Merrill Lynch (MER), in taking the extreme action of agreeing to sell $8.5 billion of stock and sell $30.6 billion of bonds at 22 cents on the dollar, in order to protect its credit rating, has scared the market. Traders are now openly questioning how bad can this crisis get.

Overnight, the markets in Asia-Pacific were weak: Australia down -1.33% to 4923.3; Shanghai down -1.82% to 2850.3; Hong Kong down -1.89% to 22258.0; India’s Sensex 30 down -3.89% to 13791.5; and Japan’s Nikkei 225 down -1.46% to 13159.45.

In Europe at 7:45am ET (1245 GMT), the French CAC was down -1.18% to 4273; the German DAX down -0.67% to 6309; but the UK FTSE was up +0.48% to 5336. Clearly, there is an effort by the Bulls to boost the market at the open.

Yesterday, the North American equity markets were crunched again. The DJIA (-239.61 -2.11% to 11131.08), S&P 500 (-23.39 -1.89% to 1234.37), and the NASDAQ Composite (-46.31 -2.00% to 2264.22) stumbled badly. Toronto Composite (-0.56% to 13303.96) and Venture board (-0.08% to 2186.5) were also down, but much less so.

NY markets closed near their lows as selling pressure continued all day, although volume was exceptionally light. Financials (XLF -4.7%) led the sell-off, with Consumer Discretionary (XLY), Industrials (XLI) and Tech (XLK) also off more than -2.0% each. Energy (XLE +0.4%) managed a gain as Crude Oil ($WTIC +$1.47/bbl) closed up to 124.73.

The extreme industry groups were Airlines ($XAL -6.2%), Broker-Dealers ($XBD -5.2%) and Banks ($BKX -4.5%) on the downside, and Integrated Oils ($XOI +0.5%) and Goldminers (+0.2%) on the upside.

For the Cara 100, with very small volumes, the winners were SYT, BDK, NUE and GG, each up just +1.7% to +2.8%, whereas the losers were WBK (-10.5%), IBN (-8.4%), MICC (-8.0%) and TTM (-6.6%), which reflected the broad market sell-off.

In addition to the Merrill woes, two more US banks (First Nation Bank of Nevada and First Heritage Bank) were the sixth and seventh failures of the year.

After the bell, Amgen (AMGN +12.2%) reported a surprising Q2. Earnings dropped -7.6% due to restructuring and other charges as well as further declines in anemia drug sales. But these results beat analyst forecasts and there was also a positive study result on the company's promising osteoporosis drug (Denosumab). AMGN set a 52-week high of $62.50 before closing at $60.48.

On the corporate earnings front early today, Sony Corp (SNE) reported Q2 earnings plunged by about half to 34.98 billion yen ($326.9 million) versus a consensus forecast of a 52 billion yen ($486 million) profit. The reasons given: (i) a strong yen, (ii) the absence of "Spider-Man 3" revenue, (iii) faltering results at its cell phone operations battered earnings, and (iv) price competition in its core electronics sector.

The $USD closed the session down -0.24% to $0.7267 and the Euro was up +0.24% to $1.5741. US Bonds ($USB +1.07% to 115.03) were up as there was a safe-haven move to bonds and cash from equities during the session.

Precious metals were quiet yesterday, closing up +$0.90/oz to 937.80.

Spot prices at about 7:45am ET are for gold, palladium, platinum and silver per oz (vs yesterday morning’s prices): 925.31 (930.05), 386 (383), 1763 (1752) and 17.41 (17.42). The USD has just firmed in the past hour.

Comments & Outlook

The fact that Merrill Lynch did not previously write-down their mortgage-backed assets in any significant way, despite knowing their dire straits, is inexcusable. Yesterday the Company sold almost $31 billion of such assets for 22 cents on the dollar. That write-off is more than Merrill’s market cap. Regulators need to know when Merrill actually believed their assets were significantly overpriced on the books, and who in management misled the stakeholders of the company. I think these are indictable offenses.

America has to wake up. It’s not just Merrill at fault here. Recently, Lehman Brothers did the same. Had they written off bad assets earlier, at a point I believe the insiders really knew the score, that company would have been bankrupt as well. And, I think Fannie, Freddie and scores more are in the same boat.

The capital markets can no longer accept such deceitful practices as the norm if the market is to remain an effective value pricing tool. Right now, it’s a joke. The authorities must fail to understand the importance of such matters at hand. Either that or they are complicit in what is going on.