Dear reader following the weekly update from www.prudentbear.com
Hyper-volatility was the order of the week, although the major averages ended with only small changes. For the week, the Dow declined 1.1% (down 14.3% y-t-d) and the S&P500 slipped 0.2% (down 14.3%). The Morgan Stanley Cyclicals dipped 0.4% (down 15.9%), while the Morgan Stanley Consumer index mustered a 0.1% gain (down 9.8%). The Transports declined 0.9% (up 8.5%), and the Utilities were smacked for 2.4% (down 11.4%). The broader market fared better. The small cap Russell 2000 jumped 2.5%, lowering 2008 losses to 7.3%. The S&P400 Mid-Caps slipped only 0.6%, also down 7.3% y-t-d. The NASDAQ100 gained 1.3% (down 11.4%), and the Morgan Stanley High Tech index declined 0.6% (down 11.5%). The Semiconductors were hammered for 7.7% (down 11.5%). The Street.com Internet Index added 0.6%, and the NASDAQ Telecommunications index surged 6.8% (down 6.4%). The Biotechs jumped 4.8%, increasing 2008 gains to 6.0%. The Broker/Dealers fell 6.0% (down 30.3%), while the Banks recovered 0.7% (down 28.7%). With Bullion sinking $25, the HUI gold index dropped 6.4% (down 0.1%).
Well the winner this week in the equity markets seem to be Bear, however I would qualify the interesting week with fantastic fight between Bull and Bear as a draw
Is the party over?
A couple days ago, the music has stopped. But then the music started again, it seems that some entity found some monies in order to pay the band. Well now we can enjoy more of the nice melodious music. Yes we can dance again. The party goes on at least for some more time. However if I look around, to me it seems that not only the band looks very tired but as well the dancers on the dance floor. Well for the moment being they got some kind of a new energy input and although the look tired they still move around. Well dear reader it seems like everything is fine. But some at the party did not know when to stop. Yes they got exhausted so much that they needed life support. After having received some oxygen for some hours one pair is now more or less OK. At least they might be able to go on with the party but they should be more careful about their health. Yes I regret to let you know that not only one entity but by today already 7 did not have that luck. Yes in their case life support was too late. For them the party is over no doubt about it. Such is live. Well dear reader I was told that there are some 90 more with similar symptoms. The emergency units are on alert. Well in any case it seems that the rest of the ones present at the party do really enjoy it at least that is what they let us know. But for how long?
Well the question of course is, what will happen once the party really stops? Who will clean up the mess? Who will gather the empty bottles? Who will help those who were not able to leave the party on time and therefore lay around either tired or maybe drunk?
Well dear reader, we will know more sometime in the future. I see that there are already some people or parties leaving the party. Some are rather forced to do so, although they would have preferred to stay. Others might consider leaving too. Those who consider it might have listened to Richard Fisher, the former head of the Dallas FED. In a speech given to the Commonwealth Club of California. Fisher said:
“...tonight I speak for neither the committee, nor the chairman, nor any of the other good people that serve the Federal Reserve System. I speak solely in my own capacity. I want to speak to you tonight about an economic problem that we must soon confront or else risk losing our primacy as the world’s most powerful and dynamic economy.
“...If you wanted to cover the unfunded liability of all three [Medicaid] programs today, you would be stuck with an $85.6 trillion bill. That is more than six times as large as the bill for Social Security. It is more than six times the annual output of the entire U.S. economy.
“Add together the unfunded liabilities from Medicare and Social Security, and it comes to $99.2 trillion over the infinite horizon. Traditional Medicare composes about 69 percent, the new drug benefit roughly 17 percent and Social Security the remaining 14 percent.
“I want to remind you that I am only talking about the unfunded portions of Social Security and Medicare. It is what the current payment scheme of Social Security payroll taxes, Medicare payroll taxes, membership fees for Medicare B, copays, deductibles and all other revenue currently channeled to our entitlement system will not cover under current rules.
You can read the whole text of his speech here: http://www.dallasfed.org/news/speeches/fisher/2008/fs080528.cfm
Well dear reader the information from Fisher might lead some people to really take the decision and leave the party or at least to look for some bullies that could help them as security guards if things might complicate a bit.
