Another Stock Rally That Really Wasn’t

Posted on July 30th, 2008 in Daily Stock Market / Economic News - The Real Story, Mr Mortgage's Personal Opinions/Research

I don’t care whether the market goes up or down, but I do care when free markets are not free to trade under their own devices and moral hazard litters the landscape. Other than typical month-end mark-ups, which the SEC has turned a blind eye to forever, a couple of things worth nothing about today’s massive rally in the markets, led by the financials.

First, most traders I spoke with today had the same fear from the early morning. That was the SEC striking midday with an announcement that the new, temporary specific arrangement short selling rules would be extended to ALL stocks. This could have played a major factor in keeping the financials elevated with sporadic bouts of short-covering throughout the day.

But only one of the fears came true. After hours the SEC did extend the rule until Aug 12th but only to the original 19 stocks. By law they can only extend it 10 trading days at a time. Cox sure put those dastardly short seller pirates who created this entire subprime crisis that bled over into a global crisis and looming depression in their place.

Anyway, this qualifies as a disappointment if you ask me. The SEC fear is now gone for another two weeks and all that sticks out on the day is another mystery rally on the back of Merrill’s massive equity capital raise, dilution and the selling of billions of CDO’s including Super Senior 2005 and prior ABS CDO for 22 cents on the dollar, which they were kind enough to finance for the buyer with only 25% down. As a matter of fact if you go to Big Picture, they maintain Thain sold the CDO’s for 5.47 cents on the dollar.

The SEC needs to focus more of its time on banks and their reporting. If you remember, Citi posted ‘lower than expected’ marks on their CDO book at about 61 cents. Why does Citi get to mark at 53 cents and Merrill 22, 17 or 5.47 cents depending on your math?

Morgan Stanley quickly covered for Citi saying ‘this isn’t an apples to apples comparison bla bla because Merrill had more 06-07 vintage bla bla’. But that was before we learned that indeed most of what was sold was prior to 2006 vintage…Doh! They tried to cover for AIG as well, which posts earnings on Monday…in a transparent world they would be talking about much lower marks on their CDO in the future.

Sean Egan from Egan-Jones, arguably the only ‘honest’ rater in the business says:

Sean Egan, of Egan Jones, called the sale a watershed moment, with implications that would trigger huge additional writedowns on CDOs and related assets worldwide. “This sends a loud and clear signal that the issue with CDOs is not liquidity in the market but problems with the value of their underlying assets,” he said.

Mr Egan said that Monday’s sale indicated that the problems were not temporary and that there needed to be widespread devaluation of CDOs. Mr Egan said: “The accountants will have to put significant pressure on their clients to write down these assets — Fannie Mae and Freddie Mac in particular — as this high-profile transaction has underscored the losses that are inherent in these kind of asset-backed securities.”

Merrill aside, banks need to raise money, Paulson and Bernenke have been preaching this for months. Most have already burned all foreign investors through capital raises Q4 2007, private investors through capital raises in Q1 2008 so the only thing most have left is to sell common and burn the share holder. Merrill will likely be the first of many, so look out. And it may come quickly while the euphoria from Merrill burning the share holders (such a strange statement – ‘euphoria from Merrill burning shareholders’) is in the air and many bank’s stock prices are near 2008 highs.

Finally, Bill King sums up the action from early on as only he can. With much appreciated permission here is a clip from tonights missive. -Best Mr Mortgage

31 Responses to “Another Stock Rally That Really Wasn’t”

  1. Mr. Mortgage you are right on this point. The trick is to concentrate the increases in just a couple of big stocks to give the illusion that the market is going up; a kind of manipulation that is the same as the tail wagging the dog. It’s especially troubling when you compare the Russell 2000 against the DOW. You know that somebody is painting the tape.

  2. What is /are SPUs?

  3. SPU
    From Wikipedia, the free encyclopedia
    Jump to: navigation, search
    SPU can stand for:

    Seattle Pacific University

    Saint Paul University a University

    Sardar Patel University

    Seattle Public Utilities

    Science for Public Understanding and AS Level course

    Socialist Party of Ukraine

    “Sound Processing Unit”, a Sound card

    Student Peace Union

    Stream Processing Unit in Sun Microsystems’ UltraSPARC T2
    Synergistic Processing Unit in the Sony-IBM-Toshiba Cell microprocessor

    Suomen Pyöräilyunioni, the Finnish governing body of cycling

    Split Airport has IATA code SPU

    Staplehurst railway station has National Rail code SPU

    State Planning Unit,
    Chief Minister’s Department, Sarawak, Malaysia

    This disambiguation page lists articles associated with the same title. If an internal link led you here, you may wish to change the link to point directly to the intended article.

