You've Got Mail. From the SEC

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Good Morning,

Gold prices followed crude oil to lower ground overnight but remained above support at $964 as the dollar failed to attract fresh buyers and as Iranian war rhetoric continued to be pumped into news feeds. Buyers in India remained on the sidelines, expecting more substantial declines in the price of their favorite metal. Yesterday's worst fall in oil in over 17 years brought values down to near $136 as signs of strong demand destruction and further potential for more of the same turned sellers into the dominant crowd in that market.

A possibly deeper slowdown in the world's largest economy has oil longs wondering where the additional gains in their positions will come from in future months. According to the Bloomberg Global Confidence index, the majority of respondents expect a tough second half for the global economy as the U.S. works its credit problems out. Open interest in oil shrank yesterday but some of it can also be attributed to the new aggressive agenda of supervision and restrictions that the SEC is adopting.

New York spot bullion opened under light selling pressure this morning, with a $3.70 drop to $973.50 per ounce as participants awaited economic data of some import before taking more risk. Core and headline CPI numbers as well as capacity utilization and industrial production figures are expected to be potential market movers today. At least as far as CPI is concerned, it appears that Dr. Ben knew very well what he was talking about yesterday when he fretted about the rise in prices. CPI rose by the most in 26 years in June, courtesy of spiraling energy and food costs. Stagflation appears to be taking hold in the US economy and while everyone knows how to combat it, few are willing to take that bitter pill just yet. The dollar rose to 71.80 ahead of the market's open but then again, oil pared its losses and was trading above $137 at last check. Silver fell 5 cents to $18.86 while platinum lost $24 to $1936 and palladium shed $7 to $434 amid growing perceptions of shrinking auto production and a shift towards small cars with small engine displacements.

Indications are that short-sellers enjoyed their best month in over seven years as the stock market swooned on a raft of bad news. Apparently, not every such trade may have been conducted with borrowed stocks in someone's pocket. Some traders, in fact, may not have had any pockets to speak of, as the were buck naked. This has caught the attention of regulators who were at first just focusing on Bear and Lehman trades and possible rumours. Now, they are casting a much wider net in order to catch some very interesting fish that are possibly lurking out there in marketland. Bloomberg reports that:

"The U.S. Securities and Exchange Commission subpoenaed Wall Street's biggest firms and hedge-fund advisers in a widening effort to crack down on suspected manipulation of Lehman Brothers Holdings Inc. and Bear Stearns Cos. shares, said three people with knowledge of the matter. The SEC's enforcement unit demanded information from investment banks including Goldman Sachs Group Inc., Deutsche Bank AG and Merrill Lynch & Co., according to two of the people, who declined to be identified because the inquiries aren't public. The Washington-based regulator is seeking trading records and e- mails, one of them said.

The subpoenas mark a new front in the broadest U.S. investigation of Wall Street trading since state and federal regulators targeted mutual-fund abuses in 2003. The SEC issued an emergency order yesterday curtailing short selling in financial stocks, including Lehman and mortgage-finance companies Fannie Mae and Freddie Mac. The agency also is examining whether securities firms have adequate controls to thwart misconduct.

``The SEC is trying to determine whether there was illegal manipulation of market prices, and that is far easier to do if you have a broad sweep,'' said Tamar Frankel, a law professor at Boston University. SEC Chairman Christopher Cox, 55, told the Senate Banking Committee yesterday the agency is investigating whether illegal trading contributed to the collapse of Bear Stearns in March and the 80 percent drop in the market value of Lehman Brothers this year. The probe focuses on traders who seek to profit by intentionally spreading false information about the New York- based firms.

Former Bear Stearns Chief Executive Officer Alan Schwartz and Richard Fuld, the head of Lehman, have contacted Goldman CEO Lloyd Blankfein, asking whether Goldman traders spread misleading information about the firms, the Wall Street Journal reported today, citing people familiar with the matter. Goldman spokesman Lucas van Praag told the Journal that the New York-based firm was ``supportive'' of Bear Stearns, ``rigorous about conducting business as usual'' and wasn't involved in wrongdoing.

More than 50 hedge fund firms including SAC Capital Advisors LLC and Citadel Investment Group LLC also received subpoenas from the SEC, people with knowledge of the situation said. The Wall Street Journal reported the requests to hedge funds yesterday. Most of the subpoenas were sent last week, and some recipients are being asked for information relating only to Lehman or Bear Stearns, a person familiar with them said. The SEC won't limit its focus to individual investors, and will likely sift for ``communications that would suggest traders got together and coordinated efforts for a particular security,'' said Barry Barbash, a partner at Willkie Farr & Gallagher LLP in Washington who previously headed the agency's division of investment management.

Regulators began their probes in March as Bear Stearns's stock plunged on speculation it lacked adequate cash to operate. The drop spurred clients to pull business and forced the firm's sale to New York-based JPMorgan Chase & Co. on March 16. Lehman has struggled since then to quash concerns that have helped push down its stock 78 percent this year. On June 3, the company denied it had borrowed from the Federal Reserve and said cash holdings increased during the quarter. Last week, two of its biggest clients, SAC Capital and bond-fund manager Pacific Investment Management Co., denied they were pulling business.

Cox told officials at the Federal Reserve and U.S. Treasury over the weekend that the agency is stepping up efforts to curb market speculation, a person with knowledge of the talks said. The agency's inspections unit announced plans July 13 to cooperate with the Financial Industry Regulatory Authority and the New York Stock Exchange's regulatory arm to check whether firms have controls to prevent the intentional spread of misinformation.

Cox yesterday told lawmakers the agency will require traders to obtain shares of brokerages, Freddie Mac and Fannie Mae before betting their shares will fall. The temporary order, to take effect July 21, will bar so-called naked short-selling, in which traders avoid the financial cost of borrowing stocks.

The order requires anyone making a short sale to first ``borrow or arrange to borrow'' the securities and then deliver them by the settlement date. It applies to shares in 19 companies, including Citigroup Inc., JPMorgan and UBS AG. In traditional short selling, traders borrow stock through a broker and hope to profit by selling shares at a higher price and later buying them back at lower prices to repay the loan. Naked short sellers do the same thing, with one difference: They don't borrow any shares, which means they can drive down prices by flooding the market with orders to sell shares they don't have.