Please take note that I will not advice about new posts. If you are interested in this blog, please visit the blog once a week.
Are you ready and in a safe shelter? I do hope so. Do you hold physical gold? I do hope so. It does not matter if the prices are low (I would be a buyer if I would hold liquid funds). In gold we trust! No change in that sense.
Well dear reader the headline about the hurricane hits exactly what I was foretelling just a week ago. Yes we definitely have entered into the second leg of the hurricane. The calm in the eye of the hurricane was misleading. Now we know what happened. Things are changing fast. Faster than I have expected. Below you can read what I wrote yesterday on Sunday. Today this is already to some extend old news.
Now we know that Lehman Brothers could not find a buyer and entered Chapter 11. It is no surprise that Lehman is gone and the fact that they were not able to find a buyer shows in how bad a shape they really were. It does not come as a surprise that Merrill Lynch had to look for a solution as well. However, what came as a surprise to me is that they had to do it already now. I expected that ML might be next weekends action. AIG is no surprise either.
Well dear reader once again we hear how everybody is happy that the problems are solved and how well they were solved. Well as before this is complete nonsense. The problems are not solved at all and there is much more to come. Just think about all the Credit Default Swaps that have to be settled now. According to Bloomberg Lehman was the 10th biggest counterparty in the CDS. What will happen to those CDS? Who will pay the CDS written on the Lehman risk? This is a coming disaster which will hit fast. The Fed meanwhile will not be able to hand back the crap they took in as collateral of all the banks rescued so far. This will remain in their books.
Before moving to what I wrote last week, first a comment from www.shadowstats.com
The inflationary recession and systemic solvency crises continue to intensify, with the solvency crisis breaking over the seawall, once again, this past weekend. Federal Reserve and U.S. Treasury management of developments in the last three days appears likely to have deepened the systemic liquidity crisis, rather than to have eased same. By allowing the loss of Lehman, the Fed and the Treasury either believed they could contain the resulting negative systemic impacts, and/or they were playing to presidential election year politics by trying to look tough on the "moral hazard" issue. Irrespective of moral hazard, the solvency crisis has evolved too far — under pre-existing lax oversight by the Fed and Treasury — for the overseers now to start denying help to entities that could threaten the system. Playing politics with systemic solvency significantly increases the risks of systemic collapse and/or the cost of preventing same.
With no help offered by the Fed and Treasury to Lehman, and the politically-correct implication that there are no financial institutions too big to fail, risk has increased for an intensified crisis of confidence in the U.S. banking system, with possible flight to safety out of (a run on) the U.S. banks. Such is despite the liberalized and expanded liquidity facilities just offered by the Fed, and increasing speculation of renewed Fed easing, and despite any $70 billion fund being created by private global banks. I still expect that the Fed and the Treasury will do whatever they have to do, will create whatever money they have to create, in order to prevent an unthinkable systemic collapse. The costs and difficulty of doing same have just been increased by this weekend’s activities.
Former Federal Reserve Chairman Alan Greenspan was widely quoted from a Sunday television appearance, where he described the current crisis as "a once in a half century, probably a once in a century event." Slightly over a century ago, the 1907 banking/financial panic triggered a depression and resulted in the founding of the Federal Reserve, which was supposed to prevent banking crises such as seen later in the 1930s, 1980s and 1990s, and today. Where Fed actions in recent years encouraged and fostered some of the financial system abuses that have led to today’s circumstance, the Fed’s practical role now has evolved into one primarily of financial-crisis containment.
The President’s Working Group on Financial Markets (PWG), popularly called the Plunge Protection Team, was created following the 1987 stock market crash, with an eye towards the Treasury, the Fed and various market regulators preventing disorderly, and maintaining orderly, financial markets. Direct intervention/manipulation of the equity, credit, currency, oil and gold markets has been seen at different times since 1987. Most recently, intervention often has been coordinated with foreign central banks. Although PWG activity, by its nature, usually is not disclosed, in the current banking solvency crisis, interventions have been a virtual certainty, such as with the extraordinary market gyrations seen at the time of the Bear Stearns failure.
The PWG certainly will be at work in today’s market place, given the fundamental market displacements from the evolving banking solvency crisis, as well as pressures in different markets from the unwinding of various Lehman positions. Accordingly, the various markets remain subject to extreme volatility and distortions, where short-term market movements may appear to be irrational.
