THE INTERNATIONAL FORECASTER
08_07_#1_IF
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
Make no mistake the beginnings of the credit crunch that you are witnessing could bring the world financial system to a halt. We can look forward to contracting credit, higher interest rates, the ultimate end of leveraged buyouts, the collapse not only of the CDO market, but that of junk bonds as well. We will soon see almost all 30-year fixed rate mortgages with 20% down and 700 FOIC’s for those who want to be homeowners. They will be assisted by lower home prices.
Early in 2001 we stated that the point of no return had been passed financially and economically and from then on it would be down hill, and that is the way it has been. Now the thoughtful can see the disintegration. We have had a 5-year ride built on sand and we are seeing the beginning of the beginning of the end. What should be of interest to those who understand is that credit markets are virtually at a standstill. The Bank of Japan is afraid to raise interest rates for fear of a collapse in the carry trade, which would reek havoc worldwide. Investors are also discovering that almost all official statistics from major nations are bogus. We are also seeing the Bank of England and the European Central Bank, which have been raising interest rates; backing off on further rate rises, so that markets do not collapse. For their efforts they will be the recipients of higher inflation.
The correction in housing, CDO and other credit markets hasn’t been seen since the “Great Depression.” Home prices will continue to fall, as will the stocks, bonds, derivatives and employment. Just to give you an idea of this contraction in housing 80% of new loans are being rejected and only $3.7 billion in CDOs were sold in June, compared with $42.3 billion in May and those numbers will continue to fall. International banks are stuck with $300 billion in debt that now lies in limbo. Billions and billions of dollars of deals are falling through.
In the Senate passed energy bill one sentence could make builders of new nuclear plants eligible for tens of billions of dollars in government loan guarantees. The nuclear industry needs as much as $50 billion in loan guarantees over the next two years to finance a major expansion.
The potential is to considerably expand the nuclear industry, which plans to build 28 new reactors at an estimate cost of about $4 billion to $5 billion apiece.
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While our Treasury Secretary Paulson lies about credit contagion and how it will affect our economy, the economy is moving deeper into recession. It will be manifested for all to see later this year and early next year. Tighter credit terms alone will chop off 0.5% GDP growth never mind the eventual fall out. While consumer spending advanced at a slim 1.3% in the second quarter, business investment rose at an 8.1% pace. This kind of business investment cannot continue in a declining economy just as home equity loans and cash out loans in real estate will become a thing of the past as real estate prices continue their journey downward.
First time claims for jobless benefits rose less than forecast, up 4,000 to 307,000 for the week ended 7/28. The 4-week moving average fell 305,500 from 309,000. Those collecting unemployment fell to 2,525 million on 7/21/07 from 2.541 million.
Factory orders increased 0.6% in June. Factory goods were unchanged when transportation was excluded.
A war is underway behind the scenes in the hedge fund industry about the way funds are valuing some assets for their end of month performance reports. We expect lawsuits to fly once hedge funds are forced to mark to market and not mark to model.
Yes, it is a scandal a day. The SEC has settled charges with Integrated Silicon Solutions and former CEO Gary Fischer, who will pay $540,000 in restitution, in a scheme to backdate options. The shareholders got screwed and our government keeps the fines and, of course, no one goes to jail.
Investment banks were well aware of the growing risks in subprime loans to less credit worthy borrowers, but they did not pass on much of the information to credit rating agencies or investors. Where was all this due diligence and the clients never got to see it? Firms like bear Stearns, Lehman Bros., JP Morgan Chase, Goldman Sachs and Citicorp were making too much money to deal with risk, facts and suitability.
Korean Finance Minister Kwon Okyu says, “The yen carry trade and some kind of misalignment among major currencies is not good for the global economy.” Korea is fed up with Japan’s undervalued currency. Japan, like the US Treasury and the Fed, lies about manipulation of their currency and other currencies. In the 15 months through March 2004, Japan spent the equivalent of Indonesia’s annual GDP to drive down the yen against the dollar. China tells everyone what it’s doing and could care less. Asians are fed up with the Japanese and Chinese policies, just as Europeans and Americans are. Again, the only solution for currency rigging is goods and services tariffs for all nations.