Musing a bit about what Fisher said, some savvy investors with a profound knowledge of maths came across the following conclusion.
If all US citizen would have to pay the bill today, it would mean that the approximately 304 million (included infants and elderly) would have to pay USD 330,000 each, or 1,3 million per family of four.
Well dear reader that means everybody would have to pay. It does not matter at all if they have participated at the party or not. Well at least everybody has been invited anyway it just happened that most never really had the chance to get to the place where the party was going on.
Well that’s quite an amount indeed. A really expensive party I would say.
So who is going to pay? The future generation? Certainly yes. But maybe not alone. To cover the existing unfunded liabilities someone must pay the approximately USD 99 trillion. It is without doubt an awful lot of money. The question is, can all be paid?
Bill Bonner who wrote the excellent book "The empire of debt" says that throughout history many nations confronted by sizable debts which they were unwilling or unable to pay have decided to use an apparently painless solutions which is monetization.
My guess is that we might see the same.
The problem is only that the examples of all those countries that kept running their printing presses showed that the relief was only at the beginning but due to inflation or hyperinflation at a later stage the solution in fact turned out to be worse.
Well dear reader some people at the party almost never have been on the dance floor but rather in the room where they play the Monopoly game. Yes those that play get addicted and have a hard time to quit. The game as such has seen some kind of evolution over time. Well I can let you know that the "free out of jail" cards are in a really high demand lately.
Well maybe the cards need not to be used at all, as those who should supervise the game seem to be asleep or might have been looking too deep into the bottle.
Well the Monopoly not only evolved over time but it got as well a lot more exiting. At least now the action is not only in one direction and to make it more interesting, the situation changes basically by the minute. Following some information about the game
From The King Report…
The economic damage that follows financial damage is becoming more pronounced.
The Times: Big companies are delaying payment to smaller suppliers by more than 100 days in the biggest squeeze on small firms' cashflows since the early 1990s. [Last full-blown recession
http://business.timesonline.co.uk/tol/business/industry_sectors/banking_and_finance/article4368931.ece
The Times: Economic tremors in the West reach China A slowdown in the flow of containers through the giant ports of southern China is providing an amber warning light that all is not well in the vast workshops of China's eastern seaboard.
http://business.timesonline.co.uk/tol/business/industry_sectors/transport/article4368529.ece
McClatchy: Commercial bankruptcies soar, reflecting widening economic woes Driven by a sour economy and skittish consumers, U.S. business bankruptcies saw their sharpest quarterly rise in two years, jumping 17 percent in the second quarter of 2008, according to an analysis by McClatchy. [So why is the BLS B/D Model creating more jobs in 2008 than it did in 2007? Yep, we know.]
http://www.mcclatchydc.com/227/story/44717.html
The FT: US food companies are preparing another round of hefty price increases as soaring commodity costs force them to pass on rises to consumers. Sara Lee, maker of meat products such as Jimmy Dean sausages, said costs would compel it to push up prices on meat lines by up to a fifth later this year.
http://www.ft.com/cms/s/0/c245dc2c-5673-11dd-8686-000077b07658.html
The global economy is at the point of maximum danger
By Ambrose Evans- Pritchard
The Telegraph, London
Sunday, July 20, 2008
It feels like the summer of 1931. The world's two biggest financial institutions have had a heart attack. The global currency system is breaking down. The policy doctrines that got us into this mess are bankrupt. No world leader seems able to discern the problem, let alone forge a solution.
The International Monetary Fund has abdicated into schizophrenia. It has upgraded its 2008 world forecast from 3.7 percent to 4.1 percent growth, whilst warning of a "chance of a global recession." Plainly, the IMF cannot or will not offer any useful insights.
