Thrilling Thursday Wrap-Up

Wow, what a day!

We started out nice and skeptical and we were not terribly surprised to see 300 points peel off the Dow between 10 am and 1 pm, especially as Bush spoke at about 10:15 and he is a serial market killer whenever he appears on TV during the day.  I noted at 11:57 that the VIX was indicating another 200-point down move and a negative rumor about STT was the catalyst that pushed us to lows an hour later.  Despite the very gloomy circumstances, it just felt wrong and the VIX hit the 2002 highs so at 1:04 I said: "Capitulation at 1pm is very good because we have time to turn back.  LIKE ASIA DID TODAY!!!" 

Well, that hit the nail on the head and that's exactly what we did, the turn started just after I said it and by 1:39 STT was officially denying the rumors and London suspended short-selling, which made it pretty obvious the markets were heading up.  The statement from London was (thanks DB): "LONDON (MarketWatch) — Britain’s Financial Services Authority on Thursday announced the unprecedented move of banning short-selling and forbidding any increase in new positions. Also, disclosure will be required on all positions of more than 0.25% of a stock. The ban is due to remain in force until Jan. 16, but it will be reviewed in 30 days. "While we still regard short-selling as a legitimate investment technique in normal market conditions, the current extreme circumstances have given rise to disorderly markets. As a result, we have taken this decisive action, after careful consideration, to protect the fundamental integrity and quality of markets and to guard against further instability in the financial sector," said Hector Sants, chief executive of the FSA"

Talk about  a game changer!  That, on top of the rules already enacted by our own SEC made it safe to get back in the water in the financial sector.  The announcement came AFTER the UK markets had closed so it's very possible that our 400-point rally (in 3 hours) into the close will cause something of a short squeeze when London opens in the morning so it will be interesting to see what kind of follow-through we get tomorrow. 

Speaking of follow-through, the Hang Seng should be interesting tonight as we saw huge movement in both the FXIs we've been looking at all week as well as the FXP puts from the morning post.  The movement of the two ETFs that track the China stocks indicate a better than 1,000-point move up is expected from the Hang Seng. 

 Another boost was provided late in the day by talk of setting up a new sort of Resolution Trust Company in what the WSJ is calling "perhaps the biggest intervention in financial markets since the 1930s."  At the center of the potential plan is a mechanism that would take bad assets off the balance sheets of financial companies, according to people familiar with the matter, a device that echoes similar moves taken in past financial crises. It's size could reach hundreds of billions of dollars, one person said.

Think about how brilliant this is:  Paulson presides over GS as CEO and buys up hundreds of billions of bad debts, which are hugely profitable for a while but toxic and everyone knows it – everyone makes Billions, including Hank.  He leaves GS to run the treasury at the top of that market, in July 2006.  The market melts down (pushed over the cliff by the rising commodity prices that were pushed up by GS) and nothing is done until GS competitors BSC and LEH are destroyed along with other institutions and our GSE's FRE and FNM.  NOW Paulson comes up with a plan to have the taxpayers take all that toxic paper off the hands of GS, leaving them once again with pristine balance sheets and able to lever up for the next scam.  Chances are Paulson will be back at GS next year in some capacity that enables them to give him a very large sum of money…

Oh well, what can you do?  At least Sarah Palin says she's really going to shake things up and tell those old boys a thing or two so we have that to look forward to!  Anyway, the turnaround was stunning and it remains to be seen exactly what sort of plan our fine Congresspeople hammer together on such short notice.

Meanwhile, the private sector took action against short sales. The California State Teachers' Retirement System, the nation's second-largest pension fund with a securities lending program of $29 billion, on Wednesday said it was halting lending of Goldman Sachs and Morgan Stanley shares. On Thursday, the pension fund added State Street Corp. and Wachovia to the list.  Calstrs Chief Investment Officer Christopher Ailman said he sent out a note to 60 other pension funds urging them to take similar steps. "It's quite clear you can see where the enemy is hiding and you can prevent it from being armed," Mr. Ailman said, referring to the short sellers who were borrowing shares to push their prices lower.

So it looks like it's going to be war.  The bears are on the run but we're not out of the woods yet!