However, the two largest recipients of TARP money – Citigroup Inc. (NYSE: C) and Bank of America Corp. (NYSE: BAC) – have yet to pay back their loans and the government is still exposed to possible losses from those two heavyweights, as well as from smaller U.S. banks.

The government netted roughly $4 billion – the equivalent of a 15% annual return – from  eight of the biggest banks that have fully repaid their obligations to the government, according to calculations by The New York Times.

Those financial institutions consist of:

• Goldman Sachs Group Inc. (NYSE: GS) – $1.4 billion in profit.
• Morgan Stanley (NYSE: MS) – $1.3 billion in profit.
• American Express Co. (NYSE: AXP) – $414 million in profit.
• Northern Trust Corp. (NYSE: NTRS), The Bank of New York Mellon Corp. (NYSE: BK),    State Street Corp. (NYSE: STT), U.S. Bancorp (NYSE: USB) and BB&T Corp. (NYSE: BBT) – $100 million to $334 million in profit.
• Fourteen smaller banks that have repaid their debt – $35 million in profit.

JPMorgan Chase & Co. (NYSE: JPM) and Capital One Financial Corp. (NYSE: COF) could yield an additional profit of more than $3.1 billion in the coming month, but the final number is dependent on how much they will pay to buy back their warrants, The Times said.

Additionally, the U.S. Federal Reserve earned $16.4 billion through the first six months of the year, thanks to a range of rescue programs – including loans to investment banks and purchases of mortgage-backed securities – while the Federal Deposit Insurance Corp. (FDIC) saw a profit of more than $7 billion on the fees it charged through a program that guaranteed debt issued by banks. Still, the FDIC has agreed to assume most of the risk on $80 billion in loans and other assets, and expects to eventually have to cover $14 billion in future losses on deals cut so far, according to The Wall Street Journal.

“Taxpayers should heave a sigh of relief that the investment in banks protected them from even more catastrophic losses from more bank failures,” said Aswath Damodaran, a finance professor at the New York University’s Stern School of Business.

The government said last year that its decision to purchase preferred shares from hundreds of banks ravaged by mortgage defaults would yield a positive return, including a 5% quarterly dividend and warrants to buy stock in the banks at a set price over 10 years.

As many banks stanched their losses and began to turn a profit, the government authorized them to buy back the preferred stock, make the dividend payments for each quarter since October. Banks also were permitted to buy back the warrants, which had a low fixed price – and which provided therefore provided a windfall for the government as the markets rallied.

The U.S. should consider imposing an automatic ban on dividend payments by lenders when “the bank stock price plummets and the banks aren’t doing well,” New York Federal Reserve Chairman William Dudley told CNBC, expressing concern over how the payouts could end up dissipating the banks’ capital.

Should a bank lose capital because of a falling stock price, it could raise more capital by issuing debt that is convertible, Dudley said.

Had private investors taken matching stakes in the banks in October, they would have tripled their investment to roughly $12 billion, or 44% on an annual basis, according to University of Louisiana at Lafayette finance professor Linus Wilson, who analyzed the data for The Times. But there’s a good reason for that. Under this hypothetical scenario, the private investors would have demanded a higher rate of return, bought in at a lower price, or both – because of the high risk that they would have been incurring.

But the government wasn’t in this to make a profit – it was working to stabilize a financial system that was quickly losing the public’s confidence, experts note.

“Had these banks tried to raise money any other way, they probably would have had to pay quite a bit more than the government received,” Espen Robak, head of Pluris Valuation Advisors, which analyzes the value of large financial institutions, told The Times.

Threat Posed by Loss-Shares

Despite the encouraging news that taxpayers are getting strong returns on their reluctant investments, the loan guarantees invested in the two largest TARP recipients – Citigroup and Bank of America – have not yet been repaid. Citi received $50 billion in TARP funds, while BofA got $45 billion.

In the last month, Citigroup has seen its stock surge roughly 58%, along with a 19% return in the shares of BofA, which leaves the U.S. government sitting on a combined $18 billion of profits from the warrants it purchased last year.

Those banks also hold troubled mortgages and other loans that no one can put a value on – which is why these so-called “toxic assets” have yet to attract buyers.

“No one has a good handle how much is out there,” Elizabeth Warren, the chairman of the Congressional Oversight Panel who acts as the so-called “TARP watchdog,” told Reuters Television in an interview last month. “Here we are 10 months into this crisis…and we can’t tell you what the dollar value is.”

More than 50 deals brokered by the FDIC to absorb losses at small banks affected by the financial crisis still remain in place. These agreements to assume the risk of loans and other assets from the consolidation of failed banks are known as “loss-shares,” and are an important inducement for healthy banks to take over busted institutions.

The FDIC brokered the sale of Alabama’s Colonial BancGroup Inc.’s (OTC: CBCGQ) deposits to BB&T after Colonial failed. It also agreed to help BB&T buy Colonial’s $15 billion portfolio of loans and other assets and absorb over 80% of any future losses. Under the deal, BB&T’s losses are capped at $500 million and – in the unlikely event the entire portfolio becomes worthless – the FDIC is on the hook to cover the rest.

The FDIC sees these deals as a way to keep loans and other assets in the private sector, as well as mitigate the cost of cleaning up the industry.

It would cost the FDIC considerably more to simply liquidate the assets of failed banks, especially with more than 400 banks on its “problem list.” Loss-share deals will cost $11 billion less than if the agency seized assets and sold them, The Journal said, citing the FDIC.

So far this year, 109 banks have failed – quadruple the amount of failures in 2008. The FDIC’s recouping any lost money from the loss-share deals, many of which are in place for up to 10 years, is dependent on the recovery of the economy

Some worry that bankers may tire of the partnerships with the FDIC and not work toward fixing bad loans because the bulk of the losses will fall to the government. But agency officials maintain that because banks still have a “material” exposure, they will be reluctant to do this.

“There is certainly an incentive for the banks to play fair and do right, but there is never a limit on the ability of the private sector to shift cost to the government,” former FDIC general counsel John Douglas told The Journal.

