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News that Moves: "Buy America" Bill, US Treas.Yields Up, Andrew Hughes "Bad Bank", Bad News

White House reviewing "Buy American" measure, according to White House spokesman Robert Gibbs - Reuters
Reuters reports that the Obama administration is still mulling its position on 'Buy American' steel provisions approved this week by the House of Representatives and that have caused concern among trading partners, a White House spokesman said on Friday. "The administration is reviewing those provisions as part of the recovery plan, and that review is continuing," White House spokesman Robert Gibbs told reporters.

RCM Comment: I just can't believe this story! I guess history is simply bound to repeat itself. This same sort of protectionist legislation occurred during the great depression and was a DISASTER. Protectionism never helps the economy, but is, of course, wonderful if you are pandering for votes. I am told by my friends who are ardent Obama supporters that he is smart and has surrounded himself with smart people. Well, here is a simple IQ test. Let's see if they get this right. I genuinely hope they do and I will be the first to applaud using this blog.

Treasuries Drop as Record Sale Draws Higher-Than-Forecast Yield
Jan. 29 (Bloomberg) -- Treasuries plunged as the government sold a record $30 billion of five-year notes at a higher yield than forecast, indicating weak demand.
The auction, which caps a week when the Treasury raised $78 billion in notes and bonds, may signal investors will have trouble absorbing the as-much-as $2.5 trillion in debt the U.S. is likely to issue this year to pay for a $1 trillion budget deficit and programs to spur the economy. The Federal Reserve’s failure to provide a timetable for possible purchases of Treasuries yesterday also weighed on prices.

RCM Comment: This story goes hand in hand with the story about the German debt auction failure. Expect to see more of these issuance problems as the tsunami of supply hits the market this year. And remember, Gold prices rise as yields rise.

"Bad Bank", Bad News
Another miserable failure in the making
by Andrew Hughes

...The emphasis on getting credit flowing again for car loans, consumer credit and mortgages ony serves to aggravate the basic problem that these pundits seem to be ignoring; Consumers are flat broke and over indebted as it is, they don't need more credit; they need more jobs. The Banks don't need any more free money; they need to be put in to bankruptcy to purge the system of the junk on which they have based their business model. The reason the banks refuse to lend is that they are holding on to the money to cover their accelerating losses. As each company fails, as each debtor loses their job the dominoes are falling faster and are obliterating the banking sector.

In case you wanted to know why the financials continue to implode...More Andrew Hughes:

The most recent report from the Comptroller of the Currency seems to have gone unnoticed in Washington and the press. If banks are not lending because of increased capital requirements in the face of Credit Default Swaps, other derivatives and loan defaults then the report goes a long way in describing exactly why:

Credit Exposure to Capital ratio. Amounts in $Trillions

Bank Assets Derivatives Derivatives Credit Exposure to Capital Ratio
J.P. Morgan Chase $1.8 $87.6 400.2
Citi $1.2 $35.6 259.5
Bank Of America $1.4 $38.7 177.6
HSBC $.18 $4.1 664.2

RCM Editorial: Financial Stocks' Effect on the DOW, Obama & the Stimulus Package, Greenlight Cap. & Gold

Interesting thought: "Jim Bianco points out that if the remaining financials in the Dow were priced at zero, it would only lose another 300 points. So, they are rapidly running out of room to take the market lower."

While this thought has merit I would also point out that the financials will have an almost impossible time leading the market higher. I heard on the financial news networks yesterday the usual hysteria that accompanies any rally. Cheerleaders were blathering on about the rally led by the financials and pundits were picking the oft elusive bottom. What they fail to discuss is the simple fact that this group requires a dramatic infusion of capital. And whether or not this infusion will be government assisted or constant follow-on offerings, the result is the same: endless supply and dilution leading to weak or underperforming equity prices.

And another thing...

Why can't the Obama administration and Congress devise a stimulus package that will, you know ... stimulate the economy? Am I asking too much? Is this concept too difficult to comprehend? Instead of focusing their efforts on the crisis at hand this package appears to have the usual pork barrel spending and handouts to special interest groups. Someone please tell me why ACORN, a group whose activities (while it is not PC to say) are arguably one of the root causes of the banking crisis, is receiving funds from this stimulus bill? Does ACORN's involvement in the election process - an involvement that some have suggested amounts to voter fraud - have anything to do with this handout? So basically 'change' to the Obama team means changing which special interests get the handouts. How should we reconcile the situation? I guess we could say: "the more things change the more they stay the same."

Greenlight Founder Takes Grandfather’s Advice on Gold By Stewart Bailey and Saijel Kishan
Jan. 28 (Bloomberg) — Greenlight Capital Inc. founder David Einhorn is finally taking his grandfather’s advice. The $5.1 billion hedge fund is buying gold for the first time amid the threat of inflation from increased government spending. Since Einhorn was 10 years old, his grandfather has warned him that investing in bullion and gold-mining stocks was the only “sensible” thing to do given the threat of inflation and the risks of so-called fiat currencies, New York-based Greenlight said in a Jan. 20 letter to clients. The firm had never before considered buying bullion or mining-company shares.“To everyone’s dismay, we believe some of Grandpa Ben’s predictions are playing out,” Greenlight said in the letter, a copy of which was obtained by Bloomberg News. “The size of the Fed’s balance sheet is exploding, and the currency is being debased.”Greenlight is turning to the centuries-old currency to mitigate the effects of the economic collapse and government efforts to end it. Bullion gained for the eighth straight year in 2008 as governments in Europe and the U.S. rescued banks from collapse.

RCM Comment: David, I know of a good way for Greenlight to move assets into precious metals: Consider investing in the hedge fund Fortune's Favor Precious Metals. The fund was up 4.99% net in 2008 even with the collapse of the mining companies and an approximately 24% decline in the price of silver. Plus, I hear the managers have their own money in the Fund and are pretty cagey veterans.

