-- Posted Wednesday, 9 January 2008 | Digg This Article | Source: GoldSeek.com

January 9, 2008

Peter@Grandich.com

Editor’s Note – Since first publishing the Grandich Letter in 1984, I’ve always tried to make an honest assessment of my previous year’s work. Please remember we can’t give individual investment advice or respond to most calls and emails.

2007 Review –

I believe 2007 was one of my best years (if my tax bill is any indication). Yes, some of our companies fell flat on their faces and I wasn’t perfect on the markets, but overall it was an outstanding year.

I spent most of 2007 speaking about a desire for the Fed to move to an easing position before the U.S. Stock market could top out. They did so in October and I actually went short. So far, this has proven to be the top. Gold’s 37% gain and platinum’s spectacular rise clearly vindicate my constant stance to choose precious metals over not only the U.S. stock market, but over base metals as well. Being a U.S. Dollar bear and being fortunate enough to foresee the ups and downs in oil added to the great year.

Finally, while always trying to make known that failure is the norm in the junior resource market and some of our companies gave new meaning to being “dogs,” we had good fortune on numerous fronts.

2008 – The Good the Bad, the Ugly

It’s extremely important to fully grasp how important my http://www.grandich.com/docs/alert_10-14-07.pdf issue is to my overall outlook. While I will always try to guess what the next few weeks and months may bring, I wanted my October 14th edition to drive home that my outlook for several years to come is very bearish regarding America and its markets, as well as its social, political and economic landscape. And my “gospel” for this belief is this video http://www.grandich.com/video/60min.162mb.wvx.  (Internet Explorer Only)

If I said it once, I said it a thousand times, “America has been robbing Peter to pay Paul and Peter is tapped out.” 

Please read http://www.msnbc.msn.com/id/22081728/

“The Federal Reserve is totally out of it. They’re destroying the currency and driving up inflation, which will result in higher interest rates and a worse economy. We now know the Fed doesn’t understand markets or economics, but is just trying to bail out its friends on Wall Street at the expense of 300 million Americans, nay, of the whole world.” 

                                                - Investment Guru Jim Rogers

Jim Rogers is definitely onto something. I believe Greenspan and now Bernanke have done far more to hurt the economy than help. History is already beginning to show how much at fault Greenspan was during his tenure and Bernanke is picking up where he left off:

“We do not expect significant spillovers from the subprime market to the rest of the economy or to the financial system”. 

                                                - Fed Chairman Ben Bernanke May 17, 2007

One should expect such rhetoric and badly erroneous outlook from one of the many “Don’t Worry, Be Happy” crowd that apply their trade on TOUT-TV day in and day out, but not from arguably the most important money man in the world. I feel this is just another in a long list of factors that makes Comptroller David Walker’s outlook (on the video) so scary and why I’m so bearish.

Sub-Crime Fiasco –

So much has been written already, yet we’re not even past the early innings of this disaster. So, let me just share a few thoughts with you:

· For starters, I think one should pause and contemplate the broader implications of the subprime mess. In my other business, we practice an alternative to traditional financial planning.  We do this in part because we believe financial institutions work mostly “against” the best interests of the investor. At the very least, this fiasco should make one think long and hard on how the financial sector goes about its business and whether regulators are truly able to protect us.

Among the dubious practices was offering mortgages to people who the lender knew, or should have known, would have numerous problems paying the mortgage back. In some instances, these mortgages were purposely created to fail. The term is the so-called “neutron loans” – they kill the borrower but leave the house standing. Loose lending was widespread as “NINJA” (no-income, no-job, no-asset) loans were among the many ways loans were used to inflate the housing bubble. If Greenspan truly was unaware of this and the many other tricks of the trade, what does that say about the ability of government regulators? I doubt he wasn’t aware which makes me even more concerned.

· This is much different than the Japanese or Latin American debt crisis.  The Japanese banks were one big club, and the corporate loans they held had long shelf lives. American banks effectively colluded to conceal their Latin exposure while they restructured. Sub-crime has unraveled very quickly in part because these collateralized debt obligations have a shelf life of only around three years. Not only do they crystallize faster, but accounting reforms have forced many institutions to mark their assets to market no matter how difficult that may be.

· Treasury Secretary Paulson’s bailout plan was DOA (dead on arrival) despite the hoopla the merry men of Wall Street tried to paint about it. For starters, the rate-freeze plan applies only to loans taken between the start of 2005 and July 30, 2007, and with rates scheduled to rise between January 31, 2008 and July 31, 2010. Anyone whose loan rate has already reset is stuck with the higher payment. Homeowners who are in arrears more than a month, or those who have been 60 days late more than once in the past 12 months, are ineligible. Homeowners who are in foreclosure process or those who already refinanced their loans are also ineligible. Experts have already shown very few of the masses in trouble will be helped in the end.

