Light at the end of the tunnel?

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For yet another extraordinary week in global markets, the Dow declined 2.4% (down 3.9% y-t-d) and the S&P500 fell 1.8% (down 5.5%). The Transports were hit for 2.2% (up 13.6%), and the Morgan Stanley Cyclicals dipped 0.9% (down 1.8%). The Utilities sank 2.6% (down 6.4%), and the Morgan Stanley Consumer index declined 2.1% (down 7.0%). The broader market was stronger. The S&P400 Mid-Caps added 0.4% (down 0.5%), while the small cap Russell 2000 slipped only 0.8% (down 6.0%). The NASDAQ100 declined 1.1% (down 6.0%), and the Morgan Stanley High Tech index fell 1.3% (down 6.2%). The Semiconductors dipped 0.3% (down 2.3%), the Street.com Internet Index lost 1.3% (down 4.0%), and the NASDAQ Telecommunications index fell 1.9% (down 2.2%). The Biotechs declined 1.3% (down 4.9%). The wildly volatile financial stocks were sold this week. The Broker/Dealers sank 6.2% (down 17.5%), and the Banks lost 6.0% (down 8.5%). With Bullion rallying $29.20, the HUI Gold index recovered 5.9% (up 3.3%)

Well dear reader, I doubt that we really see the light at the end of the tunnel. Why? Well the news do not indicate it yet. My guess is that we are still in the first quarter of the tunnel and that before seeing the light we will have to pass through a really dark part. I hope that no hidden obstacles are on the way.

Well dear reader, apart from what I would say, already normal bad news that hit the tape (and of those there were plenty again over the past days) it seems that somebody sees the light at the end of the tunnel.
Adrian Ash reports on www.bullionvault.com about good news. He writes:
Crisis over, the old crisis returns.
Equities are trading at the lowest price/earnings ratio in a generation; unemployment is ticking lower; household balance sheets are fast improving; confidence in the monetary and financial system has been restored.
And the price of gold – that long-term indicator of financial stress – has slumped forced wealth out of dead metal into wealth generating lending and business at last.
Well dear reader, reading what Adrian Ash has to say, one really wonders on which planet he lives. But wait. Oh I should have gone on with the reading. Adrian’s next sentence is:
Oh, hang on.. that was 1982
With that sentence he moves fast forward to May 2008 and mentions that markets give Bernanke credit for having turned the corner and bringing stability back, according to one portfolio manager. Is this really so?
Well dear reader it might be that some people really do believe what they say. Others might use the same words or similar ones because of their public position. That of course does not mean that they personally believe in it, it only proves that the Orwellians ordered them to say it.
A portfolio manager for instance, tells the press that in their view things are in a bottoming phase. He mentions as well that the latest data – which by the way is showing the slowest US economic growth – “was modestly better than expected”. Wow that is really great news. Right? Well this is the rubbish we were hearing a lot lately. Well dear reader if you want to be happy do it as them, expect the worst and when it will be a bit better. Bingo. Expecting the worst gives you a good chance to get the slightly better news and thus the happy feeling. Playing it this way might help. However at the end it is not really the great thing. To me it rather seems like you getting home and finding your sweet home in a complete mess. Windows broken, doors broken, safe open and the people who did it obviously have taken all your jewels, maybe cash, family silver and anything else with some worth with them. But to your surprise and happiness you find within the mess a gold coin on the floor (Maple Leaf or Eagle or Krugerrand). The thieves must somehow have lost the coin. Well dear reader, this is really great news isn’t? Everything with some value is gone but the gold coin is still there. Well this is, and no doubt about it, really much better than what you have expected when entering through the damaged door. Well dear reader having gold coin(s) in your possession, although it might be the only valuable item left from all your valuables, is without doubt always recommendable and important. But dear reader is the fact that you found one single gold coin left and all your other valuables gone, really that excellent news?
Well dear reader if a portfolio manager or a hedge fund manager believes to see a positive sign in the latest news that is OK. I am even willing to accept that they are expressing their real believes, although of course it sounds more like a sales speech in order to get new investors. However when the CEO’s of Citi, Goldman, JPM and Deutsche Bank et all let us know that we are closer to the end than to the beginning or that the signs are encouraging or anything similar, I do file these comments under the rubric “rubbish”. Well it is in my opinion crystal clear that the CEO’s of PPT member banks have no choice than to follow the Orwellian orders/line.
Well dear reader, I am really glad that I sleep well anyway and that these news do normally not bother me much. However I must admit that a few days ago I was really worried. Why? Well the fact is that a few days ago missed the collapse of the whole financial system by a hair’s split. Yes dear reader this is the cruel truth. Although I do not agree with the Fed and other Central Banks politics to save banks I must admit that if the FED would not have done it in the case of Bear Stearns, we would be in a more difficult situation. But does that mean that we are now safe? To be honest, I truly doubt it. The ship has hit already the iceberg. So far it seams to stroll along fairly well. But there is a leak and the water is dropping in, although for the moment being still slowly but at the same time with an increasing speed. Of course that would mean we have time. That would even mean that we might have time to repair the leak. Unfortunately it is not so easy. Maybe it was not only once the ship hit an iceberg but several times. That would mean we have several leaks to be repaired at the same time. Furthermore we are still in the ice sea with hundreds of icebergs getting closer every day. Of course, dear reader, now you can ask why I still sleep well if I do believe that hard times lay ahead. Asking me why I still sleep well is certainly an interesting question and I must admit that sometimes I ask myself why. Well first of all it seems to me, that there is no reason to have sleepless nights over something I cannot change anyway. Secondly I am a positive thinking person (with all the rather negative news I put in the blog it might seem that this is not the case but yes it is truth). Third I believe that I am prepared in the best way possible with my, looking at the big picture, rather limited resources. Of course there still a lot to do in many senses. One of the items that I believe should be done, is keep up informing you about what is going on and letting you know facts that are not easily available. I truly hope that all this information helps you to take wise decisions or at least helps you in you personal situation in whatever form possible.
Well dear I truly believe that we are at a very important point in our history. I believe that in a few years ahead, looking back, most of the people will say why did we not see it. They will say as well; why did we not prepare ourselves.
Being at this important point, I would like to provoke all readers to muse about their activities. In that sense I plan to bring up in one of my next musings some provoking ideas with the hope that you dear readers, come up with your ideas and your suggestions. A kind of anonymous discussion forum would be great. I will let you know in due time.




