Good morning from Cape Town

The past week witnessed a turnaround in sentiment as renewed recession fears dominated investors' actions. "What the market giveth [the previous week], it also taketh away [last week]," was Briefing.com's very apt description of events.

Read all about this in my regular weekly blog post, highlighting some thought-provoking news items and quotes from market commentators during the past week, and briefly reviewing the week's market action on the basis of economic statistics and a performance chart.

Here is the link to the "Words from the Wise": http://tinyurl.com/2f3n2e

One more thing, forget about markets on Thursday and spend a romantic Valentine's day!

Aurelian
CEO selling 800K at 7.75 came up on the
Ink Research site today , access thru TD ???

tough time to be short commodities (no position):

http://tinyurl.com/2w95fs

excerpt:

"But most of all: other commodity markets started behaving oddly at the end of the week. Dan Norcini, writing on Friday for Jim Sinclair's put it succinctly: "The entire commodity complex was on what can only be called a "roaring tear" today ... platinum, palladium, copper, crude oil, wheat, soybeans, corn, sugar were all soaring today. Sugar rallied 5%, stunning the shorts, while Minneapolis wheat was once again locked-limit bid with the hapless shorts completely unable to exit the market ... folks, I have seen some bull markets in my time as a trader but I have rarely seen anything like the Minneapolis wheat market. Take one look at what is happening to food prices and tell me that gold is not seeing what is taking place there ..." See Website
This past weekend, yet again, the International Monetary Fund announced it would like to sell some gold. Since gold went bullish in 2002, official sector noises of this type have often appeared just as gold began an important move up. Further back, the IMF gold sales in 1978-80 heralded the great gold surge of that time. The Gold Anti-Trust Action Committee, one of a number of gold bug operations that think gold's price is manipulated, put out a scathing press release. See Website
Nevertheless, as Dow Theory Letters' veteran Richard Russell put it: "Gold only 10 bucks from its high, and so far it hasn't let any of the "profit-takers" back in at lower prices. Ah well, the danger of trading out in a bull market."

Good morning.

The ANALysts are not too busy today. Here are your CARA 100 Ratings Changes:

Upgrade:

GSK - to Buy @ UBS

New Coverage:

SNDK - Sell @ Caris & Co.

-------------------------------------------------

Have a great and profitable day.

Re: Ink Research ARU.TO:

Jan 31/08 Anderson, Patrick Fergus Ne Direct Ownership Disposition in the public market Common Shares 7.750 -800,000 -50% 800,000

Insider Sales in the last year in ARU.TO: Net Selling $-11,872,616

Recent history on IMF decision to sell gold . . . . last time IMF tried to sell gold was 2005, per today’s Everbank’s Daily Pfennig, and the U.S. vetoed it . . . (think maromatics brought the requirements up) . . . absolutely no guarantees this would happen again.

Yesterday, I posted a link to a list of names and symbols of Canadian Miners that are contained in the S&P/TSX Capped Diversified Metals and Miners Index as a possible start to a P&F Buy Signal List in StockCharts. Here it is again:
http://tinyurl.com/2atlpk

The symbol for that Index is $SPTMN and on the wkly chart at the link below one might see that the longer term trend is down compared to the bounce back to the Fib50 and return to the Fib38. This might be considered to be good except that the Index is below its 10wSMA (50dSma) and RSI has turned back down.

This week will need to show a good positive move in order to forecast good times to come for the “Juniors”, I think, but not trading advice for anyone.
http://img179.imageshack.us/img179/6859/chart2ar2.gif

...............................................................
Thanks Quasi, I don’t have GoogleMail so I went with ImageShack and if I can do it, anyone can.

Silver prices very robust in trade this morning, just off its breakout high. Friday's increase was twice that of Gold's in terms of percentage.

Too early to tell definitively, but silver appears to be advancing against gold due to seasonal factors. Platinum setting record price, silver probably related as silver and platinum are related geologically and market wise.

A revival of the silver price while gold trades sideways would indicate a return of speculation in the PM sector, not necessarily related to global banking woes.

It's official, Yahoo reject MSFT offer. Both stocks up in PM. Tremendous opportunity here. Remember YHOO was trading under $19 before this.

I put the gold videos in the previous post of my blog.The latest post has some good links to solar stocks, a few good articles for Buffett and Bill Gross.
www.WallastonInvestments.com

That was http://wwww.WallastonInvestments.com

BAC/CVX replacing MO/HON in the DJIA...

Good Morning!

Re POG today:

As 2nd ave well pointed above, prices say that mr market is on a "lets wait and see if they really get to sell the IMF gold".

My intuition tells me that yes, they will sell the IMF gold in April, for the simple reason that the current situation is indeed very serious.

But now we have 45 days or so before that time comes around. Some market players may be interested in pumping POG during the period.

So, my gut feeling now (different from what I was on my mind last Friday) is that we may witness a finall run of POG right to the end of March.

Just imagine the level of short squeeze in gold if, as and when POG clears a little over 1.000, say 1.050.

The "stars" may be aligning for a serious speculative gold run between now and March end.

Just my gut feeling.

Cheers,

regarding the IMF gold sales, i wonder if they are attempting to capitalize on the fear such an announcement would create, sending gold down in the process for their "short" strong friends.

here is Jim Sinclair's take on IMF's proposed gold sales:

-------

The following is the history of the IMF and their gold shares.

It is important to note that their sales all have taken place at times when major bull markets were either just beginning or, as in 1976-1980, at the start of the major parabolic move to then all time highs.

Now you know why I said our friends from 2002 Chung Phat and Dr, No are high-fiving at the news that the biggest dopes in gold are about to prove their status beyond any doubt once again.

How and when the IMF used gold:

Outflows of gold from the IMF's holdings occurred under the original Articles of Agreement through sales of gold for currency, and via payments of remuneration and interest. Since the Second Amendment of the Articles of Agreement, outflows of gold can only occur through outright sales. Key gold transactions included:

Sales for replenishment (1957–70). The IMF sold gold on several occasions during this period to replenish its holdings of currencies.

South African gold (1970–71). The IMF sold gold to members in amounts roughly corresponding to those purchased in these years from South Africa.
Investment in U.S. government securities (1956–72).
In order to generate income to offset operational deficits, some IMF gold was sold to the United States and the proceeds invested in U.S. government securities. Subsequently, a significant buildup of IMF reserves prompted the IMF to reacquire this gold from the U.S. government.

Auctions and " restitution" sales (1976–80). The IMF sold approximately one third (50 million ounces) of its then-existing gold holdings following an agreement by its members to reduce the role of gold in the international monetary system. Half of this amount was sold in restitution to members at the then-official price of SDR 35 per ounce; the other half was auctioned to the market to finance the Trust Fund, which supported concessional lending by the IMF to low-income countries.

Off-market transactions in gold (1999–2000). In December 1999, the Executive Board authorized off-market transactions in gold of up to 14 million ounces to help finance IMF participation in the Heavily Indebted Poor Countries (HIPC)
Initiative.

Between December 1999 and April 2000, separate but closely linked transactions involving a total of 12.9 million ounces of gold were carried out between the IMF and two members (Brazil and Mexico) that had financial obligations falling due to the IMF. In the first step, the IMF sold gold to the member at the prevailing market price and the profits were placed in a special account invested for the benefit of the HIPC Initiative. In the second step, the IMF immediately accepted back, at the same market price, the same amount of gold from the member in settlement of that member's financial obligations. The net effect of these transactions was to leave the balance of the IMF's holdings of physical gold unchanged.

Should they sell in April of 2008 then gold is going to the next Angel above $1650.

