SATURDAY MARCH 17, 2007
THE INTERNATIONAL FORECASTER
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An international financial, economic, political and social commentary.
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US MARKETS
Fresh from Goldman Sachs, Robert Steel, the Treasury Undersecretary for domestic finance, tells us the government is monitoring the distress in the subprime mortgage industry and believes the current situation is manageable. From his lips to God’s ears. The excess of the past four years have blown up in the middle of the financial sector and the losses will be larger than the 1980’s Savings & Loan disaster that almost took down the financial system.
This is not a spike in subprime loan delinquencies and defaults; this is the beginning of two years of massive defaults. The rules have changed for getting a loan or a new loan. Many mortgage holders just won’t qualify and at the rate subprime lenders are sliding into bankruptcy, there will be very few lenders left to lend. Most lenders are up to 680-700 FOIC ratings with 5% down in cash and as the noose tightens those numbers will escalate.
Most all of the subprime lenders will fail, because bank lenders will cut off funding as they already have with a number of companies, including the country’s second-largest subprime mortgage maker New Century Financial, putting them on a path to bankruptcy. These are the same banks, along with the Fed, who started this fiasco. There are millions of loans that were made that should have never been made. The subprime lenders were, as the S&L’s were, allowed to borrow short and lend long. A sure recipe for disaster. We now see 26 large lenders in bankruptcy or having been bought out and many other small companies have just disappeared without being even reported by a totally controlled media.
As always the Fed, the banks and the mortgage lenders are to blame, not the dumb souls who agreed to these loans. That said, this does not mean that the federal government should take steps to protect low income homeowners, who by the longest stretch of imagination, should never had a loan in the first place. They are simply incapable of making the kind of payments necessary to have a loan. Unfortunately, the system has to be purged and purged it will be. The overriding question is will the financial system hold up under such an onslaught? To subsidize three million unqualified people to keep them in homes, they should never had in the first place, is the height of folly.
One of Wall Street’s dirty little secrets is that insider trading still flourishes. Charges are pending against several top Wall Street firms who defrauded investors and pickup up $14 million in the process based on inside information, and that unnamed traders made more than $5 million knowing ahead of time about a buyout offer for Texas Utilities.
The SEC should stop pretending it is enforcing the law. Taking down Martha Stewart is not what enforcement is all about. What we are taking about is serial lawbreaking and the SEC does little about it. They tolerate it.
As an example, how does the average US Senator beat the market by 12% a year, yet we see no investigations? It is obvious they have a substantial informational advantage over ordinary investors.
The SEC turns a blind eye to public officials who profit from non-public information and corporate insiders who make money based on what they learn behind the boardroom doors, and if it is legal for big trading houses to take advantage of what they know about their customers’ trading habits, what is the value of the insider trading law? The solution is sinfully simple; throw out the current insider trading laws and send the SEC lawyers over to the Justice Department, where they can concentrate on the real crime - stealing.
Insiders who cheat commit a crime against their employers or other entities to whom they are obligated, not against some vague moral notion of fairness. Using inside information is stealing and it is a felony. Yet, none of the connected elitists on Wall Street go to jail, they pay fines and go off and do it all over again. Two sets of rules, one for them and one for us.
We also saw Democratic Senator Christopher Dodd on CNBC and like a true conman, in a straight face, he told us lawmakers “will have to consider providing aid to about 2.2 million subprime mortgage borrowers who are at risk of defaulting and losing their homes.” Mr. Dodd wouldn’t it be easier to just give them their homes free and clear, because they should never had a loan in the first place and if you subsidize them they will just get in further trouble as the economy collapses?
He says the cost will be $164 billion. Where he got this figure no one knows. The figure to cover from 1998 until 2006 would be over $1 trillion. Forbearance or something like that would be disastrous and highly inflationary.
Between bad economic news, the subprime debacle and the winding down of the yen and franc carry trades, we have a perfect storm on our hands. Prices are materially weak, and have been for two weeks. The yen carry wind down has just begun. Haruhiko Kuroda, the former Minister of Finance and now the President of the Asian Development Bank says, “there has been some unwinding of yen carry trades, but a real-scale unwinding of carry trades is yet to come.” If that was real-scale then moves in the Forex market would have been bigger, which wasn’t the case. The unwinding could take a year or more.
We expected giant subprime problems and they have begun. What we didn’t expect so quickly was how quickly previous cycle peaks have been taken out. In this case bleak is a conservative assessment.
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GOLD
A few hours before New York opened on Wednesday all markets were weak. The Dow was off 50, the S&P 45 Dow points and Nasdaq 50 Dow points. The FTSE was off 170 Dow points; the CAC was off 101 and DAX 127. Oil was off $0.01, but gas was up $0.01. The euro was unchanged and the pound was off .0042. The 2-year Treasury bill yield was 4.49% and the 10’s were 4.47%. The Nikkei was off 501 and the yen was minus .17. Gold was off $8.30, silver $0.21 and copper $0.03.
