The Securities and Exchange Commission (SEC) is becoming the very thing it is supposed to be stopping -- a stock market manipulator. The SEC was first established after the Great Depression to protect the general public from these kinds of shady stock dealings that caused that catastrophe. But the Wall Street Journal reports that the SEC has now become the epitome of the very thing that it's supposed to prevent.
That's thanks to a temporary rule it created last Tuesday that blocks the short selling of the stock of 19 big banks and financial institutions unless the short sellers can borrow those shares. (As Barron's [subscription required] points out -- it's interesting that the SEC has announced it is enforcing this so-called naked short rule since the practice is already illegal).
I can only imagine the profit opportunities available to those who had early access to this list of 19 -- which according to my calculations have risen an average of 27.5% since Tuesday. Fannie Mae (NYSE: FNM) and Freddie Mac (NYSE: FRE) -- whose CEO made $20 million last year, according to AP -- are the biggest winners -- up 90% and 74.5% respectively since then. Meanwhile, all the other companies that the SEC did not protect are wondering why they were not on the list.
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I know it doesn't matter at all. Right now we are so stuck on the banking problems and on the companies bleeding from higher energy prices that nobody cares about all of this cash, which will be used to shrink equity. They won't care because the banks, brokers and homebuilders, and the hobbled companies that use oil, have to issue so much equity that you can't see the effect of the equity shrinkage. But it will eventually matter. It has to matter that Deere has taken out 10% of its stock in the last four years. It does matter that Black & Decker (NYSE: BDK) (Cramer's Take) has eliminated almost 20% of its equity. Emerson's taken out 5%, same with Boeing (NYSE: BA) (Cramer's Take). There's just a huge amount of equity being shrunk.
MOST NOTEWORTHY: Wachovia, American International Group and BT Group were today's noteworthy downgrades:
Oppenheimer downgraded shares of Wachovia (NYSE: WB) to Underperform from Perform as they believe the outlook is "bleak" for equity shareholders. The firm thinks Wachovia's expenses can't come down fast enough too offset earnings erosion.
Wachovia downgraded shares of American International Group (NYSE: AIG) to Market Perform from Outperform as they believe AIG's CDO valuations worsened in Q2, which could result in a $2B-$7B after tax "valuation adjustment." Wachovia expects the value of AIG's core insurance franchise to be obscured by its credit exposure.
Collins Stewart cut BT Group (NYSE: BT) to Hold from Buy on concerns surrounding the company's fiber network expansion.
OTHER DOWNGRADES:
Nokia (NYSE: NOK) was downgraded to Add from Buy at WestLB; the firm also lowered Ericsson (NASDAQ: ERIC) to Hold from Buy and Alcatel-Lucent (NYSE: ALU) to Sell from Hold.
Third Wave (NASDAQ: TWTI) was cut to Hold from Buy at Deutsche Bank.
AT&T (NYSE: T) was removed from Goldman's Conviction Buy List.
TheStreet.com's Jim Cramer says our problems are so widespread, he sees lots more IndyMacs before we're out.
You don't need me to tell you it's awful out there. You don't need me to tell you that there's no quick fix for any of these things. But what might help you understand why it feels so bad this time is that I have never, in my career, seen so many companies go off track at the same time. This is one unbelievable moment, and it is made more horrible by the day as companies' stocks just get pummeled, causing people to then question the very viability of the companies involved.
First, obviously, are Fannie Mae (NYSE: FNM) (Cramer's Take) and Freddie Mac (NYSE: FRE) (Cramer's Take). We don't know what will happen, but we do know that their futures are much darker than their pasts. Their best hope: a Democrat becomes president and shows the usual love to both. But as investments, they are pretty much perma-losers going forward. The losses are that heavy. Yes, it is true that two years from now they will be better, but will the government let them limp through to that? View them as calls on a Democratic win.
We all know that Citigroup (NYSE: C) (Cramer's Take), Wachovia (NYSE: WB) (Cramer's Take), Washington Mutual (NYSE: WM) (Cramer's Take) and National City (NYSE: NCC) (Cramer's Take) are in trouble. Bank of America (NYSE: BAC) (Cramer's Take) says it isn't in trouble, but obviously the market doesn't believe management because the stock failed to rally when it said its dividend was safe. Any short-selling hedge fund could hire 30 actors and have them line up at a Washington Mutual or two and get a bank run going. Then we would have to hear about a "hasty" Treasury department plan to bail out WM. Hasty? How can these guys not see it coming?
With shares in Lehman Brothers (NYSE: LEH) losing another 14% of their value Monday, and the stock trading under $13, rumors are swirling as to what the bank is planning to do. While there has been speculation that the bank may be taken private, an option that I think is very interesting, others have said that another bank is going to swoop in and take over the company. At the discount levels the stock is trading, that may make sense. The only problem is who the buyer will be.
MarketWatch has an interesting article about this issue and the claim is that there really is no one out there to make a bid for the struggling investment bank. The article quotes Jeff Harte, a securities industry analyst at Sandler O'Neill & Partners, " I'm hard pressed to give you many viable buyers of Lehman. Most large banks are focused on their own capital issues. Even if a bidder did come forward, it would have to win over a lot of Lehman employees -- who control around 30% of the stock -- or risk losing them once the deal was complete."
The most obvious suitor would be JPMorgan (NYSE: JPM), but it has its hands full with Bear Stearns. Other banks like Citigroup (NYSE: C) or Wachovia (NYSE: WB) are fighting for survival. That leaves us with European banks, many of whom are also trying to stay afloat. One bank that has the money needed to finance a deal could be Deutsche Bank (NYSE: DB). It could be interested in a deal as it would gain a foothold into the fixed-income desk at Lehman. The only problem is that the bank is focused on growing its retail banking franchise, not investment banking.
