Making decisions is stressful. It is much easier to do nothing than decide whether one's current course of action is correct or needs to be altered. When urgency is added to the equation, we come under greater pressure because we often feel we do not have enough time to make an informed decision. Add money into the mix and stress levels increase. Leverage increases the potential for anxiety even further. In a deteriorating market, the perception of the need to make a decision grows all the time. Investors who sell as they reach their 'pain threshold' help to make up the minds of more people which re-enforces the trend. This helps explain why markets can accelerate lower. This is at least in part, why so many investors in money market funds were heading for the exit last week.

However, occasions when emotions take the place of rational analysis are not good times to make investments decisions. It throws into sharp contrast the many Wall Street adages about buying when everyone else is scared. Listening to these prognostications when a market is rising and confidence is high is easy. Acting in the correct manner when sentiment is plumbing the depths is quite another. This is especially true when investors are quoting the definition of a stock down 90%, is one that was down 80% and halved.

We have long held that the best time to buy our favourite themes was following a correction. While committing all of one's capital to the market at current levels would be a rash move, building an investment position incrementally would appear to be a better strategy. We continue to run the risk that markets may eventually move lower. However, the facts are that many sectors have been sold aggressively and are rallying from support. That support is of at least near-term significance. The short covering rally that started on Friday is not over and most markets, particularly those that had the largest short positions still have potential to rally further. However, it is only once the short covering rally expires and markets consolidate that we will see if the September lows hold. Volatility remains high and we will continue to be presented with interesting buying opportunities.

Email of the day (1) - on Blackrock World Mining Trust:

"I was wondering if you have any idea why the Blackrock World Mining Trust, one of the Fullermoney favourites, has been declining for the last couple of days whereas most of the miners/gold/oil/other commodities have strongly rebounded. Would it be something to do with the takeover of Merrill by BofA? Perhaps you or David know the Fund Manager and may be able to make some enquiries for the benefit of the subscribers?"

My comment - Thank you for this interesting question. I phoned the fund this afternoon and while the manager Graham Birch is away, his colleague Evi Hambro was kind enough to call back. He was not aware of any particular reason why the fund's price is not performing, but posited that it may be suffering from investors attempting to raise capital. The discount to NAV has widened quite abruptly over the last week and now stands at 17.94%. This is probably more of a reason for the fund's underperformance than the constituents of its portfolio or anything to do with Merrill Lynch.

BHP Billiton, Rio Tinto, Xstrata, Potash Corp and Barrick Gold among a host of others were overextended and bounced late last week. They either improved upon that performance or held their gains today. Considering the extent of the downside move and number of shorts in this market, a further rally is likely. They would now need to sustain moves below last week's lows to question scope for further upside.

Gold found support near $750 on September 11th. It has since posted an incredible upward dynamic, held the gain and improved upon it. $750 marks a low of at least near-term significance and it would now need to sustain a move below $825 to question current scope for further upside.

Silver found support on September 11th near $10. It continues to rally and would need to sustain a move below $12 to question current scope for additional upside.

Oil completed a Type-2 top in mid-July and remains in a medium-term correction. From the high, it fell more than 33% before finding support near $90. Today's action suggests shorts are being squeezed and oil is once more attracted speculative flows. A downward dynamic would be needed to question scope for additional upside.

Commodities have gained at the same time as the rescue package for financials was released. This package is putting pressure on the Dollar which continues to fall back from its high. A sustained move above 80 on the Dollar Index would be needed to question scope for further downside. (More on this in the Audio.)

Commodity currencies such as the Australian Dollar, New Zealand Dollar, Canadian Dollar, Brazilian Real, Russian Ruble and the South African Rand had all fallen significantly against the Dollar over the last two-months. However, the Dollar appears to have reached a medium-term peak and would need to sustain a move above the recent highs to question scope for some further weakness.

Considering All Options: The VIX hits 42. Where will it land? - Thanks to a subscriber for this interesting report by Krag Gregory, John Marshal, Stuart Kaiser and Amy Wu for Goldman Sachs, which looks at how the VIX index has been trading. Here is a section:

No model will tell us how or when volatility will subside given the extreme stress in the system but with the intense focus on volatility, we think it is useful to examine how S&P 500 implied volatility levels are trading against key macro factors in an attempt to look through the noise.

Our results suggest a short-term VIX level of 28%, a decline of 5 vol points from current levels. In our view, this is evidence that option prices currently reflect a large risk premium triggered by recent distress in capital markets and financial services companies that makes predicting a near-term path nearly impossible. However, by incorporating a fundamentally driven short-term VIX estimate investors can better quantify and understand the risk/reward of positions in the context of their own views of financial system risk.