Its "mean-reversion" model misses the entire point of this crisis, which is that central banks have pushed debt to fatal levels by holding interest too low for a generation, and now the chickens have come home to roost. True "mean-reversion" would imply debt deflation on such a scale that would, if abrupt, threaten democracy….
http://www.telegraph.co.uk/money/main.jhtml?xml=/money/2008/07/21/ccview121.xml
and
http://globaleconomicanalysis.blogspot.com/2008/07/death-spiral-financing-at-wamu-merrill.html
and an opinion of Mike Shedlock
Citigroup (C), Lehman (LEH), Morgan Stanley(MS), Goldman Sachs (GS) and Merrill Lynch (MER) all have a huge percentage of level 3 assets. Level 3 assets are commonly known as "marked to fantasy" assets. In other words, the value of those assets is significantly if not ridiculously overvalued in comparison to what those assets would fetch on the open market. It is debatable if any of the above firms survive in their present form. Some may not survive in any form
Well dear reader as you know not all players are always happy and of course not all can win. Well in fact it seems that most of the time there are more losers than winners. One of the players who feels to be on the losing side mentions:
What are we taxpayers getting for our money as we bail out the geniuses who have run some of our leading financial institutions into the ground? The Treasury is extending a reported $300 billion line of credit to Fannie Mae and Freddie Mac, but what do we receive in return?
The answer, I'm afraid, is very little -- other than relief from the imminent threat of a much worse crisis. I'm glad that a systemic meltdown has been avoided again, temporarily. But these bailouts are the equivalent of "no document" loans to borrowers who are saying in effect, "Lend me billions right now or I'll destroy the international financial system."
please read the complete opinion of this person on the following webpage
http://www.washingtonpost.com/wp-dyn/content/article/2008/07/15/AR2008071502423.html?ref=patrick.net
Tuesday
Well dear reader on Tuesday the game got really interesting. Once more the invisible hand, a player that has not really been invited at all and therefore should not play, got really active and I must admit in a very successful way. When this player started to manipulate the game out of the dark,
his moves involving a lot of money (real money or not does not matter at all because in both, the real world or the Monopoly, only paper or FIAT is used anyway)
the paper Gold and Silver futures were brought down substantially. Yes the player really managed to use all its tricks and not only the precious metals were played down but oil too. This success alone would already ward the "excellent work" award but if we sum up the success of having been able to move the equity markets up at the same time, the whole turns into a real and true success story. Wow, how well they know how to manipulate the game. Incredible indeed. following some charts
But what is really incredible is the fact that it seems that nobody really found out what happened. Maybe some did but as they are invested in those papers too there is of course no complaint to be expected from their side. Well dear reader it is really great to have equities higher, at least for all the players who hold some. However the question is how long will that go on? The question now is why the player in the dark, in some circles known as PPT (also known as Plunge Protection Team or with the official name The President's working group for financial markets with its many subgroups, or maybe the best explanation nowadays is in a simple way "The Goldman Gang"), felt like influencing the game so that precious metal prices fell? Well my guess is that some news to be given to the players will not be to their liking and therefore the indicator of worry has to be kept down. The other possibility is that some people will earn nice monies when prices can be kept down until after the option maturity date, which happens to be next Monday.
following some news given to the players
Some folks might have a bit of trouble putting Wachovia's $8.86Billion QUARTERLY loss in perspective.
Wachovia loses $8.86Billion, slashes jobs
http://uk.reuters.com/article/bondsNews/idUKWNAB160920080722
Well dear reader knowing that the precious metals prices are not let to go up and knowing that the invisible hand will have their victories from time to time, I still believe that prices will rise over time.
Furthermore with the mess we have to face, liquidity crisis, 2 times close to a break down of the financial systems, banks with enormous amounts of bad assets on their books and so on, I still prefer to hold gold. It does not matter that we see price fluctuations and lower prices will not matter neither. Why? Well because as long as there are dark clouds hanging low I prefer to have some gold which still will shine even with lower prices. Gold will allow us, I believe, to maintain purchasing power and if things really go sour gold will do just fine. But we have to keep in mind that we need real gold for such cases not paper gold.
So dear reader it seems that the party is not over yet? What do you think? What would your reaction be when your banker calls you and tells you the crisis is over. When he or she gets so exited that he tells you: "look at the great results that the banks lately made public". He or she even might tell you that the examples are really SUPER results.
Well if that happens than we can say optimism is back.
