Saturday, November 29, 2008

November 29.08 commentary.


Good morning Ladies and Gentlemen:


The gold and silver comex  inventory levels are very interesting to say the least.  The silver OI for December rests at 6,500 contracts.  The amount of silver  hit was about 3,040 contracts.  It looks like the minimum amount of silver that will stand will be 33.5 million oz.  The volume on the last day of trading at the comex  registered 15,500 contracts or 2.5 x OI for the last OI for Dec which is totally unusual.


The lease rate and libor rate are identical at 2.22%.  The difference in the December to March silver is around 5 cents.  It does not make sense for traders to buy the Dec silver when they can buy March for a few pennies. The amount of silver that eventually will stand can be anywhere from 33 million to 50 million oz.  If future traders sense trouble they will try and queue jump.


In gold, the OI for the Dec gold rests at 1.6 million oz.  The amt hit was .8 million oz and the trading for the last day was about 4.5 million oz.

We still do not know how many contracts were exercised through the option side of things.  All will clear on Monday.  However I believe that the comex data is all suspect.


In economic news, as I have indicated above Libor rose to 2.22%. The banking channels are still clogged.


We are also witnessing a huge rise in price for the 10 year treasury.  The yield has come all the way down to 2.94%/  With default rates on these bonds rising by 4 basis points (54 from 50), there is certainly no flight to quality.  Not only that but the stock market rallied this past week.


There is no doubt that the Government is buying its own debt and they are ready to release the billions of printed dollars used to buy these bonds.  The monetizing the debt is identical to the printing press going full tilt.


This is the biggest news of the day yesterday:* * * * *

New U.S. mortgage crisis looms

The Associated Press

November 27, 2008 at 1:56 PM EST

WASHINGTON — The full scope of the U.S. housing meltdown isn't clear and already there are ominous signs of a new crisis — one that could turn out the lights on malls, hotels and storefronts across the country.

Even as the holiday shopping season begins in full swing, the same events poisoning the housing market are now at work on commercial properties, and the bad news is trickling in. Malls from Michigan to Georgia are entering foreclosure.

Hotels in Tucson, Ariz., and Hilton Head, S.C., also are about to default on their mortgages.

That pace is expected to quicken. The number of late payments and defaults will double, if not triple, by the end of next year, according to analysts from Fitch Ratings Ltd., which evaluates companies' credit.

"We're probably in the first inning of the commercial mortgage problem," said Scott Tross, a real estate lawyer with Herrick Feinstein in New Jersey.

That's bad news for more than just property owners. When businesses go dark, employees lose jobs. Towns lose tax revenue. School budgets and social services feel the pinch.

Companies have survived plenty of downturns, but economists see this one playing out like never before. In the past, when businesses hit rough patches, owners negotiated with banks or refinanced their loans.

But many banks no longer hold the loans they made. Over the past decade, banks have increasingly bundled mortgages and sold them to investors. Pension funds, insurance companies, and hedge funds bought the seemingly safe securities and are now bracing for losses that could ripple through the financial system.

"It's a toxic drug and nobody knows how bad it's going to be," said Paul Miller, an analyst with Friedman Billings Ramsey, who was among the first to sound alarm bells in the residential market.

Unlike home mortgages, businesses don't pay their loans over 30 years. Commercial mortgages are usually written for five, seven or 10 years with big payments due at the end. About $20-billion (U.S.) will be due next year, covering everything from office and condo complexes to hotels and malls….



This will cause massive unemployment and loss of taxes for municipalities.


This is scary:  big problems in China as we are witnessing riots and closing of factories:

The Telegraph: China slashes interest rates as panic spreads The People's Bank of China cut interest rates by more than 1pc point as the economy crumbles and millions of jobs are predicted to go ahead of Christmas.

The leading think tank group ECRI has come out and stated that the usa economy is shrinking fast

ECRI Leading and Coincident Indicators

This is why the Fed and Treasury stayed in panic mode after the massive, opaque Citi bailout.

The monetization of mortgage debt helps all those ARMs that are scheduled to reset in the coming months. Unfortunately, many Americans will not qualify for new mortgages because they have lost jobsor have negative equity in the homes.  End

The economy continues to falter as the Treasury and fed have no option but to buy its own debt with paper money.

This will eventually hyperinflate the economy and send us into a depression  because of the high prices and low economic activity.


Speak to you on Monday.




Wednesday, November 26, 2008

Nov 26.08 commentary.


Good evening Ladies and Gentlemen:


I will not give a commentary tomorrow as it is a USA holiday. My next commentary will be on Saturday.


Gold finished down by 10.00 to 808.30 and silver fell by 6 cents to 10.21.


The open interest on both gold comex and silver comex fell.  The gold OI retreated to an astonishing low of 276000.  It fell by 5000 contracts yesterday.  The OI on silver fell by a monstrous 3400 to an all time low of 86800.


