Good day… And a Thunderin’ Thursday to you! It’s Thundering and raining here, so I felt that naming today a “Thunderin’ Thursday” was bang on! We had a wild and wacky Wednesday yesterday, with the Fed Heads playing the part of the court jester… And… I want to know, right here, right now, why the media isn’t blasting Fed Head Honcho Big Ben Bernanke! I’ll tell you why they should be, in a minute…

OK… As I said, we had a wild and wacky Wednesday yesterday, as the non-dollar currencies went for a spin on Mr. Toad’s Wild Ride, with Big Ben Bernanke in the role of Mr. Toad! HA! That makes me chuckle! Here’s the skinny, and what everyone should be up in arms about…

The FOMC meeting concluded with interest rates remaining at near zero… But what happened next was, well, exactly as I said it would happen, but we’ll get back to that in a minute… What I’m talking about here is that the Big Ben’s band of merry men announced that the U.S. economy’s return to growth was insufficient to withdraw stimulus, and that quantitative easing would remain until March next year… WHAT!

HEY BIG BEN! I read in the Financial Times the other day, yes, the Financial Times, that you said the recession was likely over! I also read in another publication that you said basically the same thing… So! If what you told these fine publications is true… Why then do we need stimulus in place along with Quantitative Easing until next March? You could almost hear Big Ben saying… “Oops, did I say that out loud?” HA!

Doesn’t that just tick you off? Big Ben and the President going around telling people that it’s all clear and consumers can come out now and resume their spending, only to find out it was nothing but “feel good” stuff… Yes, stuff to make us “feel good”… So we would take our eye off the ball… But not me! You can’t fool a wiley old veteran like me, right Jack Milner? I’m not falling for that change-up… And it ticks me off that they thought I was so stupid to fall for that!

Ok… Let’s take a trip back to Monday of this week, when I was trying to explain why the dollar had reversed the negativity toward it… I said this in the Pfennig on Monday… “Seriously though, the markets are of the belief that the Fed will keep rates near zero, but will announce that they will begin to remove stimulus, as Head Fed Honcho, Big Ben Bernanke, believes the recession is over…

I think this is wishful thinking on the markets’ part, as I really don’t see the Fed Heads doing anything, but talking about doing this, that and the other thing. You see, the Fed Heads know all too well that the Commercial Real Estate problems are just beginning and with Unemployment.”

I’ve been more right about what the Fed Heads were going to do, for the last 2 years, than Big Ben!

OK… So, here’s where the wild and wacky comes in… The non-dollar currencies were hanging around on a corner trading in a tight range, when the announcement of further stimulus and Quantitative Easing was made… You should have seen the non-dollar currencies begin to run up VS the dollar… It was crazy, I mean in a manner of minutes the euro traded from 1.4765, to 1.4850, and Gold? It was soaring too! But then it was one of those a-ha minutes, and no, I’m not talking about the 80’s group singing Take Me On! No, it was one of those head slapping moments when you say… Wow, I could have had a V-8!

Basically, investors figured out that by leaving the stimulus in place longer than originally planned, the Cartel, I mean the Fed, is confirming that the U.S. economic recovery isn’t nearly as robust as Big Ben and his compatriots have led everyone to believe. Stock markets fell, and the Treasury rates rose.

With the stocks backing off, the risk assets of currencies and precious metals backed off VS the dollar… And, we ended the day, where we started it… A wild and wacky Wednesday for sure!

The overnight markets were very confused as to what direction they should take… So, as I turn on the screens this morning, the euro is 1.4775, and Gold is $1,014… About the same as yesterday morning… If you weren’t around for the spin on Mr. Toad’s Wild Ride, then you would think… “How boring these currencies and metals are”… HA!

The thing that keeps haunting me here with yesterday’s stock sell off… Could it be the next leg down that I keep warning you about? Could yesterday’s sell off be the harbinger of more selling? We’ll have to keep an eye on this, folks… If we see 3 or 4 days of consecutive selling, it could very well be the indication that the next leg down is here…

Well… The other day I mentioned that the dollar could very well be the last man standing when it comes to near zero interest rates, and that could lead to the dollar becoming the next funding currency for the Carry Trade…

Ty brought to my attention this fact that plays quite well with that thought… For the 1st time since 1933, 3 month LIBOR rates in the U.S. (.28563) are lower than Japanese Yen 3 month LIBOR rates (.34875)

And one wonders why, the dollar is getting beaten like a rented mule? (no animals were hurt!)

A reader called in yesterday and wanted to know what I thought regarding… how a new SDR would affect the currencies. (Specifically NOK, AUS, BRL, CHF)

Well… That’s a tough one! Because if we do end up with a new SDR, no one knows what the makeup of that SDR will be… So, I can’t say how it would affect any currency until we begin down that road to a new SDR… If the current makeup of an SDR is used, then euro, yen, sterling and dollars would benefit… But one has to think that if things come to pass and we start down that road of a new SDR (Special Drawing Rights) that the makeup would be quite different, and could possibly even have some Gold as a component!

So… Sorry, I can’t really answer the question, because it’s an unknown… I hope my beautiful bride reads this part, as she usually only reads the first and last paragraphs, because she always contends that if I don’t know the answer to a question that I just make something up… See, dear? I said I couldn’t answer the question!

Ok… G-20 begins today… Look for these knuckleheads to take a toughened stance on speculation, with Oil in mind… I think that all they will do is make things tough for the Commodity Currencies of Australia, New Zealand, Brazil, Canada, South Africa, and Norway… There’s also an outside chance that these knuckleheads will attempt to do something to limit the rise in currencies VS the dollar… In other words, prop up the dollar… I’m not convinced they could do that, and I am convinced they shouldn’t do that!

Speaking of Norway… The Norges Bank (Norway’s Central Bank) did as I thought they would with rates, and what I hoped they would do with their statement… Here’s the skinny… The Norges Bank left rates unchanged… But… Said after the rate announcement that “they were CONSIDERING a rate hike”… The Norwegian krone went on a moon shot immediately after that statement.

In the race between Norway and Australia as to which will be the first to hike rates, Norway takes the lead, with that announcement yesterday… But, it really doesn’t matter, as no one will get the checkered flag or anything… The thing that makes the difference is that the yield differentials to the U.S. will begin to grow wider… And that, my friends, will go a long way toward currency strength for the currency that rewards investors with higher yields!

