THE INTERNATIONAL FORECASTER

WEDNESDAY  111407(4)_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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If you want a strong signal that recession is upon us consider that truck sales have fallen 30% to 45% each month since March compared to a year earlier. Another signal is that the production index has fallen from 58.3 to 46.9 and new orders fell from 56.2 to 53.9. Recession is in full flower. What else can be expected when we have a net external debt position of between $5.6 and $7 trillion? The reason for the range is that the Treasury and the Commerce Department figures are bogus.

The world should have never allowed the US to pile up the colossal debt that it has. Out of balance are the trade balance, the current account balance and a monstrous fiscal deficit. For 15 years corporations and government have been rolling short term paper. Now consumers are borrowing on credit cards to pay their mortgages and maintain their living standards. American Illuminists refuse to put their financial house in order. They have absolutely no intention of doing so. How could American banks be so dumb as to commit 59% of their capital to real estate loans? Those average houses have fallen from a peak of $262,000 in March to $211,700 in September. This is a 20% drop and we still have 15% to 20% to go. Many of these loans are in negative equity already and hundreds of thousands have been foreclosed. That means when they are sold the banks lose money, which comes directly out of bank capital. Banks can go bankrupt. That is $2.6 trillion in mortgages. If only half go under that is $1.3 trillion or half of the entire capital in the commercial banking system. You probably were unaware of it, but in August and September companies like Washington Mutual and Countrywide borrowed $163 billion from the Fed. Plus $1.2 trillion in commercial paper is frozen. The banks are lending companies that money as well. The reason is lenders won’t lend on commercial paper that is collateralized by CDOs and ABSs. Put the two together and you have a mega liquidity problem. We believe Citicorp and Merrill Lynch have already reached that stage and the Fed is propping them up.

Commercial paper is already down more than $360 billion. The Fed via the banks using fractional banking via the Fed discount window now supplies those funds. It is obvious that the financial system has serious problems and a giant salvage operation is in progress politically and financially. Needless to say, America’s problems affect the world.  That is because of all the CDO, MBS and ABS’s that foreigners have bought and because the US dollar is the world’s reserve currency. Financial forces in the US have abandoned the dollar and thus a run is taking place against the dollar. We forecasted this when the dollar was 92 on the USDX. Today it is closing in on 75 with no end as yet in sight.

The bankers’ backup fund is on its way in an abbreviated form via Citigroup, P Morgan Chase and Bank of America. We do not at this writing have any details. The fund supposedly will be operating in January. These three banks are going to apparently invite 60 other banks to help cover up their massive losses. Needless to say, the credit will be supplied by the Fed. The banks will say it is their money and, of course, it isn’t. The fund would not rescue troubled SIVs, only lead to the more orderly demise. The big troubled banks will be bailed out by other banks as funded and proscribed by the Fed. Again the elitist banks are buying time and short circuiting bankruptcy. This move will create massive inflation. The fund’s organizers say it is intended to avoid a severe credit market disruption. We call it a collapse of the financial system. This will allow the SIV’s to be sold off piece-by-piece, allowing time for recovery of those assets. This is totally improbable. These assets will never recover. They were in part worthless to start with. The idea that this proposed fund could help thaw the frozen market for asset-backed securities by establishing a ready buyer, even if no SIV uses it, is ludicrous. Few investors will touch this toxic waste – ever. What we are going to see is acceleration in the pace of asset-backed defaults and troubles. This is because the contagion spreads through linked investments, such as CDO’s holding asset backed securities. When the structures start to fold, it accelerates very quickly. Banks will be forced to change business models. If people cannot securitize their loans they will stop writing them. That will freeze the entire real estate industry.

This past weekend almost 300 homes were auctioned off in Massachusetts. It was a Countrywide Financial auction. Most homes sold for about 40% off July 2004 prices and most need work.

Real Estate Disposition will sell 1,000 homes in Houston, Dallas, Phoenix and Las Vegas in December. Countrywide, Bear Stearns and Wells Fargo own the houses. Auctions are scenes you will see every month for the next few years.

Countrywide President, Angelo Mozilo, at a presentation at the Milken Institute a few weeks ago said, “He and his company were victims of financial forces beyond their control.” He explained that borrowers forced lenders like Countrywide to lower mortgage standards. The industry faced special pressure from minority advocates to help people buy homes.

