RCM Editorial: Changing the Rules of the Game with the Stroke of a Pen

Comments by Gary Rosenthal:

It has come to our attention that a piece of legislation traveling through Congress contains a little known section that would retroactively render naked Credit Default Swaps(CDS) unenforceable. In other words, with the stroke of a pen Congress would make contracts previously entered into by two willing parties unenforceable. On what legal grounds can Congress do such a thing you ask? Why, on the grounds that all such contracts are "contrary to public policy".

Ours is not to judge but to recognize meaningful change ahead of the crowd and to properly position our clients. At Rosenthal Capital Management we work 24/7 to uncover little gems like this in a tireless effort to beat the crowd to what may turn out to be a profound money making opportunity. Clients will remember our January 08 letter in which we outlined the destruction that CDS would likely rain on our banking system in the latter half of 2008. And rain it did. In this light we believe this little piece of legislation may well be the most important piece of legislation that Congress will pass concerning the recovery of the global financial system. The financial landscape is littered with the tattered ruins of once great corporations. Since we were fortunate to anticipate and avoid this destruction we feel confident in our ability to identify where to most advantageously place capital for its recovery. We will be happy to share our favorite ideas with you once we have taken positions with our clients.

RCM Editorial: The Condition is Called Complacency

I have been asked the same question repeatedly over the last few weeks. In fact, what began as a seemingly innocuous trickle has turned into a deluge of disillusionment and despair. So often now have I fielded this question that the time has come to dissect and reveal its true destructive force on a portfolio.

The offending question is often asked as a rhetorical with a pregnant pause at the end:

"Bret, at the beginning of 2008 my US equity portfolio was valued at X. Now, the value is 1/2 X, so I guess I should just hold on to my positions and wait for them to come back.... I mean they always do, right?"

Sometimes this question is followed by the Tweedle Dumb and Tweedle Dee of investing platitudes: "I can wait because I'm a long term holder", and, "You haven't lost money until you sell it".

If I seem glib, I don't mean to and if I have offended some I apologise. There is nothing lightweight about this question. In fact, it reveals a serious condition that can be terminal to a portfolio. The condition is called complacency. How has this malignant complacency been allowed to spread through the mind of the suffering portfolio owner? And what must be done to reverse the effects? I will attempt to answer these questions.

I see two main reasons for the complacency:

1) Ego gets in the way of good judgement all the time. The ludicrous apothegm that you have not lost money until you sell was most certainly created by someone trying to coddle his ego. Admitting you were wrong is difficult to do but is almost certainly the first step on the road to redemption.

2) For roughly 50 years the US equity markets behaved in a manner that bred, fostered and encouraged complacency. You see, from the 1950s to 2000, the market averages were higher at the end of each 5 year increment. This phenomenon was even recognized by the education system and eventually universities churned out students who believed in the myth that is called 'A Random Walk Down Wall Street'. Of course, no one even bothered to point out that the averages were constantly reformulated during the five years with the worst companies being taken out and replaced with stronger ones. Nope, from universities on up to investment professionals the concept of buy-and-hold was preached with the faith that markets always go higher. Well, now the game has changed. The averages were lower in 2004 than in 2000 and will be lower in 2009 than in 2004.

So, let's reverse the effects of complacency:

Step one: Simply forget about your ego and stop wasting time trying to point fingers. My advice: Don't look at the level of your assets at the beginning of 2008 and try to come up with a scheme to recover it all tomorrow or bury your head in the sand and hope what you own will recover. Instead, look at the level of your assets today and imagine it is all cash. Ask yourself what would you do today with this cash in this environment to best protect the assets and make them grow. Then execute on this new plan. If you need help with this process I humbly suggest you spend some time on our website. You will find letters we have written to our investors as well as monthly updates on individual positions that may offer some guidance.

Step two: Recognize that the game has changed and the rules are different. After the crash of 1929 it took the averages over 2 1/2 decades to go to new highs and no doubt the complexion of the averages changed during that time. So, holding a portfolio of losers after the crash probably resulted in an even worse outcome. The rules have changed and you must change with them. Find out what areas of the market will perform best in this environment and don't hesitate to realign your portfolio. Actively manage your assets, don't be passive anymore.

