News&Notes: TrimTabs & Reserve Primary Fund

TrimTabs estimates all equity mutual funds post outflow of $9,227 mln in week ended Wednesday, October 29
TrimTabs Investment Research estimates that all equity mutual funds posted an outflow of $9,227 million in the week ended Wednesday, October 29, versus an outflow of $6,470 million in the previous week. Equity funds that invest primarily in U.S. stocks posted an outflow of $7,051 million, versus an outflow of $1,920 million in the previous week. Equity funds that invest primarily in non-U.S. stocks had an outflow of $2,176 million, versus an outflow of $4,540 million in the previous week. In addition, bond funds had an outflow of $5,867 million, versus an inflow of $532 million in the previous week, and hybrid funds had an outflow of $2,751 million, versus an inflow of $249 million in the previous week. Separately, TrimTabs reports that exchange-traded funds that invest in U.S. stocks posted an inflow of $903 million, versus outflow of $1,790 million in the previous week. ETFs that invest in non-U.S. stocks had an inflow $1,226 million, versus an inflow $426 million in the previous week. Separately, TrimTabs reports that exchange-traded funds that invest in U.S. stocks posted an outflow of $1.79 billion, versus inflow of $4.21 billion in the previous week. ETFs that invest in non-U.S. stocks had an inflow $426 million, versus an inflow of $522 million in the previous week.

Troubled fund begins payouts - NY Times
NY Times reports the Reserve Primary Fund, the giant money market fund whose customers have been waiting more than six weeks for their cash, announced late Thursday night that it would begin mailing checks to shareholders on Friday — for half their original investment. The announcement was the first indication of the losses the fund sustained when a wave of redemptions on Sept. 15 forced it to freeze withdrawals and liquidate its assets. The next day, the fund said it had "broken the buck," reporting a per-share value of less than a dollar. The announced per-share payment — 50 cents on the dollar — is more than some had expected, but well short of the dollar-per-share value that millions of money fund investors have long taken for granted. Indeed, it is considerably less than the price the fund reported on Sept. 16, which was 97 cents. But the Reserve Fund's president, Bruce Bent, said that he hoped the checks being mailed out would be the first installment, not the final payment.

RCM Editorial: Understanding Who is Responsible For the Current Mortgage Crisis

The following link will take you to a story published today in the Investor's Business Daily. Please take your time and read carefully. This story offers a brilliant and concise timeline of the events that led us into this crisis. In this politically charged environment there has been a desire to accuse and place blame. It has become convenient to attack big corporations and Wall St. and in turn accuse capitalism as the root cause for this credit collapse. The environment has spawned populist views that laud sharing the wealth and other socialist creeds as a cure to this country's ills. However, after reviewing the actual facts, dates, quotes and maneuvers covered in this timeline, you will see that these populist views are not the antidote but instead the poison. On the other hand, this is not an attempt to absolve Wall St. Facts will show the financial community had a hand in magnifying the crisis. We are not publishing this piece with political motives. We are only attempting to arm you with an accurate understanding of the current situation.

http://www.investors.com/editorial/IBDArticles.asp?artsec=5&issue=20081029&rss=1

News& Notes: Pension Fund Gap & US Hospital Woes

RCM Comment: The following three stories highlight the viral nature of the current credit crisis.
Pension fund gap hits $100 bln - FT
FT reports US companies will need to inject more than $100 bln into their pension funds to cover market losses, putting them in a cash squeeze at a time when it is difficult to raise money. The cash payment, estimated by several pension industry executives, would be spread over this financial year and next year. Companies' pension fund losses -- running at an estimated 20% in the year to date -- also are expected to alter earnings this year, partly because of accounting changes. The 700 largest corporate plans were more than 100% funded at the end of last year, but as of last week that had fallen to about 83%, according to estimates by Mercer, a pension consultant.

Lockheed, Ryder Drain Cash as Crisis Hammers Pensions By Pat Wechsler and Edmond Lococo
Oct. 29 (Bloomberg) -- A trade group whose members include Lockheed Martin Corp., Dow Chemical Co. and General Motors Corp. is pressing Congress to help close a record $200 billion deficit in U.S. pensions created by this month's global stock-market collapse.
The Committee on Investment of Employee Benefit Assets is kicking off a lobbying effort today to delay provisions of the Pension Protection Act that it says will force companies to drain cash flow to comply with funding rules set to take effect next year.
``This will be real money that companies will have to come up with,'' said Judy Schub, managing director of the Bethesda, Maryland-based group, which represents 110 of the nation's largest retirement plans holding almost half of U.S. assets. ``The law will be forcing people to be taking money out of operations at the worst possible time.''
Aetna Inc., the third-largest U.S. health insurer, said today that pension expenses caused by stock market declines will lop 30 cents to 40 cents a share off next year's operating earnings.
Ryder System Inc.'s pension contributions will ``significantly increase in 2009'' and force ``cost management'' to protect profit, Chief Executive Officer Gregory Swienton told a conference call Oct. 22. The Miami-based, truck-leasing company's plan had $1.5 billion in assets in 2007 and was underfunded by $1 million, according to Standard & Poor's Corp.
More...

US hospitals may have to buy back $8 bln in debt - FTFT reports US hospitals may be forced to buy back more than $8 bln of debt as a result of turmoil in the credit markets, adding to their burdens just as a weakening economy is draining resources. The problem for the hospitals involves so-called variable rate demand notes and other securities that they have agreed to buy back in some cases. The interest rates on VRDNs reset periodically and investors have the right to reject the new terms and sell the paper back to the issuer or a bank. An estimated $400 bln in VRDNs have been issued in the US and most require banks -- rather than the issuer -- to buy back the debt. However, Moody's Investors Service, the ratings agency, said 24 not-for-profit hospitals in the US have issued $8.4 bln of debt requiring them to buy back the paper. Lisa Martin, senior vice-president at Moody's, said three hospitals -- NorthShore University HealthSystem in Illinois, North Mississippi Health System and Virginia's Riverside Health System -- have had to repurchase such debts. Although they all have sufficient cash to meet their obligations, the repurchases were described as highly unusual by Moody's. In the past, hospitals could usually count on their bankers to find new buyers for such debts. "Three out of 24 might not sound very bad, but it is unprecedented," Ms Martin said. "There has rarely been a situation where a hospital has not been able to find a new buyer."

News&Notes: British Pound & S&P500 Futures

Bloomberg TV Highlights: RCM Comments

The British pound has its biggest 2 day rally vs. the US$ in 16 years. Further evidence that the redemption wave is ebbing.

Copper jumps 10% today biggest one day gain in 10 years.

Yesterday's big rally was preceded by a huge amount of buying in the S&P 500 futures contract. This is the footprint of the PPT and reduces the validity of the rally yesterday. We have seen these types of moves often right in front of a Fed meeting. The key will be the reaction to the Fed move after 2:00 pm today.

U.S. FDIC, Treasury working on foreclosure prevention program based on gov't guarantees of home mortgages - Reuters
Plan would provide up to $500 bln-$600 bln in gov't guarantees on up to 3 million at risk motgages. Plan would require restructured mortgages based on homeowner's ability to pay lower monthly payment for a period of time, most likely 5 years.

