I’ll admit it’s hard to come to grips with our current financial crisis.

You see I’ve become blended. In the process of all my research and discovery, I’ve lost a little bit of my individuality. I’m guessing you might be in the same boat. You’re concentrating so much on your own work, family and financial needs, that it can be difficult to remember that not everyone lives your life and faces completely different problems.

I know that’s where I am. And as I wade through this Rescue Bill, I keep flashing back to the reasons they tell us it’s “necessary.”

“…if we don’t pass this the economy will grind to a halt. More average, hard working citizens will be crushed and it’ll take years to pull ourselves up again.”

I took a walk around my neighborhood last night. It’s a large middleclass community here in south Florida. Lots of kids…great place to live. Yet it looks no different than it did two years ago.

Flashback to two years ago… The Florida real estate market was booming. The value of everyone’s homes was going up 25% a year. People were happy, new cars were in the driveways. Certain kids went to private schools.

And then last night, many people were out walking, running, biking…smiling and saying hello. The kids were out playing in their manicured yards next to the new cars shining in the driveways…nothing looked any different. Yet.

You see, for now, I’ve been fortunate. I don’t know anyone who’s lost his or her job in all this mess. No friends or even friends of friends who’ve lost their home to foreclosure. I don’t even know anyone who had to move because they couldn’t pay their mortgage.

So if this is what I’m seeing then (remember everything just seems to blend together these days) it’s easy to assume that everything is okay.

It’s easy to think this is JUST a Wall Street problem. Sure, it’s spilled over to cars and housing but these industries have always been – and will always be – in boom-bust cycles. Hot economy…lots of new cars and houses…secure jobs. It’s almost too easy to believe that nothing new is happening here…no national crisis.

But the fact is: This time IS different. The “mess” will be coming to my world. I know it. I can feel it. I have no proof…Everything still looks the same but…

This could all easily change. Neighbors won’t always be able to pay those mortgages. Friends can lose jobs. New car purchases will be put on hold. Cooling economy…layoffs…maybe even foreclosures.

The world is changing – and it’s about to reach your neighborhood and mine, whether we’re ready for it or not. And it will look a lot like the world you’ve been reading about.

Silver prices usually track and follow gold prices but often amplify them during declines. This is what happened recently during the sell-off on commodities markets. On July 15 silver closing price was $US19.12 an ounce. Last Friday, it closed at $US11.32. It’s a 41% decline in 2 months and a half, much more important than the pull back on gold prices.

The chart shows the strong positive correlation between gold (red line) and silver prices (black bars). Since the beginning of 2008, this correlation was almost perfect. However, since mid-August, silver prices have been failing to keep up the pace and are much more “heavy” than gold prices. What is going on?

Click to Enlarge

It’s likely that silver prices have been manipulated as they have been extremely oversold by 2 banks during August. The monthly Commitment of Traders (COT) report of the Comex is a document that tracks all the long and short positions held by large and small speculators, and by commercial, with the number of contracts opened week by week.

It appears that in July and early August, 2 US banks have massively increased (+547%, more than 6 times) their short positions on the silver market, for a total amount of 2.7 billion US Dollars. This is huge. This extreme dominating position (the 2 institutions were holding 61% of the short positions) has generated a panic movement which has driven prices downward very quickly.

More recently, the key factor of the sell-off is the massive liquidations of positions from hedge funds which chase cash as they deleverage and reduce drastically their risk exposure.

As a result the price action cleared the important support level that was backing the upside trend since August 2007 when prices fell below $US17 in early August.

The level of $US12.50 was another intermediary support which has been eventually cleared too on September 8. The price action bottomed at $US10.31, has bounced back sharply and has been falling back for two weeks now. The MACD and Momentum technical indicators trigger new bearish signals.

That’s why a pull back towards the recent low of August is likely. A potential double bottom on this support might be possible but anyway the upside is quite limited on the near-term. The recent rebound failed to break above the 38.2% retracement ratio of the 8-weeks decline (between points A and B on the chart). This resistance (around $US14) should be difficult to clear.

Indeed, many small players have been caught by the panic occurred in August and did not have time to close their long positions. Therefore they close their positions as soon as a rebound drives the price a to a significant resistance level. The coming weeks should be therefore a consolidation phase with potential rangy market between $US10.30 and $US 14.

For all the predictions that have been flying around, there is one thing which no-one seemed to predict - The impact on European economies.

The graphic below, from the BBC website shows the relative size of the recent bailouts. The graphic doesn’t include the European banks which have fallen over or have been propped up - Fortis, Dexia, Irish banks, Danish banks and now the German mortgage lender Hypo Real Estate. The Hypo bail out is calculated at approximately $90 billion.

The intriguing point here is that while house prices have sky rocketed in the UK, US and Australia over the last thirty years, in Germany they have barely kept pace with inflation. During the last ten years they haven’t even done that.

There are some idiosyncrasies in the German market. One of those is controls which dictate how much rent a landlord can charge. This doubtless means that German property investors have to be more constrained when buying a rental property knowing that they cannot increase rents to cover the cost of a higher purchase price.

