It is becoming more and more apparent that today’s breed of politicians is good at only one thing, getting elected.

As folks that have never run a business, never had to tell an employee to clean off his desk or risk any of their own money, our lawmakers should quit pretending like they know what they are doing and let the hard stuff up to the professionals.

Let ‘em outsource the legislation, I say.

Don’t get me wrong, I love my home state of Pennsylvania, but it is run by a gang of numbskulls. By mid-November they have run out of important things to do and are now searching for ways to keep busy.

The state’s auditor general, Jack Wagner, has decided he no longer wants school districts or local municipalities to have the right to hedge their books.

He calls the notion of entering swaps, “…gambling with public money.”

The so-called financial expert backs up his statement with the fact that a local school district had to spend $12 million in “excessive fees and other charges” to unravel swap contracts it had with Morgan Stanley and JP Morgan.

Wagner failed to mention the many, many times the same contracts saved school districts millions of dollars.

If you’re not familiar with the world of swaps, it is a pretty simple concept that allows you to trade something like variable interest rates for fixed rates. Or, in the case of my graduate finance tests, orange juice futures for pork belly futures.

Ask any finance professional worth his salt and he will tell you he’ll take a fixed interest rate over a variable rate any day. A fixed rate is predictable and can be planned for. A variable rate, on the other hand, can do just about anything.

But when school districts or local municipalities offer bonds, they often have to issue them with variable rates, especially when rates are low.

To protect themselves in case interest rates make a drastic turn in the wrong direction, they call in swap dealers like Morgan Stanley or JP Morgan. With a few strokes of a pen, they can lock in a fixed rate.

Unfortunately, as has been the case across the world, swap contracts that made sense in an environment with climbing interest rates no longer make sense now that investors have access to darn-near-free money.

The schools and towns that were acting responsibly by entering basic swaps are now forced to make larger payouts because their hedges went the wrong way.

And what’s a better way for a wannabe politician to get some votes? Make it look like he’s saving poor, old taxpayers from evil Wall Street financiers.

Idiots.

It is this kind of action that forces CFOs to enter the world of creative accounting. Outside of the commodities industry, I dare you to dig through any company’s 10-K and find the word hedge, swap or derivative.

You’ll be hard-pressed to find it, yet any big firm is most certainly using swaps for protection.

But don’t tell their shareholders. If just one contract goes against them, shareholders tend to revolt, telling executives to stop “gambling” with their money.

Knowing that swaps, futures and option contracts are fantastic way to create predictability and price limits, CFOs continue to enter agreements. They simply call them something else.

Ever seen that line on the balance sheet that says “other”?

That’s your swap.

If a politician, elected or appointed, thinks forcing schools and municipalities out of swap contracts will save taxpayers any money, they are either ignorant fools or lying to you.

*** Speaking of ignorant, Alaska’s Department of Revenue is ready to make a blunder of its own. The organization has an unfunded pension balance of $7.5 billion, a common problem these days.

What’s the 49th state’s solution? It wants to issue a $2 billion bond and invest the proceeds in the equities market. If things go its way and the state earns the market average of 8% annual gains on its equities, it could rake in an extra $40 million annually.

But talk about a gamble.

Right now, the state’s bonds are selling with rates just above 6%. But the department says it won’t consider a bond issue unless the rates are below 5.5%. I sure hope not.

Imagine if you or I walked into a bank these days and said give me ten grand. I’ll pay you back with my stock-market gains.

Unless you got out of a $100,000 car and live in a $2 million mansion, you’d be laughed out of the joint.

Now, it’s easy to argue Alaska has more than enough collateral to back up the bonds. I mean it’s not going bankrupt anytime soon. But the chances of a loss on this “intrastate carry trade” are far too high.

Trying to time this top-heavy market is nearly impossible, especially when it will take nearly two months to get the bond sale lined up.

How’s this for the ultimate proof this is a horrific idea? If the state had made the move lawmakers first approved it just months before last fall’s market collapse, it would have lost hundreds of millions of dollars and would have remained on the hook for a couple of billion bucks.

With investing logic like this, it’s no wonder tax rates are soaring across the country. When it comes to investing, our leaders are clueless.

I’d rather let Madoff invest my money. At least he’d have fun with it.

The 64-year-old Mack will remain as Morgan’s Chairman when Gorman, 51, takes over the CEO post on January 1, the company said.

Mack came under criticism as he scaled back Morgan’s risk profile even as rivals like Goldman Sachs Group Inc. (NYSE: GS) regained momentum as the worst economic downturn since World War II began to wane, according to the Associated Press.

“Gorman has really earned his stripes,” Anton Schutz, president of Mendon Capital Advisors Corp., which owns Morgan Stanley shares, toldReuters. “He did a great job at Merrill, he’s doing a good job at Morgan Stanley, and the timing for a change seems to be good, because we’ve made it through the worst of the crisis.”

Before joining Morgan in 2006, Gorman had held a series of positions atMerrill Lynch & Co. Inc., including leading its global private client business from 2001 to 2005.

Morgan received $25 billion in federal funds under the Troubled Asset Relief Program (TARP) last year, and has since repaid the entire amount to the U.S. government.