U.S. regulators hope to announce new Treasury Dept, FDIC anti-foreclosure program as early as Thursday, according to source - Reuters

Reason For The Market Rally...

Dollar rises most against Japan's yen since January 1974, gains 5.2% to 97.57 yen in New York - Bloomberg

RCM Comment: You have read in this blog repeatedly over the last few weeks about the tsunami of redemption & repatriation that was dragging all asset classes down in price. The $64,000 question: How long will this selling action last? No one knows the answer for sure, but the canary in the coal mine, the light at the end of the tunnel, the lighthouse in the storm (somebody stop me!) is the action of the Yen vs the US$. As funds redeem and repatriate the yen carry trade unwinds rapidly and sends the Yen up strong vs the US$. Once the pressure of the unwind is over the US$ snaps back signaling the end of this round of redemptions. We have no way of knowing if this is the end of the redemption wave or just a pause, but today is certainly constructive.

News&Notes: T Boone Pickens

RCM Comment: Another one bites the dust...

Pickens's investors ask for exit - WSJ
WSJ reports about half of the investors in T. Boone Pickens's energy-oriented equity hedge fund have asked to withdraw their money on the heels of losses of about 60% this year, according to people close to the matter. Mr. Pickens and his investment firm have lost $2 billion since peaking in late June, Mr. Pickens said Sunday on the CBS program "60 Minutes." His fund, BP Capital, will have about between $400 million and $500 million after expected withdrawals. It started the year with about $2 billion. A few weeks ago, Mr. Pickens moved the fund almost entirely into cash to help ride out the volatility in the energy patch, according to people close to the matter. Mr. Pickens is expected to personally hold about 20% of the fund after the withdrawals, or about $100 million, after he does some selling along with his investors. He has lost an estimated $400 million or so in his funds this year. The hedge fund has been hurt by the recent plunge in energy prices and tumbles in energy stocks.

Gold Update: The table appears set for a substantial markup of gold

As you will see from the links below the gold speculators have been removed from the market and the bullion banks (manipulators of the gold mkt) have transitioned from huge short to long positions. It is our belief that the bullion banks (Goldman Sachs and J.P. Morgan, each important owners of the common stock of the Federal Reserve--shame on you if you still think the Federal Reserve is an entity of the U.S Government) are in desperate need of capital and are likely to use their manipulative ability of the gold market to replenish their devastated capital base. If we are correct in this assumption, the price of gold should enter a period of steady rise shortly after the November 4 election. We believe the coming period of rising prices may reach historical proportions given the recent and continuing unbridled creation of fiat money globally.

We are now moving Fortune's Favor I into a diversified list of gold/silver mining stocks at prices that can only be described as surreal as they have been reduced to prices that have absolutely no relationship to rational long-term intrinsic value. In our experience, devastation like this has only occurred under conditions of very intense forced or involuntary liquidation. While it is difficult to predict when this period of commodity hedge fund and commodity index fund liquidation will come to an end we believe a prudent period of accumulation can be commenced with evidence suggesting the bullion banks have moved to the long side.

Click here for today's Commitment Of Traders charts in Gold and the USDX and Commercial Activity in Comex Gold with commentary from Trader Dan Norcini

Click here for today's Custodial Holdings charts with commentary from Trader Dan Norcini

News&Notes: CALPERS, Yen Gains, Citadel & Tech. Finance Defaults

RCM Comment: The following three stories are all connected and offer a clear window into the asset bear market we are experiencing. The forced selling at CALPERS is a microcosm of what is going on all over the investment community. Forced selling leads to all sectors going down at the same time: financial, technology & commodity. No sector is spared and no fundamentals matter for the short period of time while the unwind occurs.

Next, we have hedge fund liquidation and prime brokers targeting emerging market funds in particular. So we have the perfect storm of mutual fund, hedge fund & pension fund forced selling. This is the first time in history we have seen draw downs in stock & bond funds, hedge funds, money market funds & savings accounts all at the same time. We call this phenomenon 'massive deleveraging'. As long as this action continues we will see lower prices of all assets.

These stories, of course, explain why the Japanese Yen is exploding in value vs. all currencies. With prime brokers targeting emerging market hedge funds, the massive redemption and repatriation is causing a dramatic unwind of the Yen carry trade, a favorite of emerging market hedge funds.

When this cycle comes to a close (and like all cycles it will) we will experience dramatic revaluation of certain assets that were affected simply because they were caught in the net of redemptions and forced liquidations. A cool head and a keen eye will lead us to significant opportunities in the weeks and months ahead.

CALPERS has consistently said they “never” sell stocks. That changed this week, as the world’s largest pension fund announced they are undergoing forced selling of stock to cover pension fund disbursements.

Hedge funds face collateral pressure - FT
FT reports the survival of a raft of hedge funds is being threatened by fresh pressure to stump up more collateral for trades made in a range of illiquid assets. So-called prime brokers, who provide a range of services to hedge funds, are imposing tougher conditions on their clients and charging more for financing following the collapse of Lehman Brothers in mid-September, raising fears that more funds face collapse. The more conservative terms mean that a hedge fund would have to put up additional collateral against financing if markets fall further, or sell down its holdings. The problem for many hedge funds is that they have already sold down their more liquid investments and are grappling with a wave of redemptions from their own investors. Further collateral requests or higher financing costs may push many of them over the edge. One fund manager said: "Funding is being withdrawn by prime brokers and funding rates have risen sharply in the past week or two. A tough environment is just getting tougher." Industry managers are concerned that renewed market turmoil, leading to weaker performance and client redemptions, could lead to a vicious circle of selling by hedge funds. One prime broker said the situation was "on a knife edge". "Everyone needs to keep their nerve," he said. He added that prime brokers were particularly targeting funds that specialized in emerging markets.

G7 warns on excessive yen gains - Guardian Unlimited
Guardian Unlimited reports Japan is poised to intervene in its currency market for the first time in more than four years after the G7 issued a warning over recent excessive gains by the yen that have pummeled exporters' profit forecasts. In an emergency statement issued in Tokyo, the G7 stopped short of calling for concerted action to rein in the yen, which last Friday rose to a 13-year high of 90.87 yen to the dollar, but said cooperation remained an option to bring stability to global markets. The G7 said it was concerned about "excessive gains" by the yen that have forced major Japanese exporters to drastically reduce profit forecasts as the weak dollar eats into exports to the US. "We reaffirm our shared interest in a strong and stable international financial system," the statement said. "We are concerned about the recent excessive volatility in the exchange rate of the yen and its possible adverse implications for economic and financial stability. "We continue to monitor the markets closely, and cooperate as appropriate."

Citadel seeks to reassure debt holders - WSJ reports Federal officials are closely monitoring large hedge funds, wary of a shakeout in the industry and the risk that market woes could trigger hidden, systemic problems from the largely unregulated sector. In recent days, examiners with the Federal Reserve questioned Wall Street counterparties in at least two instances about their exposure to debt and other holdings of Citadel Investment Group and Sankaty Advisors, the credit-investment affiliate of private-equity firm Bain Capital, according to people familiar with the matter. Two Sankaty leveraged-loan funds that had several billion dollars in assets have declined as much as 50% this year on credit losses, according to people familiar with the funds. While regulators don't expect to launch any hedge-fund bailouts, they are examining whether any could pose a threat to the broader financial system if the funds do run into trouble.
RCM Comment: This story requires constant monitoring. As we have learned over the last few months reassurances are often red flags of impending disaster. You need only to remember the stories leading up to the collapse of Bear Sterns, Lehman Bros. and countless others to see the value of reassurances.

