Well dear reader musing about what is going on right now, I must confess that I have a strong feeling that we will very soon get some very ugly information about banks. A week ago, we got already a taste of it. Last week was rather calm regarding such news. It seems like people were more concerned with what Obama was doing. But, dear reader this relative calm of last week seems to me rather like the calm before a heavy storm that will hit soon. Once again, I do expect some nasty news about bank problems. It would not surprise me at all to hear soon that more banks will have to be nationalized. Bank of America and Citibank are clearly candidates for such a scenario but may others too. JPM and Goldman do have a huge derivatives exposure on their books, a situation that can blow up anytime. My guess is that the government will have to help both banks (in fact that is precisely what the government clandestinely did over the last couple of months). If you would like to get an excellent essay and analysis about the health of JPM, send me an e mail and I will get back to you.
Of course not only the US banks have troubles. Many have problems and therefore the list of troubled banks is long. England, Spain, Ireland and so on, are countries with major banks in deep trouble. Nationalizations of banks in many countries is clearly a possible scenario. Again dear reader, it would in my opinion be a mistake to trust that banks that so far did not have major problems, will as well sail safely through this coming new storm. They will suffer and maybe big time. Following a chart that shows how market capitalization of major banks has changed over past year.
Well dear reader, what should one do to protect the assets the best way possible? Send me an e mail if you like to know about some alternatives. There are alternatives that might be of your interest.
Now let’s go to the news. First the overview of last week
Source www.prudentbear.com
For the week, the S&P500 declined 2.2% (down 7.9% y-t-d) and the Dow fell 2.5% (down 8%). The Morgan Stanley Cyclicals fell 6.1% (down 10.5%), and the Morgan Stanley Consumer index declined 1.7% (down 5.3%). The Utilities slipped 0.6% (down 1.7%), and the Transports sank 6.1% (down 16.2%). The S&P400 Mid-Caps fell 3.1% (down 6.9%), and the Russell 2000 small caps declined 5.0% (down 11%). The Nasdaq100 declined 1.9% (down 3%) and the Morgan Stanley High Tech index 1.8% (down 1.3%). The Semiconductors fell 2.9% (down 1.8%), the InteractiveWeek Internet index slipped 0.4% (down 1.0%), and the Nasdaq Telecommunications index gained 0.8% (up 1.7%). The Biotechs lost 4.2% (down 2.6%). The Broker/Dealers rallied 1.0% (down 6.2%), while the Banks were slammed for 11.0% (down 35.8%). With bullion rallying $56, the HUI Gold index gained 9.6% (up 0.5%).
What’s hot what not
My guess is that we will see more of this guy this year
Gold
Well dear reader as you already know, Gold and Silver are in my opinion the investments that will do very well in 2009. Over the last 3 weeks gold moved between 880 and 800. The way gold behaved last week, with the strong up move on Friday, shows me that we are close to the break out and therefore that we will see much higher prices soon. The move on Friday with 40 USD plus shows us how fast such moves can be. In respect to gold I would say fasten your seat belts but in a positive way. In this case we need to have our seat belts fastened because of speed not so much because of a bumpy road ahead.
Important is to keep in mind that this move up has been occurring against a backdrop of relatively very low open interest (future contracts for explanation click on the following link http://en.wikipedia.org/wiki/Open_interest). After making a peak above $1000 last year, open interest in gold reached to almost the 600,000 mark, topping out at 593,953 nearly a year ago to this exact date. Yesterday’s open interest number was 342,088 or 57.5% of the peak. This comes with gold around $110 or so away from reaching the $1000 level again. Clearly, there is a great deal of room in the paper gold market should momentum players begin returning in size. Well dear reader that means that in the case that some speculators would enter the market the price of gold can go up considerably. What would the price be with 100,000 more contracts?
The above add I found last year in Sydney. Well the trend goes on.