Despite this, Germany’s largest mortgage lender is relying on a massive cash injection from the German government.

The reason we bring this up is that it goes to show that despite the heavy hand of government intervention that has contributed to a stifled German property market, it hasn’t prevented Hypo Real Estate from getting into strife.

More evidence that the outlook for the Japanese economy continues to worsen, perhaps at a pace not expected by policymakers in that country and overseas. Its bad news for Australian raw material companies like BHP Billiton and Rio Tinto because much of the downturn is being driven by the slump in car demand inside Japan and in export markets. On Tuesday it was poor industrial production and unemployment figures that filled out the current picture of the state of the Japanese economy. Output in August fell 3.5% from July, and was down a huge 6.9% on August 2007, while August unemployment rose to a four year high of 4.2%. Yesterday it was the widely respected and much anticipated Tankan survey of business sentiment from the Bank of Japan. Produced quarterly and released on the first day of the new quarter, the latest report suggests that Japan’s largest manufacturers have turned pessimistic about the prospects for business for the first time in five years, thanks to the impact of the financial crisis and the US slowdown on demand for exports. We’ve already seen how that is actually having a knock-on effect: exports in August to the US fell a record 22% and more than offset a solid export performance to China and the rest of Asia. The Tankan index of confidence among big cars and electronics manufacturers slid to minus 3 points in the September quarter from a positive reading of plus 5 in June, a fourth quarterly drop. It was the first negative reading for the index since 2003 and indicates pessimists outnumber optimists. Sentiment among large non-manufacturers, small manufacturers and small non-manufacturers was just as gloomy in the survey, with the index for each group showing the worst reading since 2003. The fall in business sentiment came as wages fell for the first time in 8 months, mainly due to a decline in summer bonuses.

Toyota. Nissan and Honda have already trimmed car output in Japan and new figures for September for the US, just released, indicate little hope of any improvement. They had a brutal September in the US as well with sales down by 20%-37%.

So deep were the cuts in output that Japan experienced the largest drop in domestic vehicle output in a decade in August. Exports to the US plunged the most in almost five years.

This in turn is having a knock-on effect on steel demand, plastics and other commodities and suppliers across the country and on imports.

It’s bad news for Australian iron ore and coal suppliers and raises more questions about the possibility of another round of price rises for the April 1 2009-10 financial year. Coal prices ex Newcastle are trading at six month lows this week.

Reports from Japan say the downturn for these big companies is starting to be passed on through medium and small companies which supply these larger businesses and employ around 70% of the country’s labour.

Economists in Tokyo say the Tankan questionnaires were filled out last month when the US financial crisis was erupting with Fannie Mae/Freddie Mac being bailed out, and then the collapse of Lehman Bros, the rescuing of Merrill Lynch and AIG and then the freeze on lending by nervous banks.

The Bank of Japan is been injecting $US10 to $US25 billion on some days to maintain liquidity in the Japanese money market, and has done US dollar swaps of upwards of $US100 billion with the US Fed to inject more US dollars into the economy

An interesting plus at this stage though from the Tankan survey was that a majority of companies say they still plan to boost investment, instead of cut it.

Japan’s largest companies said they plan to increase investment 1.7% this year, but some economists warn that should the global crunch continue at current levels for much longer, that optimism could very well disappear and the news in the next Tankan, due in early January, could paint a very different story.

That 1.7% increase is much slower than in the past two Tankans, representing a slow winding back of plans.

Big Japanese companies expect recurring profits to fall 8% this fiscal year, on a year-on-year basis (six months ago they were predicting a small rise of 2.4%).

The large manufacturer index in the Tankan is still above numbers recorded during Japan’s most recent recession in 1998-02 when survey plunged to minus 51 in 1998, as the Asian currency crisis was in full swing and the government had to buy failed lenders including Long-Term Credit Bank of Japan.

The crux of the bailout is that it’s designed to keep banks from failing by recapitalising them. It’s like a massive financial organ donor program where the Treasury replaces the guts of the current system with new, unclogged guts.

But even if Paulson can come up with $700 billion from Congress, many of the banks are going to fail anyway. They borrowed money short term to buy long-term assets (mortgage backed securities and collateralized debt obligations). Now, the money must be paid back but no one wants to lend short term. Why? The assets are falling in value.

When the assets fall in value, it wipes out equity capital. You have a small amount of capital controlling a large amount of assets. If you take a write off on the assets, it wipes out your capital. You’re insolvent.

Here’s the thing…$700 billion is not going to be enough to remove the troubled assets from bank balance sheets. But then, Paulson must know that. He’s hoping that Treasury buying kick starts the market by establishing a price for the stuff.

Then, he’s hoping, private equity, hedge funds, and others with cash come in from the sidelines to make deals with the banks and get the assets off the balance sheet so the banks don’t fail. The key is establishing a price for the garbage above the current price. That’s what Paulson aims to do with the money from Congress.