News that Moves: The Privateer: Gold vs. U.S.Treasuries & Mr. Mortgage: Rising Rates and Delinquencies

RCM Comment: 2008 was a successful year for us and 2009 seems to be continuing that trend. We are pressing our advantage in the month of January, focusing Fortune's Favor I on three basic areas: 1) Long gold (silver) & related assets, 2) long energy pipelines, 3) selective short sales focusing on (but not limited to) the financial space. However, success can breed complacency and as Andy Grove (former CEO of Intel) used to say, "Only the paranoid survive." So, with that thought in mind let's touch the proverbial goal posts and see if our investment themes still hold water. The stories below should shed some light on this matter. Remember, in order to successfully navigate the treacherous waters of the financial markets one must constantly test one's theories and be ready to react as the market changes. There is no room for ego in this business and the ability to reinvent oneself is tantamount to survival.

Gold Going UP - Treasuries Going DOWN - The Privateer

...especially in times of fiscal and/or financial strife, Gold and the yields on debt paper - especially longer-term debt paper - go in the SAME direction. THIS week (January 19 - 23) the yield on the US Treasury's 30-year debt paper has SOARED - rising from 2.87 percent to 3.31 percent! That has led to the biggest plunge (don't forget with debt paper, yields and prices on the secondary markets go in opposite directions) in the 30-year bond since 1982!

What most followers of Gold know is that the stellar decade for the metal in US Dollar terms was the 1970s. What some of them forget is that the 1970s was also known as the (all but) "fatal decade" for US Treasury debt paper. Yields rose throughout the decade as higher and higher rates were demanded by domestic and international investors alike to compensate for the "profigate" (for the time) spending policies of the US government and the downward pressure put on the US Dollar as a result

The spike in US long-term Treasury interest rates this week is ominous in the EXTREME! It is literally not possible for the rest of the world to "buy" the quantity of new debt proposed by the Treasury even if ALL global savings were marshalled for the task. The quantity of such savings would not buy more than 30 percent of it. This points with deadly accuracy towards a situation in which the Treasury, in order to sell the debt, is going to have to offer a higher rate of interest to potential buyers to offset the rapidly growing risk of holding the paper. The same thing happened in the 1970s, but the fiscal, financial and economic situation of the US in 2009 is VASTLY worse than it was in those days.

The already existing facts are that the British budget deficit will equal 9.4 percent of Britain’s GrossDomestic Product (GDP). This compares with 4.9 percent in the Euro zone and 8.4 percent in the US.When President Obama’s $US 825 Billion “stimulus” package is added, this year’s US budget deficit will climb to an historic 14.5 percent of US GDP. The farce that is the official US debt ceiling will have to be raised yet again to make room for this deficit explosion. Instead of Congress all standing with red faces, the climbing political likelihood is that the US will simply dispose of the “debt ceiling” and simply remove any legal “limits” to the debt of the US Treasury. The road is then open to unlimited debt.

MR. Mortgage:
Rates have shot up considerably in the past week and a half from roughly 5% at 1 point to 5.5%-5.625% at 1 point to the borrower. This was despite the Fed in the market buying $19 billion in Agency MBS last week. In the months leading up to the Fed announcing their QE plans, rates got under 6% several times — the mid’s 5%’s really is not that great. One would hope that with the Fed in there buying Agency MBS at the pace it is, rates could hold — but they have not been able to. This spike in rates will have a serious impact on the weekly MBA mortgage applications data that come out each Wednesday. My guess is that they are down this Wed and plunge the Wed after next.

The number of mortgages 90 or more days delinquent continued to rise at Freddie Mac (FRE: 0.68 +3.03%) during December 2008, reaching 1.72 percent of the GSE’s total single-family mortgage portfolio, the company reported Friday morning. That’s a jump of 62.2 percent from year-ago levels, and up 20 basis points from a 1.52 percent level reported for November 2008 — not surprisingly, as the nation’s housing woes have spread, Freddie Mac has posted a monthly rise in delinquencies throughout the entirety of last year.

News that Moves: Increase in U.S. Gov't Debt Limit, German Bond Auction Failure, U.K. Banking Bill

RCM Comment: Welcome to the wonderful world of inflation. While on this ride please keep your hands inside the cart at all times. The exhibits below will give you a glimpse into the enormity of the worldwide situation. This ride is speeding up, so please hold on to the bar. You will notice that the bar I am referring to is Gold. This bar is your only defense against being thrown off of the financial track to success. Fiat currencies are being created at an ever increasing rate as governments manipulate laws to continue expanding lines of credit; the proverbial line of coke for the addict. You will notice after reading the following stories there is a rebellion stirring. Gold prices were up this morning $24 even in the face of a stronger U.S.$, but the rally accelerated the second the story broke that the U.S debt limit could be raised to $12.14 trln from $11.315trln and closed on the Comex at 1:30pm up $37.50. Enjoy the ride...

Senate finance package would ok raising US govt borrowing authority to $12.14 trln from $11.315 trln; Senate Finance Committee says to consider stimulus package on Jan 27

