MERRILL'S QUEST FOR CAPITAL

This was just the link I was looking for, when I wrote yesterday's post.

Here it is : FACTBOX: Quotes from Merrill's Thain on capital needs.

http://www.reuters.com/article/marketsNews/idINN2824127720080729?rpc=44&sp=true

Meanwhile the Fed has extended its emergency lending programme to investment firms to January 2009.

I wonder if we are all set for another round of writedowns of Toxic CDO's that have no market.

MERRILL LYNCH: Wall Street Credibility and Sovereign Wealth Fund Capital

You really can fool all of the people all of the time (or so it would seem); Writedown after write down, Lies and more lies: and yet Wall Street believes in the Investment Banks!!! The DJIA was up over 266 points yesterday!
"Fool me once, shame on you. Fool me TEN TIMES!!, shame on me."
Investors just don't seem to get it yet.

On Thursday 17th July, 2008 Merrill Lynch lost $4.9 billion for the June quarter.
John Thain (Merrill's CEO) reiterated his stand that Merrill did not need to raise more capital. (By selling equity). http://www.iht.com/articles/2008/07/18/business/18merrill.php

12 DAYS later, a stock sale is announced !!!! Yes they need more capital AGAIN!!!
Meanwhile, Mr. Thain is also looking to sell stakes in Merrill’s valuable assets (Bloomberg LP and BlackRock Inc) to raise capital.

The Bullish Bear says-----------------

Merrill sold some $30.6 Bn worth of TOXIC CDO’s at 22 cents on the dollar.

• Firstly, after Merrill Lynch, who’s going to be next? http://www.forbes.com/wallstreet/2008/07/29/merrill-citi-banks-biz-wall-cx_lm_0729writedowns.html
• Did the CDO’s turn toxic overnight or in the last 12 days since the June quarterly result.
  $ 30.6 Bn -> $ 11 Bn at the end of June -> $6.7Bn yesterday.
• Was the sale triggered by the Undercapitalized Bond/ CDO Insurers who could not pay up?
• Was the sale cheaper than marking them to market (since the really toxic stuff may have no market) which may have triggered more confusion and asset fire sales?
• What is the market value of the ‘Toxic Securities’ of Bear Stearns that the FED now holds; not 22 cents on the dollar I hope??
  

Wall Street Credibility and Downside protection for Sovereign Wealth Funds
Yesterday, a further $ 8.55 Bn stock sale was announced, including a stock sale to TEMASEK (Investment Company of the Government of Singapore).

Thanks to a downside protection clause, Temasek will be compensated for the nearly 50% loss suffered on their December 2007 ‘bailout investment’ in Merrill Lynch.

As per the clause, if Merrill raised more capital in the 12 months following the Temasek deal, at a stock price of less than $48, Temasek would be compensated for the difference.

The Wall Street Journal calls it a Sweet Deal for Temasek. http://online.wsj.com/article/SB121735266454993851.html?mod=googlenews_wsj

I would call it STREET SMART investing!!
When you must deal with someone whom you cannot trust completely, like bankers that just can’t be truthful and disclose to you the true value of their assets and liabilities:
You Protect Yourself.
This is definitely going to set a precedent, as new Capital becomes more expensive and comes with many strings attached.

Worse still, as investment banks look to dump Toxic CDO’s and avoid Mortgage related securities, the slowing MBS market is going to result in the unwillingness of Banks to lend to the Residential Housing market in the US.
If you are looking to buy the US Financials now that the worst is behind us - >Caveat emptor

HERE WE GO AGAIN : US FINANCIALS: FOOL'S RALLY !!!

Well until yesterday, led by a fall in Oil prices, the US Financial Sector rallied sharply from recent lows.
''''The credit crisis was over - Freddie Mac & Fannie Mae bailed out - and the housing market settling down''' .................UNTIL YESTERDAY.
As data from the US Housing sector continues to deteriorate, the banks may be set for a fresh round of writedowns.
An endless number of bailouts and low interest rates on the USD, are going to erode the purchasing power of the USD in the long run.
I wouldn't trust this rally, and would instead look at adding to gold positions on further declines in the precious metal.

LUXURY SEGMENT : SLOWDOWN AHEAD

The Luxury and up market segment is slowly but surely feeling the impact of the slowdown in global economic growth. New and fast growing markets in Asia may not do enough to offset the slowdown elsewhere.

SLOWING DEMAND - RISING COSTS
As Starbucks is closing down stores and fighting rising input costs, L’Oreal is moderating growth forecasts.
A weak USD, is also affecting the margins of European companies like Porsche SE, LVMH, Luxottica and L’Oreal.

