Dear reader, I wanted to pause this week but with so many news I finally decided to write a few notes. Well in fact I truly hoped that my next musings will be with mainly good news because I truly feel sorry for having bombed you with such bad news over the past days. Well dear reader there is some good news of course. At least for all gold and oil investors the week was bright. But apart from the commodity sector there is nowadays unfortunately not so much positive to report.
Well dear reader the news of the week certainly was on one side the disastrous situation of Fannie and Freddie and on the other side the new record price of oil.
To start my musings lets have a look at the overview of the week source www.prudentbear.com
Winner of the week regarding stock markets
For another week in a historic period, the Dow declined 1.7% (down 16.3% y-t-d) and the S&P500 fell 1.9% (down 15.6%). The Transports were hammered for 5.2% (down 2.9%), while the Utilities added 0.4% (down 5.2%). The Morgan Stanley Cyclical index dipped 0.8% (down 18.9%), while the Morgan Stanley Consumer index added 0.7% (down 11.6%). The Russell 2000 rallied 1.4% (down 11.9%) and the S&P400 Mid-Caps increased 0.1% (down 8.2%). The NASDAQ100 slipped 0.3% (down 13.1%), and the Morgan Stanley High Tech index dropped 1.5%. The semiconductors sank 2.5% (down 15.3%), The Street.com Internet Index fell 1.6% (down 11.4%), and the NASDAQ Telecommunications index declined 1.6% (down 12.1%). The Biotechs gained 2.6%, reducing y-t-d losses to 3.0%. The Broker/Dealers sank 6.6% (down 35.1%), and the Banks lost 4.9% (down 38.5%). With Bullion gaining almost $31, the HUI gold index jumped 4.2% (up 11.0%).
Well as some of you know, I never liked Fannie or Freddie and did already some 3 years back recommend to sell both or at least not to touch them at all. Yes you are right, I might have been too early. However I prefer to be on the sidelines too early than being late. Why did I suspect that troubles are ahead? Well the statistics showed clearly that the housing sector was in an extreme bubble phase and therefore a severe correction had to be expected. With that fact, it was easy to see that Fannie and Freddie will be affected heavily. Following a bit history found on www.dailyreckoning.com.
Quote
Freddie and Fannie are huge government-chartered mortgage lenders. In 18th century France, speculators bet on the riches of Louisiana, through the government-chartered Louisiana Company. In the 19th century, they wagered their money on the riches of India, through the government-chartered East India Company. And in the 20th century, they gambled on rising housing prices through Fannie and Freddie.
Unquote
Well this week Freddie lost more than 68% and Fannie approximately 55%. Since the beginning of the year Fannie lost approximately 76% and Freddie 84%. If we look back at January 2007, it looks of course a lot worse. Taking the stock prices from January 2007 Freddies stock is minus 93% and Fannies minus 86%. Well dear reader, are we going to see the next bailout? It would be a bailout that will be truly expensive without doubt. Why are we going the see a possible bailout? Well both mortgage lenders are simply speaking, running out of money. The would need to raise billions possibly something like an amount north of 80 billion. Who is going to give them the money? I mean, a couple of months ago it would not have been a real problem but today? A few months ago, people still believed that nothing could ever happen to the two. Banks still had "strong buy" ratings out. But as so often things change. The housing bubble finally got to the point where it could not grow anymore and started to deflate. House prices are still falling. More on that later.
Well anyway rising capital is a problem for both. As they need a lot, it is really becoming a survival issue. I doubt that any serious investors will put his money with any of the two, although the price now might seem very cheap. Well maybe so, maybe not. If we look back in a couple of months, we might have to say it was not yet cheap. Those holding stocks might have to accept the same fate as the Bear Stearns shareholders. What will happen to all the bondholders? Many questions indeed. For the moment being the situation definitely does not look very positive (to say it in a nice way). Well with all these questions it should not come as a surprise that the news are already foreseeing certain scenarios, scenarios never contemplated before (except for a handful of savvy observers or observers with their crystal ball)
Well the body language speaks in a clear way
*Reuters) - Mortgage lenders Fannie Mae (NYSE:FNM - News) and Freddie Mac (NYSE:FRE - News) are "insolvent" and may need a U.S. government bailout, former St. Louis Federal Reserve President William Poole was quoted as saying in an interview with Bloomberg.