That is the only implication IMF sales have to the price of gold. It has been the most powerfully bullish event every time they have done it, and will be again.

If any newcomer to gold sees the IMF news as a reason to sell gold these newcomers are as DOPEY as the IMF has proved to be every time, time and time again.

Respectfully,
Jim

Hi,

Further to my last post, I would like to add the following:

Imagine you are a central bank worried about your need to supress the POG. Now imagine that you agree with other central banks that this will be done with IMF gold.

Would you go on dishoarding your reserves or would you simply sit back, and wait 45 days for the supression to happen at someone else's cost?

So my gut feeling tells me that "the coast may be clear" of furher supressive dishoarding between now and the end of March.

If this would be the case, then POG would soar untill that time of reckoning comes...

If the IMF wanted to sell some gold that's not already spoken for in terms of international agreements sometime in April, it had better start accumulating some pronto.

2nd - over the past few years, as gold rallied to new highs and then fell, it scared traders and we would see a number of posts here stating that traders sold and were looking to add back to gold holdings when it declined to $x and then the decline wouldn't make it that far. At a number of these junctures, I posted something along the lines of; "how many of us would like to add at $x?" - meaning that if a lot of traders want to add at $x, we probably won't get there again. My dime store psychological study has shown that after we see a bunch of posts here looking for a second decline that the buyers are there, so we won't see those lows again. Granted, this is a very small sample and not statistically relevant, but we have seen this time and time again in all markets in both long and short positions. Trading out of your entire position in a bull market has a low probability of working out, IMO.

IMF gold sales is not good for the citizens of countries that have large gold reserves, but are good for countries that want to diversify reserves; see Middle East and Asia.

Fort Knox gold holdings will never be audited, imo.

Re commodity bull - Parabolic moves in securities eventually lead to exhaustion, but that exhaustion doesn't necessarily lead to a decline of 1/3 to 2/3 of price, it may lead to a sideways consolidation of 1/3 to 2/3 of the time of the major rally, so we may simply see a consolidation of the soft commodities at historically high prices. That consolidation would usually be over after the price oscillators have declined off of overbought conditions. Trade in probabilities, not emotions.

Have a great week!

American International Group, Inc. (AIG) is down 7% now. Can't find any news.
Anyone know of any reason for the drop.

My first post: Good morning to all, and thanks to all who have provided such an excellent educational site.I am a us citizen trying to prepare for the "trade of the generation". My question to the community deals with the mechanism of acquiring physical gold, and subsequently shielding this holding from a government sponsored 'call in', as again mentioned by Mr.Cara in sundays missive.
A google search revealed a number of brokers such as kitco or monex. Does anyone have any personal experience with these, or any other brokers? Next, I am assuming that since we are not making a numismatic purchase, that one or ten ounce gold bars are the most effective means of acquiring the metal close to spot pricing.
Finally, and most importantly, are their onshore or offshore mechanisms to shield the purchase from
a government inspired recall? Thanks in advance to all who reply.

Walmart Management Reported to me this weekend at a meeting that the Supercenter store's sales are up 6% from last year. Is WMT a good buy considering people are getting poorer, and look for one stop shopping, and low prices?

g034- you're right, and the fact that i disembarked the gold run around 750 and have been unable to find another entry pretty much says it all...

AIG is dropping because it announced that it will have to write down it's valuation of it's Credit Default Swaps.

The COT for platinum and silver waking up with gold lagging a bit seems to be a clear call that speculative ferver is increasing for the metals. Bill mentions that Platinum looks like it may be overreaching itself and be at risk of a pull back. I have to ask myself, and other here, these moves do not happen in a vaccum. If silver and platinum together go parabolic, then I think we are done for this phase, and we can all follow Bill's advice to accumulate some of the stuff after it has come back to earth.
The one thing I have learned over the years following commodities, is that once the metals take off, the only thing that stops them is a lack of shorts to squeeze and lack of new specs piling in. Have we reached that point? The technicals for PLAT are fairly overbought with daily and weekly RSI over 80, but that just means more to come. ;-)
Disclosure: Short FED call spreads, planning on buying some put spreads against DEC wheat this week. Call me crazy, but I may sell 1 contract of platinum if it is still parabolic in 1-2 weeks, big mistake or opportunity?

AIG 8k filing http://tinyurl.com/36n67e

leaning into a little QID at 51.46...

I'll try to post some charts of price patterns. Let's see if this works..

UNG:
http://img216.imageshack.us/img216/5484/ungxc2.jpg

HANS
http://img145.imageshack.us/img145/6066/hansvz1.jpg

EWM - one of few country ETF's in uptrend still.
http://img217.imageshack.us/img217/9356/ewmua2.jpg

My intermediate price target for the Dow based on Fibonacci retracement and using 02' lows as guide post + 10yr trendline. Shaded area of green is potential.

http://img217.imageshack.us/img217/8453/dow10yrvg4.jpg

g034, 2nd_ave,

I've learned that when there is a trend in place, I do best when I simply ride it. This means "staying on the horse" even when he's bucking. There are good traders out there, but I don't count myself among them.

I just stay on; sometimes HANG on!

2nd - sorry, I didn't know that, Caraista. If Bill is correct and the global exchanges raise margin requirements we could see a major drop again that could let you in.

If you recall; the early 2006 run up to $730 was followed by a drop of over 25% to under $540 in overnight trade, followed by a long consolidation period. What was different then was that the move to $730 was parabolic in nature. The current move does not have that feature in a weekly chart, so a precipitous drop has a lower probability of occuring, imo. BUT, we are coming into a seasonally weak period for gold, so raising margins during this period may stimulate higher selling than normal. The weekly bar in the 2006 decline was an exhaustion bar (barely...closing higher than 1/2 of move, but it was a wide trading range). If we see a decline now, I will be watching for signs of an exhaustion bar/two bar reversal/etc. confirmed by price oscilator buy signals on a daily chart - that's my plan for trading around the core position, fwiw.

g034- not complaining->wife and i entered into several great trades in gold/miners beginning in 2005 (when we started reading this blog), up to and including buying into the august 16 sell-off last year...then turned bearish on everything last fall...

Good Morning all...
Getting a late start after flying back from Arizona. Got in at 1:30AM so I needed my beauty sleep.

Many Thanks to the Arizona Herding Association for a great weekend. The weather was awesome and everyone had a great time.

We may have a couple of new readers. Welcome Alan and Brad if you have ventured into BillCara.com.

Platinum: Much of move is due to power outages in South Africa and loss of production. I see SA still is having power issues this AM.

Could be why GFI is at 13.27 right now? New 52 wk low.

Adding to GFI at 13.13

Holding EEM as a longer term position and sitting here looking at the chart that looks just broke. Broke below 18 month long term trendline as well as 200 day MA recently. Now, the cahrt tells me to sell but the heart wants to believe EEM can decouple longer term. Anyone care to discuss this looking at it from an intermediate term perspective? Meaning is this a sell or a hold in a 6-12 month time frame. I say sell.

Gold - speaking of trends, we need a new high to generate a higher high and higher low pattern that shows an uptrend in gold price. If that new high doesn't occur, the daily charts will form a head and shoulder pattern that will probably be tradeable. I say that because the RSI has been divergent with price pattern - the left shoulder had a higher RSI than the head and the current shoulder (if it is one). If this h&s pattern is confirmed, the price target is just above the 38.2% retracement (around $80 - $81 for you GLD traders) and may provide a good entry point because the RSI will be in the AZ at that point on a daily. Of course, there will be other things to look at at that time.