Speaking of Australia… The Reserve Bank of Australia’s (RBA) semi-annual Financial Stability Review gave a generally clean bill of health to the banking system and noted sentiment among households and business had improved considerably in recent months… But… The RBA went on to caution that it was not strong enough yet… Which then puts the Aussie rate hike forecast further behind Norway’s…

In New Zealand overnight… It’s been a good week o’ data for the Kiwis… Last night, it was the latest Consumer Confidence Index which jumped to a 4 – year high of 120.3 (previous reading was 106)! WOW! So… The highest Consumer Confidence in 4 years! This news helped kiwi to remain above 72-cents… Even with the risk assets sell off…

In Germany this morning… The Business Climate Index, as reported by the think tank IFO, disappointed a bit, as it came in (91.3) lower than forecast (92), but… The 91.3 marked the 6th consecutive monthly increase for the data… So, the trend is still in place…

And it’s good to be the yen, eh? I mean, recently, we’ve seen yen rally when the other currencies rally VS the dollar… And before that, we’ve seen yen rally along with the dollar… Last night, yen rallied alongside the dollar, and is trading with a 90 handle this morning…

And then there was this… The Federal Reserve System has disclosed to the Gold Anti-Trust Action Committee Inc. (GATA) that it has gold swap arrangements with foreign banks that it does not want the public to know about. WOW! This is a BIG DEAL folks, as the Fed as recently as 2001 (Big Al Greenspan) denied that these swap arrangements existed…

GATA believes that this letter suggests that the Fed is indeed very much involved in the surreptitious international central bank manipulation of the gold price particularly and the currency markets generally.

So guess what I think regarding the Fed now? That Ron Paul’s bill to audit the Fed needs to get on a roll! Remember, it comes before a committee tomorrow, I believe, where it will be decided to forward the bill on or kill it… So, call your representative and tell them you believe they should back Ron Paul’s bill to audit the Fed! I’ve got a bag full of names to call these guys at the cartel, I mean Fed… But, those are verbally used only… Nothing in writing… Hey! This is a family safe letter!

OK… So, to recap… The Fed is leaving stimulus in place along with Quantitative Easing until next March. So much for Big Ben, and the President’s claim that the recession is over, eh? The currencies rallied at first on the Fed’s announcement, but later realized the rot on the economy’s vine has been exposed by the Fed, and then the currencies sold off VS the dollar to end the day unchanged…

Currencies today 9/24/09: .8745, kiwi .7235, C$ .93, euro 1.4775, sterling 1.6220, Swiss .9770, rand 7.3850, krone 5.7630, SEK 6.8380, forint 183.15, zloty 2.82, koruna 17.04, RUB 29.99, yen 90.60, sing 1.4110, HKD 7.75, INR 48.03, China 6.8273, pesos 13.37, BRL 1.7980, dollar index 76.25, Oil $68.36, 10-year 3.41%, Silver $16.81, and Gold… $1,014.10

That’s it for today…I hope everyone arrives to work dry, as it’s a Thunderin’ Thursday!

Chuck Butler

Source: Oops, Did I Say That Out Loud?

After spending three days visiting the restive eastern province of Zhejiang, Premier Wen Jiabao argued for maintaining the loose economic policies implemented under the stimulus program, saying it’s too soon to be “blindly optimistic,” according to a statement by the State Council.

His remarks are likely to fuel an ongoing debate between government officials over whether it’s time to rein in bank lending.

After the government called on Chinese banks to provide increased liquidity to the economy, they lent about $1.08 trillion (7.37 trillion yuan) in the first half of the year – almost 50% over the government’s target of $732 billion (5 trillion yuan), and nearly double the total loans extended throughout all of 2008.

Most analysts credit the stimulus program for China’s economic rebound, as GDP expanded by 7.9% in the second quarter, up from 6.1% in the first quarter. But now some officials have voiced concerns that asset bubbles and non-performing loans could threaten a long-term economic recovery.

Last week, Chinese Legislator Yin Zhongqing called for limiting new loans to 10 trillion yuan for the full year, according to the Wall Street Journal.

The benchmark Shanghai Composite Index (SSE) is down 15% this month, amid fears that the government will move to tighten bank lending in the second half of the year to throw a wet blanket on the economy. The SSE, Chinas’ benchmark index, zoomed 91% from Jan. 1 to Aug. 4, hitting a high of 3,478.01.

China’s cabinet yesterday (Wednesday) said it’s watching for signs of overcapacity in industries including steel and cement and will increase “guidance” in the coal, glass and power sectors.  It will also place new restrictions on stocks and bonds sold by companies in those industries.

And continuing another trend, the People’s Bank of China last week in an internal memorandum notified its branches to curtail lending for the remainder of the year.  Other Chinese banks, including the Industrial & Commercial Bank of China (ICBC) and China Construction Bank (CBC), have also curbed lending in recent months, Reuters reported, citing anonymous sources.

The Chinese bi-monthly Caijing reported that with the new ceilings in place, ICBC has already lent 83% of its full-year new lending total, while CCB has lent 79%.

Other bankers reported that liquidity appears to be drying up and that loan approvals are taking longer than normal.

“It takes more time to process credit approval from Beijing headquarters now, and the pricing for onshore deals has been heading north in recent months, particularly for U.S. dollar deals,”a banker familiar with the process told Reuters.

And while the going rate for loans to top-tier multinational companies in the first half of the year were made at a margin of 150 basis points above the London Interbank Offered Rate (LIBOR), margins have now soared to over 200 basis points, according to the same banker.

Still, Beijing is unlikely to pull back from the massive stimulus program and the resulting liquidity that has bolstered the world’s third-biggest economy.  Even with the slowdown, analysts still expect total lending to exceed $1.5 trillion ($10 trillion yuan) this year.

And Premier Wen has called on policymakers to maintain “moderately loose” monetary policy and “active” fiscal policy.

That means the Chinese economy will remain flush with liquidity for the foreseeable future. And just to be on the safe side, the China’s State Council has issued a directive to banks to provide more loans to smaller firms.