* * * * *
Fannie, Freddie insolvent, Poole tells Bloomberg
(Reuters) - Mortgage lenders Fannie Mae and Freddie Mac are "insolvent" and may need a U.S. government bailout, former St. Louis Federal Reserve President William Poole was quoted as saying in an interview with Bloomberg.
"Congress ought to recognize that these firms are insolvent, that it is allowing these firms to continue to exist as bastions of privilege, financed by the taxpayer," Poole was quoted as saying in an interview held on Wednesday.
Chances are increasing that the government may need to bail out the two mortgage companies, Poole was quoted as saying.
Shares of the two companies have taken a beating recently on worries about whether they can withstand more losses and support housing as well as concerns that they may need to raise massive amounts of new capital.
Freddie Mac shares tumbled 23.8 percent to $10.26 on the New York Stock Exchange on Wednesday, while Fannie Mae shares sank 13.1 percent to $15.31.
Poole could not be immediately reached for comment.
The WSJ: The Bush administration has held talks about what to do in the event mortgage giants Fannie Mae and Freddie Mac falter, according to three people familiar with the matter, as the stock prices of both companies continue to fall sharply…
The government doesn't expect the entities to fail and no rescue plan is imminent, these people said. Government officials and market analysts expect both companies will be able to raise large amounts of capital relatively easily. Treasury officials are nonetheless talking about what the government could -- or should -- do if Fannie and Freddie become so pressed that they are unable to borrow money and continue operating.
http://online.wsj.com/article/SB121564782376340951.html?mod=hpp_us_whats_news
Fortune: The Fannie and Freddie doomsday scenario; It's time to wonder what would happen if Fannie Mae and Freddie Mac failed. "If Fannie or Freddie failed, it would be far worse than the fall of Bear Stearns," says Sean Egan, head of credit ratings firm Egan Jones. "It could throw the economy into depression or something close to it."…
Egan estimates that Freddie alone will need to raise $7 billion over the next two quarters due to writedowns and losses. But the company's market capitalization - the number of outstanding shares times the share price stands at $8.7 billion…
Outright nationalization is an unlikely option given that neither the current administration nor the presidential candidates could afford to support such a move in an election year.
More likely, the Treasury Department or the Federal Reserve would come in and provide a liquidity backstop, in the form of a loan or guarantee to bondholders that they will be paid…That would allow give officials the ability to argue that they weren't bailing out the companies, but rather making an investment that would pay off in the long run.
http://money.cnn.com/2008/07/09/news/companies/benner_fanniefreddie.fortune/index.htm?postversion=2008070914
The NY Times’ Steve Labaton has a different take than Tuesday’s Street and fin media spin on Bernanke’s assertion that Fed direct lending to The Street is bullish. Federal policy makers have concluded that the turmoil plaguing the housing and financial markets is likely to spill deep into 2009, becoming one of the most significant domestic problems to confront the next president when he steps into the White House in January.
http://www.nytimes.com/2008/07/09/business/09housing.html?_r=1&th&emc=th&oref=slogin
The NY Times on a very under-reported story: Time is running out for IndyMac Bancorp, one of the faded darlings of the subprime era. On Tuesday, IndyMac, one of the nation’s largest independent mortgage lenders, faced what amounted to a run on the bank. As depositors rushed to withdraw money, IndyMac’s share price, already in a free fall, spiraled even lower…
In its regulatory filing on Tuesday, IndyMac blamed Senator Charles E. Schumer, Democrat of New York, for fanning worries about its financial health. Last month, Mr. Schumer sent letters to the F.D.I.C. and other regulators warning that IndyMac might fail. His comments prompted regulators to restrict the company’s borrowing. As a result, IndyMac’s so-called operating liquidity dwindled to about $1.7 billion...
http://www.nytimes.com/2008/07/09/business/09lend.html?th&emc=th
July 12 – Reuters (Patrick Rucker): “Federal Reserve Chairman Ben Bernanke told Freddie Mac chief Richard Syron that his company and Fannie Mae could take advantage of the emergency discount window, according to two sources familiar with the conversation… Fed spokeswoman Michelle Smith said U.S. central bank officials were following the situation with struggling Fannie Mae and Freddie Mac closely but disputed that access to the discount window had been offered… On Friday night, a Fed spokeswoman confirmed that there had been a call between Bernanke and Syron on Thursday initiated by Syron. But she said there was no discussion during that call about Freddie Mac or Fannie Mae accessing the discount window. However, two sources familiar with the conversation between Syron and Bernanke later affirmed the conversation and what was said about potential discount window action. The two sources said Bernanke and Syron spoke by phone Thursday afternoon and in that call the central bank chief said he intended the discount window to be opened if necessary to Fannie Mae and Freddie Mac.”
some more about Fannie and Freddie
source dailyreckoning.com
And poor Freddie and Fannie.
