Dear reader
Although I promised not to bother you anymore with the information pieces until next year, I decided to send you this quick post. Why? Because I feel that there was simply too much of important information pieces this week.
Fed
The Federal Reserve cut its Fed Funds Rate and the Discount Rate by 0.25 bps. After staging a modest rally earlier in the day, Wall Street sold off in the afternoon. Clearly, the market was expecting a larger cut and disappointed investors sold the news. As the Fed is already behind the curve it will need a lot more rate cuts to keep the market happy. The reaction of the market will mean that the PPT will have some more work to do in order to keep markets at actual level. It would not be a surprise to see a test recent lows.
The Federal Reserve and counterparts in Europe, Canada and Britain banded together on Wednesday to cough up funds to boost liquidity in their first coordinated action since terror attacks shut U.S. financial markets on September 11, 2001.
The action was decided in a meeting in Cape Town. One of the participants mentioned; "Central banks cannot compensate for this lack of confidence simply by injecting additional liquidity. On the contrary, the financial market participants themselves must take the fundamental steps needed to restore this confidence."
http://news.yahoo.com/s/nm/20071213/bs_nm/economy_credit_dc_2;_ylt=AiQ78rFTe.XqPJcWWQKZ7uwE1vAI
Dear reader, I leave it to you to guess if the above action does give us some hints on the actual situation and what is to come.
Credits
Yes my dear reader it does get uglier. Almost on a daily basis we get know information about banks or any kind of investors reporting losses due to the subprime, credit crunch crisis. Following a few examples that hit the wire this week
Freddie Mac expects $10-12 billion credit losses
http://news.yahoo.com/s/nm/20071211/bs_nm/usa_subprime_freddie_dc_2;_ylt=Aib.ecBFMo0ng1h15.6DTJoE1vAI Mortgage crisis forces big cuts at WaMu
http://news.yahoo.com/s/ap/20071210/ap_on_bi_ge/washington_mutual_2;_ylt=AmkRRmT9fb7fqJvPoerLhuEE1vAI Bank of America says closing money market fund
http://www.reuters.com/article/marketsNews/idUKWEN288320071210?rpc=44
UBS writes down $10 bln, Singapore injects capital
http://news.yahoo.com/s/nm/20071210/bs_nm/ubs_dc_3;_ylt=ApKnccCCaA1pXLqj0MrykV4E1vAI
Societe Generale Takes On $4.3 Billion of SIV Assets
Dec. 10 (Bloomberg) -- Societe Generale SA, France's second-biggest bank by market value, will bail out a $4.3 billion fund after losses related to the collapse of the U.S. subprime-mortgage market to avoid a fire sale of assets.
Societe Generale is following London-based HSBC Holdings Plc and Rabobank Groep NV of Utrecht, Netherlands, in rescuing structured investment vehicles. Societe Generale was ``very close' to having to cede control of its Premier Asset Collateralized Entity Ltd., or PACE, to an outside trustee, Standard & Poor's said Dec. 7.
``They jumped before they were pushed to avoid being forced to sell assets,' said Nigel Myer, a credit analyst at Dresdner Kleinwort in London…
The Telegraph: Why are banks so reluctant to lend to each other…?But it is also possible that the banks' reluctance to lend reflects a rational fear that bank losses are already, and will be in the future, much bigger than the manageable estimates of losses from sub-prime mortgages suggest. I think this is probably closer to the mark. Over and above the sub-prime losses, there will be losses from prime mortgages and from lending to commercial property, and from heaven knows what else - in both the UK and in the US. There are the makings here of a nasty interaction between weak asset prices, bank losses and a weak economy.
http://www.telegraph.co.uk/money/main.jhtml?xml=/money/2007/12/10/ccom110.xml
Citigroup Will Assume Control of 7 Structured Investment Vehicles With $49 Billion in Assets
http://biz.yahoo.com/ap/071213/citigroup_sivs.html
The word that comes into my mind is OUCH
The problem with the subprime mess or the investment vehicles which until recently seemed top high quality is, in fact, that nobody really knows what these papers are worth or if these papers do have anything to back it up and most important if these papers can be sold at acceptable prices. The whole repacking of the mortgages into papers with different tranches was, as we find out now, an exercise of converting prime meat together with low quality meet into hamburgers. The problem is that some of this burger meat was labeled as prime beef (well they forgot to let us know that between the prime beef there is a lot more of useless fat and other trash). That means that a lot of investors believed that the bought prime beef an in fact got low quality hamburger meat instead. To me this is fraud. Of course the rating agencies that played along with the packers ( US financial industry) will not accept their responsibility at all. Interesting to find out what their excuses will be.