Also, I hear zero geopolitics these days in the news. It wouldn't surprise me for a selloff to be met with many talking heads discussing much lower gold levels, driving prices down from mom and pops, then when we hit the levels stated above, we would start hearing about all the bad news in Pakistan leading to a rally. Just trying to think ahead.

Btw, I write more about gold than stocks if simply because of the lack of good analysis and/or lies in mass media these days. I find it more interesting these days also.

Bought straddle on Yahoo Mar 30. I think those buying YHOO are dreaming, but with the straddle it doesn't matter. The stock should move one way or the the other.

Very large volume on March 30 calls, 18,000+ contracts traded.

Exited SUF this morning on a 25% pop, and I can't find any news to account for that. New COO but that can't be it. Will buy back if given the opp between 2.50 and 3.00.

Re: Microsoft and Yahoo: the best article I've seen is by Robert X. Cringely of PBS who I've been reading for the last 20 years:

http://www.pbs.org/cringely/pulpit/2008/pulpit_20080208_004240.html

excerpt:
"Same for Microsoft, which with its Yahoo acquisition will quite consciously try to convert itself into the next General Electric, a company that uses its sheer economic power to make most of its money. All those golf games with Jack Welch were for a purpose. That's why Microsoft is assuming debt to buy Yahoo. It is a logical thing to do and will be accepted by Wall Street much more easily than if Ballmer explained that Microsoft was restructuring and acquiring debt to make it possible for the company to not just pay $44.6 billion for Yahoo, but probably another $100 billion for the other acquisitions that will shortly happen to position Microsoft in the GE space, where it will be protected from bad guesses on technology shifts."

Seamus: JNJ still coming to us. I know you were watching this a dollar or two ago.

I'd like it in the mid to upper 50's.

UYG at 33.90

Craig RE GFI..

I like this for a long term hold. Looking at it..I see a possible fall to around 11.50-12.00...

Just keep stop loss tight I do not think we have seen a botttom in this one just yet...JMO

Craig

JNJ Yes, looks like the weekly may go sub 30 RSI; upper 50's would be attractive.

Also, watching SFD, anticipating more of a drop with the overall market, while thinking of the impact of Chinese winter storms on hogs and pork production. Far as I know, SFD is the only company so far to sell pork to China. However, think the Brazilian companies PDA and SDA may be players if they can swing it. Took profits on half of position on PDA last week when it broke the trendline. Still retaining the other half.

I like the chart of IBKR. Nice bounce off of suport this morning. I think there are some in this.

Long IBKR Mar Calls.

2nd, QID at 51

craig- thanks...obviously, i think we go down from here, but waiting for confirmation before pressing the trade...

Taking profits on UYG.
MACD still pointing up but stoch and DJIA look to be rolling over. Not giving it back, can always re-enter.

Holy cow....Bloomberg guests slaves to fashion or is hair an economic indicator?

geckojb re EEM
I don't see the long term trendline broken yet, except for one day back on January 23rd.
http://tinyurl.com/2j3xw3
Not a recommendation, just an observation.

GEckojb: You are right...selling EEM for an intermediate hold is a wise decision.

Not because of decoupling, its main components except for CHL are export driven.

IF you believe that the $SPX will go down further, so will EEM. save your capital...better prices ahead.

If you think we have bottomed...then maybe EWZ and EEM is a better buy. EWM is dominated by Sime Darby..a local unilever, none of the stocks in EWM trade elsewhere other than the KL exchange..different animal there altogether...and the ruling party UMNO ..has a nice stake in the largest companies. ITs a political story..not neccesary just a growth story..there is valuation component, then a speculative premium...or discount :)

EEM is a trading stock..1-2% a day moves...in either direction. Look at the average true range.it belongs to traders now, not buy and hold investors.

IF you believe in fundamentals...EEM is a p/e of 16 around the same as S&P trailing earnings at these levels..long term average for the S&P is 15.

Moon,
The main reasons for my turning bullish are:
Market is oversold with improving breadth, giving a positive divergence.
Pessimism is elevated and ubiquitous.
My 5-Day Momentum indicator is entering "buy Mode"
Sorry, I did not realized that you ask for reasons before.

cyderman: it's all in where one draw's the lines I suppose. Here's my chart using "closing Values" instead of H/L like it seems you are using. Eye of the beholder I guess.

Gold line is based on weekly closes where as purple line is based on daily closings.

http://tinyurl.com/25hza7

Thoughts when looking at yours then mine?

Craig: Jim Grant always looks like that. He's one smart guy!

AU - Anglogold Ashanti has been plunging the last couple of days. It seems oversold. Anyone have an opinion on this one? No position

Aurator: Yes, smart. A little "different" in that Professorial/studious kind of way.

Putting him on a split screen with Ms. Browne was interesting.

I liked his take on how the market was *adjusting value*. I must agree, "Cash is comfy".

William Lerach committed fraud. As a lawyer for Milberg Weiss he put into question the integrity of the US Judicial system. But Lerach is now up for sentencing and many want the federal Judge to impose leniency. Look at the influentials that have pleaded with the judge to let this crook go free.

http://investigatethesec.com/drupal-5.5/node/171

"AngloGold Ashanti Ltd. (AU:anglogold ashanti ltd sponsored adr
Last: 34.70-1.61-4.43%

11:52am 02/11/2008

AU 34.70, -1.61, -4.4%) said Thursday that the power shortage currently facing the company will account for an estimated reduction in production of approximately 400,000 ounces of gold in 2008, assuming that a sustainable 90% power supply is achieved for the remainder of the year."

Thinking about selling jan 09 12.5 puts 1.20 on
FORM which is at 19.83.

Input?

The gold juniors that I follow are up big although on modest volume. Seems like speculators are coming back with the support at 1320 / 12,000 seemingly established. I suppose it will be like this when the market finds its ultimate bottom. The juniors will come roaring back.

THANKS WILL

If a huge company like AIG had over valued their Credit Default Swaps and didn't change anything until the auditor instructed them to: how many other companies currently have over valued CDS's on their books?

What are the top companies that have CDS exposure? How large is the CDS market compared to the 'sub prime' market in terms of balance sheet risk? On a general basis how have the prices of CDS's dropped/risen in the past few months to a year. And how many companies haven't written down their CDS investments by a similiar amount as the broad CDS market move?

OBFUSCATION

One of the Cara 100 stocks, Whirlpool reported record earnings last week and the stock rocked 10% higher on the news. I remember wondering how business was so good considering the state of the US housing market.

Herb Greenberg reports:
SAN DIEGO (MarketWatch) -- Here's something that you won't see in the spin cycle from Whirlpool: While its main business is making washers, dryers and other bulky appliances, a big part of its profits are from tax credits.
By "big," I mean it appears that last quarter, in a roundabout way, tax credits helped boost Whirlpool's earnings by 26% -- and not just any tax credits, but Brazilian tax credits.
That isn't normally the kind of stuff that makes for fun weekend reading. But considering that Whirlpool doesn't go out of its way to point this out when it reports earnings -- there was nothing about Brazilian tax credits in a recent statement heralding "record results" -- I figured that I would. After all, 26% is a significant number. To put it in perspective, according to Citigroup analyst Jeffrey Sprague, 63 cents of the $2.38 a share came from the tax credit.

Digging into the 10k report, it was indeed reported as required.

Credit Default Swaps better not fail, leading to a domino effect that turns the mountain of derivatives into an avalanche of bank failures...that's all that needs to be said. Unless you own gold of course.

g034,

We may be in a similar circumstance if POG initiates a parabolic move induced by serious short covering.

FWIV, several traders I know are adding serios short positions in gold futures.

