New&Notes: Bernanke's 2002 speach, Fund Flows, Hedge Fund Fresh Wave of Withdrawls & The Pennsylvania Pension Problem

RCM Comment: If you need further confirmation of our Fed chairman's beliefs that rapid money creation is the panacea to deflationary worries, then read the following excerpt. Make no mistake, this is the road map Bernanke is following. In fact, if you click on the following link you will be able to access the whole speech. http://www.federalreserve.gov/BOARDDOCS/SPEECHES/2002/20021121/default.htm

Notice how Ben has methodically tried each remedy that he laid out in this speech. Now we have reached the quantitative easing step to economic redemption. 2009 should be a momentous year for the price of Gold.

Ben Bernanke - During an address to the National Economists Club, Washington D.C. November 21st, 2002:

Although a policy of intervening to affect the exchange value of the dollar is nowhere on the horizon today, it’s worth noting that there have been times when exchange rate policy has been an effective weapon against deflation. A striking example from U.S. history is Franklin Roosevelt’s 40 percent devaluation of the dollar against gold in 1933-34, enforced by a program of gold purchases and domestic money creation. The devaluation and the rapid increase in money supply it permitted ended the U.S. deflation remarkably quickly. Indeed, consumer price inflation in the United States, year on year, went from -10.3 percent in 1932 to -5.1 percent in 1933 to 3.4 percent in 1934.17 The economy grew strongly, and by the way, 1934 was one of the best years of the century for the stock market. If nothing else, the episode illustrates that monetary actions can have powerful effects on the economy, even when the nominal interest rate is at or near zero, as was the case at the time of Roosevelt’s devaluation.


TrimTabs estimates all equity mutual funds post inflow of $10.4 billion in week ended Wednesday, November 28th
TrimTabs Investment Research estimates that all equity mutual funds posted an inflow of $10.4 billion in the week ended Wednesday, November 26, versus an outflow of $19.5 billion in the previous week. Equity funds that invest primarily in U.S. stocks posted an inflow of $6.8 billion, versus an outflow of $12.2 billion in the previous week. Equity funds that invest primarily in non-U.S. stocks had an inflow of $3.6 billion, versus an outflow of $7.2 billion in the previous week. In addition, bond funds had an outflow of $7.4 billion, versus an outflow of $13.0 billion in the previous week, and hybrid funds had an outflow of $2.4 billion, versus an outflow of $4.6 billion in the previous week. Separately, TrimTabs reports that exchange-traded funds that invest in U.S. stocks posted an inflow of $4.3 billion, versus inflow of $6.7 billion in the previous week. ETFs that invest in non-U.S. stocks had an inflow $1.5 billion, versus an inflow $1.1 billion in the previous week. RCM Comment: No surprise the market was up last week. I post this story simply to remind us that money flows move markets not news stories or economic announcements.


Hedge funds hit by fresh wave of withdrawals - FT
FT reports hedge funds have been hit by a fresh wave of withdrawals as investors search for cash, prompting more funds to impose emergency measures to block repayments. London Diversified Fund Management, one of Britain's best-known fixed- income managers, on Friday suspended both its hedge funds as trading conditions in the derivatives markets created valuation difficulties ahead of redemptions. LDFM, founded by former JPMorgan bankers David Gorton and Rob Standing, manages close to $3 bln, down from a peak of $8 bln after its main fund fell 23% this year and investors pulled out. LDFM is joining a roster of hundreds of hedge funds in restricting withdrawals, with investors and prime brokers estimating as many as a fifth have suspended or limited what investors can get back as they have their worst year on record. This week CQS, a London convertible bond specialist run by former Credit Suisse banker Michael Hintze, began canvassing investors on whether it should change the terms of its main fund to allow it to restrict withdrawals if markets worsen next year.RCM Comment: I hear on the financial news stations today that the markets are down because various economic data released today was not to the liking of Wall St.. This type of reporting is useless. The main reason the markets are weak is explained in the above story and the stories to follow: redemptions and repatriation.

Pennsylvania pension faces billions in losses - WSJ
WSJ reports the stock-market downturn could force the Pennsylvania state employees' pension fund to make cash payments of $2.5 billion or more to trading partners on Wall Street. The potential hit to the $27 billion pension fund is the result of an exotic strategy used to help finance $9.2 billion in hedge-fund investments. Those bets helped the pension fund beat the market when stocks were rising, but backfired when the market sank. Use of the aggressive strategy, called "portable alpha," has been cut in half, with officials of the Pennsylvania State Employees Retirement System acknowledging that the pension fund's exposure was "too large." Since stocks began falling, the fund has had to pay out $1.5 billion. Based on current market values of derivatives still outstanding, Pennsylvania could owe another $1 billion, a fund spokesman says. With the pension fund down about 14% in the first nine months of 2008, it is possible that the state will have to quadruple its annual contribution to roughly $1 billion in 2012, according to people familiar with the situation.


Tudor Jones suspends withdrawals from flagship fund - FT
FT reports Paul Tudor Jones, who shot to fame and made a fortune when he predicted the 1987 stock market crash, has suspended withdrawals from his $10 bln flagship hedge fund and plans to split out toxic assets into a new fund with lower fees. Mr Jones, in a letter sent to clients on Friday, said investors wanted back 14% of their money at the end of the year. This would have left the remaining investors holding too large a proportion of illiquid assets, particularly corporate credit in emerging markets, the letter said. The suspension is further evidence that even successful hedge funds are being hurt by the rush for cash among investors, as the Tudor BVI fund is down only 5% to the end of November, far ahead of the industry. Some in the industry fear the suspension could lead to further withdrawals from successful funds as investors search for cash elsewhere, prompting more trouble for hedge funds.


Satellite halts hedge fund withdrawals, fires 30 after losses - Bloomberg.com
Bloomberg.com reports Satellite Asset Management, founded by former employees of billionaire George Soros, stopped client withdrawals from its three largest hedge funds and eliminated more than 30 jobs after losses reduced the co's assets to about $4 billion this year. Satellite Overseas Fund, Satellite Fund II and Satellite Credit Opportunities have declined as much as 35% in 2008, said a person with knowledge of the funds' performance... The company has received withdrawal notices, which are effective through June, for 21% of the $2 billion Satellite Overseas Fund, its largest fund, the person said. Satellite has cash to meet current redemptions and will continue to run the funds and sell securities over a period of years to avoid unloading them quickly in slumping markets, the person said.


EU blocks French move to shore up capital for retail banks - FT
FT reports the French government's plan to shore up the capital position of France's six main retail banks is being blocked by the European Commission, which insists they must reduce their lending in return for state support. Christine Lagarde, French finance minister, yesterday spoke to Neelie Kroes, European Union competition commissioner, to persuade her to lift her veto on France's €10.5 bln support package, but Ms Kroes is sticking to her view that banks cannot use state aid to increase their lending books. "We have to apply the same criteria to everyone . . . support should be sufficient to offset the negative impact of the current financial crisis and no more," said one official. The French government reacted furiously to the Commission's argument. One senior official described it as "ridiculous" and "stupid" because it would exacerbate the credit crunch - the very thing Paris said it was trying to avert when it decided last month to inject capital into all its large high street banks.

News&Notes: Commercial Real-Estate Casualties & Lehman Fallout

RCM Comment: Coming to you live from the road in San Diego: Happy Thanksgiving!

