I am looking forward to seeing how Merrill shareholders vote now that the big bailout has occurred and the arbs are challenged by the short ban.

Here is the section from the BAC/MER merger agreement.

6.3 Stockholder Approval. Each of Company and Parent shall call a meeting of its stockholders to be held as soon as reasonably practicable for the purpose of obtaining the requisite stockholder approval required in connection with the Merger, on substantially the terms and conditions set forth in this Agreement, and shall use its reasonable best efforts to cause such meeting to occur as soon as reasonably practicable. The Board of Directors of Company shall use its reasonable best efforts to obtain from its stockholders the stockholder vote approving the Merger, on substantially the terms and conditions set forth in this Agreement, required to consummate the transactions contemplated by this Agreement, and shall recommend such approval except to the extent expressly permitted under Section 6.10(d). Company shall submit this Agreement to its stockholders at the stockholder meeting even if its Board of Directors shall have withdrawn, modified or qualified its recommendation. The Board of Directors of Company has adopted resolutions approving the Merger, on substantially the terms and conditions set forth in this Agreement, and directing that the Merger, on such terms and conditions, be submitted to Company’s stockholders for their consideration. The Board of Directors of Parent shall use its reasonable best efforts to obtain from its stockholders the stockholder vote approving the issuance of Parent Common Stock in the Merger, on substantially the terms and conditions set forth in this Agreement, required to consummate the issuance of Parent Common Stock contemplated by this Agreement, and shall recommend such approval except to the extent making such recommendation would cause the Board of Directors of Parent to violate its fiduciary duties to Parent stockholders under applicable law. Parent shall submit the stock issuance proposal to its stockholders at the stockholder meeting even if its Board of Directors shall have withdrawn, modified or qualified its recommendation. The Board of Directors of Parent has adopted resolutions approving the Merger, on substantially the terms and conditions set forth in this Agreement, and directing that the issuance of Parent Common Stock in the Merger, on such terms and conditions, be submitted to Parent’s stockholders for their consideration.

I’ll be watching the action in inverse ETFs with great attention today.  Here’s a list.

Shorting of equities of the financial variety may be prohibited for now.  But the shorts will just find new places where shorting is not prohibited.  Once the covering in financial stocks is done, whoever has money left or who has not been wiped out entirely will redirect their efforts to other stocks, commodities, financial instruments, etc.  The volatility and hedging in other asset classes will likely go wild.   If you couldn’t stand the consequences of shorting financial stocks, good luck dealing with the losses and volatility in the rest of the financial system.

It looks like the guy that tried to bring us the Super-SIV is getting close to a much bigger fiasco that some people are calling a new “RTC”.  Sadly, a week ago while having lunch with a close friend I suggested that the government would likely set up a big bad bank entity and try to put all the crap from the financial industry into it in one fell swoop.    I just got a bad feeling when I heard that Paulson was fixated on the good bank/bad bank concept as his solution for Lehman.

Why stop there?  Why stop with just doing one investment bank at a time?  Of course that never worked out with Lehman because no non-governmental entity wanted to touch the same stuff they helped create.  So it is only the next evolutionary step for a socialist like Paulson to resolve that problem and replace the nonexistent buyer with the US government.

Does anyone get the sense that Paulson is just tired?  Tired of having to work so hard every damn day, every damn weekend.  He is probably worn down.  And besides PIMCO pretty much ordered them to do it this morning.  So just give in Hank.  Just take all that crap that the investment banks innovated and securitized and made all kinds of profits on years ago and buy it.  Buy it all.  And while you are at it, with your unlimited blank check powers, just buy every bad mortgage or house or car loan or car or credit card ABCP or the crap they bought with the credit card.  Buy it all.  Buy, Buy, Buy!

Just lump all that shit onto the government’s books so that the IBs and then everyone else can go back to making a whole new bunch of crappy loans.  Never mind what this will do to our country, our taxes and our currency.  Reading through the Volcker, Brady, Ludwig summary, it all seems so simple.  Just say, “desperate times call for desperate measures” over and over and over again and you will convince yourself it is not only necessary, it is beneficial.  I have no idea how they are going to be able to price these assets at “fair market value” or how they are going to force the seller to sell.  For the holdouts, those marks are going to be brutal.  As a result, if this goes through, I fully expect the mark-to-market rules will be waived.  If not, the losses that would have to be taken will devastate the banks as much as they would have been devastated with no intervention.