The options open to the Fed and the Treasury in keeping the system afloat all involve creating new money and liquidity, with implications for higher inflation, regardless of any near-term, violent and heavily suspect moves in oil pricing. My longer-term outlook remains the same, for a deepening bear market in equities, an eventual spike in long-term interest rates, heavy selling of the U.S. dollar and much higher prices for precious metals.
Once again dear reader, I do recommend to subscribe to www.shadowstats.com, an excellent information service at low costs
Well more about it in the following comments I wrote last week.
Well dear reader the following text is what I wrote mid last week. Now things have changed already. Lehman Brothers, Washington Mutual and AIG, the insurance company, do look really bad. More on that after the text I wrote mid last week.
Well dear reader after the de facto takeover of Fannie and Freddie it seems that the party is going on. Nobody seem to care that the pair needs permanent oxygen input. They were saved thanks to the oxygen tanks that were provided. Let's hope that there are enough tanks on stock and let's hope that the used ones can be refilled fast enough. The party that was so beautiful with such a nice décor and beautiful people everywhere, excellent music and lots of champagne seems to become more and more a Halloween party. All those participants hovering around with their oxygen tanks on there back do not look that beautiful anymore. Well in fact they now seem as having a serious health problem. Well the glamour of the party is gone but even so the participants try to go on as usual. How long can one party being on oxygen (some seem to be on drugs too)? When does exhaustion start to sink in? As an observer I hope they can keep on for some time, although what me eyes see is not really that nice at all. But anyway breaking up the party right now would mean hardship for most. Keep the party running, at least for the moment being, seems to be the solution that hurts less.
Well dear reader, at the beginning of last week everything really seemed to be OK. Everybody was happy with the Fannie/Freddie solution. Of course what their rescue really means was not yet clear to everybody. Well during the week it became a fact that some more rescue actions are needed. This weekend there are discussion how to solve the Lehman case. Next rescue action meetings might be about the rescues of Washington Mutual, AIG, GM and even GE. Is mentioning GE to far reaching? Well of course I do not know and it might be so. But dear reader when I was telling some people back in 2005 that I would never touch Fannie Mae or Freddie Mac, although they had excellent ratings and so on, I was mentioning already at that time GE as well. Well Fannie and Freddie proved me right. Let’s hope that I am wrong with my prediction about GE. The rest of the companies mentioned are definitely candidates for bankruptcy if not already in that situation.
Well dear reader you certainly remember that a couple of months ago I warned about the financial health of Lehman. Well it seems that we got to the point of recognition regarding Lehman. Will it be Goldman to take over Lehman? Will it be another solution? We will see in the next days.
Please keep in mind that there are still other institutions with major problems. Although some US banks so far do not seem to have had major problems, I would not bet a cent on their survival. Jumping to the conclusion that these few banks that mastered the storm well so far might not run into troubles ahead, is in my opinion a risky conclusion. Remember that banks like Goldman Sachs have still huge amounts of assets booked in Level III. I have my serious doubts that all these assets really could be sold at the prices as per their books. Most probably not, at least that is what recent sales of similar papers suggest. That means to me that those banks that did well so far might have to make major write-downs as well. JP Morgan, which is another example of a financial institution that seemingly did well so far, has billions of derivatives on their book. These derivatives could easily become a major problem at some point. With other words, I would be careful with conclusions. Moving fast forward to year 2012 and looking back, we possibly will have to admit that what looked still OK in 2008 was not necessarily that safe as it seemed. Of course the other way round can be the case too. Meaning that some that looked shaky in 2008 might do better in the coming years.
Now to Lehman and WaMu
Lehman gone?
Lehman One-Year Default Swaps Trading at 11% Upfront, CMA Says
Sept. 11 (Bloomberg) -- Sellers of default protection on bonds sold by Lehman Brothers Holdings Inc., the fourth-largest U.S. securities firm, started demanding upfront fees, according to data provider CMA Datavision.
Contracts protecting $10 million of Lehman debt for one year cost 11 percent upfront and 5 percent a year, according to CMA prices at 8:50 a.m. in New York. That's up from 1,200 basis points at the close of trading yesterday. The price means it costs $1.1 million in advance and $500,000 a year to protect the bonds compared with $1.2 million a year yesterday.
