Oreo
Well dear reader with this post I try to sweeten up what I am offering you from time to time. The idea of using the example of the Oreo cookie I took from Jim Publava from www.financialsense.com. Just for your information, financial sense has been the first webpage I started to check on a daily basis back in 2000. It is a webpage with excellent information. Now back to Oreo. What does the Oreo cookie have to do with financial markets? Well Jim Publava believes that we are getting closer to the nice sweet filling between the hard black cookies.
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Well, the latest Fed plans – and believe me, they’re not done yet – to open up the discount window to primary dealers – I mean if they were to have done this probably a week earlier Bear Stearns wouldn’t have been in the problems that enveloped it. But the fact that the Fed is now swapping paper with financial institutions – basically they’re taking their illiquid assets, whether it’s Fannie or Freddie, that if you had to sell them now you would take a huge loss and drive the prices down; what they’re basically doing is the Fed is taking this paper onto their balance sheets. Congress is working on additional bailout plans and so is the Fed. There are going to be more bailouts and possibly additional failures. Eventually, the crisis is going to subside; the markets will stabilize and we’re going to get closer to that creamy filling inside the Oreo.
I mean right now there is an ocean – and I mean an ocean – of money that is sitting in cash today which is seeing returns lower by the day – especially with each Fed rate cut; remember they cut the discount rate a ¼ point on Sunday and they just cut it another 75 basis points on Tuesday – there are massive short positions in the market. That’s why you see, when you have these announcements, these explosive moves on the upside which is mainly short covering. But there are massive short positions in the market that are going to be forced to be unwound. You take the stimulus helicopter drop from the rebates that are coming around the corner here, that is going to hit consumers somewhere around May and into June. So I expect at some point we’re going to see explosive rallies in the stock market as cash comes off the sidelines, as short sellers are forced to cover. And when it begins it is going to start out very quickly. You get the first 10% move in a blink of an eye and it’s going to take the markets by surprise. So overall my best assessment is that we’re getting closer to that creamy center of the cookie.
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Well dear reader I truly do hope that we will be able to enjoy the creamy white filling as much as possible. But what happens once we are through the white creamy sweet filling? Will the dark cookie be as sweet as the filling? Maybe not. Well anyway although we see all these bailouts, tax rebates and rate cuts that will come, it will cost and there is still no free lunch and that means somebody at the end will have to pay although everybody is saying we’re bailed out. This dear reader will be other side of the Oreo.
Leverage
Yes dear reader, leverage is the most important fact right now. Why? Well as long as things go well leverage of course is a very positive thing but once we go the other way round the basics to change. Following some comments from Jim Publava from www.financialsense.com
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When I talk about leverage factors here, I’m going to discuss this in what I call generalizations for financial institutions. Some of the institutions may be more or less leveraged than their peers within their group. But as it stands today, in generalities, it pretty much looks like this. Commercials banks are leveraged 10-to-1, meaning for every one dollar of equity they have 10 dollars of debt. If you take a look at savings institutions, they’re leveraged 8.4-to-1. Credit unions are leveraged 8.4-to-1.
Now here’s where it gets scary. Brokerage firms and hedge funds are leveraged about 32-to-1, meaning that for every 32 dollars of debt they only have one dollar of equity to back it up. And then government sponsored entities such as Fannie and Freddie are on average leveraged let’s say 25-to-1. If you take all institutions combined, the system is leveraged over 12-to-1. Now, these are general figures and if you add derivatives to the equation, then those numbers could be even higher than what I just told you. For example, James Turk wrote a piece on our site this week, it was called Will Citibank Survive? And if you look at Citibank’s stated leverage on their balance sheet, Citibank is leveraged 8.2-to-1; but because Citibank has gone on a lot of acquisitions and they’ve bought other banks, which means they’ve added a lot of goodwill to their balance sheet, if you take out the intangible assets such as goodwill from the balance sheet their real leverage is about 42-to-1, meaning that they have really 42 dollars of debt backed by only one dollar of equity. And if you take a look at the trend on Citibank’s leverage, it has nearly doubled from about 21 ½ to nearly 42 in a little over just 2 years. That’s how crazy and how ramped up this market was getting during the real estate boom. [5:08]
unquote
Well dear reader the topic of leverage that we have in the system is very important to understand. As long as we have such a high percentage of leverage the risk for a financial meltdown does not disappear. Bailouts will cost a lot of money. Money that will be printed and therefore will increase monetary inflation. At the end it is the taxpayer’s money. Should really the taxpayer’s money help to help the greedy pack that got us into this mess? Should the taxpayer’s money be used to repair the damage caused by the greedy’s pack unscrupulous speculation? Should it invest billions to save ailing financial institutions and thereby engendering new risks and side effects? Finally it is like treating a drug addict with more drugs.
