NEW YORK - Pessimism about a protracted economic downturn washed over the financial markets on Thursday, sending stocks plunging and seeing further tightening in credit markets.
News of declining factory orders and a seven-year high in jobless claims stoked fears that the US Government’s financial rescue plan won’t ward off a recession.
The Dow plummeted 348.22 points, or 3.22 per cent, to 10,482.85, while the broader S&P500 fell 46.78 points, or 4.03 per cent, to 1,114.28.
The NASDAQ, which carries tech and more recently listed heavyweights, lost 92.68 points, or 4.48 per cent, to 1,976.72.

LONDON - European stock markets fell on Thursday following disappointing economic data from the United States and a decision by the European Central Bank to maintain interest rates at current levels.
In London, the benchmark FTSE 100 index dropped 89.3 points, or 1.8 per cent, to 4,870.3.

FRANKFURT - In Germany, the benchmark DAX 30 index lost 145.7 points, or 2.51 per cent, to 5,660.63.

PARIS - In France, the benchmark CAC 40 index gave up 91.26 points, or 2.25 per cent, to 3,963.28.

TOKYO - Japan-listed shares fell more than 1.8 per cent on Thursday, hitting a three-year low on worries about the financial crisis despite the US Senate approving a mortgage debt bailout.
The Tokyo Stock Exchange’s benchmark Nikkei 225 index shed 213.5 points, or 1.88 per cent, to 11,154.76.

HONG KONG - The benchmark Hang Seng index fared better, lifting 194.9 points, or 1.08 per cent, to 18,211.11.

WELLINGTON - New Zealand-listed share prices rose more than one per cent on Thursday, but investors remained cautious over the US rescue package after it was passed by the Senate.
The benchmark NZX 50 index rose 44.68 points, or 1.4 per cent, to 3,232.64 on light volume.
After an hour’s trade today, the NZ market had dropped 64.223 points, or around two per cent, to 3,168.42 at 0800 AEST.

SYDNEY - Local stocks may trade lower today after US equities markets fell by close to four per cent, while Europe suffered less but also was in the red.
The key Wall Street indices all were down, as were commodities, including oil, gold, silver, and copper.
At 0800 AEST, the December Share Price Index futures contract on the Sydney Futures Exchange was down 95 points at 4,680.
In economic news today, the Australian Industry Group and Commonwealth Bank will release their Australian Performance of Services Index (PSI) for September.
The TD Securities/Melbourne Institute will release its Inflation Gauge for September.
Contact Uranium Ltd will hold its annual general meeting in Perth.
Ellerston Capital Ltd will hold a general meeting in Sydney.
In Sydney, Climate Change Review head Professor Ross Garnaut will address the Committee for Economic Development of Australia on “Australia in a low emissions economy”.
Yesterday, the benchmark S&P/ASX200 index lost 33.5 points, or 0.69 per cent to 4,761.1, while the broader All Ordinaries shed 40.4 points, or 0.83 per cent to 4,774.1.

NYMEX

Oil prices closed at their lowest level in two weeks on Thursday, tumbling below $US94 a barrel on doubts that a revamped financial bailout plan will be enough to avoid a protracted economic slump, and revive dwindling US energy demand.
Light sweet crude for November delivery fell $US4.56 to settle at $93.97 a barrel on the New York Mercantile Exchange — crude’s lowest settlement since September 16.
Prices earlier jumped as high as $US100.37, but eased back later as traders digested the details of the revised bailout package.
Oil prices have fallen about $US15, or 13 per cent in the past month as traders’ concerns about waning global energy consumption have outweighed supply threats caused by Gulf coast hurricanes and militant attacks in Nigeria.
The slump in energy demand has accelerated beyond the US.
In India, domestic oil product sales totaled 2.41 million barrels per day in August, the lowest level this year, according to Barclays Capital research.
In the same month, Japan’s oil demand fell by 8.4 per cent.
Significant gains by the US dollar against the euro have also helped push down prices.
Recent data shows that US fuel demand is falling while supplies rise.

COMEX

Commodities prices plunged on Thursday as a rapidly strengthening US dollar and more gloomy readings on the economy compelled investors to dump positions in gold, grains and energy.
Gold for December delivery dropped $US43, or 4.8 per cent to settle at $844.30 an ounce on the New York Mercantile Exchange, after earlier dipping as low as $US833.50.
December silver shed $US1.65, or 12.9 per cent to settle at $US11.12 an ounce, while December copper sank 16.2 cents, or 5.8 per cent to $US2.6275 a pound.