Following a comment from Peter Brimelow:
When I last wrote on gold, the metal's very promising year-end rally was attracting attention, especially because the world's banking problems, and the response of governments, had created an outstanding macro case for gold.
http://www.marketwatch.com/news/story/story.aspx?guid=%7BA0FDDFC0%2DD424%2D4D4B%2D86A7%2D50CE3007B543%7D&
Following dear reader some comments on the report Brimelow mentioned towards the end of his article:
This call to arms has been instigated by the dramatic and sudden discovery of an important document buried in the Federal Reserve’s archives by writer and researcher Elaine Supkis. This document is posted on her blog at:
http://emsnews2.wordpress.com/2009/01/15/1961-top- secret-fed-reserve-gold-exchange-report/
The document, which is marked "Confidential," is from the papers of William McChesney Martin, Jr., and this collection is held by the Missouri Historical Society. A scanned image of the original document is posted by the Federal Reserve Bank of St. Louis at the following link:
http://fraser.stlouisfed.org/docs/histor ical/martin/23_06_19610405.pdf
Most importantly, GATA consultant James Turk has brilliantly dissected this document in an essay titled, "The Federal Reserve’s Blueprint for Market Intervention," which has been served at The Matisse Table and at www.GATA.org…
http://www.gata.org/node/7095
The title of this confidential report is:
Confidential - - (F.R.)
U.S. Foreign Exchange Operations: Needs and Methods
The note is very interesting and a must read for everybody who over the past couple of months had questions why the gold price was not really going up, which should have been the case in such a abysmal economic situation. Well dear reader the gold price is managed (not to say manipulated) Gold is a competitor to the worthless commodity paper printed with ink on it called USD or whatever other fancy name is used. The FIAT currencies are accepted as medium for exchange of goods as long as people have faith in it. Once this faith is gone the paper will have no value anymore. Zimbabwe is the most recent example of it. So it is in the interest of the Central Banks to keep the fantasy up, that the paper money has value. Therefore the price of the only true store of value (apart from Silver) and therefore competitor has to be kept under control.
Talking about market management or manipulation it is important to know that the hard fact and truth is that if the Plunge Protection Team (Working Group on Financial Markets) would not have stepped up constantly to drive the DOW mysteriously higher in the last hour of trading on the New York Stock Exchange, the market probably would have broken down much earlier than it did and given the investing public more of a clue that something was really wrong and not as they want us to believe that "Everything is fine."
The document found and commented by the really savvy James Turk, is that it fits in with much grander conspiracy theories. Since this document, based on what has happened, really is a blueprint for market manipulation since 1961, it feeds into the conspiracy theories. It also feeds right into the scary notion revealed in a famed President Clinton comment that goes something like … "I didn’t realize I wouldn’t be in control here when I became President." … meaning there were far more powerful background forces pulling the strings and on how he must operate.
Economy
Well dear readers you already know I take any official statistic with a high amount of caution. Although I do not trust these statistic, it is interesting to know that :
The U.K. is “officially” in recession now, its first since 1991.
British GDP fell 1.5% in the fourth quarter of last year, on top of a 0.6% drop the previous quarter. Two consecutive quarters of negative growth and there’s your recession. Analysts figure on a 2.1% drop for 2009, with no recovery till at least spring of 2010. The news knocked down the pound below $1.36 -- another 24-year low against the dollar.
Well The US does not look better at all. Following the CBO forecast. (again I do not trust the figures and I am convinced that the true situation is a lot worse)
The CBO report was chock-full of economic forecasts. Here’s the highlight reel:
The U.S. economy will contract in 2009 by 2.2%
GDP will grow again in 2010, but by just 1.5%
Unemployment will peak at 9% in early 2010
Consumer inflation will be a nonissue in 2009, increasing only 0.1% for the whole year
Home prices will fall another 14% between the third quarter of 2008 and the middle of 2010
Government deficit will exceed $1.2 trillion this year, 8.3% of GDP
The American recession will end sometime in the second half of this year.
