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Short Covering Panic

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I don't want to burst your bubble but investors did not suddenly turn bullish on the market early this afternoon. The masses did not suddenly decide that, "Hmm... Morgan Stanley has fallen from $22 to $12 in the last three hours, it's probably a buy" and push the stock back up to $24.50 before the closing bell. The same can be said for State Street (bank) Corp. which saw its shares fall from $68 at the opening bell to almost $29 at its low and then rebound back to $54. Goldman Sachs fell from $115 around 10:00 a.m. to almost $86 before bouncing back to nearly $120 later in the day. The bulls did not suddenly make a break for it and overwhelm the bears.

Stocks were falling to new relative lows when suddenly, just after 1:00 p.m., headlines began crossing the wire that the British Financial Services Authority had declared a temporary ban on short selling financial stocks. The U.S. market immediately reversed. The rally stalled a bit from 2:00 p.m. to 3:00 p.m. but news that U.S. Treasury Secretary Hank Paulson was considering a Resolution Trust Corp. type of solution to the credit crisis and news that there was to be a high-level meeting with Paulson, Bernanke, and congressional leaders turbocharged this short covering rally into the closing bell. Tomorrow is a triple-witching option and futures expiration Friday and traders were desperate to cover positions ahead of the weekend. Thus we got a four percent rally in the major averages and 13% to 16% rallies in the banking indices.

Crude oil didn't fare as well as stocks. Light sweet crude came close to $102 a barrel before paring its gains to end with a 0.6% gain. The rally in commodities like gold and oil began to fade as the U.S. dollar bounced higher late this afternoon.


Parts of the nation continue to face shortages of gasoline. The Department of Energy reported that 95 percent of Gulf oil production remains offline and a hefty portion of our refining capacity is still shut down. The Southeast portion of the country is suffering the brunt of this supply problem. AAA claims that the average price for gasoline rose 20 cents to $3.855 a gallon in the last week.

Speaking of shortages, Nigerian oil production is falling sharply and some experts are worried that production could fall to zero. The nation normally produces about 2.5 million barrels per day. The latest surge by the MEND rebels has cut the country's output to just 1.5 mbpd although the Nigerian National Petroleum Corp. claims that the rebels are only responsible for a loss of 700,000 bpd.

One area of the world that shouldn't be seeing any shortages is Iraq. Would you believe that Iraq has twice as much oil as Saudi Arabia? Saudi is the world's largest oil exporter with 24% of the globe's proven oil reserves. The Saudi's claim to have "proven" reserves of 260 billion barrels. There are plenty of experts that would disagree with just how proven those figures are. Saudi's neighbor to the north may someday unseat them as the world's biggest exporter. Earlier today the Arab Economic Report for 2008 was released and inside it is estimated that Iraq has approximately 526 billion barrels of oil.

Don't forget that next week on Monday, September 22nd is the next IAEA meeting in Vienna. The International Atomic Energy Agency will meet with its 35-nation board of governors to discuss their latest report on Iran's nuclear program. The report has not been released yet but it is rumored that the contents will disclose enough information for the global community to enact harsher sanctions on Iran. Naturally some fear that the report could fan the flames of a military strike by the U.S. or Israel. Concerns over the outcome of this meeting could keep a floor under oil prices.

Jim Brown


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