Rescue plan is investment, not expenditure

Lawrence Summers, a professor at Harvard University and managing director of D.E. Shaw & Co., says the $700 billion government rescue plan is not simply another outlay of funding but an investment that could actually benefit taxpayers. Summers explains that there are many factors involved, including global economic conditions, that make it impossible to know what will happen, but past government rescues show that a positive outcome is certainly possible.

more at http://www.ft.com/cms/s/0/290ca9f6-8d8b-11dd-83d5-0000779fd18c.html

Leverage and Systemic Risk

According to various distinguished sources including the Bank for International Settlements (BIS) in Basel, Switzerland -- the central bankers' bank -- the amount of outstanding derivatives worldwide as of December 2007 crossed USD 1.144 Quadrillion, ie, USD 1,144 Trillion. The main categories of the USD 1.144 Quadrillion derivatives market were the following:

1. Listed credit derivatives stood at USD 548 trillion;

2. The Over-The-Counter (OTC) derivatives stood in notional or face value at USD 596 trillion and included:
a. Interest Rate Derivatives at about USD 393+ trillion;
b. Credit Default Swaps at about USD 58+ trillion;
c. Foreign Exchange Derivatives at about USD 56+ trillion;
d. Commodity Derivatives at about USD 9 trillion;
e. Equity Linked Derivatives at about USD 8.5 trillion; and
f. Unallocated Derivatives at about USD 71+ trillion.

Let us think about the invisible USD 1.144 quadrillion equation with black swan variables -- ie, 1,144 trillion dollars in terms of outstanding derivatives, global Gross Domestic Product (GDP), real estate, world stock and bond markets coupled with unknown unknowns or "Black Swans". What would be the relative positioning of USD 1.144 quadrillion for outstanding derivatives, ie, what is their scale:

1. The entire GDP of the US is about USD 14 trillion.

2. The entire US money supply is also about USD 15 trillion.

3. The GDP of the entire world is USD 50 trillion. USD 1,144 trillion is 22 times the GDP of the whole world.

4. The real estate of the entire world is valued at about USD 75 trillion.

5. The world stock and bond markets are valued at about USD 100 trillion.

6. The big banks alone own about USD 140 trillion in derivatives.

7. Bear Stearns had USD 13+ trillion in derivatives and went bankrupt in March. Freddie Mac, Fannie Mae, Lehman Brothers and AIG have all 'collapsed' because of complex securities and derivatives exposures in September.

8. The population of the whole planet is about 6 billion people. So the derivatives market alone represents about USD 190,000 per person on the planet.

Rescue plan gives ample power to Treasury secretary

The revisions and compromises Congress made on the Bush administration's rescue plan did not alter the central tenant of giving the Treasury Department vast and unprecedented power over the financial sector. Secretary Henry Paulson and his successor will have nearly unchecked discretion on how the $700 billion fund is spent. That could mean the fund may be used to buy distressed assets other than mortgages and mortgage-backed securities.

more at http://www.nytimes.com/2008/09/29/business/29bill.html

The Impact of Derivatives

1. Derivatives are securities whose value depends on the underlying value of other basic securities and associated risks. Derivatives have exploded in use over the past two decades. We cannot even properly define many classes of derivatives because they are highly complex instruments and come in many shapes, sizes, colours and flavours and display different characteristics under different market conditions.

2. Derivatives are unregulated, not traded on any public exchange, without universal standards, dealt with by private agreement, not transparent, have no open bid/ask market, are unguaranteed, have no central clearing house, and are just not really tangible.

3. Derivatives include such well known instruments as futures and options which are actively traded on numerous exchanges as well as numerous over-the-counter instruments such as interest rate swaps, forward contracts in foreign exchange and interest rates, and various commodity and equity instruments.

4. Everyone from the large financial institutions, governments, corporations, mutual and pension funds, to hedge funds, and large and small speculators, uses derivatives. However, they have never existed in history with the overarching, exorbitant scale that they now do.

5. Derivatives are unravelling at a fast rate with the start of the "Great Unwind" of the global credit markets which began in July 2007 and particularly after the collapse of Freddie Mac and Fannie Mae in September this year.

6. When derivatives unravel significantly the entire world economy would be at peril, given the relatively smaller scale of the world economy by comparison.

