-- Posted Friday, 10 August 2007 | Digg This Article
DEEPCASTER LLC
www.deepcaster.com
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Financial and Geopolitical Intelligence
Deterioration, and accompanying increased volatility, has begun to be manifest in several Major Markets. Gold, Crude Oil, and Equities Markets in particular, have recently become afflicted with the deterioration and volatility “disease.” But one can profit from deterioration and volatility.
Most indications are that the deterioration and volatility is going to continue in several Major Markets, but not in all. Indeed, one Market is likely to strengthen over the next few weeks and Deepcaster has just recommended a trade designed to profit from it.
But how does one protect oneself and profit from the other markets which are deteriorating?
Deepcaster will not recapitulate all the variety of guidance it has given in recent months addressing this question, but will only note and reiterate a few:
1) First and foremost, one can timely establish short positions. Deepcaster has recommended four in the last thirty days. All four of these positions are showing a profit today, as we write.
2) Try to ascertain market realities and distinguish these realities from market “noise” and the palaver of the Talking Heads in the Big Media. If these folks said anything contrary to their sponsors’ or the Big Media’s interests how long do you think they would actually be on the air?
To note just one disturbing Reality, the sub-prime mortgage market crisis is not only likely to be with us for a while; rather, it is worsening. There are another $40 billion in ARM resets occurring in the U.S. every month until November 2008. We expect this to have an increasingly negative ripple effect throughout the markets and the economy.
3) Try to separate emotions from the facts, however unpleasant the facts may be. One unpleasant fact, for example, which is not much commented on in the Big Media, is that financial markets are now subject to the biggest credit bubble in the history of the world. Just consider the following comments by credit market analyst Doug Noland at prudentbear.com.
“The Government-Sponsored Enterprise tab is today running out of control. Keep in mind that Fannie and Freddie already have combined “books of business” (mortgage backed securities holdings and guarantees) of almost $4 trillion supported (in the best case) by stockholders’ equity in the neighborhood of only $60 billion (current financial statements not available!). The thinly capitalized Federal Home Loan Bank system has another $1 trillion of assets. Before all is said and done, taxpayer Government-Sponsored Enterprise exposure will likely reach the trillions -- to add to other untenable ballooning Federal contingent liabilities…
Total mortgage Credit doubled subsequent to the Greenspan Fed’s reckless post-tech bubble “reflation.” Risky mortgage exposure now permeates the (global) system and is highly susceptible to “Ponzi Finance” dynamics…
The process of transforming risky mortgage loans into coveted perceived safe and liquid (“money”-like) credit instruments has broken down on several fronts. Not only is the risk intermediation community impaired, marketplace confidence and trust in the quality, safety, and liquidity of mortgage (and mortgage-related) securities is being shattered…
The marketplace is now experiencing forced de-leveraging and a liquidity dislocation – with systemic ramifications…
I cannot this evening overstate the dire ramifications for the unfolding Credit Market Dislocation. There is today serious risk of U.S. financial markets – distorted by years of accumulated leverage and derivative-related risk distortions – of “seizing up.” A system so highly leveraged is acutely vulnerable to speculative de-leveraging and a catastrophic “run” from risk markets. At the same time, the Bubble Economy and inflated asset markets – by their nature – require uninterrupted abundant liquidity. The backdrop could not be more conducive to a historic crisis, yet most maintain unwavering confidence that underlying fundamentals are sound…
The junk bond market has basically closed for business…
Confidence in “Wall Street finance” has been shattered. The manic Bubble in Credit insurance, derivatives, and guarantees is bursting. The manic Bubble in leveraged speculation is in serious jeopardy. The currency markets are a derivative accident in waiting…
We are now witnessing how abruptly euphoric boom-time liquidity abundance can transform to a liquidity crisis.”
