Before I explain, I would ask you to give us the courtesy of acknowledging that our combined 60+ years of experience in this business may give us unique insights into the machinations of the financial markets. And in fact, these insights helped lead us to a successful 2008 campaign.

Now, let’s get to the matter at hand: market manipulation. We believe it may be possible the market rally is nothing more than a manipulation engineered by the President’s Working Group on Financial Markets, A.K.A Plunge Protection Team (PPT). The object: generate support for US Treasury Secretary Geitner’s proposals on Monday. Can you guess who is the chairman of the PPT? If you said Geitner, collect $200 from the community chest. This footprint of possible manipulation was never more apparent than during last year’s TARP debates. Each time it appeared that the wishes of the then chairman of the PPT, Henry Paulson, were going to be denied by congress, the markets would collapse. Hank would point to this decline and use fear tactics as a means to bully weakminded congressmen to do his bidding. Engineering a sharp market decline or rally continues to be an effective tool to push Congress around. However, eventually the markets revert back to the true trend. As an example, you may recall the market rewarded Congress with a sharp rally when TARP was passed only to collapse shortly thereafter. We offer this angle as food for thought, another piece to the puzzle that is called the equity markets. Our challenge is to avoid being influenced by deceitful short-term market manipulations and maintain a proper portfolio strategy.

US Treasury in plans for record debt sale Published: February 4 2009 18:01 The US Treasury on Wednesday opened the floodgates of government bond issuance, revealing plans for a record debt sale in February and more frequent auctions in the months to come. The announcement came amid growing fears about US government deficits and sent the yield on the benchmark 10-year Treasury note rising to 2.95 per cent, up from just over 2 per cent at the end of December. The rise in Treasury yields has been pushing mortgage rates higher, complicating efforts to revive the economy. The US Federal Reserve said last week it was “prepared to” buy Treasuries if that would be a “particularly effective” way of reducing private borrowing costs.”The Fed has to be troubled by the fact that mortgage rates have been rising and the buying of Treasuries by the Fed may come sooner than the market expects,” said William O’Donnell, UBS strategist. The Treasury said it would sell $67bn (£46bn) in new securities next week, the largest ever quarterly refunding, beating the last peak in August 2003. It may also start monthly sales of all its benchmark Treasury securities. At the end of February, the Treasury will start selling seven-year notes every month for the first time since the issue was discontinued in 1993. Sales of 30-year bonds will double to eight times a year and the Treasury will say in May whether the bond will be sold every month. For Barack Obama’s administration, the step-up in borrowing costs comes as it is fighting to secure an $800bn-plus fiscal stimulus, and is likely to need many hundreds of billions more to fund a banking sector clean-up. The Treasury Borrowing Advisory Committee expressed concern on Wednesday over the sharp jump in net borrowing needs – which market analysts estimate could reach $1,500bn to $2,500bn for the 2009 financial year. Traders are particularly concerned about the appetite for Treasuries among foreign investors, who hold more than half the outstanding $5,500bn in Treasury debt. In recent years, demand for US government debt has been stoked by developing countries running huge trade surpluses with the US and recycling dollars by buying Treasuries. However, many are facing growing pressure to stimulate their own economies and are seeing their current account surpluses decline as global demand diminishes.

U.S. Treasury default bets surge, hit new record NEW YORK, Feb 4 (Reuters) – Rising U.S. government borrowing has a growing number of investors betting on a potential default by the Treasury down the line, according to credit default swaps data on Wednesday. According to CMA DataVision, five-year U.S. CDS spreads stood at 82 basis points on Wednesday, having closed on Tuesday at a record 85.9 basis points. As a result, it currently costs $82,000 a year to protect $10 million of U.S. debt. That is up tenfold from levels seen a year ago and even more from the negligible levels that were common before the credit crisis. The CDS market is used to hedge against the possibility of sovereign and corporate defaults, and has played a controversial role in exacerbating the credit crisis. Many believe a default by the U.S. Treasury is a physical impossibility, since all of the government’s debts are denominated in its own currency and it could conceivably print more dollars to meet their obligations… RCM Comment: This story should have ended with the comment “…leading to a dramatic rise in the price of gold.”

RCM Comment: Those of you who have a significant portion of your “safe money” in Municipal bond portfolios take heed of the following two stories.

There is a high chance a majority of the States within the United States of America could file for Chapter 9 bankruptcy:

There are currently 46 states with high budget deficits, Arizona being one of them. In fact, Jan Brewer, the newly appointed Governor of Arizona has a major crisis on her hands, one that Arizona and national media isn’t covering. The alarming news is the State of Arizona has 90 to 120 days before they completely run out of money. After that, all bills and tax refunds owed to the citizens will go unpaid. Before Janet Napolitano left for her new Homeland secretary position, she had a stand-off with Arizona Treasurer Dean Martin. The AZ Treasurer forewarned Napolitano about Arizona’s financial crisis, but she refused to heed his words. With neighboring California on the verge of bankruptcy this year, many States will follow in their steps. Many States are already scurrying to cut unwanted costs, cut State-funded programs, raise taxes, not issue tax refunds to their citizens, and borrow money just to survive in 2009. Unfortunately, many banks – the same banks the Fed bailed out – are refusing to loan money to the States and their Treasury agencies. The article, State Budget Troubles Worsen, at the Center on Budget and Policy Priorities website is an excellent piece to read. It shows where each State currently stands in these challenging economic times, and you see 46 of the 50 States are clearly in the financial red.

States’ jobless funds run low – WSJ
WSJ reports a growing number of states are running out of cash to pay unemployment benefits, a sign of how far social-welfare systems are being stretched by the swelling ranks of the jobless in the deteriorating U.S. economy. Unemployment filings have soared so high in recent months that seven states have already emptied their unemployment-insurance trust funds, which were supposed to see them through recessionary periods. Another 11 states are in jeopardy of depleting reserves by year’s end, according to the National Conference of State Legislatures. So far, states have borrowed more than $2.3 billion in emergency funds from the federal government, money they are required to pay back. New York has already borrowed more than $330 million to pay unemployment claims, according to the U.S. Department of Labor. In the past, New Jersey borrowed from its trust fund to pay for other expenses, and now it has only a few months of payments in reserve. Even states with relatively flush trust funds such as Tennessee are warning that they could go broke in the next year if unemployment levels stay high.

RCM Comment: I feel like I’m experiencing deja vu. The story below sounds strikingly similar to protestations of health and stability expressed last year by the CEOs of Lehman Brothers, Bear Stearns, WaMu and others right before the fall.

BAC Bank of America CEO Lewis says the idea of nationalization is absurd (5.95 +1.11) -Update-
BAC Ken Lewis in CNBC interview says they have the leeway to run the company the way they want to. Says he doesn’t feel good about the $500K pay cap, noting he’s fine with it, but others could go to other banks. Says he has talked to govt officials, regulators, etc, and nobody has ever said they thought nationalization was the way to go or likely to happen. Says never had anybody remotely talk about nationalization of BAC as a possibility.