He that did ride so high doth lie so low, as Marc Antony said of Caesar, after the latter was stabbed to death. Freddie and Fannie were the darlings of Wall Street...the leaders of the house price bubble...with nearly half the nation’s $12 trillion worth of mortgages. A couple of years ago, they could do no wrong.
Now, they can do no right.
The government-chartered mortgage lenders are “in turmoil,” says the Financial Times .
They should be in Chapter 11, says former St. Louis Fed chief, William Poole. Fannie has $5.2 billion more in liabilities than in assets, he says. Both lenders are insolvent, he maintains. Like a racehorse in the Kentucky Derby, they should be given the coup de grace as quickly as possible, he believes.
Unquote
Well dear reader having the pair in serious troubles is bad news for everybody. Why? Well it possibly means that their derivative book is under water and that would mean that the pair now has become a serious counterparty risk which could lead into a serious financial crisis posing a systematic risk. Well the story will certainly go on over the next days.
Peak Oil
The oil price has been fluctuating heavily the last weeks. Is that a sign that we might be close to a correction? It would really be great if we could see a normal market correction towards the 100 USD barrel level which in my opinion is a possibility with a good chance to happen. Well anyway following and interesting study who takes up the argument of the speculators being responsible for the price increase.
Please read on
http://www.aspo-usa.com/index.php?option=com_content&task=view&id=410&Itemid=91
Well having a price correction might help, at least for some time, to reduce protests from truck drivers. The list of countries with protests gets longer and longer by the week. Belgium, Scotland, Spain, India, South Korea, Nepal, Malaysia, Thailand, Hong Kong, Nigeria, Italy, Portugal, Greece, France are already on the list. This week New Zealand and Australia joined them and the truck drivers in German plan to do so. Well I truly hope that in your case these rather nasty strikes will not happen. Anyway having some staple food reserves at home might not be that bad an idea.
Well dear reader, speculators is one thing but producing, transporting and refining the commodity another. Following an overview of all the issues we have to face in regard to oil and its derivatives being available where one likes to have it.
• The world’s largest oil fields were discovered by the end of the 1960s
• The amount of extractable oil reserves in the ground worldwide is dwindling rapidly
• Nothing can comprehensively replace the plentiful supply of cheap oil
• Many oil alternatives are much more expensive
• Nothing is remotely on the horizon to be developed and mass produced to significantly replace oil as the energy of transport and heavy machinery
• World refining capacity is working at full tilt, so even if we had the extra oil we could not refine it
• There is not the carriage capacity around the world to transport any significant extra payloads of oil
• Most oil producing countries are declining in their oil production as they are beyond Peak Oil
• The attempted universalization of economic development, taking hold in many less developed countries (including China and India), is leading to insatiable demand for oil as supplies dwindle
• Many officials and experts, even in the oil industry itself, are proclaiming that oil prices will soon reach $200 a barrel, on the way to much higher prices
• There will be an increasing world shortfall in oil supplies against demand, as the supply dwindles in the face of escalating demand
some more about infrastructure
Pipelines
“According to Quest Offshore, between 2007-2011, the industry will have laid down 35,000 miles of pipeline. That's a lot of steel. And a lot of pipelay barges to do the work. And crews. It's a demand that should continue for years to come, even if the oil price comes down. Well this is only the figure of new pipelines, if we take into consideration as well all the pipes that have to be replaced because they are old and leak, we talk about big numbers.
Matt Simmons the energy guru says "Rust never sleeps".
Well dear reader following you find the text that a dear friend of mine has received as a letter through the frequent flyer program.
Quote
Our country is facing a possible sharp economic downturn because of skyrocketing oil and fuel prices, but by pulling together, we can all do something to help now.
For airlines, ultra-expensive fuel means thousands of lost jobs and severe reductions in air service to both large and small communities. To the broader economy, oil prices mean slower activity and widespread economic pain. This pain can be alleviated, and that is why we are taking the extraordinary step of writing this joint letter to our customers.
Since high oil prices are partly a response to normal market forces, the nation needs to focus on increased energy supplies and conservation. However, there is another side to this story because normal market forces are being dangerously amplified by poorly regulated market speculation.
