impact on the recession or made it worse, while 41% said the spending was good for the economy. More than three-quarters said they are “somewhat worried” or “very worried” that some of the stimulus money is being wasted.”

Hmmm…. Maybe there are more Pfennig readers out there than I imagined! Now, we need to make the other 41% see the error of their thinking, and get them to diversify a portion of their investment portfolio out of the dollar, and into the asset classes of currencies and metals!

And with that note… I think I’ll head to the Big Finish! No wait! I wanted to mention that the threat of hurricanes in the Gulf have pushed the price of Oil higher, and will continue to have an affect on Black Gold’s price!

Currencies today 8/18/09: A$ .8240, kiwi .6710, C$ .9050, euro 1.4120, sterling 1.6560, Swiss .9280, rand 8.05, krone 6.1410, SEK 7.26, forint 193.10, zloty 2.9525, koruna 18.14, yen 95, sing 1.45, HKD 7.7515, INR 48.75, China 6.8338, pesos 12.94, BRL 1.88, dollar index 79.18, Oil $67.75, 10-yr 3.50%, Silver $14.08, and Gold… $938

That’s it for today… My little buddy, Alex, has his first day of school today… He’s in the 8th grade this year… My, time has flown since he was just starting school! When I was a kid, we didn’t start school until after Labor Day… I remind him and my two other children that are both teachers, of that whenever August rolls around! My beloved Cardinals won a big game last night in Los Angeles… Of course I’m in bed sleeping by the time the 1st pitch is thrown! Keep it going, Cardinals… Just keep it going… I’m very glad that I was able to get in to a good orthopedic doctor and get that shot as quickly as I did… I wonder how long I would have had to wait, no… Never mind I’m not going there! It’s time to hit send… So… Let’s get going on that Terrific Tuesday!

Source: German Investor Confidence Soars!

Treasury Secretary Timothy Geithner is once again traveling abroad to assure foreign nations that their investments in the United States are safe But this time it’s not China he’s trying to assure; it’s another large supporter of the dollar: Saudi Arabia.

While inflation has held steady in the face of increasing budget deficits, the purpose of Geithner’s multinational tour will be to repeat assurances that such deficits will not trigger a strong bout of inflation and in turn sink the value of the dollar and foreign holdings. Last month, Geithner was in China – the largest holder of U.S. treasuries – to make the same assurances.

Geithner reiterated the Obama administration’s commitment to protecting the value of the dollar and maintaining investor confidence in the U.S. financial system in an interview broadcast on CNN’s“Freed Zakaria GPS.”

“A strong dollar is in the interest of the United States. Of course, I deeply believe that,” Geithner said. “Our commitment … to the world and of course, the American people, is to make sure we’ll put in place the policies that can sustain confidence in this economy and this financial system.”

While rising unemployment – well beyond what the Obama administration expected – is prompting talk of a second stimulus package, Geither said it’s too soon for that. Only 11% of the $308 billion stimulus funds allocated to discretionary programs will be spent in the current fiscal year, and only half by the end of fiscal 2010,Money Morning reported last week.

“I don’t think that’s [deciding on a second stimulus is] a judgment we need to make now,” Geithner said Sunday on the CNN program. “We can’t really make it prudently or responsibly.”

Assurances from the man in charge of the world’s largest economy are important to those whom have invested in it, but several economists believe the Obama administration needs to do more to address worries about U.S. deficits.

“We have a fiscal policy that will ultimately undermine the value of their holdings and that has got foreign investors nervous,” said Mark Zandi, chief economist at Moody’s Economy.com told The Associated Press. “They are seeking assurances that the U.S. is committed to dealing with its long-term deficit problems.”

Geithner will also discuss with officials from Saudi Arabia and the United Arab Emirates the lack of stability of oil prices, which rallied about 115% to $73 a barrel after falling below $34 a barrel in February. The Commodity Futures Trading Commission (CFTC) last week said it will hold a series of hearings this month and in August to determine whether or not it should place new limits on energy futures contracts.

There’s a good chance that the United States and other economies will start growing again, Geithner said in a Reuters interview.

“In my view there are significant risks and challenges ahead,” he said. “We have a very powerful set of policies in place, coming on stream. I think there is a very good chance we will see the U.S. economy and the world economy get back to recovery, get growing again, over the next few quarters.”

Source: Geithner Takes Dollar Assurances to Mideast ]]> http://www.contrarianprofits.com/articles/geithner-takes-dollar-assurances-to-mideast/19081/feed 0 http://www.contrarianprofits.com/articles/gold-slips-more-than-1-percent-as-dollar-rises/18722 http://www.contrarianprofits.com/articles/gold-slips-more-than-1-percent-as-dollar-rises/18722#comments Mon, 06 Jul 2009 13:45:11 +0000 Contrarian Profits http://www.contrarianprofits.com/?p=18722 Gold slid more than 1 percent on Monday as a stronger dollar dented interest in the metal as an alternative asset, with investors buying the currency as a safe store of value amid fears over the economic outlook.

Strength in the U.S. unit kept most dollar-priced commodities under pressure as it made them more expensive for holders of other currencies, analysts said.

Spot gold was bid at $921.20 an ounce at 1507 GMT, against $932.30 an ounce late in New York on Friday.