Source: Morgan Stanley CEO Steps Down, Will Remain As Chairman

The Dow was up 120 points yesterday. Now, we’re beating the bounce of 1930. The post-crash bounce in 1930 lasted 5 months. Ours began on March 9 th… so it is now in its sixth month.

And like 1930, people are coming to believe that recession is almost over… and happy times are here again.

Heck, we’re sure the trouble is behind us now; 53 economists said so!

Aug. 12 (Bloomberg) — Recovery from the worst recession since the 1930s has begun as President Barack Obama’s fiscal stimulus — derided as insufficient and budget-busting months ago — takes effect, a survey of economists indicated.

“The economy will expand 2 percent or more in four straight quarters through June, the first such streak in more than four years, according to the median of 53 forecasts in the monthly Bloomberg News survey. Analysts lifted their estimate for the third quarter by 1.2 percentage points compared with July, the biggest such boost in surveys dating from May 2003.

“We’ve averted the worst, and there are clear signs the stimulus is working,” said Kenneth Goldstein, an economist at the Conference Board in New York.

“A federal program to replace older vehicles with more fuel-efficient ones helped boost sales of cars and light trucks last month to the highest level since September, according to industry figures. Automakers, operating with lean inventories, will resume output to meet the jump in demand.

“Cash-for-clunkers was the icing on the cake,” said David Greenlaw, chief fixed-income economist at Morgan Stanley in New York. “It’s well-timed stimulus syncing with cyclical forces leading to a ramping up of production.”

Yes, now the economy is firing on all cylinders… or just about. Yep. No doubt about it. Still, there are some nagging doubts. The latest figures show foreclosures still increasing – up 7% in July from a year before. And house prices are still going down. And unemployment is still going up. And consumer prices are falling… indicating a Japan-like deflation. And business profits are falling. And consumers are cutting back. But except for that – housing, jobs, sales, profits and deflation – everything is working out beautifully.

Now that we mention it, all the indicators of real economic activity are down.

So, the feds aren’t taking any chances. Yesterday came news that the Fed would continue buying bonds at least through October. And they are not likely to raise rates either. The banks can borrow at practically zero interest… and use the money to buy Treasury bonds. The 10-year yields about 3.7%. In effect, they’re lending the money back to the people they got it from… and earning 3.7% for their trouble.

But, take away the stimulus spending… and the stimulating low interest rates… and what have you got? An economy entering a depression.

Oh, there’s the rub, isn’t it? If the feds hand out money so people can buy automobiles, people buy automobiles. If they don’t give out the money, people don’t buy automobiles. If they buy automobiles, of course, it looks like the economy is recovering. But take away the giveaways, and the recovery disappears.

Solution: keep giving away money!

Hold on… something wrong here. If you could generate economic prosperity by giving people money so they could buy things… why not give them money to buy everything? Why just autos? Why not give them money to buy financial advisory services? Ah… now we’re talking!

But let’s keep this serious… well, as serious as we can be when we talk about programs designed by knuckleheads.

So, the feds are encouraging people to buy autos. Set aside the fact that buying too many autos and other things is what got them into trouble…

… if giving people money so they could buy things actually made people prosperous, welfare recipients would be the richest people on the planet. Obviously, it doesn’t work that way. What makes people rich is the ability to earn money… not their ability to get handouts. And remember, too, the feds don’t really have any money to hand out.

They can only get money by taking it from its rightful owners – either in taxation or loans. Or, they can print it up themselves. In any case, the money adds nothing real or extra to the economy. It merely distorts the economy… twists it… misleads it… and makes it a bigger mess than it was already.

*** Here’s another reason housing prices are going down: housing priorities are changing. Baby Boomers are entering a phase in their lives when people typically escape from urban/suburban centers in favour of small towns and rural areas. If this pattern continues, it will mean a big shift of population, say the experts.

Remember, it’s what you do, who you do it with, and where you do it that counts. By the time a person reaches middle age, the first question is usually settled… the second is often in doubt… and the third is actively being considered. That is, few people begin a new career after the age of 50… but it seems like more and more decide they might want to try life with a new partner.

“I can’t imagine it,” said Elizabeth. “It just seems like too big an adjustment. It took me a quarter century to get used to you. I don’t know if I could get used to someone else…

“On the other hand, it might be fun to try… ”

Well, for whatever reason, it seems like people are changing partners – even at a rather advanced stage in life. And as for the where to live – it’s a question on practically every baby boomer’s mind.

“I just got tired of living in the city,” said a man who spent his entire career in Paris. “Just too much hassle. I’d rather visit occasionally than live there.”

Our friend has moved to the country not far from here. He has set up a small woodworking shop in a garage and happily spends his time making chairs and tables. When his house is full of them, he’ll probably have to give them to friends and relatives.

“It’s much nicer living out here than in the city,” says another friend. “And much cheaper. You can buy a whole house for half the cost of an apartment in town… and then you don’t have to pay for parking… you can raise chickens and vegetables… and you can even heat with wood, if you want. You don’t really have to spend much money at all.

“And the quality of life is higher. Small towns are more friendly. They’re prettier… usually. They’re easier. So they’re perfect for people who are retired.