I will leave you with this image. Conceptualize if you will that you were playing football for the last X amount of years. You knew the rules, you wore pads, you played on turf and wore cleats to help grip said turf. Now all of a sudden you find yourself playing a different game. Let's say, ice hockey. You will still need pads, but the rules have changed which will take some getting used to. Take your time, be methodical, study. If you run out onto the ice still wearing cleats you will fall all over yourself. This is precisely what most of the best money managers of the last 50 years are doing today: falling all over themselves using tools that worked in the last cycle but can't possibly work in this one.

News that Moves: Jim Sinclair on Geithner, The Fallacy of US$ Strength, Trouble for the British Pound, CDSs on US Treas. Debt

Jim Sinclair: On Geithner...

During testimony on his nomination, when Secretary of the Treasury Geithner was asked about errors made in the Great Depression, he replied: There were two:1. Monetary stimulation ended too soon.2. Heed was not taken of the dollar foreign exchange position. Think hard on the implications of both these points. The dollar rose into the Great Depression, acting as a break on American exports as protectionism was rising everywhere. You can be sure the present dollar rally as a place of refuge has no meaningful future.

RCM Comment: The following offers good insight into the recent US$ strength:

"The dollar buying is a result of CDS margin calls. No-one in the MSM etc will talk about this, as it exposes the mad system they have created and more importantly just how vast the CDS position is, relative to the real world. Every time the Stock Market starts tanking and the end of the financial world approaches, we get huge dollar buying, because CDS’s blow out and the margin calls go out. Most CDS’s are Dollar based."

RCM Comment: For those of you asking about currencies I offer the following story as further evidence that the British pound is in for a pounding. The quantitative easing train has left the station and it is going to get ugly for this fiat currency. You may wish to refer to our Jan. 21st blog for more thoughts on this topic. The Bank of England's Monetary Policy Committee has voted unanimously to seek Goverment permission to increase the amount of money in the economy as interest rate cuts lose their power to fight recession. The 9-0 vote by the MPC was revealed in the minutes of the meeting held on February 5. The Bank's Governor Mervyn King will now write to Alistair Darling, the Chancellor, to ask for approval to introduce measures aimed at raising the supply of money in the economy – known as quantitative easing. The Bank hopes that by increasing the quantity of money in the economy it can encourage banks to increase lending and consumers to start spending

RCM Comment: To understand this story just think of credit default swaps (CDS) on US treasury debt as the proverbial 'canary in the coal mine'. The US is mining the world's wealth by issuing obscene amounts of debt. At some point the mine explodes and collapses with the outright refusal and/or inability of our trading partners to accept more IOUs. As we draw closer to this conclusion the CDSs will sound the alarm with ever widening spreads. NEW YORK, Feb 18 (Reuters) - The cost to insure U.S. Treasury debt with credit default swaps jumped to a record high on Wednesday as President Barack Obama unveiled another round of spending designed to stem home foreclosures. Credit default swaps on U.S. government debt widened 8.5 basis points to 90 basis points, or $90,000 per year for five years to insure $10 million in debt, according to Markit. The swaps had traded at less than 10 basis points a year ago. President Barack Obama on Wednesday pledged up to $275 billion to help stem a wave of home foreclosures that sparked the U.S. financial meltdown. Swaps protecting the sovereign debt of Germany also rose 12 basis points to 85 basis points on Wednesday, while swaps on Britain fell 4.5 basis points to 164.5 basis points, Markit data shows.

News that Moves: Brokerages Tighten Hedge Fund Financing & Eastern European Currencies Crumble

RCM Comment: As I write this note the equity markets are down over 3% across the board with financials leading the way. At the same time, Gold and Silver prices are called higher by over 3%. Those of you who are part of the Fortune's Favor Family of Funds, follow this blog, or are members of our website know that today is an eminently successful day.

O.K., our moment of felicity has passed. Let's get to the business at hand: Many different stories are being bandied about in the financial media trying to explain today's action. I submit the following two stories as catalysts for the move and humbly suggest they are in essence what is moving the markets today.

