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The Editor’s Rant:

Fanny and Freddie have been saved, but Lehman and others loom. Oil, despite what some would like to believe, is done. Any move higher for oil is a technical bounce. Yes, IKE was a big powerful hurricane, but it is no reason for Oil to go higher. OPEC is cutting production but again, this is a reason for prices to move lower.

OPEC cut production for the first time on many months in an effort to stabilize prices. Note: Their goal isn’t to drive prices higher; they just want them to stabilize, meaning doesn’t fall too much more. The good news, I remain of the opinion that Oil prices have much further to fall and should provide consumers with much needed relief. But it won’t be enough.

Fanny and Freddie are saved, so what does that really mean? It means people that own Fanny and Freddie stock are out of luck. Why the stocks continue to trade is beyond me as there is no value there. FNM has gone from $70 to $.070 in one year, and yes, the management teams will be well paid.
The takeover means the owners of the billions and billions of Fanny and Freddie bonds will not incur losses.
It’s all about the bond holders. Who are the bond holders? Think China, think OPEC, think of any entity that buys US Debt to support our deficits. China owns a lot of US T-bills, and they also own a lot of Fanny and Freddie Bonds.

From a money multiplier effect stand point, it makes a lot more sense for China to buy Mortgage related bonds than Treasury bonds. Why? Because mortgages mean homes are being built for lots of Chinese goods. Wages paid to the people that build the homes can be spent at Wal-Mart. And we all know a lot of their merchandise comes from China. From a global economic stand point, funding the mortgage market in theory should have a greater impact than supporting US Government spending, which has a low economic multiplier effect.

Fanny and Freddie have be saved, Hurray! There is just one small, well not so small, problem. The chart below tells the story.

The Rant:

Sometimes about all there is to say is: nothing changes but the date and the weather…and the speed of global communications.

Bad debt and the fall out, rising commodity prices and the fall out, & the slowing economy; these are the ongoing major themes of the day. The data is known, the topics have been covered, and the market has discounted a significant portion of the news. In short, it is time for a new story to emerge. I am tired of talking about the old one and like the street, desperately want something new. If we are going to get in early on the next big move, we need to figure out what the new story is and or will be…and therein lays the problem.

What’s the new emerging story? I can’t find one…yet. Biotech? Yea, that one never worked for me either. Some money is flowing into the sector, but, well, my experiences on anything other than a very short-term basis with the bio-tech group have been…shall we say…of poor quality.

Consumer retail? It sounds good with the price of gas backing off, but the truth is consumers are strapped and wages are stagnating. The S&P 500 Retailing Index (S5RETL Index or $GSPMS on Stockcharts.com) made a strong move higher off the July low. You can see in the chart that almost 80% of the 28 stocks in the group are above their 49-day moving averages, a healthy overbought condition.
But take a look at the group’s cumulative breadth line.

Editor’s Rant:

Where to start: If you are operating under the premises that you must remain fully invested long, then the the potential for great pain over the balance of the year is extremely high. Will there be places to hide? Yes. But relative out performance only goes so far. The market is working into another climax type selling low, which will likely reverse in dramatic fashion. But make no mistake, once the next 1 to 3 month rally runs its course, another shoe will drop, and this cycle of capital distruction will continue. 

Over the years I have found a chronic problem with prognostication. Things never play out as quickly as one expects. One day you are reading the tenth article on a subject when suddenly it hits you, ding. In a microsecond you see how events should/will unfold…over the next (pick a number) of months. Over the next week it seems all the key elements of said expectations are touched on, and there you are. Your scenario of certainty, tectonic in construct, has played out in a week. The key is resisting the temptation of believing the coast is clear.
It is hurricane season. The sky is clear today, but there is a big storm brewing.

A revision: The mortgage meltdown is now estimated at $1.3 trillion, about a third more than the original estimate. When the "out guessing" becomes a game, that is when we will know it is about over. So far, about 0.3 trillion have been written off, that leaves $1 trillion to go.

With banks busy writing off dead loans as fast as they can, they don’t have much to lend. In the 30’s depression, folks that were desperate bought goods from the local store on credit. They were terrified they wouldn’t be able to repay their good friend, the store keeper. The store keeper extended the credit because he knew the patrons and how desperate they were. This went on for a while until the store keeper was over extended. Then there wasn’t anything left in the store to buy, not even on credit. That is when it really got bad.

With credit tight, as companies raise prices, they will find / are finding that all that does is reduce unit sales and therefore the entire economy. Many companies that have held the line on prices had hedges to soften the blow. Well, the hedges are running out. When they do, bang, they will raise prices, or there won’t be anything on the shelf.

Cramer on CNBC always has something for you to buy today. Why, because that is what he does. He tells people what to buy today. The fact he does it with great zest even makes it entertaining, in small doses of course. But at the end of the day we are still standing out there on a beach in the early phase of hurricane season. When the wind starts to blow and the clouds darken, take protective measures. If it isn’t the storm of the century, so be it. This is a time (read: from now until deep in the fourth quarter) when the penalty for being too conservative is much more attractive than the risk of being over exposed in a bad market.

When will it all be over?

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