And then Garic…
Late yesterday afternoon the S&P 500 came off of its highs and the Treasury market miraculously started rallying after the auctions were finished. This morning the Government reported its preliminary Q209 GDP report where Personal consumption expenditures was reported to be weaker than expected, the S&P proceeded to sell off 4 points and the Treasury market continued its miraculous rally. Primary dealers who bought the largest weekly auction of Treasuries in the history of the world were miraculously bailed out. The mainstream media is unleashing propaganda that China showed up to buy the 7 year. Yet, the Treasuries own data shows China has been buying T-Bills, holding T-Notes and selling Mortgage Backed Securities for over a year. Once again the primary dealers have absorbed the largest and worst auctions in the history of the world and made over 1% on any of their purchases of the $120B in debt that taxpayers will owe. Meanwhile, the preliminary GDP report shows Private Domestic Investment falling at a 20% annual rate and Federal Government Spending rising at a 10% annual rate. Welcome to the Soviet Union. My point is once again every market is being tightly controlled and priced to benefit Wall Street and Washington while the real world continues to crumble. We are now past the 2 year mark of the worst financial and economic crisis in 70 years and the powers to be are still engaging in price fixing in all markets, printing however many dollars it takes to fix these prices and using the media to lie to the public about the real state of affairs. The level which Gold finds support continues to slowly march higher. The fundamental economic and monetary news continues to be incredibly bullish for holders of Gold.
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Ok here are some numbers for yesterday:
The euro rose .0161 to 1.4251. The pound gained .0194 to 1.6698. The yen went with the other currencies today, rising .092 to 94.64.
Silver finally showed us some "oomph," which has been sorely missing. Perhaps the silver game is finally on. There have been so many false starts. The silver open interest dropped 929 contracts to 97,827.
Crude oil was up sharply, gaining $2.51 per barrel to $69.45.
The CRB rose 2.51 to 257.12.
U.S. economic news:
08:30 Q2 GDP (first read) reported (1.0%) vs. consensus (1.5%)
Q1 final was revised to (6.4%) from (5.5%)
Q2 Personal Consumption (1.2%) vs. consensus (0.5%)
Q2 Price Index 0.2% vs. consensus 1.0%
Core PCE 2.0% vs. consensus 2.3%
end
Here is the official news release on the GDP figures for 2009 and the revised and final figure for 2008:
U.S. economy barely grew in 2008-government
WASHINGTON, July 31 (Reuters) - The U.S. economy barely grew during 2008, at about a third the rate previously thought, the Commerce Department said on Friday, largely because plunging home values undermined consumer spending.
Benchmark revisions issued by the department showed gross domestic product expanded at a pedestrian 0.4 percent last year, instead of 1.1 percent as previously reported.
GDP measures the value of all goods and services produced within U.S. borders and is the broadest measure available of total economic activity.
Spending on residential construction tumbled 22.9 percent in 2008, instead of the previously reported 20.8 percent drop, the department said.
Falling home prices helped shrink household wealth, resulting in consumer spending falling 0.2 percent in 2008 rather than rising 0.2 percent as previously believed. Consumer spending accounts for over two-thirds of U.S. economic activity.
The sharp revisions to 2008 included a much steeper 2.7 percent annual rate of contraction in the third quarter instead of the 0.5 percent rate of decline reported earlier.
But fourth-quarter GDP was revised to show a 5.4 percent rate of decline, less severe than the previously reported 6.3 percent rate of decrease.
The economy slipped into recession in December 2007 and came close to posting four straight quarters of GDP declines last year. Boosted by the government's $168 billion stimulus program, second-quarter GDP grew at a revised 1.5 percent rate -- less than the 2.8 percent rate previously thought…
-END-
This is the worrisome number: the fall in personal consumption. In plain English..the consumer is just not spending and the consumer is 70% of total GDP:
Jul 2009 08:43 EDT DJ MARKET TALK: Consumption's A Worry In GDP Data
Worrying drop in consumer spending in 2Q has caught mkt's eye: real PCE was down 1.2% in 2Q vs increase of 0.6% in 1Q. Durables declined 7.1% vs increase of 3.9%, nondurables down 2.5% vs 1.9% rise. Service spending at least posted a gain of 0.1% vs drop of 0.3%. (ML)
end
The Milwaukee Managers Purchasing Index was released yesterday and this manufacturing area also showed contraction. We saw Chicago also contract in their news release a few
days ago:
10:00 Jul Milwaukee Purchasing Manager's 45.0 vs. consensus 52.0
Jun reading was 50.0
* * * * *
end.
However business activity did pick up in the Chicago area (not manufacturing):
US Midwest business activity rises in July
NEW YORK, July 31 (Reuters) - Business activity in the U.S. Midwest rose in July, a report showed on Friday, to its best showing since last September, when Lehman Brothers' failure pushed the banking sector to the brink of collapse.
The National Association of Purchasing Management-Chicago business barometer rose to 43.4 from 39.9 in June. Economists polled by Reuters had expected a reading of 43.0.
A reading above 50 indicates expansion.
