WEDNESDAY, NOVEMBER 1, 2006

THE INTERNATIONAL FORECASTER

MIDWEEK READING

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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International_forecaster@yahoo.com

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US MARKETS

We are told that the SEC is on the verge of approving a system, proposed by the NYSE, to accommodate hedge funds to change the margin requirements from 50% to 15%. The 50% rule has been in effect since just after the stock market crash of 1929.

            Part of the cause of the collapse of the market was the lax margin rules, which were set at 10%. That allowed an investor to buy shares and only deposit 10%. The rest of the funds would be borrowed from the broker, as they are at a 50% rate today.

            We can guarantee you, based on the absence of regulations of hedge funds alone, that 15% margin rates could cause a market catastrophe, never mind a derivative blowup or a dollar collapse.

            The market internals just do not add up to a 12,100 Dow. Investors and the public in general are confident, but there is a near collapse in business confidence and especially within the housing industry. The Conference Board business confidence index, a survey of CEO’s dropped 6-points to 44, the first time below 50 since 9/11. Every sub-category was also negative for now and for six months. This has to mean a fall in corporate profits from 12.5% growth to 4% to 5% growth. The experts are looking for another year of 12.5% profits. They believe capital investment will make up for the slippage in consumer spending. We do not believe that – no matter how cheap and how available credit is. The stock market is priced to ultra-perfection; thus, you do not want to be there.

            A lot of the trouble in the housing market is still beneath the surface. ARMS are being used by 36% of new homebuyers and only some of the lenders have started to tighten up qualifications. Builder’s say new home orders are off 40% and cancellations are up 40%. The building of a home or a sub-division takes 2 to 5 years, thus, the building you see going on has been in the pipeline for sometime and has to be completed. We expect this building will go on for at least another year. That continued supply will put continual pressure on inventories.

            The unbridled optimism you hear from government, Wall Street and CNBC is pure disinformation and propaganda. Our economy, even with the continued tidal wave of money and credit, is in very serious trouble.

            We still believe that after four years we are still in a bear market rally that has been created by manipulation via the “Working Group on Financial Markets” and the Fed’s repo pool. During that period, general stock investors haven’t made much money, but subscribers to the IF have.

            With what is going on in the world right now, how can anyone buy the stock market at a P/E multiple of 29 times trailing earnings? For 76 years the average trailing P/E multiple has been 15.5 times earnings. We believe it is fair to say that a 50% correction would be normal. We can just hear the CNBC moderator saying, that’s a pretty scary thought. We say you bet it is and that is reality. Not only is real estate headed down, that correction will finally trigger a stock market correction, which will be equally as damaging and the Plunge Protection Team will be powerless to stop it. Again. If interest rates are lowered to save the economy, the dollar will collapse. The Fed is in a box and cannot get out. The Fed is staring into an abyss.

            Free trade and globalization continues to steal Americans’ jobs 24 hours a day seven days a week. Economists are telling us we have begun a slow slide downward in the percentage of workers participating in the labor force. That would be deflationary if the Fed wasn’t whacking out money and credit at an 11-1/2% to 12% rate. As long as the Fed keeps this up inflation will rage. Yes, you can have raging inflation in a failing economy. Pain is being inflected on the economy and on the lives of Americans, but it cannot be avoided. We still believe the market has it all wrong on interest rates. We’ll need another ½% to ¾% rise by June 2007 to try to hold inflation at bay and to provide an acceptable yield to the foreigners who are buying $3.5 in dollar assets each day. Keep in mind the Europeans are raising rates and that means to retain a premium to attract funds they have to raise rates. You cannot have a slower economy and lower inflation because the Fed has to continue to increase money and credit.

            Housing sales of new homes even though down 2.5% in the past year, which is the largest percentage decline in median prices since 12/70, builder incentives have not been included. Those incentives vary up to 20%. This is to deceive other buyers and lenders to avoid the appearance of lower prices. Thus, the new house market and the used house markets are much weaker than they seem.

            We wonder how long Americans are going to be bamboozled on their tax cuts? Tax receipts are up 11.4% and of that, 10.2% came from Americans earning less than $250,000 a year. We hope you tax slaves appreciate what is being done to you. We call this trickle-up economics. That is when the bottom 80% supports the top 20%.

            It just never ends. Rep. Henry Waxman (D-CA) has sent a letter to the OMB as the senior Democrat on the House Government Affairs Committee, showing where more than $1.5 million has been spent and billed to taxpayers so Cabinet heads, including Education Secretary Rodney Paige, could travel on private jets to tout controversial bills like the “No Child Left Behind Act.” The story is just as sordid and all the others coming out of Washington- another scandal and abuse of government power.

            The auctions are coming - the auctions are coming. In Southern California 30 condos are auctioned off to bail out a builder. One of the high bidders for a 2-bedroom condo paid 18% below list price or $394,000.She is a 25-year old clerk. Someone has to tell us how such a person with such a job can afford such a condo?