Over at the comex pits, the December OI for gold  fell to 34000.  However the volume on the last day of trading for gold rocketed northbound and the final estimated traded contracts exceeded 155000 for the December contract.


In silver, the OI rested at 11000.  However the estimated volume exceeded 34000.


Please note that in gold the estimated volume for the December contracts exceeded 5 x the OI limit for the month.  In silver the estimated volume for the December silver exceeded 3 x the OI limit for the month.


This is most unusual.  There is no contango as the Feb price of gold is within pennies of the December contract.  If there is no price differential why would so many people buy the current month and not the future month. Likewise there is no contango for the silver prices with respect to the December vs the March contracts.


If I am a betting man, I think that some big boys came in on the buy side under the disguise of being part of the cartel buy and roll (taking the opposite of speculators by Feb and sell their expiring December contract).   They would then take delivery of the current months buy.


You would generally do this on the last day to hide this from the cartel into giving up huge amts of contracts that they would have to supply.


It would not make sense for anyone to play with such a huge volume of trades on the last day.  They could trade Feb for gold and March for silver and get a few months of trading without penalty.


Friday, will tell the true story.  We will also know the amount of options exercised on both silver and gold.

However, it is safe to say that the low OI on a rising gold and silver price certainly spooked members of the cartel.  The hitting and silver price on the last day was meant to stop option players from exercising their contracts.  I still think we will have 50 million oz of silver and 2.5 million oz of gold standing.  Lets wait and see.


As for the physical demand for gold and silver please read this:


U.S. Mint says coins depleted, allocating Eagles

NEW YORK, Nov 25 (Reuters) - The U.S. Mint said that all 2008-dated bullion coins, with the exception of the American Eagle gold one-ounce and silver one-ounce bullion coins, have been depleted because of high demand and a lack of coin blanks.

On Oct. 7, the Mint said that it was necessary to focus production primarily on the popular American Eagle gold one-ounce and silver one-ounce coins due to limited blank supplies.

The Mint told its authorized dealers in a memorandum dated late Monday that weekly allocations for the American Eagle gold and silver one-ounce coins would continue, with the final 2008 allocation scheduled for Monday, Dec. 15.

"The quantities of blanks that we have been able to acquire from our suppliers continue to be very limited, while demand for bullion coins remains high. As a result, it is necessary for the U.S. Mint to delay the launch of other bullion coins until later in 2009," it said.

Produced from gold mined in the United States, the 22-karat American Eagles have been novel items among collectors and investors since their introduction in 1986. Each coin has a face value of $50 but it is sold by authorized dealers at a premium to the price of gold.


And now for some economic news:

First of all, Libor remained at lofty levels today finishing the day at 2.18%.  However what is very strange is the behaviour of the 10 year bond.  The yield fell all the way down to 2.98%.  Generally, the stock market tanks when we see the long bond fall in yield or rise in price.


However when you combine this with the huge amount of bailing out the usa is doing you must begin to wonder what on earth is going on.  It is very clear that the usa government is in on all these trades.  They are bidding up the price of these bonds to help get mortgage rates down, which in turn will elevate home prices.  In other words, the Government is trying to inflate home prices and they are going to do this through the 10 year bond.

Here is the passage:

The yield on the 10 yr T note was last at a remarkable 2.98%. As Adrian noted, the US Government is desperate to get mortgage rates down and is manipulating our Treasury note market to get the job done.

December 10 yr T note

With all the horrendous US economic news, and disappearing US interest rates, the scenario for the dollar to take out 75 on the downside could not have been better. The fact that the dollar rose .80 to 85.78 is a testament to the resolve of our Orwellians…

The ECB reported a sale of 2.83 tonnes of gold for the week, well below the 9.6 level on the Washington accord II.

Durable goods collapsed last month. Here is the passage:

U.S. durables orders weaken sharply in October

WASHINGTON, Nov 26 (Reuters) - New orders for long-lasting manufactured goods plummeted in October as demand weakened across nearly every major sector and shipments faltered again, the Commerce Department reported on Wednesday.

Orders for durable goods that are intended to last three years or more fell 6.2 percent, more than twice the 3 percent decline that Wall Street economists had forecast, after declines of 0.2 percent in September and 5.5 percent in August.

The October drop was the sharpest since an 8.3 percent plunge in October 2006.

Orders for nearly every category of durable goods declined, including drops of 12.6 percent for primary metals, 6.8 percent for machinery and 11.1 percent for transportation equipment. Orders for non-defense capital goods excluding aircraft that are taken as a proxy for businesses' investment intentions fell 4 percent in October after decreasing 3.3 percent in September.

Shipments of finished goods also weakened in October, dropping by 2.4 percent after a 0.2 percent decline in September, in a signal that hiring at U.S. manufacturers are likely to keep dropping as factory output slows.