This was the big news of the day, private Insured Mortgages Defaults are on the rise for June:
U.S. insured mortgage defaults rise in June
* Defaults rise, cures decline on insured mortgages
* Deterioration slows from prior month
* Weakness follows end of foreclosure moratoriums
NEW YORK, July 31 (Reuters) - Defaults on privately insured U.S. mortgages increased and the number brought up to date fell in June for a second straight month, reflecting further pressure in the nation's housing market, though the pace of deterioration slowed.
The Mortgage Insurance Companies of America, a trade group, said 88,362 insured borrowers were at least 60 days late on payments in June, up less than 1 percent from May and up 30 percent from a year earlier. Late payments often foreshadow foreclosure. The number had risen 8 percent in May.
Mortgages brought up to date totaled just 51,908, down 1 percent from May and the fewest since January, but up 20 percent from a year earlier. The month-over-month decline had
been 10 percent in May.
Private mortgage insurance lets people buy homes with down payments of less than 20 percent, and guarantees that lenders will be repaid even if borrowers default. Insurance in force totaled $915.1 billion in May, the trade group said.
The industry has been tightening its standards after struggling with losses from having backed subprime and other risky mortgages, which have eaten into capital. While most major U.S. home loan providers adopted mortgage modification programs in the last year to keep borrowers in their homes, many foreclosure moratoriums expired in March.
end.
Also note that mortgages brought up to date is down 1% from May as the usa is still facing massive defaults. We are now approaching the height of the prime mortgages resets and the ARMS resets. This will be devastating to the banks.
Joseph Ackerman, the Chairman of the large Deutsche Bank reported a lousy quarter and reiterated that the economy has a long way to go to recover. Here is the story:
Ackermann Says Bad Loans Are ‘Next Wave’ of Crisis
July 31 (Bloomberg) -- Rising delinquencies among consumer and corporate borrowers are the "next wave" of the financial crisis and may affect banks that have avoided losses so far, said Deutsche Bank AG Chief Executive Officer Josef Ackermann.
"This crisis has consisted of a series of earthquakes, with changing epicenters," Ackermann said late yesterday at an event in Zurich. "Bad loans are the next wave. Banks that have fared relatively well so far will also be affected by this."
Deutsche Bank, Germany’s biggest lender, said this week it set aside 1 billion euros ($1.4 billion) for risky loans in the second quarter. The seven-fold increase in provisions and below- forecast revenue from trading sent the Frankfurt-based bank’s shares to the biggest decline in four months on July 28…-END-
This is Bill Holter's commentary for yesterday:
Bill H:
Bank holiday?
To all; being a long time soldier in the "Gold War", I can remember back 7 or 8 years when the cabal would smash Gold over the head with gobs of paper. This is still the preferred method but the effects are no longer as damaging to the psyche nor do they have any staying power. Back in the old days, once Gold got smashed it might take 2-3 months to right itself and get back to where the attack took place. This week is another example of a "paper attack" but here we are in the same week and Gold has already recovered. My how things have changed!
The bounce in the Dollar that had the Larry Kudlow's of the world jumping up and down doing their "King Dollar" dance has evaporated completely as the Dollar is again knocking on the door of a breakdown in price. The "show"of Dollar strength that was put on for the benefit of the Chinese is over. This show probably cost as much as he Olympics but couldn't even last a week and was not nearly as entertaining. Whether they used steroids or not, the Dollar is certainly frail and bares no resemblance to it's former Arnold like physique.
I have read several reports by the venerable Harry Schultz along with Bob Chapman and Jim Willie that state a "banking holiday" is scheduled for Sept. They say that U.S. embassies across the globe have been instructed to purchase and stock up on foreign currency (enough to last a year) prior to this time frame. It does make sense to me, as you all know this "bank holiday" scenario is one that I suggested will occur since late last year. If/when this "holiday" comes to pass, you must have currency and food put aside ahead of time. Another area that some take for granted are your safe deposit boxes. These will not be accessible during the holiday so if you have metal stored, don't count on being able to use it.
The seasonal patterns that have witnessed panics in the past is but weeks ahead of us. Never in the past has the U.S. entered this Sept.-Nov. time frame with such debt, delusion, nor financial frailty. In my opinion there has never in all of history been conditions as ripe as these for an outright financial and currency panic. Nor has there ever been a time when the fundamental reasons for owning Gold were even close to as widespread and strong as they are now. We know that mine and Central bank supply is drying up, we know that "funny business" is pervasive in the ETF's and COMEX warehouse inventory movements (lack of). We know that credit has imploded and the Treasury and Fed have layed their balance sheets on the line (otherwise known as the chopping block), you must trust now that 5,000 years of monetary history has validity. Gold IS money, paper is currency. No one has ever kept up with the cost of living by holding currency long term, they have by holding MONEY! Stay prepared and have a nice weekend. Regards, Bill H.
end.
The following story came out of FASB. They had their meeting and they are intent on establishing mark to market accounting against the wishes of the bankers. This would be devastating to Wall Street. Here is the update on the story I brought to your attention last weekend:
ul 31 2009, 1:15 pm
Mark-To-Market Is Back: With A Vengeance!
