Feb 9, 2008

Dear reader
As mentioned, I am trying to post from time to time, although actually I am traveling and therefore I do not have much time to write.
The spanish version should be out soon.


Derivatives

Dear reader, although I have been critizing derivatives over the last months, I’d like to mention that not all derivatives are bad. What I clearly do not like is the fact that we have over 500 trillion of USD in derivatives, which is at least 10 times world GDP (please take note that this is the official world GDP and if we would consider the real GDP the number would definitely be above the factor of 10) and that a 80% of these derivatives is in some way related to interests. That means that we have an enormous amount of money in a kind of casino play with the only difference that the guys betting in the casino know clearly that if the bet on black and red shows up, they lose while the guys betting on the derivatives casino do not yet know it.
Anyway the surprise will be of course substantially much bigger for those betting on the derivatives casino. Well dear reader, it is clearly not my idea to rant on the derivatives. Yes there are a lot of derivatives that make a lot of sense. For example when a coffee producer sells his future production via derivatives or when a coffee trader buys via futures what he needs. This is the kind of business that helps all the involved parties to calculate their prices, be it to calculate their production cost or their purchase price. However if I look at the derivatives connected to interest rates, then yes we do talk about casino. I mentioned it before, but I would like to mention it again, all those people who recently bought credit risk derivatives and believe that now they are perfectly well hedged, are for a sure ride of surprise when they will find out that their hedge will not be as good as they thought. You might have an excellent insurance plan but in the case that your mighty insurance company get’s out of business, your best planned insurance plan might still be the best insurance plan ever made on planet earth but unfortunately it will not cover your risk anymore. That means your time spend to find out how to insure yourself unfortunately has been time lost. Maybe relaxing on a nice boat trip enjoying a delicious wine together with dear friends would have been a much better investments than buying credit risk insurance using derivatives.

http://www.cornerstoneri.com/comments/TrillionDollarSecret.htm

Below an example of a company that possibly will have to face some negative surprises sometime in the future

Bear Stearns Makes $1 Billion Bet on Subprime Market
Feb. 8 (Bloomberg) -- Bear Stearns Cos., the U.S. securities firm that posted its first-ever loss last quarter on mortgage writedowns, is betting more than $1 billion that subprime home loans and bonds will continue to decline.
The wager, a ``short' position on subprime mortgage securities, was increased from $600 million at the end of November, Chief Financial Officer Sam Molinaro said today at an investor conference in Naples, Florida. The company also reduced its holdings of so-called collateralized debt obligations and underlying bonds, Molinaro said.

The sinking value of assets tied to mortgages led to Bear Stearns's fourth-quarter loss of $854 million. The company, the fifth-largest U.S. securities firm by market value, dropped 46 percent in New York trading last year, more than any Wall Street rival, leading James ``Jimmy' Cayne to hand the chief executive officer role to Alan Schwartz last month…
Nice bet. Will the counterparty be able to pay when the have to?


From www.shadowstats.com

A quick look at the "advance" estimate of fourth-quarter GDP growth and January payroll data and revisions indicates a rapid surfacing of the inflationary recession that recently has been gaining recognition among Wall Street analysts and consensus economists. With the Fed capitulating to stock-market demands for easing, deterioration in the U.S. dollar should accelerate sharply. The general outlook for the months ahead, however, remains the same, with a deepening inflationary recession, a major bear stock market, heavy selling of the U.S. dollar, heavy buying of gold, and an eventual flight to safety away from the greenback that will spike long-term interest rates (currently negative net of inflation).


Gold

1 - Valuation -- the most important, yet overlooked commodity on the board
2 - U.S. dollar still over-owned, diversification and/or new reserve currency still needed 

3 - Worldwide gold reserves are stagnant and mine production is shrinking (peak gold)
4 - China’s gold and futures exchanges just now launching access to gold investments for retail investors 

5 - No sign of an end to cheap money policies despite a sizeable inflationary threat 

6 - Coming bear market in shares to provide extra fresh safe haven “liquidity” 

7 - Seasonal trends are favorable until about May-June 

8 - 2008 U.S. election uncertainty 

9 - Geopolitical uncertainty / wild card 

10 - U.S. budget deficit to widen on recession and current stimulus plan
11 - Confidence in Fed impaired as Bernanke seen to panic on latest rate cuts

Gold

From Orlandini looking at the point and figure chart



There is a bullish price target of 1,125.00 and that is a long ways from here. I look at this graph and then I think that gold could actually take five runs to get through the 931.5 resistance thereby building a strong base for a run to 1,125.0 and that would catch a lot of investors by surprise. A lot of investors are negative gold right now and that would leave them scrambling to build a position. Looking at gold this way, I am growing quite bullish.