Twenty years ago, 21 percent of oil contracts were purchased by speculators who trade oil on paper with no intention of ever taking delivery. Today, oil speculators purchase 66 percent of all oil futures contracts, and that reflects just the transactions that are known. Speculators buy up large amounts of oil and then sell it to each other again and again. A barrel of oil may trade 20-plus times before it is delivered and used; the price goes up with each trade and consumers pick up the final tab. Some market experts estimate that current prices reflect as much as $30 to $60 per barrel in unnecessary speculative costs.
Over seventy years ago, Congress established regulations to control excessive, largely unchecked market speculation and manipulation. However, over the past two decades, these regulatory limits have been weakened or removed. We believe that restoring and enforcing these limits, along with several other modest measures, will provide more disclosure, transparency and sound market oversight. Together, these reforms will help cool the over-heated oil market and permit the economy to prosper.
The nation needs to pull together to reform the oil markets and solve this growing problem.
We need your help. Get more information and contact Congress by visiting
Unqote
The letter has been signed by the 12 CEOs of US airline companies. Well dear reader it might be that in some way they have a point. However it is very interesting to see that when the same airlines do buy futures it is fine but when other do not. Yes airlines have bought futures to protect them from rising prices. Their problem is that they miscalculated the whole thing and therefore did not protect them sufficiently, one could say the whole in other words as well and say they did screw up (sorry for the word) with their speculation. They bought futures in order to hedge themselves against rising prices, approximately 2 years ago, which was OK. Their mistake was that they did it only for a year term and not for longer terms. Why? Well I suppose they must have listened to the analyst of their investment bank who told them that oil price will come down to below 50 dollars again. By not having gone into longer hedges, they clearly messed up speculating. As their speculation did go sour it is the old game which is, to point your finger at others. Yes of course there is some kind of speculation in the market. And yes there are some derivative buyers who will not ask for delivery at all. But that does not mean that they are the responsibles of the increase and furthermore it does not mean that they really are speculators. Why? Well imagine, you are a heavy energy user and as being one, your cost base is going up tremendously because the oil and natural gas prices are going up strongly. So when you buy a derivative you buy in fact a hedge against rising costs of energy. The fact that you will not ask for delivery does not change this fact at all. So this is a clear case of someone not taking delivery and still not being a speculator.
So why are the airlines sending these letters? I imagine it is a) to prepare us for higher flight prices b) to take them out of the fire line by finger pointing at others and c) they want to paint themselves as the good guys what possibly might not be the case.
the company shown is not one of the ones that have signed the letter
If these guys would have done their job correctly (or would have listened to the handful of advisors who already some years ago were telling everybody that oil prices will go up a lot more), they would have hedged them for years to come because there is medium to long term only one way for the price of oil and that is UP. Any short term correction will NOT change it at all and will only be a chance to start some smart hedges.
Inflation
Well as mentioned before, Zimbabwe is certainly a good example of what can happen once the inflation is out of control. Following some more information
July 7 – The Wall Street Journal (Roger Bate): “Amid Zimbabwe’s political violence is an economic lesson for anyone who doesn’t keep an eye on inflation… With food aid only trickling back into the country and hundreds of thousands without enough cash to buy food, it was clear during a trip there last month that the crisis is deepening. Consumer prices have more than doubled every month this year, in some cases doubling every week. A conservative estimate provided by Robertson Economic Information Services, a Southern African consultancy, says that prices are now three billion fold greater than seven years ago… The exchange rate is currently an astronomical 90 billion Zimbabwe dollars to one U.S. dollar… Buying anything is a ‘bizarre experience,’ said Lucy Chimtengwende from Bulawayo, who spent $12 U.S. on lunch recently, with the bill in local currency being an astonishing 1.1 trillion Zimbabwe dollars. The menu had no prices on it, she told me by phone, prices are quoted to you and are constantly changing. And if you want to pay by check, good luck. Most proprietors don’t accept them, and for those that do, the price is double, given the time it takes the vendor to receive payment.”
