TUESDAY DECEMBER 26, 2006
MID WEEK READING
THE INTERNATIONAL FORECASTER
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
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It is very important to note that the 2% surge in PPI for November is the largest in 30 years. We won’t give you the core because it’s worthless. The PPI is bogus. It is the product of obscure understating of small truck prices over the past few months.
Our government’s economic statisticians engineered unwarranted price reductions, hedonics, in small truck prices that serve to overstate GDP and understate the GDP deflator. It appears that November was a month of reckoning. In November PPI light truck prices increased 13.7% and passenger car prices increased 2.2%. That was done to help rig the November election.
In addition, the November CPI had gasoline prices down 1.6% though another US government agency, the EIA, had them gaining in price. In fact, gasoline service station sales increased a substantial amount.
The November PPI gasoline prices surged 17.9%, and we are supposed to believe that in the CPI November gasoline fell 1.6%, preposterous! They must believe we are cretins.
Electronic sales are way off yet only a few days ago the Commerce Department reported a 1% jump in retail sales for November even though industry companies reported much less growth. It should be noted funds are heavily over weighted in technology stocks.
The US, Europe and Japan have good reason to worry about the geopolitics of commodities. Between them they account for 62% of oil imports, but only 6% of exports. The Middle East and the former Soviet Union account for more than half of exports. Nearly half of all the natural gas imported by Europe comes from Russia.
A new “Center for Responsible Lending,” CRL, study reveals that 2.2 million American households will lose their homes and as much as $164 billion due to foreclosures in the subprime mortgage market. Where were they over two years ago when we told all who wanted to, to sell?
US growers produce $35 billion worth of marijuana annually, making the illegal drug the country’s largest cash crop, bigger than corn and wheat combined. Five states produce more than $1 billion worth each. They are California, Tennessee, Kentucky, Hawaii and Washington. Overall annual usage is $200 billion.
Income disparity continues to grow. In 1980 the average corporate CEO’s earnings were 42 times the average working person, it was 85 times in 1990 and 431 times in 2004, as the average executive pay hit $14 million a year. Adjusted for inflation the average worker makes less than in 1972. In fact, if 75% of wives did not work purchasing power would be 50% less.
Between 1979 and 2004 income rose 27% adjusted for inflation, but it all went to the top executives. The bottom 60%, earning less than $38,761 in 2004, made less than 95% of what they did in 1979. The 20% above them earned 2% more, and only 5% had significant gains earning 53% more in 2004 than in 1979. The largest gains went to the top 1%.
Since 1979 there has been a massive transfer of wealth from ordinary working people to the top income earners at the same time social benefits have been slashed, especially for those earning poverty-level wages of $11,166 a year. Sixty million Americans live on $7.00 a day excluding any form of welfare.
Since Ronal Reagan it’s been bad, but since George Bush it has been a catastrophe for the lower class, especially when you consider the outrageous handouts to the rich in the form of huge tax cuts not only for the mega earners but also for giant corporations. The rich have been given a license to steal at the public’s expense and the labor market has become the law of the jungle. If that wasn’t bad enough the transnational elitist conglomerates have brought offshoring and outsourcing to strangle the American worker, leaving many permanently unemployed or working for $10 to $12 an hour.
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The latest jobless claims totaled an increase of 9,000 to 315,000. Personal consumption was up 2.8%. The crooks in Washington had the Commerce Department change third quarter GDP from 1.6% to 2.2% and back to 2%.
November leading indicators were up 0.1% unchanged. The Conference Board shows slowing economic growth is likely to continue. Four indicators increased, money supply, vendor performance, core capital goods orders and stock prices. Five indicators contracted, jobless claims, building permits, the interest rate spread, the factory workweek and consumer expectations. Over the past six months the index was up 0.2%, which foreshadows turning points in the economy 6 to 9 months ahead.