As the expectations of a recovery in the second half of 2008, are now being postponed to 2009; companies are looking to just meet, and not beat their targets for 2008.

DJIA - USDX - GOLD : YEAR TO DATE

LOOK NO FURTHER : THE CHARTS SAY IT ALL !!

FASTEN YOUR SEAT BELTS : TURBULENCE AHEAD

Equities the world over have had a miserable first half for 2008. Indian and Chinese Equities have sold off very sharply. As the DJIA battles it out at the 11,000 mark; markets in Europe are struggling with the ever strengthening Euro. (EUR/USD now nearing 1.60).

Meanwhile Gold ended last week at $964.60, and has outperformed equities in 2008.

GOLD: THE PERFECT STORM

As Freddie Mac & Fannie Mae continue to struggle, and the DOW broke down below 11,000; the consolidation in Gold appears to be progressing well.

Gold is now just over the $960 mark, and the USDX Index is treading lower.

We could be on the verge of a major break out in the Gold Price here.

The Perfect storm

• Tensions in the Middle East,
• A possible Bailout of the GSEs,
• Surging Crude Oil prices
• A possible DJIA close below 11,000??

Wait and Watch!!

FREDDIE MAC & FANNIE MAE : NEW LOWS

As the stock prices of Freddie Mac & Fannie Mae continue to plunge, the US Treasury Secretary and the US Fed are doing their best to calm things down. While they denied that Freddie Mac & Fannie Mae are insolvent, they claim that the GSEs are adequately capitalized.

Henry Paulson said that he had been assured by the regulator of Fannie Mae and Freddie Mac (The Office of Federal Housing Enterprise Oversight) that the companies have enough capital.

Talk about being behind the curve. As these Government sponsored enterprises (GSEs) are struggling to survive, and may need a GOVERNMENT BAILOUT themselves, the Treasury Secretary and the FED, expect them to support the collapsing US Housing market.

Will we see a Government Bailout or a further easing of their Capital requirements?

Clearly too big to fail!!!!!

WATCH THIS SPACE

INDIAN BILLIONAIRES & the SENSEX

The recent stock market meltdown has eroded the fortunes of many Indian Billionaires.
Certain Large cap stocks have been beaten down severely and value is now emerging.
http://www.business-standard.com/common/news_article.php?leftnm=10&bKeyFlag=BO&autono=327869
Billionaires in the Media (Ramesh Chandra of Zee TV), Real Estate (KP Singh of DLF), and Infrastructure Logistics (GM Rao of GMR Infra & Gautam Adani of Mundra Ports) sectors have been the worst hit.

The stock market here is facing a confidence crisis, and no one is willing to back the ‘Long term India story’, given the turbulent global equity markets.

Expectations of inflation are getting built into the system, and that it going to make the ongoing battle with inflation all the more difficult.

Rising interest rates, rising fuel & food prices and tighter lending policies by banks will slow down growth rates. The upcoming quarterly results may confirm the slowdown.

UK REAL ESTATE

Real Estate prices in the U.K are headed down. The FTSE 350 Real Estate Index has also corrected sharply, returning to levels last seen in 2004-2005.
Tightening credit conditions and looming job cuts at London banks are contributing to negative sentiment in the housing market.

Consumer Debt levels in the UK remain high and as prominent homebuilders struggle to raise capital, property prices are declining to new lows.

http://www.cnbc.com/id/25488999

http://www.bloomberg.com/apps/news?pid=20601068&sid=aFs.PFqy8CEk&refer=home

GOLD & ITS 300 DAY MA !!

Gold continues to be extremely volatile, as the EURO and Crude Oil prices continue to dictate its direction in the short term.
The Fed cannot afford another rate cut (remember the Strong USD campaign), but any rate hike to fight inflation will trigger further sell offs in the already jittery equity markets.

As you can see, the 300 day MA has been a very consistent and reliable support for Gold since early 2001.

( The Chart below was compiled with data from my friend Stamatis Leontsinis!)

How LOW can Gold go???
Looking to GOLD's 300 day MA , I do not expect any downside below the the $800-$825 levels. I would buy Gold on days when it declines significantly, like the recent decline a week ago when it fell by over $20 in a single session.

The 300 day MA is at the $800 level currently. Over the next couple of months, volatility in Crude oil prices and any pullbacks in the Euro will lead to increased volatility in Gold. Use the declines to buy!

Remember, Gold loves stagflationary environments: Slowing Growth & rising Inflation.
High oil prices and High food prices are contributing to rapid inflation the world over
US Housing, US Financials and the US Auto sector have really struggled in the first half of 2008. These sectors are going to contribute to deteriorating employment numbers in the second half.
In the mean time I will add to Gold positions on declines.