I always like to start with the bad news and finish with the good.  This week was no exception in the bad news arena.

          Bloomberg reports  up to half of Alt-A borrowers will soon owe more on their house than they are worth.  This puts some $800 billion of debt at risk.  What would you do if you couldn’t afford your new higher payments and found out your house is now worth less than the mortgage you are paying off?  From the story;

“If they have home equity left, borrowers are hesitant to default, even if in trouble,'' the analysts wrote. ``If the house is worth more than the loan, why default and leave money for the bank? Better to sell the house instead.''

          If this logic is followed expect a ton more homes to flood the market and drive prices down further and in turn exacerbate the problem even more.

US foreclosures have more than doubled in Q1 2008 year over year.

“Almost 650,000 properties were in some stage of foreclosure during the quarter, or 1 in every 194 U.S. households, Irvine, California-based RealtyTrac Inc., a seller of foreclosure data, said today in a statement. The number was 112 percent above a year ago. Nevada, California and Arizona had the highest rates.”

          The largest mortgage lender in the UK, HBOS, is looking to dilute their shares by issuing $8 billion worth which equals two new shares for every five already issued, to supplement depleted capital as a result of write downs and a worsening housing market.  That’s approaching a 50% dilution and in view of worsening conditions would scare me if I were a shareholder.  A great quote, although very optimistic in my view, from the story;

“Chief Executive Officer Andy Hornby said today he expects home prices to fall in both 2008 and 2009 by less than 10 percent and is ``planning for a more challenging environment ahead.'' HBOS wrote down an additional 2.8 billion pounds on mortgage-related losses and will reduce its dividend this year, the Edinburgh-based bank said in a statement.”

          Citigroup sold twice as much stock as planned to shore up the balance sheet after continuing losses.  They raised $4.5 billion at a slight discount to the closing price on that day.  That totals $41.5 billion raised over the past five months, or $8.3 billion a month, or over $276 million a day.  An analyst was dismayed that Citigroup raised such a small amount as said:

“Citi needs to raise an additional $10-$15 billion or sell several hundreds of billions worth of assets in order to truly shore up its capital position.”

The part about needing to sell “hundreds of billion worth of assets” is a nice admission that many of the assets on the book have no or possible up to 5% value remaining.  It’s been speculated by highly respected sources for a long time now that many of these assets will approach zero.  It seems as if this slip implies it has happened much quicker than the mainstream media is willing to admit or report.  This story above is full of juicy tidbits and worth a read.

Deutsche Bank, Germany’s biggest bank, reported its first loss in five years.  The losses were on asset backed securities and loans for leveraged buyouts write downs.  The loss was $4.2 billion.

RBS is cutting about 7,000 jobs as a result of the ongoing, worsening crisis.  That’s 25% of their workforce.  RBS is Britain’s second largest bank.

          As I’ve expected the Federal Reserve has boosted their Term Auction Facility (TAF) 50% from $50 billion to $75 billion.  And the Fed has expanded the range of assets they will accept as collateral on any lending through this facility.  Look for this to increase further in the not too distant future.

          I suppose the big news is the 0.25% rate cut by the fed this week.  It was expected quite some time ago, in my circle, that the rate would be taken down to 2%.  Now that it’s there I don’t expect any movements for the summer at least.  The Fed is running out of bullets and I expect them to come out with further creative solutions soon and save anymore rate cuts for emergency use only.

          Countrywide’s debt rating was cut to junk today by Standard & Poor’s.  I am in shock that Ambac hasn’t followed yet, but don’t worry they will.

All this news of continued capital raisings, jobs slashed and now the Fed raising their loan cap sure doesn’t point to an end to this dilemma in my view, but then again I guess you can’t argue with the market, which keeps these stocks propped up on any sniff of bad news.

To finish off the bailout/write-down/capital raising/job cuts/mortgage delinquencies etc...  scene, I point to the Bank of England’s move to keep the public in the dark on their credit crunch easing plans.  A quick quote from the story, ask yourself if you feel safe in any bank in England now, or the world for that matter.

“Ferocious and unprecedented secrecy means taxpayers will never know the names of the banks that have been supported through the special liquidity scheme, which was unveiled by Bank Governor Mervyn King last week.”

On the geopolitical risk side this week was action packed.  In the very risky Venezuela Crystallex was denied an exploration permit on its Las Cristinas mine which fuelled the talk of nationalization once again.  In stark contrast to their approval in January regarding their environmental impact study they’ve now been shut down when only needing a mine construction permit.  Talk about getting a company to do everything for you and then shafting them.  There is no doubt this huge project will proceed, but who owns and operates it is still very much up in the air. 