Brokerages tighten hedge fund financing - WSJ
The Wall Street Journal reports brokerage firms are reducing financing and other services to hundreds of hedge funds, in a move that could accelerate the shakeout among these heavy-hitting investors. Under financial pressure, securities firms are dividing their hedge-fund clients into lists of those they consider best able to weather the financial turmoil and those they're less sure of. The result is that more funds may have to merge, find other financing at higher cost or close. The squeeze, described by a range of brokerage-firm and hedge-fund officials, takes different forms. For instance, they say firms have reduced financing for the flagship fund run by John Meriwether, a founder of Long-Term Capital Management, the fund whose near-collapse caused a brief market crisis in 1998. The move has forced Mr. Meriwether's Relative Value Opportunity fund -- down 42% in 2008 -- to reduce its borrowing to finance trades, putting pressure on returns. Mr. Meriwether, whose firm is called JWM Partners LLC, declined to comment. RCM Comment: I find this story extremely disturbing for two reasons: 1) This action by the banks seems to be setting up a vicious cycle. It would appear that banks are failing to see the interconnected nature of the hedge fund industry. The "less sure of" funds will be forced to liquidate, which will put pressure on the "weather the turmoil" funds that own similar assets, which in turn will lead to a growing number of "less sure of" funds. Did you follow that reasoning? This action basically leads to the continued unraveling of the hedge fund industry. This unraveling caused violent swings in the markets during the 4th quarter of 2008. 2) During Q4 of '08 and particularly in December, funds suspended redemptions to slow down mass liquidation, which helped stabilize the markets. However, the next window to redeem is rapidly approaching (end of Q1). We would not be surprised at all to see violent swings increase as we get closer to the end of March. The banks' decision to "tighten financing" will only throw fuel on the redemption fire.

Eastern European currencies crumble as fears of debt crisis grow - Daily TelegraphThe Daily Telegraph reports that Hungary's forint fell to an all-time low on Monday, and Poland's zloty slumped to the lowest in five years, on plunging industrial output. Half of all loans to the private sector in Poland are in foreign currencies so borrowers face a severe debt shock after the 40% fall of the zloty against the euro since August. The mushrooming crisis has already started to spill over into Germany's debt markets, lifting credit default swaps on German five-year bonds to a record 70 basis points. A report by Moody's released on Tuesday said the region's banks were coming under severe stress as the property bust combines with a rising debt burden. "Local currency depreciation is a major risk to East Europe banks," it said. There are contagion worries for Western banks that have lent $1.74 trillion to the ex-Soviet bloc -- split between $1 trillion in foreign loans and $700bn in local currency debt through subsidiaries. The region needs to roll over $400 bln in foreign debts this year, equivalent to a third of total GDP, raising concerns that it may need a massive rescue programme from the International Monetary Fund and the European institutions. RCM Comment: This story is a main reason for the surge in the price of the U.S.$ and Gold today. That's right. You read it correctly. The US$ and Gold are going up together. Those of you who have been reading this blog for the last few months will recall we have listed this behavior as a key signpost on the road to higher Gold prices. We have relentlessly stated we will know we have entered an explosive stage in Gold prices when the metal advances against all currencies at once. Please hold on to the bar...

RCM Editorial: Writing from the Road...

Gary and I are working this week out of our old haunt, New York City. We are having a great time, accomplishing a lot, and enjoying NYC (all together now: LET'S GO RANGERS!!). Plenty has happened in the markets this week and we will get back to blogging the 'News that Moves' as soon as possible.

I felt I would make just a few comments to tide you over:

In our last blog (Feb. 6th) we explained that the rally last week appeared to us to be a classic example of the 'buy the rumor' type of trade. This week's trading has completed that phrase as the markets have 'sold the news'. No surprises here. As the markets move lower during a bear trend you will often see violent moves higher on rumor and then the true trend settles back in as the news is revealed. What must be understood is the following: No one piece of news is capable of changing the trend.

The congressional hearing today illustrated another case of ridiculous political grandstanding. The USA has serious issues that need to be resolved and these jokers are wasting their time grilling the CEOs of the banking industry. I will not waste time on the absurdity of Barney Frank or his cohorts. I will simply say this: If they were wearing togas they would strongly resemble the rabble that surrounded Caesar. Except Caesar, in this example, is the collected citizens of the USA.

