-- Posted Sunday, 19 August 2007 | Digg This Article

THE INTERNATIONAL FORECASTER

08_07_#3_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

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As usual we hear the soothing voices coming out over CNBC. Everything will be just fine. Two weeks ago they said the market would hold and we’d have no debt contagion. They were as usual dead wrong. Everyone who bought CDOs and ABS bonds was given the same pitch, namely that they were a relatively safe bet, since much of the paper had AAA ratings, but offered higher returns than regular corporate bonds.

Now delinquencies in the subprime market are at 14% of total, up from 10% in 2004 and 2005. We are ultimately looking for 1/3 to ½. The damage inflicted will vary from $750 billion to $1.3 trillion, not the $100 billion the CNBC barkers are talking about. No one is talking about factoring in the contagion of quality mortgage loans, home equity loans and the damage it is causing in commercial paper and in the ability of hedge funds to procure credit. All the players are having big problems, but not the major banks who have the strongest balance sheets and are able to refinance their operations most easily thanks to the extra liquidity that central banks have put into the market in the past two weeks.

The problems from this mortgage fiasco will be felt for the next few years. Inflation, real inflation, not government lies and worst of all, recession with a big fall in consumption.

This reminds us of the collapse in 1974 of the Herstatt Bank, only it is much worse this time.

S&P is probably going to downgrade several issuers of commercial paper, especially where the paper is backed by residential mortgages. Commercial paper in the US has grown to $2.2 trillion with about $1.2 trillion backed by residential mortgages, credit card receivables, car loans and other bonds. The major buyers include pension funds, insurance companies, hedge funds and short-term money market funds.

We have seen a massive move out of stocks into money market funds. Last week, more than $36 billion moved into those funds, the 5th largest shift since December 2005. In all, some $2.6 trillion is in money market funds.

Four possible down grades by S&P are American Home Mortgage, which is in bankruptcy, KKR Atlantic Funding Trust and KKR Pacific Funding Trust, two affiliates of the buyout from Kohlberg, Kravis Roberts; and Ottimo Funding, an affiliate of Aladdin Capital Mgt.

Among M/M funds that held commercial paper issued by these companies are Evergreen Institutional M/M Fund, Brookhollow and Funding. Legg Mason’s Master Portfolio Trust Liquid Reserves Portfolio, Columbia Fund Series Trust Cash Reserves and Sentinel all had commercial paper.

Federal departments spent $1.6 billion from 2003 through the second quarter of 2005 on 343 contracts with P. R. firms, advertising agencies, media organizations and individuals to prepackage news. That is managed news. We taxpayers are funding covert propaganda to be used against us.

The Labor Department says food prices are up 4.1% for the 12-months ended June. Things people have to eat such as eggs are up 19.5%, milk 13.3%, fresh chicken 10%, naval oranges 19.8%, apples 11.7%, dried beans 11.5% and white bread 9.6%.

The major cause is corn prices driven up by our president’s ethanol program to enrich elitist corporate farmers. Americans spend 12.8% on food, 7% at home and 5.7% away from home.

Overall net capital inflows into the US fell to $58.8 billion in June from May’s revised inflow of $107.3 billion, barely sufficient to cover June’s US trade deficit. That deficit was $58.1 billion. Net long-term capital inflows totaled $120.9 billion in June from $126.0 billion in May.

US 2-year interest rate swap spreads widened to 66.0 BPS as 2-year Treasury yields hit 18-month lows courtesy of the Fed and the Working Group on Financial Markets.

The Goldman Sachs Confidence Index, which was conducted in the last week of July and the first week of August, based on CEO’s assessments of business conditions for the coming quarter, fell from 57 in the second quarter to 33 for the third quarter, the lowest since the 3rd quarter of 2002.

The WSJ reports that commercial REITS have more exposure to subprime residential loans than originally thought. RAIT Financial Trust, a commercially focused REIT, disclosed that it had $95 million worth of exposure to American Home Mortgage. If written off it would reduce their book value by 7%.