U.S. gold futures for August delivery on the COMEX division of the New York Mercantile Exchange fell $9.70 from Thursday’s close to $921.30 an ounce.

“There is a sell-off with the dollar strength,” said Standard Bank analyst Walter de Wet. “Gold is holding…

Good day… And a Terrific Tuesday to you! Thundering storms moved through here this morning, as I was preparing to leave home and drive to the office. As slow as I am with getting around these days, I got pretty wet from my car to the office building. But, I didn’t melt, as most would have thought! HA! And, I’ll dry out soon enough… Well before anyone else comes in!

OK… Well… When I left you yesterday, the dollar was on a rampage, from the comments by the Russian Finance Minister, Kudrin… Was it an overreaction, I asked? A resounding YES was my answer… I think the proof is in the pudding on that this morning, as the dollar buying has hit a roadblock, and reversed overnight, with the euro gaining back about 1%…

The euro also got a needed boost this morning, as German Investor Confidence jumped to a three-year high. Seems most investors believe the economic slump in Germany, the Eurozone’s largest economy, is easing… Of course, we know that while Investors believe the economic slump may be easing, it may, in reality, not be easing… It’s all about perception, right? Any old way, the currencies have rebounded from yesterday’s bloodbath… And now the currencies have a bid tone, and not the dollar!

And now a news flash just came across that these countries are “considering buying each other’s bonds, and swap currencies” to eliminate the dollar from those transactions… OK… Skip back to yesterday… Here’s what I said… Pfennig 6/15/09: “I would have to think that the Finance Ministers of these countries would be interested in knowing how they can avoid another downward spiral caused by dollar buying… And… This… Would be the key, folks… I don’t know what it would be, but if they did something like a currency swap / foreign exchange line between each other for trade, that would be colossal! Which is bigger than HUGE!”

The BRIC (Brazil, Russia, India, China) meeting I told you about yesterday, actually happens today. Sorry for the mix-up, as I thought it would happen later this week. There were already comments hitting the news wires that Russian President Medvedev, wants to talk about issue of the dollar as the reserve currency… Now, if he does, and I’m not saying that he will, but if he does talk about that, doesn’t that wipe out the Finance Minister, Kudrin’s, comments about Russia’s belief in the dollar? And… If he does, and again, I’m not saying that he will, but if he does, my thoughts yesterday, that this would happen at the BRIC meeting, would come to fruition…

There’s always been a clamoring for a basket of currencies consisting of the BRIC countries… The problem is that the Russian ruble just isn’t liquid enough to get this done, like EverBank World Markets does their other CD’s… So… How about dropping the “R” and doing a BIC? Well… Again, even though EverBank does offer these currencies of Brazil, India and China individually, it’s not easy… In fact it’s quite the ordeal to get them done… But, eventually, we’ll think of something!

OK… Now back to the goings on in the markets… This BRIC meeting today seems to have quite a hold on the markets’ attention today… And it is a BIG thing, IF they do discuss the alternative reserve currency talk… Talk the talk, and walk the walk… These countries can’t keep complaining about the need for a new reserve currency, and not do anything about it…

Looks like all the stimulus and money supply in the U.K. is beginning to show up in the inflation data… U.K. May CPI jumped .6%, thus pushing the year-on-year (YOY) figure to 2.2%! Now, this is important for a couple of reasons, folks… 1. it could signal an end of the easy money in the U.K. IF they are prudent in removing the stimulus, as they and their friends over at the Fed claim they will be… And 2. and more importantly… Is… The U.S. has actually been behind the events surrounding the financial meltdown in the U.K…. So… If the U.K. is beginning to see inflation rise, it stands to reason that it won’t be long before we see it happening here too…

Down Under… The currencies of Australia (A$) and New Zealand (kiwi) both fell flat on their respective faces with the dollar on the rampage yesterday… But were able to rebound a bit overnight. They were moved higher, when the minutes of the last Reserve Bank of Australia (RBA) hinted that the RBA was going to maintain their easing bias, but move to the sidelines for the foreseeable future… Folks… That’s Central Bank parlance for… This is it! Unless the sky falls! This is the bottom as far as rate cuts go! But… It will be awhile until they move up…

Well, that’s how I read their statement! And I’ve been reading Central Bank statement for 17 years now… I think the traders that cover A$’s think the same thing… And kiwi, just grabbed on to the coat tails of the A$…

Did you see the color of the TICs data yesterday? WOW! Or should I say, UGH? The net security purchases by foreigners for April showed a HUGE drop! The total net purchases were $11.2 Billion… VS $55 Billion in March! And… The ongoing holdings of Treasuries feel a net of $2.6 Billion… Now… Here’s where I get all ticked off folks… We’ve had Japan, China and Russia all say publicly that they have full faith in U.S. dollar denominated assets (read Treasuries)… But when it came to backing up the talk with the walk… They failed to show that they have full faith in these assets, didn’t they!

These countries and their Finance Ministers caused investors HUGE losses with their statements, but when it comes down to the cheese that binds, these Finance Ministers didn’t have the intestinal fortitude to back up the statements… Well, at least in April they didn’t!