Well although the numbers we get delivered are showing us a picture that looks better than reality the following numbers do not look good at all. Of course, the US as a consumer economy (maybe not so much anymore) having more and more people without job will mean less consumption.
Initial claims for unemployment benefits leaped 62,000, to 589,000, last week, the Labor Dept. also reports today. Continuing jobless claims now exceed 4.6 million. Both measures are at the highest levels since 1982.
Fight Fire with Fire! Following comments from
Bill Bonner
Every emergency triggers a response... and every response adds to the burden of regulation and debt. In the United States of America, we are still paying for fire-fighting equipment bought by our grandfathers in WWII. And we are still taking orders from bureaucracies set up by the Roosevelt Administration to solve problems that disappeared 50 years ago.
The real question for an investor is one of faith. How much faith do you have in your top officials? Can they pull it off? Can they stop deflation?
This dear reader is indeed a good question
Bonner goes on:
There is now no doubt that the world economy has entered a significant correction. Most likely, it will be long and hard.
Well, dear reader, who does not agree on that?
More from Bonner:
So what do the feds do to try to fix this problem? Fight fire with fire! Throw some more tinder onto the blaze... get people to borrow, spend and speculate even more!
http://www.dailyreckoning.com.au/fight-fire-with-fire/2009/01/16/
Well dear reader in the first months of last year we had some riots worldwide due high food prices. Now riots start because of the bad economic situations. A new trend?
Riots in Iceland, Latvia and Bulgaria are a sign of things to come
Icelanders all but stormed their Parliament last night. It was the first session of the chamber after what might appear to be an unusually long Christmas break.
Ordinary islanders were determined to vent their fury at the way that the political class had allowed the country to slip towards bankruptcy. The building was splattered with paint and yoghurt, the crowd yelled and banged pans, fired rockets at the windows and lit a bonfire in front of the main door. Riot police moved in.
http://www.timesonline.co.uk/tol/comment/article5559773.ece
China
China’s economy is growing at its slowest pace in seven years, the Chinese government said today. GDP expanded at an annual rate of 6.8% in the fourth quarter, still robust, but slight compared to the 9% growth China enjoyed in the first three quarters of 2008 and a pittance of China’s 13% growth rate in 2007.
Well dear reader as with other countries, one can certainly assume that the statistics coming out of China most probably are worse than what the Chinese want us to believe. Well anyway the statistics show us that China has its problems too. Maybe they are not growing at all. I came across a piece of informatione where it said that the export from Japan to China have fallen from 16% yoy expanding in July last year to now a contraction of 35% yoy. Investors in the Chinese stock market had the hope that the slowdown in consumption in the US will not affect the Chinese market that much because the interchange within Asia and the Asian comsumption would compensate somehow the lower demand out of the US. Well that seems to have been rather a wishful thinking.
Doom
Following a comment from Celente:
"We are forecasting dramatic measures will soon be taken by the Obama Administration that will worsen the credit crisis and severely damage the
nation's economic system," says Celente. For example, Timothy Geithner, President Obama's nominee for Treasury Secretary, has pledged to expand and prolong government intervention in the financial markets. He said his economic team would take "forceful" and "substantial action" on a "very dramatic scale" to "forge an integrated strategy on how best to achieve currency realignment." Celente advises to closely read the signals that have been clearly telegraphed by Mr. Geithner. "From proclaiming a bank holiday, confiscating gold to backstop devaluing currencies, mega-bailouts for the too-big-to-fails to nationalizing public firms and dollar devaluation . .
http://socioecohistory.wordpress.com/2009/01/24/celente-code-red-economy-in-collapse/
“Credit losses could peak at a level of $3.6 trillion for U.S. institutions,” famous forecaster of doom and gloom Nouriel Roubini said this week, “half of them by banks and broker dealers. If that’s true, it means the U.S. banking system is effectively insolvent, because it starts with a capital of $1.4 trillion. This is a systemic banking crisis.”
Total financial write-downs and losses have now surpassed $1 trillion since the start of this crisis in mid-2007. That’s puts us barely a third of the way though this mess, if you follow Roubini’s logic.