7. The derivatives market collapse could make the housing and stock market collapses look incidental.

NASDAQ OMX Europe Begins Trading

NASDAQ OMX Europe has commenced trading just six months after announcing its intent to launch a multilateral trading facility (MTF). Trading has begun in 25 FTSE 100 stocks and this will be followed by a staggered roll-out of approximately 600 European securities, to be completed by the end of October.

In connection to the NASDAQ OMX Europe launch, the NASDAQ OMX Europe Index has been introduced. The NASDAQ OMX Europe Index will be a market capitalized weighted index designed to track the companies traded on the NASDAQ OMX Europe marketplace. The NASDAQ OMX Europe Index will be calculated in Euros and disseminated every 15 seconds.

Morgan Stanley and Goldman Sachs to become consumer banks

The last two Wall Street securitisation firms standing are to cease trading as investment banks.

Morgan Stanley and Goldman Sachs are to become bank holding companies, which potentially means that they will soon accept customer deposits.

Both banks will also now be more directly regulated by the Federal Reserve.

The decision to re-shape their business models comes in the wake of extreme turbulence on the financial markets over recent days.

Lehman Brothers has been forced into bankruptcy after investor concerns over its liquidity led to sharp falls in its share price, while Merrill Lynch moved to merge with Bank of America.

The other member of Wall Street's "big five", Bear Stearns, collapsed in March and was bought by JPMorgan in a Fed-brokered deal.

Lloyd C Blankfein, chairman and chief executive of Goldman Sachs, said: "While accelerated by market sentiment, our decision to be regulated by the Federal Reserve is based on the recognition that such regulation provides its members with full prudential supervision and access to permanent liquidity and funding."

John Mack, head of Morgan Stanley, added: "This new bank holding structure will ensure that Morgan Stanley is in the strongest possible position - with the stability and flexibility to seize opportunities in the rapidly changing financial marketplace.

"It also offers the marketplace certainty about the strength of our financial position and our access to funding."

1869: Gold prices plummet

On this day, more colorfully known as "Black Friday," gold prices plummeted, sending the markets into chaos. At the root of the wreckage was an old-fashioned swindle, engineered by flamboyant financier Jay Gould and his robber baron partner, James Fisk. Gould and Fisk conspired to inflate and then corner the gold market, primarily by spreading a rumor that President Grant was about to stop the sale of government gold. Grant, who was better suited to the battlefield than office, initially bought into their logic, due, in part, to his belief that the sale of government gold would hurt farmers and small-time entrepreneurs. The president eventually saw through the scheme and, in response, put $4 million worth of gold on the market. The price of gold in specie, which had previously swelled to $163.50, promptly shrank to $133. Investors were ruined and the economy went into a tailspin. The swindle ultimately took a toll on two of its main players. It blemished Grant's record, raising suspicions about the war hero's competency. And Gould surreptitiously dumped his share of the gold before the drop in specie prices, leaving Fisk with a hefty loss on the deal.
- source: www.history.com

Google's U.S. Search Share Hits 63%

Google's August search engine market share in the U.S. rose to 63 percent, costing rivals Yahoo and Microsoft some losses.

CBOE members approve settlement with CBOT

(Reuters) — Members of the Chicago Board Options Exchange voted overwhelmingly on Wednesday to approve a legal settlement that would pave the way for the largest U.S. options exchange to go public or merge with another exchange.
CBOE members voted 779-70 to endorse the deal with CME Group Inc.'s Chicago Board of Trade full members, the CBOE said. There were 63 abstentions.

The settlement, finalized Aug. 20, gives some CBOT members an 18 percent stake in CBOE's demutualization plan to become a shareholder-owned company, plus a cash payment of $300 million.

In a statement, CBOE Chief Executive William Brodsky said: "(W)e have crossed one of two remaining major hurdles to the final resolution of this matter."

The Delaware Court of Chancery also needs to approve the settlement. CBOE said a hearing is scheduled for Dec. 16.

A separate hearing is also set for Sept. 29 to address "certain (CBOT) class members' objections to the eligibility requirements to participate in the settlement," CBOE said, adding "final approval" will come only after any appeals are resolved.

"If approved, the settlement will enable CBOE to act more rapidly to demutualize and to consider subsequent strategic transactions," Brodsky said.

Most market watchers expect CBOE to go for a public offering in order to establish a value, then negotiate with buyers.