This is the first admission by a mortgage lender that banks and perhaps the Treasury or the Fed had pressured lenders like Countrywide to relax standards. The minority demands were aided and abetted by politicians. Mozilo stated it is now time for the government to increase loan limits at Fannie Mae and Freddie Mac. Countrywide says it bent over backwards as the largest lender to Hispanics, African-Americans and Asians. As it turns out most of these borrowers should have never received loans. Mozilo decried the practices of competitors in 2005 and 2006, but emulated them to keep and expand market shares. These telltale signs also told Mozilo that all this would end up badly and that is why he ended up selling Countrywide stock. He was assisted in building this dream by Sir Alan Greenspan, then Chairman of the Fed, who extolled the virtues of the ARM, adjustable rate mortgage, and said everyone should have one. This madness was officially sanctioned by the Fed and they supplied a 1% prime rate and 3-1/4% ARM teaser mortgages to make it all happen. Mozilo took full advantage by getting bigger and using vertical integration. That is capturing ancillary business to further fatten profits. Mozilo played the political aspects to the hilt with many connected and well known people joining his board. Mozilo went to the edge and it looks like he may have fallen over.

The SEC is investigating Mozilo for selling his shares into a market where his own firm was the buyer. The company borrowed $1.5 billion in badly needed capital to purchase 38.6 million shares for $39 each. This has been a common practice among executives to enrich themselves at shareholder expense. If the SEC were to find this inappropriate, which it is, then Angelo would have to give the profits back to the company. That could happen, and should happen because he knew exactly what was going on. It will also affect thousands of other executives who did the same thing. There is no more blatant conflict of interest.

Record numbers of homeowners are defaulting on their mortgages and as they do so, questionable practices among lenders are coming to light in bankruptcy courts, leading lawyers to contend that companies instigating foreclosures may be taking advantage of the imperiled borrower, because there is little oversight of foreclosure practices and the fees that are charged, bankruptcy specialists fear that some consumers may be losing their homes unnecessarily or that mortgage services who collect loan payments are profiting from foreclosures.

Bankruptcy specialists say lenders and loan servicers often do not comply with even the most basic legal requirements, like correctly computing the amount the borrower owes on a foreclosed loan or providing proof of holding the mortgage note in question.

Questionable fees have been added to almost 50% of loans in Chapter 13 bankruptcy. The adds were mostly less than $200 each, but collectively they raise millions of dollars for loan servicers at a time when the other side of the business, mortgage origination is in the tank.

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GOLD, SILVER, PLATINUM, PALLADIUM AND URANIUM

About the only thing the cartel managed to accomplish this past week was to keep spot gold from breaching its all-time high of 850 and gold futures from breaking their all-time record of 875.  This is excellent because now we will get a chance to take a breather and consolidate before taking out not only 850 like it did not even exist, but also taking out 1,000 before the end of 2007, and perhaps even going well beyond 1000!  Thank you, cartel!  That was absolutely the perfect remedy for ensuring that our precious metals rally did not get overdone.  Incidentally, your cutesy moves this past week have just ensured the utter and complete annihilation of the commercial shorts. You would make excellent gold bull strategists.  If you ever want to give up the bear gig, we are sure we can find a place for you in the bull camp.  Just pop a couple of horns on and come on over!  Last week, gold, silver and precious metal stocks set new records across the board despite massive gold manipulation by the cartel in terms of central bank sales, leasing and yen-hits piled one on top of the other, completely humiliating the cartel.  In stark contrast to the Dow's loss of 500 points this past week (with a loss of 618 since last Tuesday's close), a stinging drop of 3.7%, spot gold gained exactly $25.00/oz., up 3.1%, and silver gained $.81/oz., up a whopping 5.5%. It’s like a tale of two cities!  Do you remember when all the pundits, analysts, commentators and the mainstream media were saying that gold and silver were just following the stock markets up and down?  NOT ANYMORE!  So much for that theory!

The cartel's lies are all out in the open now as far as the pros are concerned, and they are running like scared rabbits from equities and other types of dollar-denominated assets into precious metals and commodities, especially oil.  The safe-haven status of gold has now been launched in a most splendid manner and will now continue in this role until the bitter end as the fundamentals for gold are now a "no-brainer" and they keep getting better every day!

