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Free markets died last week. Despite the marked erosion of rules over the past eight years of the Bush Administration, the U.S. had remained the poster child for free capital markets – until Friday. On Friday, the government could no longer stand idly by and allow markets and their participants to decide the fate of public companies so they intervened. Their two major thrusts were to buy $700 billion in distressed mortgage assets from financial institutions and initiate a ban on short selling of 799 financial institutions to prevent business failures from clogging the system. This ban on short selling was all-encompassing and not limited to naked shorts (where stock is sold before the proper arrangement to borrow it is completed) and is not due to be lifted until October 2 at the earliest however the ban could be extended beyond this date should the need arise, but will not exceed thirty days.

Earlier in the week, with AIG on the ropes, the government blinked and whereas a bailout could not be found for Lehman Brothers, suddenly out of the blue, $85 billion of taxpayer’s money was found to takeover AIG thus preventing a collapse that government officials indicate would have triggered a global financial crisis. The problem with AIG was evidently the derivatives book, a complex web of party and counterparty risk entangling far too many funds and institutions around the world – part of what Warren Buffet refers to as the ticking financial time bomb. Thus in a matter of days, the U.S. taxpayer has become the owner of the world’s largest source of mortgage finance and the largest insurance company in the nation. Perhaps next to be nationalized will be General Motors?

When Japan was coming to grips with its deflationary environment and illiquid banks fed on a diet of extremely cheap lending rates starting in the 1990’s, American officials and Wall Street types were quick to offer a prescription for their troubles. They advised the Japanese to force these banks to mark down these depressed assets even to the point that some banks might fail thus cleaning up their balance sheets, ridding themselves of the bad debt and giving them a chance to return to healthy businesses once again. By rescuing these latest firms, the U.S. government has risen to the height of hypocrisy in doing precisely what the Japanese did and not following their own advice.

Now if Japan is any indication of what to expect given these latest actions, we should expect deflation for the next fifteen years and moribund economic growth. The net result is not prevention of the inevitable just a delay. Moreover, the U.S. is ill equipped to handle such a situation given that Japan was not obliged to borrow huge sums of money to finance a trade deficit among other things.

As for the new rule banning short selling, this is the second example of hypocrisy running rampant in government and on Wall Street. Investment firms such as brokerages all have internal groups that trade for the company’s own account and selling shares short is one action that they have embraced in order to generate a profit. Now some of these people are dismayed to find their own companies the targets of short selling and the viability of their employers is put into doubt. So how do they react? By calling for a ban on short selling. Perhaps the new rules would be easier to digest if these same people weren’t receiving annual compensation packages that exceeded the GDP of some small nations.

Technically Speaking

Thursday’s late rally coupled with Friday’s fuel was sufficient to carry all indexes higher on heavy volume into the week’s close. In the broader markets, the S&P 500 managed to eke out a small gain on the week while the Dow Jones Industrials settled lower by a small margin.

Similar story in the tech sector with the Nasdaq-100 booking a small loss for the week while the Nasdaq Composite managed a slight gain. Heavy volumes were the rule of the day for the last two trading sessions of the week.

Despite the large rebounds, resistance will be strong as all signs point to a slowing economy and buyers will quickly get hesitant as the bounce extends. On the broader markets, the S&P has two levels of strong resistance – the first is around 1300 and the second is near 1325 while on the DJ-30, resistance at the 11,750 area remains very strong.

Within the tech sector, the ND-100 hits fierce resistance around 1850 but even 1800 could provide some difficulty for bulls. Meanwhile the Composite index appears to be capped for now below 2400.

New Buy Recommendations (in order of preference):

None.

New Short Sales

None.

Stock Positions to Sell/Exit:

We exited all open short positions on Friday at the open. The lone stock held long, SUN, was exited earlier in the week at its stop.

Portfolio Comments:

New stops have been added in bold to the list while others have been modified. Those that have blanks are being carried unstopped for now. Please see our complete list of stops in the table below.

List of Current Stock Recommendations:

Action Ratings. The following is the legend for designating immediate action
for our stock recommendations. The first is B, meaning the stock is timely
to buy but the case for doing so right here is not overwhelming. Either the
stock may have gotten ahead of itself and may be vulnerable to a retracement or
else the stock has been performing disappointingly but may simply be
regrouping. B+ and B++ indicate stocks for which there is a technical case
to buy now, with plusses adding weight according to how many there are, up
to a maximum of two. Stocks rated H are ones to hold, awaiting confirmation
to buy more or to sell. SELL, of course, means what it says. It seldom pays
to override this designation. In the case of stocks held short, the rating is S where positions should be retained. S+ and S++ indicate stocks for which there is a technical case to add to the positions with plusses adding weight similar to long positions. The maximum number of plus signs is 2.

N.B. There are no longer restrictions on foreign stocks held in Canadian retirement savings accounts.

New stops in BOLD

* Stop on a closing basis

** Buy if above entry price

*** Split-adjusted price