Bank and Banksters
The new British rescue scheme might be too little, too late for Royal Bank of Scotland. The bank said it expects a $41 billion loss for all of 2008. That’s despite a $63 billion government injection RBS split with Lloyd's and HBOS back in October. If the RBS forecast rings true, it’ll be biggest annual loss for any company in the history of the U.K
HSBC, supposedly one of the best banks in the
world, needs US $31 billion. Santander, the Spanish bank many considered the best in Europe, lost US $3.5 billion to Mr. Madoff and has other problems as well. Then there are rumors that Ireland will soon drop out of the European Union.
Bill Bonner again:
Bankers don’t make loans in the hopes of getting ‘good citizenship’ awards. They lend money when they think they can make a buck. The remarkable thing is that they’re so bad at it. They lent recklessly when there was little hope of getting their money back. Now, with the widest spreads in history – the difference between their cost of money and their return on it – it’s easier to rob a bank than get a loan from one. There are two explanations for this anomaly – both of them wrong.
The following does certainly not come as a surprise
The first is that bankers are wicked. A report in the Daily Express , for example, tells us that RBS “bosses spend 50k pounds on champagne banquet” celebrating Burns Night on Friday, before announcing a 45 billion pound loss on Monday morning. Over in the United States, the Wall Street Journal gave out word on Tuesday that much of the $140 million donated to fund the biggest inauguration in history came from banks that had received bailouts.
Well dear reader do you remember that a couple of months ago one of the proposals to solve the banking crisis was to create a bad bank by moving the bad assets off the balance sheets of the banks into a new bank. Well some of the assets have been moved off balance sheet already and are now in the books of the FED. Of course these assets are not owned by the FED (at least not officially nor legally but my guess is they will end up being owned by the FED anyway). Well dear reader creating a bad bank is not necessary anymore, there are already many of them. Well we still could create a waste deposit bank.
January 21 – Bloomberg (Dara Doyle): “The bloodletting may be far from over for Ireland’s banks as the wheels come off what was once Europe’s fastest-moving economy… ‘Nobody can stop what’s happening,” said Ken Murray, CEO of Blue Planet Investment Management… ‘It’s going to carry on, and governments are going to have to come up with the capital because the market doesn’t have it.’”
GE
GE Falls on Dividend, AAA Concern Amid Sagging Profit
General Electric Co. fell the most in more than two months as Chief Executive Officer Jeffrey Immelt failed to allay some investor concerns the company’s earnings power won’t be enough to shield the dividend and AAA credit rating.
GE this week traded the lowest since 1996 as investors questioned the ability to protect both the AAA credit rating and the dividend amid a deepening recession. GE’s President, Jeffrey Immelt is shrinking the finance unit to 30 percent of profit from more than half in 2007. The company added to reserves and tripled cash on the balance sheet to $48 billion. Orders in the infrastructure divisions slipped in the quarter even as the total backlog rose last year.
Equity markets
Dear reader I hear from time to time that stocks are now cheap as the P/E ratio is low. First of all historically seen a P/E ratio of below 10 or better 6 has been a good ratio. Although these ratios have come down lately the ratios are still too high. Furthermore the E shows the earnings estimations, which in my opinion in most cases in my are incorrectly estimated too high anyway, especially as most US companies do depend on consumption which will fall steep due to more and more people without jobs and due to the fact that those with jobs are cutting their consumption too. That means that the P/E ration in fact is not that low as indicated.
Well it seems that the direction of the market is down. If the market would not be pushed up by the PPT time over time, we would see much lower markets anyway. Sooner or later that will happen. The beach ball theory does work both sides. Well as an interesting piece of information following a comment, which shows clearly that looking at an index is just giving indications. But as with any statistics it depends how one looks at it.
