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Fear is now rampant in the market despite the government finding the wherewithal to pass legislation allowing the much-ballyhooed bailout to proceed. The original $700 billion became an $800 billion price tag owing to additional initiatives used ostensibly as bait to get the required number of votes in the House. Traders on the Dow Jones Industrials were so happy that this boondoggle of a bill passed that they caused the index to slide immediately some 300 points erasing Friday’s gain to that point of the day. Apparently, this was another case of buy the rumor and sell the news.

Now the government can undertake to develop the necessary offices and deploy or employ the human resources who will implement the programs but one should keep in mind that this is going to take some time. While these programs are being developed, the severe credit crunch will not be postponed, it will not be suspended, and it will not be delayed. The needy financial institutions will still need to fund their daily operations, which are becoming increasingly difficult with the three-month dollar London Interbank Offered Rate (LIBOR) rate rising to 4.21% on Friday, the highest level since January. A rising LIBOR rate is indicative of reluctance by banks to lend to each other overnight and the reason for this is fear of the unknown. The banks themselves don’t wish to lend to each other for fear that the borrowing bank might fail or be subject to a run on deposits forcing it to close its doors at least temporarily.

Even a corporation such as GE with its AAA credit rating is not immune to these borrowing costs; it noted this week that its overnight borrowing costs had literally doubled in the past few weeks undoubtedly causing a drastic rise in the costs of funding daily operations. GE has relied in the past on its financing arm, GE Capital, for half of its profits, however the market for commercial paper, a market that is the lifeblood for GE Capital, has dramatically changed in a very short time. This past week, there was a record decline of $95 billion in circulating commercial paper – this in a market now totaling $1.62 trillion, down from its July 2007 peak over $2 trillion. GE Capital had $97 billion in outstanding commercial paper at the end of its second quarter with an average maturity of 61 days. Given the very significant decline in this market, the risk of GE defaulting was the cause of its credit default swaps (instruments used as insurance against defaults) jumping momentarily 125 basis points this week to 740 bps before settling back to 680.

In an environment where the US government has embarked on a plan to flood the market with newly printed dollars and where large corporations with reputations as safe vehicles for investment are seeing their stock prices declining, it would be normal to assume that gold would benefit. But this is no normal environment. First, the fear factor is driving investors into buying US Treasuries as the only true safe investment. This wave of purchasing is pushing up the value of the US dollar, which in turn, is putting downward pressure on the price of gold, at least in terms of US dollars. Second, the Federal Reserve’s effort to add liquidity including debt creation is not stoking inflation. Merrill Lynch’s chief N. American economist, David Rosenberg pointed out that the Fed’s activities are more than offset by deflation caused by the combination of asset liquidation, debt repayment and increased savings. Without inflation, the price of gold remains stuck.

The government’s bailout plan will help some financial institutions eventually but is not likely to help in the coming days. Furthermore, the reports on crippled European banks are arriving more frequently as well as those concerning weakened, Asian corporations leading us to believe that the situation will become far worse before improving. One symbol of this global decline was the week’s announcement on September auto sales in the US where large percentage drops in sales were seen across all manufacturers both domestic and foreign.

Technically Speaking

The nearly 800-point drop on the Dow Jones Industrials on Monday was confirmed by the end of the week with its close below that level. Similarly, the other major markets experienced the same fate and leave us certain that we have not reached the bottom. Volumes were high though lower than those seen on the rebound in mid-September. We expect a continuation of this process as margin calls and a need for liquidity, ostensibly fund redemptions, prompt both investors and firms to dump assets.

Stochastics on all markets are significantly oversold and we expect some buying to return but strength is to be sold. Market action is telling us that even on days where buying is uncovered early in the session, sellers often appear as buyers evaporate sending the indices weaker as the day progresses. Market sentiment is quite low as credit crunch fears evolve into fears of a deep recession.

New Buy Recommendations (in order of preference):

None.

New Short Sales

We want to initiate short sales on two specific sectors: retail and shipping due to the slowdown in consumer purchases.

Retail:

Aeropostale (ARO) – ARO slid through its 200-day moving average this week and is now testing support around $28 however given the slide of the past few sessions, it is highly unlikely to find support at this level. Also Friday’s close was lower than the July low adding to the likelihood that this support will fail.

Ross Stores Inc (ROST) – This firm closed on Friday just above its 200-day moving average and is poised now to slide through with a likely test of the $22 area, an area that has been tested four times since the beginning of 2004. With the expectation of a consumer recession, we expect this support to fail this time around.

Gap Inc. (GPS) – Gap’s starting point for its previous rise in early August was negated this week when it fell below that level and broke support. The July low below $16 is now the target and with progressively lower highs and lower lows since the fourth quarter of 2007, the likelihood is strong that a test of the 2002 low is in the cards.

Nordstrom Inc. (JWN) – Nordstrom broke through support at its July low on Thursday and extended those losses on Friday. Already it is treading below its 200-day moving average and the next level of support is located at $20 not far below its current price.

Shipping:

Frontline Ltd (FRO) – FRO slid through support around $49 this week and is now headed for a test of the 2008 low made in January. In the past two weeks, FRO has tested its 200-day moving average and been turned away by resistance. Now we expect to see a test and probable failure of the multi-year low near $29.

Overseas Shipholding Group (OSG) – Friday’s close set a new 2008 low for OSG and did so on rising volume. Now OSG is dropping toward a test of the previous support area near $45 extending back to 2005.

Tidewater Inc. (TDW) – TDW failed its attempt above its 200-day moving average and sellers returned to send this stock close to a new 2008 low. While support has been strong near the $45-46 area in the past, we expect this level to fail in the coming days or weeks.

Stock Positions to Sell/Exit:

None.

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