Trouble is, the price Paulson wants to pay for the assets is much higher than what the market is willing to pay. Kick starting it won’t work if the first bidder (the government) comes in and pays a price the market has already said no to.

You see it’s not the price of the assets that’s at issue. It’s the value. And that value is much lower than the current price. There’s not much Paulson or anyone can do to change that.

If the Congress wants to save Americans from being foreclosed on and losing their homes, it has to come up with a plan that simply removes from the market all the houses connected to all the bad mortgages. If it could magically do this, you might contain house price falls in the rest of the market.

Or you might not. Either way, no one knows how to cut the cancer out without dismembering the patient. We suspect a new government agency will be set up to do two things: buy the bad mortgages from the banks first. Second, as the owner of the note, the Feds will offer to refinance people into longer-term, government guaranteed 30-40 year mortgages at a lower-than market interest rate.

The Feds will guarantee that note and sell it back into the market (sort of how Fannie and Freddie worked before). Even then, just because we want to keep people in houses politically doesn’t mean it will be possible economically. You can’t pretend houses are worth more than they are.

Congress may try anyway. And the markets may believe, for a day or two, that the passage of plan fundamentally alters the dynamics in the system. But it does not. Not one jot.

Borrowed money has to be paid back. Assets that were bought with that borrowed money are falling. That is how all credit bubbles end. This one is no different.

NEW YORK - Financial markets uneasily awaited a US Senate vote on the government’s proposed financial sector bailout early this morning (AEST), with stock prices showing sharp fluctuations and credit markets remaining tight.
The benchmark Dow Jones Industrials Average was down more than 200 points in early trading, but ended up just into the red.
The Dow fell 19.59 points, or 0.18 per cent, to 10,831.07, while the broader S&P500 slipped 5.3 points, or 0.45 per cent, to 1,161.06.
The NASDAQ, which carries tech and more recently listed heavyweights, fared worse and lost 22.48 points, or 1.07 per cent, to 2,069.4.

LONDON - Stocks rose in most European markets, with Germany slightly down, after a powerful rally on Wall Street the previous day.
In London, the benchmark FTSE 100 index lifted 57.1 points, or 1.16 per cent, to 4,959.6.

FRANKFURT - In Germany, the benchmark DAX 30 index shed 24.69 points, or 0.42 per cent, to 5,806.33.

PARIS - In France, the benchmark CAC 40 index rose 22.44 points, or 0.56 per cent, to 4,054.54.

TOKYO - Japanese shares rallied on Wednesday from a three-year low after Wall Street roared back to life.
The Tokyo Stock Exchange’s benchmark Nikkei 225 index put on 108.4 points, or 0.96 per cent, to 11,368.26.

HONG KONG - The Hong Kong-based market was closed for a public holiday.

WELLINGTON - New Zealand shares clawed back the previous day’s losses to close more than three per cent up on Wednesday.
The benchmark NZX 50 index rose 97.74 points, or 3.16 per cent, to 3,187.96.
In early trading today, the NZ market was up 21.261 points, or 0.67 per cent, at 3209.222.

SYDNEY - Australian stocks have received a flat lead today, with Wall Street markets finishing slightly down, including stocks and oil, although gold and silver were higher.
In Europe, the British and French bourses were up moderately, but the Eurozone’s largest economy, Germany, saw its key DAX stocks index fall.
At 0800 AEST, the December Share Price Index futures contract on the Sydney Futures Exchange was up 28 points at 4,875.
In economic news today, the Australian Bureau of Statistics will release international trade data for August.
Telecom Corporation of New Zealand will hold its annual general meeting in Wellington.
Milton Corporation Ltd holds its annual general meeting in Sydney.
Rio Tinto Ltd chief executive Tom Albanese addresses the Melbourne Mining Club in Melbourne.
Also in Melbourne, ANZ Banking Group Ltd’s Australia operational chief executive Brian Hartzer addresses the American Chamber of Commerce in Australia on “Leading Through the Tough Times”.
In Perth, The Institute of Public Affairs hosts the 2008 Harold Clough Lecture, with Professor Aynsley Kellow speaking on “The Politics and Science of Climate Change - The Wrong Stuff”.
Yesterday, the benchmark S&P/ASX200 index leapt 194.1 points, or 4.22 per cent to 4,794.6, while the broader All Ordinaries climbed 183.2 points, or 3.96 per cent, to 4,814.5.