JP Morgan Bans Trading With Citadel

JP Morgan decided it had had enough with senior executives exiting to join Citadel Investment Group. JP Morgan responded by halting trading with the hedge fund across stocks, bonds and foreign exchange.
Starting earlier this year, a number of JP Morgan execs began moving over to Citadel. This included Derek Kaufman, who joined as senior managing director and head of the U.S. fixed income business; Bill King, who joined as senior managing director and head of securitized products; and Patrik Edsparr who became CEO for Citadel Europe and head of global fixed income. "It's a strong action for JP Morgan to get to the point where this ban gets out in the market," says Denise Valentine, senior analyst at Aite Group. "It's a dramatic statement about both firms, especially when tensions are high across the board right now."

HSBC is now the largest bank in the world

The London-listed firm has taken over the position from the Industrial and Commercial Bank of China (ICBC), in terms of market capitalisation.

Shares in ICBC have been dropping since the Asian nation's government announced a reduction to the cost of bank loans on Monday.

This is the first such cut imposed by the Chinese authorities since 2002, and led to the bank stock declining by ten per cent yesterday - its legal one-day limit.

HSBC, which fell 0.7 per cent in London on the same day, remains in relatively good health - despite suffering from credit crunch-related asset writedowns and losses, in common with other Western banks.

It now has a market value of roughly $180 billion, Reuters reports.

Thanks to its recent decline, ICBC can only manage a capitalisation of $168 billion.

CME volume soars as investors seek cover

CME Group Inc., which runs the Chicago Mercantile Exchange and the Chicago Board of Trade, saw a much-needed volume spike this week as investors used futures and options contracts to guard against losses and bet on future market moves.

So far this month, trading at CME (which also operates the New York Mercantile Exchange) rose 32% to 17.5 million contracts a day, a sharp turnaround from the decline in trading the CME reported last month. The company handled more than 100 million contracts this week, a new record.

As pressure mounts in Washington for regulators to curb the excesses that prompted this week’s government bailout of the financial markets, CME stands to benefit further.

“A lot of this comes down to a crisis of confidence in the over-the-counter markets,” CEO Craig Donohue said in an interview earlier this week. The CME is developing plans to clear credit default swaps — the insurance-like contracts at the heart of the American International Group Inc. meltdown — though Mr. Donohue wouldn’t say when. Clearing, or guaranteeing, such contracts could have averted the threat of runaway losses that prompted the government to take control of the insurer.

“It is a tremendous opportunity for CME,” Mr. Donohue says.

Chicago-based Clearing Corp., a clearinghouse largely funded by Wall Street banks, plans its own credit-default swaps clearing operation as soon as next quarter.

The Chicago Board Options Exchange, which saw record volumes this week, could also benefit in the long term.

OptionsXpress Corp. CEO David Fisher, who does business with CBOE and CME, says he believes that the problems in the over-the-counter derivatives market that led to AIG’s collapse will prompt traders to turn to regulated exchanges. “I think there will definitely be some push in that direction from Washington,” he says.

Lehman collapse renews calls for derivative exchange

The bankruptcy of Lehman Bros. and the credit-rating downgrade of AIG renewed calls for a central clearinghouse for credit derivatives. The collapse of Lehman potentially leaves trading partners with billions in losses. "The fact that I can't tell you the notional value of derivatives contracts Lehman has written the day after a bankruptcy is a scary thing," said Brian Yelvington, a strategist at CreditSights.

more at http://www.bloomberg.com/apps/news?pid=20601087&sid=aKRxRwPBYCUg&refer=home

Old-fashioned banking rises as financial landscape changes

The balance of power on Wall Street is shifting as investment banks fall out of favor and commercial banks emerge as the more attractive business model. A year ago, five major investment banks dominated, but only two of those -- Goldman Sachs and Morgan Stanley -- are left. Meanwhile, commercial banks such as Bank of America, JPMorgan Chase, Deutsche Bank and Banco Santander have become more powerful. Banks are going "back to basics -- to, if you like, the core purpose of the system with less bells and whistles", said Douglas Flint, finance chief at HSBC. "There is a recognition that when the dust settles ... the construct of the industry will be different."