Now to the news
The last 2 weeks the equity markets did very well while precious metals did poor.
However if we look back using a time horizon that is a few years, we certainly can say that precious metals have gone up considerably (gold has more than tripled) while stocks had a rather poor performance compared to the precious metals. Although lately the precious metals did not so well, in my opinion nothing really has changed compared to the situation at the beginning of 2000. That means that the precious metals in my opinion are still a bargain while stocks definitely not.
Looking at the debt situation, we certainly can say that the debt bubble has been only partially deflated and that Americans still live beyond their means.

Another item from the news:
Five Asian nations are in talks to form OREC -- an organization of rice-exporting countries. Hey that seems to be a joke. Well to be honest it is rather the other way around.
While they haven’t officially taken on that acronym, officials from Thailand, Vietnam, Cambodia, Myanmar and Laos announced an informal agreement to form a cartel of rice-producing nations today.
“We don’t aspire to be like OPEC,” said Samak Sundaravej, the prime minister of Thailand. “We hope to be a group of five to help each other in trading rice on the world market.”
But as OPEC does with oil, OREC (we’ll call it that until we’re told otherwise) would have a total chokehold on global exports for rice -- a position of immense power. Setting the price for 50% of the world’s most important food staple is no small matter.

Jim Rogers has been once more in the news;

“I've been buying shares in China for the first time in a long time,” declared Jim Rogers recently.
Most of the China’s major indexes are still about 40-50% off all-time highs set late last year. But as the nervous rush to the exits, Rogers says it’s time to buy back in. “My new money goes to commodities and China. All the panic looks like a bottom.” At a seminar this week in Beijing, Rogers said his Chinese investments will focus on agriculture, tourism, airlines and education. 



Well credits have been in the news again
Credits

April 29 – Bloomberg (Jody Shenn): “About half of subprime and Alt-A mortgages made in 2006 and 2007 may be ‘underwater’ or close to it by midyear, putting about $800 billion of debt at greater risk of default, according to Barclays Capital. Subprime loans that exceed the value of the related homes jumped 5 percentage points to 19.8% in the fourth quarter, and may reach 26% if property-price drops continue at the same pace…analysts Ajay Rajadhyaksha and Derek Chen wrote… Such Alt-A loans, a grade better than subprime, would grow to 23% from 16.3%... ‘Mortgage loans are moving underwater at a very sharp pace, far more than suggested by aggregate home price data.’”

April 29 – Financial Times (Paul J Davies): “The credit ratings of the troubled complex bonds that pool together slices of mortgage backed securities – so-called structured finance CDOs, or CDOs of ABS – are set to come under further pressure after changes introduced by Standard & Poor’s. The ratings agency has cut its assumptions about the amount of money likely to be recovered by investors in US subprime mortgage backed bonds when the individual mortgagees default on their loans. This in turn has had a knock-on effect for the recovery assumptions for collateralised debt obligations built out of those bonds.”