Our Equity Trading Strategies team recently launched a Global Index Compass Monitor which is designed to quantify how major international indices respond to the equity markets outlook for economic growth, interest rates, oil prices, and common global market risk. The Global Index Compass shows that equity indices share a common set of macro drivers that explain a substantial part of index returns over time as well as index returns relative to one another. We utilize this toolkit to analyze how S&P 500 implied volatilities are trading relative to key macro drivers. For more information on this methodology see their October 25, 2007 report, "Introducing our Global Index Compass".

Our model includes explanatory building blocks which monitor shifts in the equity market's view of key macroeconomic forces, namely economic growth, interest rates, oil prices and shifts in common market risk not picked up by these three major macroeconomic drivers. These factors are extracted daily from US equity prices using our Equity Trading Strategy teams Wavefront models. Regressions of changes in implied volatility versus these four macro factors suggest a short-term value of 28% for the VIX, a decline of 5 vol points from current levels.

My view - The VIX Index is much better at predicting market lows than highs and it has recently moved to a level, not seen in nearly 6 years. It fell back from the high near 42 on Thursday and declined further on Friday. While the Index remains at elevated levels, it would need to push back upwards to new highs to question scope for some additional downside.

Goldman, Morgan Stanley Bring Down Curtain on Wall Street Era - This article by Christine Harper and Craig Torres for Bloomberg covers the re-categorisation of Goldman Sachs and Morgan Stanley as banks, Here is a section:

The Wall Street that shaped the financial world for two decades ended last night, when Goldman Sachs Group Inc. and Morgan Stanley concluded there is no future in remaining investment banks now that investors have determined the model is broken.

The Federal Reserve's approval of their bid to become banks ends the ascendancy of the securities firms, 75 years after Congress separated them from deposit-taking lenders, and caps weeks of chaos that sent Lehman Brothers Holdings Inc. into bankruptcy and led to the rushed sale of Merrill Lynch & Co. to Bank of America Corp.

``The decision marks the end of Wall Street as we have known it,'' said William Isaac, a former chairman of the Federal Deposit Insurance Corp. ``It's too bad.''

Goldman, whose alumni include Henry Paulson, the Treasury Secretary presiding over a $700 billion bank bailout, and Morgan Stanley, a product of the 1933 Glass-Steagall Act that cleaved investment and commercial banks, insisted they didn't need to change course, even as their shares plunged and their borrowing costs soared last week.

By then, it was too late. As financial markets gyrated -- the Dow Jones Industrial Average whipsawed 1,000 points in the week's last two days -- and clients defected, executives at the two firms concluded they had no choice. The Federal Reserve Board met at 9 p.m. yesterday and considered applications delivered that day, said Michelle Smith, a spokeswoman for the central bank. The decision was unanimous, she said.

And also from this article:

``This new bank holding structure will ensure that Morgan Stanley is in the strongest possible position,'' Chairman and Chief Executive Officer John Mack, 63, said in a statement last night. ``It also offers the marketplace certainty about the strength of our financial position and our access to funding.''

Goldman, the largest and most profitable of the U.S. securities firms, will become the fourth-largest bank holding company. The firm already has more than $20 billion in customer deposits in two subsidiaries and is creating a new one, GS Bank USA, that will have more than $150 billion of assets, making it one of the 10 largest banks in the U.S., the firm said in a statement last night. The firm will increase its deposit base ``through acquisitions and organically,'' Goldman said in a statement last night.

``Goldman Sachs, under Federal Reserve supervision, will be regarded as an even more secure institution with an exceptionally clean balance sheet and a greater diversity of funding sources,'' Lloyd Blankfein, 54, Goldman's chairman and CEO, said in the statement.

Citigroup, JPMorgan
The Washington-based Fed is the primary regulator of bank- holding companies, which are firms that own or control banks.
Citigroup Inc., Bank of America Corp. and JPMorgan are bank- holding companies regulated by the Fed.

Securities firms, by contrast, had been regulated by the Securities and Exchange Commission. The SEC's future becomes dimmer with the change in Goldman and Morgan Stanley's structures.

``You can't kiss goodbye to the last two important investment banks without noting that the house is empty,'' said David Becker, a former SEC general counsel who is now a partner at Cleary Gottlieb Steen & Hamilton in Washington. ``It's a downward spiral where the less significant the population you regulate, the less your available resources.''

My view - The SEC has been neutered by the move to allow Morgan Stanley and Goldman Sachs to become fully fledged banks regulated by the Fed. The lack of any effective oversight has been highlighted during the current crisis as a key failure of the SEC. Going forward, the role of the SEC will need a serious rethink, but that is likely to be put off until the current crisis is under control.

