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.

10/8T12:43 News & Notes

Joint statement by Central Banks on rate cut
Throughout the current financial crisis, central banks have engaged in continuous close consultation and have cooperated in unprecedented joint actions such as the provision of liquidity to reduce strains in financial markets. Inflationary pressures have started to moderate in a number of countries, partly reflecting a marked decline in energy and other commodity prices. Inflation expectations are diminishing and remain anchored to price stability. The recent intensification of the financial crisis has augmented the downside risks to growth and thus has diminished further the upside risks to price stability. Some easing of global monetary conditions is therefore warranted. Accordingly, the Bank of Canada, the Bank of England, the European Central Bank, the Federal Reserve, Sveriges Riksbank, and the Swiss National Bank are today announcing reductions in policy interest rates. The Bank of Japan expresses its strong support of these policy actions... The Federal Open Market Committee has decided to lower its target for the federal funds rate 50 basis points to 1-1/2 percent. The Committee took this action in light of evidence pointing to a weakening of economic activity and a reduction in inflationary pressures. Incoming economic data suggest that the pace of economic activity has slowed markedly in recent months. Moreover, the intensification of financial market turmoil is likely to exert additional restraint on spending, partly by further reducing the ability of households and businesses to obtain credit. Inflation has been high, but the Committee believes that the decline in energy and other commodity prices and the weaker prospects for economic activity have reduced the upside risks to inflation.

Britain announces bank bailout worth hundreds of billions - NY Times The NY Times reports Britain announced a three-part multi-billion dollar bailout for its beleaguered banks, and Spain moved to mount a separate rescue of its own banking sector. At a news conference, Prime Minister Gordon Brown insisted that the crisis had begun in the U.S. As a result of the crisis, he said, "the global financial market has ceased to function." He depicted the British measures as far more radical than had been forecast and farther reaching than America's $700 bln bailout. "We have led the world today with a proposal to restructure our banking system," Mr. Brown said. "We are taking the steps that I believe other countries will take in the future." A statement from the British Treasury said at least $350 bln "will be made available to banks under the special liquidity scheme," doubling the size of a credit line from the Bank of England established as the financial crisis began and designed to unlock frozen lending between banks. Additionally, the British government pledged $87 bln in direct support for eight major banks. The move amounted to a partial nationalization of some of those institutions. Minutes after the announcement, the British stock market fell by almost 5%. Mr. Brown said there would be "strings attached and conditions to be met" by the banks. "We expect to be rewarded for the support we provide." "Our stability and restructuring program is comprehensive, specific and breaks new ground," Mr. Brown said. "This is not the American plan. Our plan is to buy shares in the banks themselves and therefore we will have a stake in the banks." "We are not simply giving money," he said. Alastair Darling, the chancellor of the Exchequer said the government would continue to do "whatever is necessary" to combat the financial crisis. "The reason we are doing this now is because it is necessary to stabilize the banking system." The Treasury announcement promised support for the banks in two overall tranches of $43.5 bln to be drawn as preference share capital. The banks were named as Abbey, Barclays (BCS), HBOS, HSBC (HBC), Lloyds TSB (LYG), Nationwide Building Society, Royal Bank of Scotland (RBS) and Standard Chartered. It said the amount to be issued to each of the eight banks remained to be finalized but would take into account issues such as the executive compensation packages offered by British banks and would require "a full commitment to support lending to small businesses and home buyers." The statement also promised a " government guarantee of new short- and medium-term debt issuance to assist in refinancing maturing, wholesale funding obligations as they fall due."
RCM Comment: The two stories above prove the central banks both here and around the world have dropped the proverbial gloves and are fighting the credit crisis with all they've got. They have taken their collective eyes off of commodity prices and are content to debase currencies. Watch closely, this should lead to a rise in the value of Gold against all currencies.

Russia, Indonesia suspend trading in emerging market stock rout - Bloomberg.com
Bloomberg.com reports Russia suspended trading on its Micex Stock Exchange for two days and Indonesia halted trading indefinitely as stocks plummeted in the worst emerging-market rout in two decades. Russia's Micex Index dropped 14.4% before the suspension as President Dmitry Medvedev's package of $186 bln in support for banks and companies failed to lift investor confidence that the government can arrest its worst financial crisis since the 1998 default. The Jakarta Composite index fell 21% in its biggest weekly slump in at least 25 years. Investors are fleeing on concern the worsening global credit crisis will cause more banks to collapse and push the global economy into recession, lowering the price of the commodities that drive developing nation economies. The benchmark MSCI Emerging Markets index is headed for its worst weekly decline since it was established in 1987 after falling 21.4%.
RCM Comment: Billions of hedge fund dollars have been directed to emerging markets over the last few years. In fact, up until recently emerging markets were the only bright spot on the investing landscape. Now redemption and repatriation are the orders of the day, but remember, most hedge funds have lock up agreements with clients. It is no coincidence that the emerging markets have swooned in the 1st week of October because in most cases requests for redemption occur one day a year and that day is September 30th.