Capital Markets Do Not Need More Regulation, says Ex-SEC Chief Economist Richard Lindsey

Richard Lindsey, former SEC Chief Economist and director of Market Regulation, says the U.S. financial system will grow stronger from the current crisis " but he hopes the SEC will not push forward more prescriptive regulations as a knee-jerk reaction to the financial turmoil.

"As a regulator, you want to give firms enough freedom to fail, or you don't have growth, innovation or people taking chances. But you need to manage the political aspects of it. This is not a Depression, it's not a replay of 1929. It gets played up [in the media], but ultimately the [financial] system will get stronger," Lindsey told WS&T in an exclusive interview on the sidelines of the Actimize annual Client Forum in New York.

Will the regulatory hammer nevertheless fall down on the financial industry in the next few weeks? It's hard to predict, says the former SEC chief economist, since it's at least in part "a political process."

Just a few hours before we spoke, the SEC announced new restrictions on short-selling, where traders bet on prices falling. Lindsey says he hopes this wasn't a hasty early reaction to the crisis. (On Thursday, UK regulator FSA also issued restrictions on short-selling, which some say was a factor behind Wednesday's rescue takeover of HBOS, the UK's biggest home lender, by Lloyds TSB in a $21.8 billion deal.)

Lindsey suggests there will be some U.S. regulatory action in coming weeks on the insurance front. Speaking the day after the U.S. government's $85 billion bailout of AIG, he says the insurance industry may see the creation of a federal regulator (It is currently only regulated at the state level, though there has been talk for years of an optional federal charter that would give firms the choice to be regulated at a federal level instead.)

But in the capital markets, rather than new regulations, firms will probably see an increase in the number of SEC examinations, Lindsey says. "There'll be more time spent inside firms, explaining what you're going to do."

Ultimately, disclosure and transparency are better regulators than rules, Lindsey adds. "The problem with prescriptive regulations is that you have to know the answers."

If you tell someone exactly how to tie their shoe laces, the chances are that when they try to exactly follow your instructions, they won't be able to do it, says Lindsey.

"The problem with prescriptive regulations is that sometimes you get outcomes you don't want. Also, if you draw some lines, the game becomes how close people can get to the line. Flexibility works better."

Still, the current crisis does highlight a lack of accountability, Lindsey contends. Board members of financial firms must start taking more action and more responsibility. "I expect shareholders to take [legal] action."

Lindsey is certain that the financial system will recover from the current crisis. He draws comparisons with the bursting of the dot-com bubble in 2000. Today, the technology industry is booming. Likewise, the financial industry will become stronger as a result of the current turmoil, he contends.

In the meantime, Lindsey refutes industry talk about the possibility of reinstating the Glass Steagall Act, which was implemented after the Depression and in part separated investment banks from commercial banks. The Act was repealed in 1999.

"It was a very long process to remove the law once it was on the books " it was heavily fought on both sides. Congress decided to repeal it," Lindsey said. "And nothing that happened is a result of the repeal of the Glass Steagall Act. The problem has been the investment banks, not commercial banks."

Group wants date for SEC to adopt international standards

Accounting regulators want the Securities and Exchange Commission to quicken the pace for its proposed adoption of international accounting standards. "The key to getting people moving is to set a date," said David Tweedie, chairman of the International Accounting Standards Board. Under the proposed framework, companies would switch in 2014, with some moving to the method by 2010.
more at http://www.financialweek.com/apps/pbcs.dll/article?AID=/20080910/REG/809109970

Banks writedowns & losses (so far)

1868: Mint gets a name

The nation's six-year-old currency agency was officially christened as the Bureau of Engraving and Printing on this day.
source: www.history.com

Fed takes over AIG, extends $85 billion bridge loan

To avoid collapse, AIG agreed to give the U.S. government a 79.9% stake in exchange for a bridge loan of as much as $85 billion from the Federal Reserve. New executives will replace AIG's management, and the government will have veto power over the company's major decisions. A senior Fed staffer said AIG's most likely move was an orderly liquidation, but the insurer could remain as an ongoing enterprise.

