July 2008

We had Armageddon in mind when we sent out bear-market price projections for a list of bank and financial stocks in early June. At the time, we noted the following: 'The attached charts when taken together suggest that U.S. financial stocks are verging on a selling panic. The picture becomes even more compelling when you consider the recent plunge in base metals and the bullish stirring in junior golds.' However, even in our most bearish imagination we could not have foreseen that most of the stocks on the list would be at or below their targets within a mere six weeks. But they are. And that's the good news. The bad news is that, based on our original projections, a few financial titans still have quite a ways to fall before they could be expected to bottom. Here are the price projections that we originally disseminated, along with current prices based on yesterday's close: (Click on table to enlarge) As you can see, the shares of Lehman, Citigroup, Merrill and UBS still have a lot of room to drop if they are to achieve their targets. As for Fannie Mae and Freddie Mac, we gave no price projections at all, since both yielded targets below zero. The jury is still out on that one, but we wouldn't bet against nullity. We were confident in these numbers then, and we are confident in them now. We will update with lower targets for the stocks that have already achieved their original price projections. The new numbers will be published on the subscriber page of Rick's Picks, but if you are a non-subscriber and would like to be apprised, simply click here. *** Last Chance to Sign Up Because of family vacation plans, I will be able to offer the Hidden Pivot Seminar

Although inflationists have always argued the Fed would do 'whatever it takes' to prevent a credit collapse, evidence continues to mount that policymakers are in fact taking a deflationary course. Why else would they let Fannie and Freddie shares fall to zero even as bondholders lick their chops in expectation of a 'restructuring'? Allowing stockholders in these two Government Sponsored Enterprises to bite the dust is tantamount to letting real estate values continue to fall, since, as the capitalization of the GSEs shrinks, so does their ability to buy up mortgage loans originated by others. How inflationary does that sound? Even if so dire a scenario as a shareholder wipeout should come to pass ' and it appears increasingly likely it will ' bondholders could conceivably come through it unscathed and then reap substantial capital gains when preferred shares issued by Fannie and Freddie are pumped back up to par via taxpayer-backed guarantees. Because the preferred stock of the two firms is trading at a deep discount, priced to yield between 8% and 11%, we recommended them yesterday on the subscriber page as an enticing speculation. Our reasoning was that if the GSEs merely survive in some form ' as how could they not? -- bondholders may live to see preferreds currently trading around $20 rebound to par at $50. We are evidently not the only ones who foresee this happening, either, since scavengers went after Fannie and Freddie preferred stock on Friday with the voraciousness of piranhas. Specifically, they bought Freddie preferred 'S' paper for $16 that could have fetched as much as $21 later in the day. 'The Deal' Is Dead To return to the question of inflation versus deflation, the outcome is no longer hypothetical, nor is it even much in doubt. All of the bank bailouts so far have

Hope sprang eternal in the Rick's Picks chat room yesterday that crude oil's big surge would somehow send stocks plummeting. Alas, it was not to be. Short-covering persisted throughout the day, pushing the Dow Industrials to yet another undeserved gain ' this time 82 points. Bearish hopes had doubtless been inspired by a 1218.00 target we'd proffered for the E-mini S&P. The target implied a decline of about 27 points, equivalent to around 250 points in the Industrial Average. Instead, the S&P futures bounced twice during the day from just above the previous day's lows, hinting that traders were not about to be embarrassed by having their lack of imagination and daring put on global display. Was there perhaps some news out that would explain the stock market's perverse behavior? The big story of the day concerned a second test by Iran of medium- and long-range missiles. This was surely responsible for most of crude's more than $5 gain yesterday, but it could hardly have been the cause of the rally in the broad averages. Perhaps we should simply accept the time-tested wisdom of chartists that holds that stocks will rally whenever they are ready to rally no matter what the news. Tit for Tat The scariness of Iran's missile maneuvers may have been mitigated by the fact that Israeli fighter jets had performed heavily symbolic maneuvers of their own a few weeks back. 'Tit-for-tat' therefore seems a more plausible explanation than that the two countries are planning to go to war. This is notwithstanding the Ayatollah's somewhat churlish statement on Tuesday that Tehran would "set fire" to Israel and the US navy in the Gulf in response to any American attack over its nuclear program. This threat did not appear to rattle the U.S. brass. Asked if the two countries

