Week of September 22 2008
- “As a group, 17 or the 19 stocks for which naked shorting was banned jumped nearly 20% in the three-day period (July 15-18)!” Unfortunately, this rally was short-lived.
In other words, the last SEC action generated nothing more than a short squeeze where prices were temporarily driven higher by short covering. Prices then continued to fall putting in lower lows.
- There was a net loss of more than $70 billion (net sale of Treasuries) during the July low in stock markets. More concerning, the orange linear regression trend line remains strongly negative and the sales remain below the yellow dashed line that shows the approximate amount that the US Treasury must raise each month just to pay off last year's budget deficit – a deficit that has skyrocketed with all the bailouts announced so far this year! Falling purchases of Treasuries has the potential to put strong upward pressure on interest rates if it continues.
Furthermore, Matt's summary view on the market is the same as mine:
- Until there is a significant turnaround in earnings, the housing market firms and economies start growing again, any recovery will be short-lived.
The trading on Monday was disappointing: there was no upward follow-through, which means the market is not confident the $700B bailout will succeed. The US Government has a monumental yet simple task it needs to accomplish: convince the world that it can restore credit liquidity and be able to back it.
The huge (historic) drop in the US Dollar led to a rise in gold and oil prices. The latter will undermine consumer confidence and therefore my call to take a long on the consumer goods sector.