Doug Noland, www.prudentbear.com, Credit Bubble Bulletin, “Credit Market Dislocation”
So, if Noland’s analysis is correct, we may well be headed for a disaster with financial markets “seizing up” unless…the Central Bankers Cartel* can, through Intervention via their massive derivatives positions, prevent or ameliorate the Looming Crisis. Since they bear major responsibility for creating the conditions which led to the crisis one certainly expects they will help prevent or ameliorate it.
*[We encourage those who doubt the existence of Intervention by a Cartel of Central Bankers to read Deepcaster’s October, 2006 summary overview of Intervention entitled “Juiced Numbers IV: How the Government Gets the Statistics It ‘Wants,’ Markets Get Manipulated, Citizens Get Deluded, and Worse” at www.deepcaster.com. Also consider the substantial evidence collected by the Gold AntiTrust Action Committee at www.gata.org for information on precious metals price manipulation. Virtually all of the evidence for intervention has been gleaned from publicly available records.]
4) Given the foregoing, it is essential to stay attuned to the “Interventionals.” Cartel Intervention appears to be crucial in determining whether such a crisis can be staved off or ameliorated. Deepcaster regularly reviews The Interventionals (as well as the Fundamentals and Technicals). Indeed, it is Deepcaster’s close attention to The Interventionals that prompted Deepcaster to recommend four short positions in the last 30 days all showing profit as we write today.
The evidence indicates that The Cartel of Central Bankers holds the dominant positions of all the investors and traders in the precious metals, equities, certain strategic commodities and credit markets. They apparently hold the “whip hand” through their various derivatives positions (e.g. the $260 trillion plus derivatives position reflected on the Bank of International Settlements books, which is used in the credit markets).
We reiterate that these massive derivatives positions make The Cartel the most potent “player” in the aforementioned markets.
Nonetheless, it is essential to note that:
5) The Cartel has to take account of and accommodate somewhat to fundamental and technical market realities. They must do this not only because it is important to maintaining The Cartel’s credibility in enhancing the fiction that markets are entirely free. But The Cartel also has to realistically address the challenge of not forcing the markets “too far,” via their massive derivatives positions - - “too far” away, that is, from their “natural” fundamental and technical tendencies. Were key markets forced to move “too far” away from “natural” there would be a real risk of serious systemic impairment or collapse.
Therefore, given the deterioration in several markets, and apparently increasing systemic threats to the international financial system, is it essential to be able to trade the downside as well as the upside, if one wants both to protect assets and to profit.
6) Thus, to properly play deteriorating markets for profit, one needs to identify technical tops and breakdowns in falling markets as entry points for short positions, just as one would look for technical bottoms and breakouts in rising markets. That is, one must evaluate the technicals.
But one must also be very cautious about excessive reliance on technicals, since The Cartel periodically uses technical patterns as “lures” to get traders “offside,” to achieve Cartel goals.
7) Regarding The Fundamentals, just as in rising markets one identifies generally disdained investments which have inherent actual and potential value, one should identify over-loved, over-valued issues to play on the short side in deteriorating markets.
Thus, when markets are breaking down, look for genuine fundamental bottoms – i.e. when equities issues with fundamental value have become generally under priced and when market conditions are more favorable. Such a time would of course be the time to consider buying.
8) Finally, all the above is subject to The Trump Card of Intervention. The Cartel of Intervenors has been remarkably successful so far in dominating the markets in which they intervene. Whether they will continue to be as successful on an ongoing basis is open to question.
That is why it is essential to stay attuned daily to the Interventionals as well as the technicals and fundamentals to profit in deteriorating markets. All of Deepcaster’s “short” recommendations and Deepcaster’s Forecasts for Gold, Crude Oil and the Equities Markets have been based on an evaluation of all three.
Finally, regarding the Interventionals, it is important to ascertain The Cartel’s Interventional Goals to the extent we are able to do so. Interventional Patterns and Trends and educated deductions from them give us important clues regarding The Cartel’s Interventional Goals and thus future markets moves.
Deepcaster
August 10, 2007
DEEPCASTER LLC