The Big Bad Bank appears to be a solution that politicians and regulators can get behind to show the public they are doing something.  It doesn’t matter what I think of that something.  Apparently it doesn’t matter what anyone that isn’t looking for a bailout thinks either.

• Did the equity market short sellers cause house prices to decline?  Other than investors buying distressed homes at deep discounts in foreclosure how much demand is there?
• Did the equity market short sellers cause the Asset Backed Commercial Paper market to decline?  When the SIVs and other off balance sheet entities stopped buying, how much demand is there?
• Did the equity market short sellers cause the Auction Rate Securities market to disappear?  When the IBs weren’t there to backstop them, how much demand is there?
• Did the equity market short sellers cause the corporate bond market to slow down so dramatically?
• Did the equity market short sellers cause the demand for new cars to decline?

I want to know who is responsible for all that.  And I think they should be punished.  It is “unpatriotic” to not buy cars and not buy houses and on and on.  Of course I am being sarcastic.

We have lots of problems in this country.  It’s really easy to focus entirely on the shorts and once that has stopped, maybe we can start dealing with the root causes.

After all the financial activities by our government in the past few days, weeks and months, President Bush was largely silent other than to say he supports his team and the country should feel confident that the economy and financial markets are fundamentally sound. Rah Rah Rah!  Blah Blah Blah!  So it was a bit odd to hear that press conference/statement by the President.  I missed the part about how the economy is sound and heard only one thing of significance.  As you know, I don’t need the political leaders to tell me how calm I should be or to explain markets or economics to me.  Especially since they have been terribly wrong about their predictions and their interventions have contributed to where we are today, I am even more convinced they have no clue.  I cannot figure out the reason for the President’s statement and oh, that one thing of significance I mentioned?????  The only thing I found interesting was why he said he canceled his travel plans to stay in Washington.  That sounds like something you do when you expect a problem and you don’t want to look out of touch by being on a trip to raise money for the election.  The whole thing was odd.

Most people say “flight to safety”.  I just don’t think Treasuries are the definition of “safety.”  Some people say “flight to quality”.  I just don’t think Treasuries are the definition of “quality” when they represent the financial condition of this country with its deteriorating tax base, its overleveraged consumer, its increasingly unemployed workforce working in lower quality jobs, its devaluing real estate, its trade deficits, its budget deficits, its excessive government spending, its expanding and underfunded social programs,  its expanding list of failed banks, its underfunded FDIC, its underfunded and reckless PBGC, its deteriorating Federal Reserve balance sheet, its nationalized financial system, its pathetically weak fiat currency…………..But if you want to suggest that piling all your money into short term Treasuries is a “safer” bet than equities, I have to agree with you, for now.

However, when you look at the 3-month T-bill and see a whopping 0.02% yield today you have to be very careful.  That’s the lowest level since WWII - not a good time if I remember my history.  Whenever a trade gets this overcrowded, it doesn’t usually end well.

The “breaking of the buck” at the Reserve Money Market Mutual Fund is very troubling.  I really respect Bruce Bent and not just because he started the Money Market Mutual Fund industry.   If this can happen to him due to Lehman’s demise, you bet it can and will happen to others who do not have his ethics or experience.  In fact, it has happened several times, but the sponsors were there to cover the losses (please reread Propping Up Money Market Mutual Funds from November 2007).  I suspect that some of these banks will not be able to keep that up forever and we will likely see some more buck breaking.  A year ago, I shared my personal story about concerns over the quality of assets held in a money market mutual fund.  Note that the ABCP and SIVs of last year and other risky assets held in some Money Market Mutual Funds are as crappy now as they were then.  You can assess whether Treasuries with no yield are “crappy.”

If you have a MMMF with a yield in excess of 1.5% over the past days, weeks, and months, you really need to evaluate what is in there and decide whether a few extra basis points are worth the risk.