“And here in France, there’s another phenomenon. When people retire, they want to go back to where they came from. Usually, they have a house they inherited from parents or grandparents. So, they leave the apartment in Paris to their children, who are just building their careers. And they retire to the country. It’s not a bad way to live.”

*** We are enjoying our month in the country. Not exactly a vacation… but close. We work in the office from 8AM until lunchtime at about 2PM. Then, we turn our attention to other things. In the summer, that means painting. We’re repainting the billiard room, because Elizabeth decided that the curtains needed to be changed. And then, we’re repainting a farmhouse, top to bottom, before renting it out.

Painting is a fairly relaxing occupation. You can do it while thinking about other things. Rolling the walls or cutting in the corners, some men might think of going hunting… or playing golf. We try to figure out what is going on in the world economy. For these are remarkable times we live in. We see what is happening… pretty much what we expected. But we’re not sure where it leads.

Readers may have noticed a shift in our thinking recently. Well, you can blame latex. As we were painting in the billiard room we began to see that governments are more incompetent than even we had realized. They can’t create inflation on demand. A few months ago, we were preparing for inflation… even hyperinflation. Now… we’re not so sure. The depression and the Chinese vigilantes may hold off inflation… even for years.

Does this mean you should sell your gold? Well… we wouldn’t go that far. Even in the Great Depression gold and gold mining stocks rose in price. And the one and only sure thing is that the world’s monetary system is dangerously unstable. We’d hold gold until it settles down. Just don’t count on getting rich from it.

Source: An Economy Entering a Depression

By 1306 GMT, the pan-European FTSEurofirst 300 <.FTEU3> index of top shares was down 0.4 percent at 884.79 points after trading between 879.97 and 888.23 points.

“Morgan Stanley’s operating loss per share looks on the high side, compared to others in the sector. I think Morgan Stanley’s paying back public aid has distorted results; it is not known if this has been incorporated into analysts’ expectations of the results,” said Heino Ruland, strategist at Ruland Research.

Bank shares took the most off the index after Morgan Stanley reported its third consecutive quarterly loss and Wells Fargo reported rising credit losses.

“The continuing decline in asset quality is a worry, and whilst they are making money in other areas it just goes to show that conditions in the consumer segment are still evidencing headwinds,” said Paul Chesterton, senior sales trader at CMC Markets.

Barclays , BNP Paribas , UBS and Lloyds Banking Group were down 1.5-3.8 percent.

Miners were also heading lower. BHP Billiton fell 2.8 percent after the world’s largest miner reported a 10 percent fall in iron ore output to 27.048 million tonnes after its operations were hit by mining fatalities and flooding in Australia.

Energy stocks were down as crude slipped 1.5 percent. BP , Royal Dutch Shell , Premier Oil and Total were 0.8-2.8 percent weaker.

On the upside, drug makers added most points to the index. GlaxoSmithKline gained 0.3 percent after it beat expectations with its second-quarter earnings and said momentum in the second half would pick up on the back of flu vaccine sales.

Across Europe, the FTSE 100 <.FTSE> index was down 0.3 percent, Germany’s DAX <.GDAXI> was down 0.4 percent, and France’s CAC 40 <.FCHI> was down 0.8 percent.

July 22 (Reuters)

