– This morning, the bad news continued for Lehman. It told Wall Street it will post a second straight quarterly loss but promised to slim down in the future, putting an end to a brief pre-market rally in its shares.

– The futures of the nation’s smaller banks isn’t exactly rosy, either. Rumor has it that Warren Buffett’s Berkshire Hathaway (NYSE:BRK.A) has “told one of its subsidiaries to stop insuring bank deposits above the amount guaranteed by the federal government.”

– The government’s multi-billion-dollar social welfare program for Wall Street continues to make news. Regarding the bailout of Fannie Mae (NYSE:FNM) and Freddie Mac (NYSE:FNM), Forbes asks a surprisingly good question: Why is it necessary to inject taxpayer funds into these companies as equity?

Ordinary companies need capital so that they can meet their obligations, but both these companies will have access to a financial facility at the Treasury that will allow them to borrow all the funds they require.

They don’t need capital. The injection of capital is, in fact, a gift to the existing shareholders, who–as the owners of insolvent companies–own nothing and deserve no benefits from the taxpayers. By injecting these taxpayer funds and enabling the companies to survive, the Treasury plan opens the possibility that the existing shareholders will eventually profit from their investments, when, by all rights, they should be wiped out.

Instead of conservatorship, says the mag, which keeps the status quo, the government should have but the toxic twins in receivership.

Could the government’s judgment on the matter was clouded by all the money Fannie and Freddie lobbyists were throwing at it? Fannie and Freddie spent $7.4 million on lobbying in the first six months this year. Since 1998, they have flung $174 million at the nation’s public servants.

– Yesterday, Jim Rogers called the bailout “socialism for the rich.” “This is madness, this is insanity, they have more than doubled the American national debt in one weekend for a bunch of crooks and incompetents,” Rogers said. “I’m not quite sure why I or anybody else should be paying for this.”

– Despite all this, the dollar is continues to defy gravity. This from yesterday’s 5 Min. Forecast:

Incredibly, the dollar continues to rally. The dollar index is currently hovering around yesterday’s high of 79.7. If you’re a chartist, keep your eye on that 80 level… it’s been a rallying point for the greenback ever since the dollar index was introduced.

– However, GoldMoney’s James Turk, quoted in the 5, says this is “this bounce has all the characteristics of a bear market rally. It is sharp and swift and happened without any change for the better in the fundamental outlook for the dollar.”

In fact, if it has changed at all, the outlook for the dollar has worsened, which is the first reason to suggest that the buck stops here, namely, that its bear market rally is ending. As the recession in the U.S. deepens, the probability of the Federal Reserve raising interest rates anytime soon has fallen. Consequently, real (i.e., inflation-adjusted) U.S. dollar interest rates remain negative.

– Eric Roseman, The Sovereign Society’s investment director, agrees with James. Yesterday, Eric said the commodities correction will be short lived, thanks to a lack of real support for the greenback. He recommended picking up oil, drillers and gold stocks in anticipation of a commodities bounce.

– This morning, oil climbed $1.12 to $104.38 a barrel on news that OPEC has moved to reduce output levels. If you’re looking for a reason why oil is still way off this year’s peak, Rick Pendergraft at Investor’s Daily Edge has an interesting theory. He says the goverment’s recent ban helped killed oil prices.

– Finally, gold has staged a recovery in Europe on Wednesday after hitting an 11-month low in Asian trade. Reuters reports that “spot gold was at $775.50/776.60 an ounce against $775.80/777.80, well off its session low of $762.55 an ounce, its weakest since Oct 2007.”

–  Commodities expert Lee Lowell at The Smart Profits Report reckons gold is oversold:

Gold topped out right near $1,000 an ounce back on July 15 and has given up roughly $200 an ounce since then – a $20,000 move in equity.

As with the other commodities, that’s a big swing. And just like silver, gold is oversold and could see just as impressive a bounce if people start to pile in.

The currency markets continued to get hammered by the US$ on Friday with the dollar index climbing all the way back above 76, a level we haven’t seen since mid February. The dollar did sell off a bit in early European trading, but it has started to climb again as I write.

