Yesterday the Securities and Exchange Commission (SEC) extended its emergency action restricting naked short selling of Freddie Mac, Fannie Mae and 17 investment banks.
The initial emergency action on July 15 pulled the market out of a downward spiral that had hit two-year lows. After a substantial recovery, nearly 900 points in the Dow Jones Industrial Average, the market turned south again, retracing the move by more than the notable 61.8% Fibonacci level. The extension spurred another impressive two-day rally.
But we have to question where this faith is coming from. Sure it helps to put a bottom below the investment banks but it is based on the notion that “there now exists a substantial threat of sudden and excessive fluctuations of securities prices generally and disruption in the functioning of the securities markets that could threaten fair and orderly markets” according to the SEC that described this as “unusual and extraordinary circumstances.”
Just the time you want to get in the market, right.
And they aren’t the only government agency acknowledging serious troubles. The Federal Reserve has extended the Primary Dealer Credit Facility (PDCF) and the Term Securities Lending Facility (TSLF) through Jan. 30, 2009. It also introduced an 84-day Term Auction Facility to go along with the 28-day TAF. I guess all these major investment bank were becoming embarrassed having to go back every few weeks to uncle Ben and ask for a loan and keys to Fed. This is not the act of a Central Bank that believes the worst of this crisis is behind us.
Meanwhile Merrill Lynch has been doing some mighty interesting financial gymnastics of late. The most interesting of which is selling off assets valued at $11.1 billion—as recently as a month ago— for $6.7 billion and loaning $5 billion of that to the buyer as well as being on the hook for it. Doesn’t sound like a great deal to me.
And as all this is going on we are being led to believe that the economy is showing improvement. So we decided to go to a more reliable source. Economist John Williams has been exposing the folly involved in government economic reporting for years on his Web site Shadowstats.com.
Williams noted in his newsletter today that, “Wall Street continues spinning that the economy is on the upswing, that a recession was dodged. The financial and economic propagandists have been grasping at straws and using "better-than-expected results" strategies in mitigating not only impaired corporate profit reports, but also ongoing, negative economic data. The game is to hype expectations to the downside and then to turn euphoric when terrible results beat expectations.”
Williams points to five key series that show or suggest an ongoing and deepening recession.
(1) Nonfarm Payrolls - two consecutive quarterly contractions with year-to-year change in contraction as of June.
(2) Industrial Production - current quarterly contraction and near-zero year-to-year growth.
(3) New Orders for Durable Goods - three consecutive quarterly contractions and current-quarter year-to-year contraction in nominal terms (not adjusted for inflation), with worse results net of inflation.
(4) Purchasing Mangers Manufacturing New Orders - two consecutive quarterly contractions.
(5) Retail Sales - four consecutive quarterly contractions and two consecutive quarters of year-to-year contraction.
Williams says, “Such activity in any of those areas is not seen outside of formal recessions.”