more at http://www.nytimes.com/2008/09/17/business/17insure.html?ref=business

1920: Wall Street explodes

As lunchtime approached on September 16, 1920, New York's financial district was grinding through its regular motions--people were gathering outside to eat, and brokers were holed up inside, busily trading away the day. But before the clock hit noon, routine gave way to panic, as a horse-drawn wagon filled with explosives suddenly detonated near the subtreasury. Flames flooded Wall Street, shooting up nearly six-stories-high. The blast shattered windows around the area and sent a pipe crashing against the neck of a man strolling some six blocks away from the subtreasury. All told, approximately 30 people were killed and at least a hundred more were wounded. The only famous financial figure to be injured was Junius Spencer, J.P. Morgan's grandson, who suffered a slight gash on one hand. Since radical bashing was in vogue at the time, Communists, Anarchists, and anyone else leaning too far to the left were accused of having staged a violent protest against capitalism. More pragmatic souls argued that the wagon belonged to an explosives operation and had simply strayed from its prescribed route. Whatever merits these theories have, the ensuing investigation failed to uncover the culprit or cause of the blast, and the case remains a mystery.
source: www.history.com

Morgan Stanley amassing $10 billion property fund

Shrugging off concerns about a downturn in property markets, Morgan Stanley plans to invest $1.5 billion in China from the $10 billion that it is raising for its global property fund, a source said. The Morgan Stanley Real Estate Fund VII Global will likely begin investing before the end of 2008. Investments in China will focus on the country's largest cities, where luxury apartments can sell for $20 million or more.
More at http://www.reuters.com/article/ousiv/idUSSHA30162720080903

CME signs deal with Japanese exchange

Exchange operator CME Group Inc. said Wednesday that it has signed an agreement with Japan's Osaka Securities Exchange Co. to jointly develop products and services.

Through the memorandum of understanding with Osaka, CME Group hopes to further extend its reach in the Asian marketplace, Chief Executive Craig Donohue said in a statement.

Jiji news agency said the two exchanges would agree to start talks to enable the trading of Nikkei index futures around the clock.

CME Group operates the Chicago Mercantile Exchange and the Chicago Board of Trade. Osaka Securities is Japan's largest derivatives exchange.

Analysts bank predictions 'becoming more inaccurate'

More and more doubt is being placed on how well analysts can forecast bank earnings, Bloomberg reports.

Data compiled by the news agency, using the Standard & Poor's 500 Index, showed that correctly predicted earnings were only made by the forecasters in just 6.7 per cent of cases in 2008.

This is the lowest ratio measured by Bloomberg since 1992 - providing evidence for the point of view that the performance of the crunch-hit financial sector is becoming increasingly difficult to predict.

Despite the downwards trend, high-profile accurate calls have occurred recently - such as Meredith Whitney's claim that Citigroup would cut its dividend two months before the bank actually did so.

However, despite this increasing regulations from the Securities and Exchange Commission have made the job harder, one analyst told the news agency.

Walter "Bucky" Hellwig at Morgan Asset Management commented: "It's not the high-profit, high-dollar profession that it used to be.

"In the wake of all the regulation to separate investment banking from analysis, the job of the analyst became just that, often just watching the stocks and checking the estimate."

1789: First Treasury secretary is named - Alexander Hamilton

With the nation in need of a strong financial leader, President George Washington asked American Revolutionist and stalwart Federalist Alexander Hamilton to step in as the first secretary of the treasury. The move came a week after the official founding of the Treasury Department. Hamilton was Washington's aide-de-camp during the American Revolution, and was instrumental in the formation of the U.S. Constitution. During Washington's administration, Hamilton, with his support of strong federal government and conservative property rights, often came into conflict with Secretary of State Thomas Jefferson, a Democratic idealist who favored states' rights.

- source: http://www.history.com/

British companies flee country's high taxes

British companies are increasingly looking to move overseas to avoid what they say is an oppressive tax system. In the past week alone, three companies have said the would move from the U.K. The moves come at a time when Britain is already struggling with a sluggish economy and a record budget deficit.

more at http://www.nytimes.com/2008/09/05/business/worldbusiness/05tax.html

Pimco fund reaps $1.7B from betting on Fannie, Freddie rescue

The Pimco Total Return Fund, led by Bill Gross, reaped rewards from investing in agency bonds and betting that Fannie Mae and Freddie Mac would be bailed out by the U.S. government. The fund saw its highest one-day rise against its benchmark index Monday, gaining $1.7 billion after the government takeover.
more at http://www.ft.com/cms/s/0/838d3cb4-7e96-11dd-b1af-000077b07658.html