    I like a lot the Socialist Party of Ukraine, the Sound Processing Unit, Student Peace Union and the State Planning Unit. 🙂

  4. Acronym Definition
    SPU S-Band Polar Ultra
    SPU SAP Processing Unit
    SPU Sardar Patel University (Vallabh Vidyanagar, Gujarat, India)
    SPU Seattle Pacific University
    SPU Seattle Public Utilities
    SPU Secure Processing Unit
    SPU Segmented Polyurethane
    SPU Service Publication Unit
    SPU Sheep Production Unit
    SPU Signal Processing Unit
    SPU Simulator Processor Unit
    SPU Socialist Party of Ukraine
    SPU Sociedad Peruana de Urología
    SPU Society for Pediatric Urology
    SPU Socket Power Unit
    SPU Solar Panel Unit
    SPU Solids Processing Unit
    SPU Sound Pick-Up
    SPU Sound Processing Unit
    SPU Southern Polytechnic University
    SPU Southern Polytechnic University (Georgia)
    SPU Special Planning Unit
    SPU Special Police Unit
    SPU Special Purpose Unit
    SPU Split, Croatia (Airport Code)
    SPU Sripatum University (Thailand)
    SPU Strategy and Policy Unit
    SPU Sub-Picture Unit
    SPU Subsystem Power Unit
    SPU Synergistic Processor Unit
    SPU System Processing Unit
    SPU Security Processing Unit
    SPU Self Patch Utility
    SPU Service Pack Update
    SPU Single Processor Unit
    SPU Subpicture Decoding Unit

  5. The US Government is freezing the market until after the Olympics. China would flip out if their CDO holdings totally tanked during their coming out party.

  6. Great info.

    Mystery rally, eh? Or perhaps the President’s “Working Group” ? The 20B in repos was definitely their hand.

    Did we not hit the 15% decline in prices from the 2005 peak yesterday? So we are well on our way to the 3 trillion mark in lost value in the housing market.

  7. No problem. Amortize the crap on 30 years. New emergency funding this morning for Wall Street firm. Hey National-Socialism at its best ! Adolf Hitler would be proud of Paulson.

  8. You guys with your Adolf references etc are a real joke.
    The reality is that Freddie and Sallie have been massive state players for many decades and back half the mortgages in the USA. In the UK for exmaple there is no back-up.

    Are you saying you want Freddie and Sallie eliminated?

    The sad truth is that your ‘ national socialist’ GSEs were allowed to act too much like stupid private sector bankers in the last five years or so and they created toxic crap and permitted too much expansion.
    in Canada , their equivalent of Freddie/Sallie/Indymac behaved carefully, only refinancing prudent mortgages with the result that they have NO PROBLEMS!!!!!!!!!!!!

    But Canada tends to get ignored in the US.

  9. Anything that is not American tends to be ignored. The rest of the world, the cultures or the languages don’t really exist for the US. I must admit we are a little bit boring and really too nice in Canada.

    We should sometime threaten to cut the gas and the oil to get your attention. 🙂 Hey your national-socialist are printing money like crazy this week. Mein Herr, furher Bush has just signed the law. 1000 billion free giweaway to the buddies in banking. If that’s not fascism I wonder what it is.

    Anyways the crap was sold to the people and the crap will be eaten by the people, not the bankers. The are all on on tear this week. Hey ! Free money.

    The suckers called taxpayers are paying our bills ! Yeap it’s national-socialism à la Adolf my friend. Print till you die. And the markets are lovin it !

  10. Hey I wondered. Where is the balanced budget promised by the right wing liars stinking conservative in office ? That to ressemble a lot to national-socialism budgetary programs. The sky is the limit and yeah the foreingners are the morons, you have to mention it, that financed the whole mess and the bubbles reapeatedly. Chineese russian idiots in Fannie Mae and Freddie Mac. Can you believe how crazy it was ? China had 500 billion in Fannie Freddie and the Russians 100 billion. Crazy and dumb ex communists. Anyways I am finished investing in the US. Finished. I am waiting to buy some farm land in a cheap place. I said farm land not damn real estate. And no, not in the USA.