ReutersBy David Oakley in London
Published: January 7 2009 13:30 A German sovereign bond auction failed on Wednesday as investors shunned one of the most liquid and safe assets in the world in a warning for governments seeking to raise record amounts of debt to stimulate slowing economies.
The fate of the first eurozone bond auction of 2009 signals trouble ahead as governments around the world hope to issue an estimated $3trln in debt this year, three times more than in 2008.
The 10-year bonds failed to attract enough bids to reach the €6bn the German government wanted. Bids of €5.24bn, a cover of only 87 per cent, amounted to the second worst auction on record in terms of demand. Such developments were rare before the credit crisis. Before the seven German bond auctions that failed last year, the last German bond auction to fail was in July 2000 after the dotcom crash. Analysts said the vast amount of supply is deterring investors and a growing number of countries, including those with deep and mature bond markets, such as Germany, the UK and Italy, are struggling to attract buyers. The Netherlands has seen bond auctions fail, the UK and Italy have been forced to offer investors higher yields to meet their auction targets, while Spain and Belgium have cancelled offerings because of a lack of demand.
The German finance agency admitted that investor appetite for government debt had waned, although insisted the auction was “not a disappointment”. Meyrick Chapman, a UBS fixed-income strategist, said when a German bond auction failed it “does suggest there may be trouble ahead for other governments wanting to raise money in the debt markets. Before the financial crisis, German bond auctions just did not fail.” However, analysts stress the heavy supply is being offset by fears of deflation and recession, which are typically supportive to government bonds and have depressed yields, which have an inverse relationship with price, to historical lows. The UK on Wednesday successfully sold £2bn in gilts due to mature in 2038. But Robert Stheeman, chief executive of the UK Debt Management Office, has warned that the large supply of debt could deter buyers of gilts. Britain is planning to raise £146.4bn in bonds this financial year – three times more than last year.
Copyright The Financial Times Limited 2009

from the UK Telegraph: The Bank of England will be able to print extra money without having legally to declare it under new plans which will heighten fears that the Government will secretly pump extra cash into the economy. The Government is set to throw out the 165-year-old law that obliges the Bank to publish a weekly account of its balance sheet -- a move that will allow it theoretically to embark covertly on so-called quantitative easing. The Banking Bill, which is currently passing through Parliament, abolishes a key section of the law laid down by Robert Peel's Government in 1844 that originally granted the Bank the sole right to print UK money. The ostensible reason for the reform, which means the Bank will not have to print details of its own accounts and the amount of notes and coins flowing through the UK economy, is to allow the Bank more power to overhaul troubled financial institutions in the future, under its Special Resolution Authority. However, some have warned that it means "there is nothing to stop an unreported and unmonitored flooding of the money market by the undisciplined use of the printing presses." It comes after the Bank's Monetary Policy Committee cut interest rates by half a percentage point, leaving them at the lowest level since the bank's foundation in 1694. With the Bank rate now at 1.5 percent, most economists suspect that the Government and Bank will soon be forced to start quantitative easing -- directly increasing the quantity of money in the economy -- in a drastic attempt to prevent a recession of unprecedented depth. Although the amount of easing is likely to be limited, news of this increased secrecy will spark comparisons with Weimar Germany and Zimbabwe, where uncontrolled use of the central banks' printing presses ultimately caused hyperinflation. The Bank said it will still publish details of its balance sheet, but, significantly, the data -- the main indicator of the extent of quantitative easing -- will not be presented until more than a month has elapsed. For instance, under the new terms of the law, if the Bank were to have embarked on a policy of quantitative easing last month, the figures on this would not be published until the end of this month. The reforms, which are likely to be implemented later this year, will make the Bank of England by far the most secretive major central in the world, experts said. In the US, where the Federal Reserve has already cut rates to close to zero and started quantitative easing, the main way to track its purchases of securities and the expansion of its balance sheet is through precisely these same weekly accounts. "Quite why the Bank has to keep its operations so shrouded in secrecy is a mystery to me," said Simon Ward, economist at New Star. "This will make it much more difficult to track what the Bank is doing." Among the details which will no longer be published are those revealing the extent to which London's banks are using the Bank's deposit facilities -- a yardstick of pressure in the financial system. Debating the issue in the House of Lords recently, Lord James of Blackheath, a Conservative peer, said: "Remove [this] control and there is nothing to stop an unreported and unmonitored flooding of the money market by the undisciplined use of the printing presses. "If we went down that path we would be following a road which starts in Weimar, goes on through Harare, and must not end in Westminster and London. That is the great fear that the abolition of that section will bring about -- but the Bill abolishes it

Bank of England to buy up corporate bonds to unblock markets
The Independent reports the Bank of England will start buying up corporate bonds within weeks to unblock capital markets and free banks' balance sheets so that they can lend to support the economy, Mervyn King, the Bank's Governor, said last night. In his first speech of the year, Mr King outlined radical plans for the Bank to buy up an initial 50 bln pounds of illiquid assets in the market to increase the flow of credit, with the option of ex-tending the scheme to boost the money supply by effectively creating new money. The asset purchases will come on top of a raft of other measures designed to get banks lending to limit the impact of the recession. Mr King told a CBI dinner in Nottingham that the Bank was ready to use "unconventional measures" to boost an economy facing a marked contraction in the first half of this year after a sharp slowdown at the end of 2008. The bank's intervention in shattered credit markets could make key securities more liquid, reduce the cost of borrowing for companies and ease the strain on banks' balance sheets, he said.

RCM Editorial: Success in 2008

2008 was a defining year for Rosenthal Capital Management. While the market averages collapsed (S&P500 down 41%, Dow30 down 36.2%, and the NASD Comp. down 42.8%) the Fortune's Favor Family of Funds escaped unscathed. In fact, our flagship fund, Fortune's Favor I, experienced an increase of 3.4% net of all costs, and the Fortune's Favor Precious Metals Fund increased 4.99% net.

Due to this success we are entertaining requests to open up the Funds to new investors. As we go through the process and decide the best course of action we are asked the same barrage of questions: What is your approach? Why were you able to increase net worth in '08 while your peers suffered? Is your focus momentum or value, or some sort of black box trading scheme? The answer to these questions, I fear, will be considered mundane. If potential new investors are waiting for a sexy response I hate to disappoint, but alas there is no magic formula. Perhaps it is best to answer what we are not and in the end they will see where the truth lies:

We do not have a black box secret we need to keep. As experience shows, secrets are manure for impropriety. We are completely trasparant, sorry to bore you.

We do not invest in illiquid assets and attempt to place (or markup) a value on them at the end of each month.