Tech finance defaults rise - WSJ
WSJ reports troubles are brewing in the technology-financing business, the credit that greases many technology sales. Defaults on tech financings, loans that allow companies to purchase computers, software and other products, have spiked this year. The problems are surfacing after years in which such loans flowed freely. Now the banks and specialty lenders that most tech companies rely on to finance customer sales are retrenching, and financing terms are getting tougher. Some big tech companies, such as International Business Machines (IBM), Oracle (ORCL) and Cisco Systems (CSCO)., are stepping into the void -- lending more of their own money to customers and taking on new risks. In September, 0.86% of equipment loans -- which includes a range of office equipment -- were written off as losses, up from 0.48% a year earlier, according to the Equipment Leasing and Finance Association, an industry group for 700 lenders. While the numbers appear low, it's about the same as the percentage of real-estate loans -- around 1% -- expected to be written off in the third quarter by the top 100 U.S. commercial banks, according to research firm Aite Group. Tech-financings will reach $88 billion, about 14% of the total amount spent on computer hardware and software this year, estimates IDC.
RCM Comment: We have been developing the theory that as we come out of this bear market the best investments will be companies with strong cash flow and solid dividends. The era of growth stock out-performance may give way to dividend stock out-performance, much like we saw in the 1950's. The above story is one example of why growth stocks will carry lower P/Es.

News&Notes: TARP, IMF & More Market Manipulation

Treasury is considering taking stakes in insurance companies, signaling expansion of so-called TARP rescue plan

Treasury Secretary Paulson is said to plan buying stakes in regional U.S. banks - Bloomberg.com
Bloomberg.com reports Treasury Secretary Henry Paulson is preparing to take stakes in a number of regional U.S. banks as he seeks to halt the freeze of credit to businesses and households, according to a person briefed on the matter. The Treasury may announce the plans as soon as today, the person, who was briefed by bankers and Treasury officials, said on condition of anonymity. The purchases would be the second round in a $250 billion program to inject capital into financial companies, after an initial $125 billion was allocated to nine of the largest banks.
RCM Comment: Do these two stories really need a comment?

Regulators examining market close stock surges - Reuters
Reuters reports U.S. regulators are taking a closer look at unprecedented volatility in stock markets near the close of trading, hunting for any signs of manipulation. "It is something we're looking at," said Brendan Intindola, a spokesman for the Financial Industry Regulatory Authority. "We're really taking an extra close look at it in the light of the volatility we've seen in the market in recent weeks." FINRA typically looks at "market on close" activity, which are orders executed as near to the end of the exchange day as possible. But its surveillance unit has now ratcheted up its examination of possible efforts by some firms to try to raise the price of a stock for marking near the end of the trading day. "Marking the close" is a form of market manipulation.
RCM Comment: The regulators better watch out. They may very well discover that the government, through the PPT, has been manipulating the market in the last hour for months now.

IMF said to consider loans of 5 times members' quotas at IMF- Bloomberg
IMF is said to consider 3-6 month loans for emerging markets. said to consider aid to help with liquidity, not solvency.

TARP's purpose is to unfreeze credit markets, but process has become something like a 12-step program - Friedman Billings
Friedman Billing says the purpose of the Troubled Asset Relief Program is ultimately to unfreeze the credit markets, but the process has developed into something like a 12-step program. So far, the Emergency Economic Stabilization Act has provided for interbank guarantees, commercial paper purchase, and direct preferred equity investments in regulated financial institutions to promote M&A, and then create a value proposition for the survivors that allows the banks to attract equity in the public markets rather than be permanently financed via the TARP. Market conditions may cause officials to act with even more alacrity and create new and different experiments meant to stem the tide of sentiment. The system is past the tipping point into what could be a vortex that would be terribly destructive. The time to invest in financials is when they can present a value proposition to investors that involves good margins and the potential to grow.

News&Notes: LIBOR, Argentina & Calpers

Overnight dollar Libor falls to lowest level since June 2004 - Bloomberg.com
Bloomberg.com reports the London interbank offered rate, or Libor, that banks charge each other for overnight loans in dollars fell 16 basis points to 1.12%, the lowest level since June 2004, the British Bankers' Association said. The rate for three-month loans dropped 29 basis points, or 0.29 percentage point, to 3.54%. The Libor-OIS spread, a gauge of cash availability that measures the difference between the three-month rate and the overnight indexed swap rate, narrowed to 250 basis points for the first time since Sept. 30.

Fall out:
Argentina default looms, pension seizure roils market - Bloomberg.com
Bloomberg.com reports Argentina's planned seizure of $29 bln of private pension funds stoked concern the nation is headed for its second default in a decade. President Cristina Fernandez de Kirchner's decision hurt markets already reeling from slumping commodity prices and slower growth. The retirement system, set up in 1994 to help bolster capital markets, owns about 5% of companies listed on the Buenos Aires stock exchange and 27% of shares available for public trading, data compiled by pension funds show. Argentine bond yields soared above 24% before the announcement late yesterday, and the benchmark Merval stock index tumbled 11%. The last time the government sought to tap workers' savings to help finance debt payments was in 2001, just before it stopped servicing $95 bln of obligations.

Calpers says decline in assets may lead to increased employer contributions

LIBOR Fabrication

Jim Sinclair's Commentary:
A small warning: Libor was caught fabricating its data on April 16th 2008. Who knows what lies behind the Libor door when a big lie would be very appreciated by the honest population of Wall Street. "This game of "smoke and mirrors" took a big blow today with an article that you probably didn't hear about today. CNBC "bubble-land" TV wouldn't dare bring this to your attention. The WSJ and Bloomberg reported today that the Libor rate is being misquoted by banks. The Libor is set on the marketplace based on what the banks tell them they paid to borrow. This rate is not set by regulators. The Libor rate is set on trust. So the banks are lying and saying they are paying a lower rate when they really paid a higher lending rate. The British Bankers' Association will speed up the review of the process by which money-market rates are set daily amid concern that some contributors are providing misleading quotes. The global credit squeeze has raised concern lenders have been manipulating the so-called fixing process to prevent their borrowing costs from escalating, the Bank for International Settlements said in March. Participants have complained about whether banks are submitting accurate information, said Angela Knight, chief executive of the London-based BBA."
RCM Comments: LIBOR is the interbank lending rate in London and is used as an indicator for the health of the global banking system. Government regulators would love to see the spread between LIBOR and U.S. treasury bills narrow because the market would rally on the premise that their bailout policies were working. We are unwilling to embrace any unconfirmed positive spin regarding LIBOR as we believe it can be too easily manipulated.