And $11.2 Billion a month is not going to be enough to finance the Current Account Deficit… Which will print tomorrow, how convenient! But that’s for April, and we won’t get all that data for months! However…

Right now, the “experts” believe the Current Account Deficit, which consists of the Trade Deficit, and the Federal Direct Investment, will be a deficit of $85 Billion (recall that the Trade Deficit had come down in the 1st QTR) for the 1st QTR… And going back, which is exactly what the Gov. doesn’t want anyone to do, I see that the total purchases in the 1st QTR were a mere $40.63 Billion… There’s a $46 Billion gap there folks…

I’ve gone over this financing thing so many times in the past that it make my head spin (yes, you should see it spinning right now!) just thinking about explaining it again… But, for those new to class… When a country has a financing problem (like it looks we had one in the 1st QTR) the gap gets pushed to the next quarter and so on, until… The chickens come home to roost… And then, a country has only two choices… They can raise interest rates aggressively to make the assets more attractive to the foreigners, or… They can allow a general debasement / weakening of their currency, to make purchases of the assets cheaper by discounting the clearing mechanism… The dollar, in this case… So… Which one do you think a Gov., especially one like ours, will choose to use? Yeah, right, like they would choose number 1!

Ok… Some more depressing news about the housing sector came through yesterday in the National Association of Home Builders Home Price Index (NAHB) printed worse than expected yesterday… The “experts” forecast the NAHB would be a 17… And it printed at 15… Soon afterward, economist Robert Shiller, said that the housing downturn “was not over yet”… Economist Nouriel Roubini, said that “house prices will fall another 15-20%” and… Banking analyst Meredith Whitney said that “she is even more bearish than either Shiller or Roubini on housing.”

That’s not good news folks… Nouriel Roubini as been dubbed as a gloom and doomer by the media (I don’t think so… He just tells it like it is, he can’t help it that it’s not all seashells and balloons for the economy, like the media would have you believe!) and when another analyst, as prominent as Meredith Whitney says she’s even more bearish than Roubini, you’ve got to sit up and take notice!

I just can’t end the day’s letter with those two depressing stories back-to-back… Oh! Here’s an interesting story… The Japanese Finance Minister, believes the recession in Japan is nearing an end… Yeah, right… If I had a 1-oz Gold American Eagle Coin for each time a Japanese Finance Minister has said those words since 1990, I would be quite the “rich man”! But, the markets swallowed his statement hook, line and sinker, which is good for the yen! Japanese yen outperformed all the currencies overnight, and is trading with a 96 handle once again!

Speaking of Gold… It has rebounded by $8 this morning, as the sentiment to buy dollars has faded…

Currencies today 6/16/09: A$ .8020, kiwi .64, C$ .89, euro 1.39, sterling 1.6440, Swiss .9220, rand 8.00, krone 6.42, SEK 7.8070, forint 201.50, zloty 3.2550, koruna 19.2780, yen 96.83, sing 1.4575, HKD 7.75, INR 47.75, China 6.8335, pesos 13.36, BRL 1.95, dollar index 80.55, Oil $72, 10-year 3.72%, Silver $14.35, and Gold… $937

That’s it for today… The rain that came through this morning was very a “hard rain”… And no, I’m not going to go into Bob Dylan here… We’ve had our share of “hard rain” lately, and the low lying areas are seeing flooding. The river that runs through my little river town, is on the rise again… I thought I had a doctor’s appt today, but my calendar tells me it’s next Tuesday! Yahoo! OK… Not too much else to talk about this morning, so, I’ll just end it here, and send you on your way to a Hopefully Terrific Tuesday!

Source:  German Investor Confidence Is On The Rise

The 30-year Treasury is now at its highest level since last November. The rise in bond yields has raised questions about whether the Federal Reserve will step up efforts – which began in March – to keep yields down through direct purchases of government bonds.

Tom Porcelli, economist for RBC Capital Markets, described it as a “terrible auction.”

Why is this bad news? Because such poor demand in the face of America’s requirement for record amounts of public debt will make it very difficult for the Fed to keep interest rates low.

You see, politicians pretend that there are few adverse consequences to their worsening debt addiction. And since the collapse of the debt bubble in 2007, they have been putting Americans in hock like it was going out of fashion.

Of course, all of this borrowing has very real consequences for Americans. As investor confidence and risk appetite return and US equities rally, investors are turning their backs on the low-yielding US bond market. As investors shun US treasuries, interest rates move higher to lure investors back into the market. This rise in treasury rates puts pressure on interest rates everywhere – from homes to cars to the interest corporations must pay on any new bonds they issue. Mark our words, higher interest rates in this market will just wind up choking off any real recovery.

The very real consequence of the rising long-bond yields can be seen in the recent rise in mortgage rates. This, again, from the FT:

Mortgage rates have been following the government bond yields higher. A 30-year fixed-rate mortgage averaged 4.84 per cent last week, according to a Freddie Mac survey, compared with 4.78 per cent the week before.

As underground investor Tom Dyson (who edits the excellent 12% Letter ), a rise in the long bond’s interest rate can crush certain income investments.

If the long bond’s yield rises from 4% to 8%, the yield on all other income investments must also rise by 4%. A 12% junk bond would become a 16% junk bond. A 14% dividend payer would have to become an 18% dividend payer.

