Excerpt From John Mauldin's Outside the Box

"Investors insight"

I have been recieving John Mauldin's enewsletters for over 2 years now for the best insight into the inner workings of both the Financial Markets and the Geopolitical landscape that affects them. I highly encourage you to sign up for his free enewsletters. In this issue Michael Lewitt of Hegemony Capital Management discusses the many problems that our Financial Markets face and he reiterates alot of what I have been posting about since my latest trade.

A couple exerpts:

The latest example of regulatory malfunction in the financial markets is the SEC's limitations on selling short the stocks of 19 financial firms. Readers should understand that this stopgap measure will have absolutely no impact on the underlying value or the long-term stock prices of these companies. This is merely a political bone being thrown to those who would sooner blame short-sellers for the credit crisis than the institutions (and the individuals responsible for mismanaging them) who acted in a wholly irresponsible manner. Leon Cooperman, one of this generation's great investors and a man always willing to speak his mind, described the situation very frankly in a recent interview in Barron's: "The financial economy is in disarray and that is really a result - and you can quote me on this - of imprudent financial activity by the commercial banks and investment banks. They levered themselves up. They did things that were foolish. They should be ashamed of the way they conducted themselves, and now they have to right that, and they are de-leveraging."1

By engaging in selective protectionism of a few favored companies rather than re- imposing the uptick rule and treating all companies equally, the SEC furthered the appearance of favored treatment for large institutions that raises serious moral hazard concerns and dampens confidence in U.S. financial markets. The following is the list of the 19 firms that the powers-that-be decided were worthy of special protection from market forces:

BNP Paribas Securities Corp.
Bank of America Corporation
Barclays PLC
Citigroup Inc.
Credit Suisse Group
Daiwa Securities Group Inc.
Deutsche Bank Group AG
Allianz SE
Goldman, Sachs Group Inc.
Royal Bank ADS
HSBC Holdings PLC ADS
J.P. Morgan Chase & Co.
Lehman Brothers Holdings Inc.
Merrill Lynch & Co., Inc.
Mizuho Financial Group, Inc.
Morgan Stanley
UBS AG
Freddie Mac
Fannie Mae
Among the more interesting aspects of this list is the fact that more than half the names are non- U.S. firms enjoying the protection of the U.S. regulators and the fact that some large U.S.-based firms that are clearly being pummeled by short-sellers are missing from the list (i.e. Wachovia Corp., AIG International Group, Inc., Washington Mutual). The ostensible basis for inclusion on the list - status as a primary dealers plus Fannie and Freddie - speaks to the reactionary nature of the rule-making. Finally, this desperate measure is yet another example of the capitalism-for-the poor, socialism-for-the-rich economic model that American financial authorities have adopted over the past two decades.

As a result, when it announced that it would enforce the rule selectively with respect to a select number of financial stocks that had been battered by short sellers (ignoring the fact that a number of these companies had posted tens of billions of dollars of losses due to gross mismanagement and deserved to be sold), the agency effectively admitted that it had been failing to enforce its own rules. The SEC's announcement predictably sent holders of naked short positions scrambling to borrow stock while other short sellers ran to cover their positions in these and other financial stocks in anticipation of a rally in these shares. The result was a historic rally in financial shares that was given a boost by the bailout of Freddie and Fannie but was wholly unrelated to any improvement in the underlying businesses of the companies whose stock prices rose so sharply.

And now to Merril:

And naturally Merrill Lynch's announcement, which included a highly dilutive share sale to compensate for the multi-billion capital loss suffered by the firm, led to a rally in the firm's stock price. Let us get this straight - the firm admits that it grossly mis-marked its book, reports a(nother) multi-billion dollar loss, announces a hugely dilutive stock offering, and the stock rallies? Makes perfect sense to us. And people wonder how and why the financial markets continually fall into crisis!

Finally, troubling insight into the American Car Manufacturing Industry, I suggest you read the entire article but here is an excerpt:

Just prior to S&P's move came the effective collapse of the automobile leasing industry. In the days prior to the S&P downgrade, the automobile financing industry came totally unglued. This is the latest indication of how severely credit is being rationed at all levels of the U.S. economy. Chrysler Finance was the first of the Big Three automakers' finance arms to announce that it would stop extending automobile leases. This decision, which is nothing less than catastrophic for Chrysler's vehicle sales despite unconvincing protests to the contrary by the privately-owned carmaker, was due to the fact that leasing has been rendered unprofitable by Chrysler Finance's rising borrowing costs and the plunging residual value of Chrysler's gasguzzling vehicles. Chrysler debt is trading at levels that suggest an imminent bankruptcy filing.

GMAC and Ford Motor Credit are not expected to eliminate leasing entirely but are likely to severely cut back on auto leases since they can't make any money on these transactions. Wells Fargo has also withdrawn from the business of financing car leases. Other financial institutions are sure to follow.

The latest news out of Detroit makes it abundantly clear that the endgame for the Big Three is going to be massive bankruptcy restructurings. One would hope that politicians in Washington, particularly the two Presidential candidates, would begin formulating national energy plans that include restructuring plans for the American automobile industry. No viable energy plan will meet this country's needs without creating the proper tax and other economic incentives to build fuel-efficient vehicles. Rather than continuing to be one of the problems that lie at the heart of the American economy, the recovery and revitalization of the auto industry could be a major component of an economic and energy policy that could lead this country out of the difficult times we are experiencing and are doomed to repeat unless we take some bold steps right now