Perot Fund liquidates as debt bets turn sour - WSJ
WSJ reports last week's record plunge of the commercial real-estate securities market has claimed its first major casualty: a $1.5 billion fund with investors including Texas billionaire H. Ross Perot and members of his family, said people familiar with the matter. Other hedge funds and money-management cos that invested in real-estate debt face the potential for more margin calls. These include a $2 billion fund managed by Petra Capital Management, a co founded by Andy Stone, one of the founders of the commercial-mortgage securities business. Also, Guggenheim Partners, one of the best-known managers in the business of investing in commercial real-estate debt, recently asked its investors for about $300 million in additional capital to help one of its debt funds to pay down borrowings. And Centerline Holding, the asset manager led by real-estate mogul Stephen Ross, is talking to its lenders to restructure its loan obligations. Mr. Ross and Edward Shugrue III, manager of real-estate debt funds for Guggenheim, declined to comment. The woes of these funds promise to put more strain on the banking sector. Banks that have made short-term loans to these funds mightn't recoup all their money even if the funds liquidate.

Groups in Lehman asset trap - FT
FT reports several companies reliant on four US hedge funds face collapse because the funds cannot access shares and loans held at the London arm of Lehman Brothers, the collapsed bank. The four funds -- whose names were kept secret in a High Court ruling this week -- claimed that they were likely to close in mid-December if they failed to get access to information about their assets frozen at Lehman. The funds made an unsuccessful effort to force the administrators of Lehman, four PwC partners, to give them details of their assets and how much they owe to ­Lehman. The funds are likely to be followed by "numerous" others of the 1,000 former clients of the Lehman prime brokerage, Lehman Brothers International (Europe), according to PwC. The warnings from the funds follow several cases of funds closing or blocking withdrawals because they cannot access holdings at Lehman, even though they expect to recover them. In his ruling, Mr Justice Blackburne said the funds argued that, if they could not get information on their assets by mid-December, "it is likely that the funds will be wound down forthwith". As well as job losses, "the funds' inability to engage in restructuring will probably lead to the collapse of at least four companies in which securities are held".

RCM Editorial: Redemption & Repatriation Tsunami Update

We are constantly searching for signs that the Tsunami is beginning to ebb. When the wave subsides we will witness a violent recovery in assets that have been suppressed for no other reason save the desperate need for liquidity. The following is a list of developments that represent the proverbial 'light at the end of the tunnel':

Russia's MICEX exchange suspends stock trade limit-up from 1535 GMT - Reuters
During the repatriation craze most stories pertaining to emerging markets spoke of halts in trading due to limit-down conditions.

The U.S.$ has traded lower the last two sessions vs. the Euro

But, the U.S.$ has traded higher vs the Yen; a sure sign the carry trade unwind is slowing.

U.S. Treasury bonds have traded lower the last two sessions.

Gold traded higher by over $50 on Friday and is trading up another $25 as of this writing.

Silver as well as copper and oil, to name just a few commodities, are all trading significantly higher in the last 2 trading sessions

RCM Editorial: Paper Burning = Gold Buying

We have been writing for months about the unfolding credit drama. We have discussed the tsunami of redemptions and repatriation ad nauseam. We have highlighted stories about bailouts and ballooning government debt. We have discussed many ideas and tried to differentiate for you, the reader, which stories mattered and which were erroneous.

During all of the negative hysteria we have highlighted one extremely positive investment theme. In fact, highlighted may be too delicate a word. We have been on the mount, the soap box, the podium. We have preached, shouted and implored. Our message has been simple and clear: PAPER BURNING = GOLD BUYING.

Friday may go down in the history books as the beginning of the next leg up in the price of gold. The precious metal rallied in price over $50. I will spare you today and not launch into another lecture on the fundamentals of the gold move. I will however, remind you that in our opinion the only reason gold has not exploded higher in the last few months is the negative effects of the massive withdrawals from equity mutual funds and hedge funds. As we have expressed in previous missives, when we get closer to the end of the year the pressure from redemptions will ebb and one of the 1st assets to feel the positive effect will be gold. Friday's action may have offered us a glimpse at this new investment paradigm.

I have no doubt the road ahead may be bumpy. As we get closer to the end of the year volatility will continue to reign supreme. However, make no mistake about it: Gold will be a beacon of light in the midst of this financial storm.

News&Notes: Paper Burning = Gold Buying, Citi Bailout, Hedge Fund Redemption & Redstone Ruin

RCM Comment: Read the next three stories and then ask yourself: Can I smell the paper burning? Gold rallied over $50 on Friday and is called another $12+ higher this morning.

Obama eyes $500 billion in Stimulus; Paulson weighs ramping up aid again - WSJ
WSJ reports aides to President-elect Barack Obama and President George W. Bush are rushing to craft measures to shore up financial markets and prevent a policy vacuum from further harming the economy during the transition of power between the two men. Mr. Obama's team is putting together a new economic stimulus plan containing more than $500 billion in federal spending and tax cuts over the next two years, Obama aides and advisers said Sunday. That package would be far more aggressive than anything envisioned during the campaign. Democratic leaders in Congress are preparing to rush passage shortly after New Year's to have a stimulus-plan bill ready for Mr. Obama to sign once he is inaugurated Jan. 20. Meanwhile, Mr. Bush's outgoing Treasury secretary, Henry Paulson, is now considering a more activist stance in his final weeks in office than he had signaled as recently as last week. He is considering tapping the second half of the government's $700 billion financial-industry rescue fund, and rolling out new programs in response to worsening market conditions, according to people familiar with the matter. Among other things, he is seeking ways to make it easier for households to borrow money. He is also looking for ways to reduce the burden of foreclosures on homeowners.

Dollar slides versus yen, euro as US recession concerns mount - Bloomberg.com
Bloomberg.com reports the dollar fell for a second day against the euro on speculation a U.S. housing report today will add to evidence the world's biggest economy is in a recession. The currency also slid versus the yen on concern home-loan defaults will climb, adding to $967 bln of losses at financial institutions that led to a government bailout of Citigroup (C). U.S. data may show home resales dropped the most in a year in October, fueling expectations the Federal Reserve will add to last month's two interest-rate cuts to spur growth.

C Citigroup adds $40 bln of capital benefit through agreement with U.S. Treasury, Federal Reserve, and FDIC (3.77 )
Co announces that it has reached an agreement with the U.S. Treasury, the Federal Reserve Board, and the FDIC on a series of steps to strengthen capital ratios, reduce risk, and increase liquidity. The U.S. Treasury will invest $20 bln in Citi preferred stock under the TARP. Citi will issue an incremental $7 bln in preferred stock to the U.S. Treasury and the FDIC as payment for a government guarantee on $306 bln of securities, loans, and commitments backed by residential and commercial real estate and other assets. As a result of the asset guarantee, the $306 bln portfolio will have a new risk weighting of 20%, thus freeing up an additional $16 bln of capital to the co. Citi will issue warrants to the U.S. Treasury and the FDIC for approx 254 mln shares of the common stock at a strike price of $10.61. Citi also has agreed not to pay a quarterly common stock dividend exceeding $0.01/share for three years effective on the next quarterly common stock dividend payment. Citi's Tier 1 capital ratio for the third quarter ended September 30, 2008, on a pro forma basis, for the October TARP capital injection and the new capital generated by today's announcement, subject to Federal Reserve Board approval, is expected to be approx 14.8% and its TCE/RWMA ratio would be approx 9.3%.
RCM Comment: This bailout deal will not help the liquidity crunch. This preferred stock investment is like a long-term loan and so the $40 billion will not be leveraged and loaned out. This may help stablize Citi, but it will not compel Citi to extend credit which is the crux of the issue.