One investment theme does surface during this sham of a hearing. Time was wasted complaining about bonuses to management. Cato, Brutus and the rest want to restrict the free market and control payouts of all the banks receiving government funds. While this control has a wonderful populist sound and plays well while pandering, it has one simple effect: The talented people inside these banks - people who are needed to fix this mess - will simply leave. The senators claim to be protecting taxpayers, but this view is completely shortsighted. It is the proverbial cutting off the nose to spite the face. The talent will walk, start their own investment banks when the time is right, and then profit, while the old banks the taxpayer owns will languish and under perform.

So, the investment theme is simply to continue shortselling the banks (including Goldman Sachs & JP Morgan) as the diaspora of talent unfolds. This does not mean these stocks will go straight down. Like all investment themes, a nimble manager will be required to reap the rewards, but reap we will as if it were a full moon.

News that Moves: Mark-to-Market Accting., The PPT, US Tres. Plans Record Debt Sale, US Tres. Default Bet Surge, State Budget Troubles, BofA CEO Lewis

NEW YORK (Reuters) - Stocks extended gains on Thursday as shares of financial services companies sharply cut losses on talk that Washington's rescue plan for banks may include suspension of a key accounting rule mark-to-market accounting, traders said. (RCM Comment: For the record, we believe the mark-to-market issue is complete and utter nonsense and will be disastrous if passed. It will produce complete mistrust of bank balance sheets and earnings statements, which will eventually be reflected in price earnings ratios declining to unprecedented lows.)

RCM Comment: The markets are adding to the gains today in a classic buy the rumor trade. We will have to wait and see if the markets sell the news after Geitner outlines his U.S. banking fix on Monday. However, the short term reaction is really quite inconsequential. In fact, we would like to draw attention to the rather curious pattern that has unfolded around key bailout debates in Congress.

Before I explain, I would ask you to give us the courtesy of acknowledging that our combined 60+ years of experience in this business may give us unique insights into the machinations of the financial markets. And in fact, these insights helped lead us to a successful 2008 campaign.

Now, let's get to the matter at hand: market manipulation. We believe it may be possible the market rally is nothing more than a manipulation engineered by the President's Working Group on Financial Markets, A.K.A Plunge Protection Team (PPT). The object: generate support for US Treasury Secretary Geitner's proposals on Monday. Can you guess who is the chairman of the PPT? If you said Geitner, collect $200 from the community chest. This footprint of possible manipulation was never more apparent than during last year's TARP debates. Each time it appeared that the wishes of the then chairman of the PPT, Henry Paulson, were going to be denied by congress, the markets would collapse. Hank would point to this decline and use fear tactics as a means to bully weakminded congressmen to do his bidding. Engineering a sharp market decline or rally continues to be an effective tool to push Congress around. However, eventually the markets revert back to the true trend. As an example, you may recall the market rewarded Congress with a sharp rally when TARP was passed only to collapse shortly thereafter. We offer this angle as food for thought, another piece to the puzzle that is called the equity markets. Our challenge is to avoid being influenced by deceitful short-term market manipulations and maintain a proper portfolio strategy.

US Treasury in plans for record debt sale Published: February 4 2009 18:01 The US Treasury on Wednesday opened the floodgates of government bond issuance, revealing plans for a record debt sale in February and more frequent auctions in the months to come. The announcement came amid growing fears about US government deficits and sent the yield on the benchmark 10-year Treasury note rising to 2.95 per cent, up from just over 2 per cent at the end of December. The rise in Treasury yields has been pushing mortgage rates higher, complicating efforts to revive the economy. The US Federal Reserve said last week it was "prepared to" buy Treasuries if that would be a "particularly effective" way of reducing private borrowing costs."The Fed has to be troubled by the fact that mortgage rates have been rising and the buying of Treasuries by the Fed may come sooner than the market expects," said William O’Donnell, UBS strategist. The Treasury said it would sell $67bn (£46bn) in new securities next week, the largest ever quarterly refunding, beating the last peak in August 2003. It may also start monthly sales of all its benchmark Treasury securities. At the end of February, the Treasury will start selling seven-year notes every month for the first time since the issue was discontinued in 1993. Sales of 30-year bonds will double to eight times a year and the Treasury will say in May whether the bond will be sold every month. For Barack Obama’s administration, the step-up in borrowing costs comes as it is fighting to secure an $800bn-plus fiscal stimulus, and is likely to need many hundreds of billions more to fund a banking sector clean-up. The Treasury Borrowing Advisory Committee expressed concern on Wednesday over the sharp jump in net borrowing needs – which market analysts estimate could reach $1,500bn to $2,500bn for the 2009 financial year. Traders are particularly concerned about the appetite for Treasuries among foreign investors, who hold more than half the outstanding $5,500bn in Treasury debt. In recent years, demand for US government debt has been stoked by developing countries running huge trade surpluses with the US and recycling dollars by buying Treasuries. However, many are facing growing pressure to stimulate their own economies and are seeing their current account surpluses decline as global demand diminishes.