A typical deal has the FDIC agreeing to cover 80% of future losses on a big portion of the assets, and 95% on the rest. However, the FDIC does not expect to see the 95% scenario play out on any of the deals it has made so far.

Source: U.S. Turning Profit on TARP, but Big Loans Remain in Banks’ Hands

There are a lot of uncertainties permeating the market right now, not the least of which is healthcare reform. Will that reform entail a public option that could add $1 trillion to the deficit?  How is reform going to be financed?  And is it going to mean higher costs for employers across the board, or just the healthcare insurers?

Investing is made infinitely more difficult when 18% of U.S. gross domestic product (GDP) is hanging in the balance.

And you still have to consider:

• That unemployment is likely to keep rising, perhaps over 10%.
• That the U.S. Federal Reserve’s policy of quantitative easing is slowing down.
• That there is almost certainly a second wave of home foreclosures on top of the current commercial real estate epidemic.
• And that retail sales are still a long way from recovery.

There is also reason to believe that the U.S. dollar will continue to be weak, though it probably won’t sell off precipitously.

The U.S. dollar has weekend against the Euro lately, having fallen 0.8% Friday.  Technically speaking the chart shows a traditional “cup and handle” formation that could lead to an acceleration of the dollar’s downward trend.  Gold prices, up about 13% Friday, confirm this trend and could soon break through the $1000/oz resistance.

Fundamentally, if the economy – encumbered by high unemployment and a relapse of the housing market – does not pick up the dollar could be further imperiled.

Weakness in the dollar will also be affected by the Fed’s withdrawal of liquidity, which is likely to proceed at a gradual pace.

Finally, diversification away from the dollar among the world’s central banks is taking place, albeit at a slower pace than many analysts have suggested, and that too, is weakening the dollar.

Let’s concede that there is no currency that could supplant the dollar as the world’s major reserve currency. So, it’s unlikely that the world’s central banks will simply abandon the dollar anytime soon. However, we must also acknowledge that a reduction in the weightings of the U.S. dollar within central bank reserves is already underway.

An Aug. 14 article by BNP Paribas currency strategist Ian Stannard in Euromoney recently described this gradual shift in currency reserves.  The article noted that only 62.5% of global currency reserves are in U.S. dollars, down from about 66% in 2005.

So I do not anticipate a sudden shift in central bank reserves, but rather a continuation of the measured restructuring we’ve seen so far. Thus, the slow weakening trend in the U.S. dollar is likely to continue.

So, in this very uncertain investment scenario, I prefer to go for more secure returns in bonds.  And we can achieve great diversification at a cheap cost with the iShares iBoxx $ Investment Grade Corporate Bond Fund (NYSE: LQD).

For starters, its weighted average coupon of 6.26% offers a current yield slightly north of 6% at today’s prices.  Investors are assuming interest rate risk, which means that if interest rates climb, the value of the bond has to come down.  But in the short term, there is no immediate threat of inflation.

Looking at the major holdings of the fund – which has no single position that accounts for more than 1.26% of its total holdings – I see some names that have demonstrated continued stability and others that have shown recent signs of improvement, such as American Express Co. (NYSE: AXP).  So I do not expect any major credit spread hiccup here.  I certainly do not see any hiccup that a 6.26% coupon would not compensate for.

For an additional hedge against dollar weakness, I suggest you revisit my June 8 recommendation of the iShares SPDR Gold Trust ETF (NYSE: GLD). You may also consider buying a bit of the PowerShares DB US Dollar Index Bearish (NYSE: UDN) fund.  Do not go overboard. Err on being light, rather than heavy on hedging, since timing currency moves is very difficult.

Recommendation: buy iShares iBoxx $ Investment Grade Corporate Bond Fund (NYSE: LQD) at market.  Consider hedging part of the US dollar risk by buying the iShares SPDR Gold Trust ETF (NYSE: GLD) and PowerShares DB US Dollar Index Bearish (NYSE: UDN). Both funds should account for a fraction of your position.  Have a 5% stop loss on UDN (**).

Source: Buy, Sell or Hold: The iShares iBoxx $ Investment Grade Corporate Bond Fund

In June, financial advisor and CNBC contributor Dennis Gartman even called Buffett “an idiot.”

But now that Berkshire has rallied more than 35% from its March lows, the only idiots to be found are those that ever doubted the world’s second-richest man’s business savvy. Indeed, many of the moves Buffett made during last year’s market melee are paying off in a big way.

Take, for instance, his $5 billion investment in Goldman Sachs Group Inc. (NYSE: GS). Berkshire last September agreed to buy $5 billion in perpetual preferred Goldman shares that pay 10% interest.  In addition, Berkshire received warrants giving it the right to buy $5 billion worth of Goldman’s common shares at any time over the next five years at a price of $115 per share.

Critics lampooned that deal when shares of Goldman Sachs fell to a 52-week low of $47.41 in November. Since then, however, Goldman’s stock has rocketed more than 240% to close yesterday (Tuesday) at $160.25.

If Berkshire cashed in it’s warrants today, it would make a 40% profit or about $2 billion. But Warren Buffett has always been a long-term investor, which makes that highly unlikely.

“We will hold the warrants,” Buffett said on Fox Business Network. “Every instinct in my body tells me that we will want to hold those warrants until they’re very close to their expiration date. The preferred pays us the dividend and the warrants are going to make us the money.”

While Berkshire waits, the $5 billion in preferred Goldman shares pay an annual interest of $800 million in dividends.

Berkshire’s total stake in Goldman is now worth more than $9 billion – $4 billion more than the company paid for it – according to University of Louisiana finance professor Linus Wilson.

Berkshire’s investment in BYD Co. Ltd., a Chinese producer of both cars and specialized batteries, has also paid off.  Berkshire’s MidAmerican Energy Holdings Co. agreed last Sept. 26 – just three days after the Goldman deal was announced – pay roughly $230 million for a 9.89% stake in BYD. MidAmerican bought 225 million shares of BYD at a HK$8 a piece. Those shares have since risen 430% to close yesterday at HK$42.40, handing Buffett a paper profit of about $1 billion.