What’s ACTUALLY Happening in the Free Market

Unfortunately, self-proclaimed free enterprisers - President George W. Bush is one among many - are either ignoring or are unable to accept the fact that some people must suffer as the purging process runs its course.

Often their vision is blurred by their quest for a tighter grip on the private sector. They call it “compassion,” but I call it “zeal for power.” Worse yet, they use other people’s money — namely, yours!

In its infinite wisdom and undying compassion for the public, our government does all it can to hamper the market’s cleansing tools — recessions and deflation.

Instead of one swift painful smack in the head by the invisible hand, their very visible hand “helps” to ensure the economy will grow much less efficiently AND remain much more vulnerable to future shocks to the system.

That’s not compassion…it’s nonsense!

Really, on a historical basis, many parts of the U.S. economy are in awfully good shape. We’re told to believe otherwise because doom and gloom dominates what the mainstream media consistently reports.

One of the biggest fear indicators they use: Employment numbers. After all, Americans don’t want to lose their jobs.

But look at the current employment situation on a historical basis: While U.S. job losses are on the upswing, they are fairly modest … and should be expected in a self-cleansing market.

As my chart shows, taking into account only the last 40 years, today’s unemployment rate sits relatively low compared to 1975, 1983, and 1993.

If we play our cards right we could see the current rise in unemployment top out around the same levels as it did roughly five years ago. That would be nothing to panic over.

We May Just Be the “Least Ugly” Right Now By Comparison

Let’s look at inflation — another economic boogeyman…

Current CPI in the U.S. sits just north of 5%. That’s easily less than the roughly 6% to 7% back in 1991. And in 1980, for example, inflation reached almost 15%.

Countries, particularly emerging markets, would kill to have inflation as LOW as 5%!

More to the point, Americans can afford necessary food items as easily as ever. Here’s a snippet from an article put together by the Federal Reserve Bank of Dallas last month:

Based on the average U.S. pay rate, it takes less than two hours of work to pay for 12 basic food items — tomatoes, eggs, sugar, bacon, milk, ground beef, oranges, coffee, lettuce, beans, bread, and onions.

That figure is nearly as low as it’s ever been.

Consumption may finally be taking a breather, as it should, but discretionary items like computers, DVD players, cell phones, digital cameras and color TVs have become far more affordable. And that even includes those families considered “poor.”

Moreover, despite my view that the U.S. government is dipping its hand way too deeply into the markets, making them increasingly less free, it’s all a relative game.

Many other countries around the world are either officially in, or about to slip into, recession.

And on a relative basis, because their governments are much more entrenched in the market than Uncle Sam is in ours, their ability to recover is hampered even more.

Why is this an important part of the dollar equation? Because it means that, despite all our warts, it’s quite possible the U.S. might still win the global economic beauty contest by getting judged the least ugly.

I’d be hard-pressed to say that a single American doesn’t yet know about Paulson’s proposed bailout of the financial system. It’s been dominating the airwaves lately and even the presidential debate devoted half of their time to the crisis at hand.

Despite the meandering dialogue of panels on CNBC and other business news sources, I want to be abundantly clear about one thing. This bailout constitutes the single greatest case of ignoring the free market in modern history.

As we went to press, it seems as if the bailout plan isn’t going to make it past Congress…but just the fact that they would propose it at all is a major affront to the free market system.

In fact, Henry Paulson repeated over and over again exactly how agitated, disgusted, annoyed, infuriated, angered, embarrassed, and irritated he felt about asking for this amount of money, or any money at all. Sounds sincere if you stop it right there.

But apparently those feelings weren’t enough to reinvigorate his free-market spirit, abolish potential bailout plans, do away with unnecessary regulation and let those who deserve to suffer, suffer.

The bail-out is back.

While you were heating a pot of coffee yesterday morning, the top brass in America were fast coming to agreement on the biggest financial ‘rescue-mission’ in history. Even as early as Friday the US market was optimistic. It put on 120 points.

The original 3-page bailout note is now an epic 100-page tome. It’s more foot-note than note. The US government votes on it today. Mercifully - despite the length - there are only a couple of key points you need to know.

Firstly, while the length of the plan has ballooned, the bail-out itself has shrunk. It’s down to a measly US$350 billion. The bailers still have discretion to raise that to US$750 billion. But the initial level of capital has halved.

The Republicans are now happier.