Furthermore, it’s going to be a big problem when the yield in MMMFs that hold almost 100% Treasuries (all that flight to safer stuff) have yields that are less than the expense ratio, even if the expense ratio is really low, like 0.50%.  Check this Fidelity fund out as an example.   A prolonged period of rates like we have now in the Treasuries will lead to some serious challenges, especially if the stock market keeps losing and being so volatile.

A week ago, I mentioned my declining bearishness in commodities and my recent UP signals in the two gold ETFs I cover (IAU and GLD).  However, I never would have expected the massive move in Gold today.  Obviously, for those people that don’t like the “Flight to Safer” trade in Treasuries, Gold was more appealing.  Hopefully everyone realizes that gold is not safe.  Just look at the recent decline and you’ll know that.

The slope of the massive move in gold and Treasuries is not sustainable, but only you can decide what is safe enough.

One more time….I cannot stand the ignorance of that comment.  The bulls talked about “all that cash on the sidelines” throughout the bull run from October 2002 until October 2007 and they keep talking about it now.  Here are a few examples of what I have said over the past few years.

On January 9, 2007 I wrote Cash Is Not Trash when the S&P 500 stood at 1412   - Here is a snippet.

As the saying goes… “cash is not trash” with the great rates you can get in money market accounts. I know that doesn’t sound exciting but then again, losing money can be exciting but not rewarding. There are always stocks to buy, but it’s getting tougher to find them so you might want to be boring for a while.

On August 8, 2007, I wrote about Cash when the S&P 500 stood at 1497 - Here is a snippet.

It’s easy for the bulls to make fun of people holding cash, but that only works when the market return is greater than the money market return.  CASH IS AN ASSET.  At times, it’s much preferred to the returns, volatility and transaction cost you get with stocks.

My friend Jack has commented on this absurdity even more frequently than I have. (click here to read his rants) Here is a sample:

It’s time once again for my quarterly rant about cash on the sidelines, except this time with brevity.

I was too busy to post anything to the blog today. I was busy putting my client’s cash to work buying various funds. When all of that cash got put to work, and those other investors took our cash in exchange for their exchange-traded funds, where do you think the cash went?

If you said to the other person’s sidelines, then give yourself a cookie for being such a smart egg. Our sidelines cash went to someone else’s sidelines in exchange for the investment that they were holding, and now we hold.

You see, all that cash never really leaves the “sidelines.” The cash just moves from one sideline to the other. It’s kind of like watching the players rotate in and out of a baseball game. There are always nine men on the field, just a different nine each time.

Here’s another great piece on the topic from Hussman from July 2006.

For the record, whenever the generic term “all that cash on the sidelines” is quoted, they are really talking about the balance in Money Market Mutual Funds (MMMF).

There is no guarantee that throwing a lot of cash at something makes it more appealing to everyone else who has cash on their sideline and no guarantee stocks will go up because of it.  There is no guarantee that cash leaving MMMF will go to stocks and not some other investment with a preferable risk/return profile.  I know the bulls and the media keep hyping this concept as a reason for you to either not sell stocks or to start buying.  However, there is no evidence that the amount of cash on the sidelines ever signals a top or a bottom or anything in between.    There is no timing technique relating to changes in the amounts of cash held in money market accounts or the corresponding stock market performance.

I’ll make it easy for you by listing the values (from ICI - the authority on measuring/reporting mutual fund balances) at year end for the “amount of cash on the sidelines” (aka money market balances) and the S&P 500 balance for the past few bull and bear markets.  Try to find a correlation.  Try to find what percentage decrease in the cash on the sidelines equates to what percentage increase in the stock market (or vice versa).  Good luck.