In a mind-bending note circulating on the Internet, James Bianco of Bianco Research points out a startling fact. If Citi, GM, Bank of America, Alcoa, JP Morgan, American Express and GE all opened at zero, the Dow would lose only 528 points. That’s because many of these stocks are below $10 per share and don’t have much of an impact on the Dow anymore.
“Conversely, if IBM alone -- a $90 stock -- dropped to zero, the Dow would lose 652 points. So the Dow is saying that IBM is more important than Citi, GM, Bank of America, Alcoa, JP Morgan, American Express and GE -- combined! Even though GE’s market cap alone is $132 billion, which is more than IBM’s market cap of $121 billion
Fixed Income
Well dear reader yields of long treasuries are picking up slowly. I mentioned in previous posts that I believe that we will see much higher yields in the coming months. It seems like we are already on the move up. So I would try to stay rather on the short term side and avoid long term bonds for the moment being. Well anyway being at such low levels, going to zero is less likely than going back up to normal levels. Therefore, as mentioned, having a high exposure long term bonds does not seem such a good idea to me.
Following a comment from Dan Norcini who explains very well what the actual situation is
http://www.jsmineset.com/wp-content/uploads/2009/01/tic-data-for-november-2008.pdf
Well it certainly will not help the Treasury market when the US is accusing the Chinese of foul play. If the Chinese decide to dump part of their Treasury holdings they can easily provoke higher prices. There would not be sufficient buyers I guess. Well the Koreans will certainly not be amongst them
January 19 – Bloomberg (Wes Goodman): “A rally that sent U.S. Treasuries to their best year since 1995 is coming to an end, South Korea’s National Pension Service, the country’s biggest investor, said… ‘It’s time to sell U.S. Treasuries,’ said Kim [Heeseok], who took over as head of investments at the start of the year. ‘The stimulus plan may cause inflation. The U.S. will raise the benchmark interest rate.’
By John Kemp Reuters Tuesday, January 20, 2009
The United States and the United Kingdom stand on the brink of the largest debt crisis in history.
While both governments experiment with quantitative easing, bad banks to absorb non-performing loans, and state guarantees to restart bank lending, the only real way out is some combination of widespread corporate default, debt write-downs and inflation to reduce the burden of debt to more manageable levels. Everything else is window-dressing.
To understand the scale of the problem, and why it leaves so few options for policymakers, take a look at Chart 1 (https://customers.reuters.com/d/graphics/USDEBT1.pdf), which shows the growth in the real economy (measured by nominal GDP) and the financial sector (measured by total credit market instruments outstanding) since 1952…
http://blogs.reuters.com/great-debate/2009/01/20/us-and-uk-on-brink-of-debt-disaster/
Currencies
Source Dan Norcini
The British Pound continues its horrid decline falling to a 23 year low against the US Dollar as events in Britain are rapidly spiraling out of control. The monetary authorities’ plan to rescue the banks there has been met with skepticism by investors while a genuine, and I might add, well-founded, fear of just who it is that is supposedly going to buy all this debt that the government is issuing which is blowing the fiscal budget deficit to kingdom come. We have a combination of a government spending itself into the drink while its stagnating economy produces fewer tax receipts. This point has not been lost on gold which once again today made yet another all time record high in terms of sterling.
One has to look at what is happening to the Pound with a great deal of sadness. Consider the once mighty British Pound, also called Sterling because it was at one time as good as silver, was the global reserve currency when Britannia ruled the seas. Its decline, which is completely due to its feckless political leaders who like ours here cannot seem to restrain spending their citizenry’s money and that of those not yet even born, is a frightening harbinger of what greets the US Dollar should we continue on our current course. From what I can see regarding the new Administration’s policies, coupled with a Congress completely taken over by those who are salivating at spending upwards of another $1 trillion, the US Dollar is doomed to follow the same course of Sterling. To say that it was inevitable is to allow those responsible to escape the blame. All of it was completely avoidable but it would have required statesmen who had the long term interests of the nation’s monetary future in mind rather than gutless politicians who lacked the courage to do what was right for the LONG TERM, even if it cost them their seats in the halls of power because of the hardship that it would inflict in the SHORT TERM.