To me that is a sign that a short squeeze blowoff may be in the cards if for some reason we get a fast move over 1.000.

As for the potential second shoulder, it seems to me as too soon to call, yet.

Cheers mate,

Also, iirc, almost 50% of the earnings of the large financials were accounted for by these "products". If that is true, has the possible failure of said products and subsequent decline in this part of earnings been factored into future estimates?

If anyone with some experience in this area knows the answer to this, we'd all like to hear from you.

Financials have historically been a "tell" on the broad market, btw.

Good evening maromatics!

I have never understood why a trader would want to short gold. Not the traditional trading reasons, but for the risk reward. Is the possible downside move worth the risk that a short is taking should some financial or geopolitical event take place that gaps gold higher? There are too many markets to trade to risk a career ending trade, IMO.

There is a rumor via a minyanville professor that AngloGold has found a huge gold deposit in Columbia but has not announced it yet. Take it for what it is worth.

geckojb
The time frames of our charts is different too. My lower trendline starts mid 03. I don't own it, but if I did, I'd sell if it broke 127 (assuming I wasn't frozen by indecision!!!)

PDA bouncing off resistance again at the 50 day EMA . . .taking profits on remaining @ 46.44 . . .observations--compared to SDA, PDA has less volume, larger bid ask spreads and no options. Most PDA trades in smaller lots. May go higher, but considering overall market trend, feel prudence is the best path to follow. (Note: SDA recently split)

g034 hope you're feeling better and thanks for your insights on gold.

Investors Business Daily Bahamas writeup.

In case you did not see it, todays IBD has a 3 page ad section on "It's better in the Bahamas"

Interesting articles - Paid ads - but informative.

wabrew, I saw the same ad this am and forgot to mention it here....sorry, Bill.

Credit swaps and third party risk - puts this whole timebomb in perspective

http://tinyurl.com/39mswt

"Banks are driving the cost of protecting corporate bonds from default to the highest on record as they seek to hedge against losses on collateralized debt obligations, according to traders of credit-default swaps. "

http://tinyurl.com/2mau2p

"Traders and analysts said they thought a CDO or CPDO was being unwound. Unwinding one of these structures involves buying large amounts of protection through the credit default swap market, which pushes the cost of protection higher."

http://tinyurl.com/2vpf2x

“The traders have been manic all morning,” said one strategist. “It looks like there’s a CDO unwind in there or a CPDO, particularly within financials.”

Buying opportunity today? XLE doing pretty well.

they continue to prop this market up...have to say, however, it feels more like a rise in a road that continues to twist and turn downhill....

Full position in HND.to @ 17.55, 10X average volume traded today (target to unload: spring, or when 10% up, then will reassess).

36,000 YAHOO Mar 30 calls traded today, straddle in place.

Question: if a multi-line "bailout" is announced, what do you think will happen to XLF (financial etf) in the near-term?

I'm not focusing my thoughts on long-term effects - just short-term (days.)

TIA Dave

Monoline bailout will lift XLF, IMHO. I closed my puts on XLF this AM for 25% gain. However I swapped them for fewer puts on ABK and MBI directly. House money burns cleaner. I plan to short the heck out of XLF again when the tile looks roght. Holding SKF and SRS as the long term trend is clear.

Short/puts XLF "when the time looks right".

Regarding Bill's "trade of the generation" of buying gold and shorting bonds which may set up sometime down the road:

About 5 or 6 years ago, I started thinking about the typical investor in America - the 401k holder. I realized that major trends can last for 20 years or so. If the typical 401k investor could only buy stocks and/or bonds and the bull markets in both were eventually going to end with the end of historically low yields, how would mom and pop be able to pay for retirement. Much of the sales literature at the time (and now as well), encompassed the last 20 years or less which was the last bull market with falling interest rates. It could have stated that over the last 100 years, that we have had just as many bear markets as bull markets, but they didn't.

We know that the last stock and bond bull started when interest rates peaked around 1980 (that's the 20 years), then what happens to 401k choices anticipated performance? Stocks, bonds, balanced funds do poorly in a rising interest rate environment. If we were looking at a 1970's type market, what asset classes did well during the last bear market? What investments did well when monetary inflation was high? The answer was gold and commodities, not paper.

The gold breakout in 2002 told me that I was on to something. But after the last 20 year bear market in gold, how could you convince mom and pop to buy gold? What if I was wrong? Better keep my mouth shut at cocktail parties...especially if smarty pants Uncle Al was there with a drink in his hand :-0

Back then, I did a search on gold in portfolios and found this on HarryBrowne.org, called the Permanent Portfolio:

http://www.harrybrown.org/PermanentPortfolioResults.htm

The portfolio consisted of S&P 500 Index fund, 30 Yr. T-bond, American Eagle Gold coins and 1 yr. T-Bill. I think it was 30-30-30-10, but not sure.

I also found that some other guys were running mutual funds that were similar (see Hussman and the Permanent Portfolio), but I wasn't looking to start a mutual fund company, so I didn't mind not being first to the party ;-). (disclosure: I do not own, or recommend the funds mentioned, there are probably more now, I am just stating a fact, do your own due diligence).

If you notice, since 1970 (including the 1970’s bear market), that portfolio, rebalanced at the beginning of every year only had four down years; -6.2%, -2.4%, -1.0% and -0.7%. Well, after the 2000 bubble burst, most investors would take those down years. The compound annual growth rate was over 9%, which many people would have taken back in 2002 also. IMO at the time, if a trader traded this portfolio, taking gains into RSI strength and adding back on RSI weakness in the broad asset classes, the returns would be improved and with the prudent use of options, mom and pop could build their own "absolute return" portfolio without using complex instruments. What if you used Cara 100 stocks instead of S&P 500 stocks?

Why am I bringing this up?

- I was right on gold, but years later I am still waiting on the bond collapse. You've got to watch the charts, trading on what you "think" may happen usually leads to losses. Have yet to short bonds.

- I think that many 401k plans are limited. One can think of their total portfolio and use asset classes that are not offered in their 401k in either a taxable account or self directed IRA.

- If you are worried about stocks and bonds now, you may want to do some further investigation into Harry Browne’s Permanent Portfolio asset allocation model or maybe better yet, listen to Bill.

- this portfolio may benefit from Bill’s “trade of the generation”.

- there are many different ways to manage a portfolio, thinking outside the box can be beneficial.

Let me be clear – I am not selling anything, or recommending this strategy. I simply think that it may be worth further study from the readers here that are worried about bonds finding a top.

Good luck and let us know what you find!

Traditional financial planning models no longer apply IMHO. They all tell you diversify and hold, to guarantee 8%+. However the US Dollar has lost almost 40% of it's value since 2000, so investors are kidding themselves if they think they are ahead. Especially traditional fixed income investors.

I think we have arrived at a complete paradigm reversal. Debt revulsion, end of the real estate cycle, entering a Kondratieff wave winter, end of the bond supercycle.

Rent, sell/short stocks, sell/short bonds, buy commodities, gold, and energy. Look at your former strategy in the mirror. Standard of living reversal as well; it will continually get worse for years. Peter Schiff will look like an optimist.

"William Lerach committed fraud."

He was sentenced to two years. Likely considerably shorter than it will take for his victims to recover.

WGW Observation: Keeping a lid on WGW, UBSS has 200k shares for sale at 3.60 on my screen. All other bid/ask share amounts are in the low to mid 4 figure area. Hi for the day is 3.59.

