After a brief period of strength fostered by falling oil prices and an improving dollar, the market has shifted back into a more confused state. Some areas are showing surprising strength (retailers) but there is still a lot of lousy economic data (jobless claims, leading economic indicators). The major indices ended mixed, as investors seemed to both acknowledge and ignore the headwinds facing the economy.

Rising oil prices resulted in a jump in oil-related shares, along with stocks in other commodity-related industries. However the banks were beaten up again. Crude closed at $121.18, and has gained 7.4% during a three-day run that marks its longest streak of gains since a four-day rally that ended on July 14.

Overnight News

- A Citigroup analyst predicts further writedowns at Goldman Sachs, Morgan Stanley and Lehman Brother’s to total $6.4bn.
- A story in the New York Times warns, “Some Fear Commercial Property Loans Will Be Next Stage in Downturn“.

Some Good News For Lehman’s, Well Sort of…

Shares of bedraggled Lehman Brother’s got a boost with an upgrade from Ladenburg Thalmann analyst Richard Bove. He now recommends buying shares of the brokerage in part due to expectations of some kind of takeover.

He can say it’s a takeover candidate, but why? Personally I don’t see why you’d buy this company. If it sells off its family silver, it’s just a badly tarnished franchise.

Mr. Bove has changed his recommendation on Lehman 5 times in 2008. My take is that Lehman’s remains a HIGHLY speculative investment where you could make money more by luck than judgement.

Oil Reclaims $120 a Barrel

The factors driving oil higher of late probably don’t mean much when viewed individually. However they add up to more than the sum of their parts.

- Worries about Russia’s response to a U.S.-Poland missile defence pact,
- the uneasy truce in the Caucasus,
- rumours that Russia may send a fleet from the Barnets sea to the Med,
- news of the planned StatoilHydro ASA refinery shutdown for two months in Mongstad, Norway,
- an ongoing eye on Tropical Storm Fay,
- the fact that it was technically “oversold”

All these factors have contributed to the increased interest among buyers

ECB Looking to Wean Banks off the Bottle

ECB board member and President of the Dutch Central Bank Nout Wellink said last night to the effect that banks were overly dependent on the ECB’s liquidity facilities and needed to start fending more for themselves. Ed Harrison at Credit Writedowns translated the article from Financieele Dagblad, a Dutch financial newspaper and the Telegraph has weighed in as well.

My take is that this would be fairly grim news for Spanish & Irish banks in particular who have been shipping these mortgage backed assets into the ECB. It’s like a game of poker. You are a bank who got dealt a bad hand. But you get to give your hand back to the friendly ECB dealer who then gives you some top trumps. However the bad hand hasn’t gone away and that’s the problem. Sooner or later you have to take those cards back and they are now worth even less as the stakes are higher.

Events to Watch Today

Ben Bernanke speaks on “Financial Stability” at the unfortunately named Jackson Hole symposium.
UK Q2 GDP numbers at 09.30.

Equities Today

WPP Group may be active after the world’s second-biggest advertising company said first-half profit jumped 14 percent on sales in Asia, Latin America and Eastern Europe.

Deutsche Bank, Germany’s biggest bank, will buy back $1 billion of debt and was fined $15 million as part of an agreement with regulators to settle a probe of failed auction-rate securities in the U.S. Deutsche is one of the eight firms to have settled claims in the last two weeks that they misled investors by fraudulently marketing the long-term securities as easy to buy and sell.

International Power may be active. The U.K. utility that generates electricity in 20 countries had its credit ratings raised by Moody’s Investors Service after new plants boosted cash flow.

Rentokil Initial will probably move. The world’s biggest pest-control provider reported a 68 percent plunge in second-quarter profit and said it will take up to five years to turn around sliding earnings.

The large mining companies, BHP Billiton and Rio Tinto might also be active. The Australian Competition and Consumer Commission is seeking more information about BHP Billiton’s $142 billion hostile takeover bid for Rio Tinto.

And Finally…………..

McDonald’s held a press conference today to unveil its latest sandwich: the Big Freddie Mac. Priced at 50 cents, it’s the first fast food hamburger to be subsidized by the federal government.

“The economy – not that there’s anything wrong with it – is causing Americans to cut back on eating hamburgers,” explained McDonald’s spokesperson Donald McDonald. “Washington has decided that the burger is too big to fail, so the Treasury Department has agreed to kick in three bucks for every Big Freddie Mac sold.”

The Big Freddie Mac, while similar in appearance, is significantly different from the McDonald’s mainstay – the Big Mac. Big Freddie’s bun is inflated to look twice as large as it actually is, while the two all-beef patties are actually one all-beef patty sliced in half width-wise and pumped up by puffy lettuce. The number of sesame seeds has been reduced to one with a promise of more in two years if the burger market bubble continues.

Each Big Freddie Mac comes in a special wrapper printed with suggestions on how to “flip the burger” for profit by selling it to people who are new to fast foods or kids who haven’t learned to read yet.