Berkshire reported second-quarter profit of $3.3 billion, up from $2.88 billion a year earlier. The boost was largely attributable to derivative gains, which soared to $2.36 billion from $689 million the year prior.

Berkshire’s book value rose 11.4% in the second quarter, to $73,806 a share, and Barron’s estimates that it already could have increased since to around $79,000 now.

What Buffett’s Buying

So if Buffett’s supposedly cold hand has suddenly turned hot, how can investors benefit? Simple: By following the leader.

A 2007 study by two university professors titled “Imitation is the Sincerest Form of Flattery” showed that buying what Buffett has bought – even a month after his purchases – is a pathway to superior returns.

“The market … appears to under-react to the news of a Berkshire stock investment since a hypothetical portfolio that mimics Berkshire’s investments created the month after they are publicly disclosed earns positive abnormal returns of 14.26% per year,” the study said.

And according to a regulatory filing disclosed Aug. 14, Berkshire is reading the tealeaves on healthcare reform. As of June 30, the company had loaded up 1.2 million shares of Becton Dickinson & Co. (NYSE: BDX), a maker of such medical equipment as scalpels, catheters and syringes, while winding down its positions in healthcare insurers. Berkshire cut its holdings in WellPoint Inc. (NYSE: WLP) by 27% to 3.5 million shares and sold 3.4 million shares, or 24%, of its UnitedHealth Group Inc. (NYSE: UNH) stock.

“If the government is going to open health care to more people, demand for health care supplies would increase,” Gerald Martin, a finance professor at American University’s Kogod School of Business told Bloomberg. “The plan that’s going through Congress could be a real negative to the health insurers, but the people who provide the supplies could really benefit.”

Berkshire also increased its holdings in Johnson & Johnson (NYSE: JNJ), the world’s largest maker of health-care products, by 14% to 36.9 million shares. The purchase of J&J shares marks the second straight increase in the size of Berkshire’s stake, according to Bloomberg.

All of the biggest holdings listed in Berkshire’s filing gained in value in the second quarter. American Express Co. (NYSE: AXP) rose 71% in the period, Wells Fargo & Co. (NYSE: WFC) rose 70%, and Burlington Northern Santa Fe Corp. (NYSE: BNI) jumped 22%. Berkshire’s single largest holding, The Coca-Cola Co. (NYSE: KO), rose 9.2% in the three months ended June 30.

Source: Berkshire’s Back, So What’s Warren Buffett Buying Now?

It is hard to be a hater this week. As I told TFN Strategic Trader subscribers a couple of hours ago, the banks are at the helm. Their earnings reports and latest health assessments are driving the markets.

You may be jealous of the average $800,000 salary over at Goldman Sachs (NYSE:GS) or the billion dollar profits recorded at companies recently saved with the tax money pulled out of your paycheck every two weeks, but it is impossible to deny investors are little wealthier this week because of the money made by the nation’s banking industry.

For the most part, the equities market has been on the rise over the past month thanks to the surprisingly upbeat reports from the nation’s top investors and lenders. Goldman started the trend and just about every other firm since has reinforced it.

Today, it is American Express (NYSE:AXP) doing the heavy lifting and preventing the markets from selling off going into the weekend.

On sentence from the company’s CEO, Ken Chenault, sums it up best:

“Although it is still too early to point to any sure signs of an economic recovery, the number of cardmembers who are falling behind in their payments, the volume of bankruptcy filings and the level of loan write-offs were better than we had expected.”

It is nearly the same sentiment from every bank reporting over the past couple of weeks.

For investors smart enough to keep on investing while the markets sagged, Wall Street’s recent attempt to fix its mistakes is paying off handsomely.

In fact, if you followed my advice and took advantage of one of those free picks we are always boasting about, you are sitting on profits of about 20% thanks to Discover’s (NYSE:DFS) recent surge above the $12 level.

Time to sell?

After the recent running of the bulls, lots of investors have a nervous finger on the sell button.

In fact, I got some pressure (I won’t name the source) earlier in the week to unload the Discover position and lock in gains of just over 10%.

I didn’t cave and the move paid off. Here’s why:

Remember all of that money sitting on the sidelines last spring? As the markets collapsed last fall, just about everybody reduced their exposure to the equities markets. Bond prices soared as investors went nuts protecting their wealth.

With the first real glimpse of economic recovery not seen until last week, much of that money remains on the sidelines. Folks still have their unopened 401(k) statements scattered across their desk reminding them of the recent pain.

But as more and more positive news hits the Street, those investors will follow the money and increase their appetite for risk once again.

As huge amounts of money return to the equity world, demand will outstrip supply, forcing prices higher. Just think of it as the opposite of a run on a bank. As the fear subsides, the greed will take over.

With that, I say we let our gains ride. Let the “new” money push the markets even higher before we make our move.

Even with the Dow above 9,000, the top is much further away than the bottom. There is plenty of room left for the bulls to run.

Source: Cowboy Up: How Long Can We Stay On?

Here are listed sales in the filing, courtesy of 24/7WallStreet.com:

· 7/20/09… 1,817,000 at $28.7269 average in open market sale.

· 7/21/09… 3,915,100 at $26.9188 average in open market sale.

· 7/22/09… 2,254,200 at $26.6425 average in open market sale.

What took Buffett so long to start selling Moody’s? We have no idea. Moody’s runs one of the biggest scams on Wall Street. It charges the companies whose securities it rates (just like Standard & Poor’s and Fitch also do).

So what do you think these ratings agencies did when presented with a whole load of junk mortgage-backed securities to rate? They assigned them investment grade status and pocketed the cash.

If these ratings agencies had instead acted honestly and responsibly (rather than pimping themselves out to the highest bidder) the whole subprime debacle and the ensuing credit crisis could have been avoided.

Buffett isn’t the only investment whizz who thinks Moody’s is heading for trouble. Hedge-fund legend David Einhorn of Greenlight Capital is selling Moody’s short.