Consumer spending plunged in October:

U.S. consumer spending plunges in October

WASHINGTON, Nov 26 (Reuters) - U.S. consumers cut spending during October at the steepest rate in more than seven years, according to a Commerce Department report on Wednesday that underlined rising risks the economy was headed into a deep recession.

Spending plunged 1 percent, slightly more than the 0.9 percent decline that Wall Street economists had forecast.

The department revised prior months' spending data to show that October was the fourth straight month in which consumers reduced current-dollar spending, a significant loss of stimulus since consumer spending fuels two-thirds of U.S. economic activity.

Adjusted for inflation, real spending fell for five straight months through October. The last time that real U.S. consumer spending fell for such a protracted period was over a five-month span from September 1990 to January 1991, the department said.

We then heard from the Chicago’s Purchasing index and then Michigan sentiment index and they both showed poor economic activity.


Here are the various reports:

09:45 Nov Chicago Purchasing Manager's index 33.8 vs. consensus 37.0
Oct reading was 37.8
* * * * *

US Midwest business weaker than expected in Nov

CHICAGO, Nov 26 (Reuters) - Business activity in the U.S. Midwest contracted in November at a more severe rate than expected, a report showed on Wednesday.

The Institute for Supply Management-Chicago business barometer fell to 33.8 from 37.8 in October. Economists had forecast the index at 36.7. A reading below 50 indicates

The employment component of the index fell to 33.4 from 41.5 in October. Prices paid dipped to 50.7 from 53.7 and new orders dropped to 27.2 from 32.5.


09:55 Nov University of Michigan Confidence reported 55.3 vs. consensus 57.5
Prior reading was 57.9.
* * * * *

US consumer sentiment falls to 28-year low - UMich

NEW YORK, Nov 26 (Reuters) - U.S. consumer confidence fell to a 28-year low in November as mounting job losses, falling incomes and tumbling household wealth battered sentiment, a survey showed on Wednesday.

The Reuters/University of Michigan Surveys of Consumers said its final index reading of confidence for November fell to 55.3 from October's 57.6.

The index came in well below economists' expectations of 57.7, according to the median of forecasts in a Reuters poll, and deteriorated sharply since the middle of the month, when lower gasoline prices had cheered many consumers.

"Consumer confidence fell in the last half of November due to mounting job losses, falling incomes and the evaporation of household wealth," the report said.

"Consumers were unanimous in their recognition that the economy was in recession, and nearly three-in-four expected the recession to deepen in the months ahead." …


They are all at multiyear lows. Basically consumers are unanimous in their recognition that the economy is in complete recession.

Michigan is low because of lousy auto sales and  Chicago is also feeling the downturn in the economy.

New home sales fell badly last month.  Here is the important passage:

10:00 Oct New Home Sales reported 433K vs. consensus 441K
Sep figure revised to 457K from 464K.
* * * * *

U.S. Oct home sales, inventories fall

WASHINGTON, Nov 26 (Reuters) - Sales of newly built U.S. single-family homes dropped sharply in October and were running at levels last seen 17-1/2 years ago, according to a Commerce Department report on Wednesday that offered a fresh measure of the U.S. housing sector's distress..

The annual sales pace of 433,000 was down 5.3 percent from a revised 457,000 in September and was the weakest since 401,000 in January 1991. Wall Street economists had forecast that October sales would be at 450,000-unit pace.

The median sales price fell to $218,000 from $221,700 in September and was the lowest since September 2004 when it was at $211,600. The median marks the half-way, with half of homes selling above and half selling at prices below the median.


There are a couple of commentaries I would like to bring to your attention:

Not content to have ripped off the world with under-secured derivatives, the 'newer deal" is a ploy by the Fed and Gov cartel, to screw the foreign reserve holders of their purchasing power, as is evidenced by the leap of MZM by 350% annualized since September.
$7.4 Trillion created out of thin air yesterday, $800 Billion today, $700 billion Paulson bag grab, Obamas' $500 + billion stimulus yet to be announced $300+ billion bailout of Citi, $2 trillion Fed asset purchases, etc. etc, until soon, the Chinese $1.5 trillion looks like chump change. I think they(The Chinese) have just signaled that they are going to get rid of their $US and other foreign reserves, by spending it on infrastructure and gold. Repatriation of $s will soon be under way.

Don't look up and don't look down, because both the sky is falling and the bottom is dropping.
All the best
Jon G

Bailout Nation

Came across the following:

"General Motors Corp. workers will be unable to buy GM shares through two employee savings programs indefinitely because the plans' administrator believes additional investments are not appropriate based on the automaker's financial situation."

So it's not safe for them to buy, but let's give a big greenlight for the US taxpayer to get long!

 In the first commentary by JON G, he correctly states that with all the bailout money reported:  800 billion dollars today, yesterday 7.4 trillion,  700 billion for Paulson’s TARP, Obamas 500 billion stimulus pkg, the 300 billion bailout of Citibank and the Feds 2 trillion purchase of GSEs etc, the 1.7 trillion dollars of treasuries owned by the Chinese looks like chump change.  He is correct when he states that they have signalled that they are getting rid of their foreign (usa ) reserves.  The dollar is heading south in a hurry.