Iceland's krona quoted 95% below peg; regulator steps in - Bloomberg.com
Bloomberg.com reports Iceland's krona was priced at 94 percent below the peg against the euro set by the central bank yesterday to stabilize the currency as regulators said they took control of Glitnir Bank hf, the country's No. 3 lender. Nordea Bank AB, the biggest Scandinavian lender, said the price suggested by bid/ask spreads in pre-market trading was 255 per euro, compared with the 131 per euro level established by the central bank yesterday. There had been no buying of the krona to support the peg by the central bank, Nordea said... Sweden's central bank said it will loan as much as 5 bln kronor ($700 mln) to the Swedish unit of Iceland's Kaupthing Bank hf after it was unable to meet payment obligations and was put up for sale.

Rosenthal Rant: Answer to the Financial Crisis: Taking Responsibility

I have recently noticed a disturbing trend that has infected the minds of the investing public and I feel it demands our immediate attention. There seems to be an overwhelming need to lay blame or point fingers to cope with this financial crisis. The honest vocation of introspection and assuming responsibility for one's own actions has given way to the meek and sorry spectacle of crying and complaining. Allow me to give you a glaring example:

I was listening to the O'Reilly Factor on the radio the other night. A man calls in to moan about his financial troubles. He explains that he bought 30,000 shares of Washington Mutual (WM) @ $2 because the new CEO, a man who has been on the job for only a few weeks, said the company had solid liquidity. Of course, WM then goes bankrupt and the man cries to O'Reilly that he wants the CEO brought up on felony charges for misleading him. O'Reilly agrees with this man and launches into a tirade against the corporate executives!?!?

Has everyone gone mad? What kind of a world do we live in where O'Reilly, the original slap you in the face, hard core, suffer no fools journalist, cries like a little baby that the Big Bad CEO caused all the trouble for the caller. HELLO! Can someone please tell the caller to take responsibility for his own actions? If he really did buy WM just because of the CEO comments then he deserves not only to be wiped out, but also to sit in the corner wearing the dunce cap. In fact, he should feel lucky nothing else has happened to him, like an anvil falling on his head or a stick of dynamite that reads ACME on the side blowing up the ground where he's standing. How clueless do you have to be to invest a penny in WM - or any financial stock - in the midst of a credit crisis? What was he trying to do, catch the bottom in the financial sector? Well then, instead of whining about the CEO allow me to give him a little advice that may help in the future: Never try to catch the bottom. As we say in this business, if you try to catch a falling knife you will only succeed in cutting off your fingers.

And one more thing: If everyone insists on pointing fingers instead of taking responsibility, then let's at least point in the right direction. I could build a list a mile long (beginning summer 2007) with quotes from Hank Paulson and Ben Bernanke that laud the financial system, cheer the liquidity situation and assure the investing public that all is well. If there is someone to criminally charge for misleading the public let's start at the source. It's not like this current crisis just popped up out of the blue. While Hank and Ben were snowing the public with misleading statements of financial health, we here at RCM were writing letters to our clients outlining the unfolding crisis (viewable at http://www.rosenthalcapital.com/). And we were not the only ones writing. Other select professionals were fighting the good fight trying to inform anyone who would listen of the impending collapse.

I will admit it is unfair to simply chide the investing public for this abhorrent finger pointing behavior. After all, the public has suckled at the teat of Hank, Ben and the rest of the PPT for so long that its perspective has been distorted. Over the last few years, the public has been taught to expect constant steady gains with little volatility and that in the event problems do occur the government will come to the rescue. This bastardization of a free market has spawned such beliefs as someone else is to blame if you take out a mortgage you can't afford and subsequently lose your house; the short seller is to blame if the market goes down; the CEO is to blame if your investment loses value. I am here offering a reality check. Stop whining and complaining, stop looking for the culprit and start looking in the mirror. I know it is hard to do and I expect some will be angry with me for writing this missive, but I guarantee that if you stop blaming and start taking responsibility your investment results and financial situation will improve exponentially.