The Orwelllian techniques are needed because how could anyone explain to the honest taxpayer that their hard-earned money is used to help the Bear Stearnes. How can one explain to the honest taxpayer that the CEO’s of these companies that now are in the rubbish bin, have received millions in bonuses for doing a poor job? How can you explain that due to the golden parachutes the CEO’s and other top officials of these institutions received millions although they were sacked due of lack of performance (well lack of performance is in fact a nice way to say it. The lack of performance in many cases has been billions of losses).
Now let’s go to the Stock Market
Enrico Orlandini writes in his monthly newsletter at, www.dtanalysis.com the following:
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I have been watching with great interest as the US Federal Reserve tries to change the direction of the primary trend of the stock market. The Dow entered a bull market way back in 1981 and appeared to top out in 1999, only to reestablish the bull trend in 2002, and finally gave up the ghost in July 2007. After an initial scare in August, the market rallied one last time to post a slightly higher high, on a false break, on October 10, 2007. The top was at 14,340 and was not confirmed by the Transportation Index. Some of you may not be aware of the fact that I follow Dow Theory. In very simple terms, Dow Theory tries to identify value or the lack there of. When you find a lot of value in stocks you buy, and when you don’t, you sell. Value can be measured using the average dividend paid by Dow stocks and the price/earnings ratio (PER). Generally, value is present in the market place when you have a PER of 8 or less and an average dividend of 6% or higher. This combination is a good indication that stocks are cheap and should be accumulated. In today’s market, the PER stands at 17 while the average dividend is around 2%, and if Charles Dow were alive, he would tell you that value has left the building.
The Fed began to identify a problem back in August, identified the problem as a credit glitch, and decided to solve it with more credit. In an effort to smooth out the bumps the Fed lowered interest rates a lot, increased the money supply by one trillion dollars, and even dropped US $160 billion from a helicopter. By any stretch of the imagination, that is a huge investment. What’s more the European and Japanese central banks have probably generates another US $500 billion in liquidity, all in an effort to prop up the US market. And what do they have to show for it? The Dow is on its way to a fifth straight monthly decline. That is a lot of money to spend to lose for five months and I have to ask myself just what that is saying about Fed policy. I believe we have a credit crisis precisely because the Fed followed a cheap money policy for more than ten years and it gathered steam with 9/11. Just about anyone who could sign his name qualified for a loan and since the properties only went up in value, there was no way for the banks to lose. Consumers could borrow all they wanted on their houses to live well beyond their means and they did. Year after year housing prices rallied and they could simply refinance and get more money. They spent it on a variety of things including second and even third houses, vacations, SUV’s, and the latest electrical gadgets from Asia. The party that never ends! Untill
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Iceland
Well dear reader, Iceland is according to what I hear a very nice island. As it is close to the north pole it is of course very cold for most of the time. The Icelanders are said to be very open-minded and friendly people. Iceland produces it's energy mainly through he use of the geothermic capabilities. The country is volcanic and that makes it a prime location for the use of the energy that is below it's surface. Iceland is one of the top ranked countries regarding the use of renewable energy. Being actually in New Zealand I found out that the Kiwi's can improve considerably about the way they produce and use energy. Well anyway, coming back to Iceland, and to look at Iceland from a investment point of view, I must say that so far Iceland and the investment in the krona has been a very interesting investment opportunity up until recently. Especially investors looking for conservative top quality fixed income investments did like the Iceland government bonds with it’s excellent rating. Well dear reader what is really nice right now might not be so good sometime in the future. Iceland is facing some tremendous challenges due to the global credit crisis. Please read on to find out more
March 26 - Financial Times (David Ibison): "Fears that Iceland could be the first country to fall victim of the global financial turmoil grew on Tuesday when its central bank abruptly increased interest rates 1.25 percentage points to 15% in an attempt to restore confidence in its struggling currency and stave off a full-blown economic crisis. The bank said 'deteriorating financial conditions in global markets' had contributed to the emergency move. Confidence in the krona, Iceland's currency, has been shattered this year because of perceived economic imbalances in the economy and fears the banking sector is in danger of collapse. The krona has weakened by 22% against the euro so far this year. The rapid weakening of the currency prompted the central bank to adopt unusually blunt language...warning if the decline was not reversed Iceland faced 'spiralling increases in prices, wages and the price of foreign exchange'. 'Only time will tell if this works,' Ingimundur Fridriksson, governor of the central bank, told the FT. 'We are a small open economy and we are obviously affected by moves in the international economy.'"