• A parade of bellwether U.S. companies reported disappointing earnings results yesterday (Tuesday) and cut their outlook for the future. Caterpillar Inc. (CAT) reported its first loss since 1992 and cut its projection for the full year by 50%. Pharmaceutical giant Merck & Co, Inc. (MRK) and chemical maker E.I. du Pont de Nemours & Company (DD) said profits fell 57% and 59% respectively, as both cut forecasts for the full year.
• After acquiring Citigroup Inc.’s (C) Smith Barney retail brokerage unit, Morgan Stanley (MS) is considering buying U.S. regional banks in a move to boost the company’s retail brokerage operations, MarketWatch reported, citing an article in the Nikkei newspaper. “We are looking for potential opportunities to buy a bank that has a presence in an important market in the United States,” Morgan Stanley’s Chief Executive Offer John Mack said in an exclusive interview.
• Continuing to reel from the shift of advertising to the internet, the New York Times Co. (NYT) reported a first-quarter loss of $74.5 million, or 52 cents a share, MarketWatch reported. Excluding special items, the company reported a loss of 34 cents a share as first-quarter revenue tumbled 19% to $609 million. The Times, like many newspapers and magazines, is having a difficult time coping with an advertising downturn.
• Computer spies were able to copy and siphon data related to the design and electronics systems of the $300 billion Joint Strike Fighter project, The Wall Street Journal reported yesterday (Tuesday).  The newspaper quoted current and former government officials as saying the intruders have repeatedly breached the Pentagon’s computer networks, making it potentially easier to defend against the plane.  The spies could not access the most sensitive material, which is kept on computers that are not connected to the Internet. Lockheed Martin Corp. (LMT) is the lead contractor on the Defense Department’s costliest weapons program.
• Senior officials at the Federal Deposit Insurance Corp. (FDIC) have privately discussed who might replace Citigroup Inc. (C) Chief Executive Officer Vikram S. Pandit if the embattled banking giant needs additional federal capital infusions, The Financial Times and MarketWatch both reported. The FDIC identified Chief Financial Officer Edward J. “Ned” Kelly III and ex-CFO Gary Crittenden as possible successors. However, the published reports also state that any initiatives to change Citigroup’s top management will be initiated by the U.S. Treasury Department.
• The U.S. Treasury Department’s plan to excise $1 billion of so-called “toxic” assets from the balance sheets of U.S. banks is vulnerable to all types of abuse and fraud and needs the protection of tough conflict-of-interest rules, government bailout watchdog Neil Barofsky said in a report released yesterday (Tuesday). Barofsky, the special inspector general for the $700 billion Troubled Asset Relief Program (TARP), said subsidies for public-private investment partnerships (PPIP) to buy assets could expose taxpayers to higher losses – without offering accompanying increases in the profit opportunities this program is supposed to create, Reuters reported. During the rest of this week, the Treasury Department is accepting applications from asset managers to manage public-private investment funds to buy the hard-to-value, illiquid securities that are backed by troubled mortgages still owned by banks.
• In a report released yesterday (Tuesday), The International Monetary Fund (IMF) says banks and other financial institutions face aggregate losses of $4.1 trillion in the value of their holdings because of a global financial crisis that is “likely to be deep and long lasting.” In that Global Financial Stability Report – which has become a closely watched barometer of the severity of the crisis – the IMF estimated that financial institutions around the world will have to write down about $2.7 trillion worth of loans and securities that originated in the U.S. financial markets between 2007 and 2010. That estimate is up from $2.2 trillion in the fund’s report in January, and is way up from its October estimate of $1.4 trillion, according to The New York Times. Conditions have especially worsened in the emerging markets – and particularly in Europe – where banks face more write-downs and may require fresh equity, even as companies attempt to refinance existing debt. The IMF said banks will endure two-thirds of the write-downs, but noted that pension funds and insurance companies also face steep losses.
• The Reserve Bank of India yesterday (Tuesday) lowered its key borrowing rate by 25 basis points to 3.25% and its lending rate by 25 basis points to 4.75%.”The further policy rate cuts affected as part of this policy should be a definite signal for banks to reduce lending rates,” RBI Governor Duvvuri Subbarao said at a press briefing.

Source: Global Investment News Briefs Wednesday April 22, 2009

And… action.

Fourth-quarter earnings season is in full swing. Many investors seem to have forgotten over the past few weeks, but American financials still look… umn, bad. Here’s the quick and dirty:

Citigroup, once the world’s second largest bank, is getting dismantled. The pieces are going to the highest bidder, whether the buyer can afford it or not. The mega bank announced yesterday that it has jettisoned Smith Barney into the arthritic hands of Morgan Stanley.

Citi will still hold a 49% stake in the brokerage service. And the Citi/Smith Barney/Morgan Stanley venture will create the world’s biggest brokerage firm — comprised of 20,000 brokers and have over $1.7 trillion under management — but for their sake, we hope they conjure up a catchier brand name.

Still, today, Citi is planning further bust-a-moves. A New York Times article claims the company will soon attempt to split itself in two, separating “core” and “noncore” (aka profitable and notprofitable) segments of the business. Robert Rubin, who among other things helped create this “supermarket” model for Citi, resigned last week. CEO Vikram Pandit will likely follow soon.

Why the mess? Despite selling off its assets and getting over $45 billion from the government’s handout program, Citi is still expected to post a $10 billion loss for the fourth quarter… possibly more.

But the trouble isn’t relegated to Brooks Bros. snoots in New York. HSBC, Europe’s biggest bank, will need to cut its dividend in half and raise $30 billion to stay afloat, analysts at Morgan Stanley predicted today. According to Morgan’s report, profits at HSBC will decline “sharply” this year and not recover until 2011.

HSBC stock fell over 8% in European trading.

German giant Deutsche Bank braced investors today for a $6.3 billion fourth-quarter loss. The bank said it will likely turn in a loss of $5.1 billion for all of 2008.

Even the British bank Barclays, which has been on a buying spree of late, will slash another 2,100 jobs. In part due to its acquisition of a bankrupt Lehman Bros., Barclays said today it will fire about 7% of all its bankers and back-office workers.

The International Monetary Fund (IMF) is even asking for emergency loans, for crissakes.

“The world economic outlook for 2009 will not be good,” IMF Managing Director Dominique Strauss-Kahn warned. The IMF is expected to release its global growth projections for 2009 this week, and Kahn suggested yesterday they won’t be pretty. He predicted a “significant” increase in total global financial losses and write-downs — which have already crested $1.4 trillion.

To combat this worsened forecast, Strauss-Kahn is asking countries of the world to “find an extra $150 billion” to cushion the hit on more impoverished and susceptible economies. The IMF wrote checks totaling $41 billion in November, the biggest monthly bailout tab in its history. If you happen to “find” a couple billion in your couch cushions, let Dominique know.

“Despite a depression unfolding across the globe,” insists Chris Mayer, “emerging economies will still be areas of strength. ‘Emerging economies’ reliance on America is often exaggerated,’ writes The Economist over the weekend. It points to a global share of exports around 20% — a number that hasn’t budged much in a decade. Nonetheless, the longer-term trend is clear: Most of the world’s growth is coming from emerging markets. See this next chart, from The Economist:

“I think this is a trend that will continue. Much of the fast action will happen overseas. Companies without exposure to these economies will simply not grow as fast as those with exposure. All things being equal, I’d rather own a company that makes something Asia needs than one that only caters to North America or Western Europe.

