Mid August, eh? The lazy days of high summer, the 'dog days' that bedevil the keen angler when water temperatures are too high for fish to have any interest in a fly, the flat, stagnating stock markets as financial types lounge around a pool somewhere......ahh, it's all just SO relaxing...gosh - is it that time already? Crikey, that was a weird dream. I guess that by now just about everyone in the world is aware that financial markets have been the merest tad volatile over the past week, and for sure, that volatility is going to be with us for a considerable time to come. There has been so much going on, and so many zillions of words spouted about it all - mainly by those without a clue - that I almost hesitate to add my tuppence worth.....oh all right then, if you insist....

During the week of course (and immediately following my suggestion in the midweek video update that markets would bounce back up) all the major indices headed due south on Thursday - which just goes to show how much I really know about this stuff! Anyway, down they went as you know, before the 'bounce' began on Friday after the US Federal Reserve stepped in and cut one of its overnight lending rates by half a percent. Now it's easy enough to say after the event, but for me it was still evident that markets were going to bounce back up anyway - they just fell a bit further than anticipated first. We'll never know now of course, but a 'relief rally' was due with or without Fed intervention.

Will things be OK now for the bulls? It certainly looks like it - for a wee while at least, because by intervening as it did, the Fed has clearly signalled (just as it did after the collapse of the dotcom bubble) that it is prepared to do 'anything' to ensure USA Inc remains 'healthy' even if that alleged health is supported entirely via drugs, aka lower overall interest rates in due course. It's a process known as the 'Greenspan Put' after the previous Fed Chairman, Alan Greenspan (use the search engine for earlier Williams admiring comments about him), kept reducing interest rates every time things began to look ropey, and thus singlehandedly created the biggest credit bubble in history - the bubble that's now leaking from a plethora of wee holes. The problem is that if the Fed steps in every time markets take a hit, then traders/investors everywhere believe that it will always be the case, so they take massive risks, certain in the knowledge that when things go wrong, good ol' Uncle Ben will bail them out (Ben Bernanke is the name of the current Fed head honcho).

Unfortunately (for the risk takers) this time things may not be so straightforward, mainly because any sign of ongoing US rate cuts by the Fed would certainly represent the final coffin nail for the Dollar - and a further drop in its value would add an awful lot to the cost of imports into the USA - including oil of course - thus driving up overall living costs, thus meaning people can't afford to buy so much nor service their mortgages even at lower rates, thus....you get the idea. And already WalMart and Home Depot (America's biggest retailers) are warning that sales are well down and unlikely to improve for the foreseeable future, while even Countrywide (the USA's biggest home loans provider) has seen its share price halved and it has announced it is facing 'major liquidity problems'. Could it go bust? We'll see - but if it has done the same as most lenders these past few years, it will have a whole raft of NINJA mortgages on its books. (No Income No Job no Assets mortgages).

But according to Ashley Seager, writing in the Guardian, we don't need to worry because the US economy is in grand shape - I guess he went to the Jackanory School of Economics then.

Now before concluding this wee outline of the Williams Take on matters economic (as opposed to the Greenspan Put) the other point to make is one that perhaps has been missed by the pundits. In fact when I think about it, three major issues have been missed. The first is that when the Fed cut its overnight lending rate by half a percent, all it was doing was making emergency funding a wee bit cheaper to obtain for cash - strapped banks that otherwise would have gone bust there and then - the word most definitely being 'emergency'. That is hardly an expression of confidence overall that this mess is going to go away. Secondly, when much of the media reported that the Fed was 'buying some of the sub prime debt' that had a whole lot of people breathe a huge sigh of relief, anent the 'Greenspan Put' idea, with Uncle Ben riding to the rescue. But that is NOT in fact the case - the Fed took some of the sub prime CDOs as collateral for their emergency lending, solely on the basis that the institution that had borrowed these emergency funds, would buy back the mortgage debt from the Fed within a maximum of fourteen days. And thirdly (possibly the most toxic of all?) what do you think actually provides security for DEPOSITS in a bank? Does the bank hold all that cash somewhere just in case everyone wants it back tomorrow? Almost ALL of it - maybe 90% (and in the USA sometimes more than 100% of it!) is LENT OUT to borrowers, at higher rates of interest than depositors are paid - that is how banks make their profits. If the lending goes bad, what happens to deposits? Think about it - any bank's deposits are only as safe as the quality of the loans made by that bank. (in the UK of course there are certain government - backed guarantees for depositors, but you might be surprised to discover just how little is actually covered - although to be fair there's a lot less to worry about than in the USA).

Anyway, to conclude this part of the weekend ramble, what's going to happen next? Methinks more US bankruptcies among lenders, builders, estate agents - not to mention homeowners - but nonetheless a major bear market rally that could last quite a few weeks is likely now before market forces overcome political intervention, as they always do in due course. The big drop is probably now on 'hold' for a wee while, although if there IS a further fall of any size at the start of the week then all bets to the upside will be off. Interesting times indeed!

Moving along, I note that PM Gordy has "spent £39bn in his first seven weeks at No 10" according to a newspaper headline. And here I was thinking that it was the Chancellor who was responsible for the Treasury. Silly me.

I see Nokia shares took a hit when they had to recall 46 million batteries due to 'overheating'. The way mobiles are welded to people's ears I'm amazed only 46 million have overheated so far.

And I note that only a few days into the deal mentioned last weekend, Royal Bank of Scotland is already looking for a way out of its ABN Amro commitment. Ho ho. To quote a Bank of America spokesman (he was trying to be reassuring about overall market conditions and failing miserably) "It's all about sentiment..." Oh yes indeed.

Okay, let's look at a chart or two and see what might be brewing. (BUT!! .... a very BIG "but!" - don't be in a rush to do very much at the moment. This is a volatile, unsettled and thus very difficult market environment - it's a great time to be watching and learning, but it's also a time when many shirts are going to be lost. Seldom has good oldfashioned and boring PATIENCE been so necessary.) Anyway, on that note, first today there's Tesco - its long term uptrend line has been broken, so it's well worth keeping an eye on. Then we'll examine Associated British Foods where there's both a channel and some support to consider, and finally we'll note that despite the big 'up' day on Friday, the shares of Millennium & Copthorne Hotels are looking pretty weak.

And that's the lot for this weekend - I'll be away till Wednesday morning from when these notes are published so please hold your mentoring enquiries till then - there are reportedly fresh salmon to be caught and I'm not one to pass up a challenge!

Best wishes till next weekend,

Ian.

'IMPORTANT NOTICE: These WICS charts are for EDUCATIONAL PURPOSES ONLY. They represent only MY understanding of what is happening in the market for any particular share, stock, commodity or index. In NO circumstances should they be construed as recommendations to trade. If I choose to trade what I see, that is MY decision. YOU must, in turn, come to YOUR OWN conclusions about what action, if any, YOU might choose to take'