  11. Marc, Russia has divested themselves of 50 Billion of that 100 Billion because they are not as stupid as you think… They are currently working on a way to shed the rest with the least pain possible. China will be dumping too and guess who the buyers are going to be?
    We the Tax Payers of America via the Fed off course…

    I love the MSM headlines we are seeing coming out today on this “Bail Out” bill. Here are a few for you to chew on…

    AP – Bush signs housing bill to provide mortgage relief

    AFP – Bush signs massive housing bill

    CNN – Bush signs housing rescue law

    What an absolute joke…

  12. I would like to offer up the following as being much more factual in nature for a headline:

    Bush signs “Bail Out” you’re banking buddies’ bill into law today

    Bush signs American Tax Payer bill into law today

    Bush signs Fannie / Freddie share holders rescue at the American Tax Payers expense bill into law today

    Bush signs the China / Russia / Middle East “Bail Out” bill today

    Bush signs the mother of all “Bail Out” bills at Tax Payers expense into law today

    You know tell it like it REALLY is…

  13. we need to get rid of fannie freddie sallie and any other GSE.

  14. I’d love to know the terms of the ML loans to Texas and Bloomberg to finance their asset sales, maybe subsidized below market rates to pump up the nominal, stated sales prices. Where is ML getting the cash? I wouldn’t leave any of my cash in their custody, it might be (privately) insured but I’d hate to have to wait for the payout!

  15. Well you could at least break up Fannie and Freddie and put real strick limits on what is allowed for them to do.
    What’s so ironic is that in the beginning Fannie and Freddie were there, supposedly for helping poor buyers, and stimulate affordability 🙂 . It ended up a vulgar Wall Street bubble machine ! That’s the perversion.

  16. I am really starting to get completely DESPONDENT by the corruption going on right under our noses. Our government is so criminal, that they don’t even try to hide it anymore.

    WHERE are our elected officials and why have they abandoned the very people they were elected to protect???!!!!

    Seriously–this is bad.

  17. Sharon – the attitude reflects the current (out going) Whitehouse admin. I feel your pain.. as do all of us.

  18. Sharon, those elected leaders that you speak of, they are the problem!!!

    There are far too many of them that have been in power for far too long under lobbyist control at this point. They don’t work for the American public any longer… that stopped 3 or 4 terms ago or more for most. They now work for the lobbyist machine that exist today and trust me it is a machine!!!

    Did you know that there are 41,386 lobbyist registered in Washington today? Did you also know that they are referred to in some circles as the fourth branch of Government? At times there are more lobbyists running around Washington than our own public officials. It is no wonder that they have the influence and power that they have over our elected leaders.

    That is why we need to vote all of the incumbents out of office and start with a clean slate of newly elected leaders to run Washington. We need change from the top down and quickly. The lobbyist, and the influence they hold over long time Senators and Congressman is overwhelming. It is not just lobbyist either, but the political machine itself has ground to a virtual halt. The elephant and the donkey are two old timers like in the movie grumpy old men. They are always bickering like a long time married couple instead of just getting things done.

    We need a wave of new and fresh blood in Washington. We need folks that are younger and motivated to find new ways to make our country better. We need innovation and not more of the same. We need due diligence and not more recesses. We are in the worst financial crisis this country and these leaders have even witnessed in their entire lives and where are they right now? They are home on recess taking a nap because they are a bunch of tired old men. While we struggle to feed our families and pay our mortgages on lower wages due to spiraling inflation, they are collecting their 200K paychecks, sitting by the pool sipping drinks. Probably talking to lobbyist about what they want them to do when they eventually go back into session.

    More of the same will not get it done Sharon, so do what needs to be done and implore any and all friends and family members to do the same, or you can just expect more of the same…

    VOTE EACH AND EVERY INCUMBANT OUT OF OFFICE IN 2008!!!

  19. Does anyone know a resource that can help Americans earn duel citizenship? All this news is really making me sick.

  20. Market was too far to the short side yesterday and they got taken advantage of. Further short side piled on when the market took that morning dip. Once those people were taken out, the market could rally – pull back at the end of day as the history has shown – ONLY to throw a head fake on a false sell off. Watching the Volumes, Detrended Price Oscillator, and the Klinger Oscillator would have shown you it was a fake out and that shares were accumulating while the appearance looked like a sell off. Pump the market up high at the close to give others a sense of rally.
    Open this morning… more manipulation and pump up just to catch everyone long because the market just can’t be up – just to sell off the market and burn everyone. Today….. about 12:05 PM the market started it’s turn to the positive. They’re gonna get you again so be careful. Expect DJ30 to hit near 11,680-11,690.

  21. Don’t fret too much od as we can do something about this mess. That is the light at the end of the tunnel. It is all fixable, but just not with the people in place of power today. They all have to be removed. All of them! We as voters in this country can do that and reverse the course that they have set. Tired of bailing out all of their buddies then get them out of office so their buddies don’t have a voice any longer. We the people have got to get up of our duffs and make change happen in 2008. It is obvious we cannot count on our current band of thieves to do the right thing as they have continuously shown us they are truly inept at their task at hand. To borrow from the Tax Payers to “Bail Out” the lenders pretty much should be enough to wake up the masses.