“We will give appropriate subsidies to financial institutions to support them in extending loans to small companies,” the council said following a regular weekly meeting.

It also will extend measures to reduce the social security contributions paid by smaller firms that are facing difficulties and will increase tax support and direct government funding for them.

“This is tightening but it’s not a total shutdown,” Ken Peng, an economist with Citigroup Inc. (NYSE: C) in Beijing told Bloomberg News. “Policy hasn’t reversed but they are contemplating moves that have a lesser impact on the broader economy.”

Source: China Curbs Bank Lending but Vows to Keep Liquidity High

This from Bloomberg:

The London interbank offered rate, or Libor, for three-month dollar loans declined three basis points today to 0.75 percent, the British Bankers’ Association said, bringing its drop in the past two days to seven basis points, the most since Jan. 13. The rate has decreased in each of the past 35 days.

“The tension has disappeared and we are gradually normalizing,” said Patrick Jacq, a senior fixed-income strategist in Paris at BNP Paribas SA, the biggest French lender. “There’s less stress in the market and banks know they will get liquidity.”

That’s a massive drop from the three-month LIBOR peak of 4.82% back in October.

The TED spread has also dropped. This key credit indicator, which measures the difference between the three-month T-bill interest rate and the three-month Libor, has hit the lowest level since the credit crisis began.

These narrowing spreads are a clear indication that the lending markets are returning to normal. But even with this improvement, the TED spread is twice as high as its historical average. And the Libor is three times higher than its average.

Most of the complicated lending spreads that define a crisis in credit have returned to normal levels. For starters today, the mighty “TED spread”

Kind of a mouthful of a chart, eh? In simple terms, the TED spread is the difference, in percentage points, between how much it costs the banks to borrow dollars and how much it costs the U.S. government to do the same. The lower the spread, the more freely money is being lent around the country.

The spread is now at its lowest level since August 2007.

Alan Greenspan’s favored Libor-OIS spread is back to pre-crisis levels, too. This complicated affair of interbank lending compared to overnight index swaps was at 87 when Lehman died, peaked at 364 on Oct. 10 and this morning is barely 52.

Our point? While the crises in employment, housing, banks, stocks and life in general still seem as pertinent as ever, the numbers claim that the credit crisis is a thing of the past… for now, at least.

Source: The End of the Credit Crisis?

It all started the moment that Sydney closed on Monday afternoon…1:00 a.m. Monday in New York. From that point on, only Hong Kong [and the New York Bullion Banks] is a player. As I’ve said before, the New York banks [or their agents] can, and do, enter the markets whenever they want.

Gold sold off about five bucks with a smallish rally starting shortly after 12:00 noon in London. That lasted until the equity markets opened at 9:30 in New York…and then it was lights out…as gold got hit for $11 bucks. Once London closed for the day, the pressure was on again [both in Globex trading and electronic trading after], and gold closed nearly on its low of the day. June gold finished the floor session at $921.70, down $9.60. Estimated volume was a heavy 130,095 lots. And all things considered…the precious metals equities did surprisingly well. I find that encouraging…fingers crossed!

As egregious as the activity was in the gold market…silver really got it in the neck. As with gold, silver also began selling off at the same time. In the five obvious bouts of selling yesterday, silver lost 30 cents. The first was in the Hong Kong market shortly after Sydney closed, the next at the London open, thirdly…after the London silver fix around noon in London, fourthly…at the opening of the New York stock market…and lastly, in electronic trading on the Globex starting shortly before the equity markets closed. Here’s the Kitco graph…

click to enlarge

The usual N.Y. commentator had the following observations…”UBS notes this morning that they have been surprised by jewelry demand in the past six weeks, observing that ‘this is the first time we have seen any noticeable jewellery demand above $900/oz and in particular, the buying from India suggests that demand later in the year should increase a lot ahead of the Diwali festival…’. Vietnam gold stood at a $26.21 discount to world gold this morning. The unofficial Dong rate continues soft. This level, if sustained, will probably mean exports.

“Friday’s modest $2.90 Comex again saw a substantial increase in open interest. ScotiaMocatta described gold as being ‘well offered’ at $930, which was clearly true. Gold’s friends in the West have once again been reminded that breakouts attract opposition. An interesting account of the Paulson firm’s gold involvement is linked here.”

The breakout to which the N.Y. commentator refers, is the reverse head and shoulders technical pattern that has been building for the last while. The graph below [stolen shamelessly from James Turk over at goldmoney.com] indicates the current situation. It’s obvious the crooks at JPMorgan(NYSE:JPM) et al can read a chart as well as anyone. They would love to break this chart pattern.

click to enlarge

In other gold news, gold open interest rose once again last Friday. It was up another 4,507 contracts to 367,232…on volume of 116,949 contracts. Silver o.i. went the other way, with o.i. down 1,664 contracts to 94,496 on smallish volume of 17,525 contracts. As was mentioned in the first paragraph, volume in both gold and silver yesterday was pretty big…and it will be fascinating to see what happened to the open interest numbers when they become available later this morning.

It was a slow day for Comex deliveries yesterday…only five gold [and four silver] contracts were delivered. Over at the Comex-approved warehouses yesterday, another 479,227 ounces were added. As far as I can tell, there was no action in the GLD or SLV either. It was also a slow week at the ETFs in Zurich, Switzerland…as the Zürcher Kantonalbank reported that during the last week, their gold ETF only added 6,780 troy ounces…and their silver ETF added a smallish 175,543 ounces. Things were a littler busier over at the U.S. Mint, as they added to their update from Friday. One ounce gold eagle mintings increased another 3,500 to 53,500…while silver eagles tacked on a substantial 512,500 to bring May’s total up to 1,602,000.

And lastly in precious metals news, is this story from Peñoles in Mexico. Last week I mentioned that even though the strike was over at their precious metals smelter, the declaration of force majeure had not been lifted. Well, a Reuters story posted yesterday, made it official that it now has. I thank Ted Butler for sending me the piece entitled “Mexico Peñoles lifts force majeure at MetMex plant” and the link is here.