• 1994     $ 0.565 trillion     S&P   459.27
• 1995     $ 0.753 trillion     S&P   615.93
• 1996     $ 0.902 trillion     S&P   740.74
• 1997     $ 1.059 trillion     S&P   970.43
• 1998     $ 1.352 trillion     S&P 1229.23
• 1999     $ 1.613 trillion     S&P 1469.25
• 2000     $ 1.845 trillion     S&P 1320.28
• 2001     $ 2.285 trillion     S&P 1148.08
• 2002     $ 2.272 trillion     S&P   879.82
• 2003     $ 2.052 trillion     S&P 1111.92
• 2004     $ 1.913 trillion     S&P 1211.92
• 2005     $ 2.040 trillion     S&P 1248.29
• 2006     $ 2.354 trillion     S&P 1418.30
• 2007     $ 3.107 trillion     S&P 1468.36
• 2008     $ 3.582 trillion     S&P 1156.39  MMMF data through 09/10/2008 S&P through 09/17/2008

If you want to look at shorter timeframes from the recent past, click here and see how much of the week-to-week moves in the market were related to a change in the MMMF balance.

Bulls love to spout anything that promotes their case whether they are myths or facts.  I am presenting facts and you can decide for yourself.  So the next time you hear some smartie tell you that you should invest because there is a record amount of cash on the sidelines and when it comes into stocks there will be some huge increase in the index, please remember the facts.

There seems to be a belief that putting one troubled financial company together with another troubled company immediately removes the fact that either or both are troubled.

They may get a reprieve and the next individual company may get most of the negative attention for the timebeing, but I don’t see where a marriage of two ugly people makes them look pretty.

Merrill may think it escaped attention and it may have in the short term, but nothing about their proposed deal with BAC changes the risks they still have.  And if they make it to the closing, the merged entity is not immune to selling in my opinion.  The same statement can go for any other shotgun wedding arranged by our central government matchmaker.

It’s easy to blame short sellers.  The last time I checked shorts did not build the balance sheets of these companies full of excessive leverage and inflated asset prices while selling toxic financial innovation and collecting huge fees for products that have no value other than manipulating financial statements.  All those smart management teams did that all on their own.  Well, they got a lot of help from the government who provided cheap interest rates and failed to do their job to regulate this mess.

Regardless, it does appear that the government will once again shift the blame entirely on the shorts and speculators so they can ignore dealing with the real issues.  Shorts better pay attention or they will get spanked by the focus on them. The Public Relations and media spin of this story is classic.  Just suggest that all the problem is due to the shorting and then, if the government comes out strong to help the bulls, VOILA! it might appear that the situation is resolved.  That deception might work for a while, but the real culprit will return.

As you may know, I am fully supportive of reinstating the Uptick Rule and enforcing the naked short selling regulation they have chosen to ignore for years.  I cannot stand CDS so if you want to get rid of it to prevent someone from selling the equity and simultaneously buying a CDS, please make that happen.  As for this new concept being tossed around about requiring daily reports of short positions, bring it on as long as you are willing to force the longs to show their positions every day as well.  I’d love to have the daily data to see who is selling out of a long position in quantity.  I am sure many long only investors want to blame everything on the shorts, naked or legal, and there will be a growing push to ban shorting altogether.  I will never support getting rid of all short selling.  Longs are selling these stocks in quantity - you may not want to blame them, but they are selling and the shorts are not forcing them to do so.

If the issue is supposedly all about shorts and all about the low stock price, then don’t you wonder why none of these guys were willing to screw over all these excessive shorts and buy AIG or LEH for $2 per share.  I am sure the government would have loved to help anyone punish the shorts and create another one of their massive squeeze plays.  But it did not happen.  AIG was in trouble.  LEH was in in trouble.  If someone else had bought them compliments of a low stock price, they would have been in trouble too regardless of how much the shorts would have gotten caught short.

How long until AIG gets booted out of the Dow Jones Industrial Average?

More imporantly, what the hell caused them to keep AIG in for so long?  Did it have anything to do with the Dow Jones-AIG relationship?  I doubt it but who knows.

I am looking forward to the rationale of who will replace them.   Can you imagine wanting to pick another financial firm when you have no clue what problems they have or how long they will survive?

I know….how about creating a hypothetical stock price for the Fed and the Treasury and put that in the index so we can just avoid having to deal with the next nationalization.  Besides, if the Dow index is supposed to represent the US economy and the balance of stocks in each sector, shouldn’t the new United Socialist States of America be a big component?