News&Notes: Money Mkt Investor Funding, Synthetic CDOs, & Mr. Mortgage

RCM Comment: Due to recent requests, I wish this morning to remind you, the reader, the purpose of this blog. We are not seeking to explain short term market gyration. Volatility has increased exponentially and we feel discussing market moves and direction at this time would be detrimental. Instead, this blog was created for the purpose of helping you cut through the confusion and spin of the news cycle. We publish in these pages only the news stories we feel will have a real lasting imprint on the markets. Through the use of color and commentary we hope we are able to help you better understand the events of the day and provide you with some solid footing in the middle of this quagmire of confusion and misdirection. As always, we welcome any questions or comments you may have. This is an important time for dialogue so feel free to communicate with us where directed at the bottom of each blog or by phone (561) 575-6832.

Details of Federal Reserve Money Market Investor Funding Facility
The Federal Reserve Board on Tuesday announced the creation of the Money Market Investor Funding Facility, which will support a private-sector initiative designed to provide liquidity to U.S. money market investors. Under the MMIFF, authorized by the Board under Section 13(3) of the Federal Reserve Act, the Federal Reserve Bank of New York (FRBNY) will provide senior secured funding to a series of special purpose vehicles to facilitate an industry-supported private-sector initiative to finance the purchase of eligible assets from eligible investors. Eligible assets will include U.S. dollar-denominated certificates of deposit and commercial paper issued by highly rated financial institutions and having remaining maturities of 90 days or less. Eligible investors will include U.S. money market mutual funds and over time may include other U.S. money market investors. The short-term debt markets have been under considerable strain in recent weeks as money market mutual funds and other investors have had difficulty selling assets to satisfy redemption requests and meet portfolio rebalancing needs. By facilitating the sales of money market instruments in the secondary market, the MMIFF should improve the liquidity position of money market investors, thus increasing their ability to meet any further redemption requests and their willingness to invest in money market instruments. Improved money market conditions will enhance the ability of banks and other financial intermediaries to accommodate the credit needs of businesses and households.

Trouble for banks, insurers may lurk in synthetic CDOs - WSJ
WSJ reports a recent rash of bank failures is wreaking havoc on a large but little-known corner of the credit markets, in a development that could mean more write-downs for banks and higher borrowing costs for companies everywhere. Even as some lending markets begin to recover from last month's demise of Lehman Brothers, the securities firm's default -- together with those of other U.S. and European banks -- is causing new dislocations in the multitrillion-dollar market for complex investments known as synthetic collateralized debt obligations. That could mean trouble for banks, hedge funds and insurance cos around the world, which used synthetic CDOs as a way to invest in diversified portfolios of companies without actually buying those companies' bonds. Many synthetic CDOs contain a heavy dose of exposure to financial companies, including Lehman, Washington Mutual and recently nationalized Icelandic banks Glitnir Bank hf, Kaupthing Bank hf and Landsbanki Islands hf. As a result, the users of synthetic CDOs are facing a wave of credit-rating downgrades and outright losses, which are coming to light gradually as ratings cos pore over hundreds of individual synthetic-CDO deals. Meanwhile, hedge funds and other investors are heading for the exits amid worries about how bad the losses and downgrades will be, causing the market value of synthetic CDOs to slide. Dealers are offering about 50 cents on the dollar or less for some pieces of synthetic CDOs that used to be rated triple-A, according to one trader. That is down from about 60 cents on the dollar only three weeks ago. "We've seen some hedge funds trying to get out of positions, and that's rattling credit markets," said Laurent Gueunier, head of structured corporate credit at AXA Investment Managers in Paris.

Written 10/20 by Mr. Mortgage's Guide to the Truth:

Today, the daytime financial market variety shows are simply giddy over the DataQuick report saying ‘SOUTHERN CA HOME SALES ARE UP 65% OVER LAST YEAR’.
Sorry to rain on the pom-pom parade, but how I see it home sales were worse last month. Let me explain. In Sept 2007, there were 12,455 sales of which 12.6% (1570) were foreclosure related. This means last Sept there were 10,885 ‘organic’ sales, which is ‘me selling a home to you’. In Sept 2008, total sales were in fact up 65% over last year at 20,497. But, 50% were foreclosure related meaning only 10,249 organic sales went off. This is significant and worse than a year ago. Also, remember that last Sept sales plunged by 30% from August due to lenders pulling out of the jumbo market all at the same time so it was not a tough month to beat.
Organic sales have plummeted as prices have fallen because with values down 40%-70% across the state, so many are underwater. When you owe more than your home is worth you can’t sell or refinance. You are stuck. Additionally, more than 10k homes in SoCal entered the foreclosure process or were actually foreclosed upon during the month of Sept meaning the problem is getting worse because more inventory is coming in than going out. Lastly, prices fell a sharp 7.6% in a single month, which puts even more people underwater in their homes and exponentially increases the chance of loan default across all paper types. Please show me a month where organic sales rise, prices stay steady or rise and foreclosures stay steady or fall and I will call that a ‘better’ report. This surely is not it.

News&Notes: LEH's CDS unwind, Rule changes, Iceland update & Alt. Energy

Quote of the day: "Real wisdom is being stored away in the subcellars by the misers of learning."
Henry Miller

RCM Comment: Interesting link that discusses the fallout from the LEH bankruptcy with regards to the Credit Default Swap maket. http://www.telegraph.co.uk/finance/comment/ambroseevans_pritchard/3211647/Fears-of-Lehmans-CDS-derivatives-haunt-markets.html

Bank-equity program gets accounting fix - WSJ
WSJ reports the Bush administration is expected to allow banks that participate in the government's $250 billion capital-injection program to avoid triggering an accounting rule that could have hurt the banks' finances. The program, announced last week, is intended to encourage banks to lend again by having the government take equity stakes in the institutions so they can rebuild their capital levels. But in its rush to get the program under way, the administration overlooked a key detail involving the potential issuance of stock, people familiar with the matter said. Under the initial plans, participating banks will sell the government a certain amount of preferred stock. But they are also required to issue warrants, which give the government the right to purchase a bank's common stock at a certain price. However, the $700 billion rescue legislation passed by Congress requires that the warrants be treated as a liability on their balance sheets. That could force the banks to record a loss and thus impair their capital levels -- the very opposite of what the government is aiming to accomplish. The SEC and the Financial Accounting Standards Board are expected to issue guidance telling the banks participating in the program that they can consider the warrants "permanent equity" under generally accepted accounting principles, people familiar with the matter said. Under such guidance, the problem would be resolved because the warrants wouldn't be considered a liability and wouldn't trigger "mark to market" accounting that forces them to price them at their currently diminished value, the people said.
RCM Comment: This story has it all! We have been writing for weeks about the unintended consequences of the government intervention which, let's be honest, was a nice way of saying the stupidity of the current leadership was boundless. But to make this story even more delicious, it comes gift wrapped with another example of rule changing to suit the powers that be. The current leadership continues to run rough shod over accounting rules to cosmetically fix problems.