RCM Comment: The redemption and repatriation wave we have been writing about continues as the following story suggests.
More hedge funds expected to succumb - WSJ
WSJ reports this has been the toughest year on record for hedge funds. Several factors suggest it could get even worse. In recent weeks, many hedge funds have been stockpiling cash in the hopes of stanching losses and having the wherewithal to satisfy investor redemptions. Some hedge-fund managers had hoped investors might reverse their withdrawal requests if the market improved. But amid the past week's rout (even with Friday's gain), and a steady redemptions drumbeat from pension funds, endowments and others, there is a sense that more hedge funds will have to close.

RCM Comment: This Bear has spared no one.
Share declines pressure Redstone - WSJ
WSJ reports the latest rout in Viacom (VIA.B) and CBS shares, which sank to new lows this week, is turning up the pressure on Sumner Redstone as he battles to resolve his family's debt problems. Mr. Redstone startled investors last month by dumping $233 million of his stock in Viacom and CBS, which he controls through his family holding company, National Amusements. The move was a bid to fix his debt problems after the stock market lurched lower and National Amusements breached an asset-to-debt covenant. But it didn't work, and his family has since been in urgent talks with its lenders about restructuring a $1.6 billion debt pile. Investors in Viacom and CBS have grown increasingly concerned that Mr. Redstone will have to sell more stock in the two companies as market conditions worsen. Mr. Redstone has said repeatedly that he doesn't plan to sell any more stock in either. While the banks can't force Mr. Redstone to sell more stock, because the debt isn't secured, the plummeting value of his assets could give him less wiggle room in negotiations with lenders. Mr. Redstone is expected to have to sell some assets as a condition of a restructuring, according to people familiar with the situation. If the banks pulled the plug on the debt now, National Amusements would likely have to file for Chapter 11 bankruptcy-law protection, people familiar with the situation said. But while the banks are under pressure themselves, that scenario could ultimately prove a bigger headache than a restructuring, and it's not currently on the table, the people said. Still, the discussions have some distance to go, and the outcome remains uncertain, they said. While the two sides have made progress, the negotiations are going slowly, the people said, in part because the lenders are juggling a string of other negotiations. Among asset sales being discussed is the family's closely held movie-theater chain. The two sides are exploring a way to sell assets over a longer period of time to avoid fire-sale valuations.

News&Notes: Equity Mutual Fund Performance, Briefing.com, Pension Reform, & Trends/Innovation

Trim Tabs - It has been a brutal year for the mutual funds industry. We estimate that assets in equity mutual funds dropped to $3.2 trillion on November 19th from $6.5 trillion at the beginning of the year. Only 7.8% of the drop comes from net redemptions. If we had been told at the beginning of the year that mutual funds would lose more than half of their value, we would have thought redemptions would be 10-15% of assets. In short, we have not seen panic yet, and selling could get a lot worse.

...Selling pressure from mutual funds could get even worse. Redemptions from US equity mutual funds totaled only 3.5% of assets so far in 2008, against 4.3% of assets during the 2001-2003 bear market. Projecting a similar redemption rate, another $38 billion could leave US equity mutual funds. Also, redemptions from global equity ETFs account for less than 21% of the assets gathered in the three prior years.

After losses, pensions ask for a change - NY Times
NY Times reports stung by outsize investment losses, some of the nation's biggest companies are pushing Congress to roll back rules requiring them to put more money into their pension funds, just two years after President Bush signed a law meant to strengthen the pension system. The total value of company pension funds is thought to have fallen by more than $250 billion since last winter. With cash now in short supply for companies, they are asking Congress to excuse them from having to replenish the required amounts. Lawmakers from both parties seem receptive to the idea, and there was talk of adding a pension relief provision to the broad fiscal stimulus package Congress considered for this week's lame-duck session. Late Wednesday, several senators announced that they had reached agreement on a bill that would provide pension relief. Even if it is not completed this week, some Congressional leaders say they will seek support for a pension relief bill in January.
RCM Comment: Instead of dealing with the root of the problem Congress continues to change rules, which simply weakens the fabric of the system.

Briefing.com - ... And once the major averages breached the key support level marked by the Oct-Nov lows two days ago, we immediately started to see a whole new round of forced selling by funds and market risk-reduction efforts by insurance co's. Hartford (HIG) essentially confirmed that insurance co's have been major sellers last night, when it stated that "The company's investment management team is taking a series of actions aimed at repositioning the portfolio in light of current economic outlooks, with plans to enhance the overall credit quality of the general account. The company is currently investing in treasuries and other high-quality securities, and maintaining higher levels of liquidity than it has in recent quarters."

...And earlier in the week a major story emerged that kicked out the one remaining leg of the stool that the financials were sitting on: There was an announcement that two separate operators, a shopping mall and a hotel, were past due on their payments to their creditors. The commercial property space (as opposed to residential) had been the one remaining "safe" area in real estate, so this announcement caused a rush by lenders to insure themselves in case of default, thus causing the CMBS market to rocket higher, which in this environment is a recipe for panic (we saw an identical panic develop with LIBOR rates a few months ago when FNM, FRE, and LEH were on the brink). As a result, all financial stocks and REITs are getting thrown overboard, the former on concerns of additional portfolio writes-downs and the latter due to concerns that REITs will have extreme difficulty rolling over debt.

Trends and Innovation: There is a world outside of the financial markets.
Transplant of windpipe grown from stem cells heralds new era in medicine - Daily Telegraph
Daily Telegraph reports The science of healing is developing so quickly that it has become almost a cliche to describe a particular operation as a "breakthrough". Yet there is no doubt that the first successful transplant of a human windpipe, constructed partly from stem cells, is an astonishing milestone -- one that could indeed mark the start of a new era in medicine... The venture was a textbook example of international collaboration, drawing on the talents of teams in Spain, Italy and Britain. To recap; the operation, on 30-year-old tuberculosis patient Claudia Castillo, took place in Barcelona, where doctors also had collected a three-inch segment of trachea from a 51-year-old donor who had died of a cerebral hemorrhage. They used a technique developed in Padua to strip the windpipe of its donor's original cells, a procedure that took six weeks, to create a "scaffold". At the same time, a team in Bristol used a "bioreactor" dreamt up in Milan to grow stem cells removed from Castillo's bone marrow. These cells were "seeded" into the donated windpipe, disguising the 'foreign' tissue that remained so Castillo's body would accept it as her own.

News&Notes: CMBS Meltdown, Quantitative Easing, Future of FNM&FRE & Citigroup Fund Failure

Fed's Kohn says that the Fed should look at additional forms of quantitative easing if deflation becomes a possibility. RCM Comment: Whenever you hear the term "quantitative easing" just remember this simple equation: QE=US$ devaluation=higher gold prices.

CMBS market begins to show fissures - WSJ
WSJ reports the market for debt used to finance hotels, offices and shopping malls tumbled Tuesday on worries that the long-feared rise in defaults for commercial mortgage-backed securities had begun, possibly ushering in the next phase of the financial crisis. Analysts at Credit Suisse said two big commercial mortgages that had been packaged into securities in the past year were likely to default. The rapid deterioration of these loans fed worries that the weakening economy and higher unemployment rate would drag down the $800 billion market for commercial-mortgage-backed securities, or CMBS, which so far has withstood the credit crisis with low delinquency rates. It's pretty unheard-of for two large loans to go bad this early on," said Richard Parkus, head of CMBS research at Deutsche Bank Securities. "This has shaken up the market" for CMBS, he said. The analyst report pushed the index that tracks these securities, the Markit CMBX, to record levels compared with Treasurys... The loans that sent the market down Tuesday were worrisome because they were made at what it now looks like was the top of the real-estate market and were based on assumptions that the cash generated by the properties would rise. Both loans were made by J.P. Morgan (JPM): a $209 million mortgage backed by two Westin hotels in Tucson, Ariz., and Hilton Head, S.C., and a $125 million loan secured by a retail center, called Promenade Shops at Dos Lagos, in Corona, Calif.