Yesterday, Moody’s shares tumbled almost 4% on the news that the Buffett had began to unwind his position in the company. We’d like to see Moody’s go out of business. But that’s maybe wishful thinking. Make sure you don’t own any shares in Moody’s. And if you’re feeling speculative, consider going short Moody’s along with Einhorn.

One of the easiest ways of deciding what stocks you should own is by “standing on the shoulders of giants.” We’re no geniuses here at Notes. But at least we are smart enough to recognize it. And that’s why we track what people far smarter than us are doing with their money.

As of the end of the first quarter this year, this is how Warren Buffett’s holdings (via Berkshire Hathaway, his investment vehicle) looked like:

1. American Express Co. (NYSE:AXP) over 151.6 million shares, same as before.

2. Bank of America Corp. (NYSE:BAC) 5 million shares; same as last quarter.

3. Burlington Northern Santa Fe (NYSE:BNI) 76.77 million shares; HIGHER than 70.089 million shares of last quarter.

4. Carmax Inc. (NYSE:KMX) 12 million shares; LOWER than the 17.63 million and that is two straight quarters of declines.

5. Coca Cola (NYSE:KO) right at 200 million shares, still same as before.

6. Comcast (NASDAQ:CMCSA) 12 million shares, same as before.

7. Comdisco Holdings (NASDAQ:CDCO) roughly 1.5 million shares, same as before.

8. ConocoPhillips (NYSE:COP) is really lower than the 71.228 million shares reported as this has been used for cutting taxes, and we already know that the number is lower than what the filing says.

9. Constellation Energy Group (NYSE:CEG) was just updated this week so the number is actually about 12.4 million rather than what the filing shows as being 14.828 million shares.

10. Costco Wholesale (NASDAQ:COST) 5.254 million shares, same as before.

11. Eaton Corp. (NYSE:ETN) 3.2 million shares; looks like new holding but may have been missed before.

There’s a lot of talk these days about how Buffett has lost his touch. This may be so. But the guy remains the world’s most successful investor. If you have a medium- to long-term investment horizon, you could do a lot worse than consider following Buffett into some of these long positions. If you think you can outsmart the guy, go ahead. But we know who our money would be with…

The details of the repayments were as follows:

• Morgan Stanley (NYSE:MS) repaid $10 billion

• Goldman Sachs (NYSE:GS) – $10 billion

• BB&T (NYSE:BBT) – $3.1 billion

• US Bancorp (NYSE:USB) – $6.6 billion

• Bank of New York Mellon (NYSE:BK) – $3 billion

• Capital One (NYSE:COF) – $3.57 billion

• American Express (NYSE:AXP) – $3.39 billion.

Lost in the euphoric brouhaha over the TARP repayments was the dispiriting news that Standard & Poor’s had downgraded the credit ratings of 18 large American banks, including one of the seven that repaid its TARP loan!

Incredibly, the US Treasury deemed Capital One sufficiently healthy to repay its $3.57 billion loan while, at the very same moment, Standard & Poor’s downgraded the credit card firm to BBB – just two notches above “junk.” Standard & Poor’s also characterized the credit outlook for Capital One as “negative.”

We would not place much faith in the analyses of either the Treasury Department or Standard & Poor’s. But we are nevertheless fascinated by their conflicting conclusions. Maybe they’re both right. Maybe Capital One is in fine shape today, as the Treasury Department’s stress test implies. But maybe the credit card company will be in miserable shape tomorrow, as Standard & Poor’s downgrade implies.

As investors, we see these conflicting assessments of Capital One as a metaphor for the entire American financial sector. This sector is a hodgepodge of conflicting opinions, data points and risk/reward assessments. Both sides of every trade in the financial sector can point to some sort of fundamental justification. The buyers see a sector on the mend; the sellers see a sector in the mire.

Your California editor is not smart enough to know which assessment is correct; but he is fearful enough to recognize a potential tar pit when he sees one. So he’s got no problem watching others wade into the water while he remains back on the bank…at least for now.

Curiously, bank stocks have gotten worse, ever since the government told us things are getting better. Most finance company stocks have been performing poorly, ever since the upbeat headlines about the “stress test” results first crossed the newswires. The BKX Index of bank stocks has tumbled nearly 19% since the close of trading on May 8, the first trading day after the Federal Reserve announced the “better than expected” results of its stress tests on America’s 19 largest financial institutions.

The TARP repayment announcements did not alter the downward trend of the BKX. Since June 9, when the Treasury Department disclosed which banks may repay their TARP loans, the BKX Index has dropped 5%.

Apparently, the finance company sector of the stock market has shifted into the “good news is no longer good news” phase. The BKX’s dazzling 135% rally between March 6 at May 8 may have adequately “priced in” all the good news that is likely to emerge for a while from the financial services industry.

Furthermore, the conspicuous recent weakness of the BKX Index is probably not good news for the overall stock market, since financial shares have been leading the market – both to the upside and the downside – during the last year and a half.

To cite just one example of this phenomenon, between February 1 and May 31 of 2008, the BKX slumped 21% while the S&P 500 actually advanced 1%. But during the ensuing month and a half, the S&P fell 13%. The BKX initiated a similar “bearish divergence” in early December last year, as it tumbled 35% between December 5 at February 6. The S&P 500 barely budged during this timeframe, but fell 20% over the next 30 days.

Obviously, the most recent decline of the BKX does not guarantee a subsequent decline in the S&P 500. But neither does it give us a warm, fuzzy feeling. So let’s call the weakness of the BKX a warning sign. Heed the warning, if you are so inclined.

Source: On the Mend or in the Mire?

Silver, which is the real centre of the universe for the bullion banks, was bludgeoned. What I said on Saturday, is worth repeating here…”But the bullion banks will, as they have in the past, most likely use their gargantuan gold short position to beat the living crap out of the silver price once again.” It was certainly “mission accomplished” yesterday, as silver was clocked for 81 cents…by far the biggest percentage loss [-5.46%] in the precious metals complex. Monday’s high price mark was around 2:00 p.m. in Hong Kong…with the low coming at the close of electronic trading in New York’s afternoon at 5:15 p.m. yesterday. Silver’s highest New York price occurred at 9:00 a.m. on the dot yesterday…just like gold’s.

