SATURDAY SEPTEMBER 30, 2006

THE INTERNATIONAL FORECASTER

SEPTEMBER 2006 (#5) Vol. 10 No. 9-5

P. O. Box 510518, Punta Gorda, FL 33951-0518

An international financial, economic, political and social commentary.

Published and Edited by: Bob Chapman

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US MARKETS

             From January 1^st through August 31^st, the average hedge fund returned just 4.2%, according to Merrill Lynch, less than the S&P 500 Index’s 5.8% total return. So much for the 32-year old wunderkinds. The redemptions are on the way. If history holds as a teacher the market should flatten out in October and more somewhat lower. Incidentally the Fed has never cut interest rates when the market was at a high. Wall Street is factoring in a rate cut, which will never materialize at this juncture.

            People should listen to Paul Volcker and his extraordinary chastisement of recent and current Fed officials and their thinking. We have maintained for years that the Fed has been trying to euchre the markets into believing that they are tough on inflation by replicating the disastrous 70’s policy of gradually hiking interest rates while supplying prodigious amounts of money and credit. The excess liquidity created forces managers and traders to find any kind of action to play.

            The recent minor correction in commodities and the bursting of the real estate bubble has redirected liquidity back towards stocks and bonds. This is a highly dangerous situation. If the Fed doesn’t cut back on credit the market will get dangerously overvalued. That will in short order send capital back into commodities and gold and silver, probably right after the elections. That will send inflation screaming again. The economy already has all the money and credit it needs. If M3 stays at current levels inflation will boom, because the real economy is sated and further credit/liquidity will do nothing but fuel inflation.

            The psychology has definitely changed. The back of the real estate market has been broken. Unmoved by a big drop in interest rates, the volume of applications for mortgages at major banks has declined 4.9%. Applications for purchase loans fell 5.5% week-to-week to the lowest level since 11/03. The number of refi apps fell 4.1%. Refis accounted for 44.3% of loans, the largest share since 9/05. Mortgage applications overall are down 21.1% in the past year, in line with other indicators of a rapidly cooling housing market. The 30-year fixed rate mortgage came in at 6.18%, dropping 18 bps from 6.36%. The 15’s were 5.81%, down 23 bps from 6.04% and the one-year ARM was 5.9%, down 5 bps from 5.95%.

            The retail price of gasoline rose by $0.50, or 17% nationwide over the past month to $2.38 a gallon, and 42% of Americans believe Bush and the oil companies are manipulating the price for political advantage, and they are right. Actually gasoline has fallen from $3.18 to $2.38 or $0.80 a gallon, which is 25%. The White House says if that is so why doesn’t gas go to $3.50 a gallon? Our answer is to enrich the oil producers and the international oil cartel. The Gulf producers are also recycling much of their ill-gotten gains into Treasury securities to keep the US from going bankrupt. In addition in trouble auto manufactures will again sell more SUV’s and light trucks – a high profit center.

            Gasoline prices are having some salutary effects on American consumers in September. The Conference Board says the consumer confidence index rose to 104.5 from 100.2 in August.

            The Fed of Richmond’s Manufacturing Index came in at 9 versus 3 in August. The shipment index hit a reading of 9 versus negative -8 in August. The revenue index improved to 11 in September from 7, while its retail sales index came in at negative -1 from negative -5 in August.

            Bernie Ebbers deserves to go to jail, but not for 25 years. JP Morgan Chase, Goldman Sachs, Merrill Lynch, Citicorp, Bank of America, the Royal Bank of Scotland and CIBC aided and abetted in the fraud. They were fined and made restitution of about $3 billion each. They bought their way out and elitists are allowed to do that. None of them went to jail and in fact, no one was charged. Murderers get 25 years, not fraudsters. Ten-years would have been appropriate along with confiscation of assets. Mr. Fastow cut a deal with the Feds and they screwed him – that’s why he spoke out on the banks being in on the deal. We can promise you there will be no prosecution or convictions. It doesn’t happen to Illuminists in America. We continue to have a 2-tired system of jurisprudence.

            1989 and 2006 are different in their housing bubbles. The eighties saw rising consumer price inflation that officially reached 13.5% and house prices rose faster than the general price indexes. In the late 80s home equity was not being used as collateral to finance extraordinary borrowing and spending binges that dominates growth. The Fed calls this wealth creation, when in fact it is a Ponzi scheme. We identified this as a bubble from the beginning, but few were listening. Americans are consuming capital at bargain-basement prices, created by the Fed. This has created a paper game and little investment and has led to massive foreign indebtedness. There is nothing unique about asset markets that would suggest that asset prices can permanently absorb overly expansionary policies without leading to costly real and financial adjustment. As an example, in 2005 credit expansion was $3.3 trillion and GDP growth of $379 billion. The escalating gap between credit and GDP growth is extremely serious, but few want to identify it as such. In 2006, credit expanded by $4.4 trillion. As you can see as time goes on it takes an ever-greater amount of credit to assist in the creation of higher GDP. This is accompanied by a total lack of savings by the public and massive personal debt. This runaway credit expansion is unsustainable, especially when accompanied by poor income growth. The result is we are headed for real trouble...