Well inflation is going out of control around the world. Following some more examples
July 11 – Bloomberg (Khalid Qayum): “Pakistan’s inflation accelerated to a 30-year high in June… Consumer prices in South Asia’s second-largest economy jumped 21.53% from a year earlier…”
July 9 – Bloomberg (Abeer Allam and Abdel Latif Wahba): “Egyptian inflation accelerated to an average 11.7% in the fiscal year that ended June 30…”
July 7 – Bloomberg (Daryna Krasnolutska and Halia Pavliva): “Ukraine’s inflation, the fastest in Europe… fell to 29.3% in June from 31.1% in May, which was the highest in Europe…”
July 9 – Bloomberg (Milda Seputyte): “Lithuanian inflation accelerated in June to the fastest pace in more than 11 years… The inflation rate rose to 12.5%, the third-highest in the EU, from 12 percent in May…”
July 7 – Bloomberg (Ott Ummelas): “Estonian inflation accelerated in June, returning to the fastest pace in 10 years, as energy and accommodation costs jumped. The rate increased to 11.4%...”
July 9 – AFP: “Inflation in some emerging countries in Latin America and Africa ‘is getting out of control,’ International Monetary Fund head Dominique Strauss-Kahn said…”
Well dear reader how about the situation in your country? Can you trust the official numbers? Do people feel the inflation too? Well higher prices will mean that many people will not have much money to spend. It really looks like the problem is accelerating and that as such does not look well. We need some Volckers but I do not see the willingness to act like Volcker. At least not yet.
What lies ahead? Inflation/Hyperinflation or Deflation?
Following a comment from John Williams from www.shadowstats.com.
Market wisdom suggests that recessions mean low inflation, but as seen with the current circumstance and in at least two historical recessions in the last several decades (specifically the 1973/1975 and 1980 recessions), recessions with significant inflation are a great deal more common than is spun by Wall Street.
As the severity of the current downturn has gained broader recognition, some in the deflationist camp are starting to argue that the underlying fundamentals driving the economy into the ground also will lead to lower prices, actually triggering a deflation. Quite to the contrary, despite deteriorating economic and financial conditions, my outlook remains for rising inflation into 2009 and for a situation that eventually will evolve into a hyperinflationary great depression, as outlined in the April 8th Hyperinflation Special Report.
Slowing economic activity, by its nature, tends to reduce inflation pressures generated by strong economic demand. The current circumstance, however, is one where inflation pressures have been dominated by commodity price distortions (primarily oil) and increasingly a weakening U.S. dollar and surging money supply growth, not from strong economic demand. The current circumstance is somewhat similar to the recession officially clocked from November 1973 to March 1975, which has been the deepest standalone economic contraction, so far, of the post-World War II era. The period was one of soaring oil prices in the wake of the Arab oil embargo, a generally weak dollar and double-digit annual growth in money supply M3.
The severe downturn of 1973/1975 was accompanied by high inflation, per official CPI reporting, with annual inflation averaging 5.2% for the year leading up to the recession, 10.7% during the 16 months of the downturn, and 7.9% in the year following.
For all readers who invest in Fund or Hedge Funds
1 July, 2008--- A recent survey by auditing firm KPMG reveals a chasm in the level of derivatives and risk management knowledge at global fund and investment managers.
The survey included mainstream fund managers, as well as institutional investors, private equity, real estate and hedge funds globally.
According to the results, 40% of mainstream fund managers surveyed said they had bought products for which they had no framework to assess risk.
Meanwhile, 20% of mainstream fund managers admitted to having no in-house specialist with relevant experience of the derivatives or structured products in which they invested. Among institutional investors who invested in derivatives or structured products, the figure was even higher, at 32%.
Fund managers might not have been identifying and tackling the right kinds of risk, the survey suggested. Just 41% of those mainstream fund managers surveyed thought their principal measure of risk reflected the majority of risk an investment firm took. Perhaps a result of recent concerns over the adequacy of risk measures such as value at risk, only 6% believed their measures represented the actual risk of loss.
Only 42% of mainstream fund managers said they could completely quantify their exposure to complex instruments, while 24% said they could completely quantify the risks arising from it.
The skills of staff at fund managers had “to some degree” failed to keep up with the growing sophistication of the industry, the survey’s authors said.
Confidence in external assessments of risk from either dealers or rating agencies also appeared to be low across all investment firms. Thirty-four percent of mainstream fund managers and 50% of institutional investors said they had been sold a product whose risk was understated by its originator.
After the battering taken by rating agencies for their underestimation of the risks posed by US subprime mortgage portfolios, just 35% of all respondents agreed rating agencies provided an accurate assessment of risk. A meagre 1% thought ratings were “very accurate” in predicting defaults.