As Tom says, the long-bond market is “weaker than a wet paper bag” right now. He reckons the magic number for shorting long bonds is 124.07. And the long bond closed at 123.26 on April 28 and is now making new five-month lows.

Here at Notes we smell opportunity. We have our eye on the ProShares UltraShort 20+ Year Trea ETF (NYSE:TBT) . This ETF has risen over 6% in the last five weeks or so.

Tomorrow’s meeting, which will focus largely on short-selling, follows recent internal discussions in which SEC officials have talked about restoring the so-called “uptick rule,” a fairly straightforward securities regulation that many experts say could have blunted the steep stock-market sell-off that U.S. stocks experienced in late 2008 and early 2009. The uptick rule was abolished in 2007.
U.S. Federal Reserve Chairman Ben S. Bernanke is a proponent of the uptick rule’s restoration.

“If the rule is to be restored, it should apply to all equally, including market makers as well as professional traders and individual investors,” Bernanke said if during a question and answer session with the House Financial Services Committee. “If the rule had never gone away it may have been helpful during this current crisis that we face.”

Rule Replacement Proposals

The old form of the uptick rule that Bernanke referred to basically held that a short-sale transaction had to be entered at a price that is higher than the price of the previous trade.

The rule, which was introduced in the Securities Exchange Act of 1934, was actually implemented four years later. It was designed to prevent short sellers from adding to the downward price momentum of an asset whose price was already under pressure and undergoing a sharp decline. The uptick rule was eliminated in June 2007.

On April 8, the SEC voted unanimously to open a 60-day public comment period and is now seeking investor input “on whether short-sale price restrictions or circuit-breaker restrictions should be imposed and whether such measures would help promote market stability and restore investor confidence.”

The agency developed five new proposals related to short selling and wants the public to file comments. The 60-day commenting period ends June 19, said Mary L. Schapiro, chairman of the SEC.

Two of the five proposals would involve a market-wide institution of the old uptick rule. The three others would create a “circuit breaker,” which is sometimes also referred to as a “collar.”  These three would set restrictions on trading activity due to a freefalling stock price. As proposed, circuit breakers would be established for when the security has fallen 10%, 20% and 30%.
The five proposals consist of:

Proposal  No. 1: Described as a “market-wide short-sale price test based on the last sale price or tick,” this proposal calls for a simple restoration of the uptick rule that had been in place for 70 years.  This would help prevent short sellers from ganging up on a weak stock and pushing it down as far as they’re able.

Proposal No. 2:  Described as a “market-wide short-sale price test based on the national best bid,” this proposal represents a slight modification to the uptick rule by making it more stringent.

Proposal No. 3:  This proposal is similar to “limit days” in commodity markets.  It prevents short selling on stocks that are enduring severe stress.  If a stock drops significantly in a trading session, then it cannot be short sold for the remainder of the trading session.  This rule would put a halt on short selling and prevent that stock from being pushed down even further – which could have the effect of crippling it, in a sense.

Proposal No. 4: A short-sale price test based on the last sale price of a particular stock for the remainder of the trading session.  This would be imposed for a stock that has fallen a certain percentage during the course of a day.

Proposal No. 5: If a stock falls significantly in a trading session, this final option would call for the introduction of a “bid test.” This would mean that, for the remainder of the day, a short seller would have to place a transaction at the highest available bid.

The Fallout of the Rule’s Removal

The uptick rule (rule 10a-1) was established in 1938 – in the depths of the Great Depression that followed the 1929 stock market crash – during the administration of SEC Commissioner Joseph P. “Joe” Kennedy Sr. Kennedy, the first commissioner of the SEC, implemented the uptick rule after examining what role short-selling played in a 1937 stock-market break.

Short-sellers are essentially betting that a company’s stock will fall in price. They “borrow” the shares from another investor and sell them, reaping the proceeds at what they believe is a “high” price. If the price falls, as they expect, they can buy the shares back at a lower price (which is known as “covering” their short sale) and replace the block of stock that they borrowed.

Their profit is the difference between the proceeds from the initial short sale higher price and what they then had to spend to cover their short sale (as well as brokerage commissions).

With the uptick rule, the objective was to prevent groups of short-sellers from, in effect, ganging up on a stock for the solitary intent of driving it down as far as possible. In such a gambit, the short-sellers hope to create a steep enough sell-off to cause panic selling by the other shareholders, which would lead to a total freefall in the stock price.

Short-selling restrictions were removed from about one-third of the major listed stocks in a year-long study conducted in 2004.  This test was conducted to see how much of an impact there would be from the uptick rule’s removal.

After a roundtable discussion about the results in September 2006, the SEC decided to eliminate rule, which it did the following July. According to the SEC, the uptick rule wasn’t really needed to prevent manipulation and actually seemed to reduce a stock’s liquidity.

“The general consensus from these analyses and [from] the roundtable was that the commission should remove price test restrictions because they modestly reduce liquidity and do not appear necessary to prevent manipulation,” the SEC reported. “In addition, the empirical evidence did not provide strong support for extending a price test to either small or thinly-traded securities not currently subject to a price test.”

However, when the uptick rule was eliminated, the U.S. stock market experienced a massive surge in volatility. Hedge funds took extreme advantage of the ability to not have to wait for an uptick in the price of a stock before they moved to sell it short.