We are not MIT grads with a computer system designed to exploit inefficiencies. These inefficiencies exist in a particular environment and often evaporate as the system functions and markets change. This process makes long term results problematic. Evidence John Meriwether's checkered past. Long-Term Capital Management resulted in the infamous $3.8 billion bailout in 1998 and yet he was able to attract investors again (moths to a flame) only to lose more than 40% in '08.

Above all, we do not employ excessive amounts of leverage in assets such as Credit Default Swaps that have no liquidity at all. We will leave that to our high profile friends at Citadel and Fortress who learned a few painful lessons in '08.

I know it may be disappointing, but we have never employed any of the above esoteric techniques of money management. We have deliberately remained isolated from the rest of the hedge fund community; as a result our portfolio is not infected with the flavor of the month investment scheme. We have never engaged in the Yen carry trade and gambled on the future price of commodities which brought so many hedge funds to their knees in '08.

We simply employ 65 years of combined investment experience to identify current macro-trends that often lead us to compelling investment themes. We then work hard to uncover the groups and individual companies that can best exploit our vision. These companies can be large, mid, or small cap. We do all of our own fundamental work and keep a keen eye on the liquidity of each position. We also engage a computer system to help (I stress help) us identify entry and exit points. Our approach is not rigid in any way. Our primary strength is our constant effort to reinvent ourselves and remain fluid while interacting with a market that is ever changing.

Above all, we believe the most important underpinning of our success is that we are the single largest Limited Partners in our Funds and we intend to keep it that way. Preservation of capital is a critical discipline for us because a significant portion our own assets are invested in the funds. We do not aggressively employ leverage with the hope of generating amplified incentive fees. We are not striving to build a castle in the sky; we are already living in it and so we follow the axiom that the return of capital is as important as the return on capital. Remember, any fool can make money in a rising market and most fools do. But all fools will be eventually separated from their money.

Please take a moment to visit the Rosenthal Capital Management website. You will be able to view our personal investment track record of almost 11 years prior to founding the Fortune's Favor Family of Funds. From May 1995 to January 2006 we transformed a starting rollover IRA of $477,000 into $11.8 million with only 2 single digit down years. The key to successful compounding is not making money but the ability to not lose materially in down markets. Therefore, the cornerstone of our management philosophy is to protect assets during difficult times and strive to maximize returns only when we perceive the window of opportunity to be open.

News that Moves: Geithner's Tax Trouble, ABX / CMBX / LCDX Indicies In Trouble, Nationalization, MYGN

RCM Comment: The following story illustrates an exemplary thought process and one we must replicate if we are going to be successful managing money in this environment.
Peter R.: Sometimes it can really be true that for want of a nail a battle can be lost. Take Secretary of the Treasury nominee Timothy Geithner's tax and nanny troubles. The Senate has now decided to hold off on his confirmation vote until after the inauguration. This may have real consequences. The Treasury Secretary is the chair of the President's Working Group on Financial Markets and he needs to sign off on their actions. With the position vacant, the Group could be immobilized. The last time this occurred was when Paul O'Neill left the post at the end of 2002 and there was a 34 day lapse until John Snow took the reins as the new Treasury Secretary on February 3, 2003. During this month gold was up over 10%. The rally started the first day that O'Neill was gone and ended 2 days after Snow took office. It will be very interesting to watch how much, if any, effect the vacancy at Treasury has this time around.
RCM Comment: Gold jumped $30 at the open today. Coincidence or ...?

RCM Comment: The credit markets have been leading the equity markets during this entire bear market, so as a leading indicator this story is very concerning. Feel free to ignore the bubble heads on the financial news networks who continue to miss the real story. They point to earnings stories and economic data as the reason for market weakness when in reality the deteriorating credit markets and hedge fund redemptions rule the day as we at RCM have tirelessly explained. The equity markets will head higher long before earning and economic data turn positive. If you feel compelled to debate this with me I must ask you to recall the ridiculous debate last year that filled a lot of useless air time about when the recession started. By the time that economic news was out the equity markets were already deep in a downward spiral.
Distressed asset indices fall sharply -FT reports indices tracking the value of the trillions of dollars of distressed assets that continue to blight bank balance sheets fell sharply this week as a negative spiral of financial distress and subsequent economic pain continued. The declines -- which signal further potential writedowns by banks -- are fuelling fears that the first quarter of this year could herald further pain for the financial system, even as many banks reveal sharp losses for the fourth quarter of 2008. After several weeks of stabilisation and even some improvement, there have been renewed falls this week in the value of securities linked to subprime mortgages, leveraged loans and commercial mortgages. The Markit ABX index for triple A rated securities backed by subprime loans has dropped 13% in the past week. The Markit CMBX index for triple A rated securities backed by commercial mortgages was also down 14.5% in the past week. The LCDX index, a barometer of leveraged loans, was down 4.6% in the past week, back to levels it traded at about a month ago. Many of the assets tracked by these indices are hard to value, and banks' exposures are far from clear.

RCM Comment: What is the common thread tying these next three stories together? The world is moving toward nationalization. Countries like Cuba, Venezuela, Bolivia and Russia nationalize assets. Do we really want to be counted among this wonderful humanitarian group of countries? Is this the change that was in voters' minds in November? In order for a true democratic capitalist system to function entities must be allowed to fail. There needs to be a constant death and rebirth process to maintain a healthy system. By nationalizing and supporting the dead wood, the system will be eaten by termites from the inside and we will be left with a hollow shell.
Rescue of banks hints at nationalization - NY Times
NY Times reports last fall, as Federal Reserve and Treasury Department officials rode to the rescue of one financial institution after another, they took great pains to avoid doing anything that smacked of nationalizing banks. They may no longer have that luxury. With two of the nation's largest banks buckling under yet another round of huge losses, the incoming administration of Barack Obama and the Federal Reserve are suddenly dealing with banks that are "too big to fail" and yet unable to function as the sinking economy erodes their capital. Particularly in the case of Citigroup, the losses have become so large that they make it almost mathematically impossible for the government to inject enough capital without taking a majority stake or at least squeezing out existing shareholders. And the new ground rules laid down by Mr. Obama's top economic advisers for the second half of the $700 billion bailout fund, as explained in a letter submitted to Congress on Thursday, call for the government to play an increasing role in the major activities of the banks, from the dividends they pay to shareholders to the amount they can pay executives. "We are down a path that this country has not seen since Andrew Jackson shut down the Second National Bank of the United States," said Gerard Cassidy, a banking analyst at RBC Capital Markets. "We are going to go back to a time when the government controlled the banking system."