NYMEX

Oil prices dipped below $US100 a barrel as a surprise increase in US gasoline supplies, and a bigger than expected jump in crude stocks, offered more evidence that the turbulent economy is encouraging Americans to drive less.
Crude oil prices traded erratically, rising as high as $US102.84 and falling to as low as $US95.95 overnight.
Light, sweet crude oil settled down $US2.11 at $US98.53 per barrel.
In London, November Brent crude fell $US1.82 to $US96.35 a barrel on the ICE Futures exchange.
Wednesday’s losses were tied to data showing more robust US fuel supplies. The Energy Department’s Energy Information Administration said in its weekly report that crude stocks rose by 4.3 million barrels, or 1.5 per cent, to 294.5 million barrels for the week ending September 26.
Analysts had expected stocks to rise by 1.5 million barrels, according to a survey by energy research firm Platts.
At the same time, gasoline inventories rose by 900,000 barrels, or 0.5 per cent, to 179.6 million barrels.
Analysts expected stockpiles of motor fuel to fall in the range of one million to three million barrels.
The continuing strength of the US dollar also helped push down oil prices. Traders buy into commodities as a hedge against inflation when the dollar weakens, and sell when the greenback gains.
In other NYMEX trading, heating oil futures fell half a cent to $US2.889 a gallon, while gasoline prices lost 5.47 cents to $US2.403 a gallon.
Natural gas for November delivery rose 39.4 cents to $US7.832 per 1,000 cubic feet.

COMEX

Precious metals were up, with gold lifting $US6.50 to $US887.30 a troy ounce, while silver jumped 49.5 US cents to $US12.77 a troy ounce.
Both have recovered slightly since mid September - gold faring better than silver - as unprecedented global credit and economic turmoil forced investors and traders alike to seek safer havens.
Copper continued its slide overnight, by 8.95 cents to $US2.7895 a pound.
Copper traders are worried about demand being sustained.

Paulson, unlike Congress, wants to throw everything the United States has into fighting the deflation afflicting American banks right away. And Bernanke - a scholar on monetary policy - understands the cost of inaction from examples like the Great Depression (when the Fed failed to address deflation until the latter half of the 30’s) and Japan’s lost decade.

History strongly suggests that any delays or lack of sufficient funds committed to blasting away at deflation can be painful. So in my mind, one powerful bailout could potentially help us find the bottom of this crisis at least in the short-term.

Instead, dollar-cost-averaging for the long-term is a great value-based strategy now, especially for younger investors. For everyone else, stick to income-producing or equity-linked investments that spin off income. Also, as credit markets eventually stabilize, look to huge values in investment-grade corporate bonds now yielding almost 7%.

This is not the time to bet the farm on stocks. Deflation - the environment of rapidly falling prices and the contraction of lending - will continue to inhibit earnings growth and domestic consumption for the next several months or longer.

Deflation is here and it’s real.

Similar trends in Japan show the long-term effects of price deflation and the Japanese government’s inability to grow inflation during the “lost decade” of the 1990s.

In some ways, Japan has been “lost” since the Nikkei peaked in early 1990. The Nikkei Index remains almost 70% below its all-time high almost 20 years ago. Currently, the Dow Jones Industrials Average is down 22.5% from its all-time high.

Can the same phenomenon happen in the United States after this credit crisis?

The United States is fighting an incredible bout of deflation right now, much like Japan in 1990. Real estate deflation is especially difficult to stop because it affects the entire economy, including individuals, corporations and especially the banking system. This is exactly what happened in Japan. The only major difference now is Congress’ willingness to act fast and avert severe deflation.

The Japanese economy didn’t bottom until 1999. Stocks have staged several unimpressive rallies over the last decade and remain well below their all-time highs. Despite incredible printing and money-supply growth over the last 15 years, the Japanese haven’t completely licked deflation.

What’s shocking about the Japanese financial crisis is that it took another five years for the stock market to bottom after they passed their RTC model in 1997 and introduced the broad-based financial services reforms.

Japan is by far the world’s premier example of failed monetary expansion. You could argue that Japan has never really emerged from deflation with price levels barely above 0% over the last few years and new signs pointing to renewed deflation as the economy slumps yet again.

Beyond the Bailout:
Even if Paulson Succeeds,
We Won’t Find an Immediate Bottom

Morals aside for just a moment, I’m going to ask the practical question about Paulson’s proposed bailout…

Could Paulson’s Troubled Asset Relief Program (TARP) put a floor on this bear market? Many investors think it would. Yet, as Congress delays passage, the economy and especially the mortgage-backed market continue to bleed.

According to investment research courtesy of Merrill Lynch, previous government orchestrated bailouts of the financial system have not resulted in immediate stock market gains. In fact, history suggests there’s more pain ahead even if Congress does change its mind.

You see, just because a central bank expands credit doesn’t guarantee policymakers can eliminate deflation across all facets of finance, consumption and industry. This process could take years.

Japan went through a similar crisis just 10 short years ago. It’s true, the U.S. may not repeat Japan’s experience, but it still points to difficult economic times ahead for America - especially as the fight to kill deflation takes every last drop of inflation-inducing monetary expansion.

The S&L Crisis Provided a Taste of What’s to Come

Even here in the U.S., a bailout doesn’t always work immediately. After the government created the Resolution Trust Corporation (RTC) in 1989 to bailout the Savings & Loans in the United States, stocks didn’t form a bear market low until late 1990. The economy didn’t bottom for another two years and housing values kept declining until 1993.