Optimism is great but, my dear reader, it might be that a naïve over-optimism might not be that healthy on the financial side. I for myself get rather cautious whenever I hear analysts and bankers being too optimistic. Why? Well because it would not be the first time and certainly will not be the last time that this happened. We have been there before. Just a few months ago we heart the same arguments and you know what happened afterwards. Are we really at the end of the tunnel? Your guess is as good as mine.
Anyway it amazes me (maybe it does not really) is the fact that so many people believe that some rather bad results should now be good news just because they have expected something worse. If they really have expected something worse and thus they have been too much on the negative side does, in my opinion, only show that their analytical capabilities are not at the expected level. Now shouting out loudly that results are super just seems to confirm my opinion. If the would look into the details and not just accept the Orwellian comments, they might be able to see that not everything is really fine and that in most cases only bookkeeping tricks helped to paint something nice which in fact is ugly.
Well dear reader without doubt many of those who should not opine so fast might not want to know or prefer to close their eyes but those using the tricks know very well what they do. Without doubt they get better at doing it with each report. But at the end, the only thing they do is in simple words "buying time".
http://www.nytimes.com/2008/07/23/business/23bank.html?_r=2&partner=rssyahoo&emc=rss&oref=slogin&oref=slogin
some more information about the same topic
PrintShare
Nouriel Roubini | Jul 20, 2008
This past week started with concerns about another systemic meltdown of the U.S. financial system as the insolvency of Fannie and Freddie was revealed and as IndyMac went bust (this third largest bank collapse in U.S. history). But the week ended with a remarkable rally of financial stocks as better than expected results from Wells Fargo, JP Morgan and Citi soothed the fears that major financial institutions were in even more distress than already predicted by market analysts.
Unfortunately, this massive rally of financial stocks in the latter part of the week is just another temporary bear market rally that will fizzle away once the onslaught of bad financial and macro news builds up again.
The Coming Systemic Bust of the U.S. Banking System: “Dead Stocks Rallying”
or another opinion
But how to square the views that a large fraction of the US financial system is in trouble with the apparently better than expected earnings results and lower than expected writedowns presented by financial institutions such as Wells Fargo, JP Morgan and Citi that led to the financials’ stocks most recent rally? There are many reasons why those earnings results are misleading and cosmetically retouched upward while the true financial conditions of the financial system are more dire than otherwise presented.
Let us discuss next in some detail the various reasons why financial conditions of financial firms and banks are much worse than those headline figures and why we the US will experience a systemic financial crisis…
following some more
Fannie, Freddie Rescue Plan May Cost $1 Trillion, Bunning Says
July 23 (Bloomberg) -- A government rescue of Fannie Mae and Freddie Mac would require taxpayers to pay ``way' more than the $25 billion estimated by the Congressional Budget Office, potentially as much as $1 trillion, Senator Jim Bunning said.
Treasury Secretary Henry Paulson ``hasn't told us the truth about this bill,' Bunning, a Republican from Kentucky, said in an interview with Bloomberg Television today. ``Why would you put in a backstop of unlimited amounts of money if you weren't going to need it.'
http://www.bloomberg.com/apps/news?pid=20601087&sid=aJ_PxvWbq4z0&refer=home
ARROYO GRANDE, Calif. (MarketWatch) -- Welcome to the conservative's worst nightmare: The law of unintended consequences. Why? Nobody wants to admit it, folks, but the conservatives' grand ideology is backfiring, actually turning the world's greatest capitalistic democracy into the world's newest socialist economy.
http://www.marketwatch.com/news/story/eleven-reasons-america-new-top/story.aspx?guid=D23E1901
-728E-4A3C-99D1-7E80F74C3AE3&dist=SecMostRead
Well dear reader the question really is, shall we party or shall we not. Should we make a break and take some fresh air outside? Many questions indeed. Well I for my part have my clear opinion and I am in regard to stocks taking my break. Well dear reader on the following link you find an excellent piece of research which in my opinion is clearly a MUST read, please read
http://www.investmentpostcards.com/wp-content/uploads/2008/07/20080627-welling-yamada-reprint1.pdf
SEC, naked short or should we rather say naked swindlers
Well dear reader, last week the SEC came out with new rules regarding shorting. First of all I thought that naked shorting was illegal so what happened is that the SEC basically now says that shorting certain financial stocks is illegal but shorting all other stock not. Strange isn’t?
