MMG Update - Friday, September 19, 2008 11:04am ET Current Trend Direction: Sideways and Wild Risks favor: Carefully Floating Current Price of FNMA 5.5% Bond: $100.69, -31bp A historic week is being capped off with an incredible day of news events, with an enormous impact. Thank goodness the economic calendar is quiet today, as government announcements have taken center stage. There are three huge announcements that are changing the financial markets around the world. First, we have been talking about the fear over the safety of money in savings for many Americans. Banks are either folding or on the brink of collapse, bonds are losing some or all of their value, and stocks are dropping at an alarming rate, all causing tremendous fear and anxiety for investors. As we discussed in yesterday's Update, this fear caused a flight to quality of such magnitude that the return on Treasuries was actually negative. People are actually willing to pay money in order not to lose money...forgetting all about any type of return for their investment. And yesterday this panic lead to a modern day "run on the bank". There was $180 Billion taken out of money market funds due to a lack of confidence. This resulted in a "breaking of the buck", which means that the Net Asset Value or NAV of some money market funds dropped below $1. Virtually all investors consider money market funds very safe and do not expect any change in the principal value, so a $1 invested will always result in a $1 balance plus any interest. But once the $1 valuation was broken investors panicked and the flood gates opened. This caused the Treasury to step in. This morning, Treasury Secretary Hank Paulson announced that the US government will guarantee money market funds. It should be noted that this does not include high yield, enhanced type, or riskier money market funds. This action is helping settle the markets and as a result stocks around the world are marching higher. Another big announcement that is helping to calm the global markets and regain confidence is the Fed's decision to create a market place for illiquid mortgage debt. As we know, the mortgage mess has buried many companies, some were previous giants with long histories like Lehman, Bear Stearns, Fannie & Freddie. The big problem is that there are no buyers for this debt in the current marketplace. So the Fed is stepping in to create a vehicle to make these purchases of mortgage debt and provide a liquid marketplace. This is a brilliant move which has been very well received and should do a lot of long term good to help the housing and lending environment. Stocks around the world have responded very favorably to this. And there is more...As someone who has managed a fund and been a student of the stock market I can tell you first hand that there is a very dark side to stock shorting. The amount of greed is incredible. Many short sellers have used currently illegal tactics such as "naked" short selling. This means they are shorting a stock without the required step of first borrowing it. This has exacerbated the problem in financial stocks as they get unmercifully beaten down. This in turn hurts their balance sheet which also limits their ability to take on credit. And this is the vicious cycle we have been witnessing. Worse yet are the short sellers who sent armies of individuals to use scare tactics on message boards to convince people the sky is falling. Today, the SEC has placed a ban on short selling in 799 financially related stocks. This ban will last through October 2nd and can be extended if needed in 30 day increments. Some other countries around the globe are also instituting similar bans. There are some very foolish politicians and others who are commenting on what a negative move this is, as well as saying there are legitimate short sellers. The problem is that they have failed miserably in policing this problem for a very long time. It is the equivalent of an electronic store saying, "pay for what you take with the honor system". While some will actually pay what is due, there is no doubt that the store will wiped out in a short period of time. The SEC did the right thing here and hopefully this will add another level of calm to the current financial crisis. These 3 steps will not fix everything, but it sure looks like a step in the right direction. And while interest rates are a bit worse this morning...who cares. The health of our financial system and confidence that our hard earned savings will not be wiped out is far more important. What good is earning a paycheck if there is no place to safely save that money. Prices will undoubtedly continue their volatile ride, but should remain within the trading range we have illustrated on the Bond page. We will float carefully this morning and be on guard for any movement that will cause price changes. P.S. - As you know we have been talking to you about the uptick rule for over a year. And how the elimination of this 69 year old rule last July was causing much greater volatility for both Stocks and Bonds. Finally the media is catching up to what you have known for a long time as it is suddenly all over the news. | 