Future shape of Fannie, Freddie stirs debate as losses mount - WSJ
WSJ reports debate is heating up over the future of Fannie Mae (FNM) and Freddie Mac (FRE) as the two government-backed mortgage companies struggle with heavy losses and investors continue to shy away from their debt. Fannie and Freddie "are teetering on the brink" as losses increase and borrowing costs rise, Jerry Howard, chief executive of the National Association of Home Builders, said in an interview. He called for the government to explicitly guarantee their debt and for Congress to quickly come up with a new structure and better-defined role for Fannie and Freddie. Some banks, which have long had an uneasy relationship with Fannie and Freddie, would like to see them disappear, at least in their current form. One idea being discussed among bankers is to replace Fannie and Freddie with several lender-owned cooperatives that would package loans into securities. Under this idea, the U.S. Treasury would get fees for backing up those securities if losses reached catastrophic levels.


Disclosure demands for credit-default swaps said to increase - Bloomberg.com
Bloomberg.com reports U.S. regulators may require banks and insurers to disclose data about all credit-default swap trades to a central registry to boost transparency in the $47 trillion market, a person with knowledge of the talks said. The Federal Reserve Bank of New York and the U.S. Securities and Exchange Commission want information about credit-default swaps that don't meet standard terms to be disclosed to a warehouse that would record all trades. The rules would offer details about the types of contracts that almost drove American International Group (AIG) into bankruptcy. While information on $33 trillion of credit-default swaps is kept by the Depository Trust & Clearing, which operates a central registry, the market may be as much as $14 trillion larger, according to data compiled by the International Swaps and Derivatives Association. Regulators are demanding more oversight after speculation in the unpoliced market contributed to the bankruptcy of Lehman Brothers Holdings and forced the government to take control of New York-based AIG.

C Citigroup liquidates fund that fell 53% in a month - Financial Times (8.36 )
Financial Times reports Citigroup (C) is liquidating its Corporate Special Opportunities hedge fund after it lost 53% of its value last month, marking the ninth time in recent months that the bank has had to close or rescue a fund in its alternative investment unit. CSO, which managed almost $4.2 bln at its peak, has a net asset value of about $58 mln and debt of about $880 mln, investors say. People familiar with the matter say investors in the fund are likely to receive no more than $0.10 on the dollar. The fund faltered even though Citi supplied it with $450 mln in credit lines and equity infusions of about $320 mln. It also bought assets with a notional value of $1 bln that it placed in the fund. Investors in the fund -- which invested mainly in debt backing European private equity deals -- have not been allowed to withdraw their money for about a year as performance deteriorated. Losses for Citi could total hundreds of millions of dollars, people familiar with the matter said.

Reprint of Tedbits: Understanding US$ Strength

Quote of the Day: “The ultimate result of shielding men from the effects of folly is to fill the world with fools”
-- Herbert Spencer, English philosopher (1820-1903) Thanks Bill King, of the King Report, for this quote.

Meanwhile, the US Federal Reserve, as holder of the world’s RESERVE currency, is now becoming the lender of last resort and creating UNLIMITED dollar swaps to prop up the dollar requirements of the world’s economies. Why must these swaps be made? It’s because borrowers around the world borrow in Dollars creating a synthetic short position in the dollar. In order to pay off their borrowing they must convert their domestic money into dollars to pay off their obligations. When the Dollar rises against their domestic scripts it is basically creating new obligations that are piling up, this is going on around the globe as the dollar rockets higher in a short covering bonfire.

It is one of the biggest reasons the Dollar is rising and will continue to do so as trillions of Dollar-denominated loans must roll over or be paid off in the next twelve months. But it does not change the fact that when they PRINT the money and send it to the other central banks that the printing occurs out of THIN air, as does the printing of the money by the Bank of England, European central bank or whoever the currency swap was conducted with: Australia, Korea, Singapore, Switzerland, etc.

The Federal reserves BALANCE sheet has now MUSHROOMED by over 120% in the last six weeks from under $1 trillion to over $2.2 trillion now. They REFUSE to report the nature of those assets, as to do so would probably reveal they are holding a good amount of WORTHLESS collateral and have exchanged them for the perceived quality of US Treasury Bills; leaving the taxpayer with the junk and the bill. Can you say FLEECED?

News&Notes: The Winds of Change are Coming in Gold & Pension Problems

GATA -Bill H - We really did receive news of epoch proportions this past week regarding Gold and either no one realized it or everyone is so demoralized that it didn't even register. The Saudis bought $3.5 Billion of bullion, the Chinese are talking about shifting or diversifying part of their $2+ Trillion of reserves into Gold, and the Russians are talking about a "Gold convertible Ruble".

GLD Govt can't handle global run on gold coins - NY Post (72.65 )
NY Post reports there's a worldwide run on gold coins. Even as the price of the precious metal itself comes under pressure along with commodities like oil and copper, people around the world are demanding so many of the valuable coins that government mints are having difficulty filling orders. A spokesperson for the US Mint tells me that gold coins in this country, for the past month, "are being allocated because of an increased demand." And the price that the government charges coin dealers has recently been increased by as much as 10 percent for a 10-ounce coin... Even when gold coins are available, dealers report that customers are paying a bigger premium than they would have just a few months ago.

Paulson hedge fund buys into mortgage securities - FT
FT reports John Paulson, the hedge fund manager, has started to buy securities backed by residential mortgages. Mr Paulson's move marks the latest example of a famously bearish investor shifting gears to profit from depressed prices in the global credit markets. John Paulson has told his investors that he started buying troubled mortgage-backed securities at the end of last week, hoping to capitalize on price falls that followed the Treasury announcement. Mr Paulson, who has $36 bln under management, was scheduled to hold a dinner and wine-tasting at New York's Metropolitan Club on Monday night so that he could brief his investors on his plans.

Record losses hit pensions of big cos - WSJ
WSJ reports the nation's largest corporate pensions had record losses in October and won't meet federal-funding requirements without a massive infusion of cash, improved asset values or a change in law. In October, the 100 largest corporate pensions lost $120 billion, their largest one-month loss in assets since consulting co Milliman began tracking the numbers eight years ago. After adjusting for liability gains, the net result was a $59 billion loss in funded status. "There will definitely be companies in this group which, without relief or massive contributions, will have to freeze their plans, probably by Oct. 1 next year," said John Ehrhardt, principal and consulting actuary at Milliman in New York. He said the pension of the average company in the index was 100% funded in January, but is expected to fall to 76% by the end of this year. If the value of assets doesn't increase or the Pension Protection Act funding rules aren't changed, pensions may end up being frozen and benefits may be affected, he said.