Executives of bailed companies will not benefit from the plan. Golden parachutes, bonuses and pay rises are out.

The Democrats are now happier.

What does all this joy mean? The whole deal is edging towards approval. It’s more likely to happen than not.

There are a lot of investors out there with faith in the idea. You can see them moving in and out of the market as the bailout saga itself ebbs and flows. Here’s the Dow over the past five days:

Out. In. Down. Up.

For the record, we don’t think much of the bailout here at MM. It’ll mean greater US debt, market intervention, and an extension of inflationary policies.

But it does present you with two pretty clear options for investing.

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?

The federal government is now on course to engineer the greatest expansion of credit in history. The long-term consequences will ultimately be disastrous for American financial assets, particularly the dollar and Treasury debt.

Thus far in September the Fed has expanded its balance-sheet by some US$425 billion dollars. In just the past three weeks, the Fed has rescued Fannie and Freddie, AIG, spent tens of billions of dollars in efforts with other central banks and has extended a US$75 billion dollar lifeline guarantee to money-market fund investors.

But these figures pale in comparison to the estimated cost of Paulson’s new plan.

Clearly, the credit crisis requires desperate measures and only governments can help to alleviate or even quash systemic failure through unprecedented credit expansion. Like I’ve said all along, it’s Inflate or Die for Western capitalism.

The strains of deflation, however, will take time to extinguish. Markets are wrong to think we can all enjoy a sustained v-shaped recovery. This just won’t happen. Corporate profits will decline for at least the next two quarters.

But over the next 18-36 months, inflation is going to make a formidable comeback as the chickens come home to roost in the United States and Europe.

The cost to resuscitate the financial system is primarily an American problem and will result in a massive expansion of credit. So inflation is all but inevitable.

The best long-term short-sale in my book is Treasury debt. The dollar will eventually return to the basement but that might be delayed as the outlook in Europe grows more and more dim. Though I can’t make a long-term case for the dollar, the odds are high it can continue to rally over the next several months or more, especially if RTC II is passed.

Next on the chopping block for the bears is the Treasury market. The United States will have to pay its creditors higher interest rates in the future. U.S. funding costs will eventually rise significantly unless the United States cuts its bloated spending. And the odds of that happening are pretty much nil.

“We cannot protect all risk in the market, and we should not do it at the risk of the taxpayer.” — Richard Shelby, Alabama Senator

“Moral Hazard” is a pair of buzz words circling lunch tables, office cubicles and board rooms around the world. Why? Simply because the Fed and Treasury are taking matters into their own hands, trying to put an end to the losses wreaking havoc on the global financial system.

And in doing so, our government could be seen as endorsing the reckless lending that led us to this disaster in the first place.

However, what scares me most about these interventions is that some could create a humongous burden on the taxpayer.

The two-year US$85, billion loan from the Fed to AIG this week is an attempt to provide a controlled environment to deal with the pain, spare the financial system from the effects of extreme counterparty risk, protect the real economy and keep the bill off the taxpayer.

So what if the burden of this financial mess doesn’t end up in the taxpayers’ lap? Could there still be moral hazard?

Good question.

Because what kind of precedent are they setting? These are banks and institutions that took on toxic derivatives and securitized debt. They fattened up when times were good, but come crying for help now that the going has gotten tough. How many more will follow expecting the same treatment?

Perhaps this is the real issue.

Earlier today some others criticized the Paulson bail-out plan for assuming that the investment banking model on Wall Street could survive the current crisis, provided it was cleansed of its bad assets. It turns out the model didn’t even make it to Monday’s New York Open.

In a move that marks the end (for now) of the high-leverage, no oversight, risk-taking investment bank model, the Federal Reserve announced that its board had approved, “Pending a statutory five-day antitrust waiting period, the applications of Goldman Sachs and Morgan Stanley to become bank holding companies.”

It’s too early to reach conclusions, but here are some initial observations on why the move was made and what it means going forward:

• The ban on short selling hits leveraged players the hardest. You don’t get more leveraged than Goldman and Morgan Stanley. The banks have to de-lever in an orderly fashion without being driven into the arms of a commercial bank partner with deposits. Goldman and Morgan have accepted the oversight that comes with commercial banking in exchange for maintaining their existence.
• Goldman and Morgan move from being prey to predators. As bank holding companies, they can now take deposits. But it’s much more likely they’ll simply acquire deposits. They can acquire the deposits of firms like Washington Mutual or Wachovia. Or, even better from their perspective, the deposits of regional banks hit hard by the collapse in Fannie and Freddie bonds.
• Goldman and Morgan gain enhanced access to Fed lending facilities now that they are bank holding companies. Even though the Fed had already set up a Primary Dealer Credit Facility, as deposit-taking institutions the new Goldman and Morgan have even greater access to more Fed loans (should they need them. What’s more, the new versions of the old investment banks would presumably be covered by the FDIC as deposit taking institutions.