March 28 - Bloomberg (Abigail Moses): "The risk of Iceland's biggest banks defaulting rose above 49% as contagion from the U.S. subprime crisis spreads, credit-default swaps show."
Well as always there are good news and bad news. For investors in Iceland banks or bonds the above of course is rather in the not so good news category. On the other side, all those who had planned to visit Iceland, might be able to pay a lot less for their trip (unless the traveler comes from a country where the mighty USD is the currency in circulation, I truly feel sorry for all my readers whose main currency is the Dollar or is somehow connected to the Dollar).
Commodities
Well dear reader we certainly have seen some heavy corrections in the commodity markets. But if we look at the fundamentals it does not look that bad at all. In fact energy, precious metals, agriculture and other commodities have been in a bull market since 2000. The weighted UBS Bloomberg Constant Maturity Commodity Index of 26 futures contracts has gained more than 20% every year since 2001. The index has been up already more than 10% this year. The Marketbasket Survey, conducted by the American Farm Bureau Federation confirms basically the trend. It says that a basked of things like bread, milk, eggs and pork chops will cost you USD 3.50 or 8.9% more this year than last. A five-pound bag of flour and a dozen eggs were among the items that saw the greatest rise in price. Both are up over 40% since January 2007. That is a lot indeed. You might remember my saying that food prices will increase tremendously and that we will see riots all over the world soon. Well rice stockpiles are at such a low level that not only rice prices increased considerably but the sale of rice had to be conrolled. Rice is the food for millions and is an important staple food for much of the world. In the past year the price of rice has risen from slightly below USD 11 ot above USD 19. These prices are the reason why we see riots in some countries. In fact these riots just add to several other riots recently due to high food prices. The countries that had to face riots over the past months were Mexico, Marocco, Senegal, Guinea, Mauritania, Uzbekistan, Yemen and Italy. There certainly will be more countries to be added to the list soon. Due to the shortage, rice producing countries are starting to put restrictions on exports in order to insure supplies for the domestic market. (this by the way will happen soon with oil as well). For example Thailand, the largest producer is considering export restrictions. The increase in prices of rice and many other commodities is due to shortages on one side and higher demand on the other side. Governments can print as much money as they want but the can unfortunately not increase food production at their will.
Following some news about this topic.
March 24 - Bloomberg (William Bi): "China's demand for meat, vegetable oil and fresh milk will outstrip supply for at least the first six months of this year, the Ministry of Commerce said... Coal, fuel, pig iron and iron ore may also suffer from supply shortages..."
March 28 - Financial Times (Roel Landingin): "Philippine fast-food chains are to begin offering half servings of rice in a move to help the government ease demand for the staple and avert a possible shortage with global rice inventories sitting at 25-year lows. Jollibee Foods, the country's biggest restaurant chain... said its operations managers were planning how to implement the plan... McDonald's is also considering serving half portions in more than 250 stores.
In regard to agricultural commodities, the 2008 crops are not even in the ground. Demand issues are pressing and widespread. There are still record-high rice prices (a global food staple) in Asia. Egypt is in the midst of a serious “bread crisis” for lack of grain. An outbreak of “sharp eyespot disease,” or SED, now threatens 4.83 million hectares of wheat in major producing areas throughout China. Water is increasingly scarce.
Well dear reader, does the above information seem like much lower commodity prices in the future? In fact it does not indicate that we will see lower prices soon but rather shows that the big picture has not changed at all. We have on one side the central banks pumping money like mad into the global financial system, which obviously is long term inflationary and on the other side we have some fundamental facts such as less food produced, less arable land, less potable water and so on,in the case of agricultural commodities. Looking at other commodities, we have further issues such like low stockpiles of almost all metals more troubles in getting the metals out of the mother earth and so on. Furthermore we have to take into consideration that the macro picture has not changed at all. We still have an incredible growth story in China, India and Russia and many other fast growing countries. Countries that themselves so far have consumed less than one third of the world’s raw materials. The 5.6 billion of people living in these countries will, as the become themselves more and more successful, get eager to receive more of the share and will get certainly more hungry. Hungry for almost anything including of course food.