In addition, the Fed by terminating M3 and other indicators has initiated a policy of hidden monetization of US debt. In just the first fiscal quarter it has increased money supply by $320 billion. That is five times more than fiscal 2006’s first quarter. If you do not have gold and silver assets get them now. If you have them increase them.
Last Thursday saw an increase in repos of $25.5 billion. We cannot remember ever seeing such a stupendous figure. This flood of credit from the Fed to banks, channeled to the Fed’s 21 dealers, is used to manipulate all markets. It shows you more and more money and credit is needed to keep the economy and the stock market from collapsing.
As we said before the meatball brigade known as the A Team went to China, that it would be a fiasco, and it was. The Wall Street speculators under Paulson’s Goldman Sachs came back empty handed. Bernanke was forced to lie to the Chinese that the Paulson plan was in the economic interest of China. Paulson said a higher yuan would be beneficial to China, which is absurd. He next recommended more socialism to create a bigger safety net so China would spend their mega savings. The bottom line is China will continue to do what its wants and the only way to stop them and save what is left of our economy is to erect trade barriers and until that is done we see a falling American economy.
The MBA Index of mortgage application activity decreased 10.2%. The 30-year fixed mortgage was 6.10%, up 8 BPS from the prior week. The purchase index fell 5.9% to 436.5. Refis decreased 14.6% and the share of refi’s fell from 52.6 to 50.8. The 15’s were 5.82%, up from 5.75%. One-year ARMS were 5.82, up from 5.76%. ARMS as a share of total loans decreased to 23.6% from 24.9%.
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An interesting phenomenon is shaping up. We have talked about this before and it is going to be interesting to see how it plays out. The result is very important. The subject is borrowing and debt. As the Fed and others make more and more credit available to save the system, will the borrowers be there to use the sea of money and credit available? Relative to nominal GDP non-financial domestic borrowing, the annualized dollar change in debt outstanding peaked at 19.7% in the fourth quarter of 2005 moving down to 13.9% in the third quarter of 2006. That is the lowest percentage since the fourth quarter of 2003. A post WWII high of borrowing in the household sector was 14.6% and the household section disposable personal income dropped to 8.8% in the third quarter of 2006, the lowest since 7.6% in the third quarter of 2001 when the economy was in recession.
The current fall in household borrowing YOY is off by 5.8 points, the largest decline since the second quarter of 1980. Interestingly households are still not cutting credit card purchases, but they are sharply scaling back the growth in their mortgage credit as the housing market recedes. The YOY fall is unprecedented in the post WWII era. Thus, not only are household borrowers cutting down borrowing relative to after-tax income, corporations have slowed their liabilities issuance relative to their after-tax income. Corporations have also been engaged in the retirement of massive amounts of their equities, either through stock buybacks or through mergers. As opposed to the late 1990s, today’s corporate credit market borrowing relative to after-tax profits is only about half what it was back in that period. Now, corporations are using more of their profits than borrowed funds to retire equity.
The demand for funds in the domestic non-financial sector has been slowing as the supply of funds from foreign investors keeps growing faster than US nominal GDP at a pace of over 6% of GDP. We wonder what they are thinking knowing the dollar is headed lower.
The conclusion is there has been a sharp slowdown in household borrowing and a moderate increase in credit card use. There has been a sharp corporate equity retirement funded out of current profits. At the same time there is still a torrent of funds from foreigners flowing into the country. This explains the rallies in the stock and bond markets and would to an extent explain the inverted yield curve. This excess of supply has put downward pressure on bond yields. The Fed is targeting short rates to slow the economy, making those rates higher than they would ordinarily be.