Following an excellent piece of information about the same topic from Mish Shedlock
Panic By The Fed: Anatomy of a Short-Squeeze
I have been talking about the short squeeze in financials all week. See The Financial Dogs Are Now Bitching About SEC Ruling. Minyanville's Todd Harrison has this synopsis of how it happened. Please consider Freaky Friday Potpourri: Anatomy of a Short-Squeeze.
Financial companies are desperate for capital but their stock prices are so low that any issuance would be dilution death for the companies. The government is desperately trying to keep the financial system together. Add that up and you get the possibility of a great manipulation.
How would the government engineer a rally in financial stocks so that these companies can sell stock to raise capital at a reasonable or at least palatable dilution level?
It might go something like this. Since financial stocks are in such trouble they have heavy short interest; this is natural and well known and can be used to their advantage. A clever “berry” might think to introduce confusing rules that raise the cost of borrowing short stock and temporarily confuse shorts into covering and not shorting more. And this is precisely what the SEC did.
It just so happened that the new SEC rules came conveniently the day before many of these financial companies were to report earnings. If just some how these earnings were really good the match would be lit on the kindling.
So far banks have miraculously come through on their end of things. Wells Fargo (WFC) and JPMorgan (JPM) reported better than expected beaten down earnings. Things must be getting better just as the companies need capital.
What a coincidence.
But if you look at how the banks “beat” their earnings the coincidence becomes clear. WFC took the unprecedented step of extending charge-off acknowledgment from 120 days to 160 days. And JPM was even more aggressive. It actually lowered its loan loss reserves quarter to quarter.
The list of financial companies where shorting regulations are being enforced/enhanced is precisely the banks and dealers (and FNM/Freddie Mac (FRE)) that have access to the Fed's balance sheet (dealers through the PDCF and FNM/FRE through the recently-allowed access to the discount window). So we can speculate on the nature of the "coincidence": Perhaps the Fed is getting worried about the value of all that collateral these dealers have posted to the Fed balance sheet and must boost the capital of these companies to protect that value.
And now on cue FRE, a $5 billion market capitalization company wants/needs to issue $10 billion in new stock? Doesn’t that sound a little crazy? Well get ready for others to do the same because the banking system needs capital desperately and the government is there to help.
But help at the expense of who?
http://globaleconomicanalysis.blogspot.com/2008/07/panic-by-fed-anatomy-of-short-squeeze.html
Some more about the same topic
July 20th, 2008 by Patrick Byrne
In the spring of 2006 I met with the very bright editor of the editorial page of a major American newspaper (I do not name the paper only because I do not wish to embarrass the individual involved). After several hours of discussion, he said gently, "I know my paper has not been so fair to you." He proceed to invite me to submit an editorial on the subject of naked short selling, suggesting a length of 1,200 words. I predicted that he would not be permitted to publish it. He replied, "I run the editorial page. I determine what gets published on it."
Some time thereafter I sent him the editorial that appears below. The next day he called and said, "I’m terribly embarrassed to have to say this, but it appears I will not be able to publish this or anything by you."
He sounded surprised. I wasn’t.
That said, it seems it a shame not to let it see the light of day, even at this late date. So again, the following is an editorial prepared for a major US newspaper which ostensibly is concerned with the operation of our capital market. The months referred to are 2006 months. Since then, the numbers involved have increased 30-100%.
http://www.deepcapture.com/
Did Someone Say, "World-Historic"?
http://www.deepcapture.com/did-someone-say-world-historic/
Mortgages
Long ARM of the law
The CBO is totally lying claiming a paltry 25 billion will reconcile Fannie and Freddie's woes. They know that wouldn't even remotely do the job. But, as is the case for all publicly financed cons, this is the phony number needed to get the bailout door open. Any frank discussions of REAL costs will come after the deal, and probably after a new presidency. The following chart shows how phony the CBO claim is. As you can see beginning in 2009, and continuing into 2011, the option ARM, Alt-A, and Agency mortgages absolutely explode upwards. It's just ludicrous for the CBO to ignore what's coming over the nest 4 years. 25 billion could very well be needed for a single MONTH. In light of over 1/2 trillion dollars of ARM resets yet to come any talk of Fed rate hikes is just blustering. Raising rates anytime during the next 4 years could implode millions of additional ARM mortgages. Wall Street also conveniently ignores this chart when cheerleading for a bottom in the financials.