And now to the

FED
John Williams
Fed Signals Deepening Banking System Solvency Crisis. There was no clear signal in Wednesday’s FOMC statement that Fed easing was finished. Keep in mind that the Fed’s overriding concern at the moment remains maintaining the viability of the U.S. banking system. Concerns for the economy and inflation (the Pabulum stories fed to investors on FOMC policy) both are secondary issues, at the moment, for the U.S. central banks.

With that in mind, recent press on large U.S. banks raising still further capital, and this morning’s Fed announcement of significantly expanded liquidity accommodations, suggest the worst part of the crisis is far from over. The slower pace of annual growth that is shaping up for April M3 (very roughly 16.6% versus a record 17.4% in March) may have a parallel in the systemic-crises effects in slowing M3 growth in December, when the system last moved into meltdown mode.

More from John Williams
Fed Signals Deepening Banking System Solvency Crisis. There was no clear signal in Wednesday’s FOMC statement that Fed easing was finished. Keep in mind that the Fed’s overriding concern at the moment remains maintaining the viability of the U.S. banking system. Concerns for the economy and inflation (the Pabulum stories fed to investors on FOMC policy) both are secondary issues, at the moment, for the U.S. central banks.
With that in mind, recent press on large U.S. banks raising still further capital, and this morning’s Fed announcement of significantly expanded liquidity accommodations, suggest the worst part of the crisis is far from over. The slower pace of annual growth that is shaping up for April M3 (very roughly 16.6% versus a record 17.4% in March) may have a parallel in the systemic-crises effects in slowing M3 growth in December, when the system last moved into meltdown mode.


Commodities
Past week I got some mails from readers, asking me about my opinion, especially related to precious metals. Well dear reader, holding precious metal investments I am of course not so happy that prices go down. On the other hand, as mentioned in previous musings, I am particularly happy to see that prices are lower which gives everybody who wanted to buy precious metals a perfect opportunity to buy a t lower prices. Therefore on one side I am not so happy but on the other side I am. I certainly do not worry at all about the future prices of the precious metals. I still believe that we will see much higher prices.
If we analyse a bit the last 7 years, we can certainly say that the months from April to August have not been good months regarding higher commodities or especially precious metal prices. Basically in all the previous 7 years we had corrections around this time. August is normally the months when precious metals prices start to move up again. Well if that has been the case why not sell the whole precious metal position in April and go back in August? Well indeed why not. As a gold bug, personally I prefer to be invested at all times. However it makes sense to reduce speculative positions in April and build up the same in August. Under speculative positions I understand any leveraged investments related to precious metals. If you have decided to hold a core position and a trading position, it would have been wise in the past years to sell the trading position in April and to go back in in August.

Dear reader you might have asked yourself why the precious metals prices fall when the FED cuts rates. This I agree does not make sense at all. But has any compartment of the markets lately made sense? Well anyway, these strange moves make sense if one knows that the PPT is trying to manage the markets in general terms. In the case of the precious metals they try whatever they can to lower prices. So whenever they have a chance they will do anything to achieve this goal. There are clear indications of the work they do. One example is that the future markets are bombed (always from the same side) whenever around the world there is a major public holiday in one of the important countries regarding trade in precious metals. Why do they do it? Well if important markets are closed it is much easier to manipulate the markets and it certainly costs a lot less.

Oil
Well dear reader, Crude oil prices are going up and up. As mentioned several times, I have no doubt that we will see USD 150 barrel soon and that USD 200 is certainly in the cards. Now there are already others telling us the same
May 8 – Bloomberg (Robert Tuttle and Maher Chmaytelli): “Crude oil may rise to $200 a barrel because of a weakening U.S. dollar, OPEC President Chakib Khelil said… echoing a sentiment aired…by Goldman Sachs Group Inc. Oil at $200 is ‘possible if we have a continuing devaluation of the dollar with respect to other currencies,’ Khelil, who is also the oil minister of Algeria, said…”

Well dear reader as mentioned there is no doubt that oil prices are heading up to higher grounds. Once again I do strongly believe that we passed Peak Oil production back in 2006. We will remain at a plateau for some time. The plateau will mean huge price movements with higher prices step by step. Peak Oil will change our world. According to a report from Hirsch, we need at least a preparation time of 20 years combined with huge cost in order to prepare us. That means if there would be willingness to spend that money and the peak production would be in 2028, we still would have time. However on one side there is no willingness to spend the money and on the other side I believe that we are already past peak (if not we most probably will see peak way before 2028). So my friends, best is to prepare yourself.
This is certainly a topic of future discussion too.
In that sense, I wish you a successful week.