Russia considers merger of metal giants - WSJ
WSJ reports the Kremlin is considering a plan to merge some of Russia's largest metals companies into a conglomerate in which the government would take a substantial minority stake, in exchange for writing off some of the crushing debts of the tycoons who control the companies, according to people familiar with the discussions. A combined metals company would have annual revenue of as much as $40 billion, and give Russia a player to rival global giants like BHP Billiton. If approved by the government and the companies, the plan would mark the first indication that the Kremlin is using the bailouts it is offering the heavily indebted oligarchs to retake stakes in their industrial assets. Under terms of the rescue deals, a state-controlled bank lent the tycoons billions of dollars to allow them to pay off foreign loans, but the bank took stakes in their companies as collateral. The metals plan was discussed at a hastily called meeting late Tuesday between President Dmitry Medvedev, other senior officials and metals tycoons including Oleg Deripaska, the largest shareholder in aluminum giant UC Rusal, Vladimir Potanin, a key owner of OAO Norilsk Nickel, and Alisher Usmanov of iron-ore giant OAO Metalloinvest.


Additional detail on yesterday's headline about the Irish govt to take steps to fully nationalize Anglo Irish Bank
WSJ reports the Irish government, saying a planned recapitalization was now "not appropriate," will take control of Anglo Irish Bank to secure its continued viability after taking hits from an accounting scandal and the broader financial crisis. In scrapping the recapitalization plans, the govt said that the position of the bank had weakened and unacceptable practices took place caused "serious reputational damage." As part of Thursday's moves, recently appointed Chairman Donal O'Connor will remain in his role, but a new board will be appointed. All employees are expected to remain at the company. The Irish government reaffirmed it would maintain the full amount of all deposits and savings for customers of Anglo Irish Bank. "I would again stress that this government decision safeguards the interest of the depositors of Anglo, and the stability of the economy, given the significance of Anglo in this regard, as already recognized by the European Commission," the Irish government said. (Other Irish banks: IRE, AIB)

RCM Comment: There are so few bright spots in the equity markets at the moment, but this has to be one of them. This stock will go on our list of ideas to be acquired when the time is right.
MYGN Myriad Genetics profiled in New America section of IBD (70.11 )
IBD reports is the leader in the relatively new field of cancer predisposition testing. It has six tests on the market that tell patients whether their genes make them more likely that they'll get various types of cancer. The co's most popular and biggest selling product is its BRACAnalysis, which stands for Be Ready Against Cancer... Myriad's BRACAnalysis is priced at $3,120 per test, but it is reimbursed 96% of the time with an average out-of-pocket expense averaging only $54, says Piper Jaffray analyst Edward Tenthoff. "Some say diagnostic testing is a discretionary item," Tenthoff said. "The test has a low out-of-pocket expense, and that's why we think the economic slowdown will not have as big an impact on Myriad." One of the biggest challenges facing Myriad, aside from health care costs and the economic crisis, is trying to get the word out about its diagnostic tests to patients and physicians, especially obstetricians, gynecologists and oncologists. Myriad's BRACAnalysis is used by roughly 10% of OB/GYNs practicing today, which translates into a roughly $30 million to $40 million business, according to Michael Yee, an analyst at RBC Capital Markets. There is a $300-million-plus opportunity if all physicians are reached, he estimates. "Despite having been on the market for 10-plus years, the BRAC is still in the early innings," Yee said. "There is still plenty of room to grow."

News that Moves: Gov't Manipulation Footprint, $150bln Out of Hedge Funds, The Privateer/gold, Real Estate Reality

RCM Comment: We are saddled with the burden of having to manage money through the footprint of government manipulation. And it is the stated goal of this blog to help you, the reader, spot this footprint so you can put in perspective the violent swings in the markets. The government, through the direction of the Plunge Protection Team (PPT), has been supporting the equity markets for years. Never was this manipulation more evident than during the period of ultra-low volatility leading up to 2008. During that period the equity markets never dropped more than 2% by the close on any given day. That type of consistency is not possible in a real world scenario. It is, of course, possible in a Madoffesque puppet show where 8-10% returns every year for 20+ years are accepted as real. But I digress. Of course, PPT support can cut both ways. Was it just coincidence that the markets plummeted during the senate debates leading up to the 1st TARP hand out? Or did the PPT simply step away from its support of the markets to help add to the panic that would force weak-minded politicians into agreeing to anything Paulson and the Fed wanted? With this in mind it should come as no surprise that the equity markets sell off as the date rapidly approaches for the release of the rest of the TARP funds. Please don't misunderstand: I am not suggesting this is the sole reason for the decline. There are many other negative factors that are weighing on the equity markets as you will read in the rest of this blog. However, the velocity and timing of the decline is a clear footprint.