U.S. Widens Scope of Bad-Debt Plan Beyond Home - This article by Dawn Kopecki for Bloomberg covers the extent of the measures being taken to shore up the financial industry. Here is a section:

The Bush administration widened the scope of its $700 billion plan to avert a financial meltdown by including assets other than mortgage-related securities.

The U.S. Treasury submitted revised guidance to Congress on its plan late yesterday as lawmakers and lobbyists push their own agendas. The department also adjusted its plan to insure money-market funds to limit protection to balances as of Sept. 19, after complaints from bank lobbyists.

Officials made the changes two days after unveiling plans for an unprecedented intervention in financial markets. The change to potentially allow purchases of instruments such as car loans, credit-card debt and other devalued assets may force an increase in the size of the package as the legislation proceeds through Congress.

``The Treasury's thinking is to make it as big and wide as possible so they have the flexibility to act if need be,'' said Shane Oliver, Sydney-based head of investment strategy at AMP Capital Investors, which manages about $108 billion. ``There have been losses on a whole range of U.S. debts and as the economy deteriorates in response to the housing slump those losses could escalate.''

Treasury officials now propose buying what they term troubled assets, without specifying the type, according to a document obtained by Bloomberg News and confirmed by a congressional aide.

`Significantly Higher'
``The costs of the bailout will be significantly higher than originally considered or acknowledged,'' said Josh Rosner, an analyst with independent research firm Graham Fisher & Co. in New York. ``How, given these changes, can the administration and Federal Reserve believe they are being forthright in their unrevised expectation of future losses?''

Treasuries rose on speculation the Fed will cut interest rates to support the rescue plan. Two-year note yields declined 8 basis points to 2.11 percent as of 3:20 p.m. in Tokyo.

Separately, the Treasury said in a statement late yesterday it would limit its $50 billion plan for insuring money-market funds to those held by investors as of Sept. 19, excluding any subsequent contributions.

The American Bankers' Association, which had expressed concern about the plan last week, praised the move, saying it would eliminate an incentive for savers to shift out of bank accounts into money-market funds. The Treasury put no limit on the money-market fund insurance, while the Federal Deposit Insurance Corp. protects bank deposits up to $100,000.

Money Market Funds

``If all money market mutual funds had been included with the government guarantee moving forward, this proposal would have threatened to take money out of local FDIC-insured banks,'' Edward Yingling, president of the ABA in Washington, said in a statement.

In its latest guidance on the bad-debt fund, the Treasury said firms that are headquartered outside the U.S. will now be eligible for assistance.

The changes come after two days of weekend talks between administration officials and congressional staff in Washington.

Treasury Secretary Henry Paulson and Federal Reserve Chairman Ben S. Bernanke told lawmakers Sept. 18 that a comprehensive attack on the worst financial crisis since the Great Depression was critical after a series of government interventions failed to normalize markets.

My view - I hope that any new institution dealing with bad debts will be focused on ascertaining fair value for these assets and finding buyers rather than becoming a political football. The Savings & Loan crisis was eventually sanitized as the debts were sold off, many at bargain basement prices, and there is no reason to believe that this crisis will not have a similar result. This continues to be a breaking story and is well worth keeping an eye for further developments.

Japan Market Outlook, Bank sector comment: Uncertainty and risk reduction weighs heavier than loan exposure to Lehman Brothers - Thanks to a subscriber for this interesting compilation report from Credit Suisse. This interesting section by Marc-Antoine Haudenschild covers the exposure of Japanese Banks to Lehman Brothers' demise. Here is the section in full:

In Lehman Brothers Holdings Inc.'s Chapter 11 filing documentation submitted to the US Bankruptcy Court on Monday, several Japanese banks featured as creditors for unsecured bank loans. Listed below are some of the biggest exposures among Japanese banks or their affiliates (according to the bankruptcy filing):

Aozora Bank: USD 463 m
Mizuho Corporate Bank: USD 382 m (subsidiary of Mizuho FG)
Shinsei Bank: USD 231 m
Mitsubishi UFJ Bank: USD 185 m
Sumitomo Mitsui FG: USD 177 m
Chuo Mitsui Trust & Banking: USD 93 m

There is some uncertainty about the actual financial impact of Lehman Brothers. bankruptcy on individual banking groups. For example, Mizuho Financial Group stated that the majority of its exposure is to operating companies rather than the ultimate parent company, and it therefore estimates its net exposure to be significantly less than stated in the filing. The amount of loans from Mizuho FG specified in the bankruptcy filing corresponds to less than 1% of Mizuho FG shareholders. equity. Aozora Bank also stated that it was still evaluating its net exposure. Mizuho FG is additionally exposed to Merrill Lynch via a USD 1.2 bn investment in convertible preferred shares. Bank of America's offer of USD 29 per Merrill Lynch share puts the purchase price closer to Mizuho's conversion price, which could prevent Mizuho from having to take an appraisal loss on its investment, thus limiting the damage somewhat.