Bulls and bears went another bloody round yesterday, setting the stage for a rubber match when the opening bell sounds this morning. Since the beginning of July, gratuitous swings have averaged about 250 points -- all of it for naught, since the dominant, bearish trend has made almost no headway. Will this be the day stocks finally break down? If so, it would probably come as a relief even to bulls, since they've been getting suckered by rallies as much as bears have been by declines. A referee would have declared a draw if it were a wrestling match, but we'll just have to wait for a clear winner to emerge. That said, we must confess that what little remains of our precious sanity would be a casualty if bulls prevail, since there is nothing in the economic environment that could explain a big rally from these levels. Short-covering could conceivably do the job, but it seems to have dried up . Crude oil's histrionics appear to have lost their power over the bearish imagination, at least for the moment, and although we could see the stock market plummeting if oil bulls get second wind, we don't expect stocks to get much lift from any further weakness in crude -- unless it catalyzes a price drop of at least $20 to $30. Meanwhile, the bearish target we've been using for the E-Mini S&P is still valid. If it's achieved, the implied fall in the Dow Industrials from these levels would be about 250 points. That's as far out on the limb as we're willing to go with a prediction right now, but you should take the odds if someone lays you 5-to-3 that the next day will be down.

We were looking for a collapse in oil prices to trigger off a big rally on Wall Street, but that's not what happened yesterday, not exactly. It was more like a delayed reaction, and a muted one at that. When traders arrived at the New York Stock Exchange, crude was already off $4 a barrel, on its way to a $5.33 loss -- the biggest single-day drop in 17 years. How did the Street respond to this economically exhilarating piece of news? Well, buyers and sellers alike dithered for the next four hours, sending the broad averages up, then down, then up again, and then down. It wasn't until the trading session was nearly two-thirds over that stocks finally took off, sort of. The Dow settled up 152 points on the day, a relatively modest gain, considering investors have been absolutely obsessed with crude oil's every uptick in recent months. Perhaps too many traders had anticipated that crude eventually would crack, and now that it quite possibly has, they're selling the news? Or maybe everyone is worried that quotes are going to come roaring back? Whatever the case, we're not planning on shorting into any rally the spills over into Wednesday's opening hour. That's notwithstanding the fact that we'd all but guaranteed a few days ago that the E-Mini S&Ps were headed for a 50-point plunge (equivalent to around 400 points in the Dow). The futures were two-thirds of the way there at yesterday's lows, and the bearish target will remain valid unless the S&Ps gain 20 points today. But it would take quite a bit more than that ' a 64-pointer, to be precise, or 5% -- to turn the daily chart sufficiently bullish to mitigate our skepticism for even a little while.

Gold's stumble yesterday is reason to turn mildly cautious over the near-term. On Sunday night, when actionable Touts for the next day went out to subscribers, we were looking to catch a swing low with the following advice: 'A decisive breach of the 930.90 [Hidden Pivot] support would set up a bottom-fishing opportunity at 920.20�' As it happened, August Gold provided us with an excellent buying opportunity when it breached 930.90 and came down to 920.10, a dime from the low we'd projected. The rally from that number went nearly $7, so there was ample opportunity to allow traders who had bought at the low to exit with a nice profit. But look at what happened when that $7 rally faded: as the chart shows, the futures went on to make an intraday low at 916.30, nearly $4 beneath the original target. The overshoot is large enough to suggest that more selling awaits over the next day or two, although a rally exceeding 941.70 would remedy that and likely set Gold on a course toward $1000. Whatever the case, Monday's price action may provide us with yet another opportunity to go bottom-fishing with a stop-loss of just a few ticks. Check out Tuesday's touts for more-detailed information. Bearish S&P Target Regarding the S&P futures, the quite bearish target we're using for the E-Mini contract remains valid despite the short-squeeze rally yesterday that greeted the new week. Bears are as nervous as we have seen them in a while, but the only thing they need fear is the inevitable three-day collapse in oil prices that is going to send stocks soaring. We have a very precise target in mind where August Crude could make an important top before that happens, but rather than try to short oil futures like so many