“I will make mere lads their princes and capricious children will rule over them”. (Isaiah 3:4)
The Euro is struggling with those sovereign debt downgrades of Greece, Spain and now Portugal. That continues to feed the move to gold which is occurring in Europe as today the gold price in Euro terms hit a new all time record at the London PM Fix coming in at €663.376.
The Dollar is going to have its own issues to deal with as investors who were stuffing themselves full of US Treasuries recently are now disgorging them at an alarming rate. Today’s catalyst for the bond sell off was comments by the Obama Administration’s Treasury Secretary designee, Timothy Geithner, who accused the Chinese of manipulating their currency. Note to Geithner – you do not accuse your biggest creditor of doing the things that your own government has been doing and expect them to continue using their savings to buy your too-numerous-to-number debt issuances.
This brings me to another point – I see one way only for those nations which are cranking up the printing presses to warp speed to avoid complete and utter insolvency – they will have to devalue their currencies against gold and inflate the debt away. I am not a statistician or a mathematician, but I cannot wrap my mind around the amount of debt being created by so many nations and envision any other scenario in which any of it has a snowball’s chance in hell of ever getting repaid. Either that or the current monetary system collapses and a new Bretton Woods type accord replaces it. When we talk about a soaring gold price we are in effect talking about the devaluation of paper currencies – it is one and the same thing for all practical purposes.
Commodities
Gold surged 6.6% this week to $899 (up 1.9% y-t-d), and silver gained 6.4% to $11.94 (up 5.7% y-t-d). March Crude rose $3.13 to $45.70 (up 2.5% y-t-d). February Gasoline slipped 1.7% (up 8.1% y-t-d), and February Natural Gas dropped 6.2% (down 19.9% y-t-d). March Copper fell 3.6% (up 4.4% y-t-d). March Wheat rallied 0.8% (down 4.6% y-t-d), while Corn was little changed (down 4.1% y-t-d). The CRB index rallied 2.1% (down 1.6% y-t-d). The Goldman Sachs Commodities Index (GSCI) recovered 2.2% (up 0.4% y-t-d).
Oil
The giant oilfield called Cantarell in Mexico will be totally dry of output by yearend 2009. The decline is accelerating. The PEMEX management and Mexican Govt supervision has been an unmitigated disaster. Drug lords are taking control of the nation. The ugly financial facts are these. Over 40% of the Mexican Govt revenue stream came from the PEMEX oil industry in 2007. That source is running on empty. The national energy surplus will turn to a deficit by 2010, like early next year. The import of refined gasoline doubles the rate of foreign reserve decline, since crude oil not produced means gasoline that must be imported. The US will lose 10% of its crude oil import supply. Texas and Louisiana will struggle to find oil feedstock for gasoline refineries. More importantly, the Mexican Govt will dissolve before our eyes, and drug lords will carve up the nation south of the border.
The following is from ASPO (Association for the study of Peak Oil) Decembers newsletter.
http://www.aspo-ireland.org/contentFiles/newsletterPDFs/newsletter96_200812.pdf
Although it is too soon to be sure, it appears that the major international oil companies may have passed the peak of their production in 2004, experiencing an overall subsequent decline of 5.2%. The table shows the approximate positions as of end 2007. It would be better to consider Regular Conventional Oil only, and look at a longer range, excluding production acquired by purchase or merger, but the data to do so has not yet been collected. The long-term discovery record of the companies would be even more significant. Shell‟s record was examined a few years ago and, to the credit of the company, showed a very close fit with the optimal hyperbolic projection, with the larger fields coming in first.
Following dear reader you see the for each of the companies mentioned the year of the peak and the respective decline
Chevron 2002 6%
Shell 2003 20%
Total 2004 11%
BP 2005 6%
Exxon 2006 2%
Combined 2004 5%
The newsletter is a very interesting read for everybody interested in energy in general and oil in particular.
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