Ted Butler and I were both disappointed with Friday’s changes in open interest. Considering the beating gold and silver took, we both expected a far more impressive set of numbers…but we didn’t get them. Gold o.i. only dropped 4,736 contracts to 383,603…on volume of 111,839. And silver o.i. actually rose! Only by 196 contracts [to 109,232 on volume of 34,681 contracts] but on such a big price decline, this was unexpected. Ted and I both agree that these criminals [the bullion banks...mostly JPMorgan] can hide their tracks by going long instead of covering their shorts…this would skew the open interest numbers. After the licking that both metals got yesterday, I’m expecting some big drops in open interest when the numbers become available from the Chicago Mercantile Exchange later this morning. If we don’t get it, then we’ve probably still got a lot of down-side pain ahead of us.

At this point in time, I have to ask myself…how far along are we in this liquidation process? It’s the “same old, same old” routine that’s been going on for the last decade…and that Ted Butler and I have been writing about for weeks now. And so, dear reader, what’s happening at the moment should be no surprise to you at all. The bullion banks are panicking the tech funds [and small traders] into puking up their longs while JPMorgan (NYSE:JPM) et al ring the cash register and make fat profits as they close out their short positions. It will be over when the bullion banks have covered as many of their short positions as they can. The only unknowns…how long it will take [a couple of weeks or a couple of months]…and what the gold and silver prices will be when we get there.

That’s why I’m not impressed with the amount of short covering I’ve seen in the daily open interest numbers lately. Will ‘da boyz’ be done at the 50-day or 200-day moving average…or will it be worse…like last July, for instance? They have close-to-a-record short position in gold…just like last July…which is mostly still intact. But can they…or will they? As Mark Twain’s famous quote goes: “History may not repeat…but it rhymes.” Stay tuned. By the way, here’s the 3-year gold chart with the above mentioned moving averages in place, so you can form your opinion.

Courtesy of the usual N.Y. commentator, comes the following…”The Gartman Letter today rather grumpily denies hinting at Government intervention in gold on Friday by saying ’someone or something’ was obstructing the advance on $1,000 again. In other words, Dennis…’someone or something’ does not appear insistent on much lower gold. No further clarification was offered, but more importantly, TGL is considering buying gold on the view that $922-935 is a meaningful technical level in a correction.” [That's not quite down to the 50-day moving average...but it's getting closer - Ed]

In other gold news, I note that neither GLD nor SLV reported any changed to their alleged bullion stashes. And over in Switzerland at Zürcher Kantonalbank, I see that their gold ETF reported no change for last week, and currently sits at 4,589,577 ounces. Their silver ETF was up a rather substantial 498,755 ounces to 48,138,943 troy ounces. I was surprised to find that the U.S. Mint has once again updated their eagle coin mintings. In one ounce gold eagles, they reported cranking out another 24,500 to bring their June total to 67,500. In silver eagles, they stamped out another 415,000 since their last report on June 10th…and are now up to 1,345,000 for June so far. The Comex Delivery report yesterday showed that a magnificent 53 gold contracts were delivered…and nothing in silver. And at the Comex-approved warehouses, a rather substantial 1,741,669 ounces were removed from inventory. That’s quite a bit.

I note in a Reuters story posted at lemetropolecafe.com that “Capital One Financial Corp’s U.S. credit card defaults rose in May as unemployment increased and Americans struggled to pay their debts, the company said on Monday. In a regulatory filing, Capital One said the annualized net charge-off rate for U.S. credit cards — debts the company believes it will never collect — rose to 9.41% in May from 8.56% in April. Still, Capital One is performing better than bigger rivals American Express Co (NYSE:AXP), Citigroup Inc (NYSE:C) and Bank of America Corp (NYSE:BAC), whose default rates already exceed 10 percent…” [This is incredible...and it's only going to get worse! - Ed]

The first of four stories today is from Bloomberg. It came out on Saturday…long after I’d filed my rant for that day. The headline says it all…and reads “Bank Rescue Costs EU states $5.3 Trillion, More than German GDP”. I thank Craig McCarty for the story and the link is here.

My next story came from a kind reader just a few hours before I put today’s commentary to bed. He sent it to me because he “thought I might find it interesting…as I would never find this on CNBS. Not just because of converging points of view, but also, the source.” He’s right on all counts, and I urge you to give this story the attention that any serious piece of journalism deserves. It’s posted at aljzeera.net and is headlined “Why America is a bank-owned state”. I thank John Parsonage for bringing it to my attention…and the link is here.

Here’s another story that deserves your undivided attention. Having extensive past experience in the field of meteorology and climatology, I’m well versed in this whole climate change affair and consider it the biggest pile of B.S. ever perpetrated on the people of the world. Al Gore can go pound salt as far as I’m concerned…and don’t get me started on that movie of his. Here’s a story from The Telegraph in London that came out this past weekend. It’s entitled “Crops under stress as temperatures fall”. Here in Alberta, the first hay cut…and virtually the entire 2009 canola crop…is a write-off…no rain. I thank P.S. for sending the story along. The link is here.

And finally…the last story…which was also posted this past weekend over at globalresearch.ca. This is a ‘must read’ as well. “The city of Yekaterinburg, Russia’s largest…east of the Urals, may become known not only as the death place of the tsars but of American hegemony too – and not only where US U-2 pilot Gary Powers was shot down in 1960, but where the US-centered international financial order was brought to ground.” The story is headlined “De-Dollarization: Dismantling America’s Financial-Military Empire…The Yekaterinburg Turning Point”…and the link is here.

Find out what any people will quietly submit to, and you have found out the exact measure of injustice and wrong which will be imposed upon them…and these will continue, until they are resisted with either words, or blows…or both. – Frederick Douglass

I see that VIPs in Japan, Russia, Germany and IMF were all cheer-leading the U.S. dollar in the last five or six days…with Japanese Finance Minister Kaoru Yosano proclaiming “Our trust in the U.S. Treasuries is absolutely unshakeable.” I didn’t see China’s voice in there anywhere, as I believe they have already spoken with Little Timmy Geithner on this issue. That’s why we currently have the US$ heading north…while JPMorgan and the boys use this manufactured opportunity to do their dirty with the precious metals. Let’s see how long it lasts.