Total amount announces is already above the 61 billion mark!!
Well as mentioned a few times, this problem is not yet solved. There is more to come. Hope you have your winter jackets, hand gloves etc. ready for the cold Kondratieff winter that is in its early stage. As promised in January I will post information about the Kondratieff cycle. Don’t miss that post, with a lot of very important and interesting information
Mortgage rescue plan
Merrill’s David Rosenberg: We were amazed to see how investor psychology was able to shift so suddenly on the "Hope Now" plan announced by the Treasury last Thursday, considering how limited and flawed the proposal really is. The question must be asked as to why it is that the media and the markets currently believe the plan is a step in the right direction when it risks abrogating contract law and invoking moral hazard.
How can this program possibly do anything but delay the inevitable? It is targeted to mortgage borrowers with the worst credit characteristics. The program will freeze interest rates at their current 7-9% subprime range - a level that they can barely afford as it is, which is why most foreclosures are occurring before the mortgage resets. And, the plan is only available to those with barely any equity in their home.
Those covered by the plan still remain at risk of defaulting Unless this initiative or some miracle manages to turn around the deflationary nationwide trend in residential real estate prices, the folks being covered by the plan remain at risk of defaulting later because their incentive to continue to service a depreciating asset at an interest rate level that is still more than double underlying income growth is going to completely vanish. There has been considerable research done showing that the principal cause of mortgage foreclosures, by the way, is not the level of the FICO score or whether someone is prime, Alt-A or subprime, but rather the loan-to-value ratio - which in turn is principally driven by the direction of
home prices (a San Francisco Fed paper, released just last Friday, shows statistical evidence of this).
http://www.financialsense.com/fsu/editorials/schiff/2007/1206.html
Commodities
Soft commodities (grains etc). In some discussion I had lately I expressed my opinion that food prices will go up much more and that I do not believe that we will see lower prices soon (if ever). As a strong believer of the Peak Oil theory and as a believer that we passed Peak already in 2006 and knowing that oil prices are a very important factor on the cost side of producing food I do not see how prices can come down. Furthermore we have other aspects that will affect the food production such as for example the fact that there every year less arable land. Furthermore the average production on the arable land is in some place decreasing considerably. For example 50% of the food production in the US is done with mono-culture production using hybrid seed varieties which over time decreased soil fertility and yields. Since the 90ies the average production from these mono-cultured pieces of land has been down by more than 10%. So the green revolution which first brought more production is now clearly heading down the road with increasing speed. Global warming, lack of sufficient water and so on are other factors that make prices increase. In general terms it seems safe to say that the green revolution brought more production but the way it was achieved was not healthy at all. Apart from using hybrid crops which do not reproduce themselves as easily as the traditional crops, using enormous irrigating systems and thus eliminating the acquifier plus the enormous use of herbicides and pesticides in fact mad the land less productive and even in some cases not arable anymore. So I believe that investing in soft commodities in the long run will at least compensate to some extend the higher costs we will have to bear.
Below you find a chart showing grains versus us equities. I was putting together the wording of above comment already at the beginning of the week. In an excellent timing, Ned Schmidt posted an essay about grains on Thursday on financialsense.com. To read his comment, please click on http://www.financialsense.com/editorials/schmidt/2007/1211.html
Following to articles that try to explain why food prices will remain high
http://www.ipsnews.net/news.asp?idnews=40359
http://www.economist.com/displaystory.cfm?story_id=10250420
Official US Statistic
Well what we get delivered is more a joke than anything else. It reminds me completely on Gorge Orwell and his 1984. Just recently I was rereading it again after more than 20 years. Wow it is incredible to find out that many things he wrote many years ago became reality. As mentioned several times I strongly recommend to subscribe to http://www.shadowstats.com/ (enter the page and then click on the right hand upper part side where it says “Alternate Data Series page.” And you will get to the page with the most important graphs. The information is excellent and you will understand why certain official numbers simply to not make sense at all. Latest from Shadowstats; M3 is already at 15.8% and is close to the historic high of 16.4% reported for June 1971.