In the second commentary on General Motors, please note that GM workers will be unable to buy GM shares through two  employee saving programs indefinitely because the plans administrator believes additional investments are not appropriate because of the companies financial situation.

The author states it is OK for taxpayers to buy the junk but not GM workers..go figure.


Speak to you on Saturday.














Tuesday, November 25, 2008

Nov.25 commentary.


Good evening Ladies and Gentlemen:


Gold closed up by 20 cents and silver  was down 7 cents.  However gold and silver were all over the map today.  Paulson called his forces to attack these metals but to no avail.


The open interest on the gold comex contract fell to an alltime low of 282900.  It fell by a huge 5500 contracts with gold rising big time yesterday.  Silver’s OI remained flat at around  90,200.


I have seen the comex silver OI for December and I am getting a little excited at the results.  Tomorrow is really the last day of trading for the metals.  Friday, is the first day delivery and we will see the amt of silver and gold standing as well as get a good idea as to the options exercised.


I stand to what I believe will happen in both silver and gold.  In silver over 50 milllion oz will be delivered.  In gold it will be at least 2.5 million oz.  This should put tremendous pressure on  the comex.   It certainly looks like a default will occur in December.


In economic news, this struck me:


Treasury considered plan to bust Citi shorts

Submitted by cpowell on 07:42AM ET Tuesday, November 25, 2008. Section: Daily Dispatches

Officials Weighed Plan to Buy Citi Shares

By Henny Sender
Financial Times, London
Monday, November 24, 2008

NEW YORK -- US regulators considered a proposal to buy Citigroup shares in the secondary market before deciding on a plan to buttress the bank with $20 billion in fresh capital and $306 billion in guarantees for distressed assets, people involved in the talks said…



In other words, regulators got together on the weekend and were thinking that they might have to buy a massive amt of Citibank shares to thwart the shorts.  Please remember that we strongly believe that Bush and Paulson ordered JPMOrgan et al to massively short commodities  in July due to their high prices and the devastating effect it had on the economy.  The resultant action by these doorknobs, we are now witnessing as we go into a huge deflationary spiral caused by hedge funds  massively selling and the banks losing big time on toxic mortgages.


Libor continues to rise and today it came in at 2.20%.   It is obvious that the lending channels at the banks remain clogged.  They cannot and will not loan.


So what does our fearless leader Bush and Paulson do?


They create another lending facility.  It seems that 7.5 trillion is not enough.  We need more:

8:15 Fed plans to lend up to $200B in consumer ABS; also to buy up to $600B in GSE debt, mortgage securities
* * * * *

08:19 Follow-up: Fed plans to lend up to $200B in consumer ABS; also to buy up to $600B in GSE debt, mortgage securities
Under the creation of the Term Asset-Backed Securities Loan Facility (TALF), the Fed will lend up to $200B on a non-recourse basis to holders of certain AAA-rated ABS backed by newly and recently originated consumer and small business loans. Treasury, under the TARP, will provide $20B of credit protection to the FRBNY in connection with the TALF. The terms and conditions are subject to change based on discussions with market participants in the coming weeks. Separately, the Fed will initiate a program to purchase the direct obligations of housing-related government-sponsored enterprises (GSEs), Fannie Mae, Freddie Mac, and the Federal Home Loan Banks, and mortgage-backed securities (MBS) backed by Fannie Mae, Freddie Mac, and Ginnie Mae. Purchases of up to $100B in GSE direct obligations under the program will be conducted with the Federal Reserve's primary dealers through a series of competitive auctions and will begin next week. Purchases of up to $500B in MBS will be conducted by asset managers selected via a competitive process with a goal of beginning these purchases before year-end.
* * * * *

10:03 Treasury Secretary Paulson reiterates that the Fed will use all tools to support the markets
Speaking on the ABS facility, Paulson says the facility may be expanded over time and that the new facility will be used to help banks increase lending, that it underscores the government's support for the housing market, and that it will take time for the markets to stabilize.
* * * * *

Now, there is a new lending facility called TALF and it will lend 800 billion dollars to Fannie Freddie and other mortgage backed securities.


It is totally amazing that no one asks the question:  where is the money going to come from to pay for all this?  I think he has used up all the trees in the usa to print the trillions of dollars needed.  Maybe he will invade Canada and get our trees and print usa money with them.

It might help our floundering forest industry.

With respect to Citibank, the rescue yesterday was for 306 billion dollars.  Citibank has only 218 billion of consumer mortgages in its portfolio.  Thus we know are witnessing commercial mortgages melting as  88 billion dollars is earmarked for commercial mortgages failures.


Today with the new announcement of 800 billion dollars of the new TALF lending facility, for some strange reason bond yields fell and bond prices rose.