Despite the apparent gap in derivatives know-how at mainstream fund managers identified by the survey, 61% of those questioned were using them. Of those with at least $10 billion in assets, almost a third said they used derivatives to a “major extent”. Among all investment firms surveyed, 57% used derivatives.
This proportion looks set to increase. Over the next two years, 39% of participants globally said they would increase their use of derivatives, while just 5% said they would reduce their derivatives use. Forty-seven percent said there would be no change in their derivatives use.
However, there appears to be little appetite for collateralised debt obligations following the recent credit meltdown. As little as 9% of respondents were looking to increase their exposure to collateralised debt obligations, with 17% of all respondents to the KPMG survey eager to pull back from the asset class.
The company quizzed senior executives at 333 investment management firms. Of them, 31% were based in North America, 29% in western Europe and 23% in the Asia-Pacific region.
http://www.risknews.net/public/showPage.html?page=802167
Well dear reader first of all we got this week the news that the Hedge Fund industry did badly this year so far. This does not come as a surprise to me. Most Hedge Funds in general terms did well up until approximately 2004. However since then the average result has been nothing spectacular at all. As many hedge funds use excessive leverage and thus have built up very high risks, any large bet could of course hurt them strongly. Well since August 2007 we saw several funds going out of business precisely because of their excessive leverage and wrong bets. As with mutual funds it is very important to know what your fund invests in. There are without doubt some funds that have shown excellent result over a long period of time and one can expect these funds to weather the coming storms relatively well but there are still too many hedge funds and I am sure that many of them will disappear.
Equity
source www.thetradingdoctor.com via www.lemetropolecafe.com
We are in a bear market and in bear markets it is the person who loses the least money that wins. No one knows how low this market is going to go. No one knows when the short covering rallies will explode upward. It appears that there are a number of trapped bulls right now. If those trapped bulls are the big money, they will do whatever necessary to get a nice rally started so they can sell to you and get out at breakeven or with a small profit. Sentiment readings in a bear market must be looked at in a completely different light from sentiment readings in a bull market. Ditto with oversold conditions. Sentiment (a contrary indicator) can get a lot more bearish in a bear market before a relief rally comes. Those trying to bottom fish—unless their pockets are very deep—are getting slashed by the falling knives.
What does “in it for the long run” mean, anyway? What is the long run if you are 50 plus years old and have been holding since the tech bubble burst and are still down with little chance to recover?
We might have a nice juicy short-covering rally that will take us back to 1380 or maybe higher on the S&P. Everyone is waiting for it, and the serial bottom callers are out in full regalia. We may even have a rally that goes back to test the highs of 2007 when the markets topped. I don’t know and neither does anybody else. However, I do know this: History may not repeat, but it usually rhymes. The markets are structured to separate the most money from the most people. The markets do not know you and do not care about you. Even if you are a famous celebrity, the markets don’t care about your position. They want to fool and trick you. So--- you sell out at or near the bottom because you can’t stand any more pain, and then---when it all looks wonderful---you get in at the top. This has been the pattern since the inception of the markets. This is the cycle of emotions that repeats over and over again. When it looks so good that you absolutely have to get it and can’t stand it any longer, you will buy at or near the top because “the worst is over and it can never go down again---EVER!” That was the mantra during the bursting of the tech bubble, and it will be heard again this time as we approach what is likely to be the last hurrah of this market into the “election rally.” The “big boys” are salivating right now because they see the little guy puking into this downage. Once everyone has puked (it‘s called capitulation –we saw it in January and March and are likely to see it again) the markets will go up. And then, when you realize that you sold at or near the bottom, you will pay higher prices to get in at or near the top. Of course, the “big boys and girls” are very happy to sell to you at these prices, and delighted to fill their bellies with the bodies of the little fish as they swim away quickly like the sharks that they are.
unquote
Well dear reader you certainly remember that I was mentioning several times that the credit crisis is not over yet and that we possibly are still in the first quarter of the corrections. Well last weekend a confidential report found the way to a swiss newspaper. Following th information:
Financial market losses could top 1,600 billion dollars: report
Posted:Sun, 06 Jul 2008 17:01:01 GMT
Author:DPA
Geneva - The global financial crisis could lead to losses of 1,600 billion dollars for financial institutes, according a report in the Swiss Sunday newspaper Sonntags Zeitung. It quoted a confidential study by the hedge fund Bridgewater Associates as saying losses for banks holding risky assets could be four times greater than the 400 billion dollars previously estimated.