Almost immediately after the uptick rule was abolished, investors began to clamor for its reinstatement. Indeed, throughout much of last year, politicians, investors and other public figures began pushing for the rule to be put back on the books.

In 2008, there was outcry from top public figures such as CNBC-TV’s “Mad Money” host Jim Cramer, as well as such elected officials as U.S. representatives Gary Ackerman, D-N.Y., Mike Capuano, D-Mass., and Carolyn B. Maloney, D-N.Y., as well as presidential candidate and U.S. Sen. John McCain, R-Ariz., who all pushed for reinstatement of the uptick rule.

The heavyweight mergers-and-acquisitions law firm Wachtell, Lipton, Rosen, & Katz may have best-summarized proponents’ desire to see the rule reinstated.

“Short-selling is at record levels,” the New York-based firm said in a statement. “We ask the SEC to take urgent action and reinstate the 70-year-old uptick rule.  Decisive action cannot await a new SEC chairman – there is no tomorrow.  The failure to reinstate the uptick rule is not acceptable.”

The groundswell of support for reinstatement of the uptick rule spilled over into the New Year, and even escalated as the markets whipsawed U.S. investors. On Feb. 25, for instance, Bernanke, the U.S. central bank chief, declared his support for the restoration of the uptick rule.  On March 10, the SEC and U.S. Rep. Barney Frank, D-Mass., (and the chairman of the House Financial Services Committee) jointly announced plans to restore the uptick rule.

Source: SEC Studies Restoring Uptick Rule That Could Have Mitigated Bear Market in U.S. Stocks

The Barack Obama administration yesterday (Monday) unveiled a detailed strategy for attacking that problem. The plan, which fleshes out a very broad strategy sketched out on Feb. 10, relies on a joint effort with private investors to rid banks of up to $1 trillion worth of the toxic assets that are clogging the financial system and blocking an economic recovery.

Labeled as the “Public-Private Investment Program,” the administration’s strategy is designed to finance purchases of devalued real-estate assets.  It will be funded with $75 billion to $100 billion of U.S. Federal Reserve and Federal Deposit Insurance Corp. (FDIC) debt guarantees, as well as the funds remaining in the U.S. Treasury Department’s Troubled Asset Relief Program (TARP).

U.S. Treasury Secretary Timothy F. Geithner is betting this plan will finally establish market values for the toxic debt left over from the U.S. housing bust, and that getting the private market involved will minimize the risk that taxpayers will overpay for assets.

U.S. stocks soared in a sign that investors like the aggressive nature and unique approach of the plan. The Standard & Poor’s 500 Index soared 7.08%, while the blue-chip-laden Dow-Jones Industrial Average advanced 6.84% in trading yesterday. The indices are still down about 10% since Geithner first outlined the Obama administration’s plans on Feb. 10.

This newfound investor confidence follows a week in which the Obama administration endured harsh rebukes for overspending, and for failing to block more than $165 million in bonuses awarded to employees by embattled insurer American International Group Inc. (AIG) – which has received more than $180 billion in taxpayer-provided bailout money.

Lawmakers on Capital Hill reacted last week by passing a bill to tax 90% of the bonuses, with some even calling for Geithner’s resignation.

But the administration stood by Geithner over the weekend and said the plan was the right solution for ridding the banking system of stubborn loans and assets – and involving private-sector investors, but without actually catering to Wall Street.

”This has never been about helping Wall Street or helping a firm that made mistakes,” Christina Romer, head of the Council of Economic Advisers, told The Associated Press. “It’s absolutely about helping a system so that people can get their student loans, and [so] that families can buy their house and buy their cars, and small businesses can get their loans.”

Private Funds Crucial

Government officials contend that they have found the right mix to attract private investors and make inroads on what could be more than $2 trillion in troubled assets on banks’ books.

The administration has stressed that the problems are so serious that the government cannot solve them alone, and Geithner emphasized that market participation is vital.

“For these programs to work investors have to be prepared to take some risk,” he told a pool of reporters.

But it may be some time before it’s clear whether his approach will work because officials still have to select private asset managers, and banks have to decide whether or not they will sell their illiquid investments.

“The big question is what is the incentive for the banks to sell?” Dino Kos, managing director at Portales Partners LLC in New York, and former executive vice president at the New York Fed, told Bloomberg News. “What is the incentive for a hedge fund to pay a price close to where the banks have it marked at?”

The backlash in Congress might mean private firms will be hesitant to take part in Geithner’s public-private partnership, even though government-backed financing will mean the private-sector investors face lower risks and enjoy heightened opportunities for profits.

To encourage private investors to be more supportive, the government will put up most of the money, shouldering more risk than the investors. Other enticements will come in the form of low-interest loans to purchasers, which could include hedge funds, private-equity firms, insurers and pension funds.

“This approach is superior to the alternatives of either hoping for banks to gradually work these assets off their books or of the government purchasing the assets directly,” the Treasury Department said in a statement. “Simply hoping for banks to work legacy assets off over time risks prolonging a financial crisis, as in the case of the Japanese experience.”