In the ‘other news’ category, I see that Moody’s has lowered Japan’s AAA Foreign Currency Credit Rating to Aa2. [Can a downgrade of U.S. paper be far behind? - Ed] In a piece from the Sydney Morning Herald in Australia, I note that “China is pumping more money into US Treasury bonds, recent data show, despite concerns expressed in Beijing in recent months over the safety of dollar-linked assets.” In a Bloomberg piece filed from Bejing comes this headline…”China’s stockpiles seen as new sovereign wealth strategy”…”China is stockpiling commodities such as copper and iron ore as part of a reallocation of its sovereign wealth amid concern that the value of its dollar assets may decline, according to the Royal Bank of Canada.” And in another Bloomberg story, it is reported that both LIBOR and the TED Spread are now almost back down to levels they were at when the financial crisis first erupted in August 2007…”People have become a bit more relaxed now because we haven’t had any bad news recently” said a Germany-based financial commentator. [If that isn't a sign that the next down-leg is imminent, I don't know what is. - Ed] And lastly [with my thanks to Bill King over at the King Report] comes this story from The Times of London [Jerusalem]…”America’s spy chief was sent on a secret mission to Israel to warn its leaders not to launch a surprise attack on Iran without notifying the US Administration. As Binyamin Netanyahu, the Israeli Prime Minister, prepares to visit Washington, it emerged yesterday that Leon Panetta, the head of the CIA, went to Israel two weeks ago. He sought assurances from Mr. Netanyahu and Ehud Barak, the Defence Minister, that their hawkish new Government would not attack Iran without alerting Washington.” [Excuse me for thinking otherwise, but this seems like Israel has basically been give then green light for "bombs away!"..."It's OK to bomb the hell out of Iran, but please let the U.S. in on it before the first one hits the ground."...or am I missing something here? - Ed] For inquiring minds, the article is linked here.

Besides the two stories already embedded in this rant, I’ve got five more…and I’ll use the fact that it was a weekend as my excuse for having so many. The first is from Zimbabwe, where Robert Mugabe’s rule has produced a hyperinflation that has destroyed the currency…and the country. Here is a brief report on daily life in that strife-torn country. The piece is entitled “Dust & Rust”…and I thank P.S. for sending it along. The ‘must read’ link is here.

It is with a certain amount of fear and trepidation that I follow the Zimbabwe story with one about California. It may be an outrageous comparison, but I see some similarities. We’ll find out about that in the fullness of time…and not too much of it either…if any of these similarities are realized. The article is from The Economist and I thank Craig McCarty for sending it along. It’s entitled “California: The ungovernable state” and the link is here.

Next comes the latest commentary from Texas Congressman Ron Paul. In his weekly column the heading reads “Audit the Fed, Then End It!” I could not agree more…and the sooner the better! I [once again] thank P.S. for sending me the story and the link is here.

The following is a story in from the businessinsider.com about the Federal Reserve. If further proof of Fed incompetence is needed…it’s right here. All you have to do is listen to “Elizabeth Coleman Inspector General” speak. As the story says…”It’s pretty much a trainwreck.” I thank Casey Research’s own John Grandits for sending it along. The headline reads “Rick Santelli Says: Watch This Video Of A Clueless Fed Inspector General” and the link is here.

And lastly is silver analyst Ted Butler’s latest commentary. In this week’s essay, Ted speaks of the current condition of the Commitment of Traders report and then delves into the bowels of the Silver Institute’s Annual World Survey. Needless to say, he finds it deficient in many respects…and he really pulls his punches in his comments about the Silver Institute, GFMS and CPM…as I have said far worse in my own commentaries regarding these morons. Anyway, the article is entitled “Silver Surplus?” and the link is here.

click to enlarge

Inflation is a disease, a dangerous and sometimes fatal disease that, if not checked in time, can destroy a society. – Milton Friedman

Inflation in one form or another is almost upon us. The downgrade that Moody’s just gave Japan was another shot across the bow for that country…as they are about to monetize their debt on an even larger scale as their economy’s death spiral worsens. Soon, all countries will be forced to face that fact. Then what of their currencies, as they inflate…or die? Friedman also said that “The fate of a country is inseparable from the fate of its currency.” That theory is about to be put to the test…and that’s why you should own all the physical gold and silver you can afford.

See you on Wednesday.

Source: And Then There’s This…Tuesday, May 19th, 2009

• A day after posting better-than-expected quarterly earnings, Goldman Sachs Group Inc. (GS) sold $5 billion in stock to repay federal bailout money. All totaled, Goldman sold 40.65 million in shares at $123 a piece, 5.5% below Monday’s closing price, Reuters reported. Goldman received a total of $10 billion from the Troubled Asset Relief Program.
• Amsterdam-based Royal Phillips Electronics NV (PHG) said its cost-reduction program will save the company more than 500 million euros ($664 million) this year, Bloomberg reported. The announcement came with its quarterly earnings report, in which Europe’s largest consumer-electronics maker reported its second-consecutive loss.

• First quarter earnings for pharmaceutical and health care retail giant Johnson & Johnson (JNJ) fell, but beat estimates by cutting costs, Reuters reported. The company $3.51 billion, or $1.26 a share, in the first quarter compared with $3.6 billion, or $1.26 a share, in the first quarter last year. Johnson & Johnson reaffirmed its 2009 profit forecast of $4.45 to $4.55 a share.

• Singapore’s economy may shrink 6% to 9% this year, the government said in its third reduced forecast this year. To counter contraction, the government will adjust the trading range of the Singapore dollar. “The situation is really dire and the central bank’s policy will improve sentiment and help the economy,” Vishnu Varathan, an economist at Forecast Singapore Pte., told Bloomberg.

• Discover Financial Services (DFS), will cut 500 jobs in May, or 4% of its workforce, Reuters reported, citing company sources. Discover, the fourth-largest U.S. credit card network, last month posted a deeper-than-expected quarterly operating loss, cut its dividend and set aside more money to cover bad loans as defaults increase.

• In a sign bankers are gaining confidence that the worst of the financial crisis is over, the London inter-bank offered rate (LIBOR) for three-month dollar loans is dropping at the fastest pace since January, Bloomberg reported. Debt strategists at Credit Suisse Group AG (ADR: CS) Societe Generale SA (ADR: SCGLY) and Royal Bank of Canada (RY), three of the 16 banks that provide the data that sets Libor each day, say the declines will continue.