Bill,

You've probably answered this before, but I was wondering why you track IYH and IYZ in the GIC Sector ETFs, rather than HLV and XLK (perhaps somebody else could post a link if this has been previously answered). Thanks

I mean XLV, not HLV

Many contributors here seem to be ultrabullish in the short-term on the POG and/or gold shares. One caveat: if the U.S. stock market trades down hard over the next few weeks as we expect, then I expect the POG to get pulled down simulataneously. Not because gold's inherent bull market is over--just because some investors will be forced to sell their gold holdings due to margin calls, losses, etc. in their equity accounts (good investments are liquidated to pay for bad investments). The temporary POG downtrade would continue into late Feb/early March.

Long-term, there are two ways we believe the bull market in gold will end: 1) only after the U.S. government announces and begins to implement policies to get their fiscal house in order (cutting spending and reducing entitlements to eliminate deficits) as well as the central bank deciding to protect the domestic and international value of the dollar or 2) a deflationary collapse in financial markets coupled with a depressionary collapse in the U.S. economy.

Our view on the POG was published in our June 2006 research report entitled "Gold and the U.S. Dollar" available on the GlobalMarkets website. Note that the POG research relates to the domestic value of the U.S. dollar--we still have gold share prices on our list of future research topics.

JW
http://www.2globalmarkets.com

p.s. Click on "To the Archive" on the GlobalMarkets' homepage for the June 2006 research article on gold.

http://www.2globalmarkets.com

RE: AIG

I notice AIG is the counterparty for the LSE traded commodity ETFS. Anyone care to comment on how much risk is in these ETFS? AIG guarantees the payments
http://www.etfsecurities.com/en/updates/document_pdfs/ETFS_Agriculture_Fact_Sheet.pdf

Long XLF at eod today.

Re FranSix 9:14 AM:
"silver appears to be advancing against gold due to seasonal factors"

SLW looks well positioned to the upside with MACD set to cross the trigger from below on record volume today.

I have been in and out of SLW many times during the last years with good gains. Thanks Bill.

Disclosure: long SLW.

GDM vs HUI and XAU

GDM barely up today while HUI and XAU up around 0.4%. Anyone know why this divergence is occurring?

Steve...

I think bill sums up the move

This week, $XAU (the Philadelphia Exchange goldminer index) dropped -1.82 pct from 184.61 to 181.25. A week ago there was a loss too, despite gold and silver soaring, and I wrote than, “Not much, but the loss came on Friday, and was led by the Big Three. Three weeks ago $XAU was at 193.55.”

Are you getting the message? There’s a squeeze on the futures traders, while the big capital pools are offing their stock positions. Banks have no money in the till to lend to the miners, so industry people will have to do like the bankers before them, go hat in hand to the Middle East and Far East gazillionaires for investment.

Gazillionaires want cheap stock.

Recently I wrote, “The past few weeks have been much more explosive to the upside than I had expected, and I was looking for a pull back.” I am still looking for a pull-back, but the Fed and the Administration are keeping the full-court press on with their pump, pump, pumping action.

Maybe that action ceases, and the $USD strengthens here

"Banks have no money in the till to lend to the miners, so industry people will have to do like the bankers before them, go hat in hand to the Middle East and Far East gazillionaires for investment."

I think that's a grey alien. Lots of people around to lend to miners in Canada.

And, if I may add, there are a few miners around with hard money in the ground waiting to be developed and extracted.

I'm concerned that the South African power outages will continue to drag down SA gold stocks like AU, GFI, and HMY. Any suggestions how I could participate in the broad gold sector with a vehicle like GDX while avoiding South African stocks? I know one idea is to buy GDM components without SA stocks, though I wanted alternatives. Thanks.

I recall taking some heat last year for suggesting KRY was an untradeable lottery ticket. Anyway, Bill, take it as a compliment that a pumper thought your name carried enough clout to help him get rid of his junky stock.

By the way, all you longs will appreciate that things can only get better from here. Enjoy the headline that just popped up:

Earnings: Nowhere to go but up

http://money.cnn.com/2008/02/11/markets/markets_earnings/index.htm

There you go. It's all a one-way bet from here on in. Load up your GOOG and kick back.

Hey, Joe Namath called a Super Bowl, Ruth called his home run, and now Alexandra Twin calls the market - it's all up from here, earningswise.

Hi.

I read the article on National Post. Congratulations.

I wonder how the jornalist did the article without mention the words "Bear", "Recession", "Bloodbath", "Financial Armageddon", and so on. Strange...

Thanks,

How did these terms become synonymous with Bill Cara in your mind?

I thought BC was about trading price cycles, not one side of the market or another.
So I think the author was accurate in not using those terms.

Those terms are for talking heads that want to influence/make markets, not those who simply study them as they are.

The Fed, HUD and the Hope Now Alliance offer more help to delinquent homeowners in America-

Quick on the heels of the Hope Now program is 'Project Lifeline'. It's not just for folks with bad credit histories, either.

http://tinyurl.com/36lz56

Re chartposting and Tiny URL links

I checked out the Google docs page today and I'm starting to really like it, thanks for the push SiO2.

I've updated my tips / tricks & notes on the subject and now have them at the following link. I also found a excellent short video showing how to use the Tiny URL function.

http://tinyurl.com/29fv5t

My goodness. I just ventured into the Yahoo Message Board and now I need a shower. I thought that stockhouse.ca was bad for pumpers and bashers. Yahoo is an absolute cesspit. Thank you Bill for hosting a place of integrity and civility!

QUASI:

You done good son,real good. thanks for the effort.

Mr. Cara:

With respect to your response to that false Yahoo post...it's good to see that you defended your position and set the record straight. I say this as a KRY long who, with many other longs, left the Yahoo board after witnessing it devolve into a cesspool of insults and false information (The false Dow Jones "Permit Denied" press release posted by someone on Yahoo almost gave me heart failure). There should be a law. I must say that it didn't come as good news when you changed your opinion of Crystallex after the departure of Todd Bruce. I have continued to hold given my circumstances but do miss your endorsement of my investment.

EEMTRADER, thanks

I also tried making my first video on the TinyURL link, but low resolution and not as good as the other one I found. If it's not broke don't fix it.

I'm currently looking at slide show techniques to visually expand on the details for charts, screen shots and annotations.

I'll update that same page as we go along.

Thanks Bill. You are a class act.

"Lugopt, re: Posted by: Lugopt at February 11, 2008 6:59 PM, thank you for your contributions. I welcome every time you make one. Obviously, English is not your first language, and the e-mails/Internet is not a particularly friendly place for people who are not skilled in media communications. Thank you for making the effort."

Please accept my apologies if my post seemed too critical/unfriendly. Clearly I'm not skilled in media communications either. Sometimes I forget this blog is multilingual and world-wide.
My bad.

In my quest in finding how Bill's Trade of the Generation (TOG) may develop into a possibility, I came across a recent analysis from Professor Nouriel Roubini of the Stern School of Business at New York University.

He was in the clear minority early last year with everyone in the media literally laughing at him.

Robert Lenzner 02.25.08 Forbes magazine said this of his analysis:

It may be time to christen a new Dr. Doom. The candidate: Nouriel Roubini, an economist at New York University's business school. He makes the old Dr. Doom, bond pessimist Henry Kaufman, look like Dr. Phil. No mincer of words, Roubini thinks a full-blown panic will scorch the global economy. He recently laid out his scenario for central bankers in Davos and had them chewing it for hours.

He thinks the immediate spark will be the collapse of bond insurers (MBIA, Ambac, FGIC and others). These insurers have guaranteed $72 billion worth of collateralized debt obligations, now crumbling in value as housing prices fall.