Rick Santelli, of CNBC announced that it was the government that was purchasing the bonds and driving yields down.  We have no idea of where the dollars went to finance these purchases.  Regardless, the Fed and Government are now totally in the market and they are crowding out retail investors.

This came in at 10 o’clock this morning:

0:02 FDIC says "problem banks" increased to 171 in Q3 - wires
Headlines. Q3 net income decreased 94% to $1.7B. FDIC says most US banks saw earnings shrink during the quarter. end

Then we got a read on home prices.  Remember that as long as prices remain low, the collateral at the banks become useless.

Here are the relevant articles:

Home prices plunge record 17.4 percent in September

NEW YORK (Reuters) - Prices of single-family homes in September plunged a record 17.4 percent from a year earlier, according to the Standard & Poor's/Case-Shiller Home Price Indices issued on Tuesday.

The composite index of 20 metropolitan areas fell 1.8 percent in September from August, S&P said in a statement.

S&P said its composite index of 10 metropolitan areas declined 1.9 percent in September from August for a 18.6 percent year-over-year drop, also a record.

The rate of home price declines has accelerated on a quarterly basis too.

In the third quarter, the decline in the S&P/Case-Shiller U.S. National Home Price Index -- which covers all nine U.S. census divisions -- remained in double digits, posting a record 16.6 percent decline versus the third quarter of 2007. This has worsened from the annual declines of 15.1 percent and 14.0 percent, reported for the second and first quarters of the year, respectively.

The U.S. National Home Price Index dropped 3.5 percent in the third quarter from the second quarter.

"The turmoil in the financial markets is placing further downward pressure on a housing market already weakened by its own fundamentals," David M. Blitzer, Chairman of the Index Committee at Standard & Poor's, said in a statement.


10:38 Sep House Price Index reported (1.3%) vs. consensus (0.7%)
Aug reading was (0.6%).
* * * * *

September Home Prices in 20 U.S. Cities Drop 17.4% From 2007

Nov. 25 (Bloomberg) -- House prices in 20 U.S. cities declined in the year ended in September at the fastest pace on record as rising foreclosures pushed down property values.

The S&P/Case-Shiller home-price index dropped 17.4 percent in September from a year earlier, more than forecast, after a 16.6 percent decline in August. The gauge has fallen every month since January 2007, and year-over-year records began in 2001.

Mounting foreclosures are contributing to the drop in home prices, while adding to the inventory of unsold homes on the market. Lower property values are weighing on household wealth, causing consumers to cutback on spending and increasing the likelihood that the U.S. economy will contract for a second consecutive quarter.

"Price declines have already led to considerable improvements in affordability, but more foreclosures and an inventory overhang will keep depressing prices," Abiel Reinhart, an economist at JPMorgan Chase Bank in New York, said before the report.

Home prices decreased 1.8 percent in September from the prior month after declining 1 percent in August, the report showed. The figures aren’t adjusted for seasonal effects so economists prefer to focus on year-over-year changes instead of month-to-month…


Of all the commentaries today, the following is most important:

The fact that it was necessary to guarantee so many assets - about a sixth of the $2 trillion in

assets that Citigroup reported at the end of September - was another indication of both the complexity and the opacity of many of the securities that were created by financial engineers in the great wave of innovation. That opacity evidently contributed to the delay in announcing the transaction, which did not come until just before midnight, New York time, on Sunday…

And get this: The assets in question - described by the government as "loans and securities backed by residential real estate and commercial real estate, and their associated hedges" - must be valued at current market value before the guarantee kicks in, but the government and the bank have yet to agree on those values.

Please note the last paragraph:  loans and securities backed by residential real estate and commercial real estate….must be valued at current market value before the guarantee kicks in,  but the government and the bank have yet to agree on those values>>>


These guys cannot agree on any value so how on earth can this being enforced.  It is beyond me!!

Bill H who seems to grasp perfectly the severity of the situation comments on the Citibank and the new bailout today:

To all; we have had bailout after bailout, put out this fire, save that bank etc.. What has not dawned yet in the minds of investors is "where does the money come from"? This is not just a U.S. phenomena though the trigger point certainly was. "Where does the money come from" is a legitimate question. Other than possibly China does any country have a surplus of cash just waiting to be spent to repair past mistakes? At least China is using its surplus fund to build infrastructure that will bear future fruits. The rest of the world is spending "new" [borrowed] money to make past mistakes go away, or hoping to.

When do the credit markets say "enough"? At what point do bond investors balk and refuse to lend more? At what point does the world run out of available capital to lend even if they wanted to? I don't have an answer as to when, however this is where all current roads lead to. Can you imagine the panic when we get to this point? Another relevant question if you accept the above is "what happens when a government[s] goes bankrupt"?

Or even what happens if a whole bunch of governments fail at the same time?

