Acting like pirates

Ahoy, maties! It's time investors shed the wool that's been pulled over their collective eyes and now covers most of their bodies, put on an eye-patch and begin swinging swords at stocks.

Today's rescue of Countrywide Financial by Bank of America failed to ignite the rally hounds on Wall Street. While the stock of Countrywide - which faced a serious bank run last week (see story) - gained in after-hours and pre-market trading, the $2 billion injected by BofA is actually nothing more than a thinly-veiled takeover move.

The "loan", which is, in reality, convertible preferred securities priced at 7.5% which can be converted into common stock at $18 a share. If exercised, that would give BofA a 17% stake in the company, but the nation's largest bank would be unable to sell those shares for a period of 18 months.

So, is BofA really thinking "takeover" as opposed to "bailout"? And why was Countrywide so eager to accept money at 7.5% when the Fed just lowered the discount rate to 5.25% and extended the loan period for member banks to from 24 hours to 30 days.

Countrywide obviously cannot access that Fed money, but the 2.25% spread between what BofA is loaning them and the discount rate is the cost of doing business these days.

With a borrowing cost of 7.5%, Countrywide will have to either charge customers somewhere upwards of 9% to customers in order to remain even marginally profitable or sell off a chunk of the company to a "rival" at a discount. It's not a pretty world Countrywide is looking at these days.

In a few words, they're doomed. The larger banks will take the better loans, offering lower rates than Countrywide, who will be forced into a position of sick sister, having to deal with jumbos, home equities, and lenders of less-than-impeccable quality.

This comes at a time when the screws have been tightened considerably already and Moody's is still considering whether or not to lower Countrywide's bond rating to junk status.

By mid-day the markets had turned to mush. Countrywide, up as much as 2.50 early on, was ahead less than 1 point. By 2:00, the earlier gains had all but disappeared, with Countrywide trading as low as 21.98, only 16 cents better than its previous close. The stock closed up a mere 20 cents, at 22.02.

Dow 13,235.88 -0.25; NASDAQ 2,541.70 -11.10; S&P 500 1,462.50 -1.57; NYSE Composite 9,478.62 +1.49

Surely, savvy investors weren't buying the we're out of the woods story being circulated by the banks, the Fed and various shills in the financial press.

All of which brings me to the pirate analogy. Investors, or at least people with an eye on not getting killed in this market, should be looking at short-selling or buying puts on vulnerable companies. Obviously, those in the financial sector are ripe for plunder, though some have already been slashed to pieces.

Like good pirates, traders should look for shifts in opportunities as conditions on the financial seas change. Companies with high debt levels and shaky balance sheets will be prone to suffer some of the more dire circumstances.

As events warrant, I'll be posting some of the better-looking short stories and puts plays right here. For the time being, I'm keeping a close eye on Wells Fargo (WFC), which suffered a two-day computer "glitch" over the weekend which pretty much shut down online operations.

In the aftermath of the 1929 stock market crash, various states and eventually the United States government ordered banks closed due to a liquidity crisis. At the time, they used the innocuous terminology of bank "holidays" to lessen the impact on the American psyche. Might Wells Fargo's "glitch" auger more such technology-related failures as a cover for systemic financial failure? Time will tell, but it's almost certain that soon, cash will again be king.

On the day, declining issues held a 5-4 edge over advancers with the bulk of the losers on the NASDAQ. There were 128 new lows and 79 new highs on lower-than-average volume. So much for volatility. People are afraid to trade in this environment and the risk that hordes of investors might cash out far outweigh the potential for a meaningful recovery in stock values.

Oil crept up 57 cents to $69.83, while gold lost 30 cents and silver added 7 cents. If a credit and cash crunch is upon us, an implosion in commodity prices may be just a warning shot of what lies ahead.

How sweet is it?

Investors, after taking somewhat of a pause the past few days, piled into stocks like they had no other place to spend their money. Of course, some of them just don't know any better. Some just follow the crowd. Others are desperate for gains and some just like gambling, and that's what this market has turned into - one big, fat, dumb casino.

Dow 13,236.13 +145.27; NASDAQ 2,552.80 +31.50; S&P 500 1,464.07 +16.95; NYSE Composite 9,477.13

Some readers may complain that I have been too negative concerning market realities, suggesting that the US economy is in good shape and that the government will save us from any economic calamity.

While the general economy is not yet a shambles, and the government will make various attempts to stave off meltdowns in the stock market, there are underlying circumstances which cannot be overlooked easily. The swooning housing and mortgage market are going to have serious consequences. Already today, the AP is reporting that more than 40,000 jobs have been lost in the mortgage industry in the past month. More than half of those have been announced in the past two weeks, and there are surely more to follow.

What will those 40,000 white-collar types do for work. Many are used to relatively high incomes and lifestyles, as the housing boom spoiled many of them and, like home buyers and house flippers, they thought the boom would never end.