• Weak demand and a supply glut could cloud the coal industry’s prospects for the rest of the year, even as U.S. coal miners are likely to show strong quarterly profits this month, Reuters reported. But big U.S. coal producers should weather the economic downturn because they sold much of this year’s production at higher prices negotiated before the recession hit last September. Coal prices are expected to stay low throughout 2009 until production cuts by major miners begin to restrict the coal supply.

• Madoff Securities International Ltd., filed for bankruptcy protection in Florida under Chapter 15 of the federal bankruptcy code. The code is designed to block U.S. lawsuits against foreign companies reorganizing overseas that have U.S. operations, Bloomberg reported. Bernard Madoff pleaded guilty last month to 11 counts including fraud and money laundering for directing the largest Ponzi scheme ever.

Source: Global Investment News Briefs Wednesday April 15, 2009

This from Sovereign Society:

Several segments of the credit markets have come back to life in December after crushing losses recorded in September and October. Though it’s too early to celebrate a broad-based credit revival, the largest issuers of investment grade debt surged this month as yields plunged. Mortgage-backed bonds, or agency debt, have also rallied sharply in December on the heels of government guarantees and the Fed’s plan to spend $500 billion dollars to shore up the sector.

With the United States and other governments amassing a truckload of debt to finance state sponsored bailouts of financial services and fiscal spending plans, it is conceivable that investors will increasingly swap low-yielding T-bonds for high quality corporate debt in 2009.

Since hitting a post-crisis peak of 4.88% in October, three-month LIBOR (London Interbank Offered Rate) has plunged to 1.52% on December 19. On December 1, LIBOR stood at 2.22%. A lower LIBOR rate is the first indicator to finally emerge from stress amid the credit crisis. Banks are still largely hoarding cash but several large institutions have started to lend in overnight markets this month for the first time since late 2007.

The Growing Yield Dilemma

The Federal Reserve’s latest interest rate cut to effectively 0% on December 16 has laid the foundations for more trouble at money-market funds where yields for 30-day and 90-day Treasury bills continues to fetch just 0.01% – the lowest in more than six decades. Earlier in December, 30-day bills actually turned negative for the first time since 1940. That means investors are paying the government to park cash.

Money market funds are now sitting on potential losses as management fees erode the yield generated by Treasury bills and other short-term paper. Though other debt securities yield more than T-bills, investors might be embracing more credit risk as fund companies look to boost yield.

A better alternative to money market funds include one-year term deposits (CDs), short-term investment grade bonds and even intermediate-term corporate debt. Term deposits should be held only at the nation’s biggest banks, including J.P. Morgan Chase, Wells Fargo and Bank of America.

Yield Hungry? Here’s a Free Lunch

The Fed’s latest moves to spur lending in a massively credit-inflicted bear market since 2007 is forcing many investors to turn to distressed corporate investment-grade bonds. The effective yield on the benchmark Dow Jones Corporate Bond Index is 7.23%, down from a record high of 8.88% just a few months ago and down from 8.06% on November 30. A lower yield means corporate bond prices are rising in value.

In September, investment grade bonds were hammered following the collapse of Lehman Brothers Holdings and posted their single worst month of performance since February 1981. Many bonds plunged more than 15% in September alone.

More than half of the investment grade bond sector is comprised of financial services debt or bonds issued by some of the largest banks in the United States and Europe. With the Fed’s implicit guarantee on the largest issuers of such debt, investors can now tap into bank issued bonds trading at a 5.16% premium to expensive Treasury bonds.

For a portion of an investor’s liquidity, corporate high quality debt is literally a “free lunch.” The largest issuers of corporate paper have started to return to the market since November, including IBM and other large cap companies. In Europe, some banks without government guarantees have managed to raise sizable offerings – a positive development.

Corporate Debt: The New Safe-Haven?

Since October, governments in the United States and Europe have swapped government paper for toxic mortgage-backed assets previously held at banks. Despite these efforts, most banks are still laced with all sorts of other clogged credits like leverage loans, auction rate securities and repo credits.

The credit crisis has not disappeared because of aggressive government and central bank action; rather, swaths of credit risk has been transferred from bank balance sheets to government balance sheets, effectively polluting central bank coffers with largely illiquid and near worthless paper. Since August, the Fed’s balance sheet has mushroomed from $850 billion dollars to more than $1.5 trillion dollars – and still rising.

Indeed, credit default swap rates since October have risen sharply on government paper while swap rates have decreased for the highest quality companies. This suggests investors are starting to place a risk premium on government issued bonds.

Are we at the cusp of a major transition in the credit markets whereby investors might increasingly purchase investment grade debt as a hedge against rising yields on government bonds? After all, outside of the financial sector many industries harbour their highest net cash levels in more than a decade. For some companies, especially the food and beverages and fast-food companies, cash flow is largely generated internally and, in most cases, these companies don’t need to raise cash to finance operations. I would argue that companies like Kraft Foods (NYSE:KFT), General Mills (NYSE:GIS) and McDonald’s (NYSE:MCD) are a better long-term credit risk than most sovereign borrowers.

Failed Auctions Rising

To confirm the above theory that perhaps investors are starting to embrace riskier bonds like investment grade debt because of bulging government deficits, consider the trend in Europe since October whereby several governments have scrapped bond auctions.

Over the last sixty days, Germany, the Netherlands, Italy, Spain, Austria and the United Kingdom have either scrapped bond auctions or reduced their planned offerings because of tepid investor interest. These governments, including Germany, the largest and most liquid, are paying higher yields to draw institutional buyers. This could mark the beginning of a bear market for government bonds at some point later in 2009, once credit markets stabilize and risk taking is resumed.

In the United States, demand for Treasury’s remains strong because of fears of deflation. The current environment – a disaster for just about every asset class except T-bonds – has supported the dollar to an extent. Foreigners are chasing Treasury securities as they scramble for safe havens. Yet even Treasury is not immune to the deluge of supply coming our way in 2009.