The hedge fund expressed doubts that the financial institutes would be able to drum up enough funds to cover the losses, something it said could exacerbate the crisis.
Bridgewater,one of the world's biggest hedge funds, based its calculations on the state of risky debt-based US assets, such as mortgages, credit and credit card demands.
The value of such risky assets is 26,600 billion dollars, according to the hedge fund. The losses would amount to 1,600 billion dollars if these assets were valued at market rates and not in the form of securitization, the newspaper said.
Well dear reader I truly would love to be able to send you some great news that makes us all happy. I am sorry but unfortunately, lately there is more and more negative information hitting the tape. Let’s take it from the positive side. Although the news is not that good at all we should try to see what we can take out looking at the positive side. Well knowing what is going on and muse a bit about it (not just accepting what is delivered to us but really take our time and muse about it using our common sense), I think we can take some positive parts out of it. How. Well first of all if I understand as much as possible what really is going on (and not only the smokescreen) I can prepare myself or hedge myself correctly. In that sense please read the following article from Ambrose Evans-Pritchard whose article are in simple words excellent
The central bankers' bank renews fear of second depression, writes Ambrose Evans-Pritchard
A year ago, the Bank for International Settlements startled the financial world by warning that we might soon face challenges last seen during the onset of the Great Depression. This has proved frighteningly accurate.
The venerable body, the ultimate bank of central bankers, said years of loose monetary policy had fuelled a dangerous credit bubble that would entail "much higher costs than is commonly supposed".
http://www.telegraph.co.uk/money/main.jhtml?xml=/money/2008/06/30/ccbis130.xml&ref=patrick.net
Housing
According to Case/Shiller house prices are falling in 23 out of 25 metropolitan areas. Forclosures are still rising
Source itulip
Why are falling incomes and rising unemployment bad for housing?
This will be self-explanatory for many of our readers, so we'll keep it brief. When incomes fall, borrowers can't make mortgage payments. Even before recession, sub-prime mortgages that were sold to households that did not have sufficient income even when employed full time at their current job. Some were never able to make the first payment. Now that the recession is here, even borrowers with lower credit risk who were granted Alt-A mortgages face default. How many? This chart from the New York Fed web site shows, for example, that nearly 25% of all Alt-A mortgage holders in California, one out of four, missed a payment in the last 12 months.
A mortgage holder who misses a payment is technically in default. While few lenders initiate foreclosure until several payments have been missed, the missed payment in last 12 months metric is a strong indicator of borrower distress, and it is rising across the nation even before unemployment has increased significantly. That's for Alt-A mortgages. You don't want to see the sub-prime numbers.
Please read on
http://itulip.com/forums/showthread.php?p=39709#post39709
Fixed Income
Well dear reader once again we saw some a kind of a flight to safety, or with better words, what many people still believe as safety. It is correct, I mean the Treasury Bond. Personally I do, as you certainly assume, not agree at all. Honestly I cannot understand that one could see the bonds of a country with such huge debts that it will never be able to pay back as safe haven. The only way to get out of debt is inflate out and that will means losses for the bond holders who themselves believe to be in a safe haven asset. Apart from being a bad credit, at least in my opinion, we have to take into consideration as well that the Dollar lost more than 60% of its purchasing power over the last 10 years. That means that even with compounded interest all holders of US Treasury bonds lost purchasing power. Probably they will not only lose purchasing power but soon capital as well. Why? Well I doubt that the huge dollar holders such as the sovereign funds and the commodity producers will go on recycling their dollars into the treasury. They know already that they will lose on their dollar positions, so why lose more? Well if there will not be much demand anymore, expect from a few optimists who maybe never lose confidence in the Treasury Bonds, prices of the bonds will fall and yields will pick up. I still cannot understand how anybody could be happy with a yield of approximately 4.5% for a 30 year US Treasury risk. Unless yields move considerably above 10% I will not have any interest in investing any money in Treasuries.
As I do expect yields of above the 10% over the coming months, I will hold on to my short position on the Treasury (in fact in my way of thinking it is a long position on yields) although I am a bit in the red for the moment being.
Equities
The S&P is down about 20% from its high...which puts U.S. stocks barely lower than they were in 2000. But adjusted for inflation, the loss has been spectacular. Remember, oil has gone from around $10 a barrel to around $140 a barrel. Everything else has gone up too. Even by official CPI numbers, the year 2000 buck is worth only about 80 cents. And the dollar against the euro is down about 40%.