Well, it has, and all of these people are up against a rising tide of debt. The mortgage industry layoffs alone will push the unemployment numbers higher next month and, be reminded, the mortgage meltdown is still in its early stages. The actual peak for repricing of 2/28 loans doesn't occur until March of 2008.

So, do you still think we're out of the woods and today's gains in stocks are a sign of more good things to come? Don't be fooled by the headlines and smiles on the faces of the likes of Maria Bartiromo and others in the financial press. Remember that these people are reporters, or in the case of the precious Ms. Bartiromo, nothing more than talking heads. Most don't have degrees in economics, but maybe in journalism. That and a willingness to tow company line will get you a job at CNBC or the forthcoming FOX Financial Network. They are not experts, though they do play them on TV.

Today's markets are merely a reflection of a temporary oversold position, not indicative of a rally formation. There is more trouble on the horizon, and you can bet that as soon as it becomes apparent, there will be a rush of selling. The Fed will have to step in and calm markets - oh, by the way, the Fed did add $2 billion in liquidity this morning - though their efforts can only easy pain temporarily, like putting a band-aid on a knife wound. It holds for a while, but soon, the bleeding overwhelms it.

But today was a day of bargain hunting. Advancing issues clobbered decliners by a 3-1 margin, but new lows continued to hold sway, 153-84, over new highs, though those numbers are nowhere near the extremities exhibited two weeks ago, at the height of the credit squeeze panic.

Oil was down again today, with futures for October delivery off 31 cents to $69.26. Since there have been no disruptions to supply, and demand is only moderate at best, paying a premium at this juncture could be a fool's game. By November, the price for a barrel of crude could be closer to $55 than $65 and gas in the US could average something along the lines of $2.40 per gallon. The world economy simply cannot sustain growth with energy prices dragging it down. The oil barons are beginning to awaken to a new reality.

There was some nibbling in the precious metals. Gold rose $2.50 to $668.70, while silver gained 6 cents to $11.73. Both may seem like bargains, but they have to work off the excessive selling from the past two weeks before making serious gains. If they continue to trend higher in the short term, latch on for a nice ride.

Behind the scenes there are major machinations going on at the Fed, the Treasury, in board rooms of central banks and even on Capitol Hill. We're not sure exactly what their plans are, but we can safely assume they will be based on alchemy and black magic rather than serious economic planning.

You do know that economics is taught in colleges as a liberal art, don't you?

Who turned out the lights?

If you thought yesterday was a slow trading day, you may have wanted to hang around for today's snoozy session.

Except for a flurry of trading in the final minutes, it was one of the dullest sessions of the year, so make that two days in a row that investors have pretty much sat on the sidelines.

Dow 13,090.86 -30.49; NASDAQ 2,521.30 +12.71; S&P 500 1,447.12 +1.57; NYSE Composite 9,332.54 +6.33

There was no need for Fed injections of liquidity or PPT behind-the-scenes maneuvers. There was little urgency to even show up on the trading floor. Nothing much at all was happening. It was really, really, really quiet. Almost spooky.

The Dow was down, but all the other indices closed lower. This is what happens when governments interfere in free markets. Inertia. Nobody trusts anything any more. It's neither a buyer's nor a seller's market. This is a dead market and that's not a very appealing state of affairs.

Without trading activity, people will soon begin another round of selling. While the market hates uncertainty (and there's still plenty of that going around), it absolutely despises complacency. If nobody's interested in buying, then stocks, like just about any other traded commodity, get marked down, just like a sale on shoes that have gone out of style.

Advancing issues superseded decliners by a 4-3 margin. New lows outdid new highs for the umpteenth consecutive session, 190-66.

There was just a little more interest in the oil market, where September futures expired with a whimper rather than a bang, down $1.65 to $69.45. Oil under $70 a barrel? I thought supplies were tight? What's next? $2.00 gas?

Even commodities markets were cool. Gold was down 30 cents to $666.30. Silver is rapidly approaching the bargain basement. On the day it lost 23 cents to $11.67 an ounce.

The truth of the matter in all of this is that there really is a liquidity crisis. We're not out of it. In fact, we're just getting started. A lot of hedge funds are out of the market, forced to liquidate to cover their market calls. Big money is sitting still, preferring bonds for the moment. Wall Street is now seen as having huge cracks in the pavement, big enough for large things to fall through, like people, businesses, banks and buildings.

Big Ben Bernanke made an appearance at the Capitol, reassuring Senator (hello, I'm running for president too) Dodd, Chairman of the Senate Finance Committee, that he would make use of "all tools necessary" to calm the volatile financial markets. Judging by the action the past two days, he already has.

Bernanke is nothing but a hack, and a rookie at that. Whatever he does will be viewed skeptically. Remember, this is an avowed adherent of "targeted inflation." His core ideas, roundly expressed in a 2002 speech titled, Deflation: Making Sure "It" Doesn't Happen Here are somewhat along the lines of dropping money from helicopters.