Over the next 12 months Treasury estimates it will have to raise about $1.5 trillion dollars to fund gargantuan fiscal spending plans, bailouts, and possible tax cuts. Treasury will re-introduce one-year, three-year and five-year T-bonds in 2009 to finance part of this spending spree. At some point, investors will force long-term rates higher. The Fed will try to influence the long end of the yield curve but will ultimately be unsuccessful. The Fed can only control short-term lending rates.

Investment grade bonds shouldn’t supplement T-bills. The risk spectrum is normally quite significant in a normal economic environment. Yet these are anything but normal economic times. It is possible that as 2009 progresses and, assuming credit markets continue to grudgingly normalize, the new safe haven in bonds will be high quality investment grade bonds at the expense of super low-yielding Treasury debt.

Source: Is Investment Grade Corporate Debt Safer Than Government Bonds?

And that figure, incidentally, doesn’t include the additional losses from secondary-prime mortgage loans, auto loans, credit card balances, student loans and the other credit-related flotsam and jetsam floating around in the debt markets.

That suggests that the hundreds of billions of dollars in emergency capital infusions from the world’s central bankers we’ve seen to date may only be a fraction of what’s ultimately needed by the time fully leveraged figures are thrown into the mix.

Second, liquidity conditions now may actually be worse than when the entire credit-crisis mess began to unravel this time last year. For example, the benchmark London Interbank Offered Rate (LIBOR) remains higher than so-called “policy rates” and U.S. Treasuries of comparable maturities.

This suggests that banks still don’t trust each other and therefore are keeping so-called “Interbank” borrowing rates high in order to reflect what they perceive to be the added risk of doing business. We’ve been warning investors to watch out for this since as far back as April, and have generally been preaching caution since the credit crisis began last year.

In other words, the fact that Libor-Treasury spreads are wider today than they were a year ago suggests that the banks really don’t know who continues to hold the toxic debt instruments the entire world has come to fear – despite a recent earnings parade of CEOs making claims to the contrary.

The upshot: Many institutions are hoarding cash – something you’d hardly expect to see if the credit crisis were really on the mend.

Third, judging from recent reports, it’s beginning to dawn on financial regulators that this crisis was never about a lack of liquidity in the first place, which is something I suggested in an open letter to U.S. Federal Reserve Chairman Ben S. Bernanke some time ago.

Instead, this crisis is about three things:

• Too much liquidity.
• Fundamental structural problems in the credit industry, including the almost-total lack of regulation.
• And the lack of transparency of complex financial instruments for which there is no public market, making them tough to value and nearly impossible to trade.

It is becoming clearer by the day that – partly because of these three factors – a good deal of money has been made fraudulently, if not illegally.

Granted recent changes surrounding the “mark-to-market” accounting of so-called “Level 3″ assets are a step in the right direction. But what few people realize is that, in the short-term, these new requirements could involve the immediate recognition of even larger losses than we’ve seen to date.

The reason is that many of the firms involved – think Merrill Lynch & Co. Inc. (MER), Lehman Brothers Holdings Inc. (LEH) and Citigroup Inc. (C), for example – will no longer be able to hide their losses in Level 3 assets, as they have in the past.

As you might expect, there’s a counterargument to this, and it’s a highly popular one on Wall Street – especially inside the CEO set, whose members desperately want to stop the financial hemorrhaging their firms are enduring. They claim they’re “selling” risky assets and “de-leveraging” their balance sheets.

But here’s what they are not telling you.

Even though these folks are technically “selling” assets – particularly the distressed “Level 3″ assets I mentioned a bit earlier – what they are really doing is assigning the upside to hedge funds, private equity firms, and sovereign wealth funds in exchange for cash.

And here’s the kicker: The banks actually are holding onto the downside liability in the event the underlying securities go bad. That brings us back to the start of this commentary, when I said that I expect more securities to go bad.

No matter how you look at it, these financial institutions are playing a vicious shell game, hoping all the while that they’re not the loser who is taken to the cleaners when he picks up the wrong shell.

Where this goes from bad to worse is that at the same time they’re playing more fancy accounting tricks, these firms continue to pony up to the Fed’s private backdoor lending window for sweetheart financing. After all, they can’t get the financing anywhere else.

That means that every taxpayer in this country is involuntarily being put in the bailout business.

As for whether or not we’re near the end of the credit crisis as a whole, it depends on whom you ask.

When this crisis started a year ago, I was asked a similar question and answered it by saying that we would not even begin to approach the end of the line until the total losses exceeded $1 trillion.

My audience chuckled politely.

Fast-forward 12 months, and nobody’s laughing anymore – especially when I say that I’m now raising my industry loss estimate to nearly $2 trillion.

Increasingly, other analysts are embracing a similar viewpoint. UBS AG (UBS) raised its estimate of the total cost of the credit crisis to $600 billion, while noted hedge fund manager John Paulson suggested $1.3 trillion is not unthinkable. Meanwhile, in a report issued last May, the International Monetary Fund (IMF) projected the bailout costs at $1 trillion.

All of this leads us to a single conclusion: At least for now, this is a “recovery” in name only.

Source: Three Ways to Know When the Credit Crisis Hits Bottom

The “that” is simply the national debt, and how we’ll deal with it as the baby boomers begin to draw on their entitlement programs… I think people now like to “live for today, and not worry about tomorrow” and that’s a real shame. As I said a month or so ago… I’m going to have to sit down and write a letter to my sweetheart granddaughter, Delaney Grace, and apologize to her for leaving her generation with a debt load that requires a huge tax burden that her grand father didn’t have, and a loss of freedoms, and life style, that her grand father had…

OK… Man that was a real somber way to get things rolling this morning, eh? Well, it’s things that have to be said, even if the people running our country won’t say them!

Alrighty then, let’s get the beat going here, and start to rock and roll! The currencies really put on a display yesterday pounding out gains VS the dollar all day long. The euro actually traded up and through the 1.30 handle at one point in the day. But profit taking took hold later in the day, and carried over to the overnight markets of Asia and Europe. But still, as I turn on the screens this morning, the euro is managing to hang around 1.2875…

Euros weren’t the only currency to see some lovin’ yesterday, as the Aussie dollar (A$) added to its early morning gains after the rate cut by the Reserve Bank of Australia (RBA), and saw 70-cents at one point in the day! But as I said above, the profit taking set in as the day and night came, and it looked like the exit polls were pointing to an Obama win. These knuckleheads are thinking that an Obama win will speed an economic recovery… Ahhh grasshopper, if it were all so easy as changing the President!