“Also in the emerging market camp’s favor: relatively low debt levels and higher savings rates than the U.S. Not all of them, of course. Some, like Hungary and Estonia and Turkey, have huge debts. But Asia generally shines in this department.”

Back in I.O.U.S.A., we’ve received even more assurance that taxpayer money is in good hands. Tim Geithner, the incoming Treasury secretary and thus head of the IRS, owed over $43,000 in back taxes.

Evidently, he was under the impression working for the IMF makes contributing to Social Security and Medicare an optional affair. What a mess. These guys aren’t even in office yet.

“As America’s economic situation worsens,” notes our small-cap sleuth Jim Nelson, “payday loan shops are cashing in.”

“Many view payday loan shops as corrupt, greedy modern-day loan sharks. In some instances, that’s simply not the case. These loan companies are providing a needed service. No one likes to hear of families being turned out of their houses because of missed mortgage payments. Cash advance businesses offer a solution to these millions of families.

“Instead of eviction, one solution for a working family is to take out a short-term seven- or 14-day payday loan. Obviously, this is the last option. But faced with foreclosure, it’s becoming a more frequently used solution for many who never thought they’d be in that position.

“Many households are taking out payday loans to fund unexpected expenses, too. With more families living paycheck to paycheck than ever before, even paying for the basics is becoming difficult.”

Jim’s found a small company that provides these services, “with a guaranteed flood of business around the corner.” He’s talking about tax refund advances… what should be a frighteningly popular option this year. If you’d like to learn more, check out PSF.

In a similar fold, have you seen this commercial yet?

Hyundai has it bad, but the American consumer has it worse… so the ad execs for the South Korean automaker came up with this clever scheme: Buy a Hyundai today, and if you “lose your income” over the next year, you can bring it back. They call it the “Assurance Program.”

Deflation… bring it on.

In the stock market, major indexes snoozed all day yesterday. The old bats are resting up before the bulk of fourth-quarter earnings announcements hit the fan. The Dow lost a little bit, 0.3%. The S&P 500 finished flat, and the Nasdaq edged up 0.5%. Whatever.

“The U.S. stock market continues to meander in sideways trading action,” notes Wayne Burritt, with some bigger-picture perspective.

“As you can see from this daily chart of the S&P 500 — a good surrogate for the broader U.S. stock market — price action over the last week has unfolded as I anticipated : The market is stuck in a near-term trading range.

“In fact, after hitting an upside range limit of 944 last week, the S&P got busy retreating to the downside. It’s now poised to retest intermediate lows in the 857 area. If that breaks, a move to the lower bound of its intermediate term range — 741 on the S&P — is certainly in the cards.

Now, while that’s surely not the uptrend we’re all looking for, don’t forget that the market has shaped this trading range in spite of simply terrible fundamental news. And that shows uncommonly strong market character, a factor we didn’t see much of last year.

“So where do we go from here? Like a star athlete that’s hit a slump, the stock market is trying its best to wage war and move to the upside. Until we get some positive fundamental data points — especially on the housing front — it’s going to have a tough time breaking out to the upside. And that means that sideways chop will likely hang around for a while.”

This morning, the Dow opened down 150 points, largely because of this:

Retail sales plunged 2.7% from November to December, the Commerce Dept. said today. Factor out auto sales, and it’s a 3.1% fall — the biggest drop in 17 years history, and twice as bad as the Street anticipated.

Year over year retail fell 9.8% — another record plunge.

For all of 2008, retail sales fell 0.1%, the first full year decline since the Commerce Dept. started keeping track in ’92. Retail sales have fallen six months in a row, the longest losing streak on the books.

Yet that little green slip of paper we call a dollar continues to defy gravity. Despite all the gloom and doom sputtering from every corner of the financial press, the dollar index is up another half a point this morning, to 84.5.

Yesterday, we read a review of our book The Demise of the Dollar on the sycophantic syndication site Seeking Alpha, in which the reviewer called comments like the above “anti-dollar.” How, we wanted to ask, can you be against a currency? He then accused us of “hating” the Federal Reserve. How can you hate a bank? Some people, we’ve learned after 16 years in this business, are just idiots.

Gold, which according to the above reviewer we “love,” remains suppressed. The spot price has been stuck at $820 over the last 36 hours.

But oil is bucking the trend. Even though the dollar is still rising, crude has inched back up to $37 a barrel. You can thank OPEC… the cartel is saber rattling again today, and for some reason, the market has decided to listen. We’ve heard a couple warnings from Saudi Arabia lately, all suggesting the country is ready and willing to cut production more than OPEC decided at its last meeting, in December. Leaders from Saudi and Venezuela are reiterating the same today.

Also attributing to the rising cost of energy, it looks like the Russian gas conflict with Ukraine might not truly be over. The two nations signed a deal and made nice in front of the cameras, but the spigots are still running dry. Several regions of the EU are still without Russian gas, now for the seventh day in a row.