Well.....imports into the bankrupt nation[s] virtually stops, credit is shut off and the foreclosure or repossession stage begins. If I am correct and we have multiple failures of sovereign governments, the monopoly game of fiat currencies will certainly cease. Then in order to have import trade take place, one must have productive capacity or Gold money. If country A has oil, they can trade that with country B for grain, cement, computers etc.. If country A has Gold money they can simply pay for imports. But this situation leads to "WHERE'S THE BEEF"?

The U.S. is certainly now known globally as a "non" producer as we have sent our productive capacity overseas for the last 20 years and are running a huge trade deficit. If we can't produce enough of what the world needs or wants then we must either reduce our consumption or make payment in Gold. THIS IS THE RUB! Supposedly the US is the largest holder of Gold on the planet, but then why are Ft. Knox and also Gold melt bars from West Point showing up on the global markets? Did we get robbed? Well of course we have, slowly at first and now apparently brazenly. This robbery will go down in history books as the greatest looting of any Treasury EVER! Foreigners will have one, and only one question for us regarding terms of trade. Remember the obnoxious little old lady in the Wendy's commercials? Regards, Bill H. end


The game will end when we cannot import anymore due to non payment of goods.


I read that Brazil is having trouble with their coffee production. They could not get credit for their fertilizer and the crop for coffee beans will be down over 50% from last year.  We are witnessing 100,000 plants in China shut down. I can see prices escalate not just from a massive increase in paper dollars but a severe supply contraction due to credit problems.


We are in an economic mess.  We are having a massive credit contraction due to the subprime, alt a and mortgage meltdown.

We have a massive deleveraging occurring because of the huge downfall in housing prices and commodities.


Yet we are beginning to see a scarcity of some commodities like, silver and soon coffee.  Eventually, a farmer in commodity rich countries would not be able to produce the food we need.


To me we are heading into a huge hyperinflationary depression.  I hope I am wrong.
















Monday, November 24, 2008

Nov 24.08 commentary.


Good evening Ladies and Gentlemen:


First the gold and silver news:  gold rose by 27.60 to 818.30.  Silver did better, rising by  84 cents to 10.34.  The open interest on the gold comex rose by 3000 to  288000 contracts.  This is a small increase with a large move in gold  on Friday.  Silver’s OI  declined by  a huge 1500 contracts to an extremely low 90,000.  This is after a big rise in the silver price.


Over in the silver comex pit, there was a small movement of about 5000 contracts at the end of the day from the December contract to March.  The OI for December is about 25000 contracts.  My number two son Lenny  (who will celebrate his 33rd birthday tomorrow) reports to me that he expects that come Friday, the first day delivery, the amount of silver standing will be 8000 contracts plus the number of contracts exercised from options.(I think that the option total will be about 2000 contracts)  .  Thus we will have 10,000 contracts or 50 million oz standing which is the largest amount ever to stand.  It will also break the comex.


I am in the dark on the gold comex.  Expect around 2.5 million oz to be delivered upon. Bryant  thinks the following will happen in gold:


Open interest in the December 08 COMEX gold ended the day on Friday at 98,080 contracts (9,808,000 ounces). Volume for the day in the December Contract was 166,330 contracts. If 20,000 of these contracts are in strong hands awaiting delivery, that means the remaining 78,080 contracts are the ones in play and they were bought and sold on average more than twice in a single day. This looks to me like the commercials are churning the market trying to cover their shorts. This reminds me of the saying your wheel is turning, but your hamster is not going anywhere. Open interest actually rose at the end of the session at a time when the market would normally be rolling their contracts over to the February 09 contract. Either some sharks smell blood in the water or the physical buyers outsmarted the shorts by waiting until just after the option expiry to buy at a low price. If memory is correct, Jim Sinclair has said that if 2,200,000 ounces are removed from COMEX it will break them. Regards,


And now for economic news: As most of you are aware, last night the Fed bailed out Citibank.


Many are perplexed that the stock market rose by 400 points with such wonderful news. Actually, the news on the health of one of the largest banks in the usa could not have been worse.


The USA Fed a few days ago coughed up 25 billion dollars to shore up Citibank’s balance sheet.  With a market cap on Friday of 20 billion dollars, the market perceived that the entire 25 billion went down a sink hole. Basically the Fed has backstopped  Citibank with loan guarantees of about 300 billion dollars.   So get this:  the Fed has orchestrated a loan of 300 billion for a company worth 20 billion dollars.  And please remember this:  the loans are only for on balance sheet toxic stuff.  The off balance sheet is still Citbank’s responsibility.  There are many reports today in Midas that state that at best Citibank’s assets are worth 50% of total assets.  Their total assets are 2 trillion dollars so they have to write off eventually 1 trillion dollars.

The real reason for the rescue is the fate of emerging markets where Citibank is the premier player.  These markets are melting faster than you can imagine.  This is why the Fed had to act immediately.  A Citibank failure would have cemented a debt deflation spiral that we could never climb out of.