U.S. stocks rallied all day, leading the “risk takers” back to the trading tables… That meant the yen and dollar were sold, and A$’s and kiwi were bought… That’s the Carry Trade in a nutshell for you there folks. Yen traded above 100 for the first time in a couple of weeks, but has settled back below the figure in overnight trading, as the profit taking took hold.

Oil prices also surged yesterday by over $6, and Gold had a strong performance… But the commodities are going through the same thing the currencies are going through this morning… Profit taking…

Factory Orders for September printed yesterday and were weaker than expected. Posting a 2nd consecutive month of weakness, Factory Orders decreased by over $11 Billion, or 2.5%. Notice something here folks… Going back to yesterday’s report on the ISM (manufacturing index) and now this Factory Orders, which is simply new orders for manufactured goods, and you have some real rot on manufacturing’s vine… While there was rot before August, the real nasty stuff has been exposed since the end of July… And guess what else has gone on since the end of July? Come on, you don’t have to be a Sherlock Holmes to figure this one out… It’s the dollar rally! The dollar has rallied strongly since the end of July, and has pushed Manufacturing to the edge of the cliff… And from the looks of the ISM the other day, (recall it fell to 38.5 from 53) Manufacturing is teetering over the edge…

Some good news on the LIBOR borrowing rate… It narrowed 21 BPS overnight… It’s still out of whack with what the markets believe it should be, but this is a good sign. Let’s hope it’s not a false dawn. If we can get borrowing costs lowered, to stop the currency swaps going on, and to apply some W-4 to the locked credit markets, then maybe, just maybe, you never know, we could get back to fundamentals! And those fundamentals have not been good lately… Speaking of fundamentals, there’s none bigger than jobs…

Friday, is a Jobs Jamboree Friday, and right now, it doesn’t look good for the U.S. employment picture as I think that it could show another loss of jobs and this time to the tune of at least 200K… We’ll get a “sneak peek” at the report this morning, as the ADP Employment Change for October will print… As I’ve explained before, this ADP report gives an indication of the direction of what the Jobs Jamboree will print… ADP is forecast to show -100K, which would not be a good sign for the Jobs Jamboree…

Some readers questioned my thought yesterday that deflation was winning the battle VS inflation, and one person even thought that my call was completely off base… I know it had been some time since I took those economics classes in college so I looked up deflation just so I get it exactly right… Webster’s says that Deflation is a contraction in the volume of money and credit relative to available goods.

Hmmm… Maybe the jury’s still completely out on this, but in my mind this is a deflationary period we’re experiencing right now, but still feel that soaring inflation is on the other side of this record… Yes, the “B” side has inflation in store for us… But then, that’s just my view from the cheap seats!

But! If I’m right, and Lord knows I can be just as wrong as the next guy writing a letter every day for 16 years at 5 in the morning, then the precious metals, like Gold, will be big winners… And non-dollar investors will also wear smiles like a Cheshire Cat! And this dollar rally will have been proven to be the fraud it is… A bear market rally… But… If I’m wrong… Well, I think I’ll just retire and ride off into the sunset… OK, I can’t do that, I have a 13-year old that still needs to go to college in 5 years! But If I’m wrong, then I’ll take my lumps and admit it like a big boy…

Thought I would pass along some news from beleaguered Iceland… We were able to get our maturing CD’s this week, traded at a much better level this week, and the news is full of hope that this will continue. I was told that there is a semblance of a spot market taking shape for maturing forwards. There’s still no deliverability or forward markets, as the largest banks in Iceland are still trying to deal with being taken over by the Gov’t. I know that there is a lot of confusion with the price that’s being reported on the internet for Icelandic krona. But believe me now and hear me later, that is NOT THE MARKET PRICE FOR KRONA! And if you think it is, call up the provider of the price and tell them you want to sell them krona at that price! OK… I’m getting a little upset right now, so I’ll stop there… Just wanted to give an update…

Well… As I opined here, the euro got back on the rally tracks, and is back above the 1.29 handle… I guess the profit taking has ended for now, eh?

With the major news circling around the Presidential Election results there’s not much left for those of us that are trying to deal with the Financial Crisis going on… So… With that void, for today at least, I’ll head to the Big Finish!

Currencies today 11/5/08: A$ .6970, kiwi .6065, C$ .8675, euro 1.2955, sterling 1.5995, Swiss .8610, ISK (no quote), rand 9.5875, krone 6.6950, SEK 7.6825, forint 199, zloty 2.69, koruna 18.75, yen 99.10, baht 34.92, sing 1.4775, HKD 7.75, INR 47.44, China 6.8280, pesos 12.61, BRL 2.1120, dollar index 84.67, Oil $68.70, Silver $10.27, and Gold… $759.78

Source: The Day After

This will be the end of another of the things that’s keeping the fundamentals in the back of the classroom. All we’ll have left is the credit squeeze… Unfortunately though I feel like we’re going to have to live with that one for some time to come! There are signs that things are loosening up, but it’s a far cry from what should be considered as “normal” in the lending arena! As long as the credit squeeze remains in place and on the minds of traders & investors everywhere, we’re stuck with the Trading Theme of 2008… Well, let’s see, it didn’t come into play until late July, so it should be called the Trading Theme of late 2008 and 2009.