Essentially, Bernanke's solution to every kind of crisis, as was that his predecessor, Alan Greenspan, is to throw money at it. That's exactly what he did by lowering the lending rate and requirements in the discount rate, so a cut in the federal funds rate shouldn't be far behind. With the markets now drubbed into an unconscious trance, he'll probably make an "emergency" cut before the Fed's next scheduled meeting on September 18.

God save us all. We're being led down the garden path by a gang of fools and thieves.

Gentle PPT nudging

Lest we all believe that 13,000 on the Dow is a number beneath which we dare not tread, today's positive close bears little resemblance to the underlying market realities.

About 2:15 pm ET, the Dow was resting comfortably at the magic 13,000 mark, when all of a sudden buying broke out like a spreading fire. A little over an hour later, the Dow had risen to its high of the day, 13,181.66 - a gentle nudge (no doubt by our friends at the President's Working Group on Financial Markets, otherwise known as the Plunge Protection Team or PPT) of 181 points to the good.

While the market pared off some 60 points of froth over the final 30 minutes, the volume tells much of the story. Nobody was actively trading. In fact, today's action was among the slowest of the year. Fewer shares were traded today than any other since July 3rd, a half-session at that. Apparently, the 600-point boost given to the market between Thursday afternoon and Friday was not enough to quell the fears of traders, other than the most intrepid (or stupid).

The ongoing mess that is the world banking and credit system has recently come within a whisker of complete collapse and Wall Street has taken notice. Either that, or half the brokers and fund managers in the world decided to begin their summer vacation today.

Dow 13,121.35 +42.27; NASDAQ 2,508.59 +3.56; S&P 500 1,445.55 -0.39; NYSE Composite 9,326.21 +11.22

Indicators were not encouraging. Advancing issues led decliners by a narrow 5-4 margin and new lows outnumbered new highs once again, 198-59.

Light crude priced lower, closing 86 cents lower at $71.12. Gold and silver took marginal losses, remaining at somewhat attractive buying levels.

The credit woes that beset Wall Street for much of the past four weeks persist, as stocks in the financial sector were hit once again.

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Merrill Lynch (MER), Bear Stearns (BSC), Bank of America (BAC), Lehman Bros. (LEH) and Citigroup (C) all took on water, with the brokerages all down at least 1.5%. Mortgage lender Countrywide (CFC) was absolutely whacked, losing 1.62 to 19.81, a 7.56% decline.

Countrywide, the nation's largest home mortgage financier, last week said it had to tap an $11 billion line of credit, since they were unable to raise funds in the market. Alongside that message was the disclosure that Countrywide originated more than $40 billion in sub-prime loans in 2006. Lenders have become so skeptical of packaged mortgage instruments that Countrywide finds itself without much support in financial markets. As highly leveraged as it is, a continuation of the credit squeeze could foster even more declines in its stock price and possibly even more serious circumstances, including forced liquidation.

That a company as robust as Countrywide could be facing bankruptcy within months is a startling development. The company is the undisputed leader in originating home mortgages, and its collapse - which was narrowly averted last week - could have far-reaching effects, both financial and psychological.

There is no antidote for non-performing loans. The solutions for lenders are somewhere between horror and catastrophe. Despite all the interventions and happy talk from Treasury Secretary Hank Paulson and Fed Chairman Ben Bernanke, this crisis is nowhere near an end.

The Fed blinks; PPT's perfect timing

After yesterday's 300-point moon shot into the close, today's 50 basis point decrease of the discount rate propelled stocks another 200 points higher on the Dow. That's 500 points in just about an hour! Nice going.

Unfortunately, it's mostly forth, but one must understand the machinations of the manipulative class. The PPT (Plunge Protection Team) bought up shares yesterday at just the right time, didn't they? Even better, there was a load of activity on some option calls which expired today on companies such as ExxonMobil (XOM), Lehman Brothers (LEH), Citigroup (C), American International (AIG), Merrill Lynch (MER), Bear Stearns (BSC) and Countrywide (CFC). The real players in this market sold stocks this morning and cashed out options for fat one-day profits.

Goody for them. However, the rest of the poor suckers out there aren't privy to the same inside info, and will probably suffer losses later on, as the credit fiasco spreads.

The little bonus from the Fed this morning came after Japan's Nikkei lost 874 points overnight (5.42%) and European markets were still struggling. It's a temporary measure, a stop gap. Stocks will get hit further next week.

Dow 13,079.08 +233.30; NASDAQ 2,505.03 +53.96; S&P 500 1,445.94 +34.67; NYSE Composite 9,314.99 +227.89

Hypnotized investors bought up shares like the sheep they are,

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being led unwittingly to slaughter. American investors have to be the least sophisticated moneyed bunch on the planet. They have been played like so many banjos.

Advancing issues outdid decliners by a 4-1 margin, but we're not out of the woods yet. There were still 296 new lows to 123 new highs.

Oil was up another 98 cents to $71.98. Gold and silver also got a boost. Gold was higher by $8.80; silver added 31 cents.

It was such a great show.