Credit-default swaps, contracts conceived to protect bondholders against default, pay the buyer face value in exchange for the underlying securities or the cash equivalent should a country or company fail to adhere to its debt agreements. A rise indicates deterioration in the perception of credit quality; a decline, the opposite…
Economist Noriel Roubini explains
It is now clear that we are again – as we were in mid- March at the time of the Bear Stearns collapse – an epsilon away from a generalized run on most of the shadow banking system, especially the other major independent broker dealers (Lehman, Merrill Lynch, Morgan Stanley, Goldman Sachs). If Lehman does not find a buyer over the weekend and the counterparties of Lehman withdraw their credit lines on Monday (as they all will in the absence of a deal) you will have not only a collapse of Lehman but also the beginning of a run on the other independent broker dealers (Merrill Lynch first but also in sequence Goldman Sachs and Morgan Stanley and possibly even those broker dealers that are part of a larger commercial bank, I.e. JP Morgan and Citigroup). Then this run would lead to a massive systemic meltdown of the financial system. That is the reason why the Fed has convened in emergency meetings the heads of all major Wall Street firms on Friday and again today to convince them not to pull the plug on Lehman and maintain their exposure to this distressed broker dealer
WM Washington Mutual may be running out of time, says NY Times DealBook (2.32)
The article notes the uncertainty that is gripping investors for both Lehman (LEH) and WM and notes that a new accounting rule forcing potential buyers to mark-to-market assets of target companies may dissuade potential buyers. DealBook says there is nervousness that the turnaround necessary may be too large a job for new hire Alan Fishman. The article says that JPMorgan has been looking at WM for some time, though notes the aforementioned accounting rules would make a purchase difficult.
23:36 AIG American International Group needs to sell things fast - WSJ (17.55) A "Heard on the Street" column says AIG's options narrow by the day as the market shows it is not willing to wait until "late September" to hear AIG's strategic plan. The column suggests the company sell its 59% stake in Transatlantic Holdings to raise $2.5B, and divesting AIG Investments might bring in $3B more. Heard would also like the company to sell AIG Direct and parts of its consumer-lending and variable-annuity businesses.
Merril Lynch
NEW YORK (Reuters) - The crisis of confidence in Lehman Brothers (LEH.N) has led to fallout throughout the financial sector -- especially for larger rival Merrill Lynch & Co Inc
http://news.yahoo.com/s/nm/20080912/bs_nm/merrill_banks_dc_1
Wall St. Goliath Teeters Amid Fear of Wider Crisis
Fearing that Lehman Brothers is only days away from collapse, government officials and senior Wall Street executives met on Saturday to try to arrest a downward spiral that might imperil other financial institutions.
http://www.nytimes.com/2008/09/14/business/14spiral.html?ref=us
Following a few comment about the rescue of Fannie and Freddie
Fannie Mae and Freddie Mac
another kind of hurricane
Hurricane Hank swept through the nation's capital yesterday with gale-
force regulatory winds and a tidal surge of federal cash, upending two of
Washington's biggest enterprises and permanently changing the landscape
of housing finance in America. In wresting control of Fannie Mae and
Freddie Mac, and in authorizing the Treasury to begin purchases of
mortgage-backed securities, Paulson has taken responsibility for assuring
that low-interest loans will continue to flow into the country's hard-hit
housing markets. Not since the depth of the Great Depression, has the
government taken such a direct role in the financial system
http://www.washingtonpost.com/wp-dyn/content/article/2008/09/07/AR2008090702486.html
Fannie, Freddie Credit-Default Swaps May Be Unwound
Sept. 8 (Bloomberg) -- Investors may be forced to unwind contracts protecting $1.47 trillion of Fannie Mae and Freddie Mac bonds against default after the U.S. government seized control of the companies in a bid to bolster the housing market.
Thirteen ``major' dealers of credit-default swaps agreed ``unanimously' that the rescue constitutes a credit event triggering payment or delivery of the companies' bonds, the International Swaps and Derivatives Association said in a memo obtained by Bloomberg News today. Market makers for the privately traded contracts will discuss how to settle them in a conference call at 11 a.m. in New York, the document said.