What was lost in this bailout and TOUT-TV seemingly failed to cover in earnest, is how flawed the plan is because it ignores the losses that “real world” investors – pensioners, retirees, 401(k) participants, money market investors and many others – are experiencing. The media has made it sound like investment banks are the main lenders and in trouble when, in fact, they hold a very small percentage of the mortgage securities. The reality is there’s a boatload of individual investors who don’t even know yet how much exposure their “income portfolio” really has to sub -crime.

The Sub-prime mess and an economy heading toward or already in recession is most likely going to create some headlines like this in the not-too-distant future: “Troubles in the Corporate Debt Market.” Up until this fall, defaults on corporate bonds were at their lowest levels in more than 25 years. But, with an absolute binge of borrowing in this millennium and an economy heading for the dumps, I anticipate heightened concerns going forward in the so-called “high yield” (who buys low-yield bonds, anyway-lol) market. Citigroup’s (yes, they are in trouble themselves) credit research team has issued a warning worthy of heed:

http://www.ft.com/cms/s/0/cc8445fa-ba67-11dc-abcb-0000779fd2ac.html . 

Also worth reading is 

http://bowdoinfinance.blogspot.com/2007/11/draining-away-four-problems-that-could.html.

Summary –

The public-at-large, especially those poor souls who watch “TOUT-TV” (CNBC-TV), have no real idea how enormous this crisis is. First and foremost, the debt markets are ten times larger than the stock market yet most investors misunderstand it or watch it - UNTIL NOW!!! Economic life begins and ends with the debt market as financings for governments, companies and pension funds with credit instruments are done there on the belief loans will be repaid on a contracted schedule with interest.

Here’s why I believe history will end up not being kind to former Fed Chairman Greenspan: banks and pensions profited when there was a wide difference between short and long term interest rates. They took in on the short side and loaned/invested out on the long side. But thanks to Greenspan’s allowing rates to fall incredibly low and seeing the yield curve all but disappear, banks and pensions ended up willing patsies for the plethora of exotic instruments Wall Street created at the expense of borrowers who could least afford the risk. Now the time has come to pay the piper in the debt market, and for America to pay for years of living way beyond their means.

http://www.telegraph.co.uk/money/main.jhtml?xml=/money/2007/12/23/cccrisis123.xml

U.S. Stock Market –

There is a whole host of reasons why I became so bearish when the DJIA made a new-all-time high last October and I ended up shorting the market. And all of them are as ugly now, if not even uglier. Since I have already spoken above about the sub-crime fiasco, let me tell you how I see it impacting the market.

The U.S. economy has not only been held up by consumers spending way beyond their means http://www.youtube.com/watch?v=27vdkmU8ErE (Shania Twain has so accurately put it to song), but a housing bubble that has now burst and led to a brutal slide in home construction, sliding housing prices that threaten to undermine household wealth and consumer spending, and turmoil in credit markets that won’t go away anytime soon.

http://www.breitbart.com/article.php?id=D8TNJ8LG0&show_article=1

Yes, the U.S. has endured financial crisis before that ended up having little or no effect on the real economy, but they were autonomous financial crises with little connection to the underlying U.S. economy. This time, ladies and gentlemen, it is indeed different because the simultaneous bursting of the credit and housing bubbles are deeply interconnected. The American home became an ATM machine for many thanks in part to Greenspan’s punchbowl. Unfortunately, there’s no magic remedy—no matter how hard the “Don’t Worry, Be Happy” crowd on TOUT-TV claims there is.

I have spoken about the cottage industry that feeds off keeping the stock market going.  It’s magazines like Kiplinger’s or MONEY, who always say to millions in and around the financial services industry that it’s a good time to buy – those whose life blood is the market.  All these people have grossly underestimated the severity of the economic, social and political plights in America.  (Expect big layoffs in this industry, and also a big hit to technology companies in the IT business as Wall Street will be the first industry group to delay or cancel expansion in this area.)

I believe a vicious, long-lasting bear market has begun and the chances are real that the lows set back at the beginning of the millennium after the Internet bubble burst are reasonable targets for the DJIA and NASDAQ. It won’t be overnight and there will be rallies, but if you haven’t positioned yourself to be a live chicken versus a dead duck already, time appears not on your side. See you at the hen house.