Russia says the gas is flowing but the Ukraine won’t open its network of pipelines. The Ukraine says there is no gas to be distributed… grab a beer, kick back and watch from a distance… this one isn’t over yet.

But maybe not that far a distance? Russian President Medvedev suggested yesterday that Ukraine was “dancing” to Washington’s music. The plot thickens…

“I have been doing business,” writes a reader, “in Eastern Europe since 1991 — sales of oil and gas equipment, projects, etc. Some of my customers are intimately knowledgeable (with the carnal type of knowledge) of the purchase of Russian/Ukrainian gas.

“Here in our Western system, when the gas product is passed from one company to the next, we use a protocol known as a ‘custody transfer.’ Gas is measured, often by both sides, using specially approved and calibrated flow measurement devices. In addition, the gas is also analyzed with a gas chromatograph to establish the quality of the gas. Here, we are more interested in buying Btu (or gigajoules) than simply a volume of gas. Producers are paid for what they produce and discounted based on the quality of the gas they sell. High-quality gas commands a higher price that low-quality gas…

“In the Russian ‘system’ — the seller tells you how much you bought, and, further, how much you will pay for the gas that (supposedly) arrives into your country.

“So imagine the scenario: Russia sells gas to Ukraine — Ukraine transports the gas to Western Europe and marks up the product prior to sales. The gas routing passes through several former Warsaw Pact countries or is fed via feeder lines into nearby countries — Romania, Hungary, Bulgaria, etc.

“Imagine further that gas sold to these feeder-line countries have absolutely no say on custody transfer or absolute knowledge of the volume of gas that they are actually receiving. Ukraine will not put custody transfer flow measurement in the cross-border locations. Nor will it allow customer countries to measure the incoming gas and honor the amounts. ‘You pay for what we say you get’ is the approach. ‘And if you don’t like it, get your gas elsewhere!”

“The only likely reason for this insistence on the status quo is the ‘shrinkage’ that is actually occurring inside Ukraine. Who knows what corrupt officials are making a profit off the ‘stolen gas’ — that Romania et al. are paying for?

“So it may be a mistake to accuse Mr. Putin of being the cause of the problem . X amount of gas crosses the Ukrainian border on the Russian side and X minus Y (in-country shrinkage) crosses the border on the other side…

“Of course, this shouldn’t matter to Mr. Putin — if the gas is actually bought and paid for by the Ukrainians prior to being marked up and sold to the European customers. But it certainly matters to the countries that are being held hostage — paying world prices for gas while only getting a partial delivery on their investment… and not being able to do anything about it.”

The 5: Thanks for the insight.

Source:Credit Crisis Sequel, Global Bank Bailout, Emerging Markets Still a Buy?, Gas Wars and More!

U.S. stocks tumbled on Wednesday as investors feared more credit losses in the banking sector, while bleak December retail sales compounded worries about the toll on consumers from the deepening recession.

Citigroup , down more than 15 percent to $4.98, was a standout drag on the financial sector, while shares of JPMorgan and Bank of America fell 5 percent and 3.5 percent respectively.

The fall in Citigroup, a Dow component, followed a deal by the embattled bank to sell a controlling stake in its crown jewel unit, the Smith Barney retail brokerage, to Morgan Stanley for $2.7 billion.

Analysts reckon the Smith Barney sale was a precursor to a break-up of Citigroup and that the bank must be urgently seeking to replenish capital due to mounting losses.

“You’d think the news on banks is baked in, but there’s still a lot of headwinds,” said Rich Parker, head of trading, Stanford Group, in New York.

“The write-downs are starting to really scare people outside of the banking area as well. Is there a balance sheet out there that you can really trust? By all indications, it seems the recession is going to be a historically long one.”

The Dow Jones industrial average slid 277.01 points, or 3.28 percent, to 8,171.55. The Standard & Poor’s 500 Index tumbled 29.99 points, or 3.44 percent, to 841.80. The Nasdaq Composite Index dropped 48.07 points, or 3.11 percent, to 1,498.39.

The sell-off marked another hindrance to the market’s push to recover from its November bear market low. The benchmark S&P 500 began 2009 up more than 20 percent from that low but is now up about 11.5 percent. The S&P financial index fell nearly 6 percent.

Sales at U.S. retailers fell 2.7 percent in December, government data showed on Wednesday, as a deteriorating economic climate forced consumers to cut back on spending during the key holiday period.

Consumer spending accounts for about two-thirds of U.S. economic activity and as such is a key pillar of corporate profits. The S&P retail index declined 3.7 percent.

Investors also sold off shares of economic bellwethers including big manufacturer Caterpillar Inc , down 6 percent. On Nasdaq, shares of iPhone maker Apple Inc led the slide, falling 2.4 percent to $85.64.

Even more unnerving to investors was a forecast by Morgan Stanley analysts that HSBC , Europe’s biggest bank, is likely to halve its dividend and may need to raise up to $30 billion of capital.

Additionally, Germany’s Deutsche Bank posted a loss of about $6.4 billion for the last three months of 2008, hitting markets in Europe.

JPMorgan is due to post quarterly results on Thursday after it moved up its reporting date, followed by Citigroup on Friday after it also moved up its results date.