The nominal amount of loans extended to Lehman Brothers Holdings in relation to these banks. equity is unlikely to threaten their balance sheets. Especially as according to their statements, the three megabanks had hedged large parts of their exposure. However, we believe that in the short term, uncertainty about the fallout from Lehman Brothers' bankruptcy filing on the financial market will subsequently trigger a risk reduction trade. This is likely to lead to an initial negative reaction for share prices in the Japanese banking sector.

Although we expect further pressure from risk reduction, we believe that once the situation settles down, we would expect some rebound in the share prices of the three Japanese megabanks. Based on the price-to-book valuations for the three megabanks, we think their share prices adequately take into account the risks of the current turbulences in the global financial markets. Mitsubishi UFJ Financial Group (BUY) trades at a P/B of 0.91x, Mizuho Financial Group (BUY) at a P/B of 1.25x and Sumitomo Mitsui Financial Group (HOLD) at a P/B of 1.18x, based on analysts. consensus estimates for FY 2008 (ending March 2009).

My view - The Topix Banks Index was one of the first Bank indices to turn down back in 2006 and remains in an overall downtrend. It has not had the same type of percentage fall as some of the US Bank indices but was looking quite overextended as it fell towards 220 in early September. Two impressive upward dynamics this month help to put a floor under the market and it would need to sustain a move below those lows to question scope for further upside.

Over the medium to longer-term, it needs to break the progression of lower reaction highs, which have been the hallmark of the trend to date, to indicate the bulls are getting the upper hand. This would require a sustained move above 325.

Email of the day (2) - on viewing and printing charts:

"Question: Is there a place where I could just print out the 200 top charts of interest to me every Monday morning. Basically save them as my favorites so that I didn't need to look each one up every week? Currently, things fall through the cracks for me because who honestly has the time to look up the 3 yr chart on Vietnam and Chile every week, for example, along with every other market I follow. But If I could set them to be in my favorites along with many others, and just hit the print button once a week that would be worth a tremendous amount to me. And I don't think I would be alone in being willing to pay for it."

My comment - Thank you for this interesting email. You can currently use the 'View All Charts' feature which will tile 8 charts one above another, per page. This allows you to quickly 'click through' your list of chosen instruments. You will find the 'View All Charts' tab above the list of securities on any of the Chart Library's menu pages.

We have the ability to create custom chart books internally for The Chart Seminar, but the interface would require a lot work before we could release it to subscribers. This is certainly something I will discuss with our IT people and with David when he returns from holiday.


Email of the day (3) - on additions to the Chart Library:

"Could you please include the following funds in the chart library: Acencia Debt Strategies, Global MENA Financials and the CG Real Return Fund? Many thanks."

My comment - All of these shares can now be found in the Chart Library.

Today's interesting charts - Many commodity related shares are rallying well and hundreds can be found in the Chart Library.

Australia - rallies impressively from the lows near 4500 in a failed downside break. At least a test of 5250 now seems likely and a sustained move above that area would suggest the bulls are regaining the upper hand.

Canada - rallies impressively from the lower side of the yearlong range. A sustained move below 12,000 would now been needed to question scope for some additional upside.

Brazil - rallied well on Friday to break the progression of lower rally highs. A sustained move below 45,000 would now be needed to question scope for some further additional upside.


Last week's signups for the Free (Abbreviated) Comment of the Day - For the week of September 14th new signups, including subscribers and pre-subscribers, live in the following countries or regions: Australia, Canada, France, Japan, Switzerland, the UK and the USA - 9 in total. In descending order, which topped the list in terms of the last week's new signups? It was the UK, the USA and Australia.

Thousands of people around the world receive Fullermoney's Free (Abbreviated) Comment of the Day, and their numbers steadily increase. Why do so many sign up? It is primarily due to word of mouth or word of press mention, from people who like Fullermoney's global perspective and our Empowerment Through Knowledge theme. Incidentally, on receiving our free daily email, you will not be contacted or solicited with advertisements and other marketing material. No one else will have access to your email address. We respect your privacy.

Please note - David will be away until Monday 29th September.