The Fed must hope this moves Morgan and Goldman out of the “problem” category and into the “solution” category. Given a big enough line of credit by the Fed, these new bank holding companies can become new non-government homes of “good assets” while the Fed and Treasury deal with the bad assets. It also keeps the unthinkable from happening: Wall Street losing all its investment banks and two big counter-parties in the derivatives market.

***Treasury includes all asset-backed securities in new plan

Even though it is just a few days old, the scale of the proposed US$700 billion bailout of troubled mortgage-related assets has already gotten bigger. Bloomberg reports today that the Treasury Department has suggested the new program include a much wider variety of asset-backed securities than previously suggested.

“The change suggests the inclusion of instruments such as car and student loans, credit-card debt and any other troubled asset. That may force an eventual increase in the size of the package as Democrats and Republicans in Congress negotiate the final legislation with the Bush administration, analysts said.

“How much are we talking about here? At least another US$500 billion. According to a September third article by Bloomberg’s Sarah Holland, “More than $358 billion of credit card asset-backed securities were outstanding as of March 31, according to the Securities Industry and Financial Markets Association. Another $196.6 billion in securities were backed by auto loans.”

Click to Enlarge

However the SIFMA’s latest data from 2007 (above) shows that once you include home equity lines of credit (HELOC) and student loans, the number quickly jumps to over US$2 trillion. It is almost certain that student loans would be eligible for purchase under the Treasury plan. But HELOCS?

If Paulson and company are doing a true “Control-Alt-Delete” systemic re-boot of the financial sector, then all securitised assets that will be affected by consumer non-payment (nor or in the future) must be transferred from private balance sheets to the public.

That means that though he’s only asked for $700 billion up-front to deal with the bad assets, the Paulson plan could eventually require as much as $2 to $3 trillion in new Treasury money to buy asset-backed securities. Of course Wall Street will only want to get rid of the worst paper and keep the best for itself.

But you are still looking at a number that’s likely to be much bigger than what Congress has been told. That number is even more bearish for the dollar than the current one, which is already bad enough.

***Forget the short-covering rally, a Futures Freeze?

One point we failed to make clear earlier today is that by eliminating shorting from the market today, regulators make it harder for the market to find a bottom, even though they are trying to help the market find a floor. Why?

Shorts help begin a new bull market by covering their positions. They do this, naturally, by being the first buyers of shares. To cover your short you buy back the shares you previously lent. Without the shorts in the market, who’s going to step in and buy at the lows?

In any event, there are still a few tricks up the regulatory sleeve if the prohibition on short-covering fails. First, there is the futures market, where one can still go short an index or security. Activity in the futures market could be shut down if the regulators think it would help. We’re not saying it would help. But now that we’ve gone through the looking glass, anything is possible.

As I said earlier this week, the United States has by far the world’s most sophisticated system of financial surveillance. Today, I’m going to give you five strategies to sneak under that surveillance, and protect your assets in the process.

First of all, to avoid pervasive U.S. financial surveillance, I highly recommend offshore investments and relationships:

• Place a portion of your assets outside the United States. Yes, you do have to report offshore bank accounts and trusts to the IRS, but you can purchase some regulated contracts, such as insurance policies, in relative privacy (see Marc Sola’s article above for more details on such a tax-deferred policy).
• Transfer funds outside the U.S. dollar. It’s still possible to legally transfer funds from the United States, into alternative currencies. The dollar has appreciated sharply in recent months, so it’s an ideal time to start diversifying your cash into greater currencies (you’ll get more “bang for buck,” because of the stronger dollar).
• Use attorney-client privilege. Many countries (including EU members) now require attorneys to report “suspicious transactions” to their domestic authorities. Keeping this requirement in mind, you can achieve considerable privacy by conducting business and financial transactions through an attorney. However, in virtually all jurisdictions, attorneys can’t provide advice that would result in or encourage the commission of a crime.
• Evaluate non-reportable offshore investments. Depending on where you live, certain offshore relationships or assets may not be legally reportable. U.S. persons need not report assets held in a non-U.S. safety deposit box, where no foreign financial institution has legal custody of those assets. Other non-reportable offshore investments for U.S. persons include real estate, vehicles and other assets not considered a “foreign bank, investment or other financial account.”
• Use cash. Despite the global crackdown on cash, you can still achieve significant privacy by using cash instead of debit/credit cards or checks. This is particularly true outside the United States. However, cash transactions (over US$10,000) are subject to substantial surveillance. An increasing number of countries also require that you declare substantial sums of cash when crossing domestic frontiers.