Household mortgage borrowing has fallen because equity is being lost and large inventories overhang the market. Mortgage equity borrowing peaked at an annual rate of about $730 billion, or 8.1% of DPI in the third quarter of 2005,slowing at an annual rate of only $214 billion in the third quarter of 2006. This has been the source of household deficit spending and it will continue to falter. This is important because consumer spending makes up 70% of GDP. On a YOY basis growth in the sum of real personal consumption and residential investment expenditures has slowed 2% in the third quarter of 2006, the slowest growth since the past recession. Yes, household borrowers are deliberately out of liquidity. There is still liquidity available, but they have begun to shun deeper debt. They know how leveraged they are. What they do not know is their leverage ratio is at a post WWII high. Their debt service burden is at a 25-year record high. Their real estate accounts for 30.5% of the total market value of household assets. Real estate has been weak for 1-1/2 years and Americans are terrified that it is headed lower in spite of Sir Alan Greenspan’s promises. They know if interest rates move higher that the result will be catastrophic. We know the next few years will be very difficult.
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GOLD, SILVER, PLATINUM, PALLADIUM AND DIAMONDS
The UAE saw retail gold sales increase 41% in the third quarter. Gold jewelry was off by 1%, but gold coins and bars rose 5%.
In Saudi Arabia demand fell 9%, but reached 33.9 tons as the Saudi stock market fell. Jewelry demand increased 9% due to high volatile world prices.
Demand in Kuwait, Oman, Bahrain and Qatar fell 9% to 12 tons.
Turkey’s demand rose 43% in the first quarter to a 10% fall in the third quarter. In Egypt, total gold demand fell 16%.
Wednesday’s a.m. London fix was $623.40 and from there on out it was a fight to stay above even thus the second physical fix was $619.25. Spot gold finished on Comex down $0.70 at $620.50 and silver fell $0.07 to $12.52. The February gold contract fell $1.10 to $624.30, silver fell $0.07 to $12.65 and copper fell $0.06 to $2.95. Gold open interest rose 1,477 contracts to 337,096. We’ll soon find out if the action is selling or shorting. We guess that it is continued fund selling. London silver came in $0.19 higher, but got beaten down all day in the US. Selling made silver contracts fall 1,910 contracts to 103,358. We believe this again is fund selling. You’d think they would give up. They are usually losers. Copper has broken down. The question is can it re-rise through support? The rally on Tuesday in gold was mostly short covering. On Tuesday the big Tocom shorts increased their shorts 234 contracts to 119,777. Goldman dropped their longs all 231 of them and increased shorts by 53, put their shorts at 31,087. In silver the Tocom shorts cleared out their 289 longs and went short 1,453 contracts. This is a somewhat dramatic reversal. On Wednesday the XAU lost 3.04 to 140.19 and the HUI gave up 8.28 to 334.80.
The Dow on Wednesday fell 7 to 12,464, the S&P fell 18 Dow points and Nasdaq fell 12 Dow points. Oil rose $0.26 to $63.72, gas fell $0.02 to $1.69 and natural gas fell $0.31 to $6.77. The euro fell .0038 to $1.3170, the pound fell .0063 to $1.9644, the Canadian dollar gained .41 to 87.13 and the dollar index rose .09 to 83.25. The 2-year Treasury note yielded 4.72% and the 10’s were 4.60%.
Peru’s gold output fell in September 9.5%, the most in 19 months.
France, Spain and Portugal have sold 530 tons of gold in the last three years and they cannot continue at this pace much longer. Russia has bought 10 tons. They want to increase their 5% gold reserve to 10%.
In Thursday’s gold market the word is two central banks sold 25 tons of gold on 12/15. This was the reason for the $12 drop. The gold was all sold during the Comex – not at the London fixings. It’s obvious the gold was sold in this manner to make a major negative impact on the market. North Korea was one of those sellers and to have sold in that manner tells us they had to have been in collusion with the Fed. In spite of this we see gold at $750 by February. Gold closed off $2.10 at $618.10 and silver fell $0.17 to $12.35. Comex gold open interest fell 1,097 contracts to 336.009 and silver open interest fell 1,322 contracts to 102,036. The dollar index rose .01 to 83.26 as the euro fell .11 to 131.74. Oil fell $0.92 to $62.80 and the 10-year Treasury notes fell from 4.60% to 4.56%. Combined gold open interest on the CBOT and the Comex fell 2,515 contracts. More awful economic news did not affect the Dow much. It fell 43 to 12,421 as Nasdaq gave up 72 Dow points. The Tocom shorts on Wednesday reduced gold shorts by 148 to 119,629. Goldman increased shorts by 1,014 to 32,101. The XAU fell 2.61 to 137.58 and the HUI fell 7.25 to 327.55.
