Alert

Alert

Before giving details about the alert, let’s look at the last weeks overview from www.prudentbear.com

For the week, the S&P500 declined 1.9% (down 2.7% y-t-d), and the Dow fell 1.6% (down 7.2% y-t-d). The Morgan Stanley Cyclicals sank 3.6% (up 10.2%), and the Transports lost 1.5% (down 12.0%). The Morgan Stanley Consumer index decreased 1.6% (down 2.1%), and the Utilities fell 1.4% (down 7.9%). The S&P 400 Mid-Caps dropped 3.2% (up 1.6%), and the small cap Russell 2000 fell 3.3% (down 3.7%). The Banks declined 2.3% (down 22.7%), and the Broker/Dealers dropped 2.8% (up 20.2%). The Nasdaq100 slipped 1.8% (up 17.2%), and the Morgan Stanley High Tech index fell 1.8% (up 27.7%). The Semiconductors dropped 1.8% (up 22.1%), and the InteractiveWeek Internet index gave back 2.1% (up 34.0%). The Biotechs dropped 2.7% (down 0.1%). With Bullion down $19.50, the HUI gold index sank 8.4% (up 3.8%



What is in this post edition?

ALERT: please read this part. I do see bank and derivative failures in the coming months

Economy: The tale of two depressions and an essay from Martin Weiss

USD: still alive

Derivatives: failure alert

Stock market: investors are too complacent and might regret it later

Gold: still looking fine

Banks and banksters: GE, Goldman

Bond: be careful with medium to long term and low quality investments

Commodities: prices will head down further



Well dear reader we are fast approaching the new hurricane season. If you do not live in an area where hurricanes do occur no worry. However there is, in my opinion, much to worry about the new financial hurricane season. Here I put a huge alert out to you dear reader. For your own sake, please be prepared. I do expect to feel the first increasing turbulences soon. The financial hurricane climax can be expected towards the end of October or beginning of November this year. I do clearly expect a mess with huge derivative and bank failures. I strongly believe that it is not the moment for complacency at all. Preparing for the coming storms does mean more than a nail here and there it means serious preparation. I for my part will stay out of investments that have any kind of derivative included or vested. At the very latest towards the end of August I will avoid such investments. Furthermore I will stay out of the equity market and will hold mainly gold and silver and some cash in Swiss Francs preferably. If you have not yet bought gold and silver I would suggest to consider a purchase or if you hold already both maybe an increase of the existing holdings might be an idea to look at. This will be THE life vest or boat for the coming storm. When somebody asks me what I recommend, I do tell that person that in my opinion a holding of at least 1/3 of the bankable assets in gold and silver should really be considered. However dear reader, please be careful. Not all supposedly gold and silver investments are what they promise. Many are only paper gold or silver not physical. As I mentioned several times paper is worthless. Please hold physical or a product that holds physical. For example the ETF’s with the ticker sympol GLD and SLV are ETF’s that I would never buy. Why? Well because in my opinion they do hold, at least part of their position and possibly an important part of it, in paper gold or silver instead of physical. I do not trust them. The way these two ETF’s behave during market swings is strange which gives me an indication that not everything might be as they want us to believe. According to the information I come across from time to time, they use sub and sub-sub custodians and therefore have of course no possibility to verify if the supposed holdings are really hold at these custodians. Please take note that there are other vehicles to invest in gold and silver than these two ETF’s. If you like to know how to invest in gold and silver, please send me e-mail to musingsoffritz@web.de.
Well dear reader what else to I like, well any kind of tangible asset that according to long term history has maintained it’s value.



Well once again, dear reader, please take the alert seriously. Be careful with any kind of derivatives. Be careful with financial institutions. Most of them are insolvent anyway. Smaller institutions with a kind of government guarantee should do much better than the biggies that are basically already insolvent.

We certainly can say that the green shoots definitely never grew. The spin masters want us to believe that everything is fine in fantasyland. Unfortunately this is not the case. The unemployment in the US is around 20% if one includes all those that do not appear in the statistics anymore. The official rate will soon be above the 10% mark. Following a comment from Jim Sinclair
Quote
Unemployment is approaching 10% in the USA with no STOP expected at that level. All the financial programs so far have been structured to bail out the Fat Cats of Wall Street. No bailout of any significance has had a positive impact on employment. The GM restructuring is a brilliant example of paper shuffling and worker elimination. Truth be known, it was the financial arm of motors that thrust the first bankruptcy stone.
Unquote



More about the economy:

Economy

A Tale of Two Depressions
http://www.voxeu.org/index.php?q=node/3421

New findings:
World industrial production continues to track closely the 1930s fall, with no clear signs of ‘green shoots’.
World stock markets have rebounded a bit since March, and world trade has stabilised, but these are still following paths far below the ones they followed in the Great Depression.
There are new charts for individual nations’ industrial output. The big-4 EU nations divide north-south; today’s German and British industrial output are closely tracking their rate of fall in the 1930s, while Italy and France are doing much worse.
The North Americans (US & Canada) continue to see their industrial output fall approximately in line with what happened in the 1929 crisis, with no clear signs of a turn around.
Japan’s industrial output in February was 25 percentage points lower than at the equivalent stage in the Great Depression. There was however a sharp rebound in March.