Two-Pronged Approach

The plan calls for dividing funding from the Treasury equally between two programs to alleviate distinctly different problems hanging over the banking industry:

• Legacy Loans: Half of the capital will go to purchase a pool of troubled loans stuck on bank balance sheets that have made it difficult for banks to access private markets for new capital and limited their ability to lend. After private fund managers put up the other half, the FDIC will guarantee financing for the investors, up to a maximum of six times the capital provided.
• Legacy Securities: In order to generate prices for securities backed by mortgages that have become highly illiquid, the Treasury will provide up to 80% of the initial capital, with the rest of the investment coming from private funds. The FDIC would then offer financing for up to six times the pooled amount.

The Federal Reserve will also bump the Term Asset-Backed Securities Loan Facility, or TALF, from $200 billion up to $1 trillion and begin accepting mortgage-related securities as loan collateral.

Additionally, the Treasury will approve as many as five asset managers “with a demonstrated track record of purchasing legacy assets” and match their money one-for-one to buy securities banks want to unload.

Austan Goolsbee, a member of the White House Council of Economic Advisers, expressed confidence that private investors will step up.

Goolsbee said in an interview with Bloomberg Television that “you will start to see this buying up the assets” shortly after the private asset managers are chosen by May.

“The private sector will compete to be partners with the government,” Goolsbee predicted. “I don’t believe they should expect to be treated the same way as a deadbeat type of institution like AIG or Fannie Mae (FNM).”

Two of the largest U.S. money managers, BlackRock Inc. (BLK) and PIMCO Financial Inc., chimed in and expressed interest in participating.

“This is perhaps the first win/win/win policy to be put on the table and it should be welcomed enthusiastically. We intend to participate and do our part to serve clients as well as promote economic recovery,” Bill Gross, PIMCO’s co-chief investment officer, told Reuters.

More May be Needed

Despite yesterday’s near-euphoric jump in stock prices, some analysts said the need for further funding may temper the plan’s actual long-term results. The administration said the program has the capacity to purchase $500 billion – and possibly as much as $1 trillion – in troubled loans, much of which reaches all the way back to the initial declines in what’s become a total collapse of the housing market, as that’s led to a wave of foreclosures that continues to mount.

Mark Zandi, an economist with Moody’s Economy.com, estimated the government would need another $400 billion with the TARP bailout fund nearly tapped out by capital injections to banks and lifelines provided to the auto companies and AIG.

Current sentiment in Congress is hostile to another bailout, reflecting taxpayer frustration with Washington, and puts the possibility of further funding in serious doubt.

Source: Will Obama Administration’s Banking Sector Fix-It Plan Finally Break the Toxic-Asset Logjam?

They just can’t help themselves – which I suppose isn’t surprising, since they don’t really have much to lose by doing so.

The way they see it is: If they’re wrong, chances are we won’t remember anyway. And if they’re right, they can crow about it for years.

They are in fact wrong. But they’ll probably claim victory in the next few weeks or months. Sentiment is so bad that many are claiming this contrary indicator signals the bottom is in.

Current Investor Confidence- All Hail The Doom

In recent weeks, we’ve seen two confidence surveys that paint a pretty grim picture…

• Last month, the Consumer Confidence Index reached the lowest point in its 42-year history.
• The American Association of Individual Investors (AAII) Bull/Bear survey showed over 55% of respondents are bearish, while only 30% make bullish claims.

And countless financial articles have proclaimed the death of buy-and-hold investing.

Typically when sentiment is at extremes, markets move in the opposite direction, catching most investors unprepared.

If you were getting jittery and ready to sell some of your stocks, you may want to think about hanging on a bit longer and sell into a rally rather than dumping them in a panic.

Okay, Mr. President… What Now?

Despite its bold rescue and recovery proposals, the Obama administration’s rhetoric hasn’t impressed the market one bit. The White House knows it. And while it won’t necessarily be pandering to investors, Obama’s team must know that with every brutal selloff that makes headline evening news, the very hope and confidence that it’s trying to inspire in Americans is eroded a little further.

Because of that, I wouldn’t be surprised to see some steps taken to lift the spirits of market participants. Something much more substantive than Obama telling American investors that it was a good time to buy, that is. Here are two things that could happen…

1. A reinstatement of the uptick rule, which requires short sellers to wait for an uptick in price before they can sell short.
2. The suspension of mark-to-market accounting, which would free up the balance sheets of financial institutions. Or it could possibly be something else completely unexpected.

But mark my words: Whether it’s a government-sponsored rally, or just a natural part of the cycle, be prepared to see a strong surge upward. Bear market rallies are notorious for featuring fast and sharp moves higher.

However, should such a rally occur, be sure to keep the bigger picture in mind. Don’t get swept away by the positive emotions… only to lose out as the market recedes again.

We may see a rally, but they’re not called “bear market rallies” for nothing. Bear markets don’t generally end, and bull markets don’t generally start, with big moves higher in the market. It’s almost always a much more gradual process.

So Where Is The Bottom, Marc?

Talk about the $64,000 question…

I’m not going to be one of those guys that attempt to call the stock market’s bottom. At least not yet. Why?

Because it’s a mug’s game, and I believe this drastic selling won’t end until the S&P 500 is trading at a single-digit P/E multiple. Here’s why…

My friend John Roque, who works for Natixis Bleichroeder, discovered a scary fact…

Going back to 1881, the four times that the P/E ratio of the S&P 500 rose above 20, it eventually turned around and didn’t stop falling until it hit single digits. The average of those four trough valuations was 6.4.