This simple solution allows you to be fully compliant while investing without restrictions due to citizenship. It allows you to enjoy full tax deferral under U.S. law, rock solid asset protection, and it serves as a first-class estate planning tool.

It’s known as a foreign variable annuity.

I know that “variable annuity” sounds boring, but it’s one of the most powerful investment tools used by wealthy individuals in their international portfolios.

An annuity allows you to invest freely, shield your assets and even allow your wealth to build up tax-deferred until you withdraw assets.

Plus, your foreign annuity will protect your wealth from the next bank failure in the United States. Not to mention, it gives you the leverage you need to have your money managed by some of the best asset managers and banks in the world.

Today we are only interested in energy. To be precise, Origin Energy [ASX:ORG] and the impact on one of our Australian Small Cap Investigator stock picks.

Let’s go through what this deal isn’t. ConocoPhillips [NYSE:COP] has not offered to buy a part or whole of Origin Energy, so this is not the same as the offer by BG Group [LON:BG] to buy the company outright for $15.50 per share.

What is the deal? It is a deal which blows open the doors to the Australian energy market.

Origin Chairman Grant Kevin McCann said “Origin is delighted to welcome ConocoPhillips, one of the world’s largest integrated energy companies, as its partner in monetizing our extensive CSG reserves and resources.”

Show Me The Energy Money
In other words, Kevin McCann borrowed the phrase “Show me the money” from the film Jerry Maguire. ConocoPhillips was happy to comply. The extent of this deal shows us who was in the driving seat.

[Source: Origin Energy]

Origin will receive AUD$6 billion in cash in return for giving ConocoPhillips a 50% stake in its Coal Seam Gas (CSG) assets. That’s AUD$6 billion just for turning up. Additionally ConocoPhillips will cover Origin’s costs to develop the project of AUD$1.15 billion. Further payments are due when production begins.

On top of that, Origin gets to book 50% of the revenues and profits from the joint venture.

What is special about CSG, also known as Coal Bed Methane (CBM)?

In some respects nothing. In some respects something. Most importantly, it is a proven and probable resource and ConocoPhillips wants it.

We won’t go into the specifics here on CSG. We will say that for usage it can be used in exactly the same way as natural gas meaning there is little infrastructure development required at the point of distribution. Also, CSG does have a number of benefits over LNG (Liquefied Natural Gas) in that it can be easier to drill and cheaper to process as it has less impurities.

Sometimes there is the tendency to make things look too complicated. The bare facts in this case is that Origin have something that ConocoPhillips want a part of and they are prepared to pay more for it than BG Group.

US Debt Increases By 50%
Speaking of government bail outs (which we weren’t, but anyway) the long anticipated move by the US government to fully finance and support Fannie Mae and Freddie Mac appears to have finally come to pass this morning.

The US government has in all but name nationalized both institutions. It effectively means that the US government owns nearly half of all outstanding mortgages in the United States and follows on the heels of news last week that the UK government was offering “free” mortgages to first home buyers.

As Moody’s chief economist points out “the federal government has now become the nation’s mortgage lender.”

How much money are we talking about here? It is, wait for it, USD$5 trillion, that’s USD$5,000,000,000,000 in home loans. That is one big exposure to the mortgage markets that the government is burdening its taxpayers with.

But sleep easily, because US Treasury Secretary Hank Paulson thinks that the government may only have to cough up a maximum of USD$200 billiion to cover any debt shortfalls. That’s USD$200,000,000,000 - which still looks like a whopping big number to us.

Let’s just put these numbers in perspective. Over the past few years you have all read about the massive debt hole that the US government is in, how it is unsustainable, how the country is living beyond its means. The current US national debt (although by the time you receive this email it will be higher) stands at USD$9,674,134,313,303 so in one fell swoop you could argue that the national debt has been increased by over 50% to just under USD$15 trillion.