EU banks get leeway on making write-downs - WSJ The Wall Street Journal reports European banks could soon find it much easier to avoid write-downs thanks to changes in accounting rules being pushed through by European policy makers. In moves that analysts say could boost earnings but make it harder to discern the financial health of banks, the European Union and international accounting standard-setters are loosening so-called mark-to-market accounting rules, which require banks to value investments at the price they would get if they sold them immediately. The changes will allow banks to reclassify some assets as long-term investments, a shift that will grant them a great deal more leeway in deciding what those assets are worth -- and how much they have lost in the latest bout of financial turmoil. The new accounting rules are "one of the many weapons being deployed to fix the banking crisis," Belgian Finance Minister Didier Reynders said in an interview. Analysts say it is difficult to estimate how much banks could reclassify among their hundreds of billions of dollars in loans and other investments. Yet not having to value some assets at the current market price "could have a material impact on earnings," said Morgan Stanley analyst Michael Helsby.
RCM Comment: So, apparently the Europeans have joined the other patients in the asylum and are refusing the swallow the medicine. Can you imagine how nice the world would be if we could all just change rules whenever we wanted? The next time I get pulled over for speeding I will be sure to tell the police officer the rules have changed, he now must hold on to that ticket because in the future the speed limit will go up and I will no longer be in violation. On a more serious note, we have written over the last week or so that cash flow and dividends may replace EPS as the key metrics for investing going forward. For a long time EPS and growth stocks have been the sexy ideas on Wall St., but as accounting standards continue to get bastardized we may see a shift back the 1950s way of thinking where dividends and cash flow were king, A company can manipulate EPS with fancy accounting, but dividends are tangible and they may begin to draw a premium as we come out of this bear market.

Update: Iceland to announce $6 bln IMF-led rescue package - FT FT reports Iceland is poised to announce a $6 bln International Monetary Fund-led rescue package alongside a number of other central banks to help stabilise its economy after its banking system collapsed earlier this month. People with knowledge of the talks between Iceland and the IMF said the IMF is expected to contribute just over $1bn with central banks from the Nordic region and Japan contributing the rest. It is unknown whether Russia will participate in the rescue plan. No official invitation from Iceland to the IMF has been made yet, but it is understood an official letter will be sent by the Icelandic government either later on Monday or Tuesday.

Winds shift for renewable energy as oil price sinks, money gets tight - WSJ
WSJ reports the prospects of renewable-energy companies soared with oil prices, but the global credit crunch and the easing of energy costs have brought them back to earth with a thud. With banks reluctant to lend and their stock prices tumbling, many green-energy concerns are struggling to find the long-term funding they need to expand in a capital-intensive industry. In the past three months, global renewable-energy stocks tracked by New Energy Finance, a London-based consultancy, have dropped about 45%, compared with a 23% decline in the Dow Jones Industrial Average over the same period. The sector's problems have been compounded by the skid in oil prices to below $70 a barrel last week from more than $147 in July. The sudden reversal in crude prices has removed -- at least temporarily -- a key rationale for investors to pump billions of dollars into alternative fuels, industry analysts say. The result: At least in the short term, a slew of projects from palm-oil-based biodiesel plants in Indonesia and Malaysia to wind farms and solar projects across the U.S. and Europe may not be able to get funding.
RCMComment: For those of you who have asked us about this sector, the above story may shed some light.

News&Notes: LIBOR & Cali. Muni. Deal

RCM Comment: Updates to stories covered in this blog over the last few weeks...

ECONX Dollar Libor logs first weekly drop since July on cash funding -
Bloomberg.com
Bloomberg.com reports the cost of borrowing dollars in London fell, rounding off the first weekly decline since July, after central banks around the world pumped unprecedented amounts of cash into money markets and governments backed loans. The London interbank offered rate, or Libor, for three-month loans in dollars dropped for a fifth day, sliding 8 basis points, or 0.08 percentage point, to 4.42%, the British Bankers' Association said. It declined 40 basis points this week. The overnight rate for dollars slid 27 basis points to 1.67%, the lowest level since September 2004. Asian rates also fell... Rates fell this week after central banks joined forces to offer lenders an unlimited supply of dollars and the European Central Bank did the same with euros. Still, the cost of borrowing between banks remains near record highs relative to the Federal Reserve's benchmark rate of 1.5%. The spread between three-month dollar Libor and the Fed rate was 292 basis points, or 2.92 percentage points, up from 108 basis points a month ago. At the start of the year, the spread was 43 basis points.

California increases offering twice to meet demand for munis - WSJ
WSJ reports California sold $5 billion in short-term municipal notes Thursday in a deal that helps the state meet its cash needs and one that was upsized twice in the final 24 hours because of strong investor demand. The state will return to the market at a later date to raise the additional $2 billion toward its $7 billion total cash-flow borrowing needs for fiscal 2008-09, Bill Lockyer, California's state treasurer, said in a statement. To woo enough investors to take on such a large block of debt, California set the initial yield ranges to relatively high levels for short-term paper. Demand for the offering was sufficient that the final yields were at the low end of ranges first quoted to individual investors. California split the offering into two tranches, with $1.2 billion maturing May 20, 2009, and yielding 3.75%, and $3.8 billion maturing June 22, 2009, and yielding 4.25%. This compares with 2.2% yields on $750 million in similar short-term notes Massachusetts sold earlier this month. "It comes down to sheer size," said Tom Dresslar, a spokesman for Mr. Lockyer. "If we'd have gone to market with $750 million we could have gotten significantly lower rates."

News&Notes: LIBOR update, FASB rules & unintended consequences

Money-market rates in London fall as Central Banks inject cash - Bloomberg.com
Bloomberg.com reports money-market rates in London fell after central banks provided $254 billion of emergency cash to ease the paralysis in the credit markets and UBS got a $59 billion government bailout. The London interbank offered rate, or Libor, that banks charge each other for three-month loans in dollars declined for a fourth day, sliding 5 basis points to 4.50 percent today, the British Bankers' Association said. The overnight rate fell 20 basis points to 1.94 percent, the lowest level since November 2004. Asian interbank rates also dropped.
RCM Comment: A spot of good news. We will continue to watch this closely

For fast cash, cos tap revolving loans - WSJ
WSJ reports cash-strapped companies aren't waiting for the U.S. banking bailout to free up credit. Instead, dozens are draining billions of dollars from "rainy day" revolving loans arranged previously with banks. The mass drawdowns reflect another weak spot for the ailing banking industry. And they show businesses' mounting anxiety about the broader economy. Some are borrowing out of a sense of caution and prudence, hoping to allay jitters about their access to funding. Others simply appear desperate for cash.

SEC eases ruling to lift banks - Bloomberg.com
Bloomberg.com reports the SEC agreed to back an effort by banks that may let them delay writedowns on a type of security that has declined in value during the collapse of the credit markets. Banks in limited cases may account for so-called perpetual preferred securities as debt, letting them wait to write down their value, the agency informed the Financial Accounting Standards Board. The SEC's interpretation may help resolve a debate over accounting for the securities, part of a broader discussion on valuing hard-to-sell assets. Auditors say the securities should be treated as equity and banks sought to count them as debt. A senior SEC official said the interpretation is an "intermediate step" until FASB can sort out the accounting treatment of perpetual preferred securities.
RCM Comment: Another example of the lack of leadership by Chairman Cox. During this crisis he has consistently chosen the route of deception and manipulation over the hard choice of reality and discipline.