Quick Note –

I have a special fondness for Canada (except the Vancouver Canucks, who are once again leading their poor suffering fans to yet another big disappointment come playoff time) and while I believe it’s in much better shape than its neighbors to the south, I don’t think it can escape being impacted by what’s unfolding here. Like it or not, Americans buy more than three-quarters of everything Canada exports, which accounts for nearly a quarter of Canada’s GDP. Yes, it may no longer be true when America sneezes Canada catches cold, but it appears prudent for Canadians to at least put on a sweater and gloves.

U.S. Dollar –

The direction of the U.S. Dollar going forward is almost certain to impact directly and indirectly all the markets we follow, therefore it should be next on the agenda.

For several years now, I have stated that, “the only party that doesn’t know the U.S. Dollar is dead is the U.S. Dollar.” The U.S Dollar Index fell from around 110 in 2002 to currently around 76 basis.  This has occurred because outside of the U.S. the world knows the empire is crumbling. Don’t just take my word for it. Chinese Central Bank official Xu Jian said recently, “The dollar is losing its status as the world currency… We will favor stronger currencies over weaker ones, and will readjust accordingly...” French President Nicolas Sarkosy warned the U.S. Congress by stating, “The dollar can’t remain someone else’s problem. If we aren’t careful, monetary disarray could morph into economic war. We would all be victims.”

Throughout this decline, Wall Street mouthpieces bantered on TOUT-TV about how a falling dollar will be beneficial to America. What these merry men failed to take into account was that this may have been true when we were a creditor nation, but now as the world’s biggest debtor it’s paramount to keep borrowed money flowing in to us. A falling dollar is harmful to those nice pushers who feed us debt junkies and they can, and have, come to a point where they no longer will supply our bad habit if it means losses on the currency exchange.

The fed is caught between a rock and a hard place. Lower interest rates to stem the falling economy and risk the dollar falling more.  Try to support the dollar by not easing aggressively and run the risk of a deeper recession. It’s like death by a firing squad or hanging.

I suspect the U.S. Dollar Index can eventually break below 70. It’s at that point that a real countertrend rally can take hold. But outside of oversold relief rallies, there are no real long-lasting fundamentals to support a sustained rising dollar. I certainly don’t think we’ll ever see 110 on the index again unless when they get to 55 they reverse split it two for one-lol!

The Middle East is likely to have an impact on the dollar but not in the way one would first assume. Please read:

http://www.economist.com/opinion/displaystory.cfm?story_id=10177927

http://biz.yahoo.com/ap/071118/opec.html         

http://www.gata.org/node/5874

Oil –

Like many other markets, I’ve been on the right side most of the time for so long that I want to bet against myself simply because I have to be wrong some time (that’s why I love the junior resource market where being wrong is a regular occurrence). Of all the markets I follow, this is the toughest to figure out going forward as oil appears reasonably priced in this range. The natural tendency is to think a doubling in the past year combined with an economic U.S. showdown that can lead to slower growth worldwide should help drive prices lower. However, supply is fairly tight, geopolitical concerns should continue to be priced into a barrel of oil and peak oil is a legitimate long-term concern. Barring an economic or geopolitical catastrophe, I would look for a broad trading range of $75 to $115. Either way, the financial markets shouldn’t count on any long lasting relief from dramatically lower prices.

Iran –

As per my October 14, 2007 Grandich Letter, I’m speculating that President Bush is not going to leave office without putting a halt to any real Iranian nuclear ambitions (in his mind, at least). While Bush, Cheney and crew continue to press for a solution, peaceful or not, even some key non-Republicans are setting the ground work. Senator Joe Lieberman said not too long ago that, “we’re already fighting world war four against Islamist radicalism.” The move away from a diplomatic solution seemed to increase with the demotion of Ali Larijani as Iran’s chief nuclear negotiator and Russian President Vladimir Putin’s objections to further UN sanctions. I would think if Bush is indeed going to act, it will be before the election in November, so stay tuned.

And while it seems only Israel and the United States feel military action is the answer, you need to consider a reason why several Arab countries met in Annapolis, Maryland late last year. Dubbed by some the “coalition of the frightened,” there’s great concern about Iran throughout the Middle East.

http://www.ft.com/cms/s/0/da1f8eca-9d54-11dc-af03-0000779fd2ac.html

Gold –

So I missed by two days. I had predicted a new, nominal all-time high for gold in 2007. Shoot me (only kidding, Internet peanut gallery).