Senator Charles Grassley (R-IOWA) has crafted a trade bill that passed the Senate Finance Committee by a margin of 20-1. Congress is sick and tired of George and the neocons secret deals with Beijing, and our mounting trade deficits as well as job losses. We see a trade bill this fall or early next year, finally. China is well aware of what is happening, they sold $5.8 billion in US Treasuries in April and $7 billion in May.
On the US scene most people are unaware that junk bond funds lost 10% to 15% of their value over the past six weeks. Interest rates for leveraged buy-out artists, who issue junk bonds to finance acquisitions soared 120 basis points, and more than 40 junk bond offerings were canceled or restructured worldwide in the past five weeks. Yields are going to continue to slow the process, and a couple of years from now most of these kinds of deals will be history.
US and European banks alone are sitting on $500 billion worth of leveraged loans.
Monster’s Employment Index fell to 183 points in July from 186 in June, but up from 165 a year earlier.
Accredited Home Lenders, a subprime mortgage lender, is in the process of being sold, but they are now concerned about their ability to stay in business.
Investment bankers, brokerage houses, banks, insurance companies and hedge funds have serious financial problems. If the current problems force the US government to step in and affect a bailout of some or all of these entities then you can expect the dollar to come under severe pressure, never mind all the stress that is already being heaped upon it. We certainly do live in interesting times.
The bettors are now forecasting an 80% chance of a ¼% cut in interest rates in the fourth quarter. If that happens the dollar will break 80 on the USDX and gold will rush to $1,000 an ounce. We see the Swiss franc, the Canadian dollar, the yen, the NZ dollar and the pound headed higher.
The downside in the market will be led by mortgage companies, construction and affiliated companies. It will be carnage not experienced for many years and that is why we still haven’t covered any housing shorts. Next to move to the downside will be banking and brokerage stocks. Mortgage finance stocks are doomed as well. Foreclosures cost lenders $80,000 per property. Wall Street and Washington can deny it all they want, but contagion is with us for 2 to 3 years or more. Many more, some 200 large mortgage companies will fail as well as banks, investment banks, brokerage houses and hedge funds.
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GOLD, SILVER, PLATINUM, PALADIUM AND URANIAM
Gold ended Wednesday down $3.40 at $663.80 and silver down $0.01 to $12.88. The cartel held gold down all day but at one stage in the wee hours they had it down about $9.00, so again they were unsuccessful in knocking gold out. The stock market was a real piece of work. Absolutely blatant manipulation. Five minutes prior to the close the Dow was even and by the close it was up 150 points. Prior to the close in that timeframe it traded up 176 Dow points. In Dow point equivalents S&P rose 96 and Nasdaq 49 in those last five minutes. This is classic manipulation only our government can get away with. Gold open interest fell 11,744 contracts to a new recent low of 351,185. Silver open interest rose 457 contracts to 118,580. The yen fell .50 to 118.95, the euro was -.0004 at $1.3666, the pound was +.0005 at 2.0295, the Canadian dollar was +0.80 at 84.54 and the dollar rose .09 to 80.75. The large Tocom shorts increased their net shorts by 2,544 contracts to 129,981 as Goldman increased their shorts by 457 to 26,109. The same group increased their net silver shorts by 63 to 5,279. Interest rates rose with the 2-year Treasury bills up to 4.60% and the 10’s up to 4.78%. Oil fell $1.51 to $76.70, gas fell $0.08 to $2.08 and natural gas rose $0.21 to $6.40. The XAU fell 3.44 to 145.27 and the HUI fell 5.39 to 339.65.
Gold bullion imports to Turkey jumped by 328% yoy in July to 45.7 tons, the highest ever recorded in a month. They rose 42.5% in the first 7 months of the year. This is 36.5% above the May 2006 record.
Thursday early on the market was mixed. The Dow was -7, S&+4, Nasdaq -8 and FTSE +73 Dow points. The CAC was +34 and the DAX was +70. That tells us they didn’t believe yesterday’s rally in the last five minutes. The yen was +.14, the euro +.0002 and the pound-.0006. The 2-year was 4.62% and the 10-year was 4.79%. Oil was -$0.65, gas -$0.02 and natural gas +$0.03. Gold was +$2.10, silver +$0.098 and copper +$0.02.
Another miracle – 2% in 2 days – yesterday it was 150 points on the Dow in 5 minutes at the close, today it was 101 Dow points in the last half hour. These are the benefits of living in a corporate fascist state. Were it not for the 30-handle SPU surge, the Dow Jones Transport Average would have closed below the June low of 4,991 and triggered a Dow Theory Sell Signal. During the day the S&P 500 briefly breached its 200-day moving average, 1,450.38, the cartel made sure it didn’t break.
