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Another bailout package is being developed and revised as we write however this time it appears to be in the form of a global rescue package. Western governments led by the G-7 countries are working around the clock to salvage their banking industries torn apart by the indiscriminant worldwide collapse in financial institutions.

At its roots, the most recent jarring attack on banking has been caused by the frozen credit markets. Banks are unwilling to lend money to each other due to the lack of conviction of knowing that the bank being lent to will remain solvent long enough to pay back the loan. This contagion is spreading though and affects other transactions through the leverage that credit normally supports in financial markets. A severe lack of credit means that banks must build up more liquidity themselves in order to manage their operations and remain in compliance.

In corporate cases such as GE, its need to sell commercial paper in order to finance daily operations has hit a roadblock in the form of frozen credit markets. In order to attract investors, the interest rate has had to rise significantly in order to satisfy their demands. Not only does this raise GE’s cost of capital, it’s a symbol of increasing competition in a world where the pool of available funds is decreasing sharply. In such an environment, capital investments are postponed or canceled thus lowering the rate of growth in the economy – this spells recession.

Moving forward there is another wave to look forward to and that is the massive de-leveraging that’s needed. On one hand we have the fund redemptions that force funds to sell both good and bad assets at falling prices in order to raise cash and on the other hand we have spectacular collapses such as Lehman Brothers and AIG causing derivative books to be unwound, ultimately affecting other institutions still standing. The opaque world of derivatives is likely to be the larger culprit owing to the sheer enormity of the derivatives market. We suspect that the clean up of these firms has begun in earnest and the resolution of the derivatives books is what partly drove the FASB to announce this weekend, a decision that sought to clarify mark-to-market accounting rules. They ruled, "(d)etermining fair value in a dislocated market depends on the facts and circumstances and may require the use of significant judgment about whether individual transactions are forced liquidations or distressed sales." And in the next paragraph, they state, "(i)n determining fair value for a financial asset, the use of a reporting entity’s own assumptions about future cash flows and appropriately risk-adjusted discount rates is acceptable when relevant observable inputs are not available." In other words, the FASB is willing to grant much latitude to the companies’ assumptions of worth when they value these illiquid, financial instruments.

Technically Speaking

The massive slide in indices last week was clearly unexpected however it served to give short strategies like our’s a tremendous boost. As we mentioned last week, we are concerned about a rebound and given the magnitude of the slide, this concern has grown in importance. In overnight markets, the broader S&P futures are trading approximately 43 points above Friday’s close and we would expect that to continue into trading on Monday morning.

Generally speaking, we don’t believe that the global bailout plan is cause for the markets to begin celebrations, however the stochastics on daily charts for all four major indices indicates vastly oversold markets that are overdue for some type of bounce and indeed we saw this to some degree on Friday afternoon. In the tech sector, the Nasdaq twins also sport oversold stochastics on their weekly charts adding to the presumption of a bounce to occur.

To give a rough estimate of the amplitude of the bounce, we would presume a level of 50% of the corresponding decline, which closely matches the closes of last Friday. Therefore for the S&P 500, this would mean a bounce to the 1100 area; for the Dow Jones Industrials, a move toward 10,000, which has become strong resistance; for ND-100, resistance is likely in the gap opened on Monday from 1440 to 1470 and for the Nasdaq Composite, the same is true for the area between 1905 and 1947.

We don’t believe that markets have bottomed at this point unlike many other analysts. The force and extent of the bounce will depend heavily on if and when a thaw occurs in credit markets so predictions at this point would be premature. Still it would seem likely that a break of the 200-month moving average on the DJ-30 is a real possibility and that point is currently just above 7000.

For our shorts in general, we would expect that retailers and shippers would perform comparatively worse given the state of the economy and particularly the consumers’ retrenchment expected for the next two quarters at a minimum.

New Buy Recommendations (in order of preference):

None.

New Short Sales

None.

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