Which leaves us with the first option as the best one. Go private. Clean up the balance sheet, get profitable, wait a few years for the financial storm to pass, and go public once again.
Aaron Katsman is the lead Portfolio Manager and Managing Director of America Israel Investment Associates, LLC. and Senior Editor of IsraelNewsletter.com. DISCLOSURE: Writer's fund has no position in any stock mentioned, as of 7/15/08.
Who is next to fail/fall? That seems to be the only question on investors' minds these days, and this morning is not different as concern about the health of the financial sector grows. With global markets plunging overnight, the dollar falling to yet another record low against the euro and ahead of a day full of economic data releases and earnings, as well as a testimony from Fed chairman Bernanke, U.S. stock futures dropped this morning, indicating the market is poised for a lower open.
On Monday, what seemed like might be a promising day with the government plan to bail out Fannie Mae (NYSE: FNM) and Freddie Mac (NYSE: FRE) and several large deals including the mega beer deal between Anheuser-Busch (NYSE: BUD) and InBev. But once again financials took front stage and after IndyMac was seized by federal regulators over the weekend Wall Street tumbled. The Dow industrials fell 45 points, or 0.41%, the S&P 500 dropped 11 points, or 0.9%, and the Nasdaq Composite lost 26 points, or 1.17%.
As the day go on, investors will have more to chew on though as several economic reports are due out today. June Producer Price Index, a measure of inflation at the wholesale level, is due before the market open, at 8:30 a.m. EDT. While economists expect a smaller increase in prices in June, an increase is expected for both PPI and core-PPI, which excludes food and energy prices. At the same time, June retail sales will be released, and may show a nice increase due to the government checks. July NY Empire State Index will also be released at that time and it's likely we'll see it decline further. Then, 10:00 a.m., a reading on business inventories for May is due.
Wachovia downgraded AIG (NYSE:AIG) to "market perform" from "outperform", according toBriefing.com. The news service also reports that Oppenheiner downgraded Wachovia (NYSE:WB) to "under-perform" from "market perform".
AT&T (NYSE:T) maintained Buy but Removed from Conviction Buy List at Goldman Sachs according to247wallst.com. The financial website also reports that Motorola (NYSE:MOT) Started as Sell at Societe Generale
MOST NOTEWORTHY: Wachovia, Deutsche Bank and Pearson plc were today's noteworthy downgrades:
UBS believes it is increasingly likely that Wachovia Bank (NYSE: WB) will need to raise capital. The firm said the company may need to raise $5B in equity and cuts its dividend to 1c, which will save $3B annually. UBS cut shares to Neutral from Buy and lowered its 2008 EPS estimate to ($1.98).
Morgan Stanley downgraded shares of Deutsche Bank (NYSE: DB) to Underweight from Equal Weight as they believe DB may have to increase its tier 1 ratio, which could lead to dividend cuts or asset sales.
Deutsche Bank downgraded Pearson (NYSE: PSO) to Sell from Hold as they believe the weak funding environment for Education will slow earnings growth.
UBS downgraded Wachovia (NYSE:WB) to "neutral" from "buy" according toBriefing.com. The news service also reports that JP Morgan upgraded Macy's (NYSE:M) to "neutral" from "underweight."
"Analysts polled by Thomson Financial expect Intel (NASDAQ:INTC) to report second-quarter income of 25 cents per share on revenue of $9.32 billion," according to the AP.
Ciena (NASDAQ:CIEN) raised to Market Perform at JMP Securities, according to24/7 Wall St.
Early in the day, rumors that a government bailout might destroy the value of the common stocks of Fannie Mae (NYSE: FNM) and Freddie Mac (NYSE: FRE) sent the shares down almost 50%. Comments by the government and an offer by the Fed to provide short-term funds to the firms helped, a little. At the close, FNM was off about 22% and FRE was down about 3%.
Financial stocks could have one of their worst days in decades today.
A number of the largest financial stocks are trading off by huge amounts. Fannie Mae (NYSE: FNM) and Freddie Mac (NYSE: FRE) have been off over 30% on news that the federal government may take them over, leaving owners of common shares with nothing.
Analyst concerns about large write-downs in the second quarter are driving bank stocks down. Wachovia (NYSE: WB) is down 12% on a downgrade by Fox-Pitt Kelton. Washington Mutual (NYSE: WM) is down 9% on troubles radiating from the mortgage markets.
Wall Street remains unconvinced that Lehman Bros. (NYSE: LEH) can keep its largest customers, which could push the brokerage in the direction which destroyed Bear Stearns. Lehman is down 12%.
Prepare for the slaughter. It's looking ugly out there.
Douglas A. McIntyre is an editor at 247wallst.com.
Most of the market did relatively well, but shares in big financials could not be saved, even by reassurances from the Treasury Secretary himself. Comments from the former president of the New York Fed to the affect that Fannie Mae (NYSE: FNM) and Freddie Mac (NYSE: FRE) sent the stocks down with Freddie Mac down, at one point, over 25%.
The Securities and Exchange Commission (SEC) is becoming the very thing it is supposed to be stopping -- a stock market manipulator. The SEC was first established after the Great Depression to protect the general public from these kinds of shady stock dealings that caused that catastrophe. But the Wall Street Journal reports that the SEC has now become the epitome of the very thing that it's supposed to prevent.
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Who is next to fail/fall? That seems to be the only question on investors' minds these days, and this morning is not different as concern about the health of the financial sector grows. With 
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