U.S. Treasury default bets surge, hit new record NEW YORK, Feb 4 (Reuters) - Rising U.S. government borrowing has a growing number of investors betting on a potential default by the Treasury down the line, according to credit default swaps data on Wednesday. According to CMA DataVision, five-year U.S. CDS spreads stood at 82 basis points on Wednesday, having closed on Tuesday at a record 85.9 basis points. As a result, it currently costs $82,000 a year to protect $10 million of U.S. debt. That is up tenfold from levels seen a year ago and even more from the negligible levels that were common before the credit crisis. The CDS market is used to hedge against the possibility of sovereign and corporate defaults, and has played a controversial role in exacerbating the credit crisis. Many believe a default by the U.S. Treasury is a physical impossibility, since all of the government's debts are denominated in its own currency and it could conceivably print more dollars to meet their obligations... RCM Comment: This story should have ended with the comment "...leading to a dramatic rise in the price of gold."

RCM Comment: Those of you who have a significant portion of your "safe money" in Municipal bond portfolios take heed of the following two stories.

There is a high chance a majority of the States within the United States of America could file for Chapter 9 bankruptcy:

There are currently 46 states with high budget deficits, Arizona being one of them. In fact, Jan Brewer, the newly appointed Governor of Arizona has a major crisis on her hands, one that Arizona and national media isn't covering. The alarming news is the State of Arizona has 90 to 120 days before they completely run out of money. After that, all bills and tax refunds owed to the citizens will go unpaid. Before Janet Napolitano left for her new Homeland secretary position, she had a stand-off with Arizona Treasurer Dean Martin. The AZ Treasurer forewarned Napolitano about Arizona's financial crisis, but she refused to heed his words. With neighboring California on the verge of bankruptcy this year, many States will follow in their steps. Many States are already scurrying to cut unwanted costs, cut State-funded programs, raise taxes, not issue tax refunds to their citizens, and borrow money just to survive in 2009. Unfortunately, many banks - the same banks the Fed bailed out - are refusing to loan money to the States and their Treasury agencies. The article, State Budget Troubles Worsen, at the Center on Budget and Policy Priorities website is an excellent piece to read. It shows where each State currently stands in these challenging economic times, and you see 46 of the 50 States are clearly in the financial red.

States' jobless funds run low - WSJ
WSJ reports a growing number of states are running out of cash to pay unemployment benefits, a sign of how far social-welfare systems are being stretched by the swelling ranks of the jobless in the deteriorating U.S. economy. Unemployment filings have soared so high in recent months that seven states have already emptied their unemployment-insurance trust funds, which were supposed to see them through recessionary periods. Another 11 states are in jeopardy of depleting reserves by year's end, according to the National Conference of State Legislatures. So far, states have borrowed more than $2.3 billion in emergency funds from the federal government, money they are required to pay back. New York has already borrowed more than $330 million to pay unemployment claims, according to the U.S. Department of Labor. In the past, New Jersey borrowed from its trust fund to pay for other expenses, and now it has only a few months of payments in reserve. Even states with relatively flush trust funds such as Tennessee are warning that they could go broke in the next year if unemployment levels stay high.

RCM Comment: I feel like I'm experiencing deja vu. The story below sounds strikingly similar to protestations of health and stability expressed last year by the CEOs of Lehman Brothers, Bear Stearns, WaMu and others right before the fall.

BAC Bank of America CEO Lewis says the idea of nationalization is absurd (5.95 +1.11) -Update-
BAC Ken Lewis in CNBC interview says they have the leeway to run the company the way they want to. Says he doesn't feel good about the $500K pay cap, noting he's fine with it, but others could go to other banks. Says he has talked to govt officials, regulators, etc, and nobody has ever said they thought nationalization was the way to go or likely to happen. Says never had anybody remotely talk about nationalization of BAC as a possibility.

