As financial markets opened Monday, it's looking like global financial markets, and economies, are in for a prolonged period of pain and suffering. Asian equity markets suffered sharp sell-offs that carried over to Europe and the U.S. despite passage of the US rescue plan and steps by European governments and central bankers to rescue failing financial institutions, reassure bank deposit holders by increasing deposit insurance guarantees and announcing their intention to address systemic risk, both domestically and internationally.

Stocks initially rallied in Europe and the US early Tuesday but then reversed course. The Federal Reserve early today announced that it would step in to calm and reassure buyers of commercial paper by acting as a buyer of last resort. The Fed is going to create a commercial paper purchase program outside the rescue/bailout plan approved by the US Congress on Friday.

Further boosting liquidity, a globally coordinated round of interest rate cuts looks like a certainty.

As mentioned in another context in today's Global Investor issue, Australia's central bank cut its key short term interest rate benchmark 100 basis points-- a full percentage point, to 6%, the largest cut since 1992.

Aussie shares, and the Aussie dollar, rose as a result. Countries, such as Australia's and Canada's, with a heavy natural resource export component, and their currencies and stock markets have taken a particularly severe battering as a result of the US-led financial system collapse.

This may have gone too far, too quickly so I'm looking closely at some potential trades in G3 Global Investor to bet on a reversion to the main in that currency against certain cross currencies.

Investors appear to have little faith that even coordinated central bank and government actions can avert a global recession. As reported in Monday's Flash Alert, market pundits expect central bankers to get together and enact a globally coordinated interest rate cut, as well as the continuation of massive monetary injections to boost liquidity and revive lending activity.

Nonetheless, major and emerging equity markets took significant hits Monday and resumed their downward slide Tuesday as news of more weakness in the European and US banking sectors broke.

Common Criminals

Meanwhile, the US Congress wants to get to the bottom of this mess and find out what happened that brought this crisis on, and so quickly. Lawmakers in Washington D.C. are calling financial industry executives on the carpet as investigations into the root causes of the financial system's collapse began yesterday--better late than never, I suppose.

I began to explore the issue of 'Who Got Away?' last week. Today, in the first of a planned series of investigatory hearings, Richard S. "Dick" Fuld Jr., the CEO of now defunct Lehman Bros. testified before a Congressional panel led by Rep. Harry Waxman (D-CA), chairman of the House Oversight and Government Reform Committee.

As Fuld testified, it became clear that Lehman Brothers executives, who had benefited greatly while sowing the seeds of the current crisis, were concerned about nothing and no one but themselves, even as they petitioned Congress to save the firm.

Fuld's testimony revealed that Lehman put millions of dollars into the accounts of departing executives even while pleading for a federal rescue, according to a Reuters' news report.

"Executives who feared for their bonuses in the company's last months were told not to worry," according to documents cited at a congressional hearing, Reuters reported.

This isn't the end of this story - more to come.

Jeff Manera, Editor
G3 Global Options
G3 Global Investor
Emerging Markets Insider
Email: Jmanera@EmergingMarketsInsider.net

Stock markets around the world opened up strong and held on Monday, following a rush of news announcements over the weekend by central bankers and government finance ministers seeking to calm and reassure the global investment community and the public that they will do whatever they can to shore up banks, revive the flow of credit and protect depositors.

Rebounds in European and US equity markets followed on the heels of a rebound in Asian markets after central bankers and government finance officials made strong, reassuring statements following weekend meetings in Washington D.C. and Paris.

While governments' emergency relief measures have become crucial, don't believe for a second that we can put the financial system and credit crises behind us. While some of these efforts appear well-conceived and directed, others will prove not to be.

Today, after a bullish burst of early trading the markets faltered, with profit-taking and some normal congestion setting in after such a big run-up.

Currency Thoughts:

The devaluation of the U.S. dollar is one of the factors helping our current currency position in the G3 Global Investor portfolio. And it's also one of the reasons why I'm always watching for a good entry point in some other currencies. Some worth a look include the Aussie dollar, Euro currency, Canadian dollar and the Mexican peso.

Looking south of the US border at a currency not normally talked about actively in currency circles, the Mexican banking system is reportedly sound and the money markets functioning relatively well, even in the face of US and European bank subsidiaries drawing in their horns and money market investors in general more wary.

The big international banks are cutting back their credit lines and closing out positions, which have led to big drops in the Mexican peso, to the extent that the Mexican central bank took the rare step of intervening in the forex market to defend the currency and set up a dollar purchase program. That's reassuring and should calm those with funds in the Mexican money market.

On top of earning higher interest rate returns in the MXP money market is the fairly good prospect of the peso appreciating against the US dollar over the next three to six months and longer term.

