10/10T8:39 News & Notes

RSX Russia's Putin says govt to invest RUB175 bln in stock mkt, according to report - DJ (16.22 )
DJ reports Russia's government will invest 175 billion rubles ($6.7 billion) in the Russian stocks and bonds starting next week, the Prime-Tass news agency reported Friday citing the country's Prime Minister Vladimir Putin. The government intends to use the country's reserve funds to support the Russian stock market, which has lost almost 70% of its value since its mid-May high of almost 2,500 points. Under the plan, the country's state development bank Vneshekonombank, or VEB, will invest RUB75 billion in shares and company bonds, Putin said.


India cuts reserve ratio, scraps bond as markets tank - Reuters.com
Reuters.com reports the Reserve Bank of India slashed its cash reserve requirement to free up some $12 billion in funds and ease a cash squeeze that drove overnight rates to an 19-month high and forced the government to cancel a bond auction. The Reserve Bank of India cut the reserve ratio by 1.5 percentage points to 7.5%, increasing the scope of the 50 basis point easing announced earlier this week. The R.B.I. sprung into action after overnight rates soared to as much as 23 percent in the money market, which reopened following Thursday's holiday. The rupee hit an all-time low and the main stock index plunged more than 9%, joining a global sell off on recession fears despite unprecedented coordinated action by the world's leading RBIs to stave off a crisis. Earlier on Friday the government called off an auction for $2 billion worth of government bonds, citing liquidity conditions. Despite a global round of interest rate cuts on Wednesday and Thursday, Indian overnight lending rates more than doubled from Wednesday's closing levels of around 10%.


U.S. weighs backing bank debt; removing deposit insurance limits also on the table- WSJ
The WSJ reports that the U.S. is weighing two dramatic steps to repair ailing financial markets: guaranteeing billions of dollars in bank debt and temporarily insuring all U.S. bank deposits. If the two moves come to fruition they would mark the government's most extensive intervention yet in the financial system, as officials ponder increasingly far-reaching measures to stem the sprawling crisis. The top economic officials of the Group of Seven leading industrial nations will meet starting Friday in Washington where they intend to discuss a proposal from the U.K. government to bolster bank lending. Under the U.K.'s recently announced plan, which it is now pitching to the G-7 members, the British government would guarantee up to $250 billion ($432 bln) in bank debt maturing up to 36 months. The British concept to expand its proposal to other countries has a lot of support from Wall Street and is being pored over by U.S. officials, according to people familiar with the matter. White House spokesman Tony Fratto said the U.S. "is reviewing the idea and discussing it with our British counterparts." The move to back all U.S. bank deposits, which is only in the discussion stage, would be aimed at preventing a further exodus of cash from financial institutions, including small and regional banks, some of which are buckling under the strain of nervous customers. In recent weeks, customers have pulled money out of some healthy community banks under the assumption that the government will only insure all the depositors of larger banks in the event of a failure. It's not clear that either idea will become reality, and U.S. officials downplayed expectations of any announcement this weekend. A blanket guarantee on deposits could present risks apart from exposing the FDIC to enormous costs. Guaranteeing all bank liabilities without doing the same for money-market mutual funds or insurance companies could prompt customers to move money from one sector to another, seeking the best protection. Yet not making such a move opens up the possibility that customers with large deposits in U.S. banks might withdraw their funds and move them overseas to jurisdictions that offer more insurance.

RCM Comment: Three more examples illustrating the world-wide bonfire of currencies. Governments around the world are attempting to stem the tide of the financial tsunami by printing money and buying equity and debt with worthless paper; in effect, monetizing the crisis. This process has never succeeded in reversing a decline. It only succeeds in prolonging the crisis and ruining currencies. The silver (forgive the pun) lining in all of this is the effect these policies will have on precious metals. We can expect to see a significant rise in the value of precious metals as well as other hard assets as these policies are implemented.



Investors pulled a record $72 billion from U.S.-managed stock and bond mutual funds in September, seeking the safety of government-insured bank deposits as the financial crisis worsened. Shareholders took $43.5 billion from stock funds last month and $28.8 billion from bond funds, according to data compiled by TrimTabs Investment Research in Sausalito, California. The exodus continued in the first week of October, with an additional $49.3 billion of outflows.
RCM Comments: Redemptions are usually at the heart of any major sell-off. This story helps explain why all equity groups are selling off together. You may ask the question, why are commodity stocks going down when currencies are burning? Or, why is CSCO trading at a 10 PE with billions of dollars in cash on the balance sheet? The answer is that there may be many good companies in a sell-off but no good stocks because selling is indiscriminate. In addition, the government continues to set policy that has unintended consequences. By increasing the safety of bank deposits the government has encouraged individuals to take money out of brokerage accounts, in essence draining money out of the system.

Other government moves that have shown a complete lack of understanding for the function and psychology of the markets:
Restrict short selling = reduces liquidity, increases volatility and facilitates a 20+% decline in the equity markets over the last 5 trading sessions.
Guarantee money markets = incentive for investors to pull money out of equity funds and hide in money markets in turn facilitating a 20+% decline in the equity markets in the last 5 trading sessions.