July/August post

We are indeed in an interesting environment. What I mentioned in my previous posts is happening.

• First of all there are several hedge funds in trouble and I am convinced that we will hear a lot more news of more funds in deep problems. (read http://dealbook.blogs.nytimes.com/2007/08/09/bnp-paribas-freezes-funds-on-subprime-woes/?ex=1187323200&en=f42957ee2abc97fa&ei=5070&emc=eta1)
• The big private equity funds using credits to buy companies just found out that for the moment being there is no credit or liquidity. That means they have to cancel several deals. This in my opinion is certainly not bad as the way these private equity funds behaved was not positive for the economy in the long run.
• Central Banks are injecting loads of liquidity in order to try to calm the markets. ( http://www.bloomberg.com/apps/news?pid=20601206&sid=abxvzZgdV5.I&refer=realestate)

How central banks have acted to inject funds?

FRANKFURT, Aug 10 (Reuters) - Central banks from Frankfurt to Sydney have injected extra cash into banking systems to calm panicky credit markets in the last 24 hours. Below is a breakdown of their actions.

• EUROPEAN CENTRAL BANK The ECB pumped 94.8 billion euros ($130.6 billion) in a one-day tender on Thursday, the largest amount ever. It followed with 61.05 billion euros ($83.61 billion) in a 3-day tender on Friday and said it continued to monitor conditions in the euro money market closely. The totals were well above the amounts that the ECB flooded into markets immediately after the Sept 11, 2001, attacks on the United States. At that time, 69.3 bln euro in overnight money was allocated on Sept. 12, 2001, followed by 40.5 billion euro the next day.
• U.S. FEDERAL RESERVE The Fed added $24 billion into the U.S. banking system on Friday, its biggest single-day cash injection in nearly four months. But analysts said this did not amount to an emergency injection of liquidity and was not significantly above the range of funds added in normal market conditions.
• BANK OF CANADA The Bank of Canada injected C$1.64 billion ($1.55 billion). It said it was in contact with other central banks on the global situation and stood ready to add money as needed.
• BANK OF JAPAN The BoJ supplied 1.0 trillion yen ($8.45 billion) at its regular money market operation on Friday after a slight rise in the benchmark overnight call rate. Traders said the amount was at the higher end of market expectations, but was not a major surprise.
• THE RESERVE BANK OF AUSTRALIA The RBA on Friday added more than twice the usual amount of money into the banking system, injecting A$4.95 billion ($4.19 billion) in its regular morning money market operation.
• SWISS NATIONAL BANK The SNB offered banks money at a below-market rate of 2.6 percent for the second day in a row on Friday. Traders estimated that 2-3 billion Swiss francs ($1.68-2.51 billion) was probably injected on Thursday, when the market rate was at 3 percent.
• CENTRAL BANKS OF MALAYSIA, INDONESIA, PHILIPPINES Traders said the Asian central banks intervened in foreign exchange markets on Friday to support their currencies by selling U.S. dollars. BANK OF KOREA South Korea's central bank said on Friday it was ready to add funds to markets if needed.
• CENTRAL BANK OF NORWAY The central bank said Thursday's loan of 45 billion crowns ($7.80 billion) gave ample liquidity to banks and it would continue to ensure orderly operations in the money market.

This is definitely not small business. In fact the amounts injected are higher (read Bernake panics and gold responds http://globaleconomicanalysis.blogspot.com/). I strongly believe that the crisis is just at the beginning and that the Central Banks will need to inject a lot more money. Well on one side I truly hope that they will be successful in order to have a few more months with a happy market environment, but on the other side I do know that these quick batches are not really the solution. Markets need from time to time a correction in order to eliminate excesses. What we are seeing now is that the problem is postponed and as the excesses in fact do increase the future correction will be a lot stronger.

Equity markets

As mentioned in my previous post, I do believe that the Plunge Protection Team will do it's best to keep the equity markets positive ( http://www.marketoracle.co.uk/Article1771.html). My favorite stocks are the stocks related to oil & gas (especially now after a correction of approximately a minus of 20%), refining, drilling, metals, water, infrastructure building, land, timber and soft commodities.

Bonds

Who wants to buy bonds knowing that the prices might be much lower in a few days. There are simply no buyers in the market. The Investment Banks are filled up with bonds they cannot sell or place in the public. There must be a lot more junk

Gold/Silver

I expect the prices of both metals to increase considerably until February 2008. Inflation adjusted prices should already be much higher. Now with the liquidity crisis, more people do want to be on the safe side and therefore will buy some Gold

Oil

Please read http://globalpublicmedia.com/richard_heinbergs_museletter_the_view_from_oils_peak.

Again, prices short term can be influenced with politics or political talk. The trend however is clear, no increase in production but high increase of the demand side. We will see much higher prices in the month to come.