          Further to this Crystallex stated they were unsure how to proceed and are seeking clarification on whether this means they will be denied the right to open the mine.  Company spokesman Richard Marshall said; "This letter seems to suggest a complete policy change in position relating to this region.”

While anyone investing in this sector is feeling the pain shareholders of Crystallex are near the end of their pain threshold as the stock dropped 60% on the news.  The high over $6 in 2006 is a far cry from the $0.86 print on this day.

          Cornerstone Capital, a Newmont partner has said :

“Cornerstone, a Canadian mining exploration company, said it provided a notice of force majeure due to the mining mandate issued by Ecuador's Constituent Assembly on April 18, which placed a moratorium on exploration and mineral development activities for up to 180 days.”

“In addition, Cornerstone also provided notice of force majeure on the Shyri Project in south-central Ecuador.”

          The shares of Cornerstone rallied 8% to $0.25 on Thursday.

Aurelian has laid off most of its Ecuadorian staff and had to halt all drilling.

          Iamgold is reviewing its investment budget in Ecuador and deciding on whether to lay off its 120 employees who are working on the Quimsacocha project there.

          Corriente Resources is awaiting further instruction and clarification from Ecuadorian officials before they decide what to do with their 150 employees there.

          Dynasty Metals & Mining is also awaiting further clarification before deciding what to do with their 350 employees.

          MPH Ventures announced they will no longer be proceeding with their option agreement in Ecuador as a result of recent governmental policy changes.  Lateegra Gold was their partner and now looks stuck up a creek without a paddle...I mean partner. 

          Although statements have been made reinforcing the idea that responsible mining will be permitted there, it’s still too early to say whether they will turn face again.

          Four Gold deposits are up for auction in Siberia with estimated reserves of 60 tons.  It will be interesting to see who picks these up as well as who shows interest in them.  So far Polyus Zoloto and Severstal have submitted bids.

          The contrarian in me comes out strong when I start to see stories like this.  All you need to read is the title; “Calling It Quits on Gold, Platinum - It's Time to Go Financials!”

          This story is telling as the Indians look for value and still love the metals.  Just remember how many people live in these regions and try to understand how deeply their love for Gold is.  You can watch their premiums over time and see they play it right, buying on weakness not strength which is the way to play the metals.  Most people get too emotional and do the opposite and in turn lose their shirts.

 “Jewellery makers from India to Indonesia have stepped up purchases after bullion dived to its lowest level in three months, pushing up premiums for gold bars in Southeast Asia.”

          De Beers was lucky enough to discover  a treasure filled shipwreck from the Columbus era this week of Namibia.  Those coins will go for a pretty penny when they go to auction.

          Gold Fields had to suspend work at some South Deep operation after nine workers were killed at the 3,000 meter level.  This highlights one of the many extreme risks of mining at such depths.  Accidents are common and protests are becoming more prevalent as a result.  This all leads to more money being spent on safety and reduced output.  South Africa is plagued with issues these days.

          This headline says it all.  I have the upmost respect for Mr. Jim Sinclair and you can bet his money is not to be squandered. 

“Tanzanian Royalty Chairman to Proceed With 5th Tranche and Provide C$1,725,000 Private Placement.”

We rarely get a story of increased production but last year Nevada did increase production...well on the surface anyhow.  If we dig into the numbers we see the dollar value was $5.4 billion in 2007 and $4.9 billion in 2006.  Gold made up the largest amount of metals mined but declined in 2007 to 6 million ounces from 6.3 million ounces in 2006.  Headlines rule the world these days and many people don’t go past them.  As you can see this headline; “Nevada mine production up to $5.4 billion” is a direct attack on the true market forces within the Gold arena and just highlights the fact that you must dig very deep to get answers which certain forces do not want to be found.  Supply and demand equal the truth.

          The Platinum supply story continues to unfold.  The headline says it all; 

“'Enormously tight' market could see platinum price breach peak of $3 308/oz in early March – Investec”

          Also from the story a couple of estimates for this years very much uncertain Platinum production;

“Investec's forecasts were that there would be a supply deficit of 400 000 oz of the white metal this year, but other market watchers were calling for a deficit of as much as 600 000 oz, Gail Daniel stated.”

Mining in Zimbabwe has decreased some 61% March vs. February.  The story blames the fact that the miners haven’t been getting paid by the Reserve Bank.  Apparently they are supposed to receive pay allocated 35% in local currencies and 65% in US dollars.

Peter Barnes the CEO of Silver Wheaton expects the price of Silver to reach $30 an ounce in the next few years.  This is a very conservative and safe estimate in my opinion and I am calling for at least the all-time high around $50 to take place within a year and a half.

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-- Posted Monday, 5 May 2008 | Digg This Article