THE INTERNATIONAL FORECASTER
Wednesday - Mid Week 110307(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
Here we are four months into a credit crisis and it is only 5% resolved. We believe this crisis has a long way to go as the interbank system attempts to restore confidence and trust. The traditional buyers of short-term corporate debt, better known as commercial paper, are still on strike and there is no end in sight.
Over the past month the attention in the media has been focused on structured investment vehicles, SIVs, which have no visible market and hence no value. By our calculations the major New York banks are holding more than $400 billion of this toxic garbage.
As you know our Secretary of the Treasury Mr. Paulson, formally of Goldman Sachs, who we cannot decide whether he is still in Wall Street or doing what he should be for the American people, has been used as the front man to rescue his colleagues, the bankers and investment bankers. Though we are told no government money will be used, this past week Mr. Paulson floated a proposal to reward lenders for not raising interest rates on resetting loans and to reward homeowners who should never had loans in the first place. The banks and the deadbeats get bailed out and the American taxpayer again is allowed to foot the bill.
Demand for asset-backed securities, such as SIVs, CDOs and ABSs has evaporated. Those who have been able to find buyers are receiving $0.18 for the worst paper and $0.47 for the best assets. Thus, that $400 billion being held by big banks is worth perhaps $100 billion. Thus, by creating this Master-Liquidity Enhancement Conduit, or M-LEC, which will effectively be a buyer of last resort, using the proceeds of its own debt issues to purchase assets from troubled SIVs. The idea is to flog the $0.47 paper and avoid an avalanche of forced selling. After two weeks this new super toxic fund has gone nowhere. We argue that voluntary co-guarantee schemes like this are doomed to failure because only the weakest institutions want to participate. There now exists an entire market that is deemed too big to fail. If market prices prevail the results will be disastrous for banks, investment banks, hedge funds, brokerage firms, pension funds and thousands of other companies invested in toxic garbage. The Treasury’s participation tells you this situation is far worse than thought.
The banks created SIVs to move assets off its books and reduce the banks’ capital requirements. They were leveraging themselves to end run banking regulations. The risks these banks and others have assumed are a major threat to the solvency of these entities. In addition, many of the SIVs are leveraged 10-15 times or more. You might liken the process to a pyramid where you take short-term paper and use it for leverage to purchase long-term paper that pays a better yield. This if you get a spread of 4% and leverage it up 10-15 times you get a high risky return. The stage we are now at is that the commercial paper market is frozen, and the banks cannot attract funds that way to continue their game. That is why the discount rate was lowered ½% and the banks borrowed some $350 billion short term. The problem is the banks nor others cannot borrow 270-day money in the commercial paper market any more and the Fed has to continue to roll the loans to keep these big banks solvent. Heaven forbid the banks may have to take the toxic garbage back on their own books, even if they are not technically required to do so, they probably will have to. These buyers are colleagues and friends. If they do not take them back their reputations go up in smoke. If they take them back they could be on the edge of bankruptcy. The idea for the bank is to resurrect the good paper, take it on the books and sell off the bad paper. This is what they are trying to do with the super fund. Buyers of commercial paper do not want to assume risks for an extra 1% over government paper. It just isn’t worth the risk, especially with all the negative publicity. The SIVs are totally opaque. That means the banks that constructed them will have to dismantle them. Interestingly once dismantled the banking truimperate said they will offer $0.94 plus a 4% note. Even for the good participants that is double their current market value.
There is going to be a massive liquidation of assets in the coming year. The big banks with their capitalization will make it but others won’t. The super fund idea is simply to buy time, because inevitably the paper has to be marked to market. The banks want to spread out the losses to keep shareholders happy and to survive.
Gains in spending on commercial and public construction projects offset another decline in spending on housing projects in September, as overall construction spending was up by 0.3%. Private nonresidential construction spending climbed by 1.5% while public construction spending rose by 1.9%. Spending on housing projects fell by 1.4%, the 29th straight decline. Housing spending is off 16.4% yoy.
We told you that SIVs hold $400 billion in 36 of these vehicles. We are told these positions have been leveraged giving banks about $2 trillion in real exposure. This is an insolvable problem. Many banks have to be in serious trouble. Then there are the money market funds, investment banks and brokerage houses, hedge and pension funds. It doesn’t look good.
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GOLD, SILVER, PLATINUM, PALLADIUM AND URANIUM
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Friday was a confirmation of everything we have been saying. The large specs waited until just before the market closed. Gold was bouncing up and down like a ping-pong ball between 788 and 796. Gold was at about 795 with an hour and a half left to go, when the large specs struck like a King Cobra! The gold chart went freaking vertical as gold kicked in its afterburners, slicing through 800 like it did not even exist and charging uninterrupted to its new 27-year high of 808.10, before closing at 806 even. We'll bet you could have heard a pin drop among the gold bears in the COMEX as they watched all the stops set at 800 start "plinging" away, sending gold to it new all-time high, plunging them into some deep, dark water, while the script for Twenty Thousand Leagues Under the Sea was rewritten and as they suffered simultaneously from a case of the bends and a collective myocardial infarction. The physical gold buying was absolutely furious and then the short-covering kicked in all as indicated by the vertical rise in the gold charts for the spot market.
Silver went on a binge, almost scraping against its February, 2007 highs, hitting 14.67 and closing at 14.53. The XAU and the HUI embarrassed all the other stock sectors, with the XAU rising from 181.00 to 187.63, while the HUI went raging like a wild man, rising from 422.1 to 439.38, both a new-all time closing and intra-day high! Not to be outdone, oil set yet another new all-time closing high of 95.93 after trading just over 96 for the December contract. Fanning the precious metal flames was the mortified dollar, as it plunged to a new all-time low on the spot USDX of 76.337. We will soon be a Banana Republic. The cartel has completely lost it. The large specs are now in control as long as they want to be.
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