More on the economy by
Martin Weiss
Never underestimate the impact of surging rates — especially with near double-digit official unemployment and the worst debt crisis since the Great Depression.
Rising rates in this environment will be pure poison for:
The nation's insurance companies loaded with long-term corporate and government bonds.
The nation's banks counting on low interest rates to raise funds for close to nothing.
Utilities that must continually borrow huge amounts of long-term money to finance their massive investments in power plants and facilities.
Home prices that can only fall when available credit in the nation is hogged by Uncle Sam's massive borrowing and when mortgage rates rise.
You! Stocks, long-term bonds, and virtually all types of real estate properties are extremely vulnerable to surging interest rates.
http://www.howestreet.com/articles/index.php?article_id=9756

July 7 – Bloomberg (James G. Neuger): “The world’s most affluent nations will take decades to work off the biggest buildup in debt since World War II. The political costs may be permanent, laid bare at this week’s Group of Eight summit of leading industrial powers. Bank bailouts and recession-fighting measures will explode the debt of the advanced economies to at least 114% of gross domestic product in 2014, more than triple the 35% of the main emerging economies including China, the International Monetary Fund forecasts. The run-up in debt has hastened a power shift that is sapping the industrial world’s authority to impose its economic doctrine, currency arrangements or greenhouse-gas reduction strategies. Even some G-8 officials acknowledge that the group has lost its grip amid the global recession they spawned. The eight-nation forum… is ‘a lot less relevant given its makeup and given developments in the world,’ French Finance Minister Christine Lagarde said… ‘Big players, like emerging economies, India, China or Mexico, are invited, but they’re given only a jump seat outside of the main summit.’”


USD

The dollar system their world had been based on since Bretton Woods in 1944, is undergoing a death agony. Every measure advocated to date by two US Administrations—Bush and now Obama—as well as the other G7 governments has amounted to giving heavy and even heavier doses of financial chemotherapy to a dying patient. The ever higher doses of taxpayer bailout to maintain a failed financial and banking model on artificial life support is merely worsening the underlying health of the US economy.



Source: Economist.com, July 9, 2009.

In the West, plus G7 member Japan, banks are overleveraged and thus dysfunctional, governments paralyzed with debt, and consumers are rebuilding their huge debt burdens. America is having trouble selling its public debt at attractive prices. The last three Treasury auctions have gone badly. Its largest state, California, is veering toward total fiscal collapse. The current fiscal year US budget deficit is going to surpass 13 percent of GDP, a level last seen during World War II.


Derivatives Alert

Dear reader I would like to make this alert regarding derivatives. As mentioned in a previous post, I believe that we enter a very dangerous time frame regarding major derivative failures. Therefore it might make sense to avoid derivative structures as much as possible. The counterparty risks are simply too high. Please take note that I believe that although you might be absolutely fine with your position (on the winning side) it might very well be that you will not see your money, as the counterparty will not be able to pay. Especially with precious metal derivatives I do expect that the two banks holding more than 90% of the shorts will simply say “sorry folks, no money”. They might argue that they did all the shorting on behalf of the government or for national security (maybe economic security) and having done so they hold no responsibility or liability and therefore will not pay. Yup that can happen. The same, I believe, will be true for a number if not all the food related derivatives. Calories will become very important soon. If you can invest in some kind of calories (of course not using any derivatives) or produce some kind of calories you should do well over the coming 5 years.




Note that the talk of regulation on over the counter derivatives now speaks of a clearinghouse for standardized derivatives. Someone just recognized that all the previous derivatives written cannot be cleared because they are almost a transaction without standards. That means all those transactions outstanding are still weapons of mass financial destruction and lack any practical solution.


Stock market

Well dear reader as you know I do believe that the recent rally has only been a bear market rally and that we will see much lower prices soon. The economy that most believe is still the leading economy, namely the US, and the US consumers will not fuel the growth engine anymore. The falling economic demand will hurt earnings, no doubt about it. So I simply cannot see how a true recovery could start. Don't’ believe all the talk about that the bottom is in and so on. The same was said just before entering the Great Depression. As you certainly know, the markets went down the following years by almost 90%. Don't’ trust all the clowns that try to assure us that all is right with the world. Well the captain of the Titanic did the very same thing. According to him there was no need for lifeboats and life jackets as everything was fine. Well although, I might of course be absolutely be wrong with my opinion, I clearly do not buy these stories and therefore I beg to differ because I do not see how earnings could improve soon. Furthermore don’t forget that in a couple of months the first wave of baby boomers going into retirement will start. That means those who still have some savings will be forced to draw down their public Social Security retirement from the Government as well as selling their private 401k and similar stock and bond investments in order to live in retirements. That would mean that every months millions will sell part of their 401K. That does certainly not help to push the market higher.