``This is a big deal,' said Sarah Percy-Dove, head of credit research at Colonial First State Global Asset Management in Sydney. ``The market is not experienced at settling a credit event for a name of this size, so it is a bit of an unknown.'
As of June 30, 2008, according to the most recent survey from the Mortgage Bankers Association, 9.2% of all one-to-four family home mortgages were at least one month overdue or already in foreclosure! This is the highest delinquency rate in the 39 year history of this survey.
Even the highest quality debt can only be dumped right now for, at most, 80% of face value. This assumes that there is no major disgorging of mortgages from Fannie Mae, Freddie Mac, or anyone else. Any program of massive sales of mortgages would almost certainly increase the discount from face value of all debt.
With Fannie Mae and Freddie Mac holding $5 trillion in mortgages, and under orders to sharply trim their portfolios—each company is to have a maximum of $850 billion by the end of 2009, then keep whittling down until they only hold $250 billion in mortgages—the U.S. government has, in effect, just absorbed $1 trillion in immediate losses!
The federal government already has more than $9 trillion in acknowledged debt plus is on the hook for around $70 trillion in unfunded future liabilities (such as Social Security and Medicare). So where is the federal government going to come up with an extra trillion dollars (and possibly more!) to bail out Fannie Mae and Freddie Mac?
Following an interesting comment to the rescue plan of Fannie and Freddie
http://www.safehaven.ca/article-11202.htm
Fed May Expand Funding Aid to Banks in a `Mother of Year-Ends'
Sept. 11 (Bloomberg) -- The Federal Reserve may have to increase the cash it provides to banks and brokers, already a record, to help them balance their books at the end of the year.
Six bank failures in the past two months and rising concern about Lehman Brothers Holdings Inc.'s capital levels pushed lenders' borrowing costs to near a four-month high yesterday. They may climb further as companies rush for cash to settle trades and buttress their balance sheets at year-end.
``This could be the mother of year-ends,' said Brian Sack, vice president of Macroeconomic Advisers LLC in Washington, who used to serve as head of monetary and financial market analysis at the Fed. ``The markets will need extraordinary actions to get through it.'
Well dear reader, with all these banks on the way out has anyone thought about the toxic waste of assets these banks deposited with the FED. Well sorry to have it forgotten, these assets are just a deposit and will be moved back to the financial institutions at some time in the future. Well at least that is what we were told. I just have a problem to understand how these worthless assets can be moved back to a financial institution that does not exist anymore. Well there will certainly be cases which will deliver the proof that the FED action by taking in or accepting this crap was a big mistake and was in fact a game to help its bosses by helping them to unload their crap onto the FED.
Yes dear reader the situation does not look well at all. Following some comment about the economic situation in general.
John Williams
Treasury bailouts of Fannie Mae and Freddie Mac, Congress talking with U.S. automobile manufacturers about government loans, and wild markets that remain far from rational, highlight increasing systemic instability of a nature rarely seen. When I offer that my general outlook is unchanged, which it remains, I am not at all insensitive to the massive short-term hit taken by precious metals or the significant strength seen recently in the U.S. dollar. My outlook generally is for the long-term and is based on the underlying fundamentals of an intensifying inflationary recession, intensifying systemic solvency crisis and eventually a hyperinflationary great depression. The underlying fundamentals remain place and, if anything, are getting worse. The markets eventually will catch-up with the fundamentals
The Federal Reserve, in conjunction with the U.S. Treasury, is doing its best to prevent a systemic collapse. The efforts have been successful so far, and likely will continue to be for a while. The Fed and the Treasury will do whatever is necessary to save any entity that might otherwise implode the system. They will create and spend any money needed, they will arm-twist anyone they have to, they will manipulate any market, financial statistic or news medium that will help contain the still-intensifying crisis. Failure here is not an acceptable option.
Under such circumstances, activity in the financial markets can be extremely volatile and appear irrational to the investing public, while various forms of covert crisis management are going on behind the scenes. The cost of the system’s salvation eventually will be in higher money growth and debasement of the U.S. dollar: inflation. The current instabilities, including the rapidly deteriorating fiscal condition of the U.S. government, will be explored more deeply in the upcoming newsletter.