Commerce Group mortgage subsidiary will stop writing mortgages.

Merrill Lynch reduced its rating on Countrywide to sell from buy and said a worst case scenario could see the company in bankruptcy. The company has $185 billion in available credit facilities that enables it to underwrite loans. Merrill is afraid the funds may dry up and says we cannot understate the importance of liquidity for a specialty finance company.

KKR Financial Holdings said it could lose $200 million from leveraged investments in CDOs.

The credit crunch in the mortgage market is weighing particularly heavily on small mortgage banks and brokers. GMAC, which provides short-term loans to many small lenders, has significantly tightened its lending terms. National City Corp. has suspended funding from one of its two warehouse-lending operations of most types of mortgages that cannot be sold to Fannie Mae or Freddie Mac.

KKR Financial announced the sale of $5.1 billion of residential mortgage loans, which will result in a $40 million loss. They still own $5.8 billion in CDOs. On the transaction they believe that they lost $200 million.

The US homebuilder Sentiment Index slid in August to its lowest level since January 1991. The NAHB/Wells Fargo Market Index fell to 22 from 24 in July.

The cost of protecting a notional amount of $10 million of Countrywide’s bonds against a possible default for five years stood between $435,000 and $455,000, up from $368,500 a day earlier.

Amgen will fire 14% of its staff or 2,200 people to save $1.9 billion. It will charge off $700 million. It also cut prospective earnings from $4.28 to $4.13 per share. These are the first cuts in 27 years.

We can understand why the euro is weak versus the dollar. Germany, its main member, had tepid growth last quarter in spite of the ECB injecting over a 10% increase in money and credit into the euro system. Then we find the European banks are loaded with subprime garbage. The ECB has injected some $350 billion into the banking system to keep it afloat. Worse yet, some European banks loaned massive amounts of money to hedge funds assuming enormous risk and totally overlooking the degree of illiquidity of their positions. At this juncture a weak euro is good for gold because it is a real money alternative.

Surreptitiously the Fed has been buying mortgage backed securities for weeks and in quantity, almost as much as they have been buying and monetizing treasuries. We will give you the numbers when we have them all. As you can see the elitists are trapped as we said they were six years ago. We see no way they can avoid a financial, monetary and economic implosion worldwide. All of Wall Street still doesn’t get it. The game is over and systemic problems daily grow exponentially. These people are about to find out they are not in the masters of the universe.

All things financial have been paramount. The elitists destroyed productive capacity by implementing free trade and globalization, offshoring and outsourcing. This has led to bankruptcy, unemployment and the neutralization of our greatest strength as a nation. The result is cash chasing less goods and services, which has led to inflation. The money and credit injected by the Fed is linked to nothing productive. The unbridled issuance of dollars and euros is very inflationary as is the monetization of Treasuries, CDOs and ABSs. That will lead to deflation in some asset classes that will have to be offset by more money and credit in order to keep the system afloat.

What the elitist’s central banks won’t do until forced to do so is allow the system to default and be purged of its excesses. That is why in the final analysis gold is the only permanently safe asset. This flood of liquidity in a debt crisis is just a way to make default less obvious to the untrained eye. That is why there is low-level panic. Investors are getting the message even if Wall Street isn’t.

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GOLD, SILVER, PLATINUM, PALADIUM AND URANIAM

On Wednesday, gold rose to $668.90, up $0.10, silver fell $0.17 to $12.53. Gold and silver like other market sectors have been hit by margin calls, panic and government manipulation. Gold open interest rose 1,914 contracts to 347,973 and silver OI rose 685 to 122,912.

The Dow was off 270, but rallied on short covering -167 on the day. The S&P was down 179 and Nasdaq was -240 Dow points. No matter what the Fed and the Plunge Protection Team does the market gets crushed. The news releases are bad and getting worse, as the Fed added $7 billion in temporary reserves to the banking system via overnight repos. The 3-month bill is 125 BPS below Fed funds.