Attention: This may be the single most important piece of news regarding the financial industry you will read this week. Maybe for the whole month. Maybe for the whole year. Okay I'll stop being melodramatic and get right to it. The Financial Accounting Standards Board (FASB) is in the process of making banks very unhappy. In a complete reversal from their revised policy released in April, it is considering vastly tightening mark-to-market requirements to include virtually all securities on a bank's balance sheet. Yes, it even wants the very, very illiquid stuff marked-to-market.
To understand a bit more about what how assets are valued, this entry I wrote a while back may help. Mark-to-market is an accounting concept requiring that banks mark the value of the assets on their balance sheets up or down depending on how their values change in the market. Right now, very illiquid assets do not have to be marked-to-market, so instead can be valued by the bank using internal assumptions.
Here's a blurb from FASB's July 15th board meeting:
The Board agreed to propose that all financial instruments will be presented on the balance sheet at fair value with changes in value recognized in net income or other comprehensive income with an optional exception for own debt in certain circumstances, which will be measured at amortized cost.
Why almost no one is reporting on this shocks me, because it's a huge deal. FASB is suggesting that all financial instruments -- the good, the bad and the ugly -- must be valued on a bank's balance sheet at their market value. Illiquid CDOs, property holdings, credit derivatives and anything else you can think of will all now be marked, mostly down, to what they would trade for in the market. Currently, banks can classify the most illiquid stuff on their balance sheet as "held for investment" or "held to maturity" and use whatever value they believe the assets are worth based on internal assumptions.
One of the only articles I could find about this was a good one by Jonathan Weil at Bloomberg from last Thursday night. I didn't write about it until now because it took me all week to have FASB verify that Weil's interpretation was correct. He realizes how big this news is. He provides a really great example of the implications:
Think how the saga at CIT Group Inc. might have unfolded if loans already were being marked at market values. The commercial lender, which is struggling to stay out of bankruptcy, said in a footnote to its last annual report that its loans as of Dec. 31 were worth $8.3 billion less than its balance sheet showed. The difference was greater than CIT's reported shareholder equity. That tells you the company probably was insolvent months ago, only its book value didn't show it.
Banks will be relieved to know that this accounting change will not have a major effect on net income as it appears on an income statement:
The Board agreed to propose that changes in an instrument's value may be recognized in other comprehensive income on the basis of qualifying criteria related to an entity's management intent/business model and the cash flow variability of the instrument.
But not all the income statement news is good. Some potentially illiquid instruments' gain/loss will be included in net income:
The Board agreed to propose that changes in value for derivatives, equity securities, and hybrid instruments containing embedded derivatives requiring bifurcation . . . will be recognized in net income. The Board agreed to propose that for all financial instruments, interest and dividends will continue to be recognized in net income. Credit impairments, as well as realized gains and losses from sale and settlement, also will be recognized in net income. The classification of instruments will be determined at initial recognition of the instrument and will not be subsequently changed.
FASB's rationale for this change can be found in its project update. Here are its goals:
a. Reconsider the recognition and measurement of financial instruments
b. Address issues related to impairment of financial instruments and hedge accounting
c. Increase convergence in accounting for financial instruments.
These proposed changes certainly would satisfy those goals, especially part c). Right now, there can be huge divergence for how banks value similar illiquid assets, because their assumptions can provide whatever value they believe the assets are worth. FASB's project would change all that. It would let the market decide.
Would this change be good or bad? Well banks will think it's bad. Much of the revenue they see throughout the year will now be eaten away by accounting losses for these asset re-valuations.
Investors, however, should think it's good. This does create greater transparency and lessen the possibility that a company is hiding losses that bad assets might not realize until sale or maturity.
It also took me so long to get this piece out because I was waiting for the minutes to come out for a joint meeting between FASB and the International Accounting Standards Board (IASB) that occurred last Friday in London. They still aren't out, but Deloitte's unofficial minutes indicate that FASB's proposal was discussed. IASB's standard is not as conservative. From the minutes it seems IASB remains a little unconvinced that FASB's suggestion is a good one. It is waiting to see a more detailed exposure draft. My favorite quote:
The FASB needed more time to complete its deliberations, but acknowledged the pressures on the IASB and the reasons it was pursuing the project in the way it was.
Yes, FASB understands those pressures all too well. They're called angry bankers.
The FASB spokesperson I spoke to explained that in August, FASB will decide whether to release a final exposure draft of this proposal. If it decides to do so, it will request feedback from the public. Then it will take that feedback into consideration and potentially release a new rule sometime in the fall. Watch for it, because these changes would shake the financial world.
(In the meantime, for anyone interested here's some much deeper detail on their proposal -- opens .pdf.)
end.
Late Friday night came a report that the big Texas banking chain Guaranty Trust with 161 banks in Texas and California in trouble with the regulators.
They could not raise funds and their mortgage loans are underwater. They have 34 billion in assets and deposits. The FDIC cannot find a buyer for them
speak to you on Monday
Harvey.
