Good morning Ladies and Gentlemen:
Gold closed up by 40 cents to 869.40 although it traded at 871.50 in the access market. Silver rose by 5 cents to 16.53.
Yesterday morning, gold was sent down in price by 10 dollars close to its 200 day moving average of 855.75. The powers to be knew already that the inflation number coming out of
Pundits came on TV extolling the tame inflation environment we are witnessing. I guess they are not viewing the riots around the world as people just cannot afford higher energy prices.
The CRB index rose again and is setting record levels every day. Corn and soybeans rose to again record levels.
To show the discomfort of citizens, the
Clearly the consumer is feeling the effects of higher energy costs as oil is a component of most goods produced and also a cost in the transportation of those goods.
Even my most beloved commodity (next to gold) cocoa (chocolate) rose to set a new 28 year high. I am a confirmed chocoholic!.
The open interest on gold comex on Thursday fell by 800 contracts, so the new Oi starting Friday came in at 393644. This open interest was last seen with gold at 680-700, Silver’s OI continues to diverge from gold as it rose another 1157 contracts to 132000. In essence the Oi on silver rose with a declining price. This is ominous. Also, gold ,on a heavy 160,000 contract day to see only a tiny contraction must be viewed as being very bullish.
The big news of the day and week is without a doubt the banking sector and this is where I am going to spend some time trying to explain what on earth is going on.
First on the other side of the big pond, over in
We learned yesterday from an article penned by Ambrose Pritchard Evans in which he highlights currency problems in
And now I would like to describe what is happening on side side of the continent.
First, Lehman brothers.
Yesterday, their stock closed at 25.18 with the news that Black Rock took at a sizeable chunk of their offering. This is the same people who are helping the Fed with the Bear Stearns junk.
Treat Black Rock and JPMorgan as the fed itself.
Here is the analysis on the stock so you can view for yourself its eventual demise. The company now has 554 million shares outstanding having printed 248 million new shares issued at 28 dollars. The new capital added is 6 billion dollars. They have about $35 billion in real estate related assets and about $34 billion in mortgage related assets. Both of these sets of assets are severally impaired. The former CFO Erin Callan on Monday reported that its net worth is 33.00 per share or $18 billion in retain earnings. However you must remove the huge gain from its revaluation in its own bond. Lehman bonds are trading at a big discount to par so these guys took a gain of capital and showed it on its books. If you take a discount of 25% on the illiquid real estate stuff you are left with a value of around 22.00 per share or 12 billion dollars. This includes the new 6 billion dollars from investors on Friday. However if you take a discount of 50% which is more likely, you wipe out all the gains and go into a negative 4 billion situation.
On top of that, what business are these guys going to do? Investment banking is dead. Their base is higher with no revenue and huge costs. I cannot see see guys surviving and my bet is that the fed is planning with JPMorgan the demise of Lehman Brothers.
For the past 6 weeks, we have seen the share price of Bank of America’s share decline. As I pointed out to you on many occasions, the Countrywide takeover is dead. However the ramifications throughout the banking world will be felt. Bank of America also fears this so they are saying mum. We will watch this development closely. Also remember, that the board of Directors of Thornburg Mortgage Capital voted to bankrupt the second largest mortgage company in the
The dual bankruptcy of both Thornburg and Countrywide will be devastating.
To which we highlight the following development:
US foreclosure filings surge 48 percent in May
Friday June 13, 7:29 am ET
By Alan Zibel, AP Business Writer
Housing crisis worsens as number of
WASHINGTON (AP) -- The number of U.S. homeowners swept up in the housing crisis rose further last month, with foreclosure filings up nearly 50 percent compared with a year earlier, a foreclosure listing company said Friday. Nationwide, 261,255 homes received at least one foreclosure-related filing in May, up 48 percent from 176,137 in the same month last year and up 7 percent from April, RealtyTrac Inc. said.
One in every 483
Foreclosure filings increased from a year earlier in all but 10 states. Nevada, California, Arizona,
Metropolitan areas in
Irvine, Calif.-based RealtyTrac monitors default notices, auction sale notices and bank repossessions. Nearly 74,000 properties were repossessed by lenders nationwide in May, while more than 58,000 received default notices, the company said…. end
As you can see, the perfect storm is upon us. We are seeing banking troubles over in Europe and mega troubles over here in the
Many have asked me how the
They printed 88 billion dollars to goose the markets. With that kind of money they can do just about anything!!.
The long bond price continues to fall and it fell badly to 111.80. However the 10 year is falling faster than the 30 year. And on top of this the 2 year yield note is rising faster than the 10 year.(price falling faster..remember, yield is inverse to price). In reality we are getting a flattening of the yield curve, something of which banks loathe. They borrow at the short end and lend at the long end. It seems that the Fed is in competition with bankers and are purchasing short end treasuries to shore up its balance sheet and thus draining the sector. We are seeing difficult times for people to get a loan. It will be very difficult for banks for make money and this spells disaster for our investment banks.
Many are telling me that the
If the Fed was serious in their quest to raise interest rates they could have done one or all of the following:
- it would reduce the growth rate of the money base not cause massive printing like the 88 billion dollars on Thursday through the repo pool.
- it could terminate the TAF auctions or announce a date for their termination.
- it could have given a tiny ¼ rate hike in a surprise move to back up its jawboning.
It did neither.
It will not raise rates as this will smother the housing sector which is generally 70% of the economy.
So for the next few months, you will witness the inflationary forces of the Fed printing money for our bankers and the deflationary forces of asset contraction caused by the fall in housing prices.
I strongly believe inflationary forces will win out but we cannot be 100% sure. Gold is trading sideways as it ponders the Fed’s next move.
On the energy scene, we now see that Gasoline is in backwardation and West Texas Inter
Watch for oil to be scarce and rise. Bankers do not care at all about citizens and their plight.
I wish you a grand weekend
And I will see you on Monday.