Gold
Well dear reader like with other commodities, we had to accept a correction in gold as well. Is this the end of the bull market? Well, before you jump ship and join the doomsayer regarding commodities, ask yourself this: other than price, have the gold fundamentals gotten worse or better? There doesn’t seem to be a marked increase in supply, and we know the difficulties major mining companies are having in finding new big deposits. Yes, the U.S. Dollar is overdue for a bear market rally, but do you see things better or worse for the U.S. economy down the road? For years we heard, “Buy gold only when there’s inflation.”
Where’s inflation heading, especially after all the money that’s being created in this credit crisis?
In fact dear reader the question if the up leg in gold is done is not so important. This question certainly misses the point. I believe that we still are in the primary bull market and I do believe as well that this bull market will run for a couple more years. Furthermore what are really the alternatives to protect your wealth? I still believe that we will see Gold above the 1,200 per ounce by the end of the year. Maybe a lot more, to the surprise of many. Of course for the moment being it does not look like it's going to happen and we might even see prices fall back towards the 850 USD per ounce. But once again, dear reader, although I might sound like a broken record, this should not be a reason for concern but would rather be a reason to celebrate (at least from a gold bugs point of view). Why? Because it gives me and all those who believe the same as I do, a superb opportunity to buy more of it at bargain prices. Well dear reader I still believe that one should have gold in it's portfolio. For me Gold is not only an investment or a kind of wealth protection, for me Gold is a currency. The only currency that is with value (not just paper) and is nobody's liability. As I believe in Gold as a currency, my main currency in my portfolio is Gold. Apart from gold I hold some oil & gas investments and a small cash position. As mentioned in a precious post it's my intention to increase the commodity holdings as per the list posted in a previous post. Well dear reader, if you read how I am invested you might rightly say that I am not well diversified. There is no point in trying to argue against it. So the way I am invested is not necessarily the way you should be invested. Please contact your investment advisor to check if your currency allocation is according to your risk profile and risk appetite. Apart from telling me that I am not well diversified, you furthermore might say that holding gold does not provide an income and of course you are right again. But to be honest, I have no problem not receiving any income as long as my investments in gold and oil&gas are going up more than 20% year over year. If I need some money I still can sell some of my ounces.
Peak Oil
Well dear reader in my last post I wrote about Mexico having passed Peak production. Now it seams that Russia is on the same way ( I strongly believe that middle east as a region hast passed Peak already 2 years ago)
Russian Oil Output to Fall for First Time in a Decade
Greg Walters, Bloomberg Russian oil output may fall this year for the first time in a decade as the world's second-biggest supplier struggles with rising costs and harder-to-reach fields, Natural Resources Minister Yuri Trutnev said. ``Two years ago, we said the growth rate was falling, and we said this was bad for Russia, remember?'' Trutnev said in televised remarks after a government meeting in Moscow today. ``Now we're saying the production rate is falling this year. This is not a bogeyman, unfortunately, this is real,'' Trutnev said, without giving a specific forecast. A decline would end a 10-year, 58 percent surge in production, which fell to 6.2 million barrels a day in 1998, when prices dipped below $10 a barrel and Russia defaulted on about $40 billion of domestic debt and devalued the ruble
Please read as well the essay on the following link. An excellent overview indeed.
http://www.aspo-usa.com/index.php?option=com_content&task=view&id=346&Itemid=91
Hedge Fund
Dear reader you certainly remember my cautious outlook for most of the hedge funds (there are of course still some excellent ones). I told you that I would be rather careful investing in hedge funds and that I would check in what the funds invest in. It seems that now many more people have realized that hedge funds are not the stars anymore (in fact haven’t been at least for the last 4 years). Global investors yanked $100 billion out of hedge funds in the first quarter of 2008 -- the biggest quarterly outflow in the history of the hedge fund business.
For perspective, by this time last year, hedge funds had added $19 billion to their frothy pools. In 2006, they pulled in $49 billion in the first quarter. These stats all come courtesy of Emerging Portfolio Fund Research.
Orwellians
It even gets more like it.
Treasury Secretary Hank Paulson unveiled a 218-page economic reform package equal in scope to the Bush administration’s national intelligence strategy. That legislation brought all of the nation’s 14 intelligence agencies under one office of Homeland Security.
Today, Paulson is suggesting the Federal Reserve should have “the authority to go wherever in the system it thinks it needs to go for a deeper look to preserve stability."