The large Tocom shorts on Tuesday increased their shorts by 767 to 117,170 as Goldman increased their shorts by 150 to a net 20,934. The same group increased their net silver short by 129 to 3,141. The XAU fell 5.56 to 132.77 and the HUI fell badly as AEM was hit for $4.01 a share. The HUI was off 14.19 to 316.33.

The key again to all this is the dollar as it has always been. If the central banks can keep the dollar strong then the idiots believe that everything is fine. The yen was strong again, so the market got hit again as the funds in the yen carry trade lightened their positions taking their losses. The cartel does this, even though it drives the market down, to force pressure on gold. The euro fell .0088 to $1.3443 and the pound fell .0064 to $1.9886. The Canadian dollar fell 1.33 to 92.44 and the dollar index rose .31 to 81.77. The 2-year was 4.30% and the 10’s were 4.72%. Oil rose +$0.73 to $73.11, gas was +$0.03 to $2.01 and natural gas was -$0.07 to $6.87.

We guess you could call the Thursday early morning’s action a bloodbath. The cartel has lost control of the stock market and the yen. The markets are in free fall and the yen might be called the super yen. The Dow was off -138, S&P -154, Nasdaq -142 and FTSE -282 Dow points. The CAC was -158 and the DAX -191. The yen has traveled from over $1.24 to $1.1465, +1.89 over a 2-week period. The euro was -.0024 and the pound -.0058. The 2-year Treasury hit a new low at 4.23% and the 10’s 4.66%. Oil was -$1.69, gas -$0.04 and natural gas -$0.19. Gold was -$6.90, silver -$0.19 and copper -$0.08.

Thursday was a real piece of work by over government. If anyone doubted world markets are manipulated they saw it in spades these past two weeks. Does anyone really believe that it is natural and normal for the Dow to rise from -343 to -16 on the close – all in 45 minutes? As we said the government is your enemy. S&P was up 42 and Nasdaq fell 49 Dow points. The yen rose 3.32 to $1.1298 and was close to $1.12 during the session. The euro fell .0006 to $1.3420, the pound fell .0059 to $1.9814, the Canadian dollar was +.11 to 92.92 and the dollar index fell .05 to 81.71. That said there is no rational reason for gold and gold shares to go down. It was an orchestrated takedown. We only hope the cartel sold gold to make this happen. Gold finished off $20.90 to $648, and silver fell $1.13 to $11.40. Gold open interest rose 4,736 contracts to 352,707, gas fell -$0.03 to $1.98 and natural gas rose +$0.01 to $6.88. Mark our words the central banks are panicked. The Fed added $5 billion in 14-day repos and 2-year interest rate swaps spread hit 72.00 BPS, the widest since January 2001. In return the Fed accepted $250 million of repo collateral, and $4.75 billion in CDOs. Moody’s say they see a big hedge fund collapse coming. We see lots of them. The Fed’s repo operations taking mortgage-backed securities from money center banks are a Fed bailout of a small select group of financial institutions.

Over at Tocom on Wednesday the big gold shorts increased their net shorts by 1,540 to 118,710, as Goldman increased their net shorts by 807 to 21,741. The same gang reduced their silver shorts by 21 to 3,119. The XAU fell 6.86 to 125.09 and the HUI fell 16.19 to 300.14. The lease rates for gold are the highest in several years, so that cannot be a suppressing factor. That leaves naked shorts, the commercials or gold sales.