Gold
From http://www.lemetropolecafe.com/ (as mentioned before, I do recommend to subscribe, has excellent information about Gold and what is going on in general terms)
Quote
GOLD Ace journalist (MarketWatch) Peter Brimelow writes "The Gartman Letter, not at all a bug service, but thought to reflect key hedge funds’ rekindled interest in gold, sold half its holdings yesterday 10/17). But Gartman is a nervous [in/out] trader. Nevertheless, for the longer term, the gold bug faction lead Bill Murphy's LeMetropole Cafe Website is cockahoop. has long argued the metal's price has been repressed what it calls The Gold Cartel, an alliance between the official sector (central banks, US Treasury) & chosen instruments (key investment banks, co-opted bullion dealers others) to create a financial assets [paper] boom.
"Reason for rejoicing: The discovery by James Freemarket Gold & Money Report) that: ‘The US Treasury quietly made a subtle change to its weekly reports of US Int’l Reserve Position, which includes the US Gold Reserve.
This change was first made May 14 ... It says US Gold Reserve is 261.499 million ounces & importantly, that the gold is now reported "including gold deposits &, if appropriate, gold swapped." (emphasis added).
‘This description provides clear evidence the US Reserve is in play. Gold has been removed from Treasury vaults & placed on deposit, presumably in couple of bullion banks the Treasury has selected assist with its gold price-capping efforts. Gold placed deposit gets loaned out by these bullion banks, & sold into the spot market to try capping the gold price’."
Peter says: "This is exactly what the LeMetropole gold bugs have long said was happening. It may like an arcane point. But I remember when the idea central banks were systematically selling gold at all dismissed as crankishness. Yet it's now universally acknowledged.
And gold, by the way, has fought its much higher, just as gold bugs said it would. Turk's conclusion:
‘This new evidence provided in the US Treasury report, as well as the rising gold price itself, suggests me that we are now witnessing the last scramble by gold cartel to cap the gold price. It is a vain attempt them, acting under US Treasury instructions, to make the world think the dollar is worthy of being the world's reserve currency when everyone knows it is not…
Unquote
Furthermore from the same source the following important piece of information related to gold demand.
Quote
China's wealthiest investors set for gold spree
China's wealthiest investors are on the brink of ploughing as much as $68 billion into gold markets as they take profits from roaring share prices and steer clear of property, a top fund manager and bullion bull says. Wang Weilie, a pale, bespectacled 40-something who manages over 1 billion yuan ($135 million) on the Shanghai Gold Exchange on behalf of himself and clients, says the so-called "Zhejiang clique" are ready to pounce after Beijing opens up spot market bullion trading and a futures contract launches early next year. After amassing an estimated 3 trillion yuan ($400 billion) from investing in red-hot real estate and stock markets which have risen five-fold in the past two years, the wealthy group from eastern China is looking for the next sure bet. Wang says that's gold, and expects the amount of Chinese capital invested in the bullion market to soar 100-fold to some 500 billion yuan ($67.5 billion) in the next two years -- a sum that could catapult China ahead of India as the world's top buyer. "We all agreed that upside room on stocks was limited, as was upside on property prices. But the gold price has only increased minimally, even after 20 years of China's reform and market opening," Wang told Reuters during a lunch with three business partners in Lujiazui, Shanghai's financial hub. Coupled with inflation and global economic uncertainty, the redirection of Chinese capital towards domestic gold contracts will help spot prices more than double, says Wang, who says he once cornered two-thirds of the Chinese gold forward contract. "Spot gold prices will hit $2,000 in coming years," he said. Spot gold touched a 28-year high of $845.40 per ounce in early November, nearly doubling over three years amid a flood of investment in the commodities complex -- much of it driven by China's growing demand for raw materials to fuel its economy. Wang expects more than 15 percent of the capital currently invested in China's stock market to move to gold trading. China's total market capitalization peaked at about 35 trillion yuan in October, exceeding the country's gross domestic product. The main stock index tumbled nearly 20 percent last month while Beijing has continued tightening controls over the property sector to limit price gains (Reuters).
