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