The dollar has now lost all support not only in value but also now in volume of open interest on the USDX which has suddenly dropped off.  We started out this past week with 42,676 contracts and finished that week with 37,256 contracts!  This happens as the USDX has breached the 75 handle this past Friday by briefly dipping into the 74 handle, going as low as 74.978 before closing higher at 75.400 due to the yen-hit on gold that cost the Dow 223 points as traders once again retreated to the "safety" of dollar-denominated treasuries and money market funds.  We can assure you that the dollar is going much lower and our prediction of a drop to the 72 to 75 range has now become a reality. You sort of have to ask why the cartel has abandoned the dollar when they want to suppress gold.  Is it to bail out Wall Street, or is there some other additional motive at play here?  For obvious reasons, the bailout is not working very well thanks to the power of gold, which has prospered as the stock markets, which the cartel supposedly has been trying to rescue, have been hit without mercy this week with yen-hits on gold.  The yen hits are deadly, and a fresh, new multi-year high has been reached this past Friday at about 110.672 yen per dollar as the Yen Death-Star has once again detonated.  We ask how much more the Japanese public, who are short the yen big-time on the CME, can take as the yen is manipulated against them to stop gold.  The Japanese stock market is already suffering, but more sell-offs are possible as the mom and pop Japanese are forced to cover their yen puts. The Nikkei 225 dropped this past week from 16,268.92 to 15,583.42, down 685.5 points, or a whopping 4.2%, as stock positions are sold off to cover margin calls on yen shorts.  This problem is added to the fact that Japanese goods have just become much more expensive for US consumers who are quickly running out of gas on consumer spending as they use up the last of their remaining credit, so the Japanese are now getting a double whammy of poor trading and export prospects on top of the yen problem.  We believe that the dollar could well become a carry trade currency as traders smell blood and the sharks start circling, and we further believe that this is how the Fed plans on conducting a bail out of the banking industry.  If they cannot push the markets up due to bad news and a runaway gold price that forces them to suppress stock markets to keep the large specs at bay, then there is always profit to be made from the fall of the dollar.  Imagine how much money you could make if you knew when and how far the dollar would drop by being short the dollar at just the right time.  The sudden withdrawal of support for the dollar may be pointing to that and the central banks may all rush for the exits from the dollar and start shorting it, which could send it to the bottom much sooner and much lower than even we thought.  US central banks will have to make their profits from the tanking dollar by hiding behind foreign subsidiaries and off-shore accounts, since a long walk to the gallows would be in their future if they were caught profiting from the destruction of the dollar.  Remember, they own the system, so treason is hardly an impediment.  We will be looking out sharply for any signs of this so that when the investigations and recriminations in the coming economic catastrophe begin, we'll know where to point our fingers.

Large specs have to watch out now as the overhanging Sword of Damocles on the hundreds of thousands of December gold shorts places the commercial shorts in deep jeopardy.  Make sure you get out of shorter-term protective derivatives and especially those expiring in November and possibly even December.  Large specs know that the key to 1000 gold is the implosion of the December gold shorts, and they have already surrounded these shorts and are building up their supplies of cash to move in for the kill.  Watch out for the deadly rally-crash scenario we have talked about in previous issues to devalue your protective derivatives to strip them from you during the rally as the options expire and then to get you to liquidate your metals positions in the crash.  This is usually done in the two weeks leading up to options expiry, so be ready for it.  Profit-taking should now be done big-time to store up cash for the "Big Push" past 850 and into the great beyond using the strength of the Indian wedding season and other seasonal factors to maximize profits without damaging the price of gold to the point where the commercial shorts can bail out.  All you have to do is hold out for five or six more weeks and it will be hallelujah time for gold and silver.  Funds should be allocated mainly into physical gold, with a healthy serving of gold futures and protective derivatives.  Large specs will make a fortune if they are successful, and will be destroyed if they are not.  It is all or nothing as we all look forward to the best Christmas present of all time!  The cartel will sell and lease gold big-time the closer we come to the December deadline, so be ready for them and their yen-hits as the commercial shorts approach the brink of financial oblivion and prepare to don their Crispy Critter outfits.  The volcano in the COMEX continues to smolder and sputter as gold and silver remain in the lava state going into this week.

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1-YEAR $159.95 U.S. Funds

US AND CANADIAN SUBSCRIBERS: 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.

Or:

We accept Visa and MasterCard charges.  Provide us with your card number and expiration date.  We will charge your card US$159.95 for a one-year subscription.

You can email us in two separate emails (1- the Credit Card Number with full name, address and your telephone number and (2- the Expiration date on the card.

NON US OR CANADIANS SUBSCRIBERS:

Due to the time that it takes for your mail to arrive to us from a foreign country, we would like for you to email us as above the CC information in two separate emails.

Note:  We publish twice a month by surface mail or twice a week by E-mail. international_forecaster@yahoo.com or if_distctr@yahoo.com

                                                          *****

-- Posted Thursday, 15 November 2007 | Digg This Article