The P/E ratio of the S&P 500 peaked at 44 in 1999 and has been falling since then.

Earnings for the S&P 500 this year are expected to be $48. But it’s quite possible that this figure will dip even lower if the economy continues to slide. For example, Goldman Sachs’ (NYSE: GS) estimate is $40. But for the sake of our argument, let’s use the much more optimistic $48 target.

If we assume that the P/E ratio will drop to 9 – a number higher than any of the previous trough levels – that would suggest an S&P 500 of 432. Unfortunately, that’s another 37% drop from current levels.

So What Can We Do?

Simply put, if we see a strong bear market rally between 10% to 20%, I’d sell some of the more expensive names and get some capital ready for what I believe will be one of the biggest buying opportunities in at least a generation.

Next, make a stock watchlist of companies you want to own. Which ones? Start by looking at cheap stocks with stable dividends. Firms that fit the bill here are Bristol-Myers Squibb (NYSE: BMY), a member of our Xcelerated Profits Report portfolio and Boeing (NYSE: BA), which already sports a P/E of 8 and is suffering through extremely negative sentiment.

Here’s another sector that could benefit, even if the market continues to slide…

Biotechnology.

I think the biotech acquisition boom will finally occur. That’s because small-cap biotech names will be so cheap that it will be tough for Big Pharma companies to resist those low valuations.

In summary, the next 6-9 months will not be for the faint-hearted. I think a 450-point reading on the S&P 500 is a very real possibility. And when that occurs, I’ll be backing up the truck to load up on all of my favorite names.

I’ve given you a couple of names and a sector to watch for here, but I’ll be sharing many more with you in the pages of the Xcelerated Profits Report. And if you want a piece of that action, now’s is the best time as any to get in. What are you waiting for?

Hoping your longs go up and your shorts go down.

Source: Watch This Sector During The Upcoming Bear Market Rally

The U.S. treasury broke two bond sale records this week: Uncle Sam sold $21 billion in 10-year notes Tuesday and another $14 billion in 30-year bonds yesterday — both all-time daily highs.

Both are just small pieces of the expected $2 trillion in U.S. debt sales this year… at least.

But bond investors are finally starting to see the forest for the trees. The yield on those 10 years climbed above 3% this week, the highest level in more than three months.

“Except for U.S. Treasuries, what can you hold?” lamented Luo Ping, the director of China’s Banking Regulatory Commision.

In a speech in New York yesterday, Luo said China will continue to buy and hold U.S. Treasuries. With a giant tone of reservation: “You don’t hold Japanese government bonds or U.K. bonds. U.S. Treasuries are the safe haven. For everyone, including China, it is the only option.

“We hate you guys,” Mr. Luo said, half kidding after his speech. “Once you start issuing $1-2 trillion… we know the dollar is going to depreciate, so we hate you guys, but there is nothing much we can do.”

Maybe they should buy gold. The spot price is up $50 since Tuesday, to $950 an ounce. Considering fleeting investor confidence in U.S. paper and all the stock suffering Tuesday, can’t say we’re surprised.

“We are bearish on U.S. government paper in all its forms,” says Bill Bonner. “And here’s why. The latest estimate from Goldman Sachs puts U.S. government borrowing for this fiscal year at $2.5 trillion. Meanwhile, foreigners are showing less and less interest in U.S. debt. They’re switching to short-term paper — bills and notes, which are less vulnerable to inflation and currency declines. And they’re pulling out of U.S. Treasury market generally. The total percentage of U.S. debt owned by foreigners is falling from 60% down to about 40%… a huge drop.

“Either one of two things will happen. If the government funds its deficits honestly — by borrowing from willing lenders — this huge extra demand for credit will force up yields… thereby lowering bond prices. Or if the government resorts to “monetizing the debt” — that is, funding its debt with printing press money — investors will flee bonds, in fear of higher inflation.

“Either way, it will be bad news for bond prices.”

At the same time, the U.S. budget deficit has risen to a record $569 billion in just four months. With the $83 billion January deficit the Treasury reported yesterday, I.O.U.S.A. has already topped its own annual budget deficit record, despite being just four months into the fiscal year.

At the current rate, the 2009 annual budget deficit will exceed $1.7 trillion, almost four times 2008’s record deficit and $500 billion over the Congressional Budget Office’s latest projection.

Stocks managed small gains yesterday after the Geithner debacle on Tuesday. Falling oil prices mired the energy sector, while a lack of data and even fewer earnings surprises gave traders little reason to bounce back from Tuesday’s big loss.

In the end, most major indexes inched up less than 1%. The Dow ended the day at 7,939. The S&P settled in around 833.

“I’m looking for a break above the intermediate range on the S&P at 878” notes options trader Wayne Burritt. “That should signal a move to the upside of the range. That means a run to 944 — the very top of this large trading channel — could easily be in the cards.

“In spite of a ton of terrible fundamental news, the stock market is holding onto its base. That shows uncommon resilience and, in the near term, is bullish for stocks.

“That said, it’s also not time to kid ourselves. While the market should continue to bottom out in the 800 area for some time, it’s not going to really break out to the upside until some solid fundamental data begin to show improvement.