Here is the relevant passage:


To all; Tim Geithner as new Treasury Secretary and Citigroup's near failure and bailout dominated the news this weekend. Tim Geithner, who cares? He has been at the NY Fed pulling the levers alongside Bernanke and Paulson so he obviously doesn't have the magic formula to save the world. As for Citi, I have just a few observations. First, wasn't Citi supposed to be a potential buyer of Wachovia just 5 weeks ago? Weren't they the Fed's horse in that race? Didn't they jump up and down stomping their feet while talking lawsuit against Wells Fargo's deal intrusion? Did they have the money 5 weeks ago to purchase Wachovia? If they did then where did it all go? Money center bank, cornerstone of American capitalism goes from solid to bankrupt mush in the blink of an eye? Was it all smoke and mirrors 5 weeks ago? OK, no more questions, just a simple 2nd grade conclusion. It WAS smoke and mirrors then as it is now. It has been smoke and mirrors for so long that Wall Street, Washington, and Main St. all got lulled into believing everything from the improbable to the impossible to be the new certainty.

Picking apart the Citi deal is a little bit humorous. First, Citi has already gotten $25 Billion from the TARP just recently which turned out to have been less than a band aid. In this deal Citi will get a backstop of about $250 Billion for its CDO portfolio and as I understand it this is only for their "on balance sheet assets", their "off balance sheet assets" dwarf what they show on the books. Citi will also get $27 Billion in exchange for warrants at $10.61 and 8% preferred stock. Citi closed on Friday with a market value of about $20 Billion after receiving $25 Billion just recently so this first $25 Billion has already been flushed, now the government put $27 Billion more and goes on the hook for an additional $250 Billion in guarantees? I don't get it, the government has put together a $300 Billion package for a company that the market said was worth $20 Billion [and that was Friday before a bailout]. I guess they'll deal with the bigger problem later [the off balance sheet black hole]

OK so let's look at this from OUR standpoint, the citizens who are putting up the money. Treasury and the Fed have just put up $27 Billion for a 7.8% stake in a company that was valued at $20 Billion? This is paying 12.8 times the value of the $27 Billion, another way to look at it is the government is on the hook potentially for $306 Billion or 15 times Citi's market cap. I am not a rocket scientist but with this type of deal I wouldn't get in a car to the end of my driveway with the Treasury or Fed driving! What about the off balance sheet debacle? The on balance sheet goo was supposed to be "the good stuff", what happens to the "bad stuff"?

AND AS ALWAYS, WHERE DOES THE MONEY COME FROM??? answer...out of thin air, the government can only borrow it. Well actually they do have another option. Once they can no longer borrow in the capital markets they will have only one option left, this option is always the last one used by every government in history that went bankrupt. THEY WILL PRINT, PRINT, PRINT! There are no other options left. I don't know how long it will take for the masses to do the math on this but when they do, the "value of a Dollar" will be so far from the old saying "as good as Gold" as black is to white. There will be continued efforts at spin, forget it, the system we knew and loved is toast. Actually toast is too polite, after this fire there will only be ashes remaining. Regards, Bill H.  end.

Here is the important news on the Citibank rescue:

US government to invest $20B in Citigroup, back $306B loan pool -- WSJ (3.77)
The newspaper reports The federal government agreed to absorb potentially hundreds of billions of dollars in losses on toxic assets on Citigroup's balance sheet and injecting fresh capital into the bank. Under the plan, the WSJ reports Citigroup and the government have identified a pool of about $306B in troubled assets: Citigroup will absorb the first $29B in losses in that portfolio. After that, three government agencies -- the Treasury Department, the Federal Reserve and the Federal Deposit Insurance Corp. -- will take on any additional losses, though Citigroup could have to share a small portion of additional losses the newspaper adds. In exchange for that protection, Citigroup will give the government warrants to buy shares in the company according to the newspaper. In addition, the Treasury Department also will inject $20B of fresh capital into Citigroup. That comes on top of the $25B infusion that Citigroup recently received as part of the the broader U.S. banking-industry bailout. According to the newspaper, The government didn't require Citigroup to make changes to its executive ranks or its board in return for government assistance. However, Citigroup agreed to "comply with enhanced executive compensation restrictions," the government said Sunday, and also will implement a government-backed plan to modify distressed mortgages that is designed to curb foreclosures. - SA London
Reference Link (subscription required)

 I would like to present other economic news of the day:

When I saw this, I almost fell over my chair:

Fed Pledges Top $7.4 Trillion to Ease Frozen Credit

Nov. 24 (Bloomberg) -- The U.S. government is prepared to lend more than $7.4 trillion on behalf of American taxpayers, or half the value of everything produced in the nation last year, to rescue the financial system since the credit markets seized up 15 months ago.