Thursday’s S&P rose 58 and Nasdaq 136 Dow points.
Gold rose $0.80 to $664.60 and silver was up $0.07 to $12.95. Gold open interest rose 3,122 contracts to 354,307 as silver OI rose 576 to 119,127. The big Tocom shorts on Wednesday increased their shorts by 3,845 to 134,826 contracts as Goldman added 825 to 26,936. The same group cut silver shorts 78 to 5,200. The XAU rose .97 to 146.25 and the HUI rose 2.09 to 341.74.
Newmont had a $2.06 billion loss in the second quarter due to gold hedges,
On Thursday, the dollar finally took gas. The yen $1.1923 – 36, the euro $1.3700 +.0035, the pound $2.0368 +.0074, the Canadian dollar 95.01 +.45, and the USDX, dollar index fell .15 to 80.61. The two-year Treasury fell to 4.58% and the 10’s were 4.77%. Oil rose +$0.33 to $76.86, gas was +0.01 to $2.04 and natural gas lost almost all of yesterday’s gains to $6.11 -$0.25.
After having lost massive amounts of money gold miners have accelerated their de-hedging programs during the second quarter, drawing down hedges by another 5.4 million ounces to 31.2 million ounces. This is a record 15% decline and the 21st successive quarterly reduction. This is a large cover in as much as Barrick Gold did not buy in any positions. Both Newmont and Lihir closed out their hedge books. Thirty-one companies reduced shorts by 700,000 ounces.
Of the remaining 31.2 million ounces of hedging, Barrick is responsible for 9 million ounces.
They simply couldn’t hold back the flood. The Dow fell 281 to 13,182 wiping out two days of contrived gains created by the Fed and the “Working Group on Financial Markets.” Using our formulas the S&P FELL 355 and the Nasdaq fell 388 Dow points. In the last hour it was a massacre.
Gold responded by rising $8.10 to $672.70 and silver jumped $0.14 to $13.09 to make Friday a great day. The pros have finally realized that the elitists’ attempts to control all markets is not working well anymore and that the Fed had not only been lying about inflation but they had no intention of trying to correct it. This was reflected in the 2-year Treasury bill that fell to 4.48% and the 10-year notes that also fell to 4.68%. The dollar took a terrible bashing. The yen rose 1.17 to 117.96 and that means many yen carry trade borrowers had their heads handed to them. This could spell the end to the carry trade, especially since the LDP was defeated for only the second time in 55 years. That means interest rates in Japan will probably soon rise, which will further injure the carry trade. The euro rose .79 to $1.3779, the pound rose .49 to $2.0409, and the Canadian dollar fell .24 to 94.59 and of paramount interest is that the USDX, the dollar index fell .59 to 80.02. We see a big test coming on Monday. A grueling battle is about to begin. Oil shed $1.67 to $75.03, gas fell $0.01 to $2.02 and natural gas rose $0.05 to $6.16.
The pros are calling for lower Fed interest rates. In fact 80% of players believe the Fed will cut from 5-1/4% to 5% soon. As that unfolded the ECB said in no uncertain terms they’ll be raising rates again to combat inflation. The falling dollar and 11% US inflation is making holding dollar denominated assets a super loser. In addition the Fed and Treasury’s Paulson have little credibility left. Pros worldwide know that the rigging of markets cannot go on indefinitely. We are on the cusp of something big.
The jobs report was horrible even with the lies. We will have the internals for you on Wednesday. The ISM report was surprisingly weak and that was a market negative as well. Gold open interest fell 1,522 contracts to 352,785, another new low as silver open interest sank 156 to 118,970 contracts. The commercial net shorts were reduced by 40,000 dropping recent shorts from +92,000 to +52,000.
Bear Stearns said that fixed-income market conditions are the worst in 22 years. This was just one more voice in the chorus on Wall Street looking for a Fed interest rate cut to save the economy. If they cut, the dollar collapses and gold and silver head toward the stratosphere.
There is no question Wall Street is in serious trouble and no group deserves it more. Not a day goes by that we do not hear rumors of trouble in the banking and brokerage industry, never mind the real estate and mortgage industry.
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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