Crisis reverberates in credit, stock markets - WSJ
WSJ reports government efforts to heal the credit markets are having unintended consequences that are roiling different sectors of the market and adding to anxiety among investors, who already are worried about the impact of a possible recession on U.S. companies. Barely two days after the Treasury announced plans to buy stakes in U.S. banks and the FDIC said it would provide guarantees on bank debt for three years, investors are making unexpected shifts. Wednesday, bonds issued by mortgage providers Fannie Mae and Freddie Mac sold off sharply, even though these companies have government backing behind their debt. Traders said hedge funds were forced to sell as they deleverage, and investors were selling some Fannie and Freddie bonds -- known as agency debt -- and shifting money into bonds issued by large U.S. banks. These bank bonds boast higher yields and also would benefit from implied government guarantees, making them appear relatively safe in the eyes of risk-averse investors, for now. The bonds issued by Citigroup (C), Goldman Sachs (GS) and Bank of America (BAC) gained over the last two days.
RCM Comment: 'Unintended consequences', that could be the theme of the current leadership's choices over the last few months. Paulson and Co. continue to come up with wonderful sounding populist ideas in an attempt to manipulate the current crisis but only succeed in squeezing the proverbial balloon.

Citadel dispels rumors but can't mask a bad year - WSJ
WSJ reports Citadel Investment Group has been having a miserable year with returns that have dropped 26% to 30%. But rumors that its performance was far worse were so rife that they helped drag down the stock market on Wednesday, and prompted Citadel to take steps to set the record straight. The rumors swirled for days and gained momentum on Tuesday morning when they were published on a financial Web site. After a complaint from Citadel, the site pulled down the item within an hour. Still, by Wednesday afternoon, the rumors were buzzing all over Wall Street -- and around the globe. On Wednesday, Kenneth Griffin, head of Citadel, sent a letter to investors. September, he wrote, was the "single worst month, by far, in the history of Citadel. Our performance reflected extraordinary market conditions that I did not fully anticipate, combined with regulatory changes driven more by populism than policy." In coming weeks, Mr. Griffin wrote, the firm's earnings will continue to be volatile, "as the world manages the unfolding crisis." Citadel has told clients that, contrary to the rumors, it has not seen its borrowing lines cut or the terms of its borrowings altered.
RCM Comments: Here is one perfect example of why we are witnessing extreme volatility in all asset classes regardless of fundamentals. When a fund the size of Citadel has a year this bad and they need to raise cash to meet redemptions, they sell all asset classes.

Q: Is the government rescue plan working?

Retailers lead in credit default swap widening - DJ
DJ reports the retail sector is leading others in widening of credit default swaps today, Tradition Asiel Securities says. "Weak retail sales and worsening economic outlook (are) increasing underlying risk in retail CDS and stocks," co says. Credit default swaps on Macy's (M), Jones Apparel (JNY) and Liz Clairborne (LIZ) have jumped nearly 30%, firm says. "It now appears that consumption - the lifeblood of the US economy - is now in recession for the first time since the early 1990s," Markit says, adding CDS for retailers were at record levels.

A: Not yet. I guess the government will need to guarantee the debt of Retail companies now.

10/15T11:51 News & Notes

RCM Comment: The canaries continue to die as the coal mine remains toxic even after the central bank interventions of the weekend. Evidence below:

Fannie, Freddie, FHLB debt risk premiums at record wide levels
The government backs Fannie and Freddie, but debt risk increases?!?!?! The market is suggesting that FNM and FRE could still fail.

Liquidity troubles, volatility bedevil currency markets - WSJ
WSJ reports days after governments in the U.S. and Europe announced historic steps to shore up their banking systems, currency markets have remained volatile and sparsely traded compared with just months ago. This environment makes it difficult for companies to manage their exposure to currencies, and, in some cases, has resulted in major losses. Liquidity in currency markets is "the worst I've ever seen it," said Parker King, head of currency investing at Putnam Investments. "The volatility has gone through the roof." While conditions are slightly better than during the depths of last week's turmoil, they are unlikely to improve quickly, said investors. In a barometer of the broader fear pervading markets, interest rates for short-term borrowing between banks have yet to drop significantly. The average daily turnover in currency markets in April 2007 was $3.2 trillion, according to the Bank for International Settlements. No more-recent figure is available, but investors said they are trading a fraction of what they normally would, with greater difficulty and at much higher costs. Transactions that would have had no impact on exchange rates several months ago now move the market.

Problem of home prices remains - WSJ
WSJ reports the Treasury Department's rescue plan for the U.S. financial industry doesn't directly address the root cause of the crisis: falling home prices. The government's plan, which includes taking stakes in major financial institutions and temporarily guaranteeing certain new bank debt, could cushion the economy and thus the housing market from further blows. But many economists say additional measures are needed to stimulate demand for homes and to reduce mortgage delinquencies and foreclosures. At the heart of the rescue plan is an effort to keep the credit crunch from sending the economy into a tailspin. But some economists say the government needs to do more to address the underlying problems that triggered the credit crisis. "It's very disappointing" that the plan doesn't do anything "to stop the spiral in home prices," which is reducing net worth and creating a falloff in consumer spending, says Harvard University economist Martin Feldstein.

RSX Russian stocks suspend trading as shares fall - Intl Herald Tribune (19.44 )
Intl Herald Tribune reports Russia's two main stock exchanges suspended trading as shares fell steeply in the morning, with energy stocks tracking oil prices lower. Trading was suspended at 1:05 p.m. (0905 GMT) for one hour on the RTS after shares fell 6.9%. MICEX, where most trading takes place, suspended trading at 1:35 p.m. (0935 GMT) for one hour after stocks dropped 6.9%. Shares were hurt as oil prices — the backbone of Russia's economy — dropped to $77.8 a barrel and as Asian indexes moved lower Wednesday. European stocks also declined in morning trading.

Oppenheimer discuses U.S. government's decision to inject $250 bln into financial institutions
Oppenheimer notes on Tuesday, the Treasury announced plans to make $250 bln in capital injections directly into U.S. banks. While a formal term-sheet was provided for the terms and conditions of such capital injections, co names were not officially provided. The terms are relatively painless for the participating banks and resemble something like bridge-equity in the sense that the terms encourage the replacement of such capital at the earliest date possible with benefits of a 50% reduction in warrants. Cos could of course choose to take advantage of the low-cost capital as well. Firm does not view this as an "out of the woods" move but rather one large step in the right direction to restore some liquidity to a badly beaten down financial markets. Firm believes credit costs will continue to surprise on the upside and revs will begin to surprise on the downside as cos will be forced make money off of lower asset bases. Firm believes at least a meaningful portion of this infused capital will be directed toward building reserves rather than asset growth.

Fed offers GE, Citigroup commercial paper subsidies - Bloomberg.com
Bloomberg.com reports the Federal Reserve may subsidize America's companies by purchasing their short-term debt at rates below those demanded by private investors in the $1.6 trillion commercial-paper market. Fed officials yesterday set the yield they will pay for commercial paper at about 1.6 percentage points less than the average cost for financial companies, weekly central bank data show. Policy makers last week announced emergency plans to buy the securities after the market shrank to a three-year low. The discount cuts the cost of cash to 2.2% from 3.7% for General Electric (GE) and from 4.7% for Citigroup (C), data compiled by Bloomberg show. One possible unintended consequence: private buyers are shut out. "The Fed can drive everybody else out of the market'' for buying commercial paper unless market yields drop, said Robert Eisenbeis, chief monetary economist at hedge fund Cumberland Advisors, who used to work at the Atlanta Fed. That could end up "assuring that markets won't restart,'' he said.

