50 bps

FED
The highlight of the week has certainly been the cut in the FED target rate by 50bps. Well a cut has been expected basically by everybody. However most people did expect a cut of 25bps and not 50bps. This came certainly as a surprise. The question now is why a cut of 50bps and not only the 25bps? Something really must be wrong somewhere.
Well Wall Street cheered the “surprise manoeuvre” from the Fed. Stock markets rallied strongly the same day. However the next day and the following days were just as the days before.
Well not everybody really was happy with the Fed decision. Please listen to the video of Jim Rogers before the Fed cut.

Billionaire Jim Rogers before the rate cut
http://www.bloomberg.com/avp/avp.htm?clipSRC=mms://media2.bloomberg.com/cache/vjUSJ.lwS8e0.asf

Several other commentators/essay writers mentioned that they are either shocked or disappointed and mentioned clearly that they feel that the Fed has intervened for the benefit of the financially reckless, the speculators and the Wall Street bankers and hedge funds (both holding huge amounts of toxic waste investments in their books). This cut in fact really only helps a few. Of course these “few” are the ones that the Fed wanted to help.
Does the rate cut really help? Looking at history it seems that the Fed has been always late. (http://www.hussmanfunds.com/wmc/wmc070917.htm) John P. Hussman certainly hits the nail when mentioning
Quote
Wall Street continues to hold its breath about the upcoming decision by the Federal Reserve. There’s no question that the Fed’s decision will have a market impact. This is not because Federal Reserve operations matter, but because investors believe they matter
Unquote
Well if you like to read a few excellent essays about the Fed decision, please click on the following links
http://www.financialsense.com/editorials/conrad/2007/0917.html
http://www.safehaven.com/article-8463.htm
http://www.safehaven.com/article-8448.htm

Talking about the Fed, it is certainly interesting too to read about Greenspan, who apparently did not make any mistakes in his 18 year tenure as Fed chairman.
Read:
The lies of Alan Greenspan:
http://www.sfgate.com/cgi-bin/article.cgi?file=/c/a/2007/09/18/EDCLS7TH4.DTL

Incredible indeed!!

Credit Markets:

19.9.07
09:17ET *DJ Morgan Stanley Wrote Off $726 Mln Of $31 Bln LBO Loans -CFO
09:17ET *DJ Morgan Stanley Has $31 Bln Of Loan Commitments -CFO
09:18ET *DJ Morgan Stanley $940 Mln Writeoff Shows Full Fair Value -CFO ay.

FRANKFURT, Sept 20 (Reuters) - Commerzbank could end up with a bigger loss from investments related to U.S. subprime mortgages than it had first expected, Chief Executive Klaus-Peter Mueller said on Thursday

20.9.07 Deutsche Bank’ CEO has admitted that the banks’s third quarter profits will be hit by the global credit crisis. Ackermann admitted that EURO 29 billion in credit agreements must now be reassessed as a result of the global credit crisis, which was triggered by the collapse in the US subprime mortgage sector. He did not specify how much the crisis would cost the bank.
Well we see now almost on a daily basis such information.

Expect more banks in troubles.

The game is now to try to postpone the obligation to make the losses public until next year. Interesting how the Bank of England finally helped Northern Rock. Before their rescue, they were saying that banks have to solve their problems themselves. Interesting to see that this change came the same day when Paulson was visiting the UK. Publicity of problems like Northern Rock is certainly a publicity not desired. Therefore the problem had to be solved fast in order to avoid more negative publicity. Acting fast rises the chances that nobody asks or tries to find out how the situation is with the other banks.

Rumors pop up all over.

There was a strong rumor of some banks in Spain having troubles. This does not surprise me at all. The Spanish banks are certainly heavily exposed to the local real estate sector. Knowing that Spain is in a real estate bubble as well, there must be some banks with a difficult time ahead.

French banks apparently have now been authorised to avoid disclosing losses.

Australian Central Bank had to comment on the rumors that some regional banks are in problems. Of course according to the Australia CB this is not the case.