Several readers sent me an excellent opinion piece by James Turk which appeared on GoldMoney’s website. Mr. Turk points to central bank intervention as a major reason for the recent dollar strength. The article agrees with what I was saying last week; that the dollar has no fundamental reason to be rallying. The reports and news out of the US have not been favorable to the greenback, and the twin deficits in the US continue to soar out of control. I mentioned that the recent moves of the dollar smacked of intervention, as the dollar only wanted to move in one direction, ignoring any data which would typically send it back down. Turk points to some data which backs up this intervention theory:

“When central banks intervene in the currency markets, they exchange their currency for dollars. Central banks then use the dollars they acquire to buy US government debt instruments so that they can earn interest on their money. The debt instruments central banks acquire are held in custody for them at the Federal Reserve, which reports this amount weekly.

On July 16, 2008 (the closest date of the weekly reports to the July 15th low in the Dollar Index), the Federal Reserve reported holding $2,349 million of US government paper in custody for central banks. In its report released today, this amount had grown over the past three weeks to $2,401 million, a 38.4% annual rate of growth. To put this phenomenally high growth rate into perspective, for the twelve months ending this past July 16th, assets in the Federal Reserve’s custody account grew by 17.3%, which is less than one-half the growth rate experienced over the past three weeks.
So central banks were accumulating dollars over the past three weeks at a rate far above what one would expect as a result of the US trade deficit. The logical conclusion is that they were intervening in currency markets. They were buying dollars for the purpose of propping it up, to keep the dollar from falling off the edge of the cliff.

You can read James Turk’s entire article at http://www.goldmoney.com/en/commentary.php#current. He makes a convincing argument. As Chuck and I have pointed out in the past, intervention (even cooperative central bank intervention) can only impact the markets for the short term. Economic fundamentals will eventually win out, so the central banks have only bought themselves a little time. Unless the economic data in the US does an about face (and I don’t expect it to), the US dollar will remain in its long term downward trend.

Friday saw the release of additional US data which would usually have moved the dollar lower, but not in this dollar bull environment. US non-farm productivity slowed, increasing at a 2.2% pace vs. last months 2.6% rate. Unit labor costs came in just under expectations, and wholesale inventories rose by almost 2 times the expected rate. This increase in wholesale inventories is somewhat telling, as companies were unable to sell all of the goods which they were producing. Could US consumers finally be slowing their spending? If so, it would mean an even more dramatic drop in GDP for the last half of 2008.

This week will bring a number of big economic reports here in the US, non of which are expected to be dollar friendly. Tomorrow we will get the Trade balance which is expected to have ballooned back above 60 billion in June. We will also see the monthly budget statement and ABC consumer confidence. Wednesday will bring us the Import price index in the US along with advance retail sales and business inventories. July Consumer Prices in the US lead off the reports on Thursday, followed by the weekly jobless claims. And we will close out the week with the empire manufacturing numbers, TIC flows, industrial production, and Chuck’s favorite, the capacity utilization numbers for July. If the reports come in where expected, the dollar bulls may start running for the hills.

The euro has gained a bit this morning after policy makers said the ECB remains focused on inflation and traders are beginning to realize last week’s 3.6% drop was excessive. The euro also rebounded due to expectations that government reports released this week will show consumer price growth in Europe accelerated to a 16 year high last month, more than double the ECB’s 2 percent ceiling.

If the UK producer prices are any indication of what the Eurozone inflation numbers will look like, the ECB will have to take a serious look at moving toward a tightening bias again. UK producer prices increased in July at the fastest pace since records began in 1986. Prices charged by factories rose 10.2% from a year earlier. Double digit inflation is not going to keep the BOE or the ECB on the sidelines for too long. If this rate continues, they will be forced to raise interest rates in order to combat this runaway inflation.

Danish inflation was also reported this morning, and came in at a 18 1/2 year high of 4%. These increased costs are rising concern among European central banks that employees are going to start to demand higher pay to compensate them for lost spending power which has been eroded by inflation. Denmarks labor shortage, with unemployment at 1.6% in June, means employers are more likely to give in to demands for pay increases. I would look for the Danish central bank to raise rates in order to combat this wage rate inflation risk. Higher rates should equate to a stronger Danish krone going forward.

Australia’s central bank is not helping out their currency, as the continue to signal rate cuts are in store. The Reserve Bank of Australia said in its quarterly policy statement released today that it will have more room to cut interest rates because of a ’significant moderation’ in domestic demand will slow inflation, cut economic growth in half and drive up unemployment. Today’s statement suggests Governor Glenn Stevens will ignore a spike in the inflation rate to prop up an economy buffeted by weaker domestic spending and falling house prices.

Doesn’t Governor Stevens see what has happened in the UK? Does he really want to take his country down this path of runaway inflation combined with a slowing economy? I hope not, but the statement does suggest that the RBA will begin to look at a possible interest rate cut as early as next month.