RCM Editorial: The Redemption Wave -- Is It Ebbing? US$, US Treasury & Gold -- Changes Brewing

The key to successful position taking going forward is for us to identify shifts in investment psychology. We are looking for divergences from the trading pattern of the last few months. The pattern has consisted of the following to name just a few:

--Increasing credit spreads
--Strength in the US$
--Strength in US Treasury bonds
--Weakness in commodity prices; with emphasis on gold and oil
--Weakness in the equity markets
--Record number of redemptions from mutual funds (both equity and bond), hedge funds & money market funds

The redemption and repatriation wave have been the keys to the exaggerated equity market slide since September and have led to many of the developments listed above. If we can identify when this wave is ebbing then we may have a clue as to when markets will stabilize. The stories listed below may be offering us a glimpse of change. Of course, we will need to see more stories like these over the next few weeks to really build a case for a new direction.

Got Gold Report – COMEX Commercials Least Net Short Gold In Years. By Gene Arensberg The big news this week is that the largest of the largest traders for gold futures, the commercial traders on the COMEX, are now the least net short gold they have been in years. ATLANTA (ResourceInvestor.com) -- Regardless of whether or not the world is near the end of the giant financial "Charlie Foxtrot" we have all endured up to now, the largest of the largest traders of gold futures now have the fewest bets that the U.S. dollar price of gold will fall further than they have had in years. As of Tuesday, November 4, traders classed by the Commodities Futures Trading Commission (CFTC) as commercial held a collective net short position (LCNS) of just 76,406 out of a total 303,908 contracts on the COMEX, division of NYMEX in New York. A net short position means that the trader profits if the commodity goes lower in price.Yes, the current COMEX commercial gold net short positioning is the lowest in years. Indeed, we have to go all the way back to June 7, 2005 to find a reporting week which shows a lower LCNS (67,052 then), back when gold closed at $424.87.

Trim Tabs - Speculative traders seem to be growing concerned that the U.S. will resort to the printing press. The net position of speculative traders on U.S. dollar index futures fell to zero on November 4, down sharply from a peak of 2.3 million contracts on July 29. Note that speculative traders turned bullish on dollar index futures right before the dollar rally began this summer.

Greg Harris - I say the key right now is in the share markets. I realize the problems are stemming from the debt market, but the share market market cap restoration is what is needed to tilt the equation in favor of money creation as opposed to money destruction. A 2% move up in the US market along with corresponding moves in the rest of the global markets creates trillions of new wealth. This is one reason why the US dollar is currently inversely related to the stock market....when the market is going up the money creation is winning over the money destruction; given a more or less constant demand for dollars it goes down. Another major reason is that if you look at the whole thing as a giant debt balloon eminating from the US, which is what it is, when the balloon is inflating that means US dollars are being deployed into other currencies for investment, and vice versa.

Hat Trick - The high USTBond principal value and high USDollar exchange rate will encourage foreign bond holders to begin to “spend” their artificially high valued USTreasury Bond securities before events occur to greatly undermine their value. See for instance the Chinese announcement to spend $568 billion in a stimulus package. Although great news for the commodity and reflation trade, this cannot be seen as good news for the USTreasuries. They will lose a strong Chinese bid, or see outright selling. The Chinese plan calls for strong support of public housing, infrastructure, railways, and indirectly demand for commodities. Contrast theirs to US plans to support failed financial firms and deeply rooted corruption of marquee named financial firms, at the exclusion of mainstream businesses. Other nations will soon be forced to defend their own domestic currencies against an unreasonable decline in exchange rate, the result of the Black Hole in USTBonds. Currencies from nations ranging from Europe to Brazil to Russia will react by selling their USTBond reserves, and to use them for purposes consistent with why those reserves were accumulated in the first place.

Fleckenstein Capital - The long bond was particularly weak after a terrible 30-year auction that saw both a long tail and poor bid-to-cover ratio. I point that out because for those of us looking for a potential funding crisis, I am searching for clues as to when that might begin.

Banks keep lending, but that isn't easing the crisis - WSJ reports all around Washington, policy makers are scrambling to figure out how to get banks lending again. Lawmakers have criticized banks for not using new federal money to make loans and have threatened to place conditions on additional money. Regulators last week sent out a directive, encouraging banks not to hold back on lending. But there's a flaw in that logic. Banks actually are lending at record levels. Their commercial and industrial loans, at $1.6 trillion in early November, were up 15% from a year earlier and grew at a 25% annual rate during the past three months, according to weekly Federal Reserve data. Home-equity loans, at $578 billion, were up 21% from a year ago and grew at a 48% annual rate in three months. The numbers point to one of the great challenges of the crisis. The credit crunch is surely real, but it is complex and not easily managed. Banks are lending, but they're also under serious strain as they act as backstops to a larger problem -- the breakdown of securities markets. The worst of the credit crisis is being felt not in banks but in financial markets. Loans from a bank might stay on its books. Increasingly in the past decade, loans were packaged into securities and sold to investors around the world. Institutional investors gobbled up this and other kinds of credit that didn't come via traditional commercial banks, such as junk bonds or commercial paper. To get credit flowing, policy makers need to repair financial markets as well as banks. But investor confidence in credit markets has been shattered, in part because many debt securities performed so much worse than their credit ratings suggested they would.

RCM Comment: I can't believe it! The Wall St. Journal actually got a story right. In fact, the WSJ has put its finger right on the central nerve of the credit problem. Read this story closely and you will be able to understand why real estate prices will have a hard time recovering. Housing prices reached bubble levels because loans were bundled, securitized and sold through Wall St. to pension plans, endowments and other investors. This securitization process has failed and been destroyed. The investment banks that created the process are either out of business or trying to turn into banks to survive and the pension plans that bought the products have lost so much money they are in jeopardy of not being adequately funded.

News&Notes: Redemption Deadline, LIBOR, Insurers' Rules & Equity Funds Outflows

U.S. hedge funds anxious as redemption deadline looms - Reuters.com
Reuters.com reports anxiety is sweeping the hedge fund industry before a crucial deadline on Saturday, when investors angered by recent heavy losses are expected to demand the return of billions of dollars. "Managers have a pretty good feeling for what is coming, and there are significant redemption requests out there," said Stewart Massey, founding partner of Massey, Quick, an investment consultant that puts money into hedge funds. Saturday is the last day for thousands of investors to notify hundreds of hedge funds if they want their money back by year's end. Hedge funds that require three months notice from investors who wanted to exit by year's end had a similar deadline on September 30 -- also known in the industry as "D-Day."

RCM Comment: We may be coming to the end of the redemption wave or at least the fear of the unknown. After Saturday the final demands will be in and it will be our job to look for signs that the panic has subsided. Signs such as weakness in U.S. Treasury bond prices, strength in gold and other commodities, weakness in the US$, tightening of credit spreads are a few examples of the signs.

ECONX Libor for dollars increases a second day as recession spreads - Bloomberg.com Bloomberg.com reports money-market rates in dollars rose for a second day in London after Europe sank into its first recession in 15 years, heightening concern lending by banks will slow as their balance sheets deteriorate. The London interbank offered rate, or Libor, that banks say they charge each other for three-month loans rose 9 basis points to 2.24% today, according to British Bankers' Association data. The overnight rate climbed 1 basis point to 0.41%, 59 basis points below the Federal Reserve's target... The Libor-OIS spread, a gauge of cash scarcity among banks, widened 7 basis points to 167 basis points. The TED spread, which measures the difference between what the U.S. government and banks pay for three-month loans, widened 6 basis points to 203 basis points. RCM Comment: Not a good sign...