The unprecedented pledge of funds includes $2.8 trillion already tapped by financial institutions in the biggest response to an economic emergency since the New Deal of the 1930s, according to data compiled by Bloomberg. The commitment dwarfs the only plan approved by lawmakers, the Treasury Department’s $700 billion Troubled Asset Relief Program. Federal Reserve lending last week was 1,900 times the weekly average for the three years before the crisis…

THE Fed pledges 7.4 trillion dollars????  This represents 50% of total GNP.  And gold only rises by 18 dollars?

What am I missing?


There is a great article by Chris Wood in which he states that the Fed is out of ammo.    From losses of 4 trillion in housing to a loss of 9 trillion on the stock market, we are seeing huge deleveraging that the banks cannot shake.

All the money the Fed is printing is filling the holes of the banks balance sheet.  The Fed thinks it can reflate at will.

The author thinks that they will have trouble.  They need to inflate but the deleveraging is so great that they will have trouble.  I urge you to read the article.  I have highlighted this for you to read:

The Fed Is Out of Ammunition

A discredited dollar is a likely outcome of the current crisis.



The Fed is out of ammunition, which may include gold too.  end

We have received news on the retail sales for November and they are not good:

U.S. retail sales struggle in early November: MasterCard

NEW YORK (Reuters) - U.S. sales of apparel, shoes and appliances fell dramatically in the first two weeks of November, as consumers worried about a recession and job losses further cut spending, MasterCard Advisors said in a report.

The results from SpendingPulse provide an early look into the strength of the crucial U.S. holiday sales season, which traditionally begins on the day after Thanksgiving. This year, the major holiday sales period begins on Friday, November 28.

Analysts are predicting the worst holiday sales season in nearly two decades

. end

Existing home sales continue to plummet:

U.S. existing home sales drop 3.1 pct in Oct

WASHINGTON, Nov 24 (Reuters) - The pace of sales of existing homes in the United States fell 3.1 percent in October to a 4.98 million-unit annual rate, while the median home price dropped to its lowest in more than four years, a National Association of Realtors report showed on Monday.

Economists polled by Reuters were expecting home resales to set a 5.00 million-unit pace. September's figure was revised downwards to 5.14 million from 5.18 million.

The inventory of existing homes for sale slipped 0.9 percent to 4.23 million from 4.27 million in September. The median national home price declined 11.3 percent from a year ago to $183,300, the lowest since March 2004 when a median price of $183,200 was recorded.
The percentage drop was the biggest since the NAR started keeping records in 1968. end

Late Saturday, we learned of three bank failures, the worst being Downey Loans with assets of 12 billion.  The losses were not unexpected:


FDIC Seizes Three Banks, Expanding Loan-Relief Effort
By Binyamin Appelbaum
Washington Post Staff Writer
Saturday, November 22, 2008; D01

Federal regulators seized three banks last night, including Downey Savings and Loan Association, a large California mortgage lender, expanding what is by far the most expensive crop of bank failures in modern American history and indicating that the pace of failures is increasing.

The Federal Deposit Insurance Corp., which took control of the banks, said holders of about $1.9 billion in Downey mortgage loans who have fallen behind on their payments would now be eligible for reduced monthly payments to help them avoid foreclosure. The unprecedented move in connection with a bank failure expands the agency's controversial loan-modification program, which is opposed by other parts of the Bush administration.

Downey, with $12.8 billion in assets, is the third-largest bank to fail this year, after Washington Mutual and IndyMac Bancorp. All three institutions were large mortgage lenders focused on the California market and regulated by the Office of Thrift Supervision.

The failure was not a surprise. The company said in a securities filing last week that it expected to be seized by regulators, a highly unusual confession that underscored its desperate straits. Downey was a leading originator of alternative loans called option adjustable-rate mortgages, which work like credit cards, allowing borrowers to pay less than the full amount due each month. As with credit cards, many people borrowed more than they could afford, and default rates on the loans have soared.

Another bank seized last night, PFF Bank and Trust, is also a California thrift, with $3.7 billion in assets. Its bad loans were made mostly to residential developers.


IMF economist Blanchard states that the worst is yet to come.  Here is what he has to say:

IMF economist says worst of crisis to come: paper

ZURICH (Reuters) - The financial crisis that has engulfed many top banks is spiraling into a broader economic crisis that has yet to peak, International Monetary Fund's top economist Olivier Blanchard told a Swiss newspaper on Saturday.

Blanchard said the crisis would continue for another year and called on governments to promote fiscal expansion and on central banks to cut rates toward zero.

"The worst is yet to come," he was quoted as saying in Finanz und Wirtschaft as he noted how the banking sector's woes had started to spill over into the real economy by hitting the carmaking industry.

"This is only the beginning," he added. "The risk exists that the data will get worse and worse, which would then lead to more pessimistic expectations and accelerate a fall in demand."

"It will take a long time before we go back to normal conditions."

Blanchard said the crisis should last for another year, but normal growth would return only in 2011.


There is a lot for you to absorb tonight.  There are many articles for you to read.


I urge you to take your time
























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