Cheerier sages see an economy lifting off in the second half, fueled by the Fed's rate cuts, and a rebound in the shares of bond insurers. Roubini says lower rates won't help. There are significant risks of insolvency. Here's his prediction of how it'll play out:

http://www.rgemonitor.com/blog/roubini/242290/

I just realized you have to be registered (at no cost) to see the article...For those who do not wish to register, I'll just copy it here...

The Rising Risk of a Systemic Financial Meltdown:
The Twelve Steps to Financial Disaster
by Nouriel Roubini

Why did the Fed ease the Fed Funds rate by a whopping 125bps in eight days this past January? It is true that most macro indicators are heading south and suggesting a deep and severe recession that has already started. But the flow of bad macro news in mid-January did not justify, by itself, such a radical inter-meeting emergency Fed action followed by another cut at the formal FOMC meeting.

To understand the Fed actions one has to realize that there is now a rising probability of a "catastrophic" financial and economic outcome, i.e. a vicious circle where a deep recession makes the financial losses more severe and where, in turn, large and growing financial losses and a financial meltdown make the recession even more severe. The Fed is seriously worried about this vicious circle and about the risks of a systemic financial meltdown.

That is the reason the Fed had thrown all caution to the wind - after a year in which it was behind the curve and underplaying the economic and financial risks - and has taken a very aggressive approach to risk management; this is a much more aggressive approach than the Greenspan one in spite of the initial views that the Bernanke Fed would be more cautious than Greenspan in reacting to economic and financial vulnerabilities.

To understand the risks that the financial system is facing today I present the "nightmare" or "catastrophic" scenario that the Fed and financial officials around the world are now worried about. Such a scenario - however extreme - has a rising and significant probability of occurring. Thus, it does not describe a very low probability event but rather an outcome that is quite possible.

Start first with the recession that is now enveloping the US economy. Let us assume - as likely - that this recession - that already started in December 2007 - will be worse than the mild ones - that lasted 8 months - that occurred in 1990-91 and 2001. The recession of 2008 will be more severe for several reasons: first, we have the biggest housing bust in US history with home prices likely to eventually fall 20 to 30%; second, because of a credit bubble that went beyond mortgages and because of reckless financial innovation and securitization the ongoing credit bust will lead to a severe credit crunch; third, US households - whose consumption is over 70% of GDP - have spent well beyond their means for years now piling up a massive amount of debt, both mortgage and otherwise; now that home prices are falling and a severe credit crunch is emerging the retrenchment of private consumption will be serious and protracted. So let us suppose that the recession of 2008 will last at least four quarters and, possibly, up to six quarters. What will be the consequences of it?

Here are the twelve steps or stages of a scenario of systemic financial meltdown associated with this severe economic recession.

First, this is the worst housing recession in US history and there is no sign it will bottom out any time soon. At this point it is clear that US home prices will fall between 20% and 30% from their bubbly peak; that would wipe out between $4 trillion and $6 trillion of household wealth. While the subprime meltdown is likely to cause about 2.2 million foreclosures, a 30% fall in home values would imply that over 10 million households would have negative equity in their homes and would have a big incentive to use "jingle mail" (i.e. default, put the home keys in an envelope and send it to their mortgage bank). Moreover, soon enough a few very large home builders will go bankrupt and join the dozens of other small ones that have already gone bankrupt thus leading to another free fall in home builders' stock prices that have irrationally rallied in the last few weeks in spite of a worsening housing recession.

Second, losses for the financial system from the subprime disaster are now estimated to be as high as $250 to $300 billion. But the financial losses will not be only in subprime mortgages and the related RMBS and CDOs. They are now spreading to near prime and prime mortgages as the same reckless lending practices in subprime (no down-payment, no verification of income, jobs and assets (i.e. NINJA or LIAR loans), interest rate only, negative amortization, teaser rates, etc.) were occurring across the entire spectrum of mortgages; about 60% of all mortgage origination since 2005 through 2007 had these reckless and toxic features. So this is a generalized mortgage crisis and meltdown, not just a subprime one. And losses among all sorts of mortgages will sharply increase as home prices fall sharply and the economy spins into a serious recession. Goldman Sachs now estimates total mortgage credit losses of about $400 billion; but the eventual figures could be much larger if home prices fall more than 20%. Also, the RMBS and CDO markets for securitization of mortgages - already dead for subprime and frozen for other mortgages - remain in a severe credit crunch, thus reducing further the ability of banks to originate mortgages. The mortgage credit crunch will become even more severe.

Also add to the woes and losses of the financial institutions the meltdown of hundreds of billions of off balance SIVs and conduits; this meltdown and the roll-off of the ABCP market has forced banks to bring back on balance sheet these toxic off balance sheet vehicles adding to the capital and liquidity crunch of the financial institutions and adding to their on balance sheet losses. And because of securitization the securitized toxic waste has been spread from banks to capital markets and their investors in the US and abroad, thus increasing - rather than reducing systemic risk - and making the credit crunch global.

Third, the recession will lead - as it is already doing - to a sharp increase in defaults on other forms of unsecured consumer debt: credit cards, auto loans, student loans. There are dozens of millions of subprime credit cards and subprime auto loans in the US. And again defaults in these consumer debt categories will not be limited to subprime borrowers. So add these losses to the financial losses of banks and of other financial institutions (as also these debts were securitized in ABS products), thus leading to a more severe credit crunch. As the Fed loan officers survey suggest the credit crunch is spreading throughout the mortgage market and from mortgages to consumer credit, and from large banks to smaller banks.

Fourth, while there is serious uncertainty about the losses that monolines will undertake on their insurance of RMBS, CDO and other toxic ABS products, it is now clear that such losses are much higher than the $10-15 billion rescue package that regulators are trying to patch up. Some monolines are actually borderline insolvent and none of them deserves at this point a AAA rating regardless of how much realistic recapitalization is provided. Any business that required an AAA rating to stay in business is a business that does not deserve such a rating in the first place. The monolines should be downgraded as no private rescue package - short of an unlikely public bailout - is realistic or feasible given the deep losses of the monolines on their insurance of toxic ABS products.

Next, the downgrade of the monolines will lead to another $150 of writedowns on ABS portfolios for financial institutions that have already massive losses. It will also lead to additional losses on their portfolio of muni bonds. The downgrade of the monolines will also lead to large losses - and potential runs - on the money market funds that invested in some of these toxic products. The money market funds that are backed by banks or that bought liquidity protection from banks against the risk of a fall in the NAV may avoid a run but such a rescue will exacerbate the capital and liquidity problems of their underwriters. The monolines' downgrade will then also lead to another sharp drop in US equity markets that are already shaken by the risk of a severe recession and large losses in the financial system.

Fifth, the commercial real estate loan market will soon enter into a meltdown similar to the subprime one. Lending practices in commercial real estate were as reckless as those in residential real estate. The housing crisis will lead - with a short lag - to a bust in non-residential construction as no one will want to build offices, stores, shopping malls/centers in ghost towns. The CMBX index is already pricing a massive increase in credit spreads for non-residential mortgages/loans. And new origination of commercial real estate mortgages is already semi-frozen today; the commercial real estate mortgage market is already seizing up today.

Sixth, it is possible that some large regional or even national bank that is very exposed to mortgages, residential and commercial, will go bankrupt. Thus some big banks may join the 200 plus subprime lenders that have gone bankrupt. This, like in the case of Northern Rock, will lead to depositors' panic and concerns about deposit insurance. The Fed will have to reaffirm the implicit doctrine that some banks are too big to be allowed to fail. But these bank bankruptcies will lead to severe fiscal losses of bank bailout and effective nationalization of the affected institutions. Already Countrywide - an institution that was more likely insolvent than illiquid - has been bailed out with public money via a $55 billion loan from the FHLB system, a semi-public system of funding of mortgage lenders. Banks' bankruptcies will add to an already severe credit crunch.