$150 bln taken out of hedge funds in December - FT
FT reports investors pulled close to a net $150 bln from hedge funds last month in spite of moves by dozens of funds to halt or suspend redemptions. The record December figure, equivalent to about 10% of industry assets, extends the run of outflows to four consecutive months and has increased the total net outflow for 2008 to $200bn. The size of the once lucrative industry has almost halved in the past year, to $1,000 bln under management, according to data from TrimTabs Investment Research and Barclay Hedge. Conrad Gann, chief operating officer of TrimTabs, said he foresaw more redemptions in the first quarter of 2009. "We expected December hedge fund redemptions to be significant, but the results are still surprising ... twice the peak equity mutual fund outflows in September at $72bn," he said. The hedge fund industry was clearly "under duress", Mr Gann said. RCM Comment: We have been following this story in these pages for the last few months. As you may recall we have stated that this is the number one reason for the extreme volatility we have experienced and the main reason why all asset classes have suffered simultaneously. Until this issue resolves itself expect more of the same. On a more positive note, in this environment the proverbial 'baby gets thrown out with the bath water', so time is best spent building a list of no-brainer opportunities such as buying gold or energy pipelines yielding 12%+. As always, be patient.

The Privateer: As we pointed out here last week, 2008 was the ninth year in the past decade during which the $US "price" of Gold has gone up. But 2008 stands alone because it was the first year since the $US Gold bull market got underway in 2002 during which Gold has gone up in the face of a deflationary bloodbath with $US TRILLIONS being wiped off the valuations of "assets" of all descriptions. 2008 was the year in which Gold proved beyond doubt its quality of preserving purchasing power in the face of ANY type of financial and/or monetary chaos.

Rates fall, but refinancings are limited - WSJ
WSJ reports interest rates on fixed-rate mortgage loans for prime borrowers have fallen to below 5%, the lowest level since the 1950s, triggering a wave of mortgage-loan inquiries from borrowers eager to refinance. But lenders and mortgage companies say that as many as half of the people who want to refinance can't meet the credit hurdles and won't get approved. While the low rates haven't caused a stampede of people seeking loans to purchase homes, they have set off a wave of refinancing applications. An index measuring refinancings is at its highest level since June 2003, according to the Mortgage Bankers Association. But a large percentage of applications are being turned down. Only about a third of U.S. mortgage debt outstanding is likely to qualify for refinancing, said Doug Duncan, chief economist of Fannie Mae. Nearly 70% of borrowers don't make the cut, he said, most often because their credit isn't good enough or they don't have sufficient home equity. A significant number of homeowners owe more than the current value of their homes, a situation sometimes known as being "under water." Others can't profitably refinance, often because they hold jumbo mortgages, those above the $625,000 limit for loans that can be bought or guaranteed by Fannie Mae or Freddie Mac in the highest-cost areas. RCM Comment: People repeatedly ask us what we think of the real estate market. Well, this story sums up the problem in a nutshell. Recovery in the real estate market is problematic not because of liquidity (we all know the Fed has created new money out of thin air and pushed it into the hands of banks) but because of lending standards. With the collapse of the Wall St. securitization scheme banks now must keep most of the loans on their books and naturally standards have gone up.

News that Moves: Dec.Retail Sales & Goldentree Redemptions

RCM Comment: The news that is moving the markets this morning is clearly the Retail Sales number. All was quiet on the western front until this story broke. However, remember the reaction to the news is more important than the news and the end of trading today will be more important than the open. Certainly a terrible retail number is no surprise, so a lower market at the close will be business as usual. A reversal and close well off the lows would be something worth noting.
ECONX December Retail Sales Down Sharply
December retail sales declined 2.7% from the previous month and were down 3.1%, excluding autos. Both numbers were considerably worse than the consensus estimates, which called for declines of 1.2% and 1.4%, respectively. Separately, the November numbers were revised lower to show a 2.1% decline in retail sales (prior 1.8%) and a 2.5% decline (prior 1.6%), excluding autos. Gasoline station sales were down 15.9% versus November and had a big impact on the overall reading for December. Still, it was abundantly clear that spending was weak in most other areas... Excluding both auto and gasoline station sales, retail sales were down 1.5% from November... The December details aren't encouraging. Month-to-month declines were registered in every category, with the exception of health and personal care stores (+0.4%) and miscellaneous store retailers (+0.5%). In the 3-month period ending in December, total retail sales were down 6.8% from the 3-month period ending in September and were down 7.7% from the same 3-month period a year ago... This report will factor negatively for the PCE component of Q4 GDP... For the here and now, though, it reinforces the point that consumers have clamped down on spending in the face of rising unemployment and falling asset values. There is no sugar-coating this weak data point for the economy.

RCM Comment: The hedge fund story continues to unfold and get stranger. This story suggests that the individual investor will receive illiquid, complex debt instruments as redemption payments. What is the individual supposed to do with those assets when there is no market and no expertise to sell them? This action seems like it will create more havoc in an already untenable situation. Bottom line, $350 billion left the hedge fund arena last year and more redemptions can be expected at the end of the 1st quarter. We expect this to negatively effect the market and periodically create extreme volatility.
Fund to repay investors in securities not cash - FT
FT reports GoldenTree Asset Management, a credit hedge fund, is offering in­vestors who want to withdraw money securities instead of cash, triggering protests from those who in many cases lack means to dispose of such instruments. Hedge funds such as GoldenTree warn investors in offering documents that they have the right to pay investors back "in kind" not cash. However, such payments in kind have been highly unusual until the current credit crisis, which has led hedge funds to place a variety of restrictions on investors trying to pull out their money. GoldenTree, which specialises in investing in complex debt ins­truments, had about $10 bln under management last year. But losses and redemptions could leave it with half as much if investors made good on withdrawal requests, said a person with direct knowledge of the matter.

Reprint: Peter Coy Business Week & Karl Denninger's Paulson/Bernanke 2008 quotes

RCM Comment: Here is a list for your reading amusement. While you are laughing remember there will be many predictions in 2009 and it will be our job to separate fact from fiction.