Real bear markets typically last 10-15 years. This one has another few years to go. These should be the most interesting ones. Commentators are already looking for a bottom in the stock market. They may have to wait a long time.
An ounce of gold would buy the whole Dow in 1926...again in the 1930s...and once again in 1980. If gold stays where it is, the Dow would have to drop below 1,000 for the gold/Dow ratio to return to one. More likely, the Dow will drop and gold will rise to meet it. In 1999, gold bottomed out at around $260 an ounce. Since then it is up nearly 5 times. The U.S. money supply, however, has gone up 11 times. So, our guess is that there’s plenty of upside left for the stuff they make dental fillings out of. If it were to equal the increase in M3, its price could rise to $2,700 or so.
This is all guesswork, of course. But the Trade of the Decade still looks good to us. Gold and the Dow will probably come together somewhere north of 3,000....
Above quote I believe is from dailyreckoning
Commodities / Inflation
Well dear reader as commodity prices have gone up for quite some time, more and more producers are forced to increase the prices of their end product. Following one more information about this topic.
P&G will boost product prices by up to 16%
By Bloomberg News | July 8, 2008
CLEVELAND - Procter & Gamble Co., the maker of Tide laundry detergent and Head & Shoulders shampoo, will raise prices as much as 16 percent because of higher costs for plastic, energy, and paper.
The increases are the Cincinnati-based company's steepest in at least 18 months. Procter & Gamble is betting that customers will continue to buy its Gillette shaving cream and Ivory soap rather than switching to store brands with lower prices promoted by Kroger Co. and Wal-Mart Stores Inc...
Gold
Gold has done nicely this week. Please do not forget that Central Banks are not in favour of a higher gold price and are doing whatever they can to control the price rise. So I do expect that they will try to bomb the price of gold down to lower levels. Yes of course the price of gold can go down too. Strongly believing that we will see much higher prices I will not be worried if that would happen. Furthermore, the case of Fannie and Freddie once more shows me that we still have huge risks that could grow to a real breakdown of our system. In that sense, having physical gold holdings, gives me at least the peace to sleep well and not to worry too much.
once more:
Regarding managing the gold price, there are astute market observers who already for some time have observed a strange behaviour of the ETF with the ticker symbol GLD. It really seems like the ETF is used to enforce the movements that the central banks would like to see. Following the comment from any really savvy market observer.
Quote
It has come to my attention that there is now an OPTIONS chain on GLD!
http://finance.yahoo.com/q/op?s=GLD
Now how does that work with a share that is supposedly backed by gold!?? Whose gold are they putting at risk by offering these derivatives on investors supposed "safe haven" investment? What if gold went up $500 in a week and all the call options were exercised? Where does the gold come from? Where does the money come from to go and buy it on the open market at a price $500/oz higher than the price paid by the option holder? Ah! I know! They probably have the risk hedged with an over-the-counter derivative contract that has a counter-party who doesn’t have any gold either but will sell a derivative insurance contract!
Does anybody believe that GLD is what they say it is? If so call me, I have several bridges in Brooklyn for sale…oh! I also have some options to let you buy the bridge at today’s price some time later. I’ll even send you a picture of your bridge so you can be confident that your bridge exists!
Unquote
Well dear reader, what have I done lately regarding investments.
1. I sold this week our natural gas and oil investments. For both I see a bright future but I feel that there might be a correction and therefore I’d like to wait on the sidelines
2. I bought for the first time in my life a mini short on the USD. I do not like to go short something because it is investing on something negative to happen. However in this case I see it more as an investment on the positive outcome of the Swiss Franc. So it still is betting on something positive. I might increase this investment over the next days
3. On our short on the Treasury (long yields from my point of view) our positions are still in the red but I will hold on and might buy more the next week.
4. Gold/Silver: over the past weeks I switched from conservative gold holdings (physical) to more leveraged holdings preparing for the next strong up move which I feel is in the cards. The positions are already doing well at some point I might put a stop loss order.
5. Agriculture commodities: For the moment being no position. However I think there is nice long term upside potential and I would like to invest in it. If I find a nice product with a nice leverage I will do so.
6. Coal: No investments put I think there is still some nice upside potential. However I need first of all to find a nice product with leverage and secondly I would like to wait for a correction in order to start a position.
7. Uranium: I still hold a small position in the U ETF which still is in the red. I will hold on.
8. Equities: No position apart from really insignificant holdings of some mining and oil stocks
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