On Wednesday, not only did the Dow return from a -135 to a +57, but zinc fell .37%. Aluminum fell .24%, lead rose 1.61%, copper rose .67% and nickel rose .70%. Gold fell $6.70 to $640.80 and silver was off $0.09 to $12.72. The April gold contract fell $6.90 to $642.50, silver fell $0.13 to $12.83 and copper was $2.83 unchanged. Gold open interest was up again 2,240 contracts to 394,090. Silver open interest fell 167 to 112,728. Comex and CBOT activity was stronger yesterday, which means liquidity is not a problem in the gold market. Open interest has risen in the last three business days 40 tons. There is still significant short selling and shorting via derivatives. On Tuesday, the big Tocom shorts reduced shorts by 377 contracts to 121,694 contracts. Goldman increased shorts by 1,792 contracts to 30,338. In silver the big shorts covered 292 contracts to 5,44. The XAU rose 1 to 129.54 and the HUI rose 1.84 to 320.56.
The Dow rose 57 points on Wednesday, the S&P was up 83 Dow points and Nasdaq rose 127 Dow points. Oil rose $0.23 to $58.16, gas was off $0.04 to $1.93 and natural gas was up $0.19 to $7.08. The euro rose .0035, the pound was up .0072, the Canadian dollar fell .16 to 85.03 and the dollar index fell .12 to 83.60. The 2-year Treasuries rose to 4.55% and the 10’s were up to 4.53%.
Commodities investment guru Jimmy Rogers stepped into the US subprime fray on Wednesday, predicting a real estate crash that would trigger defaults and spread contagion in emerging markets. “You cannot believe how bad it is going to get before it gets better,” said the prominent fund manager. “It’s going to be a disaster for many people who do not have a clue about what happens when a real estate bubble pops. It is going to be a huge mess.” Rogers has his $15 million mansion on Manhattan’s Upper East Side up for sale.
We might interject, where was Rogers three years ago when failure was guaranteed and the writing was on the wall? Why didn’t Rogers sell his mansion in June 2005 at the top of the market? Rogers says real estate prices will fall 40% to 50% in bubble areas, the 30 former hot areas.
On Thursday three hours prior to the NY opening most every index was positive. The Dow was up 27, S&P 25 Dow points, Nasdaq 30 Dow points; FTSE 193 Dow points, CAC +85, DAX +138, oil +$0.36, gas -$0.04, the euro -.0007, the pound -.0026, the yen +0.02, the 2-year Treasury yield 4.58% and the 10’s 4.54%. Gold was up $4.30, silver up $0.17 and copper up $0.10. As we came into the NYSE opening the Dow was off 42, S&P 36 Dow points and Nasdaq 44 Dow points. Gold was up $4.00, silver $0.16 and copper $0.12 as the NYSE opened.
Thursday could be the day that brings the end to the slide in precious metals and commodities. The Working Group on Financial Markets has been working feverishly to keep the market from plunging further. They want to keep the Dow over 12,000. As we explained two week’s ago this correction on gold and silver and commodities is temporary and we finally could be at the end of the fallout. As time progresses the effect of the PPT will lessen and volatility will increase and that will send more investors into gold and silver. That will become especially evident as the market heads lower. They know gold and silver are not going to stay down long; they just want to impede their progress and buy time. Any chartist knows the dollar index has broken down and it is only a matter of time before 80 is tested. The cartel has little gold left and that will soon become very apparent in the market place. Just be patient – it will all come to you if you wait.
In an historical context regarding the GOLD/XAU ratio, since 1974, the ratio has been greater than 5.0 about 15% of the time. When the ratio has been this high, the XAU has followed with annualized gains of 89.6%, on average, a figure that remains high even if the data is split into multiple samples. When the ratio has been greater than 4.0, the XAU has followed with average annualized gains of 27.4%. Today, it is close to 5.0. In contrast when the level is less than 3.0 the XAU has declined at an annualized rate of -36.6%, on average.
As further food for thought, the return/risk profile for precious metals shares is strengthened further if the economy is experiencing weakness. As an example, when the Gold/XAU ratio is greater than 5.0 the ISM Purchasing Managers Index has been less than 50, indicating a contracting US manufacturing sector, gold shares have appreciated at an average annualized rate of 125.6%, which is proof positive that gold and silver shares “do not go down when stocks in the general market fall.” Remember that when you read some of the drivel that is being written by financial reporters. When the ratio is under 3 and the PMI is greater than 50, precious metals prices fall an average of 49.9%.
Gold held by central banks and other government organizations declined for the 8th year in a row in 2006, to the lowest in almost 60 years said the IMF. Bullion holdings were 867.6 million ounces last year, down 1.2% from 2005, but these figures do not include leased gold, which they carry on the books as existing when in fact leased gold has been sold.