The U.S. market needed several more years to really find its footing following the S&L bailout. But the problem with this historical comparison is the current credit crisis is far more lethal than the S&L debacle. Before it’s over, this crisis will cost American taxpayers at least US$1 trillion…maybe more.

In inflation adjusted terms, the proposed bailout will cost at least three times more than the S&L rescue cost (US$350 billion in 2008 dollars). Honestly, it could be even more if you take into account that real estate prices are still declining.

That’s an important caveat because the Paulson plan aims to provide a fund to pool all distressed mortgage-backed securities. But it’s actually impossible to place a price tag on this bailout until real estate prices bottom. That means it’s probably going to be more.

The proposed rescue now is ultimately highly inflationary for the United States. This will all lead to massive credit inflation as the Fed and eventually other central banks flood the system with dollars.

Yet the short-term battle is against deflation. Right now, rapidly declining asset values are delaying any meaningful recovery for stocks, although I do see a possible “relief” rally coming in 2009. Beyond that, it’s hard to make a case for a new bull market in U.S. equities.

NEW YORK - Wall Street snapped back on Tuesday after its biggest selloff in years amid growing expectations that lawmakers will salvage a $US700 billion rescue plan for the financial sector.
Following Monday’s shellacking, the key Dow Industrials index picked up 485.21 points, or 4.68 per cent, to 10,850.66, while the broader S&P500 ran 58.35 points, or 5.27 per cent, to 1,164.74.
The NASDAQ, which carries tech and more recently listed heavyweights, climbed 98.6 points, or 4.97 per cent, to 2,082.33.

LONDON - Bargain hunting helped lift the London, Paris and Frankfurt stock markets on Tuesday after investors worldwide had dumped shares following the unexpected rejection of a US financial bailout package.
In London, the benchmark FTSE 100 index rose 83.7 points, or 1.74 per cent, to 4,902.5.

FRANKFURT - In Germany, the benchmark DAX 30 index lifted 23.94 points, or 0.41 per cent, to 5,831.02.

PARIS - In France, the benchmark CAC 40 index climbed 78.62 points, or 1.99 per cent, to 4,032.1.

TOKYO - Japan-based shares plunged more than four per cent on Tuesday, breaching a three-year low after US lawmakers unexpectedly rejected the Wall Street bailout.
The Tokyo Stock Exchange’s benchmark Nikkei 225 index lost 483.75 points, or 4.12 per cent, to end at 11,259.86, its lowest point since June 9, 2005.

HONG KONG - Hong Kong-based shares closed close to one per cent higher on Tuesday after a rollercoaster day saw the bourse fall more than six per cent at one point.
The benchmark Hang Seng index finished up 135.53 points, or 0.76 per cent, to 18,016.21.

WELLINGTON - New Zealand-based shares dived more than three per cent in the wake of the plunge on Wall Street. Shares fell as much as 4.65 per cent in early trading, but regained ground later in the day on fairly light volume.
The benchmark NZX 50 index fell 98.32 points, or 3.08 per cent, to close at 3,090.22.
In early trading today, at 0815 AEST, the NZ market had risen 64.56 points, or 2.09 per cent, to 3,154.79.

SYDNEY - Australian stocks are expected to show a stronger performance today, following a stronger performance on Wall Street overnight.
At 0800 AEST, the December Share Price Index futures contract on the Sydney Futures Exchange was 127 points higher at 4,812.
In economic news today, the Australian Industry Group and PricewaterhouseCoopers release their Australian Performance of Manufacturing Index (Australian PMI) for September, and the Reserve Bank of Australia releases its index of commodity prices.
The Hudson employment expectations survey for the 4th quarter also is due.
In company news, Orica Ltd chief executive Graeme Liebelt addresses the Committee for the Economic Development of Australia in Melbourne.
Court action against James Hardie Industries continues in Sydney.
In Brisbane, its the third and final day of the Coal Tech 2008 conference, and in Perth, it’s day two of the two-day Paydirt Asia Pacific Down Under conference.
Yesterday, the benchmark S&P/ASX200 index fell 206.9 points, or 4.3 per cent, to 4,600.5, while the broader All Ordinaries dropped 207.9 points, or 4.2 per cent to 4,631.3.

NYMEX

Oil prices swung back above $US100 a barrel Tuesday following a plunge a day earlier, with a growing consensus among investors that Congress will resurrect a failed US financial bailout plan.
Light sweet crude for November delivery rose $US4.27 to settle at $US100.64 a barrel on the New York Mercantile Exchange, after earlier rising as high as $US101.40.
In London, November Brent crude rose $US4.19 to settle at $US98.17 a barrel on the ICE Futures exchange.
Crude’s rise came despite a stronger US dollar. Investors often buy crude futures as a hedge against a weakening dollar and inflation, and sell when the dollar strengthens.
On Tuesday, the euro bought $US1.4069 compared with $US1.4472 late Monday in New York.
In other NYMEX trading, heating oil futures rose 10.62 cents to settle at $US2.8947 a gallon, while gasoline prices rose 8.77 cents to settle at $US2.49 a gallon. Natural gas futures rose 21.7 cents to settle at $US7.438 per 1,000 cubic feet.