See you on Wednesday.

Source: And Then There’s This…Tuesday, June 16th, 2009

If history is our guide, then the rally we’ve seen in U.S. stocks in recent weeks is more than just a periodic run-up in share prices – it’s the initial stage of a prolonged bull market.

The 13-week rally the Dow Jones Industrial Average has experienced off its March lows is the most powerful surge that index has seen since the Great Depression. If we look to history, stocks should continue to rally over the next three months.

“I say this with the utmost confidence and my fingers tightly crossed: This is the start of a new bull run,” Hugh Johnson, chairman of Johnson Illington Advisors, told MarketWatch.com.

The 13-week stretch from March 9 through May 29, which saw the Dow soar 28.3%, has been bested only once – by the 40.8% run-up the Dow enjoyed in the 13 weeks that followed its hitting a bottom in May 1932. The Dow surged an additional 3.1% last week.

Going back to 1900 – in any given quarter (13 weeks) – there have been 18 cases in which the market surged 20% or more, Johnson said.

Looking at the trends, the odds are strong that the Dow will be higher three weeks from now, and that means the odds are strong that the index will be higher three months from now.

“Based on history, who knows where we’re going to be four weeks from now? But in 12 weeks, the odds are we’ll be 3.8% higher,” Johnson said.
That can’t be guaranteed, however, since there has been at least case where stocks had a huge quarter, only to plunge afterward: In May 1929, the Dow zoomed 26% in 13 weeks – only to plunge 38.9% in the 12 weeks that followed.

Market Matters

General Motors Corp. (OTC: GMGMQ) officially filed for Chapter 11 bankruptcy protection and another U.S. icon has been laid to rest (until the “new” GM emerges better than ever).  With another $30 billion in government aid in hand, GM quickly moved forward by financing the acquisition of supplier Delphi Corp. (OTC: DPHIQ) by a buyout firm that will help it emerge from its own bankruptcy; reaching an agreement to sell Saturn to Penske Automotive Group Inc. (NYSE: PAG); and entering into a deal to unload Hummer to China’s Sichuan Tengzhong Heavy Industrial Machinery Corp. (though regulatory “challenges” are sure to hold up that one).  Meanwhile, Chrysler LLC progressed with its own restructuring Fiat SpA (OTC ADR: FIATY), much to the chagrin of about 800 dealers; and Ford Motor Co. (NYSE: F) plans to increase production to take advantage of the misfortunes of its primary competitors.

Shifting to a more “stable” industry, the Federal Deposit Insurance Corp. and FDIC Chairman Sheila Bair seem to be targeting Citigroup Inc. (NYSE: C) for a management shake-up, a move that could give regulators greater control of the one-time financial behemoth.  Smith Barney brokers found their new homes as a significant joint venture between Citi and Morgan Stanley (NYSE: C) was completed.  Citi also attempted to save face from the prior American International Group Inc. (NYSE: AIG) embarrassment by announcing plans to withhold millions in previously promised severance packages to former execs. On the Troubled Asset Relief Program (TARP) front, JPMorgan Chase & Co. (NYSE: JPM), Morgan Stanley, and American ExpressCo. (NYSE: AXP) each revealed plans for stock offerings as they race to become the first major bank to repay “bailout” moneys.  With GM now in bankruptcy and Citi struggling to overcome its own problems, theDow Jones Industrial Average is replacing them with Cisco SystemsInc. (Nasdaq: CSCO) and The Travelers Cos. Inc. (NYSE: TRV)effective June 8.

Energy prices resumed their higher trek, as crude spiked above $70 a barrel for the first time since last October, despite reports that showed demand at its lowest level in 10 years.  Goldman Sachs Group Inc. (NYSE: GS) analysts upwardly revised their projections for future global demand and warned of a “likely return to energy shortages” in 2010.  As gas prices have skyrocketed about 50 cents above last month’s levels, consumers are facing pressures at the pumps that threaten to hinder some of next year’s anticipated growth in the economy.

Economically Speaking

It looks like fixed-income traders are not the only ones concerned about the expanding debt position in this country.  U.S. Federal Reserve Chairman Ben S. Bernanke warned that the government “can’t borrow indefinitely” and politicos need to take crucial steps to reduce a budget deficit that is rapidly approaching $2 trillion.   Bernanke again confirmed his belief that the economy will move beyond recession by late 2009, though he also warned that the weak jobs market (among other conditions) will restrict future expansion.

Speaking of labor, the unemployment data highlighted the week’s releases and the jobless rate surged to 9.4%, a new 25-year high, as 345,000 nonfarm jobs were lost from the economy.  However, even bad news becomes good news these days as economists had predicted a far more substantial loss (525,000 jobs), and the May decline was the smallest since October 2008.  Still, more than six million folks have seen their jobs disappear since the recession began in December 2007 and May represents the seventeenth consecutive month of labor contraction.

In other news, the manufacturing sector appears to be on the verge of recovery (though ever-so-slightly) as the ISM index reported its best showing since September 2008.  On the housing front, construction spending jumped for the second straight month and pending home sales experienced its biggest increase in eight years.  Personal income surprisingly rose in April, a positive sign for future consumer activity.  Though retailers reported weaker-than-expected same-store sales for May, analysts were quick to point out that Wal-Mart Stores Inc. (NYSE: WMT) is no longer participating in these reports, a decision that should skew the numbers lower because the world’s largest retailer accounts for about 10% of total retail sales.  Luxury chains and department stores were among the worst performers last month, while The Gap Inc. (NYSE: GPS) benefited from a nice increase in activity at its Old Navy chain.

U.S. Treasury Secretary Timothy Geithner ventured over to China during the week where he praised it leaders for past stimulus measures (a tad different tact than used by his predecessor).  Recently, China has complained about the ballooning U.S. debt and analysts remain worried about its continued participation in our Treasury auctions.  The domestic powers-that-be have long criticized China about unfair trade practices and currency issues.