The more things change the more things stay the same. Okay, almost. Gold is no longer “dirt” cheap but it’s not even fairly priced, let alone expensive. I think we’re only in the fourth or fifth inning of at least a nine-inning secular bull market. The difference this year versus this time last year is that we’re likely going to see a change in the leadership of factors. Physical demand and a declining U.S. dollar are likely to take a back seat to geopolitical concerns and the absolute death march of the group or groups who have manipulated the gold price over the years. But make no mistake about it: all four should continue to help drive gold to a four-digit price in 2008.

Silver –

Silver is really a base metal but gets a pass thanks to its long-standing relationship as the “poor man’s gold.” While it usually remains in gold’s shadow, it can and should outshine it at times.

Platinum Group Metals –

Should continue to bore us all the way to the bank.

Base Metals –

It was hard for some to grasp how I could be so bullish on precious metals in 2007 yet so bearish overall on base metals. I guess these folks assume that because of my business I would have to always be bullish on all metals and/or think the only differences between them are the words precious and base. The year 2007 proved that wrong as gold and platinum performed light years better than copper, nickel, zinc and the like.

I continue to be overall bearish towards base metals, especially now that weaker economic growth worldwide is far more likely and because of concerns I now have about China (more in a moment). I continue to believe copper is heading for $2.50 or below, so I continue to greatly favor precious metals over base metals.

Special Metals –

Just about all the froth has disappeared from the uranium market (and especially in the junior resource area), yet the very fundamentals that drove it from the teens still remain in place. Meanwhile, in 2007, cobalt performed nicely as expected. Please read:

http://news.moneycentral.msn.com/provider/providerarticle.aspx?feed=FT&date=20080101&id=7986043   

http://www.mineweb.com/mineweb/view/mineweb/en/page36?oid=43655&sn=Detail 

http://www.resourceinvestor.com/pebble.asp?relid=39076

China –

Please allow this to be my official notification that I’m jumping off the bullish bandwagon when it comes to China. But please, don’t assume I’ll be seen in a bear suit anytime soon. It would come as no surprise to me that the upcoming Chinese Olympics end up being a watermark for China economically for several years to follow. This belief is also one of the key reasons I remain bearish on base metals overall. The fact that just about every private and individual investor will disagree is yet another reason for my jumping off.

Mining and Exploration Shares –

We can be almost certain that we won’t see the merger mania we saw the last two years in the mining sector simply because there aren’t that many big dogs left to merge. However, I suspect we shall see more deals further down the food chain than recent past and then more strategic alliances as mining companies come to grips with tough working conditions in the 21st century.

The gold exchange-traded funds (ETFs) have been both good and bad for the sector. There’s no doubt they greatly enhanced demand, but at the same time they became a proxy for funds and large-scale investors who used to use mining shares as a proxy for metals exposure.

And one of these years we shall get a sustained long-term rally in the juniors. I have stated it would take a new high in gold to generate regular media attention over a good period of time in order to get such a rally. I think if and when we march towards a four digit gold price, we should see a trickle-down effect for the juniors (fingers, toes, etc crossed).

Two Developing Stories for 2008 –

Look for more and more chatter about food and water shortages.

http://www.financialpost.com/story.html?id=213343

http://apnews.myway.com/article/20071026/D8SH34A04.html

Peter Grandich is the founder and managing member of Grandich Publications, LLC. (www.Grandich.com), which publishes The Grandich Letter. First published in 1984, The Grandich Letter provides commentary on the mining and metals markets, discusses the Canadian economy and investments from an American point of view, and provides commentary on the world's markets and economies. Grandich Publications also provides a variety of services to publicly-held corporations on a compensation basis.  He is also the founder and managing member of Trinity Financial, Sports & Entertainment Management Co., LLC, a firm with a Christian perspective, which serves the public-at-large and has a unique Pro Sports Division that assists athletes and entertainers.  Grandich is quoted regularly in the financial media and speaks at major investment conference worldwide. 

 

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-- Posted Wednesday, 9 January 2008 | Digg This Article | Source: GoldSeek.com

Peter Grandich is the Managing Member of Grandich Publications, LLC (www.grandich.com).
The company publishes The Grandich Letter (first published in 1984) which covers the metals and mining industry, follows world markets and economies, and covers the Canadian markets from an American prospective.

Grandich also provides a variety of corporate finance and development services to publicly-held companies.

Peter Grandich is also the Managing Member of Trinity Financial, Sports & Entertainment Management Company, LLC (www.trinityfsem.com), a Registered Investment Advisor in the State of New Jersey. Trinity provides investment advisory services to individuals, small to mid-size businesses, professional athletes and entertainers.

Peter is a long-standing member of The New York Society of Security Analysts and The Society of Quantitative Analysts.

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