Once again, dear reader, complacency is in my opinion not recommended for the time being. However I do see a lot of complacency with the average investor and I suspect that these investors are headed for a lot of pain.

Well dear reader it seems that the insiders do see the near future of the stock markets like I do. At least that is what the following article tells me



June 22 (Bloomberg) -- Executives at U.S. companies are taking advantage of the biggest stock-market rally in 71 years to sell their shares at the fastest pace since credit markets started to seize up two years ago.
Insiders of Standard & Poor’s 500 Index companies were net sellers for 14 straight weeks as the gauge rose 36 percent, data compiled by InsiderScore.com show...
Sales by CEOs, directors and senior officers have accelerated to the highest level since June 2007, two months before credit markets froze, as the S&P 500 rebounded from its 12-year low in March. The increase is making investors more skittish because executives presumably have the best information about their companies’ prospects.
“If insiders are selling into the rally, that shows they don’t expect their business to be able to support current stock- price levels,” said Joseph Keating, the chief investment officer of Raleigh, North Carolina-based RBC Bank, the unit of Royal Bank of Canada that oversees $33 billion in client assets. “They’re taking advantage of this bounce and selling into it.” ...
“They’re looking to take some money off the table because they think the rally will come to an end,” said Ben Silverman, the Seattle-based research director at InsiderScore. “It’s the most bearish we’ve seen insiders, on a whole, in two years.”
The last time there were more U.S. corporations with executives reducing their holdings than adding to them was during the week ended June 19, 2007, the data show. The next month, two Bear Stearns Cos. hedge funds filed for bankruptcy protection as securities linked to subprime mortgages fell apart, helping trigger almost $1.5 trillion in losses and writedowns at the world’s biggest financial companies and the 57 percent drop in the S&P 500 from Oct. 9, 2007, to March 9, 2009. ...
http://www.bloomberg.com/apps/news?pid=20601087&sid=aflROe0Pe0QM

Well the above information would fit into the information about a planned rally followed by a strong down move in the stock markets as per report on the following link
http://www.corbettreport.com/articles/20090624_bilderberg_predictions

Of course the above link goes into conspiracy and some could argue that this is not correct. Well you would be surprised to know what is going on without us, the broad public, to know. Conspiracy or not, true or not, I for my side do take this information as realistic. Therefore I prefer, as mentioned at the beginning of this post, to be on the sideline with stock investments and thus being out of the market completely. A down market of course would be great to short the market. However as I see a massive derivative failure soon I prefer not to make this trade as shorting the market involves a derivative. Please note that I have warned several times about banking holidays. Although I truly see a high possibility for the declaration of bank holidays over the next months, I must admit that I am somehow surprised to read about bank holidays in the sense that it is planned.

Following more information about the stock market
"In January 2008, when the S&Ps were in the early stages of what was to become a devastating collapse," explains Rick Ackerman, "domestic equity mutual funds were worth about $6.5 trillion. Lo, a little more than a year later, in February 2009, we see that the value of these funds had fallen by about 48%, to $3.4 trillion. But guess what: Over that time, net redemptions totaled only 2%, or about $100 billion! What that means, explicitly, is that mutual fund investors have stuck with this bear market throughout the decline."

Investors didn't give up on stocks - despite the huge decline in stock market prices. What that means is that there's still a lot of selling to be done.
"This bear market will end," he continues, "like every other bear market in history, with a wholesale dumping of stocks at prices that will make current values seem exorbitant in comparison."
Another old friend, Rick Ackerman, thinks the problem with this rally is capitulation...or rather, the lack of it. There's been no capitulation, says he. And you can't have a real bottom without it. No capitulation, no bottom.


Gold

If you look back at ANY market since say Aug 07 or July 07, can you identify any market that is higher than it was then? T bonds, maybe, but that’s about it apart from gold. Yes dear reader gold.