While the respective leaders have reservations about each other’s policies, Geithner’s remarks may be seen as smoothing over relations as our combined efforts will be imperative to securing an effective and long-lasting global recovery.

Weekly Economic Calendar

Source: History Hints that Current Stock Market Rally May Be the Leading Edge of a New Bull Market

Banks that require funding will have 30 days to present a capital-raising strategy to regulators and then six months to implement it.

It is unlikely that any of the banks will require any additional taxpayer money.

J.P. Morgan Chase & Co. (NYSE: JPM), Goldman Sachs Group Inc. (NYSE: GS), MetLife Inc. (NYSE: MET), American Express Co. (NYSE: AXP), Bank of New York Mellon Corp. (NYSE: BK), BB&T Corp. (NYSE: BBT), Capital One Financial Corp. (NYSE: COF), U.S. Bancorp (NYSE: USB), and State Street Corp. (NYSE: STT) are in the clear in terms of having adequate capital cushioning.

The following banks will be required to raise these assigned amounts of capital:

• Bank of America Corp. (NYSE: BAC): $34 billion.
• Wells Fargo & Co. (NYSE: WFC): $13.7 billion.
• GMAC LLC (NYSE: GMA): $11.5 billion.
• Citigroup Inc. (NYSE: C): $5.5 billion.
• Morgan Stanley (NYSE: MS): $1.8 billion.
• Fifth Third Bancorp (NASDAQ: FITB): $1.1 billion.
• KeyCorp (NYSE: KEY): $1.8 billion.
• PNC Financial Services (NYSE: PNC): $600 million.
• Regions Financial Corp. (NYSE: RF): $2.5 billion.
• SunTrust Banks Inc.( NYSE: STI): $2.2 billion.

The banks will have until June 8 to develop a plan to raise the required capital and until Nov. 9 to implement it. They may choose to raise the money in a variety of ways. They may sell assets, court private investment or convert the government’s existing preferred shares into common stock.

Citigroup has already announced plans to convert a portion of the government’s $45 billion stake into common stock, a move that will give the federal government a 36% stake in the company. Other regional banks – such as Fifth Third Bank or Regions Financial – could be forced to take similar actions, but are loath to do so, as most of the moves would be dilutive to existing shareholders.

Citigroup has agreed to sell Nikko Cordial Securities to Sumitomo Mitsui Financial Group (OTC: SMFJY) for about $5.5 billion. The deal, which is to be completed by Oct. 1, is expected to boost the bank’s Tier-1 capital ratio by approximately 27 basis points.

Morgan Stanley plans to close its capital gap by selling assets or stock to private investors, a person briefed on the plan told The New York Times. And Wells Fargo said late yesterday that it plans to sell $6 billion in new common stock in an effort to raise required capital.

While Bank of America has said it doesn’t agree with the Fed’s conclusions, the bank yesterday outlined its strategy to accommodate the government’s demands. BofA is exploring the sale of such business units as its First Republic private-banking unit and asset manager Columbia Management, The Wall Street Journal reported.

The sale of those businesses could raise a combined $4 billion, David Hendler of CreditSights Inc. told The Journal. BofA could also get about $8 billion for its partial stake in China Construction Bank Corp.

Beyond that BofA would have the options of converting the government’s existing $45 billion investment, or $33 billion in private preferred shares, into common stock.

The Fed wants bank-holding companies to achieve a Tier 1 risk-based ratio of at least 6%, and a Tier 1 Common risk-based ratio of at least 4% by the end of 2010. The goal is to get banks to the point where they are stable enough that they can borrow from private investors without a Federal Deposit Insurance Corp. (FDIC) guarantee, people familiar with the matter told Bloomberg News.

“Going forward, we just need banks to be able to issue debt without the FDIC backing – that’s the next stage for these bank names in terms of evaluating their health,” Mark Bronzo, a money manager at Security Global Investors LLC, which oversees $21 billion in Irvington, N.Y., told Bloomberg.

If the banks fail to meet capital requirements, the government will step in to provide the necessary funds. However, it’s unlikely that any more taxpayer money will be needed, as about $110 billion of the original $700 billion in Troubled Asset Relief Program (TARP) funding remains.

Wall Street’s Reaction

The Dow Jones Industrial Average closed down 102.43 points, or 1.2%, yesterday, with the Dow Jones U.S. Financial Services Index down 3.78%. However, Wall Street’s reaction to the tests won’t be fully realized until the market opens later today (Friday).

“I think this will be a confidence-instilling announcement,” Federal Deposit Insurance Corp. Chairman Sheila Bair told a Senate panel Wednesday. “There will be additional needs for capital buffers for some institutions, but I think there will be mechanisms to do that within the next six months.”

Treasury Secretary Timothy F. Geithner said in an interview with PBS television’s “The Charlie Rose Show” that all of the institutions tested already have “significant cushions” of capital and that Americans have every reason to be confident going forward.

“The results will be, on balance, reassuring,” Geithner said.

But some analysts are skeptical about what the bank stress tests actually achieved, or if their standards of evaluation were even valid in the first place. After all, the tests have occupied resources from both the federal government and the private sector for months, and have increased stock market volatility.

“The banks are healing themselves, and it could have been done a lot faster if government had gotten out of the way instead of parking the emergency equipment in the middle of the road,” Gary B. Townsend, a former banking regulator who now runs his own investment firm, told The New York Times.

Also, many bank employees, and even Elizabeth Warren, who chairs the Congressional Oversight Panel for TARP, have expressed concern that the tests weren’t stringent enough.

Last month, Warren gave rise to speculation that another stress test might be needed by the end of the year, after she called the adverse economic scenario employed by the Fed “disturbingly close” to current economic conditions.

In the Fed’s most pessimistic economic forecast, for example, the government projects the unemployment rate will climb to 10.3% in 2010. But unemployment already hit 8.5% in March and many economists are predicting that it rose to 8.9% in April. If that’s the case, it’s not hard to imagine the national jobless rate reaching double digits by the end of the year.