Jeff Manera, Editor
G3 Global Options
G3 Global Investor
Emerging Markets Insider
Email: Jmanera@EmergingMarketsInsider.net

Conditions in interbank and short-term money markets began moving in the right direction yesterday, U.S. Federal Reserve chairman Bernanke and President Bush came in support of additional government stimulus proposed by Congressional Democrats. U.S. stocks rallied 4% as a result, though on the thinnest volumes in a month.

The Conference Board's Index of Leading Economic Indicators turned positive for the first time in five months in September. The positive economic news, along with expectations that OPEC ministers will cut announce a 1 million barrel per day cut in production when they meet Oct. 24 sent the shares of materials companies, utilities and oil and gas majors upwards.

Don't pop the champagne corks yet though. It's still early days: market experts have noted that it has typically taken a year for the effects of major financial system dislocations, and emergency relief measures, to percolate through and purge accumulated ills that have been many years in the making.

Governments around the world continue to pump money into their banking and financial systems, as well as shore up banks' capital bases, both of which, while necessary, also sow the seeds for future problems. Rapid money supply growth at a time when banks and investment companies are in the midst of a massive de-leveraging that's likely to continue for months raises the likelihood of either hyperinflation or outright deflation depending which way the winds blow through the real economy.

The Swiss National Bank wiped $60 billion of bad debts off UBS' books this past week, giving the bank what one analyst described as "one of the cleanest balance sheets in the business." UBS and its peers are likely to hoard money and capital, however, given their recent losses and uncertainty regarding the value of assets that remain on its books in order to ensure that they meet minimum national and international capital and risk management ratios.

Having received some $25 billion of capital from the US Treasury, Merrill Lynch management said as much publicly. Merrill executives were reported as saying that the firm would hold on to its new funds for at least one quarter as a cushion.

In Asia, the South Korean government decided to guarantee $100 billion in bank debts and supply lenders with $30 billion in dollars to stabilize its financial markets after ratings agencies placed Korean banks on negative watch citing lack of government support to moderate foreign-currency funding risks at Korean banks

If the real economy can hold on and avoid falling into a complete tailspin while governments' rescue plans purge banks and the financial system of toxic debt and assets the recent sell-off in equity markets is creating some attractive value-based investing opportunities.

It will take some cautious market, economy and individual company, watching, to sift through, digest and analyze all the good and bad news that will be coming out in coming weeks and months...Volatility is likely to remain high so covering your back and identifying exits beforehand are even more important.

Jeff Manera, Editor

G3 Global Options
G3 Global Investor
Emerging Markets Insider
Email: Jmanera@EmergingMarketsInsider.net

As the Japanese yen and US dollar continue their seemingly inexorable rise, it's becoming more and more clear just how large and diversified this market has become. The yen reached the almost unheard of level of 93 to 1 USD in early trading Tuesday while the dollar continues to appreciate against other major, and emerging, market, currencies. Even though the Yen quickly reversed from those levels, it still remains elevated relative to historic norms.

Along with share prices and property markets around the world, commodity prices-- whether it's oil, wheat, corn, sugar or metals-- have plummeted right along with them. And even though the price of gold has held up comparatively well, even that safest, most secure form of wealth, has not increased anywhere near the degree many thought it would, and should, have given the depth and seriousness of the financial crisis.

That's not to say that gold won't do well once the massive and ongoing de-leveraging and liquidations by hedge and other highly leveraged funds runs its course, a process that is progressing. Stock market and fund investors around the world are fleeing to preserve their wealth and fleeing to the safety of government guaranteed bank deposits as evidence for a sharp, prolonged and widespread recession mounts.

G7 central bankers, speaking through the US Treasury, took the extraordinary step Monday of warning forex market participants (read bank and fund forex traders) that continued appreciation of the yen poses extraordinary risks for the Japanese and global economy. Japan's prime minister called for central banks and governments to draw up new, additional emergency measures to calm and reassure financial markets' participants as the Nikkei 225 fell to its lowest level in 25 years.

Central banks haven't undertaken a coordinated policy of large-scale, prolonged currency intervention since the 1980s. It looks like they're rapidly coming to the conclusion that it's time for another round. Until the process of de-leveraging and unwinding carry trades runs its course, even coordinated forex market interventions are unlikely to achieve their aims, however.

The big economic news this week in the US will be not if, but by how much the US Federal Reserve's Open Markets Policy Committed cuts the Federal Funds rate, if this will be a second round of internationally coordinated rate cuts by central banks, and how negative Q3 US GDP will be. The Fed committee meets Tuesday and Wednesday. A 50 basis point (0.5%) cut is expected. US GDP is due out Thursday. A negative 0.5% figure is expected.

As I've suggested, a bottoming process is in the making as central bank and government emergency programs and measures begin to be put into effect. This may provide some short short-term support to both the Yen and the dollar, but as central banks intervene in the markets, but beyond that they are both vulnerable.

Jeff Manera, Editor

G3 Global Options
G3 Global Investor
Emerging Markets Insider
Email: Jmanera@EmergingMarketsInsider.net