News that Moves: Cisco Systems EPS, FDIC's Line of Credit, Mark-to-Market Accounting Rules

RCM Comment: A real battle is brewing in the U.S. equity markets. The proverbial line in the sand has been drawn and the fight is on between bulls and bears. All three major U.S. indices are trading around key psychological support areas: Dow30 8,000, S&P500 800, NASD Comp. 1,500. What hangs in the balance? A move down that takes out the lows of November '08 or the beginning of a base and stabilization after a terrible start to the new year. On the bullish side we have the government doing all it can to stabilize the markets. Every day another story crosses the tape with a new plan to bailout the economy, rescue banks or give handouts to borrowers under water. When these stories hit the tape the markets obediently rally. Of course, on the bearish side the government took these same actions last year to no avail and the economic and earnings stories continue to illustrate a dire situation. Example: Cisco Systems (CSCO) a bellweather of the economic situation, released earnings yesterday in-line with expectations. However, the company guided next quarter's revenue number down 15-20% YoY.

So, who will win the war? I will let others guess at this age old question. Remember, the market makes fools out of most people most of the time. We are not interested in making guesses, we are interested in making money and protecting principle. In order to experience success in this business the ego must be left at the door when walking into the trading room. As my high school ice hockey coach used to say, "A net minder must read and react son, read and react." The same can be said when minding a portfolio.

Ladenburg discusses FDIC request for increased credit line
Ladenburg Thalmann notes that the Federal Deposit Insurance Corporation (FDIC) has requested the U.S. Treasury to increase the FDIC's line of credit from $30 bln to $100 bln. At last reading, the FDIC still had approximately $35.5 bln of its own. Firm says implicit in this request is a belief that bank failures are now likely to increase.

Reuters reports that it might be possible to modify mark-to-market accounting rules for U.S. banks facing steep writedowns of troubled assets without abandoning the underlying accounting standard, a senior Senate Democrat said. Sen. Christopher Dodd, chairman of the Senate Banking Committee, told reporters on Wednesday evening after a panel hearing that at least one former bank regulator was discussing how to approach the difficult issue without "walking away from" mark-to-market standards. The issue of how to value distressed assets held by U.S. banks has been one of the most difficult challenges in constructing a bank rescue plan, according to industry lobbyists and lawmakers.
RCM Comment: The markets rallied off the lows when this news hit the tape.

News that Moves: Peter Munk of ABX - China & U.S. Debt - China, Japan & Australia add to Fiat Currency Expansion - Losses on Hybrids

RCM Comment: The Chairman of Barrick Gold (ABX), Peter Munk, a well respected elder statesman of the precious metals arena, was interviewed during the Davos 2009 world economic conference. You can click on the link to read all his comments, but a key takeaway was his belief that China and other nations may begin converting reserve currency into gold. What could be a cynical view of his comments might falter when taken in context with the story below.


Chinese cautious on Treasury notes - NY Times
NY Times reports China's willingness to continue buying United States Treasury securities in large numbers will depend on its need to protect the value of its foreign investments, the Chinese premier, Wen Jiabao, said. He also said that a stable yuan is in everyone's interests. "Whether we will buy more U.S. Treasury bonds, and if so by how much — we should take that decision in accordance with China's own need and also our aim to keep the security of our foreign reserves and the value of them," Mr. Wen said. His enigmatic remarks, made near the end of a visit to Europe, could raise new concerns about China's commitment to continue purchasing United States government debt. (See 7:24 story for additional detail)

RCM Comment: Currently more than 500 trillion of fiat currencies circulate around the world. The following three stories will illustrate that this number is ever increasing. The entire market capitalization of the precious metals sector that trades on the major exchanges in the U.S. is roughly $180 billion. $180 billion includes mining companies, ETFs and closed-end funds. Q: What happens when simply 1% ($5 trillion) of the fiat currencies tries to move into the gold space? How about 10%? In March of 2006 new Fed chairman, Ben Bernanke, stopped the Fed from supplying the world with U.S. M3 numbers (the best gauge of money supply growth). In August of 2006 Rosenthal Capital Management started the Fortune's Favor Precious Metals fund. We are ahead of the curve. Why don't you come and join us?