John Embry Expects $1,500 Gold and Early Stage Hyperinflation by Year End
Back for another thought-provoking conversation with The Gold Report, John Embry sees both good and bad news in the weeks, months and years ahead. For example, John— Sprott Asset Management's chief investment strategist—is braced for "an ugly summer," with "another significant test in the equity market." Before year-end, he anticipates $1,500 gold—but also the beginning of worldwide hyperinflation that may take many Americans by surprise. And while John is bearish on world economies for the next few years, within that same time he looks toward "numerous 5- and 10-baggers" among small-cap gold producers and junior explorers with solid projects.
http://www.theaureport.com/pub/na/2697



Well dear reader, contrary to what you might hear in the media about the gold “trade” being “crowded” -- or about “hot money" -- the truth is that gold is hugely under-owned. In fact, according to the World Gold Council, if global pension funds decided to increase their exposure to gold by just 1.2%, it would require more than 44,000 tonnes -- or roughly 27% of all the gold that's ever come out of the ground.

I expect to see a gold price of above 1,000 USD soon and my guess is that this will be the last time we will see prices below 1,000.--. Once again, buy on dips.


Banks and banksters

Government Bails Out General Electric
"But regulators soon loosened the eligibility requirements, in part because of behind-the-scenes appeals from GE...Public records show that GE Capital, the company's massive financing arm, has issued nearly a quarter of the $340 billion in debt backed by the program, which is known as the Temporary Liquidity Guarantee Program, or TLGP. The government's actions have been "powerful and helpful" to the company."

http://jessescrossroadscafe.blogspot.com/2009/06/
government-bails-out-general-electric.html


http://www.dailykos.com/storyonly/2009/7/7/750786/-Incredibly-Shrinking-Liquidity-as-Goldman-Flushed-Quant-Trading

from www.lemetropolecafe.com:
yesterday late in the afternoon.....
...GS, through access to the system as a result of their special government perks, was/is able to read the data on trades before it's committed, and place their own buys or sells accordingly in that brief moment, thus allowing them to essentially steal buttloads of money every day from the rest of the punters world.
http://market-ticker.denninger.net/archives
/1192-FLASH-Goldman-Code-Theft-BOMBSHELL.html
unquote


Former U.S. Assistant Secretary of the Treasury: "[Geithner] works for Goldman"
In an interview with Max Keiser, Former U.S. Assistant Secretary of the Treasury Dr. Paul Craig Roberts said Fed Chairman Timothy Geithner should focus on "trying to save the dollar as reserve currency."

Keiser then asked if Geithner works for the public or for Wall Street.

Roberts responded, "He works for Goldman Sachs."

http://zerohedge.blogspot.com/2009/07/former-us-assistant-secretary-of.html


FDIC

The FDIC closed down seven banks late Thursday, a single-day record for the credit crisis. That brings the total to 52 for the year. Considering the five bank failures the week before, it’s clear the pace of bank busts is accelerating.
Well dear reader this shows clearly an acceleration of closings. Much more to come, no doubt about it.




Bonds

US lurching towards ‘debt explosion’ with long-term interest rates on course to double 
The US economy is lurching towards crisis with long-term interest rates on course to double, crippling the country’s ability to pay its debts and potentially plunging it into another recession, according to a study by the US’s own central bank
http://www.telegraph.co.uk/finance/financetopics/financialcrisis/5754447/US-lurching-towards-debt-explosion-with-long-term-interest-rates-on-course-to-double.html

Well dear reader I do expect yields to move up soon. There is simply too much debt floating around. Investors sooner or later do want to receive more return for the higher risks they run. To be clear, it is in my opinion not the moment to invest in medium to long term bonds. Bonds with maturity above 3 years should be avoided in my opinion.
Furthermore it is crucial to invest in top quality. Unfortunately governments are not that high top quality anymore.


Commodities

Gold ended the week down 2.1% to $913 (up 3.5% y-t-d). Silver sank 5.5% to $12.67 (up 12.1% y-t-d). August Crude dropped $7.04 to $59.69 (up 34% y-t-d). August Gasoline sank 7.2% (up 56% y-t-d), and August Natural Gas fell 6.8% (down 40% y-t-d). September Copper declined 3.9% (up 57% y-t-d). August Wheat declined 1.9% (down 15% y-t-d), and August Corn fell 5.1% (down 19% y-t-d). The CRB index dropped 5.0% (up 1.7% y-t-d). The Goldman Sachs Commodities Index (GSCI) sank 7.2% (up 15.9% y-t-d).

Well dear reader in previous posts I mentioned that I am bullish long term (but I do speak about really long term). However, short to medium term (up to the next 5 years maybe) I do not see how commodities could rally in a considerably way. We are still in a recession and have not yet touched the bottom. As long as we remain in the recession I do not see that commodity demand will increase considerably. The Chinese who over the past months were buyers of various kinds of commodities seem to have filled up their strategic reserves. They might become buyers again but at lower prices. Apart from the Chinese I do not see or hear about other buyers. Therefore dear reader I suspect that we will see lower commodity prices over the next weeks and possibly months

For weekly oil updates please go to the following link
http://aspo-usa.com/