Lehman expects $3.9 billion Q3 loss, plans asset spinoff

In an announcement that was moved up because of market concerns, Lehman Bros. said it expected to lose $3.9 billion in the third quarter. Chairman and Chief Executive Officer Richard S. Fuld Jr. called the current credit crunch "one of the toughest periods in the firm's history." Lehman plans to spin off $25 billion to $30 billion of its commercial mortgages into a new public company and said it is considering "all strategic alternatives."

more at http://www.iht.com/articles/2008/09/10/business/11lehman.php

Lehman considers moving troubled assets to spinoff bank

Lehman Bros. Holdings is looking into a plan in which it would shift billions of dollars in real estate and commercial mortgages to a new company, tentatively nicknamed Spinco, that would later be spun off, sources said. The strategy is similar to the good bank-bad bank model used in previous crises. "The model helps banks get on with their real business, focus on their strengths, after they put the bad assets aside," said Michael Bleier, a lawyer at Reed Smith who helped Bank Mellon spin off bad assets in the 1980s. "We'll see it being used again during this crisis."

more at http://www.bloomberg.com/apps/news?pid=20601208&sid=aQjsXBJ4uN1Y&refer=finance

U.K., U.S. lead "financial-development index"

A study by the World Economic Forum found that the U.K. and the U.S. have the most developed financial systems in the world, with Germany, Japan, Canada and France following. The first "financial-development index" from the forum is an attempt to measure the financial-system health of more than 50 countries. The index is expected to bolster efforts in London to compete against New York as the global financial capital. Venezuela, Ukraine and Nigeria were at the bottom of the list.

more at http://www.ft.com/cms/s/0/54067992-7dec-11dd-bdbd-000077b07658.html

Beijing Demands Dividends

The China Securities Regulatory Commission — Beijing's equivalent of the U.S. Securities and Exchange Commission — is pressing the country's listed companies to adopt more generous dividend policies.

Previously, China-listed companies that wanted to issue additional stock had to pay out at least 20% of their annual average profit for the past three consecutive years in the form of shareholder dividends (cash or stock).

The CSRC wants to raise the minimum amount to at least 30% of profits to shareholders. If a company refuses to comply, it will be punished by not being able to float new bonds or sell additional shares.

According to the Chinese agency,

"Giving fair returns to shareholders is part of listed firms' responsibilities and is the foundation of stable and healthy development of the securities market."

Listed companies will also have to include information on their cash dividend policies and previous cash dividend data in their annual reports.

If they don't declare cash dividends? Well, they'll have to tell investors why, along with what they plan on doing with their retained earnings!

Dennis Gartman's 22 Rules of Trading

Master Trader Dennis Gartman's 22 Rules of Trading, many of which you can apply to all sorts of life situations, as well as the markets.

Every day, Dennis Gartman gets up at bout 2:30 AM and writes an information packed 4 page newsletter on the world markets, oil, currencies, commodities political happenings and much more. He is read by the major trading houses and traders all over the world, as they stumble bleary eyed into work, grabbing the Gartman Report to find out what happened as they slept and to get insight as to what the issues of the day will be, and suggestions on how to trade. Dennis puts his trades on public display and talks you through his logic. It is a most remarkable work, and I find it a key part of my struggle in trying to keep up with what is going on. I am always amazed when on the occasions I find myself in the office at an early hour to find Dennis' letter hit my inbox about 5:00 AM. His travel schedule makes mine look tame, and from wherever in the world he finds himself, he writes and sends his letter. And he still maintains a single digit handicap on the golf course.

On the Friday after Thanksgiving, he publishes his "Rules of Trading," adding to them as wisdom increases. Here is today's list:

1. Never, under any circumstance add to a losing position.... ever! Nothing more need be said; to do otherwise will eventually and absolutely lead to ruin!

2. Trade like a mercenary guerrilla. We must fight on the winning side and be willing to change sides readily when one side has gained the upper hand.

3. Capital comes in two varieties: Mental and that which is in your pocket or account. Of the two types of capital, the mental is the more important and expensive of the two. Holding to losing positions costs measurable sums of actual capital, but it costs immeasurable sums of mental capital.

4. The objective is not to buy low and sell high, but to buy high and to sell higher. We can never know what price is "low." Nor can we know what price is "high." Always remember that sugar once fell from $1.25/lb to 2 cent/lb and seemed "cheap" many times along the way.