That’s right folks… When I first saw this all unfolding in July and August, I told you in this letter that this dollar strength could very well last through the elections and through to year-end… That was before the rot on the vine was exposed in September and October… Now, I fear that this will be the Trading Theme for most of 2009 too… As the Credit squeeze continues to hang over the markets like the Sword of Damocles. And… Someone told me that in 6 out of the last 7 elections, regardless of whether the Democrats or Republicans won, the dollar rallied in the 6 months following the election. So…. That takes us into 2009, with the Trading Theme and credit market squeeze… It all adds up…

And as long as I’m going down this road of bad news… I have come to a conclusion that the deflation wolf has won… For months I wrote about how inflation was winning but the deflation wolf was always at the door… Well… After viewing the landscape of falling stock prices, falling commodity prices, and falling home prices, I have to think that inflation is no longer the king of the hill… Deflation is all around us folks… The only things you don’t see falling are Consumer prices and bond prices… But those bond prices are sure to fall given the glut of Treasury issuance coming down the pipeline… And Consumer prices? Well, if Consumer Spending keeps falling off the cliff, then you can expect Consumer Prices to fall too…

But inflation isn’t going away… And in my opinion, it will hide out on the other side of this deflationary period… And at first it will look much like 1976 all over… 1976 was a great year, right Christine? But it wasn’t a great year for stagflation…

So… What does this mean for the currencies and precious metals? I don’t think it spells a Happy Days while the deflation is going on… But… On the other side of the deflation, it could very well spell rallies in currencies and metals that will be huge! You see, the Trading Theme remains in place for most of 2009, as we work through the deflation… And then as the Trading Theme is removed slowly, inch by inch, step by step, there will be an unwinding of “Safe Haven” trades (read U.S. Treasuries) and the race to the bottom for the dollar will be on…

That’s how I see it from my seat here on the Trading Desk in St. Louis Mo. Home of the 10-time World Champion St. Louis Cardinals! It’s not a pretty picture, near term, that I’m painting this morning, but even an artist paints some ugly pictures now and then… I know of one, no never mind, no need to go into that.

OK… You’ve been very patient, waiting for the update in currencies… So, here we go!

The currencies played the Trading Theme to a “T” once again yesterday… When I left you yesterday morning, the euro was trading 1.2845… But then, more deep, dark, dangerous data printed for the U.S. and the dollar slapped down the single unit and every other currency that got in its path. The data came in the form of the latest reading of Manufacturing in the U.S. The ISM Index fell from 43.5 to 38.9, a low since September 1982! OMG! For the new kids to class, the ISM Index draws a line in the sand at a 50 level… Any number above 50 equals expansion… Any number below 50 equals contraction… We haven’t seen manufacturing contract at this level since September 1982… And the NBER still hasn’t put the “recession sign” on the economy’s door? Geez Louise, what do these guys need to prove to them that we’re so deep in recession right now?

So… With that bad data in the books… The dollar rallied and pushed the single unit to below 1.27 for most of the day… We’re seeing some recovery this morning, and the euro has popped back up above 1.27… This morning, they are reporting from Europe that borrowing costs (LIBOR) have fallen a bit, thus loosening the purse strings… Recall, this was another of the things knocking the stuffing out of the euro and other currencies, as Financial Institutions in Europe stopped borrowing in LIBOR because the rate had gotten totally out of control on the high side. Instead, the Financial Institutions used the currency swaps market, selling their reserve currency (read euro) to raise the capital needed as reserves against the toxic waste they had on their books…

It was my assumption when hearing about this change to currency swaps to generate cash, that this would come crumbling down once LIBOR got back to what would be considered a “fair rate” for borrowing, and the swaps would get unwound, meaning the currency sold in the swap would be re-purchased. It will be interesting to see if this plays out, even with the Trading Theme in place.

The Reserve Bank of Australia (RBA) cut interest rates last night by a larger margin than I expected… I had thought the RBA would cut 50 BPS… Instead, the RBA followed up last month’s 100 BPS cut, with a 75 BPS cut! WOW! They aren’t messing around, eh? Before you skip down to the Currency roundup to see what the A$ is doing after a 75-BPS rate cut, no need… The A$ has rallied since the rate cut news! Talk about perverse! Currencies these days are just strange… Well, I guess it’s not the “currency” but the Currency Trader! But, who am I to look a gift horse in the mouth? The A$ is rallied…

The Canadian dollar / loonie rallied last night too… Hmmm… I’m sitting here thinking about these rallies and started humming the great song by the Who… Won’t Get Fooled Again! For I know that the Trading Theme is in play… Yes, it’s the Same Old Song… Ahhh the Four Tops too!

So, one down, two more to go… That is Central Bank rate cuts this week… Still to come… The Bank of England (BOE) and the European Central Bank (ECB)… The performance of the A$ after the rate cut is promising for these two currencies; pound sterling and euros respectively… But remember the Who!

Recall last week, when I was talking about having the fear that the Bank of Japan’s (BOJ) Ministry of Finance would intervene to stem the yen’s rise… Well, unless they’re lying… And we have no reason to believe they are… The BOJ announced last night that there was no currency intervention last week… Hmmm… Just wondering why then, did yen fall from 92 to 99? I doubt the rate cut on Friday had anything to do with it… Must have been all the jawboning…

Well, that, and… The fact that as things in the credit markets loosen up a bit, those cocky Carry Traders get back on their feet… And we all know that Carry Trades to yen are like kryptonite to Superman!

The data cupboard is pretty bare today, with only September Factory Orders on the docket, which are expected to drop -.8%… And Fed Head Fisher, will be speaking in Texas on economic challenges in Texas… Fed Head Fisher is always good for a quote… But this is election day, and most likely he will be a forgotten man today.

I’ll finish up today and head to the Big Finish right after I tell you about this little ditty that the Wall Street Journal reported this morning… “The Treasury Department is considering using more of its $700 billion rescue fund to buy stakes in a broad range of financial companies, not just banks and insurers. In focus are companies that provide financing to the broad economy, including bond insurers and specialty finance firms such as General Electric’s GE Capital unit, CIT Group and others.”

Hmmm… Is it not bad enough that now these finance companies are going to get bail out money too? But… What’s with the “others”? I sure hope they mean “other” finance companies, and not just “others” that need a bail out… Like, say, Joe’s Bar and Grill! YIKES! The Treasury Dept is out of control folks, and there’s no reining them in now… We’ve given them too much rope! UGH!

Currencies today 11/4/08: A$ .6875, kiwi .60, C$ .8525, euro 1.2785, sterling 1.5865, Swiss .8565, ISK (no live quote), rand 9.8910, krone 6.6950, SEK 7.73, forint 202.90, zloty 2.77, koruna 18.915, yen 99.50, baht 34.90, sing 1.4740, HKD 7.75, INR 47.72, China 6.8360, pesos 12.70, BRL 2.1410, dollar index 85.77, Oil $63.85, Silver $10, and Gold… $737.40

Source: Election Day!