Peter Coy at Business Week has put together a list of 2008’s worst predictions:

1. "A very powerful and durable rally is in the works. But it may need another couple of days to lift off. Hold the fort and keep the faith!" -- Richard Band, editor, Profitable Investing Letter, Mar. 27, 2008 At the time of the prediction, the Dow Jones industrial average was at 12,300. By late December it was at 8,500.
2. AIG (NYSE:AIG - News) "could have huge gains in the second quarter." -- Bijan Moazami, analyst, Friedman, Billings, Ramsey, May 9, 2008 AIG wound up losing $5 billion in that quarter and $25 billion in the next. It was taken over in September by the U.S. government, which will spend or lend $150 billion to keep it afloat.
3. "I think this is a case where Freddie Mac (NYSE:FRE - News) and Fannie Mae (NYSE:FNM - News) are fundamentally sound. They're not in danger of going under I think they are in good shape going forward." -- Barney Frank (D-Mass.), House Financial Services Committee chairman, July 14, 2008 Two months later, the government forced the mortgage giants into conservatorships and pledged to invest up to $100 billion in each.
4. "The market is in the process of correcting itself." -- President George W. Bush, in a Mar. 14, 2008 speech For the rest of the year, the market kept correcting and correcting and correcting.
5. "No! No! No! Bear Stearns is not in trouble." -- Jim Cramer, CNBC commentator, Mar. 11, 2008 Five days later, JPMorgan Chase (NYSE:JPM - News) took over Bear Stearns with government help, nearly wiping out shareholders.
6. "Existing-Home Sales to Trend Up in 2008" -- Headline of a National Association of Realtors press release, Dec. 9, 2007 On Dec. 23, 2008, the group said November sales were running at an annual rate of 4.5 million -- down 11% from a year earlier -- in the worst housing slump since the Depression.
7. "I think you'll see (oil prices at) $150 a barrel by the end of the year" -- T. Boone Pickens, June 20, 2008 Oil was then around $135 a barrel. By late December it was below $40.
8. "I expect there will be some failures. I don't anticipate any serious problems of that sort among the large internationally active banks that make up a very substantial part of our banking system." -- Ben Bernanke, Federal Reserve chairman, Feb. 28, 2008 In September, Washington Mutual became the largest financial institution in U.S. history to fail. Citigroup (NYSE:C - News) needed an even bigger rescue in November.
9. "In today's regulatory environment, it's virtually impossible to violate rules." -- Bernard Madoff, money manager, Oct. 20, 2007 About a year later, Madoff -- who once headed the Nasdaq Stock Market -- told investigators he had cost his investors $50 billion in an alleged Ponzi scheme.
10. A Bound Man: Why We Are Excited About Obama and Why He Can't Win, the title of a book by conservative commentator Shelby Steele, published on Dec. 4, 2007. Mr. Steele, meet President-elect Barack Obama.

RCM Comment: I have also included a list (courtesy of Karl Denninger) of comments by Hank Paulson and Ben Bernanke from 2008. Be careful, after reading this list you may ask yourself, "Are they criminals or imbeciles?", "Were they deliberately missleading the public or were they actually clueless?" Either answer will make you uneasy about 2009:

Mr. Paulson said in a speech March 13th, 2007: "The fallout in subprime mortgages is going to be painful to some lenders, but it is largely contained."

Chairman Bernanke before the Congressional Joint Economic Committee on March 28th 2007, just a few days later: "Although the turmoil in the subprime mortgage market has created severe financial problems for many individuals and families, the implications of these developments for the housing market as a whole are less clear. The ongoing tightening of lending standards, although an appropriate market response, will reduce somewhat the effective demand for housing, and foreclosed properties will add to the inventories of unsold homes. At this juncture, however, the impact on the broader economy and financial markets of the problems in the subprime market seems likely to be contained. In particular, mortgages to prime borrowers and fixed-rate mortgages to all classes of borrowers continue to perform well, with low rates of delinquency."

Chairman Bernanke at the Federal Reserve Bank of Chicago’s 43rd Annual Conference on Bank Structure and Competition, May 17th, 2007: "We do not expect significant spillovers from the subprime market to the rest of the economy or to the financial system."

Chairman Ben S. Bernanke speech to the 2007 International Monetary Conference, Cape Town, South Africa, June 5th: "The troubles in the subprime sector seem unlikely to seriously spill over to the broader economy or the financial system."

Mr. Paulson on Bloomberg, July 26th, 2007, just days before two Bear Stearns Hedge Funds imploded: "I don't think it [the subprime mess] poses any threat to the overall economy."

Mr. Paulson's Press Roundtable in Beijing, August 2nd, 2007, likewise, just days before the hedge fund explosion and Ben Bernanke’s unprecedented “emergency” discount rate action: "I also said I thought in an economy as diverse and healthy as this that losses may occur in a number of institutions, but that overall this is contained and we have a healthy economy."

Chairman Bernanke to Committee on Banking, Housing, and Urban Affairs, U.S. Senate, April 3rd, 2008: "Clearly, the U.S. economy is going through a very difficult period. But among the great strengths of our economy is its ability to adapt and to respond to diverse
challenges. Much necessary economic and financial adjustment has already taken place, and monetary and fiscal policies are in train that should support a return to growth in the second half of this year and next year."

News that Moves 1st addition '09: German "Failed" Auction, Cram Down Legislation, MER & Gold Bars, China/U.S. Debt, Money Flows, Califonia IOUs

RCM Comment: To start off the new year we have put together a list of essential stories. These stories are a microcosm of the world we live in and the challenges we face. This is a reality check. Beware the main stream financial media as it constantly belches out positive spin. Don't be seduced by the calls for a rally and the oft elusive market bottom. In our experience there is no need to guess at bottoms. The majority of money is made after the bottom is clearly in place and the next bull market is underway. Until then we must remain vigilant, protect principal, and as my highschool ice hockey coach used to say, "Read and react son, read and react."

Fleckenstein Jan. 8th:

...the German Bund market experienced a "failed" auction as investors bid for fewer bonds than the German government wanted to sell. Since all the world's governments are increasing their budget deficits, led by us, this development is one that we might want to take note of, especially since Germany is one of the best government credits on the planet.