ECB Leads push to flood banks with dollars in unlimited tenders - Bloomberg.com
Bloomberg.com reports the European Central Bank, Bank of England and Swiss National Bank loaned financial institutions a combined $254 bln in their first tenders of unlimited dollar funds, stepping up efforts to ease strains in markets. The Frankfurt-based ECB lent banks $170.9 bln for seven days at a fixed rate of 2.277%. The Bank of England allotted $76.3 bln and the Swiss central bank $7.1 bln at the same rate, also for a week. Policy makers are trying to unfreeze credit markets and get banks lending to each other again after a crisis of confidence culminated last week in the biggest stock-market sell-off since 1933, threatening to tip the world into a recession. Money-market rates have started to decline, suggesting the measures may be working. The London interbank offered rate, or Libor, that banks charge each other for three-month dollar loans will drop about 14 basis points to 4.50% today, according to David Buik, a market analyst in London at interdealer broker BGC Partners Inc. Asian money-market rates fell earlier today after the Bank of Japan said it will also offer unlimited dollar funds, with its first tender to be held on Oct. 21, and Hong Kong agreed to guarantee all bank deposits. In the U.S., the government has earmarked $250 bln to purchase stakes in the nation's largest financial companies including Goldman Sachs Group Inc. to prevent a banking collapse. The U.K. is spending 50 bln pounds ($87 bln ) on bank stakes, while France, Germany, Spain, the Netherlands and Austria have pledged 1.3 trillion euros to shore up their banking systems.
RCM Comment: Hard to get our heads around the numbers discussed in this piece, but easy to understand the effects this wild growth of fiat money will have on GOLD.

Key reason for last week's collapse...

Record $65 bln pulled out of mutual funds - FT
FT reports US investors pulled a record $65 bln out of mutual funds in the week to last Friday, as their losses mounted from failing stock and bond markets. Two-thirds of the money was drawn from equity funds, which saw outflows of close to $9 bln on Friday alone. Equity funds have had outflows of $56 bln during October so far -- the largest monthly drop since records began almost 20 years ago, according to TrimTabs, which tracks fund flows. Hedge funds also saw big redemptions during September. Figures are still being compiled, but the final tally is likely to reach tens of billions of dollars in outflows for the month, according to two data providers. Charles Biderman, the chief executive of TrimTabs, said a significant difference between this and previous fund sell-offs was that investors were pulling out of both bond funds and equity funds, as well as from hedge funds, money market funds and bank savings accounts.

10/14T11:01 News & Notes

How did Einstein define insanity? I believe he said it was doing the same thing repeatedly while anticipating different results. Witness our government's actions in the story below.

ECONX Paulson, Bernanke and FDIC Chairman Bair to give joint statement on actions to strengthen financial institutions and markets
Treasury Secretary Paulson, Federal Reserve Chairman Bernanke, and FDIC Chairman Sheila Bair to give joint statement on a series of comprehensive actions to strengthen public confidence in financial institutions and restore functioning of credit markets... "Today we are taking decisive actions to protect the U.S. economy, to strengthen public confidence in our financial institutions, and to foster the robust functioning of our credit markets. These steps will ensure that the U.S. financial system performs its vital role of providing credit to households and businesses and protecting savings and investments in a manner that promotes strong economic growth in the U.S. and around the world. The overwhelming majority of banks in the United States are strong and well-capitalized. These actions will bolster public confidence in our system to restore and stabilize liquidity necessary to support economic growth. Last week, the President's Working Group on Financial Markets announced that the U.S. government would deploy all of our tools in a strategic and collaborative manner to address the current instability in our financial markets and mitigate the risks that instability poses for broader economic growth. This past weekend, we and our G7 colleagues committed to a comprehensive global strategy to provide liquidity to markets, to strengthen financial institutions, to prevent failures that pose systemic risk, to protect savers, and to enforce investor protections. We welcomed the steps announced by our European colleagues this weekend to implement the action plan, and ensure financial institutions in Europe can finance economic growth. Today we are implementing our strategy with three important actions. First, Treasury is announcing a voluntary capital purchase program. A broad array of financial institutions is eligible to participate in this program by selling preferred shares to the U.S. government on attractive terms that protect the taxpayer. Second, after receiving a recommendation from the boards of the FDIC and the Federal Reserve, and consulting with the President, Secretary Paulson signed the systemic risk exception to the FDIC Act, enabling the FDIC to temporarily guarantee the senior debt of all FDIC-insured institutions and their holding companies, as well as deposits in non-interest bearing deposit transaction accounts. Regulators will implement an enhanced supervisory framework to assure appropriate use of this new guarantee. We are pleased to announce that nine major financial institutions have already agreed to participate in both the capital purchase program and the FDIC guarantee program. We appreciate that these healthy institutions are taking these steps to strengthen their own positions and to enhance the overall performance of the U.S. economy. By participating in these programs, these institutions, along with thousands of others to come, will have enhanced capacity to perform their vital function of lending to U.S. consumers and businesses and promoting economic growth. They have also committed to continued aggressive actions to prevent unnecessary foreclosures and preserve home ownership. Third, to further increase access to funding for businesses in all sectors of our economy, the Federal Reserve has announced further details of its Commercial Paper Funding Facility (CPFF) program, which provides a broad backstop for the commercial paper market. Beginning October 27, the CPFF will fund purchases of commercial paper of 3 month maturity from high-quality issuers. Together these three steps significantly strengthen the capital position and funding ability of U.S. financial institutions, enabling them to perform their role of underpinning overall economic growth. These actions demonstrate to market participants here and around the world the strength of the U.S. government's commitment to take all necessary steps to unlock our credit markets and minimize the impact of the current instability on the overall U.S. economy. The actions taken today are a powerful step toward restoring the health of the global
RCM Comment: What does it all mean? Allow me to draw a picture to help explain the announcements today. You have heard us call Ben Bernanke "helicopter Ben" because of his comments about dropping money out of helicopters to avoid a depression. And we recently promoted him to "B-52 Ben" for his prolific use of the printing press during this crisis. Well, he now has serious company in the form of Rear Admiral Hank Paulson who is the captain of an aircraft carrier full of B-52s. Question: What do you think would be a good investment during a time of epic currency creation? If you can't answer this question then you have not been reading this blog enough and frankly, I'm a little disappointed.

Systemic risk exception to the FDIC Act. This step is a desparate attempt to address the troubles in the Credit Default Swap (CDS) market. By guaranteeing the debt of all FDIC-insured institutions Paulson and Co. have essentially wiped the slate clean of all CDS business related to these institutions. If the debt is guaranteed then there is no need to buy insurance on the debt in the form of CDSs. So in essence, all of the financial institutions that sold the CDSs (insurance) and collected premiums e.g. Paulson's Goldman Sachs, are able to keep the premiums and never need to payout. What a gift! Once again the government changes the rules in the middle of the game as it tries to navigate through this quagmire of a credit crisis.

Commercial Paper Funding Facility (CPFF): Can you hear the bomb bay doors opening? I will now answer the previous question for the new reader. The best assets to buy during a time of unabated currency creation are commodities, led by precious metals and GOLD in particular.