“Remember, the stock market tends to be a leading indicator of where the economy is headed. So we’re not looking for every data point to turn to the upside. We just need a few here and there, and then investors should begin buying with more conviction.

“Specifically, I’d like to see some good news out of the housing and jobs front.”

Maybe we can find some good news in the mortgage market.

Ummn… no. Despite historically low mortgage rates, mortgages applications have plummeted to an eight-year low.

Applications fell 25% last week alone, the Mortgage Bankers Association reports. According to the group, the recent acceleration in unemployment is partially to blame. But mostly, consumers know the government is going to keep pushing rates lower.

Today, the national average for a 30-year fixed is 5.19%. But the Fed and Treasury have vowed to keep defibrillating until the rate hits 4.5%.

OK, how about on the foreclosure front? The U.S. foreclosure rate improved in January. “Only” 274,399 foreclosure filings hit the books in January, down 10% from the month before.

Wait… what’s this? According to RealtyTrac, most of decline was due to a moratorium on foreclosures at Fannie Mae and Freddie Mac. Ah, we see the logic. If you don’t allow foreclosures to take place, the problem will just go away. Impeccable.

Bummer. Foreclosures were still up 18% annually. The trend remains.

Jobs? Any good news there?

The number of continuing claims for unemployment insurance hit another record high today, says the Labor Department. A record 4.8 million people were sucking the government teat in the last week of January. New claims did come off their recent 26-year high, down 8,000 to 623,000 claims.

U.S. retail sales perked up 1%, the first increase in retail activity in six months. That’s good news, right? Darn. Still no… the majority of the retail bump was due to higher gas prices throughout January.

Geez. Can’t a brother catch a break?

Well, at least the IPO dry spell may be over. Thanks to:

Baby formula…?

Bristol-Myers Squibb spun off its infant formula maker Mead Johnson Nutrition in a surprisingly successful IPO yesterday. The company raised $720 million and sold 5 million more shares than it anticipated in the first successful float since November… the most lucrative since April 2008.

Three other companies are set to go public this week. Mead’s float is hardly an all-clear signal to the IPO world… so we’ll see how it goes.

Even good news is bad news today. A better-than-expected supply report from the U.S. Energy Dept. sent crude oil straight to the woodshed yesterday. At $35 this morning, the light sweet stuff is down to a three-week low.

Elsewhere in the resource world, China’s state-owned aluminum producer has closed its $19 billion deal with Rio Tinto (RTP). The company, Chinalco, could control as much as 18% of Rio as a result.

Here’s an interesting detail of imploding economy: Over 3,000 cars currently sitting abandoned in the Dubai Airport.

Apparently, thousands more rest ownerless in garages across the city.

Foreign workers make up 90% of Dubai’s population. But the government, says The New York Times, is canceling 1,500 work visas every day. Over 50,000 were nixed in January alone — up 86% from January 2008.

It’s a crime in Dubai to not pay your bills… so fearing imprisonment, leagues of unemployed are buying one-way tickets out of Dubai and leaving everything they can’t fit in a suitcase — cars included.

(Side note: The Dubai government is trying to save face by passing a law forbidding the media to report anything damaging to its reputation, punishable with fines up to $272,000.)

“You guys are really getting out of touch,” insists a reader. “Why not ask Rush to comment? Either that or state clearly that you are RNC minions! That would be about as stupid as some of Tuesday’s comments. Did any of you guys ever work a real labor job in your lives?

“Let’s try an experiment. Have any of you ever talked to your grandfathers or great-grandfathers about why so many of them voted Democrat from 1932-1952? Geez, guys, give them a break. If the New Deal was such a great failure, as you allege, why did the vast majority of Americans vote Democrat for so many years? And why did America go into such mourning when FDR died? And why did the standard of living for the average American make its greatest increases ever during the Democratic administrations since 1929.

“Another fact you keep overlooking: Since 1945, annual gains during Democratic administrations: 10.6%; average gains during Republican administrations: about 6% (Fidelity Investments quarterly, January 2009). Being the economic and investment geniuses that you are supposed to be, why do you keep spouting such RNC drivel?”

The 5: Huh? The quote we ran Tuesday about the New Deal amounting to futile spending, massive debt accumulation and no impact on unemployment was testimony of one of its chief architects before the House Ways and Means Committee in 1939.

But more power to you, eh? If you’re investing according to which party is occupying the Oval Office and citing Fidelity as your source… good luck. You don’t need The 5 Min. Forecast.

“All the reckless spending your government is doing,” writes a Canadian reader, “and the inflation it’s going to create is going to have dire consequences on the rest of the world too. Just like the dire consequences the rest of the world is suffering now due to the U.S. housing and mortgage debacle.

“Seems the underlying cause of these problems is the political games that go on to win popular support. Your politicians and, in fact, all politicians in democratic countries will do anything, say anything and destroy anything to get into office and stay there.

“Almost makes you wonder if we would all be better off being ruled by a benevolent dictator who could just do the right thing and not worry about what the average voter thinks about it.”

The 5: Hmmn… benevolent dictator. Honest politician. Military intelligence. We’re fans of oxymorons too. (Emphasis on “moron.”)

Cheers, eh?

Source: Bond Bubble, Deficit Record, Trading Signals, Dubai in Danger and More!