M.S. Howells & Co.- The ability of Time Warner Cable to tap the New Issue market for $2bn in financing is a concrete example of credit crisis easing – regardless of TARP restructuring. RCM Comment: A good sign...

Insurers' cash rules may loosen - WSJ
The Wall Street Journal reports at the prompting of a major life-insurance trade group, state insurance regulators are considering moves to loosen capital requirements for the industry, a development that could buoy companies but also could raise concerns about consumer protection. State regulators impose steep capital requirements on life insurers to help make sure the companies can deliver on customer commitments. But as stock markets have sunk, insurers appear increasingly likely to need billions of additional dollars to satisfy those requirements. And the decline in their own stock prices makes it more difficult to raise capital. "Let's be honest, we're in new territory here," said Susan Voss, commissioner of insurance in Iowa and secretary-treasurer of the National Association of Insurance Commissioners, in an interview Thursday. "We want to be as nimble as possible and address these issues." She added: "I can tell you, we won't do anything that puts our consumers in a vulnerable position. It's a balancing act." The balance concerns keeping requirements steep enough to protect consumers, while not so steep as to damage insurers. Ms. Voss says NAIC's leadership generally agrees with the American Council of Life Insurers, which submitted the proposals this week, that the conservative accounting used for regulatory purposes contains reserve redundancies, and some could be eliminated without hurting policyholders. "This isn't a change in the rules in the middle of the game" (RCM Comment: Which means of course it is a rule change in the middle of the game.) but "carburetor adjustments" needed because of the market collapse and which would be "prudent from a regulatory standpoint," said ACLI Senior Vice President Bruce Ferguson.

RCM Comment: I find the above story amazing at a time like this. We are dealing with the ugly fallout that easing of rules and relaxing of capital requirements in the banking sector has caused and now apparently the fix for insurance companies is the very poison that created this mess.

Trim Tabs - So far this year, a record $235.5 billion has flowed out of equity funds, reversing almost all of the inflow of $254.0 billion in 2006 and 2007. Why have equity funds experienced such huge outflows? The reason is simple—the average U.S. equity fund is down 51.1% year-to-date, and the average global equity fund is down 65.4% year-to-date.

News&Notes: Hedge Fund Losses, Nov. 10th Fed Auction, Foreclosure Update

Hedge funds lose $100 bln in October - Times Online
Times Online reports as much as $100 bln was wiped off the value of hedge fund assets last month as investors rushed to withdraw their capital and the worst markets in living memory blew a giant hole in performance. Investors redeemed about $60 bln of funds in October, while see-sawing market conditions accounted for the remaining $40 bln fall, according to EurekaHedge, the Singapore based industry research firm. The drop in assets under management means that, worldwide, hedge funds probably manage about $1.6 trln on behalf of wealthy individual and professional institutional investors. This is down from a peak last year of about $2 trln at the top of the hedge fund boom and comes amid predictions that a rash of funds will collapse before the end of the year.

RCM Comment: The above story singlehandedly explains the market collapse in October. Remember that $100 bln does not even include the Mutual Fund industry. It does not include the money taken out of the money-market funds or savings accounts in October. Do not believe what you hear on TV or read in the papers about US$ strength being a sign of world wide belief in the safety of the U.S.. Strength in the US$ is a short-term phenomenon that is purely a function of redemption and repatriation, something we have repeatedly written about in this blog. The above story simply gives you an idea of the magnitude of the situation. When this unwinding phase ends, we should witness a rather abrupt and swift reversion back to fundamental reality. Which is to say, a decline in the value of the US$ and a recovery in hard asset prices led by gold and silver.

Trim Tabs - Massive Selling of Equity Funds Resumes: U.S. Equity Funds Lose $17.8 Billion and Global Equity Funds Lose $9.6 Billion on First Seven Days of November. Staggering $151.8 Billion Pulled Out of Equity Funds since Start of September.

Trim Tabs - Speculative traders seem to be growing concerned that the U.S. will resort to the printing press. The net position of speculative traders on U.S. dollar index futures fell to zero on November 4, down sharply from a peak of 2.3 million contracts on July 29. Note that speculative traders turned bullish on dollar index futures right before the dollar rally began this summer.

On November 10, 2008, the Federal Reserve conducted an auction of $150 billion in 17-day credit through its Term Auction Facility. This was a forward auction designed to provide term funding over year-end--the awarded loans will settle on December 22, 2008. Less than 10% of the available credit was drawn down. Why? Because when cash becomes competitive with short-term credit in terms of return (that is, cash yields zero, short-term credit costs and yields zero) then there is no reason to take risk; you're better off with the cash. Ben pointed his liquidity gun at the market, pulled the trigger, and got...... CLICK. (Courtesy of The Market Ticker blog)

RCM Comment: Banks did not take up the latest attempt of the Fed to lend. The next step for the Fed is "quantitative easing" or printing money and flooding the system. During this phase foreigners should reach the conclusion that the US$ is destined to enter a serious decline and begin unloading U.S.Treasury debt. When the US$ breaks, gold & silver should take off and not look back.

Foreclosures up 25%: RealtyTrac - Reuters
Reuters reports U.S. foreclosure activity in Oct rose 25% from a year earlier, although filings in California fell by double-digit percentage points for the second consecutive month due to a state law slowing the foreclosure process, according to a monthly report by RealtyTrac. Foreclosure filings -- default notices, auction sales notices and bank repossessions -- rose by 5% from Sept to 279,561 in Oct, according to RealtyTrac. That means one in every 452 U.S. housing units received a foreclosure filing in Oct, the firm said in its report released on Thursday. The California law, which requires lenders to contact homeowners and explore options to avoid foreclosure before initiating the process, took effect in early Sept and drove the state's foreclosure activity rates down, at a pace of 31.6% from Aug to Sept and 18% from Sept to Oct. But in Sept, the California law helped drive the national foreclosure rate down, something that did not happen in Oct. "Foreclosure activity in other places rose significantly enough to offset the drop in California," said RealtyTrac Senior Vice President Rick Sharga.

RCM Comment: We will not be anywhere near the end of this crisis until we address the housing market. This story illustrates the problem is getting worse not better. In fact, the numbers would have been worse than 25% foreclosures had California not manipulated the process.

Companies of Interest: Short

SYNA Synaptics downgraded to Sell at Lazard Capital; tgt $18 (23.38 )
Lazard Capital downgrades SYNA to Sell from Hold and sets target price at $18 saying the magnitude of Intel's preannouncement last night and the negative commentary on the P.C market reflect the significant worsening in the market since mid-October. They believe that Synaptics' C4Q and C1Q revenue estimates could be at risk, as ~70% of the co's business is exposed to the P.C supply chain.

SYNA Synaptics ests cut at Oppenheimer following INTC's preannouncement (23.38 )
Oppenheimer cuts ests on SYNA following Intel's (INTC) negative preannouncement, to reflect the deterioration of the PC market. But the firm is sticking by their underlying thesis, that SYNA will benefit from the long-term growth of touch-based wireless devices and the secular shift towards notebook computing. They think SYNA may do better than the worst-case scenario they currently project, but given the macro-economic environment, they've opted to check their optimism at the door. Firm cuts their C4Q08 ests to $124 from $141 mln in revenue (consensus $138.9 mln) and to $0.58 from $0.73 in EPS (consensus $0.68); firm cuts their tgt to $35 from $39.

