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Tuesday, September 30, 2008

Credit Market Brain Freeze

On Monday, after the House of Representatives rejected a $700 billion bailout of the US financial sector, stocks and commodities joined hands and jumped off the proverbial Wall Street window ledge. The Dow plunged to its biggest one day drop ever. Commodities also plunged the most ever, led by energy and grains. A notable exception was gold, which moved higher as investors clung to an island of stability in the storm-tossed financial seas.

Crude oil and gasoline plummeted around 10%, while corn and soybeans dropped the most allowed by the Chicago Board of Trade.

“Perhaps the most important trading week since the Great Depression lies ahead as world governments try to prevent a loss in confidence in the financial system,'' one trader was quoted in Bloomberg News. The spreading global credit crisis “could cripple growth for years to come and send world trade spiraling into an abyss,'' he said.

You know that I was no fan of the original Paulson plan. However, through the diligent work of Congressional leaders on both sides of the aisle, it had changed into something that, while still not a good plan, was perhaps workable. The goal is to stop the credit markets from freezing up. If the short-term commercial debt markets stop functioning, there are companies across America that simply won't be able to make payroll.

Today, in Bloomberg, we read:

"This is unheard of, the money markets should be the engine driving the financial system but they have broken down,'' said Kornelius Purps, a fixed-income strategist in Munich for UniCredit Markets and Investment Banking, a unit of Italy's largest lender. "Any institution that hasn't completed its 2008 funding needs by now is going to be in very serious trouble. More banks are going to need to be bailed out.''

and from the same article ...

"The money markets have completely broken down, with no trading taking place at all,'' said Christopher Rieger, a fixed-income strategist at Dresdner Kleinwort in Frankfurt. "There is no market any more. Central banks are the only providers of cash to the market, no one else is lending.''

My take -- I don’t think it’s the end of the world. It’s best to remember that panic is usually followed by a bottom (but perhaps not THE bottom). Now that doesn’t mean we’ll find a bottom this week. But the howls from the trading pits in Chicago and Wall Street are rousing the Washington leviathan from its feeding trough. While the first attempt to re-flate the credit markets failed, there will be other attempts – perhaps as soon as the end of this week.

So what kind of plan do I favor? Well, some examples are here, here and here. Or maybe something completely new. I'd especially like to see the FDIC raise the limit on insured individual bank accounts to $250,000 from $100,000 and an injection of $500 billion into the FDIC insurance program. These two measures should stop a run on the smaller banks in the US that are otherwise healthy.

I don't think there's time to go back to the drawing boards before the election. However, that doesn't mean we can't see bailout-plan induced rally soon. Just to give you one example how that could happen, former Labor Secretary Robert Reich thinks we’ll get a much-reduced plan and soon. He writes:

Prediction: A scaled-down bill will be enacted by the end of the week. It will provide the Treasury with a first installment of $150 billion. Treasury can use it to back Wall Street’s bad debts with no-interest loans of up to two years, until the housing market rebounds. Or to invest in Wall Street houses directly, in exchange for stocks and stock warrants. There will be strict oversight. Congressional leaders will promise further installments, but with conditions calling for limits on salaries and relief to distressed homeowners.

My take-away is that the market is being moved by politics more than fundamentals right now. And it’s very tough to chart politics.


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Monday, September 29, 2008

News and Charts for Monday

Oil falls to near $103 on concerns US bailout package won't halt global slowdown
Oil prices fell to near $103 a barrel in Asia Monday on concern that economic growth will slow across the globe despite a tentative agreement in Washington on a $700 billion bailout package to stabilize the U.S. financial system.
"The bailout should inject confidence in the markets in the short-term," Shum said. "Longer term, it increases money supply, inflation and likely weakens the dollar -- all of which supports oil prices."
XX Sean's note -- as the saying goes, in the long term, we're all dead.

Sour economy tied to psychology that fed gas panic
As anxiety on Wall Street led banks and other investors to hoard cash last week, a different kind of market fear gripped cities across the Southeast.
A hurricane-related disruption in gasoline supplies prompted jittery drivers from Atlanta to Nashville to top off their fuel tanks more than usual, causing sporadic shortages and temporary shutdowns of stations. These closures only magnified the problem, of course, leading to more shortages, which sent local prices skyrocketing.
XX Sean's note -- there are gasoline shortages, and yet gasoline prices went down an average 1 cent per gallon last week. While different regions are fed by different pipelines, and it's not economically feasible to truck gasoline from one region to another, it still makes you wonder.

Congressional leaders, Bush team pressing lawmakers to swallow distaste, support $700B bailout.
Without this rescue plan, the costs to the American economy could be disastrous," Bush said in a written statement Sunday.
Convincing their colleagues to back the plan despite thousands of angry phone calls, e-mails and letters pouring in from angry constituents proved a tall order for leaders in both parties.
The bill lets Congress block half the money and force the president to jump through some hoops before using it all. The government could get at $250 billion immediately, $100 billion more if the president certified it was necessary, and the last $350 billion with a separate certification -- and subject to a congressional resolution of disapproval.