Well dear reader although the news about the financial sector were really bad, to the surprise of a lot of people, the best trade over the last 2 months would have been being long in financials and short in commodities. The financial sector did indeed do very well. Does that mean that we are out of the bottom and that the worst is over? Following a comment from Sprott which in my opinion is excellent
http://www.sprott.com/pdf/marketsataglance/MAAG.pdf
another must read can be found on the following link.
James Turk: Thinking Like “Fat Tony”
http://www.safehaven.ca/article-11193.htm
Well and another well written article
http://jessescrossroadscafe.blogspot.com/2008/09/text-of-paulsons-statement-on-freddie.html
Auto industry to press Congress for $50B in loans
Sunday September 7, 10:03 am ET
By Ken Thomas, Associated Press Writer
Auto industry seeking up to $50 billion in government loans to modernize plants
WASHINGTON (AP) -- Auto industry allies hope to secure up to $50 billion in government loans this month that would pay to modernize plants and help struggling car makers build more fuel-efficient vehicles.
With Congress returning this coming week from its summer break, the industry plans an aggressive lobbying campaign for the low-interest loans. The situation is growing dire after months of tumbling sales, high gasoline prices and consumers' abandoning profitable trucks and sport utility vehicles….
Well dear reader the financial industry is not the only one in need for cash.
Anyone else needs money?
The question of course is why have commodities gone down so much? Well the commodities will most probably be affected by the worldwide economic slowdown. But does is that sufficient reason for this huge ugly correction? Although the slowdown will have a certain impact (for example on industrial metals) my guess is that there was more to the story than only a recession. Market intervention comes certainly into my mind. Of course some people say that is not possible because it would need huge amounts of money but facts show clearly that it is possible. www.gata.org for example gathered lots of facts regarding the manipulation of gold and silver. Well in fact not only the precious metals are manipulated but basically most of the commodity markets too. Will this manipulation change the fundamentals? I doubt it.
Well dear reader although we might enter into a worldwide recession I still believe that this commodity bull market will last some 10 to 20 more years.
Following some comments about commodities. First of all I’d like to mention the rumor of major commodity hedge funds unloading their positions because they want to have cash towards the end of the quarter when their investors can ask for redemption. There was as well the information of one of the biggest hedge funds closing. Of course if these funds unload their positions it can on a short term basis have a negative impact on the commodity prices. Maybe you remember the Amaranth Fund which speculated heavily in Natural Gas. As Amaranth had to sell 6 billion of Nat Gas bets, the price of natural gas fell to a low of approx. 3 USD. A few months later natural gas was back on 13 USD. So yes, these unloading might have a short term impact but again I trust it will not change the trend. So dear reader, I believe that one should get ready for higher commodity prices.
Hedge funds ready to blow as positions liquidated
Adele Ferguson | September 06, 2008
DEBT-GORGED hedge funds are the next ticking bomb in the global credit crisis as they liquidate their positions in equities and commodities ahead of an expected spike in quarterly redemptions by investors throughout September.
The first hedge fund victim was Ospraie Management, which announced earlier this week it would close its flagship hedge fund and liquidate its stock after it plunged 27 per cent in August due to losses in energy, mining and natural resources equity holdings….
http://www.theaustralian.news.com.au/story/0,25197,24301269-643,00.html
Well lets have a look at the different kind of commodities
Precious metals
To start, I would like to mention it again, I truly believe that holding gold is a must in these difficult times. Furthermore I truly believe that one should hold at least a 5% of its bankable assets in precious metals (I would say a holding of between 5 to 15% is conservative and gives the minimum protection needed) Following a couple of reasons why I believe that holding physical gold is a must?
1. There are more and more banks going out of business and this trend is not yet over. There will be more fatalities in the coming months
2. More than a Quadrillion notional amount in Derivatives. Please keep in mind that nobody really knows how these derivatives behave in a real crisis. Be assured that Bear Stearns, Fannie and Freddie and now Lehman were only saved because of the derivative positions. If for example Freddie and Fannie would not have been saved the settling of the respective Credit Default Swaps would have triggered the breakdown of the world financial system. Yes that is the case believe or not.
