Market Thoughts

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With some of the largest troubled financial companies (Citibank, Merrill Lynch) hunting the world for investment dollars, you’re probably wondering what terms they need to offer to get someone to come aboard and part with many billions. Apparently, learning from BofAs ill-timed original investment in Countrywide, the rules of the game seem to have changed.

Mish Shedlock at Economic Trend Analysis explains the use of “ratchet provisions.” Here’s the article he references:

In the terms for both the Merrill (MER) and Citigroup (C), convertible transactions are “ratchet” provisions. For those not familiar with the term, when an issuer agrees to a ratchet, it gives the security holder the right obtain better terms in the future under certain conditions.

Specifically, (and in a nutshell) should Merrill issue more than $1.0 of additional convertible equity, or Citigroup $5.0 billion in the next year at a lower conversion price, the holders of the deals announced this morning can get the new price.

For existing Citigroup/Merrill shareholders, should such a further capital raise occur at a lower stock price, their dilution will be significantly compounded because of the ratchet.

At least to me, the inclusion of a “ratchet” for both of these companies suggests that, while still available, the true price for incremental capital has gone up significantly.

Shareholders in troubled financial services companies should not take this lightly.

Hmm, I can’t help but think that giving terms under these conditions adds a smell of desperation…

With yesterday’s market drubbing, the bears came out ahead and influenced our Trend Tracking Indexes (TTIs) as well. Our International TTI headed further south (-8.24% below its long-term trend line) thereby confirming our sell signal from 11/13/07.

While the Domestic TTI is technically still in Buy mode (+1.66% above its long-term trend line), we’re not adding new positions as announced in my weekly StatSheet. Some readers have asked if I think that country funds will buck the current down trend here in the U.S.; the answer continues to be no. If the domestic market declines, the rest of the world will follow. You can easily verify this by looking at the performance of country ETFs in the most recent StatSheet.

As of last week, there were only a couple of countries that showed strong momentum numbers, and they have weakened since.

Current market strength can only be found in selected sector and bear market funds/ETFs, and I suggest cautious use since trends in the current environment can turn and end in a hurry.

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