COMEX

The December contract for COMEX gold fell $US13.60 overnight to $US880.80, after spiking above $US900 on Monday in the face of the Wall Street equities meltdown.
Silver and copper also falling overnight. December silver on COMEX lost 75 cents to settle at $US12.275 an ounce, while December copper fell 2.75 cents to settle at $US2.879 a pound.

NEW YORK - Wall Street has ended a stunning session with a huge fall, the Dow Jones Industrials Average plunging more than 770 points after the $US700 billion financial bailout plan was knocked back by Congress.
The Dow dropped 777.68 points, or 6.98 per cent to 10,365.45, but the broader S&P500 collapsed 106.59 points, or 8.79 per cent, to 1,106.42.
The NASDAQ, which carries tech and more recently listed heavyweights, fell even more, by 199.61 points, or 9.14 per cent, to 1,983.73.

LONDON - European stock markets plunged on Monday, as a series of US and European bank failures rattled investor hopes that the financial crisis might be contained.
Dealers said news of a series of US and European bank failures and rescues - Wachovia, Fortis, Bradford & Bingley, Hypo Real Estate - rocked the markets amid growing doubts about passage of the $US700 billion US rescue package.
In England the benchmark FTSE 100 index fell 269.7 points, or 5.3 per cent, to close at 4,818.8.

FRANKFURT - In Germany, the benchmark DAX 30 index slid 256.42 points, or 4.23 per cent, to close at 5,807.08.

PARIS - In France, the benchmark CAC 40 index shed 209.9 points, or 5.04 per cent, to 3,953.48.

TOKYO - Japan shares ended down on Monday as global financial turmoil claimed fresh victims in Europe, and investors waited nervously for the US Congress to pass a huge Wall Street bailout package.
The benchmark Nikkei 225 fell 149.55 points, or 1.26 per cent, to close at 11,743.61.

HONG KONG - The benchmark Hang Seng Index plummeted 801.41 points, or 4.29 per cent, to 17,880.68.

WELLINGTON - In New Zealand, the benchmark NZX 50 index closed barely changed on Monday amid continuing uncertainty over global financial stability.
The benchmark NZX-50 index rose 0.95 points to 3,188.54 on light turnover.
In early trade today, the NZ market plummeted by over four per cent following the turmoil in New York, falling -135.8 points to 3,052.7.

SYDNEY - Stocks listed on the Australian Securities Exchange could be in for a shellacking today, led down by the financial and resources sectors, after the US House of Representatives rejected a $US700 billion rescue package this morning.
At 0809 AEST, the December Share Price Index futures contract on the Sydney Futures Exchange was down 339 points to 4,510.
Economic releases today include the Reserve Bank of Australia’s financial aggregates data for August.
The Australian Bureau of Statistics will release retail trade and building approvals data for August.
Fortescue Metals Group Ltd and Gleneagle Gold Ltd will hold general meetings, and Incremental Petroleum Ltd will hold its annual general meeting, all in Perth.
Ambri Ltd will hold its annual general meeting in Brisbane.
It is day two of the two-day Commodity Fundamentals conference in Sydney, and it’s also day two of the three-day Coal Tech 2008 conference in Brisbane.
It is day one of the two-day Paydirt Asia Pacific Down Under conference in Perth.
Yesterday, the benchmark S&P/ASX200 index lost 97.4 points, or 1.9 per cent, to 4,807.35, while the broader All Ordinaries gave up 95.45 points, or 1.9 per cent to 4,839.18.

NYMEX

Oil prices plunged more than $US10 a barrel Monday as a US financial bailout plan failed to win legislative approval, increasing fears that a prolonged economic downturn could sharply curtail energy demand.
Light sweet crude for November delivery sank $US10.52 to settle at $US96.36 on the New York Mercantile Exchange, after earlier dropping as low as $US95.04.
It was crude’s lowest trading level since prices edged back below $US100 earlier this month - and crude previously hadn’t traded that low since February.
Crude has fallen almost $US25, or 20 per cent in the past week amid intense bi-partisan political party talks to try and agree on the $US700 billion rescue plan.
In another sign of declining US fuel demand, pump prices kept falling Monday. One gallon of regular slipped about a cent overnight to a new national average of $US3.643. Gasoline peaked at $US4.114 a gallon on July 17.
Prices could come down as US Gulf Coast energy output ramps up following the passage of hurricanes Ike and Gustav. About 57 per cent of crude oil production, and 53 perc ent of natural gas output, remained shut-in after shutdowns prompted by the storms, according to the US Minerals Management Service.
Oil prices were also pushed down by the stronger US dollar. Investors often buy crude futures as a hedge against a weakening dollar and inflation, and sell when the dollar strengthens.

COMEX

Gold for December delivery on the COMEX division of the NY Mercantile Exchange rose $US5.90 overnight to settle at $US894.40 per ounce.
December Silver fell US47.8 cents to $US13.025 per ounce, and December copper fell US16.8 cents to $US2.9065 per pound.
Investors have been shifting funds from troubled equity and debt markets into safe haven stores that traditionally have included gold.