Seventh, the banks losses on their portfolio of leveraged loans are already large and growing. The ability of financial institutions to syndicate and securitize their leveraged loans - a good chunk of which were issued to finance very risky and reckless LBOs - is now at serious risk. And hundreds of billions of dollars of leveraged loans are now stuck on the balance sheet of financial institutions at values well below par (currently about 90 cents on the dollar but soon much lower). Add to this that many reckless LBOs (as senseless LBOs with debt to earnings ratio of seven or eight had become the norm during the go-go days of the credit bubble) have now been postponed, restructured or cancelled. And add to this problem the fact that some actual large LBOs will end up into bankruptcy as some of these corporations taken private are effectively bankrupt in a recession and given the repricing of risk; convenant-lite and PIK toggles may only postpone - not avoid - such bankruptcies and make them uglier when they do eventually occur. The leveraged loans mess is already leading to a freezing up of the CLO market and to growing losses for financial institutions.

Eighth, once a severe recession is underway a massive wave of corporate defaults will take place. In a typical year US corporate default rates are about 3.8% (average for 1971-2007); in 2006 and 2007 this figure was a puny 0.6%. And in a typical US recession such default rates surge above 10%. Also during such distressed periods the RGD - or recovery given default - rates are much lower, thus adding to the total losses from a default. Default rates were very low in the last two years because of a slosh of liquidity, easy credit conditions and very low spreads (with junk bond yields being only 260bps above Treasuries until mid June 2007). But now the repricing of risk has been massive: junk bond spreads close to 700bps, iTraxx and CDX indices pricing massive corporate default rates and the junk bond yield issuance market is now semi-frozen.

While on average the US and European corporations are in better shape - in terms of profitability and debt burden - than in 2001 there is a large fat tail of corporations with very low profitability and that have piled up a mass of junk bond debt that will soon come to refinancing at much higher spreads. Corporate default rates will surge during the 2008 recession and peak well above 10% based on recent studies. And once defaults are higher and credit spreads higher massive losses will occur among the credit default swaps (CDS) that provided protection against corporate defaults. Estimates of the losses on a notional value of $50 trillion CDS against a bond base of $5 trillion are varied (from $20 billion to $250 billion with a number closer to the latter figure more likely). Losses on CDS do not represent only a transfer of wealth from those who sold protection to those who bought it. If losses are large some of the counterparties who sold protection - possibly large institutions such as monolines, some hedge funds or a large broker dealer - may go bankrupt leading to even greater systemic risk as those who bought protection may face counterparties who cannot pay.

Ninth, the "shadow banking system" (as defined by the PIMCO folks) or more precisely the "shadow financial system" (as it is composed by non-bank financial institutions) will soon get into serious trouble. This shadow financial system is composed of financial institutions that - like banks - borrow short and in liquid forms and lend or invest long in more illiquid assets. This system includes: SIVs, conduits, money market funds, monolines, investment banks, hedge funds and other non-bank financial institutions. All these institutions are subject to market risk, credit risk (given their risky investments) and especially liquidity/rollover risk as their short term liquid liabilities can be rolled off easily while their assets are more long term and illiquid. Unlike banks these non-bank financial institutions don't have direct or indirect access to the central bank's lender of last resort support as they are not depository institutions. Thus, in the case of financial distress and/or illiquidity they may go bankrupt because of both insolvency and/or lack of liquidity and inability to roll over or refinance their short term liabilities. Deepening problems in the economy and in the financial markets and poor risk managements will lead some of these institutions to go belly up: a few large hedge funds, a few money market funds, the entire SIV system and, possibly, one or two large and systemically important broker dealers. Dealing with the distress of this shadow financial system will be very problematic as this system - stressed by credit and liquidity problems - cannot be directly rescued by the central banks in the way that banks can.

Tenth, stock markets in the US and abroad will start pricing a severe US recession - rather than a mild recession - and a sharp global economic slowdown. The fall in stock markets - after the late January 2008 rally fizzles out - will resume as investors will soon realize that the economic downturn is more severe, that the monolines will not be rescued, that financial losses will mount, and that earnings will sharply drop in a recession not just among financial firms but also non financial ones. A few long equity hedge funds will go belly up in 2008 after the massive losses of many hedge funds in August, November and, again, January 2008. Large margin calls will be triggered for long equity investors and another round of massive equity shorting will take place. Long covering and margin calls will lead to a cascading fall in equity markets in the US and a transmission to global equity markets. US and global equity markets will enter into a persistent bear market as in a typical US recession the S&P500 falls by about 28%.

Eleventh, the worsening credit crunch that is affecting most credit markets and credit derivative markets will lead to a dry-up of liquidity in a variety of financial markets, including otherwise very liquid derivatives markets. Another round of credit crunch in interbank markets will ensue triggered by counterparty risk, lack of trust, liquidity premia and credit risk. A variety of interbank rates - TED spreads, BOR-OIS spreads, BOT - Tbill spreads, interbank-policy rate spreads, swap spreads, VIX and other gauges of investors' risk aversion - will massively widen again. Even the easing of the liquidity crunch after massive central banks' actions in December and January will reverse as credit concerns keep interbank spread wide in spite of further injections of liquidity by central banks.

Twelfth, a vicious circle of losses, capital reduction, credit contraction, forced liquidation and fire sales of assets at below fundamental prices will ensue leading to a cascading and mounting cycle of losses and further credit contraction. In illiquid market actual market prices are now even lower than the lower fundamental value that they now have given the credit problems in the economy. Market prices include a large illiquidity discount on top of the discount due to the credit and fundamental problems of the underlying assets that are backing the distressed financial assets. Capital losses will lead to margin calls and further reduction of risk taking by a variety of financial institutions that are now forced to mark to market their positions. Such a forced fire sale of assets in illiquid markets will lead to further losses that will further contract credit and trigger further margin calls and disintermediation of credit. The triggering event for the next round of this cascade is the downgrade of the monolines and the ensuing sharp drop in equity markets; both will trigger margin calls and further credit disintermediation.

Based on estimates by Goldman Sachs $200 billion of losses in the financial system lead to a contraction of credit of $2 trillion given that institutions hold about $10 of assets per dollar of capital. The recapitalization of banks sovereign wealth funds - about $80 billion so far - will be unable to stop this credit disintermediation - (the move from off balance sheet to on balance sheet and moves of assets and liabilities from the shadow banking system to the formal banking system) and the ensuing contraction in credit as the mounting losses will dominate by a large margin any bank recapitalization from SWFs. A contagious and cascading spiral of credit disintermediation, credit contraction, sharp fall in asset prices and sharp widening in credit spreads will then be transmitted to most parts of the financial system. This massive credit crunch will make the economic contraction more severe and lead to further financial losses. Total losses in the financial system will add up to more than $1 trillion and the economic recession will become deeper, more protracted and severe.

A near global economic recession will ensue as the financial and credit losses and the credit crunch spread around the world. Panic, fire sales, cascading fall in asset prices will exacerbate the financial and real economic distress as a number of large and systemically important financial institutions go bankrupt. A 1987 style stock market crash could occur leading to further panic and severe financial and economic distress. Monetary and fiscal easing will not be able to prevent a systemic financial meltdown as credit and insolvency problems trump illiquidity problems. The lack of trust in counterparties - driven by the opacity and lack of transparency in financial markets, and uncertainty about the size of the losses and who is holding the toxic waste securities - will add to the impotence of monetary policy and lead to massive hoarding of liquidity that will exacerbates the liquidity and credit crunch.