    We need to make some draconian style cuts in Government and get rid of many social programs and special interest programs that only serve to sap the wealth out of the masses and to then hand it to those not deserving in my opinion. We need to pass balanced budget amendments that are real. Sure you can have that 500 Million for pork barrel spending, but cut it from somewhere else first. What you spend will need to come from some other line in the budget or the answer is simply NO!

    We have to feel a great deal of pain in order to correct the mess these current so called leaders have gotten us into, but it is achievable!!! First we need to remove as many as possible to make it that much easier to force the change. The more left over’s that stay the harder it will be to do so…

    We can do this!!!

  22. “We have to feel a great deal of pain in order to correct the mess these current so called leaders have gotten us into”

    I think Americans have been feeling it for a while now. But the press isn’t covering it. As long as Americans don’t realize (or worse, except) how bad most Americans have it, I’m afraid nothing will happen until the most critical necessities are taken away.

    Look through out history. It’s amazing how much “pain” people will sustain before an actual revolution will take place.
    And asking Americans to vote out congress is asking a lot.

    In fact, if the government can make the people feel either; Hopeless, fearful or worst of all.. complacent, then nothing will change.

    I think America is between complacent and hopeless.

    Just my opinion.

  23. The press too is part of the problem.Look how a crappy job they have done on two successive bubbles. I might console you and mention that Europe also has done a crappy job at it too. What astounds me today is the lack of critical thinking. Everybody that has something intelligent to say, has to resort to a blog. No real chance of having the truth for very long in the official media.

  24. Kip, you may be onto something… @ 11,489 and climbing!

  25. “The size of the lie is a definite factor in causing it to be believed, for the vast masses of a nation are in the depths of their hearts more easily deceived than they are consciously and intentionally bad. The primitive simplicity of their minds renders them a more easy prey to a big lie than a small one, for they themselves often tell little lies, but would be ashamed to tell big lies.”

    Mein Kampf
    Adolf Hitler (1925)

  26. Voting is the one right we have in this country that can get back control of our political leaders. We must not ever lose sight of that as country men and woman. You see elections help in other places around the globe and people are willing to die in the streets to cast a single vote. They do so to inact change within their corrupt governments or poor leadership that is in place. We will not need to be a third world country to get to that point in my opinion. I think folks are waking up now and as we se more and more pain being felt these same people are now looking for answers. I see and hear it all of the time now. It is the largets water cooler talk amongst people I work with every day. The price of food, gas and the amount of foreclosures is talked about frequently. People are tired of it already and it has just started. I think it is a good thing that the elections are not until November. It will allow for that much more fall out and pain so that we will be ready as a nation to stand together for change. One reason why Obama is so wildly popular in my opinion is because he represents change to folks. Real or otherwise perception is ones reality. People are already very eager to see things change and I think more than ready to vote for it. We do need some voices to emerge as leaders in this movement and I was hoping someone like a Ron Paul may step up, but we shall see. There are folks out there willing to carry the mantle that have the clout to do so, but in the end it will be up to the American people. If enough lose their homes and have cutbacks in their services (which are coming) they will join in to be sure…

  27. Nice call Kip – keep us posted!

  28. Here here to the comment above.

    We can throw the bastards out when we get a chance. At least the new bastards coming in might be “the devil I don’t know”.

  29. Step back and look at the much larger picture! It doesn’t matter who did what or who can fix it. (Because nobody can fix it) What matters is it is “Part of the End of Times Prophecy.”

    The (U.S. Economic Collapse of 2008)is just fulfilling every prophecy that sees the end of times coming December 21, 2012.

    Look at what else is getting ready to be fulfilled. Iran, Isreal & U.S. war! Isreal is ready to go, Iran is begging for it and the U.S. will defend the oil in the Strait of Hormuz. (Does that sound like the start of WW III?) Russia just anounced yesterday that they are rebuilding their Navy with Six Aircraft Carrier Battle Groups and a Fleet of Nucular Submarines with a time table for 2012.

    It all seems so surreal and I wish it was, but it’s playing out and everyone seems to want to play along.

  30. Jim

    If you believe in something enough, it’s bound to happen. Or as many great people in the past put it:
    “All that we are is the result of what we have thought”.
    I assume you are investing in those atomic bomb shelters again?
    (sigh)

  31. You have a great blog!

    speaking of Iran and SPU; there is a beautiful restaurant on the slopes of mount Alborz in Tehran called SPU (named after a river in the area). i had a fantastic dinner there month and a half ago. check out their website:
    http://www.spu-restaurant.com

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