In the top 15 holders, Russia was the only bank that increased their gold holdings. Its total was 12.91 million ounces, up 3.8% from 12.44. Last year sellers were the ECB, France, Austria, Spain, the Netherlands, Portugal, Sweden, the Philippines, the Czech Republic, Serbia, Colombia, El Salvador and Mexico. China’s figures remained unchanged. We reported it and that’s it. We consider the report a pack of lies.
Thursday gold and silver held their gains. Gold finished up $5.50 at $646.30 and silver rose $0.23 to $12.95. The April gold contract was up $4.60 at $647.10, silver rose $0.25 to $13.08 and copper was up $0.16 to $2.99. The giant rally in the base metals today tells us that the analysis by the base metal bears that the move in commodities over the past five years was a product of the yen carry trade or excessive hedge fund speculation was dead wrong. In both Canada and London 100-ounce silver bars are difficult to find. China continues to be a giant buyer of silver.
Gold open interest fell into a great dark hole falling 26,114 contracts to 367,976. Silver open interest rose 352 contracts to 113,080. The fall in gold OI was the elimination of spreads. We won’t know who did what until 3/23 unfortunately.
The Wednesday large Tocom shorts reduced their net short position by a huge 10,475 contracts to 111,219. Goldman increased their short position again by 1,362 contracts to 31,700. The silver shorts reduced their position by 1,740 contracts to 3,704, which is a major reversal. We suspect these silver shorts see an upward move coming. The XAU rose 2.81 to 132.46 and the HUI rebounded 5.52 to 326.08.
The Dow rose 26 to 12,160, S&P rose 46 Dow points and Nasdaq rose 42 Dow points. Oil fell $0.61 to $57.55; gas fell .05 to $1.88 and natural gas fell $0.12 to $6.96. The euro rose .0006 to $1.3233, the pound fell .0021 to $1.9368; the Canadian dollar rose .05 to 85.06. The 2-year Treasury bill rose to 4.5% and the 10’s rose to 4.53%.
Qatar tripled its gold reserves in January from December to 15.1 million Qatari riyals $43.4 million from $44.3 million riyals. Foreign currency reserves fell 1.5% to 15.5 billion riyals.
Jeffrey Christian, the CPM managing director who has never gotten anything right, has forecast gold at a $645.00 average for 2007.
In the wee hours we saw the following: Dow -27, S&P -30 Dow points, Nasdaq -38 Dow points, FTSE -40 Dow points, the CAC -35, DAX -37, Nikkei -116, Hang Send -16, oil +$0.16, gas +$0.03, the euro +.0053, the pound +.0096, yen +.73, the 2-year $.459%, the 10’s 4.59%, gold up $4.70, silver up $0.07 and copper off $0.02. It looks like another strong day in gold and silver.
The dollar certainly played its part in helping gold and silver on Friday. Having broken 84 today it plunged through 83 to close at 82.86, off .51. Gold was up $9.00 at one juncture, but finished up $5.90 at $652.20 and silver moved up $0.13 to $13.10. The April gold contract finished up $6.80 at $653.90, silver up $0.14 at $13.22 and copper broke out over $3.00, up $0.02 to $3.01. The gold barometer is rising in spite of the efforts of our Treasury, Fed and other central banks to keep it down. We were also helped by the ongoing subprime fiasco, which not only has housing under pressure, but the entire US financial structure. Washington is also serving up scandals daily as well - a corrupt garbage pit. As we have told you over and over again the central banks are running out of gold fast and it is only a matter of time until gold and silver go berserk.
Gold open interest fell 2,323 contracts to 365,653 and the silver open interest dropped 1,564 contracts to 111,516.
The gold COT report showed large specs decreasing longs by 7,343 and decreasing shorts by 1,987. The commercials increased longs by 15,508 contracts, but they also increased shorts by 9,113. That is a net long of 6,395. They obviously were looking for a gold rally. On Thursday the big Tocom shorts increased their short position by 2,050 contracts to 113,269. Goldman increased its short by 913 to 32,613. The XAU gained .75 to 133.29 and the HUI rose .93 to 327.01.
On Friday, the Dow was off 49 to 12,110, the S&P fell 36 Dow points and Nasdaq fell 48 Dow points. Oil fell $0.44 to $57.11, gas was up $0.02 to $1.90 and natural gas fell $0.04 to $6.92. The euro rose .0033 to $1.3306, the pound rose .0038 to $1.9418; the Canadian dollar rose .07 to 85.08. The 2-year Treasury yield was 4.59% and the 10’s were 4.55%. The yen rose .55 to 116.74.
China will gradually relax restrictions on the import and export of gold as the country deregulates the precious metals market.
Sir Alan Greenspan says a rising price of gold would not be an indication of inflationary pressure in the US. Just more disinformation.