3. I believe we are in Kondratieff winter
Last week I mentioned that I believe we have seen the bottom. Well that was maybe one week to early. If I would have been a commodity fund manager, I certainly would have increased positions in Gold and Silver on Friday when we hit 740 USD per ounce. Although we only will know sometime in the future if the bottom was really in, I believe that Fridays 740 marked a low risk entry point. That means although prices could go down further (what I clearly do not believe) buying at these levels should result in nice returns over the coming months. I still believe that we will see a gold price per ounce of above USD 930 (maybe 980) and Silver above USD 18 by the end of the year. My March 2009 target for gold still holds at a price above USD 1,200 and a price of 24 USD for silver.
Following some comments to the precious metals sector
from UBS gold analyst
Platinum prices have sunk further this week ….For a metal with apparently superior supply and demand fundamentals and low stocks to experience such a dramatic sell-off has shocked us, to be honest...the scale of ongoing OTC liquidation…is unprecedented… In conversations with investors and funds, what has happened in platinum is only a more extreme example of recent commodity flows… Many clients - even those with strong, positive returns - have seen large redemptions and this almost-distressed selling has weighed on many commodities, especially base and precious metals. One consequence of this loss intolerance is that long-owned trades have been cut: we know of investors who were recently forced out of long held commodity positions for this very reason.
South African Gold Production Falls 16.4% On Year In July
Thu, Sep 11 2008, 09:39 GMT
http://www.djnewswires.com/eu
South African Gold Production Falls 16.4% On Year In July
JOHANNESBURG (Dow Jones)--Gold production in South Africa, one of the world's biggest producers of the precious metal, slumped 16.4% on the year in July as the volume of minerals mined across the country declined, official data released Thursday showed.
Statistics South Africa said the output of non-gold minerals dropped 12% in July compared with the same month last year. Total production was down 12.6%.
Mines across the country have been knocked by a power shortage and safety-related work stoppages in recent months.
In January, a near collapse of the national power grid prompted many mines to suspend operations for up to five days. The state-owned electricity provider has since then rationed mines to between 90% and 95% of their usual power supply.
Industry body the Chamber of Mines last week said gold production in the second quarter of the year was down 10% on the year after falling almost 17% in the first three months of 2008….
Oil and Natural Gas
Well with an oil price below USD 100 per barrel, we have reached my target price to accumulate Oil and Natural Gas investments. Here too, I believe we are at a low risk entry point. Oil of course might go down further towards the 90 USD per barrel price. Anyway a price below 100 seems to me an interesting price to accumulate. As an commodity fund manager I would now start to buy Oil and Natural Gas investments. This would mean to go to a positon of something around 7% (from 0%) of total amount in Oil and maybe 3% (from 0%) in Natural Gas. Personally I sold part of both positions in May and sold the rest right on the high.
Industrial Metals
As mentioned before, industrial metals could suffer in a worldwide recession. Therefore for the moment being I would not hold any positions
Agricultural commodities
I have no doubt that we will see much higher agricultural prices over the coming months and years. For the moment being I would be on the sideline
Coal and Uranium
Both are in my opinion good long-term investments.
Shadow Model Portfolio
Well dear reader I established for my personal use a shadow model portfolio which includes my favourite investments. For the moment being it consist only of precious metals, oil and natural gas. The portfolio could include other commodities as well. The portfolio is a rather conservative portfolio with a core investment in Gold. The strategy is commodities long only. Small hedges might be possible however the idea is rather to sell at points where the risk of a correction is high and go into cash. Wait with the case on the sidelines until a low risk entry point arises. For Gold a low risk entry point was clearly a week ago and last Friday. Oil and Natural Gas seem to be at a low risk entry point too.
This model portfolio would still be with a performance above the 12% for this year. The investments in Oil and Natural Gas helped certainly. I am quite confident that the overall portfolio will close the year again with a performance above 20%. I let you know.
My final comment
Dear reader, I truly believe that the commodity bull market has at least some 10 to 20 years to run. Therefore I believe that a holding of at least 10% in commodities should be considered. A conservative portfolio could hold easily between 10 to 35% in commodities.
Wish all the best
Posts
![[Most Recent Quotes from www.kitco.com]](http://www.kitconet.com/images/live/s_gold.gif)
![[Most Recent Quotes from www.kitco.com]](http://www.kitconet.com/images/live/s_silv.gif)