Thomson Reuters data show expectations for JPMorgan have crumbled: A month ago it was expected to earn 27 cents per share in the fourth quarter. Two days ago that view was down to 5 cents. Before the bell, the view was a penny before special items.

On Tuesday, Federal Reserve Chairman Ben Bernanke said more steps were needed to stabilize banks, reviving the idea of authorities sopping up toxic assets from banks’ books.

NEW YORK, Jan 14 (Reuters)

The deal’s no surprise to Wall Street, since Citigroup has chalked up $20 billion in losses in the last year and Morgan Stanley needs to leverage its brokerage business by increasing its scale. But recent pressures on both companies from the Treasury and Federal Reserve may also have led to pulling the trigger.

“There’s been a lot of pressure for Citi to monetize some of their more valuable assets, and Smith Barney is certainly one,” Michael Nix, a money manager at Greenwood Capital Associates, told Bloomberg News. “There’s also been a lot of pressure for Morgan Stanley to look at how they can better lever their business units.”

Morgan Stanley is set to pay $2-3 billion in cash for a majority stake in Citigroup’s brokerage unit, Bloomberg reported. Morgan Stanley would also have the option to buy the remaining 49% of Smith Barney over the next three to five years.

But the deal could open Morgan Stanley to criticism that the bank is spending taxpayers’ money on acquisitions rather than kickstarting the economy through lending.  Morgan Stanley and Citi were among several banks to receive large government investments.

As an ongoing Money Morning investigation has demonstrated, billions in U.S. bank rescue funds are financing buyouts worldwide – instead of lending at home. Some of those buyout deals are being done in markets as far away as China. Meanwhile, credit remains tight here in the U.S. market, a situation that could be alleviated if only the banks made the bailout money available to consumers in the form of loans.

But few believe the authorities will raise many objections since the move will serve to strengthen both Morgan Stanley and Citigroup’s financial position, as well as increase their ability to pay back government loans in the future.

Although government officials have been badgering banks to use the federal funds to boost lending, they will probably back the deal since it gives Citi $2.7 billion in much needed capital while strengthening Morgan Stanley’s balance sheet with billions in assets.

For its part, ceding control of Smith Barney in exchange for cash and a sizeable capital gain underlines Citi’s need to bolster its balance sheet. Citi will record a capital gain of up to $6 billion on the difference between the valuation of Smith Barney on its books and the value of its share of the joint venture.

Putting Smith Barney in play represents a change of direction for Vikram Pandit, the bank’s chief executive, only weeks after he pledged that Smith Barney would remain part of Citigroup.  And Pandit is under pressure from the Treasury  and Fed to sell assets and improve capital reserves, according to the Financial Times.

But selling the unit comes at a steep price to Citi’s bottom line. Smith Barney will make $1 billion next year, according to a forecast by Barclays Capital. Citi’s North American global wealth management division, which houses the brokerage, contributed 20% of Citi’s net profit in 2007, up from 6% the previous year, showcasing its ability to perform even in tough times.

On the other hand, Morgan Stanley needs more brokers to turn its wealth management business into a bigger profit engine. The Citi deal would take care of that in one fell swoop, adding more than 15,500 brokers to its current base of 8,000. Brokerage businesses thrive on size as their technology costs can be spread over a larger number of brokers.

The move comes after Morgan Stanley’s recent conversion from an investment bank to a bank holding company regulated by the Fed, limiting its ability to take leveraged bets in its trading businesses. But rather than providing checking accounts to ordinary bank customers, the company will be able to focus more on wealthier individuals, with portfolios of stocks and bonds.

Meanwhile, President-elect Barack Obama made clear that there will be strict controls on the second half of the $700 billion Troubled Asset Relief Program, the government bailout fund originally designed to purchase assets and equity from financial institutions in order to strengthen the financial sector.

“Let’s lay out very specifically some of the things that we are going to do with the next $350 billion of money,” Obama said on the ABC News program, “This Week.” “And I think that we can regain the confidence of both Congress and the American people that this is not just money that is being given to banks without any strings attached and nobody knows what happens, but rather that it is targeted very specifically at getting credit flowing again to businesses and families.”

Source: Fed Pressure Factors into Morgan Stanley/Citigroup Venture

The dollar fell anew against the euro and yen while yields on U.S. and European government debt traded at or near historic lows on Wednesday, a day after the bold credit easing by the Federal Reserve to combat a worsening recession.

Oil prices dropped as much as $3 a barrel after dealers said a record supply cut by the Organization of Petroleum Exporting Countries would not be enough to counter slumping energy demand brought on by the global economic downturn.

Equity markets on either side of the Atlantic slid as the initial enthusiasm over the Fed’s surprisingly aggressive interest rate cut on Tuesday gave way to weak financial results at key banks and European data reinforced a dismal outlook.

Despite yields already at historic lows, investors piled into debt. Short-term government bonds still offer a safe-haven for investors fearful that a deepening recession will lead to further losses in other assets.

The yield on 30-year U.S. government bonds led a rally in the United States, touching a series of record lows to yield as little as 2.58 percent. Yields move in the opposite direction of bond prices.

“We are trading in no man’s land and expect this will continue into year-end,” said Thomas di Galoma, head of government trading at Jefferies & Co. in New York.