Retired Gen. Wesley Clark struck what some might regard as the low blow of the campaign the other day when he said of John McCain that 'riding in a fighter plane and getting shot down" is not "a qualification to be president." On the same point, Clark sounded less nasty a few months ago when, during a press conference, he noted the following: 'In the national security business, the question is, do you have � when you have served in uniform, do you really have the relevant experience for making the decisions at the top that have to be made? Everybody admires John McCain's service as a fighter pilot, his courage as a prisoner of war. There's no issue there. He's a great man and an honorable man. But having served as a fighter pilot � and I know my experience as a company commander in Vietnam � that doesn't prepare you to be commander-in-chief in terms of dealing with the national strategic issues that are involved. It may give you a feeling for what the troops are going through in the process, but it doesn't give you the experience first hand of the national strategic issues.' Obama Landslide�Not! Clark, torturing logic to the point of entertainment, went on to assert that Hillary (of all people) had the right kind of experience for the job. Perhaps. But does Obama? Most surely not, and that is why we are predicting that the election will be very close. This is notwithstanding a chat we had the other day with a friend in Berkeley who foresees an Obama landslide. You'd probably get the same feeling if you lived in, say, Santa Cruz, or Boulder ' which is to say, in an ideological warp. But our take is that even peaceniks will think twice

Ugly. With bullish seasonality ratcheted up to the max, the Dow still managed to fall 167 point yesterday. Perhaps we shouldn't be too surprised, since the stock market just finished its worst June since 1930. However, given the nearly 200-point short-squeeze that had turned stocks around a day earlier, we were waiting for bears to re-emerge yesterday, despairing and perhaps just a little freaked over the fact that not a single U.S. bank made it into the headlines with some new horror story. Adding to the warm glow of things, Secretary Paulson was in London to soothe true believers with the usual litany of falsehoods, including the notion that the government is loathe to meddle in the affairs of businesses supposedly too big to fail. 'We need to create a resolution process that ensures the financial system can withstand the failure of a large, complex financial firm,' Paulson told listeners. If Uncle Sam is indeed backing away from moral hazard, intending to let the financial system heal itself, we'll be interested to see how it handles the coming collapse of Fannie Mae and Freddie Mac. They are going to zero, according to the calculations of a seer for whom we have always had a great deal of respect, Porter Stansberry. In the June issue of his peerless Investment Advisory, Porter lays out a seemingly airtight case in support of his thesis. He notes, among other things, the following: 'Today, on a combined basis, Freddie and Fannie own or guarantee 45% of all of the mortgages in the United States ' $4.8 trillion worth of mortgages. But looking only at the mortgages they actually own and hold on their balance sheets, you find mortgages with a face value of $1.7 trillion. They hold these assets with only a sliver of equity,

Like many fliers who will do just about anything to accumulate airline bonus miles, I try to put nearly all of my household charges on one credit card ' in this case, an AT&T Universal Card that is tied to a travel rewards program. Typically, I have traded reward points accumulated in a given year for family trips to Florida in late July, since that's when Grandmom celebrates her birthday. Frontier Airlines has always offered the best deal, a non-stop from Denver to Fort Lauderdale that gets you there in time for a late lunch and gets you back in the early evening. Frontier's price was a little higher than the others', but not much, considering that the now-bankrupt carrier offers the only non-stop flight for this route. Imagine my surprise when I discovered the following this afternoon: 1) Frontier no longer participates in the rewards program; 2) a ticket that used to cost 25,000 reward points now costs anywhere from 38,000 to 75,000 points; 3) at the lowest price, there is only one airline ' ATA ' offering seats, and the flight times are atrocious, and 4) there are no non-stop flights available at any price. I decided to bag the trip and use the reward points for merchandise, which looks like a better value. The 'Thank You' catalog lists a Bose Home Entertainment Speaker System for 104,000 points. Or, I could get 50 Proctor Silex steam irons, with enough reward points left over for Samsonite rolling duffle bags for every member of the family. Something to live for. I should have seen it coming, since the drastic shrinkage of airline capacity has been widely publicized. But how much will the cutbacks actually help? I've gone on record here with a prediction that the airlines will not be able