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Five Things You Need to Know: Market Out Briefly on Payroll; Merrill Off-Balance-Sheet Shenanigans Draw Scrutiny; Fitch Tosses a Little Kindling on the Fire; Avian Flu Epidemic Still Possible; Minyanville Guide to Avian Flu


What you need to know (and what it means)!


Minyanville's daily Five Things You Need to Know to stay ahead of the pack on Wall Street:

1. Market Out Briefly on Payroll

The fear on the streets was palpable this morning after it was learned that the market, only a day after slashing 365 Dow points from investor portfolios, was being released early on payroll... data.

  • American employers added almost twice as many jobs as forecast in October, according to the Labor Department.
  • Payrolls climbed by 166,000 after a 96,000 increase in September and the jobless rate held steady at 4.7%.
  • "The labor market continues to be inconsistent with fears of a recession,'' Dean Maki, chief U.S. economist at Barclays Capital in New York and a former senior economist at the Fed, told Bloomberg.
  • I guess we don't look at it that way because month-old economic data has a tendency to reflect what was happening last month, not what is likely to happen in the future.
  • The Birth/Death Model adjustment was 103,000.
  • And a whopping 25,000 of those jobs were "created" in "Financial Activities" and 14,000 in Construction.

2. Merrill Off-Balance-Sheet Shenanigans Draw Scrutiny

Meanwhile, in the real world, regulators may be investigating whether Merrill Lynch (MER) violated accounting rules to delay reporting of subprime losses, the Wall Street Journal reported.

  • The heart of the Journal story rests on "unidentified people" who say Merrill engaged with some hedge funds in deals designed solely to delay disclosing losses on bonds or derivatives positions backed by subprime mortgages.
  • The U.S. Securities and Exchange Commission has opened an informal inquiry and is likely to investigate the transactions, a person familiar with the investigation said apparently told the Journal.
  • Ok, so what does all this really mean? What kind of "deals" are we talking about here?
  • The deals effectively move the securities off the balance sheet of one of Merrill's sponsored entities and onto the balance sheet of the hedge fund involved.
  • How does that work? Well, Merrill prices the assets and the hedge involved fund agrees to "buy" the assets at that price and hold them for one year in exchange for a guaranteed minimum return.
  • Sounds shady, huh?
  • It's actually more common than one might think, and assuming the "pricing" is on the up-and-up, really not that shady at all.
  • Where the water turns murky is in the pricing.
  • In one case the Journal says Merrill sold commercial paper issued by one of its entities for $1 billion.
  • If, for example, regulators were able to determine that the transaction was unreasonably priced - say, if the assets that were transferred for $1 billion were really worth $500,000 million - then this is a serious problem.
  • In fact, then it becomes virtually identical to the off balance sheet transactions that were structured at Enron to hide losses.
  • This story is just beginning.
  • Unfortunately, if the old adage is true - news follows price - then Merrill's 11.8% move lower so far today is not encouraging for the outcome.

3. Fitch Tosses a Little Kindling on the Fire

According to Fitch there were $92.1 billion worth of US corporate bonds downgraded in the third quarter of this year – 88% higher than the $49.1 billion through the first half of the year.

  • That's the highest level in almost two years, and worse, almost all of the cuts were on investment-grade borrowers.
  • Investment-grade bonds accounted for $88.1 billion of the cuts, while speculative-grade debt represented just $9.9 billion.
  • The industries most affected, as one might guess, were Finance and Banking.
  • Meanwhile, Standard & Poor's today said its bond downgrades outpaced upgrades in the third quarter by the widest margin since 2003.
  • S&P cut the ratings of 95 companies in the U.S. in the quarter and raised the ratings of 44, Bloomberg reported.
  • Again, this story is just beginning as well.

4. Avian Flu Epidemic Still Possible, WHO Warns

World Health Organization Director General Margaret Chan warned Friday that the risk of an avian influenza pandemic had not been averted despite the apparent success of several Asian nations in controlling outbreaks of the disease, the Associated Press reported.

  • The WHO warned in September that H5N1, the strain of bird flu that has been deadly in humans, had become "deeply rooted in domestic birds" in Asia despite efforts to control outbreaks.
  • WHO said it had recorded 303 human infections with bird flu in 12 nations, including 204 deaths, by October 31.

5. Minyanville Guide to Avian Flu

Avian influenza, or "bird flu", is a contagious disease of animals caused by viruses that normally infect only birds but there is mounting evidence that Avian Flu has a unique capacity to jump the species barrier and cause severe disease, with high mortality, in humans. To help you prepare for the possibility of an Avian Flu outbreak in humans, Minyanville has prepared the following guidelines:

  • Wash your hands frequently, and also be sure and wash them after drying them because what if the towel you used has Avian Flu on it?

  • If at all possible, stay home from work, especially if your work involves giving people Avian Flu.

  • Viruses, including Avian Flu, can be transferred through sexual contact. Avoid unprotected sexual contact with birds that have Avian Flu. Don't be a statistic. It is not enough that a bird "looks clean."

  • Children and the elderly are most at risk for contracting Avian Flu. Surround yourself with children and old people. They will act as a shield of sorts to absorb Avian Flu germs.

  • Step up your oral hygiene regimen. Keep your mouth fresh with Lysol instead of Binaca; Liquid Plumber instead of Listerine.

  • Don't share drinking glasses with friends and colleagues; use direct mouth-to-mouth transfer instead.

  • Fashion a homemade biohazard suit out of rubber gloves, plastic trash bags and duct tape. DO IT! DO IT NOW!!!!!

  • Use disinfectant cleaners on counters, sinks, doorknobs, telephones and any other surfaces that may be contaminated. Take your time and do a good job. When you are finished with those, start on my basement.

  • If you happen to contract Avian Flu while cleaning, stop! Because then you are no longer cleaning, you are spreading.

  • Avoid Evian water. While there's no scientific evidence that Evian is made with 100% real Avian Flu, you're still only one vowel away from certain death.

  • Infectious diseases such as Avian Flu are frequently transmitted via coughs and sneezes. If you sense a sneeze or cough is about to occur, quickly cover that person's mouth, nose and ears with duct tape.

  • To prepare for life after the Avian Flu pandemic, practice walking around like an infected human zombie and terrorizing the last remaining uninfected villagers.
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