“The stress tests will make a terrific contribution if they are tough and transparent,” Warren said. “If they are not, they will be useless.”

Still, despite the test’s alleged failings, there is a hope that with more transparency and a greater buffer of equity, investor confidence will be restored.

“This is sending a message that the banks need more capital, but their losses are manageable and the system itself is solvent,” Kevin Fitzsimmons, an analyst at Sandler O’Neill told The Times. “Whether it sticks is something else.”

Source: Bank Stress Tests: The Results Are in; Now What?

But a tiny attempt to run to the upside into positive price territory, that started just before noon Eastern, ran into another not-for-profit seller about an hour later. From there, gold sold off quietly into the close of electronic trading on the Globex. According to the usual New York commentator, estimated volume was 50,990 lots with a switch effect of 7,874 contracts.

Although it may not have seemed like it at first glance, the real ‘wow’ chart of the day was silver once again. It [like gold] ran into the mysterious 3:00 a.m. seller and sold off right into the London silver fix, which is 12:00 noon…7:00 a.m. in New York. The moment that the silver fix was in, the price got nailed for 20 cents in a matter of minutes. Ted Butler said that this smack-down [most likely by JPMorgan (NYSE:JMP)] blasted around 1,000 Non-Commercial long positions out of the water. From that obvious low point, silver began a quiet but intense rally that moved it into positive territory for the day…but obviously, it too, attracted the attention of the same not-for-profit seller as gold did…and at precisely the same time. Nothing free-market about all this. The last three days of silver trading are on the Kitco chart below. The blatant in-your-face price management of the last couple of days is obvious for all to see.

click to enlarge

Open interest changes for Thursday’s big slide in both gold and silver are [as I said yesterday] difficult to interpret because there are so many switches. Gold’s o.i. dropped 2,582 contracts to 329,066…which on the face of it, wasn’t a lot. Volume was a stiff 89,245 contracts. In silver, o.i. actually rose 44 contracts to 89,263. Volume was reasonably heavy…23,749 contracts. It is impossible to get an accurate handle on what Thursday’s o.i. numbers mean until next Friday’s COT.

The new COT came out yesterday…and it was as both Ted and I expected. There was deterioration in both gold and silver. In silver, the deterioration was a bit more than expected. The bullion banks increased their net short position by 2,289 contracts…as all the traders in the other two categories went long…or reduced their own short positions. The net short position in silver increased to 137,300,000 ounces…up a hair over 11 million ounces for the prior week.

In gold, the changes were very small. The bullion banks increased their net short position by 3,811 contracts as the tech funds and small traders went [net] longer. The bullion banks are now net short 15.3 million ounces of gold…that’s as of Tuesday’s cut-off. It certainly has declined since then. Yesterday I estimated it to be around 13 million ounces.

Silver deliveries continue. Yesterday…1,339 contracts were delivered. The big issuer was Deutsche Bank Securities [1,000 contracts]. The biggest receiver/stopper was the Bank of Nova Scotia (NYSE:BNS) [814 contracts]. There were quite a few smaller receivers and stoppers as well. It was a busy day. In gold, there 55 contracts delivered.

Comex-approved warehouse stocks rose by 591,896 ounces. I now have the U.S. Mint’s closing eagle numbers for April. On Thursday they added a smallish 500 one-ounce gold eagles to April’s numbers bringing the final total up to 147,500. In silver, they added 38,500 to bring April’s silver eagle totals up to 2,518,000…the second biggest month of the year. There were no changes in GLD or SLV either.

It was a sort of ‘nothing’ day in the precious metals…as most of the world was shut down for the May Day holiday. Even the usual New York commentator had nothing of interest. One of the only decent gold stories I could find was one posted over at Kitco. It’s from Business Intelligence in the Middle East. The article is entitled “Falling gold mine production will support prices”. It’s sort of a re-hash of what you may have already read…but on a slow news day…it’s the best I could do. The link is here.

There’s not a lot of ‘other news’ either. I have three stories today which may, or may not, be of interest to you. The first one is from Bloomberg. It appears that the FASB [Financial Accounting Standards Board] is about to approve a rule that will add hundreds of billions of dollars worth of ‘assets’ and liabilities which banks and other companies have been hiding off their balance sheets. The rule won’t take effect until next year…but if/when it does, we’ll find out in a real hurry where all the bodies are buried. It will be ugly. The headline reads “FASB to Act on Off-Balance-Sheet Rule Change by June, Herz Says”. I thank Casey Research’s John Grandits for sending it along…and the link is here.

The next story is from creditwritedowns.com and bears the heading “CDS contracts and the implosion of several Eastern European economies”. It’s very well written and not hard to follow. There is also a link at the end of that piece entitled “Insight: Kazakh banks fall foul of CDS” by Gillian Tett from the Financial Times that’s an absolute must read as well. If you get the idea that things are imploding over there…you would be right about that. I thank Craig McCarty for ‘two-stories-for-the-price-of-one’ story…and the link is here.

And lastly in a story at marketwatch.com, comes this news item filed from Tokyo. The headline pretty much says it all. It reads “China gold buy raises eyebrows for all the right reasons”. The link is here.

The new systemic risk to the system is the U.S. Congress. — James Robinson III, ex-CEO of American Express (NYSE:AXP)

Here’s another ‘blast from the past’…this time from 1978. A timeless classic from a great artist. Please turn up your speakers and then click here.

Another week come and gone. Everything out there is right out of Alice in Wonderland. It doesn’t make any difference whether you take the red pill or the blue pill…and as the quote goes in Hotel California…”you can check out any time you want, but you can never leave.” If that’s the way you’re feeling about things right now…I can certainly empathize and sympathize.

As I mentioned yesterday, I’m off until May 14th, and I’ll see you then.

All of us at Casey’s Daily Resource Plus hope you enjoy the rest of your weekend, and we [except for me!] will be here bright and early Tuesday morning.

Source: And Then There’s This…Monday, May 04th, 2009