            Another group sold off condos at 15% off list price via auction at $410,000. The buyer a 24-year old mental health therapist. This is insanity. How can these young people with limited incomes afford these condos?

            Central banks are now realizing they must take global levels of liquidity seriously, says the ECB’s former economist, Otmar Issing, “I am concerned about excessive liquidity in the world.” The concern is shared by the current members of the ECB’s governing Council, who have taken the lead in alerting other central banks to the risks at hand, noted Issing. “There is now increasing support of the view that excessive liquidity worldwide is fueling asset prices and is something which has to be taken seriously by central banks – this is a real concern.”

            The problem, as you know Mr. Issing, is that the minute the central banks ease up on issuing liquidity, the bottom will fall out of the financial markets.

            We are waiting for the third quarter flow of funds data to get a clearer picture of exactly how much financial credit accelerated in the quarter. In the first quarter it rose 8.6% and in the second quarter 10.2%. We are looking for third quarter expansion of 10% to 10.4%. We know that recoveries always end with major corporate investment and this time it is no different. What is different is that this time corporations have excellent profits and cash flow, but they are still heavy borrowers. It is no wonder the economy is not deflating. We are caught in an ocean of money.

            As we have said before, the key to understanding today’s monetary disorder is via the issuance of money and credit and particularly the credit system. We also have to watch the budget deficit, off budget spending and the terrible current account deficit. Then there is credit created by banks, Wall Street, hedge funds, finance companies, securitization and leveraged finance. The credit apparatus creates purchasing power, which flows to manufactures, service providers, oil producers, and other exports around the world. Foreign central banks end up with lots of lots of dollars in exchange for exports, and they direct that money back into US securities. This avalanche of funds, $3.5 billion-a-day, has distorted pricing in high quality US securities and has reduced returns. It has also created to an extent the inverted yield curve with help from speculative securities leveraging, It has also fostered the carry trade in yen, Swiss francs and other low-yielding currencies, part of which ends up providing dollar support. All this liquidity has forced investors to seek more risk in order to increase return, usually in lower tier securities. It also means banks match buys and sells for the global speculators with higher yielding lower quality securities, which is very profitable. This is why credit derivatives have gone bonkers. Everyone wants to write these insurance hedges because they only see clear skies. They dare not look over the horizon. 

            This overheated demand for underlying corporate loans has led to a self-reinforcing boom in M&A, LBO’s, and stock buybacks. The greater the excess the greater the resultant asset inflation. These markets today represent a gold rush mentality. This takes us full circle. Dr. Issing is correct. All of the above are a clear and present danger to global stability. We expect it to get worse and somewhere along the way the system will snap. That is why you own gold.

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GOLD, SILVER, PLATINUM, PALLADIUM AND DIAMONDS

            On Monday gold got off the blocks with a bang, up $6.00 at 4:00 A.M. and up $4.00 into the opening. Closing up $6.40 to $604.40 and silver rose $0.12 to $12.12. The December contract rose $6.40 to $607.40 and silver rose $0.17 to $12.25. The access aftermarket was $1.00 lower. This is a firm breakout and you can expect the cartel to attack tomorrow in an effort to drive prices under $600.00. If they are unsuccessful and gold closes over $604.40, you could quickly be looking at $660 or even $730. We have learned over the past several months that virtually everyone in Congress knew the Treasury was going to take gold down as it surmounted $700. What a Congress. No one will admit they knew, but some of them have told others who told us. Gold open interest fell 1,123 contracts to 320,160 as rumors swirled that China is buying gold. Silver open interest fell 1,018 contracts to 111,680. We have a feeling gold open interest could double by yearend and still need another 50,000 contracts to be overbought. On Tocom on Friday, the big gold shorts reduced their net shorts by 1,709 contracts to 107,293 putting total net at a new yearly low of 248,381. Goldman covered 922 contracts to 30,242. The big silver shorts reduced their shorts by 2,319 contracts to 9,028 contracts a yearly low. The cartel has gone too far on gold and silver suppression. Everyone on Wall Street and in government now knows what is going on.

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SUBSCRIPTION and RENEWAL INFORMATION: 1-YEAR $129.95 U.S. Funds.   

Make check payable to Robert Chapman (NOT International Forecaster), and mail to P.O. Box 510518, Punta Gorda, FL 33951-0518. Please include name, address, telephone number and e-mail address. We accept Visa and MasterCard charges.  Provide us with your card number and expiration date.  We will charge your card US$129.95 for a one-year subscription.

Foreigners please use foreign U.S. dollar denominated checks or Money Orders.

Note:  We publish twice a month by surface mail or twice a week by E-mail. international_forecaster@yahoo.com

                                                                        *****

-- Posted Wednesday, 1 November 2006 | Digg This Article