Follow Up:
Iceland index OMXI15 reopens -76% as financials reduced to zero - DJ
DJ reports Iceland's stock exchange index of its 15 largest listed companies opened after a three-day halt down 76% Tuesday, after exchange operator Nasdaq OMX Monday reduced the stock prices of the country's three largest banks to zero in the index calculation. At 1045 GMT, the OMXI15 was down 2,296.27 points at 708.35, a decline of more than 76% from the 3,004.62 closing level Oct. 8, the last day that stocks were traded on the exchange. Nasdaq OMX said Monday it had decided to reduce the closing prices of Kaupthing Bank, Glitnir and Landsbanki to zero in the index calculation, which accounted for the drop.

Iceland, with IMF deal in works, turns to Russia - Reuters.com
Reuters.com reports Icelandic officials are in Moscow for talks on an emergency loan that could be worth billions of euros, the country's latest attempt to raise cash to help save its economy from collapse. Iceland has tapped the International Monetary Fund for financing to help ease the crisis and some ministers have raised the possibility of membership of the European Union, long resisted by its fishing sector, to safeguard the economy. An official from Iceland's central bank said a delegation from the bank and government left for Russia on Monday to begin talks on the emergency loan, a move that has raised questions about Russia's motives and what price Moscow might extract.

RCM Editorial: FASB Update

Financial Accounting Standards Board (FASB) Update:

Earlier in the year the Financial Accounting Standards Board (FASB) passed a ruling that beginning this fall all companies were required to adopt FAS 157 which would make it harder for companies to avoid putting market prices on securities known as Level 3 assets. FAS 157 defined fair value, established a framework for measuring fair value in generally accepted accounting principles, and expanded disclosures about fair-value measurements. In developing FAS 157, FASB said it considered the need for increased consistency and comparability in fair-value measurements and for expanded disclosures about such measurements. In effect FAS 157 was intended to prevent companies from hiding balance sheet losses and inflating earnings.

However, this summer the FASB yielded to government pressure and postponed the adoption of FAS 157. A revised version of FAS 157 has now been released. The revised FAS 157 gives much greater latitude to corporations to misprice hard to price assets and inflate earnings. In our opinion this is yet another attempt at government manipulation of the market that is likely to fail. In order to succeed it assumes that market participants will continue to place primary importance on quarterly earnings reports. However, it is very difficult to fool all of the people all of the time. Therefore we would not be surprised to see the market move away from spurious earnings reports and adopt the 1950's attitude that dividends and yield are the primary determinants of a stock's value.

For more information you can visit this site: http://www.financialweek.com/apps/pbcs.dll/article?AID=/20081010/REG/810109977/1036

10/13T11:50 News & Notes

Details from Fed Web site on joint central bank actions to inject unlimited liquidity in short-term funding markets
In order to provide broad access to liquidity and funding to financial institutions, the Bank of England (BoE), the European Central Bank (ECB), the Federal Reserve, the Bank of Japan, and the Swiss National Bank (SNB) are jointly announcing further measures to improve liquidity in short-term U.S. dollar funding markets. The BoE, ECB, and SNB will conduct tenders of U.S. dollar funding at 7-day, 28-day, and 84-day maturities at fixed interest rates for full allotment. Funds will be provided at a fixed interest rate, set in advance of each operation. Counterparties in these operations will be able to borrow any amount they wish against the appropriate collateral in each jurisdiction. Accordingly, sizes of the reciprocal currency arrangements (swap lines) between the Federal Reserve and the BoE, the ECB, and the SNB will be increased to accommodate whatever quantity of U.S. dollar funding is demanded. The Bank of Japan will be considering the introduction of similar measures. Central banks will continue to work together and are prepared to take whatever measures are necessary to provide sufficient liquidity in short-term funding markets. To assist in the expansion of these operations, the Federal Open Market Committee has authorized increases in the sizes of its temporary swap facilities with the BoE, the ECB, and the SNB, so that these central banks can provide U.S. dollar funding in quantities sufficient to meet demand. These arrangements have been authorized through April 30, 2009.

Commercial paper markets is still largely frozen - NY PostNY Post reports the commercial paper market, used by companies to finance payroll and other daily expenses, is still largely frozen despite upbeat comments from General Electric (GE) chief Jeffrey Immelt. Commercial paper traders said yesterday that, while some companies have been able to access very short-term loans in the last two days, most investors remained unwilling to buy anything that matures in more than a month... "The CP market is still for the most part shut down so we're still in a very fragile state," said Deutsche Bank's chief US economist Joseph LaVorgna. "Until we see the details of the Fed program, the market will continue to be frozen and the fear will be present." Money market mutual funds, one of the largest investors in commercial paper, continue to worry that they won't be able to get out of their positions if clients begin redeeming their cash. "There is no secondary market right now for commercial paper, and the Fed should consider buying CP directly from investors to inject some liquidity into this market," said one CP trader at a large bank.
RCM Comment: This story along with the LIBOR stories are the real indicators of whether or not the G7 plans are actually having a positive effect.

Margin calls hitting more executive suites - WSJ
WSJ reports Aubrey McClendon liked to boast that he hadn't sold a single share of Chesapeake Energy (CHK) in years. As the company's founder and chief executive, he was a frequent buyer, borrowing against his holdings to accumulate more as the natural-gas company boomed. The value of his stake soared above $2 billion. Then came the stock market meltdown and, last week, the calls on those loans. After a series of rapid-fire sales, Mr. McClendon now owns less than $32 million in Chesapeake shares. And investors are hoping the company, the nation's largest and most aggressive producer of natural gas, doesn't suffer a similar comedown. "I got caught up in a wildfire that was bigger than I was," Mr. McClendon said Saturday. He declined to discuss his personal finances in detail, but said his personal situation was stable. "I'm fortunate that I have other resources and I'll be fine ," he said. Across the country, a number of executives and other insiders, including Viacom's (VIA.B) Sumner Redstone and a director of Coca-Cola Enterprises (KO), are facing cash demands from their stockbrokers and banks, demands that are requiring them to sell shares to repay borrowings. No one so far has flamed out quite as spectacularly as the 49-year-old Mr. McClendon.RCM Comment: Here is a real life example of margin calls and a major reason for the precipitous decline last week in the markets.

Iceland is poised to become the first Western nation to take IMF loan since 1976 - Daily TelegraphDaily Telegraph reports Iceland's industry minister Saturday became the first government figure to acknowledge that an emergency loan from the IMF was now the country's only hope. Oessur Skarphedinsson said: "I have reached the conclusion that if we call for help from the IMF, other central banks, other countries will want to take part in the aid process." The fund sent emissaries to the troubled country two weeks ago as a number of its banks neared collapse and foreign investors started pulling funds out of the economy at an alarming rate. The IMF experts have spent recent days in the finance ministry in Reykjavik examining the country's books and setting out the loan options to the country. Until now, Iceland's politicians had refused to countenance the likelihood of having to seek help from the fund, instead attempting to negotiate loans with a number of other countries, including Russia and Denmark. However, with its current account deficit gaping ever wider, its biggest banks having collapsed and its currency, the krona, having slumped, the ministers are now likely to accept the fund's help. Washington insiders say they expect a deal will be announced "imminently".