5. In bull markets we can only be long or neutral, and in bear markets we can only be short or neutral. That may seem self-evident; it is not, and it is a lesson learned too late by far too many.

6. "Markets can remain illogical longer than you or I can remain solvent," according to our good friend, Dr. A. Gary Shilling. Illogic often reigns and markets are enormously inefficient despite what the academics believe.

7. Sell markets that show the greatest weakness, and buy those that show the greatest strength. Metaphorically, when bearish, throw your rocks into the wettest paper sack, for they break most readily. In bull markets, we need to ride upon the strongest winds... they shall carry us higher than shall lesser ones.

8. Try to trade the first day of a gap, for gaps usually indicate violent new action. We have come to respect "gaps" in our nearly thirty years of watching markets; when they happen (especially in stocks) they are usually very important.

9. Trading runs in cycles: some good; most bad. Trade large and aggressively when trading well; trade small and modestly when trading poorly. In "good times," even errors are profitable; in "bad times" even the most well researched trades go awry. This is the nature of trading; accept it.

10. To trade successfully, think like a fundamentalist; trade like a technician. It is imperative that we understand the fundamentals driving a trade, but also that we understand the market's technicals. When we do, then, and only then, can we or should we, trade.

11. Respect "outside reversals" after extended bull or bear runs. Reversal days on the charts signal the final exhaustion of the bullish or bearish forces that drove the market previously. Respect them, and respect even more "weekly" and "monthly," reversals.

12. Keep your technical systems simple. Complicated systems breed confusion; simplicity breeds elegance.

13. Respect and embrace the very normal 50-62% retracements that take prices back to major trends. If a trade is missed, wait patiently for the market to retrace. Far more often than not, retracements happen... just as we are about to give up hope that they shall not.

14. An understanding of mass psychology is often more important than an understanding of economics. Markets are driven by human beings making human errors and also making super-human insights.

15. Establish initial positions on strength in bull markets and on weakness in bear markets. The first "addition" should also be added on strength as the market shows the trend to be working. Henceforth, subsequent additions are to be added on retracements.

16. Bear markets are more violent than are bull markets and so also are their retracements.

17. Be patient with winning trades; be enormously impatient with losing trades. Remember it is quite possible to make large sums trading/investing if we are "right" only 30% of the time, as long as our losses are small and our profits are large.

18. The market is the sum total of the wisdom ... and the ignorance...of all of those who deal in it; and we dare not argue with the market's wisdom. If we learn nothing more than this we've learned much indeed.

19. Do more of that which is working and less of that which is not: If a market is strong, buy more; if a market is weak, sell more. New highs are to be bought; new lows sold.

20. The hard trade is the right trade: If it is easy to sell, don't; and if it is easy to buy, don't. Do the trade that is hard to do and that which the crowd finds objectionable. Peter Steidelmeyer taught us this twenty five years ago and it holds truer now than then.

21. There is never one cockroach! This is the "winning" new rule submitted by our friend, Tom Powell.

22. All rules are meant to be broken: The trick is knowing when... and how infrequently this rule may be invoked!

Analysis: Rating agencies to overcome regulatory shake-up

New regulations, especially reforms proposed by the Securities and Exchange Commission, will likely shake up Moody's Investors Service, Standard & Poor's and Fitch Ratings, but the agencies will probably continue to be important players on Wall Street. Analysts questioned whether any meaningful reforms will emerge because Christopher Cox, chairman of the SEC, and Charlie McCreevy, EU internal market commissioner, are likely to leave office next year.

more at http://www.reuters.com/article/ousiv/idUSN0151242720080901

Lehman 'to be bought up and broken up'

Lehman Brothers might be sold off to outside investors in the near future, analysts have suggested.

The buyouts, likely to involve private equity firms or foreign banks purchasing large stakes, come due to the Wall Street institution being severely weakened by the credit crunch.

Strong rumors have already linked the Korea Development Bank with such a deal, while other potential purchasers are said to include financial institutions from Japan and Canada, and London's HSBC.

Lehman is expected to announce further asset write-downs in its third-quarter declaration next month, with analysts' forecasts of the three-month losses ranging from $3-4 billion.

This would mean that six-month losses would approach $5 billion at the bank, a far cry from the $4.3 billion profits it earned over the same period in 2007.