News&Notes: TARP Update

Treasury considers private role in TARP - WSJ
The Wall Street Journal reports the Treasury Dept, signaling a new phase in its $700 bln financial rescue plan, is considering requiring that firms seeking future govt money raise private capital in order to qualify for public assistance, according to people familiar with the matter. The move is not expected to apply to the existing $250 bln capital-purchase program, which is already injecting money into banks. But Treasury is considering attaching such conditions to any of its future capital investments, these people said. At the same time, the Treasury is unlikely to conduct any auctions to purchase bad loans and other troubled assets -- the original intention of the $700 bln rescue plan. Instead, the Treasury is expected to continue focusing its firepower on injecting capital directly into the financial sector, these people said. Treasury Secretary Henry Paulson may outline some of these changes Wednesday, when he provides an update on TARP. Treasury has just $60 bln left in its rescue fund, and either the current or next administration will have to turn to Congress to request the second half of the promised $700 bln. In another step, U.S. bank regulators could announce guidelines this week designed to encourage U.S. banks to remain active lenders as financial mkts are squeezed. Many U.S. cos and individuals have become dependent on bank credit lines as financial mkts have tightened up. The regulatory guidelines could also address sensitive issues of bank dividend payments and executive pay.

RCM Comments: Take aways from this story:

1) "requiring that firms seeking future govt money raise private capital in order to qualify for public assistance" This development is long term good short term trouble. On the plus side, this will ensure only real viable companies will get funding from the government. The private sector is a much better judge of viability. However, on the troublesome side, this will create a constant increase in supply of equity and/or debt at a time when demand has collapsed.
2)"Treasury is unlikely to conduct any auctions to purchase bad loans and other troubled assets
-- the original intention of the $700 bln rescue plan" The bait and switch continues. The debate is over, Paulson & Co. clearly lied to congress in order to get funding. The pitch to congress for money sounds better if Hank says bad loans will be purchased. In a vague way that seems to help the average voter. On the other hand, asking congress for money to inject into the financial sector seems to help Wall St..
3)"Treasury has just $60 bln left in its rescue fund, and either the current or next administration will have to turn to Congress to request the second half of the promised $700 bln." Let the games begin! I imagine Paulson & Co. will have a much harder time getting the release on the rest of the rescue package. The bait and switch only works so many times, eventually the loser gets wise. How will this effect the equity markets? Well, if we think about the action during the 1st bailout debate we will remember a very weak market. It is not in the best interest of the PPT (please see the mission statement for an explanation of PPT) to support the markets while the debate is on going. Best to have the markets suffer so Paulson and Co. can scare the silly congressmen into agreement. This tactic is even more important now because Paulson & Co. have lost a major weapon. The 1st debate happened before the election. Ask yourself, what congressman would want to appear unhelpful to the American public and vote against a bailout right before an election? Paulson & Co. have lost the time sensitive leverage of the looming election. At the very least, this lack of urgency should drag out the bailout debate and cause more uncertainty, something the markets hate.

News&Notes: Tontine unwind, Fed Delays for Money Mkts, Bailout Problems & Goldman Slime

RCM Comment: We wrote a few days ago the next 'shoe to drop' would be the announcement of major hedge fund liquidation and closure. This story is just the beginning.
Jeffrey Gendell's hedge fund Tontine is winding down a majority of funds - CNBC
Tontine had been a $9 bln hedge fund at one time. One fund, Tontine Financial, is down 83.3% for the year. Tontine Capital is down 77.8% for the year. Says this will be an orderly liquidation.

Fed delays its big plan to shore up money funds - WSJ
WSJ reports the Federal Reserve said its big rescue plan for money-market funds will be delayed until later this month. The delay, announced Monday, presents a challenge for the $3.6 trillion money-market industry, which is struggling to sell short-term debt into tight credit markets. The Fed plans to finance purchases for as much as $540 billion of the money funds' short-term debt. Many had expected the buying program to be up and running last week, but now the Fed says it will start on or about Nov. 24. The funds need the money to meet investor redemptions. The reason for the delay appears to be the Fed's preoccupation with other bailouts and wrangling over how the money-fund program will be set up... The rescue facility was originally intended for money funds, but could be expanded to include securities lenders in coming weeks, according to people familiar with the matter.

Strains mount on bailout plans - WSJ
WSJ reports the U.S. government's financial-system rescue plans are coming under pressure as a growing array of distressed companies signal the need for assistance. On Monday, mortgage giant Fannie Mae said it is losing money so rapidly it may need a cash infusion from the Treasury Department by year's end. The funds would come from a special $100 billion pool Treasury set aside back in September to aid the company. Fannie Mae had a loss of $29 billion for the third quarter... Fannie Mae's $29 billion loss for the third quarter reflected $9.2 billion in credit-related expenses, including losses on foreclosures and provisions for future losses. Along with rival Freddie Mac, the company owns or guarantees nearly half of all U.S. mortgages. Freddie Mac hasn't set a date for releasing third-quarter results, a spokesman said. The biggest factor in Fannie's loss was a $21.4 billion charge to reflect the likelihood that the company won't be able to make use of tax credits listed on its balance sheet as assets. By writing off the credits, the company is acknowledging that the worst housing downturn in decades is showing no signs of letting up. Howard Shapiro, an analyst at Fox-Pitt Kelton Cochran Caronia Waller in New York, called the losses "a form of housecleaning" by Fannie's new chief executive, Herbert Allison.

GS Goldman Sachs urged bets against California bonds it helped sell - LA Times (71.21 ) LA Times reports the co urged some of its big clients to place investment bets against California bonds this year despite having collected millions of dollars in fees to help the state sell some of those same bonds. The giant investment co did not inform the office of California Treasurer Bill Lockyer that it was proposing a way for investment clients to profit from California's deepening financial misery. In Sacramento, officials said they were concerned that Goldman's strategy could raise the interest rate the state would have to pay to borrow money, thus harming taxpayers. Such worries would tend to drive down the price of California bonds. That, in turn, would drive up the interest rate the state and its municipalities pay to borrow money. An increase of a single percentage point on a $1-billion bond issue would cost taxpayers an additional $10 million a year in interest.

RCM Editorial: US$ Strength...An Abberation or Reality?

A debate is raging in the financial community about the recent strength in the US$ and weakness in commodity prices. Our opinion here at RCM is that US$ strength is a function of massive redemption and repatriation(which require Dollars to be bought and sent back to the U.S.) that started in September and accelerated in October and not - as our colleagues would have you believe - because the world thinks the US is the best place to invest.

Evidence of the strength of our position can be inferred from the strength of the Japanese Yen verses the Dollar. While world assets are being sold the Yen carry trade is also unwinding. It is not just a coincidence that the US$ was stronger against all currencies but weaker against the Japanese Yen. The Yen carry trade, a huge favorite of the hedge fund community for the last few years, required that Yen be borrowed and invested around the world. Often, significant leverage was used in this trade. As the trade unwinds Yen must be bought and paid back, which artificially increases the value of the Yen for as long as the unwind lasts. In essence both the Dollar and the Yen are rising from the short term effect of currency repatriation.

I'd like to enter the next quote, courtesy of TrimTabs, as further evidence the world does not believe in US$ strength: “The world, acting democratically and lawfully through a global financial organization, urgently needs to change the international monetary system based on U.S. global economic leadership and U.S. dollar dominance.” On Friday, French President Nicolas Sarkozy said, “The time when we had a single currency, one line to be followed, that era is over and it came to an end on September 18.” On Saturday, Brazilian President Luiz Inacio Lula da Silva declared, “It is time for a pact between governments to build a new financial architecture for the world.” There have been similar statements from Russia, China and the Middle East over the last few months. Make no mistake, US$ strength is fleeting at best. As our government piles on more debt and TARP increases in scope there will be consequences and they don't bode well for the greenback. We have been witness to one of, if not the biggest, redemption phases in history over the last few months. Never before have we seen assets redeemed from stock and bond mutual funds, hedge funds, money market funds and savings accounts all at the same time as we saw in October. This unique time in history calls for a unique understanding of markets. Taking them at face value and building opinions based on past cycles or one's past experience will be detrimental to your financial health.