China's Premier Minister Wen looks at fresh Chinese stimulus - FT FT reports China has pledged to take all necessary measures to stimulate its economy and fuel consumer spending, but has rejected as "ridiculous" suggestions that its huge pool of domestic savings has been partly to blame for the global financial crisis. In a rare interview, Wen Jiabao, China's premier, said in London on Sunday that Beijing was considering fresh measures to boost its economy beyond its Rmb4,000 bln ($585 bln) fiscal package launched late last year. He told FT: "We may take further new, timely and decisive measures. All these measures have to be taken pre-emptively before an economic retreat." Mr Wen is on the fifth leg of a European tour aimed at reassuring trade partners that China will join the west in a coordinated effort to tackle the global economic crisis. Although Mr Wen declined to rule out explicitly a devaluation of the renminbi, he stressed that Beijing intended to keep its currency stable at a "balanced and reasonable level". He added: "Many people have not come to see this point... If we have a drastic fluctuation in the exchange rate of the renminbi, it would be a big disaster." Mr Wen said China's economy had slowed sharply in the fourth quarter of 2008, with growth dipping to 6.8%. He reeled off a list of measures -- including massive infrastructure spending and handouts to consumers -- which Beijing was taking to ensure economic growth reached "around 8%" this year.

Bank of Japan unveils $11 bln stock buying scheme - Financial TimesFinancial Times reports the Bank of Japan on Tuesday pledged to spend $11 bln to buy shares held by Japanese banks to ease the pain from the global financial crisis, reviving a scheme launched earlier this decade to head off a domestic banking crisis. The move came as a Japanese newspaper report said Mitsubishi UFJ Financial Group (MTU), Japan's biggest bank, would post a loss for April to December and slash its annual forecasts, reflecting both stock losses and a rise in bad debts. The Nikkei stock average rose after the BOJ decision, while the yen fell broadly on hopes the central bank buying would ease risk aversion. Under the scheme, the BOJ will buy up to 1,000 bln yen ($11 bln) worth of listed shares held by Japanese banks up until April 2010 to reduce their exposure to the stock market. To protect its own balance sheet, the central bank will buy shares in companies that have credit ratings of at least BBB-minus.

Billions in stimulus are proposed for Australia - NY TimesNY Times reports Australia's government would spend $42 bln Australian dollars, or $26.5 bln, on infrastructure, schools, housing and payments for low-income earners. Last year, Australia announced several measures as the economic slowdown in the United States and Europe began to spread around the world and engulf the economies of the Asia-Pacific region. "The weight of the global recession is now bearing down on the Australian economy," Wayne Swan, Australia's treasurer, said in a statement. "In the midst of this global recession it would be irresponsible not to act swiftly and decisively to support jobs." Under the plan, the budget deficit is expected to swell to 22.5 bln Australian dollars ($14.2 bln), or 1.9% of the country's GDP. "Decisive action is now required to strengthen the Australian economy and in these circumstances, a temporary deficit is the only responsible course of action to support jobs and economic growth," Mr. Swan said.

RCM Comment: The cockroach theory is in full force. When you see one cockroach you know there are more and it is no different with this financial crisis. Stories like the 'losses on hybrids' continue to scurry across the news wires. And now that the financial house is burning these stories will continue to pour out of the woodwork.
Investors brace for losses on hybrids - WSJ
WSJ reports global investors, already stung by a litany of financial innovations gone wrong, are facing a fresh round of losses on yet another product of the credit boom: so-called hybrid securities. Hybrids grew into a $700 billion market by offering investors higher yields for what was often believed to be the same level of risk as other securities. Now, those risks are coming back to haunt investors. As the U.S. and European banks that issued most hybrids run into increasing financial troubles and in some cases teeter on the brink of nationalization, the likelihood of delayed payments and flat-out losses is rising. As a result, the prices of some hybrid securities, such as those issued by part-nationalized U.K. banks Lloyds Banking Group (LYG) and Royal Bank of Scotland Group (RBS), have fallen by 25% to as much as 75% over the past two months. The potential losses have ricocheted to the big holders of these securities, the most prominent of which are major insurance companies such as Aflac (AFL), Prudential (PUK) and Switzerland's Swiss Reinsurance, which have seen their shares slammed on worries about losses. "Investors are getting beaten up," says Scott MacDonald, director of research at hedge fund Aladdin Capital.