The coming week will see financial markets continue to focus on the turmoil in the US financial system and the $US700 billion bailout plan, which seems to have been sorted out.

The US Government wants it available for approval before Asian trading opens today, but the opposition from the newly pure Republicans was a sticking point yesterday, even as the President and Senator McCain tried to push for a solution.

It’s likely to go to the vote tonight, our time.

But as we saw above, the real story remains the weakening state of the US economy, especially housing. 

There was enough information on the poor state of new and existing home sales last week to conclude that nothing has happened to alter the view that the US housing sector is still sinking and with it the economy as a whole.

US Government plans to alleviate that, the banking problems and the overall econom, are falling into the cracks caused by the current US election cycle.

If nothing is done in the next day or so, it’s very likely that markets will sort it out for everyone and everyone will lose and lose badly.

The employment data is likely to show a sharp slump in employment in September and rise in unemployment made worse by the recent hurricanes.

The Standard & Poor’s Case/Schiller home price index will show more downward pressure in July.

It’s due on Tuesday, along with a September survey of manufacturing activity in the US Midwest states and another reading on consumer confidence. A survey of US services sector is due on Friday.

The European Central Bank meets on Thursday and is expected to keep its lending rate at a seven-year high of 4.25% to fight inflation even as economic growth in the region contracts. 

Germany, France and Italy slipped into negative growth in the second quarter, dragging the zone down, and late last week Ireland fell into a full blown, two successive quarter-recession.

But no rate cut is expected because of a hardline against inflation from the executive and from Germany.

The struggle to keep the Belgium-Dutch financial group, Fortis, alive could influence the ECB if the company’s situation worsens. 

In Japan the Tankan survey of industrial sentiment and expectations will be released on Wednesday.

It will show how confidence among major Japanese companies has softened in the past quarter, with cuts suggested in spending, sales and exports, which slipped sharply in August, according to figures out late last week

The Japanese economy is slowing and contracted in the second quarter, and looks like it is again shrinking this quarter. 

The slump in exports, especially to the US and the impact of still high oil prices (compared to a year ago), is having a negative impact. Consumer inflation is running at a still high annual rate for Japan of 2.4%.

In Australia, data for retail sales, private sector credit, building approvals and the trade balance will be released.

The retail trade survey has been made less reliable after that $20 million funding chop led to a cutback in the size of the sample used to create the survey. 

Nevertheless, August retail trade data is likely to fall after the sharp rise reported in July.

But we will get a further sense of the state of the domestic economy, while the monthly private credit figures from the RBA will reveal if there’s been any further slowing in lending for housing and business, which has been a feature for most of the year.

The impacts of the slump in commodity prices and the value of the Australian dollar will show up in the Reserve Bank’s monthly release of its commodity price index tomorrow.

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NEW YORK - Financial markets remained on edge on Friday after the Bush administration’s proposal for a $US700 billion banking bailout ran into opposition from Republican and Democrat congressmen alike.
Stocks ended mixed, with big financial companies lifting the Dow Jones Industrials index more than 120 points, but worries about smaller banks and parts of the technology sector took much of the market lower.
The Dow rose 121.07 points, or 1.10 per cent, to 11,143.13. Gains by JPMorgan Chase & Co and Bank of America Corp gave support to the 30-stock index. Most of the advance came late in the session as traders placed bets that a deal would emerge from Washington over the weekend.
But broader indicators were mixed. The Standard & Poor’s 500 index rose 3.83 points, or 0.32 per cent to 1,213.01, while the technology-heavy NASDAQ fell 3.23 points, or 0.15 per cent, to 2,183.34.

LONDON - Major European stock exchanges fell in Friday trading, with Germany, France, Italy and the UK all threatened with possible recession.
In England the benchmark FTSE 100 index shed 108.5 points, or 2.09 per cent to close at 5,088.47.

FRANKFURT - In Germany, the benchmark DAX 30 index lost 109.53 points, or 1.77 per cent, to close at 6,063.5.

PARIS - In France, the benchmark CAC 40 index gave up 63.43 points, or 1.5 per cent, to 4,163.38.

TOKYO - In Japan, the benchmark Nikkei 225 declined 113.37 points, or 0.94, per cent to close at 11,893.16.

HONG KONG - The benchmark Hang Seng Index closed down 252.34 points, or 1.33 per cent, at 18,682.09.

WELLINGTON - In New Zealand, the benchmark NZX 50 index fell 50.13 points to 3,187.58 on light turnover worth $NZ72.4 million ($A59.16 million). Falling stocks outnumbered rises 56 to 31.
In early trading today, the NZ market was up almost one per cent, by 26.693 points at 3214.277.