Despite its original charter to maintain price stability, the Fed would also be granted the "responsibility and authority to gather appropriate information, disclose information, collaborate with the other regulators on rule writing, and take corrective actions when necessary in the interest of overall financial market stability." Paulson also advocated launching a Mortgage Origination Commission to develop standards for the housing industry… he wants the SEC and the Commodity Futures Trading Commission to merge to form one financial community oversight office… and he says the offices of Comptroller of the Currency and Thrift Supervision will merge into an unnamed office whose job it will be to oversee the U.S. dollar.
We haven’t seen sweeping reforms of this magnitude since the legislation that created the SEC in the first place back in the 1930s. Check this out from today’s WSJ:
Yeas dear reader its like what we really need. The founding fathers of the US might be rolling in their graves. Basically what the proposition is, is that the same people who in fact were the ones that created the mess, now will have more power. Could be from a script from Orwell. It is like putting the wolves in charge of the hen’s house.
But will it help? Following a comment from John Williams
The U.S. Treasury and the Federal Reserve,” counters John Williams, “are effectively broadcasting that they will accept any cost -- in terms of money creation and loss of regulatory integrity -- in order to save the domestic financial system.
“The alternatives -- an imploded financial system, chaos in the citizenry’s daily living, collapse in normal business activity, social and political upheaval -- are unthinkable to the powers that be. Unfortunately, their cures will be just as destructive, if not more so, in the slightly longer term.
“The government is only buying some time, which has been traditional practice. Yet the current actions taken to stabilize the financial system have set a course for a [worse] inflation, which eventually will feed upon the U.S. government’s effective long-term insolvency.
“What else could be expected from a system in which the Fed chairman is also the madam of the house of ill repute? Wall Street and most senior politicians have profited heavily from the questionable, but once highly touted business/investing practices that now have turned sour.
“The investing public ignored common sense and fed off the mania hyped in the financial media. Some regulators turned a blind eye to obvious problems. As a result, few in officialdom are in an untainted position to offer honest lectures on the virtue to the bailers or to the crowd being bailed out. Neither the Fed nor the government can afford to become principled at this late date.”
Unfortunately, in the end, it will be you will pay the price… literally.
and to close the topic following a information from Adrian who posts regularly on www.lemetropolecafe.com
PPT to come out of the Closet
http://www.nytimes.com/2008/03/29/business/29regulate.html?_r=1& ewanted=2&hp&oref=slogin
QUOTE
WASHINGTON — The Treasury Department will propose on Monday that Congress give the Federal Reserve broad new authority to oversee financial market stability, in effect allowing it to send SWAT teams into any corner of the industry or any institution that might pose a risk to the overall system.
END
I would like to think that this is some sort of sick April Fools joke, but, alas they are serious! What happened to free markets?? This is the same blue-print as the now failed Bush Administration Preemptive Strike Foreign Policy. The notion that the "financial SWAT team" goons will muscle their way into the private dealings of an institution that THEY think poses a risk to THEIR fraudulent fiat money Ponzi scheme is frightening. Presumably fund managers will be secretly flown to detention centers where "water-boarding" will be allowed to extract critical information like where they are hiding their gold!
What about this little gem…
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Under the Treasury proposal, Fed officials would be allowed to examine the practices and even the internal bookkeeping of brokerage firms, hedge funds, commodity-trading exchanges and any other institution that might pose a risk to the overall financial system.
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What a peach! The FED SWAT team can raid any institution, hedge fund, exchange, and see what key investment positions are and then pass it along to whom the want so that they then can make a fortune trading against them. (as some apparentely did with the position data they had confidential access to during the LTCM bail out!!
If you think I am a little over the top consider this…
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While the plan could expose Wall Street investment banks and hedge funds to greater scrutiny, it carefully avoids a call for tighter regulation.
END
So why would they want to have more scrutiny if they are not going to have tighter rules???? Hey, don’t pay any attention to the guys with the night vision goggles wandering around your office they just want to have a closer look at your financial dealings.
Is this designed to fix any problems for Joe and Jane America? Nope!...
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The blueprint also suggests several areas where the S.E.C. should take a lighter approach to its oversight. Among them are allowing stock exchanges greater leeway to regulate themselves and streamlining the approval of new products, even allowing automatic approval of securities products that are being traded in foreign markets.
END
Oh! You mean like the self regulation of the mortgage industry that allowed mortgages for anyone with a pulse and the self regulation of the rating agencies that allowed a triple A rating for any re-packaged debt originated by someone with a pulse! And the re-packaged garbage instrument can be automatically approved as long as it is for export to some unsuspecting investor with a pulse overseas! That should help.
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