The benchmark 10-year U.S. Treasury note was up 36/32 in price to yield 2.14 percent.

Two-year German government bond yields hit their lowest level since the euro zone was created, with the two-year Schatz hitting 1.842 percent , according to Reuters data.

It was the lowest level since the rate-sensitive Schatz was launched in 1991.

The Fed’s surprisedly large cut further eroded the U.S. currency’s appeal against the euro, which has gained a staggering 11 percent so far during the month.

The dollar hit a fresh 2-1/2 month low versus the euro and fell towards a recent 13-year low against the yen, in a plunge that stoked speculation Japanese authorities may intervene to rein in its climb, which is hurting the nation’s exporters.

“The underlying story in the FX market remains yield. The fact that the Fed made this major policy move yesterday really changed the balance of power towards the euro for the time being,” said Boris Schlossberg, director of currency research at GFT Forex in New York.

The dollar fell against a basket of major currencies, with the U.S. Dollar Index off 1.48 percent at 79.011. Against the yen, the dollar fell 1.21 percent at 87.85.

The euro rose 1.65 percent at $1.4331.

U.S. and European stocks fell. Morgan Stanley shares slid after reporting a worse-than-expected $2.2 billion quarterly loss as the credit crisis caused more write-downs.

BNP Paribas revealed an 11-month loss at its investment banking unit, hit by exposure to an alleged fraud by U.S. financier Bernard Madoff.

“Weaker company data are back in focus,” said Heinz-Gerd Sonnenschein, equity strategist at Postbank in Bonn, Germany.

“The news about BNP is the main trigger regarding European banks, while Morgan Stanley’s results only seem to seem to have a marginal impact,” he added.

Apple Inc was a major weight on the Nasdaq after the iPod maker said Chief Executive Steve Jobs will not deliver the keynote address at the Macworld trade show next month, reviving concern about his health.

Apple’s shares tumbled about 7 percent.

Sal Arnuk, co-manager of trading at Themis Trading in Chatham, New Jersey, said investors were initially enthused after the Fed’s moves on Tuesday made it clear it would do whatever it takes to get the U.S. economy back on track.

“This morning we awaken with a hangover and the realization of how many bullets do they have left?” Arnuk said.

Before 1 p.m., the Dow Jones industrial average was off 41.50 points, or 0.47 percent, at 8,882.64. The Standard & Poor’s 500 Index was down 3.55 points, or 0.39 percent, at 909.63. The Nasdaq Composite Index was down 6.67 points, or 0.42 percent, at 1,583.22.

The FTSEurofirst 300 index of top European shares closed down 0.76 percent at 828.53 points.

OPEC announced an agreement to cut 2.2 million barrels per day of output starting Jan. 1 — the biggest single reduction on record — adding to previous cuts of 2 million barrels since September.

U.S. light sweet crude oil fell $2.36 percent to $41.24 a barrel.

Spot gold prices rose $8.00 to $864.70 an ounce.

Asian stocks rose overnight, supported by sectors sensitive to interest rates in anticipation regional policy-makers will take more aggressive steps to support growth after the Federal Reserve’s easing on Tuesday.

The MSCI index of Asian-Pacific stocks outside Japan rose 2.3 percent to the highest since Nov. 11. But Japan’s Nikkei share averagE shed early gains to end down 0.5 percent as the yen’s strength walloped exporters.

Herbert Lash
NEW YORK, Dec 17 (Reuters)

It’s also expected to outline cost cutting measures that could include laying off employees, suspending plant operations, delaying the opening of new plants, and cutting the budget for research and development.

According to several Japanese media outlets, Toyota plans to eliminate bonuses for its executives and is expected to post a second-half loss.

One analyst believes the company’s dividend also could be on the chopping block.

“We anticipate that even Toyota could see its post-dividend cash flow turn negative should it keep its dividends at 140 yen,” Morgan Stanley (MS) analyst Noriaki Hirakata wrote in a report. “Thus, in this perfect storm, we expect the firm to cut its dividend to 100 yen per share for this business year.”

That’s a gigantic step backwards from last year, when Toyota took the crown from General Motors Corp. (GM) as world’s largest automaker by selling 9.37 million cars worldwide.

But like all automakers – and nearly every major industry – Toyota has been crippled by a worldwide dearth in demand, brought on by a whirlwind of job losses, devalued property, lack of credit and falling stock markets.

From January to October this year, Toyota sold 7.74 million vehicles. And during its fiscal first half – six months ended September 30 – net revenues fell 6.3% compared to the same period last year.

Year-to-date, Toyota’s New York-listed ADR shares have fallen about 38%, still much better than GM and Ford Motor Co.’s (F) respective stock declines of 83% and 53%. But recently, Toyota’s ADR shares have been moving forward in hopes that the U.S. government will bailout Detroit’s Big Three – GM, Ford and Chrysler LLC – because that would shore up the auto industry’s underpinnings: Dealerships and parts and supply manufacturers.

The United States is also the largest market for most foreign automakers. Allowing one or all of the Big Three to go under would add millions to the running unemployment numbers and deepen the recession, making the U.S. market less likely to buy their cars.

Source: Toyota to Slash 2009 Sales Outlook, Cut Costs