The Olympic opening ceremonies were quite a spectacle, it amazes me how much money and planning went into them. Much has been written about how these games are a chance for China to show the world just how far they have come in moving into world’s economic elite. Recently, China has been slowing the pace of their currency appreciation, preparing for the global economic slowdown which is expected to deepen. The yuan retreated in the last two weeks after government officials said supporting growth is as important as fighting inflation. Exporters had begun to complain about the pace of the Renminbi’s appreciation, and with a slowing economy there will probably be less need to keep up the rate of the currencies rise vs. the US$.

This should be an interesting week. The data in the US shouldn’t be supportive of the dollar, so we will see if the central banks want to fight the underlying economic fundamentals and continue to prop up the greenback. I would expect us to see the dollar lose much of its recent strength, but the last two weeks have shown me just how wrong a little central bank intervention can make me look. With Chuck, Kristin, and Jennifer all out this morning, Christine and I will be doing the trading this morning. Monday’s are the biggest trade day for us, so I better cut it off here and get to work.

Currencies today 8/11/08… A$ .8903, kiwi .7040, C$.9392, euro 1.5024, sterling 1.9227, Swiss .9277, ISK 81.52, rand 7.6909, krone 5.3287, SEK 6.2521, forint 157.67, zloty 2.1754, koruna 16.05, yen 109.83, baht 33.74, sing 1.4063, HKD 7.8095, INR 42.176, China 6.8577, pesos 10.137, BRL 1.6087, dollar index 75.89, Oil $116.00, Silver $15.34, and Gold… $860.35

That’s it for today… I love watching the Olympics, not only the big name sports like swimming and gymnastics, but also the lesser known sports which typically don’t get any TV coverage. These are the athletes who aren’t going to get any multi million dollar endorsement deals, but have still dedicated their lives to being the best at their chosen sport. With Chuck, Kristin, and Jennifer all out this morning, Christine and I will be doing the trading this morning. Monday’s are the biggest trade day for us, so I better cut it off here and get to work. Sure hope the airlines don’t decide to further delay Chuck’s flight home! Hope everyone has a Marvelous Monday and a terrific rest of the week!!

Chris Gaffney, CFA
Vice President
EverBank World Markets
1-800-926-4922
1-314-647-3837
www.everbank.com

Source: Central Bank Intervention is the Reason…

Silver rallied nicely and gold followed behind rather reluctantly. But both rallies came to an end at precisely the same time…just minutes before the NY lunch hour…and that was it for the day.

Silver punched through its 20-day moving average with ease ($17.35@Kitco) on the spike just before it got sold off hard by some not-for-profit seller, and closed at its 20-day m.a. The 50-day m.a. for silver is about 90 cents higher at $18.08. Gold closed about $12 below its 20-day m.a. Based on all of this, it will be interesting to see what’s in store for silver and gold today.

Friday’s open interest in both metals went their separate ways again…gold o.i fell 8,051 contracts despite the fact that it regained all its losses and ended up on Friday’s close. Silver o.i rose 1,954 contracts. Once again, don’t look to me for answers about this, because I don’t have any. The COT on Friday was strange enough as it was. This Friday’s report will be interesting as well, and the cut-off for that is at the end of today’s trading. By the way, I was interviewed by Al Korelin last Friday, and if you wish to listed to what I had to say, the link is here.

Two stories again today…the first from the International Business Editor of The Telegraph in London…Ambrose Evans-Pritchard. It’s entitled “The global slump of 2008-09 has begun as poison spreads.” The link is here.

The second piece is from my good friend James Turk over at goldmoney.com. It contains all the usual excellent graphs…is headlined “An Update on the Dollar”…and is linked here.

Please be assured that the financial powers that be, especially in the US, will do everything they possibly can to keep the Gold price below that US$1,000 level for as long as humanly…or inhumanly…possible. – Bill Buckler, the-privateer.com – 10 May 2008

Yesterday…MBIA, AIG and ResCap all had bad news…but the Dow was up 130 points nevertheless, so everything is fine. I see over the weekend that the Indonesian government said they might do the right thing and bow out of OPEC. No surprise there, as it’s been a net importer of oil for a number of years. Now let’s see what these clowns under the ‘big top’ have in store for us today!

See you tomorrow.

Casey Research correspondent-at-large Ed Steer is a keen observer of the financial scene and a board member of GATA.org.