RCM Editorial: Fortune's Favor I October Performance

While some of the biggest and best hedge funds experienced their worst month in history, our flagship fund Fortune's Favor I experienced a positive October with a net return of 1.56%. If Citadel would like some advice I'm sure we could work something out.

News&Notes: Citadel, Passport Fund, Trim Tabs & Fortune's Favor I

Hedge fund selling puts new stress on market - WSJ
WSJ reports hedge funds are selling billions of dollars of securities to meet demands for cash from their investors and their lenders, contributing to the stock market's nearly 10% drop over the past two days. One of the biggest hedge funds, $16 billion Citadel Investment, is being asked by several major banks to post additional collateral to cover big losses on its investments, according to people familiar with the situation. Citadel, which is run by Kenneth Griffin, was until recently considered a possible savior for troubled Wall Street cos. But his biggest hedge fund has fallen nearly 40% this year, prompting the co to hold conversations with lenders including Goldman Sachs, Deutsche Bank and Merrill Lynch that finance Citadel's trades. Citadel executives say the calls for more cash are a normal part of business when securities they hold fall in value, and they emphasize they have significant amounts of cash to satisfy their lenders. They say they have met all the demands for collateral. Lenders are hoping regulators would orchestrate a settlement among the companies involved in Citadel's loans if necessary, according to a person familiar with the situation. "Citadel is a valued client, and we continue to do business with them as usual," said Ed Canaday, a Goldman spokesman. Deutsche Bank spokesman Ted Meyer said, "Citadel is a valued customer and our relationship is business as usual."

RCM Comment: If you want to understand the vicious swings in the markets look no further than this story and the stories to follow. The markets drop of 10% in the 2 days following Obama's election has nothing to do with Obama's election contrary to what some of the talking heads in the media want you to believe. The market swings are directly correlated to inflows and outflows of capital by major mutual funds and hedge funds. Read the Trim Tabs report below and you will see the rally up in the 1st week of November correlates to an inflow of capital, the 1st in weeks. Will the inflow continue? No one knows for sure, but I will vote no and here is why: between here and the end of the year there will continue to be redemptions. The story above about Citadel I feel is very important. This may very well be the next 'shoe to drop'. The statements I highlighted in red are dangerously similar to statements we read about Bear Stearns (BSC), the two big BSC hedge funds, Lehman Bros., AIG, FNM, and FRE right before they failed. There is a pattern here, lots of misleading comments and assurances right before the bankruptcy. Both Citadel and Passport Fund claim they are down because of market forces not redemptions. If that is true, then the redemption wave is sure to follow and that will negatively effect markets.

Citadel suffered 22% loss in October - NY Post
NY Post reports Citadel Investment Group founder Ken Griffin continues to be haunted by the Wall Street meltdown horror show, as October proved to be more challenging than September. The hedge fund lost about 22% last month, which followed a 16% loss in September. October's loss was Griffin's biggest setback since he launched the now $18 billion fund nearly 20 years ago with $1 million in capital. Year to date, Griffin's Wellington and Kensington flagship multi-strategy hedge-fund vehicles are down 38%, according to people familiar with Citadel's performance... Sources tell The Post that despite the flagging performance which has walloped Griffin over the past two months, the hedge-fund manager is sanguine about credit markets, which appear to be thawing after a long freeze, and about the prospect that Citadel will emerge from the crisis stronger.

Passport Fund falls by 38% in October - NY Post
NY Post reports add another hedge fund to the growing roster getting slammed in October - which is on track to be the worst month in history for the industry. Passport Capital, the fund run by respected hedge-fund manager John Burbank, posted a whopping 38% drop in the flagship Passport fund in October, dragging down the fund's year-to-date performance 44%, The Post has learned. The October results mark a sharp turn of events for Burbank, who though down 9.5% in September, was still performing better than the overall market. Assets under management also sank, with the co reporting October assets of $3.1 billion, down from $4.5 billion at the end of September, according to an investor letter reviewed by The Post. Officials from Passport declined to comment, but a person close to the co said the decline in assets was all from performance, not investor withdrawals, known as redemptions.

TrimTabs estimates all equity mutual funds post inflow of $2,186 million in week ended Wednesday, November 5
TrimTabs Investment Research estimates that all equity mutual funds posted an inflow of $2,186 million in the week ended Wednesday, November 5, versus an outflow of $9,227 million in the previous week. Equity funds that invest primarily in U.S. stocks posted an inflow of $2,326 million, versus an outflow of $7,051 million in the previous week. Equity funds that invest primarily in non-U.S. stocks had an outflow of $140 million, versus an outflow of $2,176 million in the previous week. In addition, bond funds had an inflow of $518 million, versus an outflow of $5,867 million in the previous week, and hybrid funds had an inflow of $184 million, versus an outflow of $2,751 million in the previous week. Separately, TrimTabs reports that exchange-traded funds that invest in U.S. stocks posted an inflow of $885 million, versus inflow of $903 million in the previous week. ETFs that invest in non-U.S. stocks had an inflow $2,048 million, versus an inflow $1,226 million in the previous week.

News&Notes: Treasury Debt Arsenal Expansion

WASHINGTON, Nov 3 (Reuters) - Facing the need to borrow up to a staggering $2.1 trillion in the current fiscal year to fund economic rescue programs, the U.S. Treasury is expected to significantly expand its debt securities arsenal. Analysts anticipate that the Treasury on Wednesday will announce the return of the 3-year note and adopt more frequent offerings of 10-year notes and 30-year bonds. It may also consider more reopenings of shorter maturities. "They are going to pull out all the stops. There's a good chance they'll come back to a quarterly 3-year note, monthly 5-year (note) auctions and increase issuance pretty subtantially across the board," said Kim Rupert, head of global fixed-income analysis at Action Economics in San Francisco. The Treasury Department said on Monday it would need to borrow a record $550 billion in the October-December quarter, including a likely $300 billion in financing for Federal Reserve liquidity operations. The total was $408 billion higher than previous estimates announced in July 2008 due to outlays for economic assistance programs, lower tax receipts and lower issuance of non-marketable debt securities to state and local governments. The Treasury anticipates $368 billion in borrowing in the January-March quarter. The Treasury said a survey of 18 primary bond dealers showed a consensus for a fiscal 2009 federal budget deficit of $988 billion -- more than than doubling the record $455 billion deficit in fiscal 2008, which ended Sept. 30. The dealer consensus for fiscal 2009 marketable borrowing was $1.4 trillion, with a range of $1.1 trillion to $2.1 trillion….

RCM Editorial: US$ vs. Euro

Today the US$ dropped the most % wise vs. the Euro in one day since the inception of the Euro. This is further evidence that the redemption and repatriation tsunami has come to a close for the moment. Of course, it will come as no surprise that Gold and Silver are up today %4.4 & %3.25 respectively and Oil is up %9.12. We have been writing in this blog repeatedly that as soon as the tsunami subsides we will see a meaningful pick up in commodity prices. Today is just the beginning.