Following a chart to show you that physical production is in decline. The chart is from the biggest gold producing country. However all countries, with the only exeption of china are in decline
Derivatives
The casino is growing!!! Derivatives Trade Soars to Record USD 681 Trillion. The Bank for International Settlements (BIS) is reporting Derivatives traded on exchanges surged 27% to a record USD 681 in the third quarter.
The amounts are based on the notional amount underlying the contracts.
Interest-rate futures, contracts designed to speculate on or hedge against moves in borrowing rates, led the increase with a 31 percent increase to $594 trillion.
Trading in stock index futures and options rose 19 percent to a record $81 trillion in the third quarter, as investors speculated on whether the credit-market losses would spread to the equity markets.
Trading in currency futures and options increased 18 percent to $6.4 trillion, the BIS said.
Well my understanding of the report is that we talk about exchange traded derivatives. What about the over the counter derivatives? That means that the casino is much bigger than the number mentioned. Please keep in mind that although some of the derivatives are used to hedge existing risks, the counterparty risk is not eliminated at all. If the counterparty cannot fulfill what is stipulated in the contract there will be a problem. To me it seems as the biggest Domino game ever. One stone falls and the rest follows. Everybody might believe that they control their risks. Well that might not be the case.
http://www.bloomberg.com/apps/news?pid=20601085&sid=ad71potU0EbM
please read this excellent piece of information from Mish
http://globaleconomicanalysis.blogspot.com/2007/12/derivatives-trade-soars-to-record-681.html
This is in my opinion a clear MUST READ!!!
Nathan Lewis: THE OTHER DERIVATIVE PROBLEM
http://www.dailyreckoning.com/Issues/2007/DR121107.html#essay
(it you get in on the top, please scroll down to the info from Nathan)
Commercial Real Estate
Will commercial real estate fall? My guess is yes indeed. Found the following piece of information writing about the same topic.
http://www.safehaven.com/article-9001.htm
Peak Oil
You certainly came across the information that Brazil or Petrobras found a new Mega Oil field. This is certainly good news. However this new discovery does not change the big picture re Peak Oil at all. I think it is very important to read the article as below web link because the analysis shows clearly that bringing oneline these new production is very difficult on one side and on the other side the expectations are simply too high. This is not the first time we hear about a new Mega Oil field that was found and after a certain time it was clear that expectations were too high.
Quote (part from the information on below web link)
Later news reports like McClatchy's Massive deep-water oil find in Brazil challenges technology (Yahoo News, December 1, 2007) cited the technological challenges in producing a field that lies "under 7,000 feet of ocean water and more than 16,000 feet of rock, sand and salt, including a 1.2-mile-thick layer of rock-hard salt." Wood Mackenzie analyst Matthew Shaw "said it is unlikely Tupi production will start before 2013. But by 2022 the field could be producing a million barrels a day." Petrobras CEO Sergio Gabrielli that Tupi production will "very likely" top 200,000 barrels of oil equivalent [BOE] in 10 to 15 years, but threw caution to the wind when he said that "pilot production at the field may start in 2010-2011 at around 100,000 BOE a day." Petrobras CFO Barbassa upped the ante concerning the date—
Unquote
http://www.aspo-usa.com/index.php?option=com_content&task=view&id=265&Itemid=91
USD
The Economist put out another landmark magazine cover, just in time to mark the low.
Headline: “The Panic About the Dollar.”
Wow, The Economist proved itself again as maybe the best contrarian indicator. Since the issue with the cover as above came out, the USD is getting stronger. As mentioned in previous posts, this movement was expected. Will see if the upmove of the USD will last the expected 3 to 6 months.
Well this is it for this week. In case you have question or any suggestion or an important piece of information that is of interest to the readers of this post, please send me an e mail. Furthermore if you feel like recommending this post to your friend, please do not hesitate to do so.
Again, I wish you and your loved ones a merry Christmas and a wonderful 2008
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