GOLD, SILVER, PLATINUM, PALLADIUM AND DIAMONDS

 

            On Wednesday, gold was trading up $3.20 in London and when it opened in NY it rose to $4.20. It was strong all day. Gold closed at $597.50, up $6.00. We said if gold in the December month closed strongly then it would rally strongly. December closed at $603.30, up $6.20 an ounce. Silver on Comex closed at $11.57, up $0.21. It also closed December, up $0.21. The access aftermarket for gold was up $5.10 bearing out our rally theory. Now that central bank Washington agreement selling is over, it is full steam ahead. If you do not understand who is doing what to whom in these markets, you are hopelessly lost.

 

            Gold open interest rose 1,265 contracts to 322,737. Silver open interest fell 242 contracts to 100,000. On Tuesday, the large Tocom shorts increased their short position by 3,242 contracts to 97,109. Goldman increased their position by 1,081 contracts to 34,899. On Wednesday, the XAU gained 1.88 to 130.52 and the HUI was up 5.67 to 303.67.

 

            The overall structure of silver and gold never looked better. The September 19^th COT report showed the four largest traders are now net short 34,809 contracts, or more than 174 million ounces of silver. These four traders control 97% of the total net short position, the highest in many years yet, the CFTC and NYMEX does nothing about this concentration. We can only believe our government is behind this suppression of silver.

 

            On Wednesday, the Dow rose 20 points to 11,699, the S&P was up 18 Dow points and the Nasdaq was up 12 Dow points. Oil was $62.90, up $1.95, gasoline was up $0.05 to $1.54 and natural gas fell $0.32 to $4.20. Copper rose $0.02 to $3.49. The euro was up $0.18 to $1.27, the pound rose to 1.8891 and the Canadian dollar rose .24 to 90.03. The 2-year Treasury closed at 4.69% and the 10’s at 4.60%.

 

            On Thursday, gold did well all day. It broke $600 in the December month on Wednesday and broke clearly through on Thursday in the spot market. Gold closed up $7.50 at $605.10, but silver was a disappointment up $0.04 at $11.61. Gold open interest fell 3,327 contracts to 319,614, while the silver open interest rose 373 contracts to 100,345.

 

            On Wednesday, the large gold shorts on Tocom increased their total net short position by 6,576 contracts to 103,685. That is an increase of 18,237 since 9/21. The same dealers increased their silver shorts by 140 contracts to 1,795 contracts. Goldman covered 178 gold contracts to reduce their short to 34,721. The XAU lost .79 to 19.73 and the HUI fell 2.35 to 303.32. Gold in the access aftermarket was off $4.40.

 

            On Thursday, the Dow rose 29 to 11,718, S&P rose 27 Dow points and Nasdaq was up 42 Dow points. Oil lost $0.20 to $62.76, gasoline fell $0.04 to $1.50 and natural gas fell $0.28 to $5.39. The dollar index rose .10 to 85.42, the euro rose $0.10 to $1.2702, the pound fell $1.30 to $1,8764 and the Canadian dollar fell .04 to 89.96. The 2-year Treasury closed at 4.67% and the 10-year was 4.62%.

 

            After three years of trading on the Toronto Stock Exchange, Central Gold-Trust joined Central Fund of Canada on AMEX last week under the symbol GTU.

 

            Silver imports have risen sharply in Gujarat, India in the last week as consumers splurged on precious metals after their prices nosedived in the international market.

 

            Bullion imports were at their highest in over a year in the state with nearly 20 tons of silver and nine tons of gold coming into the country. Indians obviously see great value at these prices. They are not only purchasing jewelry, but also bullion for investment. 

 

            On 9/27/06, the IShares Silver Trust (AMEX-SLV) filed a S-1 to registration, 15,222,727 shares at a proposed minimum-offering price of $110.00 per share for a maximum net offering proceeds of $1,674,449,970.

 

            As of 9/28/06, IShares Silver Trust showed 104,323,655 ounces of silver in the trust or 3,244.8 tons. This represented 10,450,000 shares.

 

            What the cartel gives the cartel takes away. Friday was reversal day. The signal was late on Thursday when the big and mid-tier gold and silver shares were bashed in the last two hours of trading. We have seen this happen over and over again and they do not care who knows what they are doing – sheer arrogance. Spot market gold closed down $6.40 to $598.70 and silver fell $0.20 to $11.41. The December month was $604.20 -$6.70 and silver was off $0.20 to $11.54...

-- Posted Sunday, 1 October 2006 | Digg This Article

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