Consumer Credits

Retailers struggle as Americans pull back,” is how the International Herald Tribune sees it. “You’re seeing the continuing unfolding of the consumer spending slowdown,” said another expert on retails sales.

WSJ
The Journal reports that credit-card delinquencies are rising across the country, leading banks to tighten lending standards (see 4-Feb comment), and making it hard for those who have maxed out their cards to tap new sources of credit. According to the article, this dynamic could exacerbate a slowdown in consumer spending that could further jeopardize the economy. Of interest, the Journal notes that this trend may already be in motion, as the Fed on Thursday reported a marked slowdown in credit-card borrowings. The article goes on to discuss the ever-increasing use of credit cards for the purchase of everyday necessities such as groceries and gasoline.

Yes dear reader, any surprise? I guess not.

Americans have simply spent too much, borrowed too much, and saved too little.
That means that not even the new spending bill just passed by the Congress will really help.



Bailout MBIA

Bond insurer MBIA printed an extra 82 million in stock yesterday in an effort to quickly raise capital. Clearly desperate to maintain its AAA rating, MBIA hopes to raise about $1 billion during the offering, which will presumably be used to back insured bonds entering default.
That’s just super news for the few remaining (read: “insane”) MBIA stockholders: Shares are down over 10% on the news. Now around $12 per share, MBIA stock has fallen nearly 80% since October 2007.

It certainly will not be that easy to find the buyers!


Some more information

Foreign central banks net sellers of US debt-Fed 

NEW YORK, Feb 7 (Reuters) - Foreign central banks were net sellers of U.S. debt last week, Federal Reserve data showed on Thursday. 

The Fed said its holdings of Treasury and agency debt kept for overseas central banks fell $6.22 billion in the week ended Feb. 6, to stand at a total of $2.112 trillion. 

The breakdown of custody holdings showed overseas central banks bought $4.17 billion in Treasury debt to stand at a total $1.267 trillion. 

The foreign institutions sold securities from government-sponsored agencies like Fannie Mae and Freddie Mac , subtracting $10.39 billion from their holdings, to stand at a total $845.0 billion. 

Overseas central banks, particularly those in Asia, have been huge buyers of U.S. debt in recent years, and own over a quarter of marketable Treasuries. 

The full Fed report can be found on: 

http://www.federalreserve.gov/releases/h41/

Who is going to buy? Who is going to finance the US anymore? I guess the only way is to print more papers with green and black ink and some $ signs on it.


From www.lemetropolecafe.com

Quote
This week money funds increased by what is becoming a routine $46B to $3.36T. Last February that number was $2.4T. To me this means that investors are panicking. The stock market is clearly being held up by dollar creation and cash is pouring out. The public is selling everything and going to cash; they do not believe the lies anymore. The public has started to protect themselves. I just went through Fidelity’s cash reserves prospectus and they are loaded with financial paper. IMO one way or another this paper will be supported by the printing press. Either the government will print dollars to replace any failing financial paper or they will print dollars to save the institutions that issued that paper.
Unquote


US Dollar

Numerous highbrow shops in Manhattan have begun accepting euros. From wine shops to antique stores, a growing number of the elite-serving NYC business are accommodating euro-holders, due much to the fact that the dollar’s current differential with the euro is attracting more European shoppers to the Big Apple.

So far I got across a lot of stories of shops in Europe, Asia and so on, not accepting Dollars anymore, but so far never saw any information that the same is already true in the US. Is this a trend? It certainly shows something.

The Europeans have been caught by the dollar too. As America emitted more pieces of green paper, foreign banks had to emit their own colored paper to keep up with it. Otherwise, their currencies would have gone up against the dollar...making their economies less competitive on the world market. It was a cycle that appeared virtuous for quite a while. More and more money in circulation had the effect of boosting up share prices...and house prices. People thought they were better off.

That means we will see inflation not only in the US but basically all over the world. Most people do already feel the rising cost, especially of all those goods that are basic for survival such as food for example