SYDNEY - The Australian stock market generally has received positive leads from Wall Street, particularly with news this morning that US congressmen have reached agreement on a rescue package for US financial institutions.
On the Sydney Futures Exchange at 0745 AEST, the December Share Price Index (SPI) contract was up 48 points at 5,004.
In local news today, retailer Myer Pty Ltd will release annual results.
In Sydney, it is day one of the two-day Commodity Fundamentals conference.
In Brisbane it is day one of the three-day Coal Tech 2008 conference.
In Western Australia, it is a public holiday for the Queen’s Birthday.
On Friday, the benchmark S&P/ASX200 index closed down 22.64 points, or 0.45 per cent to 4904.75, while the broader All Ordinaries lost 26.17 points, or 0.52 per cent to 4,934.63.

NYMEX

Light, sweet crude oil fell just over $US1.00 a barrel on Friday as an US financial bailout plan remained stuck in legislative limbo.
Light, sweet crude for November delivery fell $US1.13 to settle at $US106.89 on the New York Mercantile Exchange, after earlier dipping as low as $US104.25.
In London, November Brent crude fell $US1.06 to settle at $US103.54 a barrel on the ICE Futures exchange.
The prospect of the financial bailout being scuttled or delayed rattled investors who were counting on the capital infusion to steady the teetering financial system.
Weak US demand for fuel has helped send crude down 27 per cent since the price surged to a record $US147.27 on July 11.
Friday’s losses were limited by tight global supply, especially in the US where the impact of hurricanes Ike and Gustav is still being felt on Gulf of Mexico oil operations.
Oil companies are redeploying workers to Gulf platforms and rigs after the storms tore through the region, but most production remains offline.
About 57 per cent of crude output, and 53 per cent of natural gas production was still shut-in as of Friday, the US Minerals Management Service said.
The Gulf area is home to one quarter of US crude production, and 15 per cent of its natural gas.
In other NYMEX trading, gasoline futures fell 3.22 cents to settle at $US2.6651 a gallon, while heating oil futures fell 3.09 cents to settle at $US3.0174 a gallon.
Natural gas futures fell 30.3 cents to settle at $US7.628 per 1,000 cubic feet. The October contract expired at the end of the day, adding to volatility.

COMEX

Gold prices briefly jumped above $US920 an ounce on Friday as a stalled plan to bail out the US financial system unnerved investors and prompted a flight into safe-haven assets. Silver also rose.
Gold for December delivery rose as high as $US920.10 an ounce on the New York Mercantile Exchange before easing back to settle at $US888.50, up $US6.50.
Other precious metals were mixed. December silver rose 22.8 cents to settle at $US13.503 an ounce, while December copper fell six cents to settle at $US3.0745 a pound.

The markets were fairly stagnant all week - everyone was waiting to see if Congress was really going to eat up Paulson’s proposed US$700 billion bailout scheme.

By the way, as Bob pointed out on Wednesday, that figure doesn’t even begin to cover the normal debt that’s already hanging over our heads. The existing public debt alone figures out to be US$31,600 for every man, women and child in America, and this new demand will add another estimated US$2,300 for every American.

In theory, this new US$700 billion (which is a dreamed up number by the way - not the real figure) will supposedly buy up all the toxic debt off everyone’s books. As usual, it’s coming out of the taxpayer’s wallets.

And as the market leaders held their breath this week, waiting to hear if we’ll all be billed for Wall Street’s questionable dealings, President Bush stepped up to the podium to throw his support behind the bill.

In fact, G.W. Bush was the most vocal he’s been about this financial crisis to date in explaining why we need this bailout. He addressed the nation using words like “long and painful recession,” “crisis” and “edge of collapse.” Basically, he was pulling out the scare tactics so everyone jumps behind this bill.

It may have the President’s support, but is it worth it - considering US$700 billion barely scratches the surface of what is estimated to be over US$3 Trillion?

It must surely go down in history as the quickest ever development of a new product. You have to give the investment bankers credit for their timing. As banks are folding left, right and centre in the United States and Congress struggles with how or whether it should bail-out Wall Street, investment bankers at Citigroup have developed a new derivative product that will bypass the new short selling restrictions.

Clearly, despite the big pay cheques, fast cars and expensive apartments, there appears to be one thing that they are short of. And that is tact. Oh, and common sense. That’s if they were hoping the government would bail them out.

In reality though, even though this is only a small example, it is an indication that if the market is left to its own devices with this mess, the banks will work a way out of it. And it won’t cost a single taxpayer dollar.

Of course there would be down sides. More of the regional banks would fold, and it would doubtless lead to more job losses on Wall Street. It could also have a detrimental effect on the availability of credit in the short term.

But by giving Wall Street an easy way out with a government bail-out it means that the banks don’t have to think for themselves. They can let someone else do all the hard work while they just hand over the rubbish mortgages.

If the US government stood up for itself and told the banks that they had to sort it out themselves they would soon come up with a solution. Considering their recent scrapes with over-complicated and over-leveraged products, chances are that they would develop a plan that involved a much lower level of risk.

As it stands, if a new bail-out is agreed to it is likely to do little more than let the banks off the hook.