The Pitfalls of Cram Down Legislation: In the next few months, we're probably going to hear a lot more about the subject of mortgage cram downs. Congress would like to wave a magic wand in a manner that's perceived to help homeowners and one of the concepts being bandied about is allowing judges to reduce mortgages for folks who are underwater. In an email to me this morning, the Lord of the Dark Matter weighed in on that subject. He succinctly explained the problems and the pitfalls, as he so often does. Thus, I'd like to reprise them here:
"Yesterday Senators Dodd, Schumer and Durbin announced a deal with Citigroup on what is known as mortgage cram down legislation. The revised bill Citigroup endorsed would give judges the ability to adjust principle payments or interest rates on existing loans, and could extend the term on the loan, according to the language of the bill. The legislation would be limited to existing mortgages, rather than future loans. Senator Durbin brokered the deal with Citigroup and is seeking similar support from other lenders. This proposed legislation will be wonderful for irresponsible borrowers, will annoy responsible borrowers who did nothing wrong over the past five years, and is an absolute disaster for lenders. Do not be fooled by Citigroup's participation: If you had your arm twisted behind your back by a three hundred and six billion dollar gorilla, your negotiating position wouldn't be terribly strong, either. "The proposed legislation will have a significant negative impact on the valuation and performance of all non-agency MBS and whole loans, and thus greatly reduce the chances that non-agency mortgage markets return anytime soon: I assume of course -- perhaps naively -- that some people actually want a non-agency MBS market to return. The proposed legislation will also negatively impact credit card and auto lending markets due to the increased likelihood of bankruptcy filings. Why would any investor again purchase a non-government guaranteed security issued by a notionally bankruptcy-remote trust when the government can simply change the rules after the fact?
"On the one hand, we have the Fed courageously and innovatively trying to reinvigorate the consumer credit market via a new non-recourse facility to provide financing for investors in new securitizations of auto and student loans. On the other hand, we get this proposed legislation which lowers the incentives for investors who want to buy and hold that type of paper. Any systemically important financial institution with a large portion of credit card, auto loan and second-lien paper on their balance sheet is going to be impacted. One of them was off 3.10% yesterday. "In sum, the cost of the bailout of the U.S. financial system is inevitably going to rise, the delta on more capital being required for U.S. banks is now 100, and it is my personal view that this proposed legislation substantially increases the probability that the U.S. banking system is going to have to be fully nationalized."

Merrill Lynch says rich turning to gold bars for safety
Merrill Lynch has revealed that some of its richest clients are so alarmed by the state of the financial system and signs of political instability around the world that they are now insisting on the purchase of gold bars, shunning derivatives or "paper" proxies. By Ambrose Evans-Pritchard Last Updated: 10:32AM GMT 09 Jan 2009
Gary Dugan, the chief investment officer for the US bank, said there has been a remarkable change in sentiment. "People are genuinely worried about what the world is going to look like in 2009. It is amazing how many clients want physical gold, not ETFs," he said, referring to exchange trade funds listed in London, New York, and other bourses.
"They are so worried they want a portable asset in their house. I never thought I would be getting calls from clients saying they want a box of krugerrands," he said.
Merrill predicted that gold would soon blast through its all time-high of $1,030 an ounce, and would hit $1,150 by June. The metal should do well whatever happens. If deflation sets in and rocks the economic system it will serve as a safe-haven, but if massive monetary stimulus gains traction and sets off inflation once again it will also come into its own as a store of value. "It’s win-win either way," said Mr Dugan. He added that deflation may prove the greater risk in coming months. "It’s very difficult to get the deflation psychology out of the human brain once prices start falling. People stop buying things because they think it will be cheaper if they wait."
More…

China Is Losing Its Taste for U.S. Debt By KEITH BRADSHER Published: January 7, '09 HONG KONG — China has bought more than $1 trillion of American debt, but as the global downturn has intensified, Beijing is starting to keep more of its money at home, a move that could have painful effects for American borrowers.
The declining Chinese appetite for United States debt, apparent in a series of hints from Chinese policy makers over the last two weeks, with official statistics due for release in the next few days, comes at an inconvenient time. On Tuesday, President-elect Barack Obama predicted the possibility of trillion-dollar deficits “for years to come,” even after an $800 billion stimulus package. Normally, China would be the most avid taker of the debt required to pay for those deficits, mainly short-term Treasuries, which are government i.o.u.’s. In the last five years, China has spent as much as one-seventh of its entire economic output buying foreign debt, mostly American. In September, it surpassed Japan as the largest overseas holder of Treasuries.
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Money Flows Out of Hedge Funds At Record Rate – Financial Times
Investors pulled a net $32B from hedge funds last month, making 2008 the first year in their recorded history that the funds have had significant outflows and ending the industry’s 18 years of asset growth.
Mike Morgan – It is important to note that the main wave of redemptions did not start hitting until this past September. And here’s the kicker. It is estimated that there are $60B of redemptions in place now that are not in the $32B number referenced in the article.

California may delay tax refunds amid budget impasse With Gov. Arnold Schwarzenegger’s veto of Democrats’ $18-billion package of tax hikes and cuts, the state could begin issuing IOUs as soon as Feb. 1. GOP legislators join a suit against the package.
By Jordan Rau and Evan Halper January 7, 2009
Reporting from Sacramento — State officials on Tuesday braced for the possibility of delaying tax refunds to millions of Californians, along with student grants and payments to vendors, as the latest round of budget negotiations between Gov. Arnold Schwarzenegger and Democratic legislators collapsed. With little more than a month’s worth of cash left in the state treasury, the governor and lawmakers have been unable to agree on how to erase a budget gap projected to reach $41.6 billion by the middle of next year. Democrats announced Tuesday that two weeks of discussions had ended in an impasse and sent Schwarzenegger the $18-billion fiscal package they passed last month. The governor vetoed it, as he had promised to do.
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