The third quarter BIS report shows swaps rose from $128 to $148 billion and options from $206 to $208 billion. Converted to metric tons gold derivatives increased by more than 2,800 tons with options rising some 3,000 tons and forwards and swaps falling by 200.
Bundesbank President Axel Weber let the cat out of the bag again by saying, “We have been asked to negotiate with other central banks” about potential swap deals involving gold, but refused to say with whom. He is letting us know there is a mobilization of central bank gold via lending operations and the intention of the leak is he doesn’t agree with it. The greater amount of gold lending, the greater use of gold options, such as puts and calls. This in part explains the explosion in gold option derivatives earlier this year. This was to slow the rise in gold as Barrick and other hedgers were de-hedging. This was physical gold fed into the market without being identified as such.
Silver and gold have been soft since early May and we just have lower prices again for the past several weeks. Something strange is going on with falling silver as Barclay’s iShares Silver Trust, SLV-AMEX, added a giant 325 tons.
On Tuesday 12/19, the COT report showed the large commercials combined short positions fell 14,550 contracts or 13% to 101,732 contracts net short. They fell 3,886 lots the previous week. That means over 60% of their shorts have been covered over the past three months, which means central banks have been bullion sellers. Could this be the last gasp?
Total Comex gold open interest added 3,995 contracts to 337,096. The bottom line is as gold fell 1.2% the commercials reduced net short exposure by 13%, an 11 to 1 ratio. This happened as gold fell in early September. The strategy is for the friendlies of the elitists to show short covering in Comex and Tocom and at the same time have the central banks via the lease market clobber gold from the physical end. They as well always tend to strike near support levels, only capable of manipulating gold on a transitory bases.
The outcome for street tracks gold shares, in spite of lower gold prices was another 3.09 tons was added to a new total of 452.01 tons. The previous week 7.4 tons were added. No matter what the elitists do they are being overwhelmed in the physical market. On the other hand it is impossible to ignore that in the month of November GLD on its own added 52 tons of new gold. This kind of accumulation during a very nasty manipulated market has all the earmarks of being long-term bullish. There is far more buying than selling in the ETF’s and almost all of it is long-term professional money.
The same is happening in silver, only more so. While silver fell almost $2.00 an ounce, holdings in Barclay’s Silver Shares Trust, SLV, increased an unimaginable 325.5 tons to 3,768.02 tons, or 121,144,585 ounces worth $1.51 billion. 279.02 tons accrued on Thursday 12/21/06. This one-day is higher than each of the previous four monthly additions. They were for November 153.8, October 140.9, September 123.02 and August 247.35 tons of silver added to SLV holdings. There has not been a 200-plus day addition since 4/28/06 or the 3-days of June 19-23 when 264.16 tons were purchased. This is mega bullish. Our government can play their derivative games, but the physical market is going to overwhelm them. Both silver and gold are going to explode in the coming year. A strong case can be made for support for silver between $12.00 and $12.35.
Support for gold is $607 to $618.00. We see another big support level and with it the base for another major rally fairly soon.
The gold and silver bull markets are still in tact and there is a storm building. Every time our government drives the prices down it just strengthens support and builds bigger bases. Most of the professional community is still not involved and investors in the US, Canada and Europe still do not have a clue to what is going on. All those potential buyers are still to enter the market and take us up to $2,000 and $100 respectively. We are starting to see these players nibble. We see continued buying from India and China and mega buying from oil producing countries that don’t know what to do with their depreciating dollars. They realize the euro and the pound are no panaceas. This is augmented by ever falling gold production and the ever-falling value of the hoard of fiat currencies.
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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