Thursday marks the death of the carry trade in the yen.  The Yen Death-Star has just been detonated due to the profligate policies of our "beloved" Fed.  Let the body count begin.  The yen has suddenly strengthened to 112.112 yen per dollar and 150.220 yen per euro as of 1:05 pm EDT.  Mind you that as late as August 8, the yen stood at 119.76 yen per dollar and 165.365 yen per euro.  That is a drop of a mind-blowing 7 and a half-yen per dollar and an unthinkable 15-yen per euro in one week.  Even yesterday, August 15, the yen was at 117.19 yen per dollar and 157.960 yen per euro, so the yen has risen by a stunning 5-yen per dollar and a gut-wrenching 7.7-yen per euro in one day!!!  We have been saying all along that the cartel has been playing Russian roulette with the markets and today the pin hit the primer, sending the Dow spiraling down by as much as 343 points so far today.  Can you imagine the size of the margin calls after the implosion of the carry trade?  This is the horror of horrors we have been talking about.  All that is left is the counting of hedge fund bodies.  The Japanese public has been decimated.  The major stock market players have just been sent over the edge of the precipice.  The Fed cannot bail the markets out of this one.  We are headed for a thermonuclear meltdown of all markets, as fear and panic place an iron grip on all players in all financial markets.  The death spiral has begun!

We were beginning to suspect, now confirmed, that many hedge funds have started to de-leverage due to exposure to the CDO problems and the plunging stock markets. That means an unwinding out of the carry trade.  They all went for the exits at once in a monumental signal failure that has strengthened the yen beyond belief, taking out the March 5 highs of 116.01 yen per dollar and 151.903 yen per euro like they did not even exist.  The Japanese public has to be in tears at this point because their life savings has been destroyed in a day.  Japan is about to implode as their population heads for the bankruptcy courts.  This is what they get for playing around with the yen the way they did and letting the carry trade bubble spin out of control.  Now a large portion of the Japanese public is in a short-covering nightmare that is adding gasoline to the ongoing conflagration.  In addition, just as the meltdowns in US markets send people fleeing to treasuries and dollars, thereby driving the dollar up, the meltdowns in oriental markets are sending oriental investors into Japanese bonds and yen, thereby driving the yen up.  That is a colossal problem, because unlike the dollar, the yen has a carry trade Sword of Damocles hanging over it.  The Sword of Damocles has just come down, wreaking havoc and destruction on an unprecedented scale.  There is now a vicious cycle, because as the yen strengthens, the markets plummet due to the carry trade unwinding, which further strengthens the yen, which in turn causes further sell-offs at an escalating pace that will create a death spiral into fiat money hell.

The yen has started to weaken slightly as of 2:10 pm EDT as the PPT now tries in desperation to attempt a stock market rescue after hitting gold by keeping the yen strong until the COMEX closed, but the damage has been done and there is no turning back.  The yen is now at 113.079 yen per dollar and 151.535 yen per euro, still stronger than the March 5 highs.  The PPT managed to save the market today with brute force, more credit injections, and tremendously high volume, but the margin call issues have not yet been settled, so expect more volatility tomorrow.  They Dow was weaving and bobbing like a drunken sailor all day Thursday, dropping precipitously from yesterday's high to today's low by a mind-boggling 728 points before the PPT brought it back to close at -15.  The PPT were in a state of cardiac arrest all day as they had to come to the rescue on several occasions, and stock volume exceeded an astonishing 6.5 billion shares.  Talk about an expensive bailout!!!  

Gold has held up rather well considering, dropping from yesterday's 669 close until it found support at 642, at which point gold reversed, bouncing back to close at about 650.  Gold has lost only 3.8% since August 8 while the Dow has lost 5.8%, so yet another counterproductive tradeoff has been made by the PPT.   And wait until you see the safe haven buying in gold start to blossom.  The cartel's attempt to suppress gold has now officially backfired.  Gold's decline will be only temporary until traders figure out that it is the only game in town, at which point it will skyrocket.  The decline in all other markets will be more or less permanent as all confidence in the markets is now lost.  The PPT can try all they want to save the markets, but they cannot go it alone.  With everyone else scared to death, and with many hedge fund deaths on the horizon, the markets can go only one way, DOWN.  "Greenspan's Folly" has come home to roost, and it is not going away.

...

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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.

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-- Posted Sunday, 19 August 2007 | Digg This Article

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