In this meltdown scenario US and global financial markets will experience their most severe crisis in the last quarter of a century.

Can the Fed and other financial officials avoid this nightmare scenario that keeps them awake at night? The answer to this question - to be detailed in a follow-up article - is twofold: first, it is not easy to manage and control such a contagious financial crisis that is more severe and dangerous than any faced by the US in a quarter of a century; second, the extent and severity of this financial crisis will depend on whether the policy response - monetary, fiscal, regulatory, financial and otherwise - is coherent, timely and credible. I will argue - in my next article - that one should be pessimistic about the ability of policy and financial authorities to manage and contain a crisis of this magnitude; thus, one should be prepared for the worst, i.e. a systemic financial crisis.

Chrysler-Scale Bailout Of Those Monolines
Robert Lenzner, 02.11.08, 6:00 AM ET

http://tinyurl.com/23kkdy

ALOHA !!

I drove to Hilo today to do some errands and look for a new truck! I have been waiting for the prices to come down some and they have. I went to the Big Island Toyota dealer pricing out a four door Toyota Tacoma. Toyota trucks seem to hold their value better than any other vehicles. I plan to pay cash but I wanted to see what interest rate I'd get if I financed. The car guy did his hocus pocus disappearing act and came back from the Wizard's Dungeon and said, "Your credit is excellent ... no problem ... I think you'll be happy with this rate 7.5%!" Hummmm ... I then told him that back in the 1980s I had great credit and when I bought a truck then the rate was 17%!! It was a younger guy who was probably in elementary school back then, but he managed a "NAH! Really?" I said "Yep!" Then he got right back to biz and started talking about warranty stuff! He totally dismissed 17% like it was a fairytale from the middle ages! Something ancient and very distant!!!

While driving I tuned the radio to 670AM on my dial and listened a brief bit to Rush Limbaugh! He was talking about his jet and how he was going to fly to NYC from Florida tonight. "It's 78F here in Florida and when I get to NYC it'll be 11F and I'll just wear my shorts. I always wear shorts! I'll only be in the 11F NYC cold for a few seconds ... just going from the airport door to the limo door!" Yet another one of us commoners who rides in jets and limos wearing shorts in 11F!! Heck, I do that all the time!!!

He had a caller on there trying to explain that we should get out or Iraq because it is costing our country too much in terms of dollars and lives. Rush said that there should be no limit to the cost to protect this country. He also said that if we got out of Iraq it would send a message to our allies and our foes that we are a country of quitters! What message did Vietnam send? And by the way Rush, where were you during Vietnam? Pushing Cheney's wheelchair ...

I am no diplomat or a member of the UN, but I can recall the Iran/Iraq War where we, the USA, sent weapons and aid to Saddam Hussein so that he could defeat the radical Islamic Iran. Is there a chance that there are some Iranians still alive that remember that? Maybe even Ahminijad the elected leader of Iran today who served in the Iran military fighting Iraq? I can also recall how we, the USA, sent weapons and aid to Osama Bin Laden so that he could defeat the Russians in Afghanistan. Is there a chance there are still some Taliban Afghans alive that remember that? How about some Russians? Is there a Russian still alive who served in the KGB then that is now Preisdent of Russia who might recall that? I'll spell it out for you ... P-U-T-I-N! US foreign policy has been a disaster for decades. What messages were sent in those instances? No wonder Iran wants a nuke so they can protect themselves against the US! We have attacked Iran in every way except a nuke! We paid Saddam to do it for us ... I am sure Israel would be happy to take Saddam's place as America's Middle East Hit Man!

US Foreign Policy is in a shambles just like the US Dollar. That is no coincidence ... This is what you get when you have a huge CENTRAL government(empire)who believes it is their job to police the entire World. Rush Limbaugh also said today that if Hillary and Obama get in they will keep the US military in Iraq. I agree with that Rush!!!

go34 ... Harry Browne's Permanent Portfolio has been touted by Richard Maybury for at least a decade now! Like gold he has a portion of his portfolio with the Harry Browne strategy. He also is heavy into defense stocks since military action will continue for decades.

THANKS ACES...YOU'RE SCARING THE SH*T OUT OF ME...AGAIN. Sooooooooooooo..........whats the penalty for closing a 401 early? its not going to bounce back enough by the time I need it-in 10yrs!
g

ALOHA !!

Onlinesaces ... The article you posted a link to entitled,"Chrysler-scale Bailout Of Those Monolines"is appreciated. This same article is also linked on Jim Sinclair's website. Jim Sinclair praises the author for finally mentioning the "D" word ... derivatives as the basis for the current chaos of bond issuers.

All that said if you read the entire article you get to the last couple sentences and the author suggests that it is the Fed and the Treasury that need to act now via a bailout! He insists not to allow this to be resolved by "free markets"!

Up at the beginning of his article he speaks of the LTCM crisis in 1998. There was a bailout of some $150bilUSD back then to save the US financial system.

I mean, to me that is exactly the problem ... BAILOUTS! Each time there is a bailout those that get bailed out go right back into ever riskier ventures. According to the author of this article now there needs to be a $400bilUSD bailout. For what? These banks we bailout have become used to bailouts and in their feeble minds bailouts have become "safety nets" for their greed and gambling addiction! If I run up my credit card and then cannot pay back my debt do I ever get bailed out? I would say it is time to let the markets be really "free" and let the bankers feel the pain for once and not the US Taxpayer who is the true lender of last resort ...

READ ON:
LAST COUPLE PARAGRAPHS OF ARTICLE

Chrsyler-Scale Bailout Of Those Monolines

You want to know fear itself? The monolines apparently have guaranteed $1.5 trillion worth of variable-rate munis that might have to be liquidated should credit ratings be lowered. It's like Waiting for Godot, a frightening play whose tone is anxiety-provoking, to say the least. Ackman calls any downgrading of $1.5 trillion in muni bonds the potential linchpin of a systemic risk.

The rot is overwhelming. Who can deal with it? The Fed and Treasury should see this is no time to let the free market deal with a crisis. Yes, there's need for a cleanup of the mess. But first the bailout. Are you listening, Mr. Bernanke and Mr. Paulson? Get going.END

What happened to gold price ,just dropped $10 in minutes very strange, stabilized and working back up again

I see same thing happened yesterday at same time too.

John,

It could be the case that shorts are being sucked in.

If that would be true, the next move up would be quite interesing...

Just my VHO

ALOHA !!

johnuk ... Its the magic of global "free markets"!

Thank you for the response Bill.

I think most here know my world views are similar to yours and know I mean well and support the blog, however, even a small incident can be discouraging and I sure didn't mean to discourage any Caraista. No matter how small an incident, it requires taking responsibility and apologizing for the error. I hope Lugopt receives it as intended.

Bloomberg reports Buffett and Berk offering to take over *municipal* liability of the bond insurers. Not the total liability, just the municipal portion. This was for Ambac, MBIA and FGIC. One co. refused the offer so far, two others have not responded.

I would think Warren made a stink bid (he would never call it that) that would be for pennies on the dollar which is why I like Berk/B for some of us looking for world beating returns in the future. I think he can see and do things we mere mortals lack the depth and resources to achieve. I'm such a small peice that I feel like a gnat on a mite on a flea on the Berk dog.

2nd, this has got to make the financials take off. Taking a small bite of UYG at the open.
The ask/bid tends to get well ahead of itself in the premarket so I'll wait for it to settle out a bit.

Tuesday Discourse is up.