Look at the huge spike in Option ARM's and Alt-A's from 2009 to 2011!
Also buried in this garbage housing legislation is an 800 BILLION increase in the statutory limit on the national debt, to 10.6 trillion. If they're lucky that'll be enough for the next 6 months, or until after the election, whichever comes first. You would think THAT little tidbit alone would have gold up $100, instead of it getting pounded into submission. The SEC and CFTC already have all the information they need to investigate illegal gold and silver manipulations. Any further evidence will be equally ignored. The phrase ""to serve and protect" has a whole new meaning when it comes to law enforcement in financial regulatory agencies. They (SEC, CFTC) serve banking, and protect banking interests.
Peak Oil
Well dear reader, we have on one side those that believe that we will enter into a world wide deflation phase and on the other side we have those that believe that China and India will not suffer that much and are somehow immune to lower demand out of the US. Well, as mentioned in my last musings, I believe that the lower US demand will have of course a certain effect around the world. However I am not so convinced that this lower consumption of the US consumer will have such a strong impact on oil prices. Yes I believe we possibly will see a correction towards the USD 100 level per barrel but it is in my opinion a "normal correction" within a bull market. I doubt that the world demand for oil will fall considerably. It will be very difficult to tell all those people in China and India, who recently have bought their first car, not to use this car anymore. As long as they can afford to pay for the car, its maintenance and for gasoline they will use their new status symbol. It does not matter that in fact walking would be the faster to move from point A to B and that in fact streets in China and India are already so overcrowded that cars most of the time do not move at all. Following a part from an essay with some more information about car sales in China
That's 836,000 new cars in China in June alone. And, significantly, in China the majority of these new cars are the first car for an individual consumer--so these aren't replacing existing cars that were already on the road, but rather are new cars that weren't on the road before. In India, May auto sales were up 14% year-on-year to 110,000 cars--that shows how much room to grow India has just to catch up to China's level of automobile penetration in the populace! GM expects global auto sales to increase 4% in 2008, meaning 2.8 million more vehicles will be sold this year than last. Especially considering that sales in mature western economies are expected to stagnate or decline, the majority of these new sales will come in developing nations where they are disproportionately more likely to represent a new, additional car on the road, not a replacement car.
The prospects for global demand destruction are not looking good. Oil is a globally fungible commodity--demand destruction in the US may be rising very slowly, but this is irrelevant in the face of rising global demand. Personal investments in cars increase the inelasticity of demand--when people have sunk cost in a car, it skews their calculation on the value vs. cost of consuming gasoline. Unless the trend in global car sales turns around, it's hard to envision a long-term retreat in oil prices...
http://www.jeffvail.net/2008/07/demand-bifurcation-point.html
Well dear reader you certainly remember when a few days ago the politicians' finger pointed at the speculators who according to the politicians are the responsible for higher oil prices. They let us know that they will do whatever they can to stop them. The following information gives you some insight about the so called speculators. Well indeed some really did speculate but not in the way the politicians thought because they were taking bets for lower prices and not higher. Well the bet did not work out that well as prices did go up and not down, which cost them dearly. They had to leave the party for good
With other words, the spike in oil prices is not because of the speculators speculating on higher prices but maybe rather on those speculating on lower prices. Isn't that what they wanted? It just did not turn out as they thought. Bad luck indeed.
NEW YORK (Reuters) - SemGroup LP declared bankruptcy on Tuesday after $3.2 billion in oil-trading losses torpedoed what had been the 12th-largest private U.S. company.