Speaking to the Observer newspaper, analyst Dick Bove, who works at Ladenburg Thalmann, commented: "There is an opportunity to take the company and break it up and make much, much more by selling off the parts."

He added that private equity firms had previously spent much more than Lehman's current estimated market value, $8 billion, on cash injections to apparently "smaller" banks recently.

Banks have taken a financial hit of around $500 billion since the onset of the credit crunch, figures from the Economist magazine show.

Thomson Reuters Links Portfolio Management and Reference Data Systems

Thomson Reuters announced it has linked PORTIA, its leading investment accounting system, to DataScope Select, its global pricing and security reference data. The interconnectivity of these two leading offerings brings world-class enterprise solutions to asset managers around the world. This initiative also represents another step forward in the integration of the former Thomson Financial and Reuters suites of products.

The teaming up of PORTIA and DataScope Select allows Thomson Reuters to offer tangible benefits to asset managers around the world. Through the newly built interface, PORTIA clients will be able to use DataScope Select’s mission-critical pricing and reference data for portfolio management and valuation as well as investment accounting. The new link allows clients to add DataScope Select security data directly into PORTIA’s investment accounting platform.

While ownership, security coverage and data accuracy have become more important in today’s market, nowhere is this more true than in the middle to back office. Accessing DataScope Select through PORTIA will provide significant benefits to financial market participants that are required to meet the toughest requirements for portfolio valuations and reporting, fund performance measurement and analysis, and regulatory and compliance reporting.

Jon Robson, President of Enterprise, Thomson Reuters, commented: “In today's market climate of heightened risk and regulatory pressures, staying competitive requires enterprises to pay closer attention to the middle and back office. Thomson Reuters aims to help its customers do just that. The linking of PORTIA and DataScope is a leading example of taking the best of both companies’ assets to deliver leading data to achieve operational efficiencies in valuation, client reporting and portfolio management.”

PORTIA provides comprehensive portfolio accounting management capabilities for asset managers worldwide. DataScope provides global pricing and security reference data including corporate actions for portfolio management, administration and valuation. DataScope covers the spectrum of data from the global exchanges, as well as foreign exchange, fixed income and derivative pricing.

Renminbi surpasses dollar as Asia's most popular currency

The renminbi is Asia's most popular currency for fixed-income corporate funding, surpassing the dollar for the first time. The shift reflects recent weakness in the dollar. "In the early part of the year, people were concerned about the strength of the dollar. Investors were more interested in having an asset in an Asian currency," said Nicholas de Boursac, managing director of ASIFMA.

More at http://www.ft.com/cms/s/0/768f5a1c-7845-11dd-acc3-0000779fd18c.html

1789: U.S. Treasury founded

With the ratification of the Constitution in 1789, the Government established a permanent Treasury Department in hopes of quelling the nation's deficit. President Washington named his former "aide-de-camp," Alexander Hamilton, to head the new office. The former New York lawyer and staunch Federalist stepped in as Secretary of the Treasury on September 11. Hamilton soon outlined a practical plan for reviving the nation's ailing economy.
- source: http://www.history.com/

KDB acknowledges it might invest in Lehman Bros.

The CEO of Korea Development Bank has confirmed that the bank is negotiating with Lehman Bros. about possible investment in the investment bank. KDB's new chairman, Min Euoo-sung -- formerly head of Lehman Bros. in Korea -- said that the U.S. subprime meltdown had created opportunities for the Korean bank to expand overseas and that he was seeking takeover opportunities.

more at http://www.ft.com/cms/s/0/868c6590-78a9-11dd-acc3-0000779fd18c.html

The US dollar index

The USD index measures the performance of the US Dollar against a basket of currencies. This performance is calculated by a formula whose real-time result is represented in the chart. The currencies are: EUR, JPY, GBP, CAD, CHF and SEK.

You can customize the chart at http://www.fxstreet.com/rates-charts/usdollar-index/

New exchange will undercut Toronto Stock Exchange 55%

Alpha Trading Systems, a new bank-backed stock market scheduled to open next month, will undercut trading fees on the Toronto Stock Exchange as much as 55%. The new exchange is backed by a consortium that includes Royal Bank of Canada and Toronto-Dominion Bank.

more at http://www.reportonbusiness.com/servlet/story/RTGAM.20080827.wralpha28/BNStory/SpecialEvents2/home