And the US? I guess the story is not much different. We certainly will not hear much and the message mostly will be that everything is under control. However, apart from having certainly huge bad credits on their books, there are several US banks that have in addition to the bad credits, enormous derivative books (sometimes several times their balance sheet). That might very well mean that the rude awakening will not only be because of credit problems but as well because of some massive problems with their toxic waste of derivatives. Those banks with these huge derivative books have no chance by any means to know really what their exposure is. Everybody believed until recently that their hedges are under control. However they were on one side not aware of the real risks and on the other side they certainly do no have any idea at all who their counterparties really are and thus what their counterparty risk really is. It certainly is not the moment for a false feeling of safety. There must only be one important market participant to fail and we will see a Domino effect happening. This Domino effect will not be nice at all.
Maybe you remember when Warren Buffet bought General Re. As Buffet never really liked derivatives he ordered immediately to reduce General Re’s hedge book. It took them more than 2 years to reduce it in a more or less structured way and they still had to bear losses in the millions. This example clearly shows that General Re in fact had no idea about the derivatives structures on their book and the implied risks. Assuming that the same is true for many other companies, I would guess, is a safe assumption.

Well, of course, all this might only be rumors. However when there is so much sound, something possibly will happen.

Gold:
Gold has moved up nicely this week. I am still expecting the Central Banks to try to lower the prices and have a down correction soon. Fibonacci resistance is at 749 and strong support at 722 and 699. September is now the months with historically the most days with closings above USD 700. In a few days we possibly will see the first monthly closing in history above USD 700. Well as I expect the CB’s to try to keep the up move under control they certainly will try everything possible to hold the 749. However once we have passed that resistance it will become more and more difficult for the CB to keep the move under control. Especially taking into account that once certain price levels are touched the gold shorts will have to cover. So we might see soon a considerable short covering which will put a lot more momentum to the up move.

From lemetropolecafe.com (subscription recommended, only cost approximately USD 200 p.a.)

Le Metropole Members,

GATA Dispatch:
Bank of England's gold not good enough for delivery
The bank keeps around 300 tonnes of the yellow metal on behalf of the UK Treasury -- before Gordon Brown initiated his controversial sales programme in 1998 the tally was 700 tonnes -- but it has emerged that not all of this remaining metal is fit for delivery.
please read:
http://www.gata.org/node/5536



Fixed Income
Well with the Fed decision of cutting 50Bps I suppose that the holders of US fixed Income papers are not really happy. How will the foreign holders react? That is certainly an important question. Well there are clear signs that foreign central banks are slowing their purchases of the US Treasuries and mortgage-backed securities. There is less and less benefit for the Chinese and other regular buyers of the Treasuries, to have a benefit of expanding or holding US Treasuries and asset-backed securities in their portfolios. Therefore it seems that we will start to see much higher interest/yields for US papers in some 12 months.

Stocks: (copy from my post Sept.9)
Well there is not much trust. Investors are still selling. Sentiments are not positive. Is it the moment to buy? Well the contrarians clearly say yes. The contrarian believing is Buy when nobody wants to buy and sell when everybody is having a party. In that sense Puru Saxena believes that it is a good moment to buy. He likes especially the oil&gas companies and emerging markets. I certainly join him in the sense that I like oil&gas, refineries and other companies related to real assets (commodities).

Commodities: (copy from my post Sept.9)
No change. The need for physical commodities is still high and I believe there will not be a change soon. Although US Housing will slow down (if not stop completely) the demand from China and India (infrastructure building) will keep the demand high.

In addition to above comment, we can see more and more newspaper articles about increasing food prices. On one side the weather conditions in several regions did not really favor good harvests. On the other side the use of some important grains to produce ethanol has had several negative impacts on the production of other food products. I do expect that prices will go much higher. Peak Oil will not help to solve this situation. In that sense, if you have a piece of arable land, don’t sell it if you can hold on. Having the chance to produce your own food will become very important in a relative short time.

Currencies
For the moment being, the USD is certainly not the preferred currency. The Canadian Dollar for the first time in many years finally reached parity to the USD again. I can not imagine why anybody might be interested in holding the USD as an investment under the actual conditions. Central Banks have been diversifying out of the USD already for quite some time. Those CB’s that have not done it yet will do it soon. Therefore the USD might tend to an ongoing weakness.