The Tulsa, Oklahoma-based company racked up the massive losses as oil prices ran up record gains, undercutting short crude futures positions SemGroup bought to hedge against its 500,000 barrel-per-day trading business
http://jessescrossroadscafe.blogspot.com/2008/07/oil-trading-losses-force-12th-largest.html
Water
Global food shortages have placed the Middle East and North Africa in a quandary, as they are forced to choose between growing more crops to feed an expanding population or preserving their already scant supply of water.
http://www.nytimes.com/2008/07/21/business/worldbusiness/21arabfood.html?em&ex=1216785600&en=d2c77eabfeb21370&ei=5087%0A
http://www.voanews.com/english/2008-07-21-voa16.cfm
USD
Well dear reader as mentioned a few times, I do not see much future for the USD. Well the USD will disappear anyway when the AMERO will be introduced. There has been a clear trend in the sense that those holding huge amounts in USD started to diversify into other currencies over the past months. Some countries still hold on to their USD peg, for example most Middle Eastern countries. However there seems to be a new trend in the coming in the sense that they possibly will start to loosen the beg. Why? Well because their imported inflation simply is too high. UAE seems to be the first to leave that separate party. Please read on
U.A.E's Dirham to Gain 5% in 2009 as Dollar Peg Goes, CFC Says
By David Yong and Matthew Brown
July 22 (Bloomberg) -- The United Arab Emirates dirham will appreciate 5 percent in 2009 as faster inflation in the Gulf state forces the central bank to ditch its 30-year peg to the dollar peg next year, according to CFC Seymour Ltd.
The central bank of the U.A.E. will drop the dollar peg by June of next year, linking the dirham to a basket of currencies, including the dollar and the euro, Hong Kong-based currency analyst Carol Chan said in a phone interview yesterday. The dirham will rise to 3.49 to the dollar from its peg rate of 3.6725 today, said Chan.
http://www.bloomberg.com/apps/news?pid=20601083&sid=aN7OzEAYpVPY&refer=currency
Well dear reader there are of course people who believe that we will see a higher Dollar and I must admit that they have excellent arguments. In some of my future musings, I will expose their opinion.
Gold
Well dear reader as mentioned before, gold and silver were taken down this week. Apart from keeping the trouble indicator under control there was one more reason to keep the prices down, which was August option expiry. Following the comment of a savvy commentator form www.lemetropolecafe.com (as mentioned a few times this page is highly recommended for subscription) regarding option expiry
Quote
What is astonishing is that with only 4 trading days left in the August Call Contract the open interest has only gone down by 1259 contracts to 73,596. Also the Call options in the money all the way up to $940 have only dropped by 714 contracts to 28,540. That means in-the-money options are not being exercised with 4 days to go and this is a huge OI! The Put OI has gone up by 814 contracts to 71,977. Puts in-the-money all the way to $940 have also increased by 648 contracts but only stand at 9187…which means a 3 to 1 ratio betting on gold going up in the next 4 trading sessions.
Meanwhile in the DEC 08 contract Calls increased by 1108 contracts to a massive 126,073 contracts while Puts increased only by 387 to 71,442 contracts making Calls outnumber Puts by 1.8 to 1. Currently 29,848 Call contracts are in the money in DEC08 while only 9152 Puts are in the money making Calls in the money outnumber Puts in the money by 3.3 to 1.
I consider smart money is the major player in the option arena so this structure looks like a play that strongly anticipates much higher gold prices …and soon. In the last 24 hours, with the price falling from 973 to it’s current price of approximately 934, a staggering 12,044 option calls have been taken out of the money,..
another opinion from the same source
Absolutely outrageous but, alas, reality. However ‘these plunges don’t come for free and a lot of ammo is used up which needs to be covered further down the line’,..
The same thing happened to the silver price last month on expiry of the July calls,..
On the day of expiry, I took note of where the largest number of option calls sat, which were at the 16.50 level. It was no surprise then that at close of play that day the price was plunged to 16.48 (see the graph below),.. In fact it was only held under 16.50 for some 30 seconds, exactly on the close, before then bouncing higher after the time had expired,.. It has not been back to those levels since!..
Well dear reader what ever happens, I believe that Gold will be the shinning element that will help me and others to find the way once the lights of the party go off.
Yes option expiry is important. With lower precious metals prices, a lot of money can be saved by those being short.
and to finish a link to sprott assets management, John Embry
http://www.sprott.com/pdf/investorsdigest/digest.pdf
Wish you a great week and let's celebrate as long as the party is going on
Cheers
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