World markets fall on investor skepticism US bank bailout plan will quickly resolve crisis
World stock markets tumbled Monday as investors reacted coolly to Washington's $700 billion bank bailout deal, recognizing that cleaning up the bad debt mess will take a long time and likely drag on global economic growth for the foreseeable future.
Asian marine transport names posted big declines after a key shipping index plunged 10 percent Friday amid slowing global trade and a recent drop-off in iron ore demand in China. The Baltic Dry Index, which measures drybulk shipping rates on 40 routes across the world, fell 417 points to close at 3,746 -- marking one of its biggest one-day declines.

In Financial Food Chains, Little Guy Can't Win
Almost no one (except Mr. Buffett) saw this coming, at least not on this scale. But let’s get back to the man of the hour. Why didn’t Mr. Paulson, the Treasury secretary, see it? He was once the head of Goldman Sachs, an immense player in the swaps world. Didn’t people at Treasury have a clue? If they didn’t, what was going on in their heads? If they did, why didn’t they do something about it a year ago, when saving the world would have been a lot cheaper?

If Mr. Paulson and Ben Bernanke, the chairman of the Federal Reserve, didn’t see this train coming, what else have they missed? What other freight train is barreling down the track at us?

Richard Heinberg: Bailout blues

Sounds like a great plan to me. Why would anyone balk? Just think of the futility of spending a few billion of that treasure on things like building bridges or railroads, projects that might actually hire real workers, when we can instead buy up mountains of toxic debt from a bunch of bankrupt hucksters. Now that’s a real investment in our future! Sorry for the sarcasm. It’s hard to resist. I’ll try to ratchet it down as I explain just what $700 billion means in terms of our nation’s energy infrastructure. America has about 130 million private homes, so that’s about $5,400 per home—not quite enough to put a one-kilowatt photovoltaic system on every roof. I use that as a standard, because that’s what my wife and I have on our own house, and it basically zeros out our electricity bill for the year.

Dollar Intervention Risk `Meaningful' on Volatility
We're getting closer to the right conditions for authorities to step in and prop up the dollar,'' said Maxime Tessier, who manages $151 billion as head of foreign exchange in Montreal at Caisse de Depot et Placement. "The nightmare scenario will be a wholesale loss of confidence in the dollar.''
Growth in the euro-zone will decelerate to 1.35 percent this year from 2.63 percent in 2007, according the median estimate of economists surveyed by Bloomberg. Japan's economy may expand 1 percent, compared with 2.08 percent, while the U.S. economy will likely grow 1.7 percent, the surveys showed.
The dollar will rally to $1.43 by year-end and to $1.40 by the end of the first quarter, according to the median estimate of more than 40 economists and strategists surveyed by Bloomberg.

Gold Fields Cuts The Minimum Size for New Mines to 200,000 Ounces a Year Gold Fields Ltd., Africa's second- largest producer of the metal, cut the minimum output it demands before investing in new mines by 60 percent as larger, safer deposits become more scarce.
The company will consider deposits as small as 2 million ounces that yield about 200,000 ounces a year, compared with 5 million-ounce deposits yielding 500,000 ounces, Johannesburg- based Gold Fields said in its annual report on its Web site today. There are ``very few'' large deposits, it said.

Gold May Reach Record on Increasing Investment Demand, GFMS's Walker Says Gold is expected to rise to a record in the next six months as turmoil in financial markets boosts investment demand, Paul Walker, chief executive officer of London-based research company GFMS Ltd., said.

Chavez Says Gazprom, Rosneft Will Form Energy `Colossus' With Venezuela Russia and Venezuela agreed to create a joint oil company that will invest ``tens of billions of dollars'' to develop fields in Latin America and beyond, Russian Energy Minister Sergei Shmatko said.

Canada's Harper Says U.S. to Face Crisis Alone, Pins Meltdown on Policies Canadian Prime Minister Stephen Harper, vying for re-election on Oct. 14, signaled his government can do little to help resolve the financial crisis that he and his Group of Seven colleagues say was caused by U.S. policies.

China's Weekly Iron Ore Import Prices Plunge 17% as Steelmakers Cut Output Benchmark cash prices of iron ore imported by China, the world's biggest buyer of the steelmaking material, fell the most since at least 2006 last week as mills cut production.
China's steel demand rose 6 percent last month, down from the 13 percent gain in the first seven months from a year ago, the association said earlier this month. Baosteel said Sept. 18 that orders are falling.

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Friday, September 26, 2008

GLD Chart for Red-Hot Commodity ETFs

Here's a chart I was unable to include in the Red-Hot Commodity ETFs issue that went out this morning. Naturally, when I'm trying to send out an issue, there's a computer problem.

If you think the US dollar has another leg down -- and I do -- then GLD shows real potential. If we are seeing a 'bull pennant' pattern, then it's best to remember the old saying: "flags and pennants fly at half mast." That would take the GLD up to 96 or so.

There is a more leveraged way to play gold, the DGP, but like everyone else, I think it's best to limit our risk at this time.

And remember, I could be wrong. The US dollar could take off like a rocket and gold could crater. Why? Because this market is plumb crazy, that's why.


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Is The Bailout Broken?

Apparently, House Republicans are in open revolt against the Wall Street bailout plan put forth by the White House and Treasury Secretary Henry Paulson. Part of it may have to do with all the changes that the Democrats made to the plan to make it palatable to their constituents, like allocating 20% of profits made by the US Treasury on the deal to a program to help low-income folks keep their homes.

As the AP reports ...
A White House summit meeting on Thursday meant to shore up John McCain's shaky campaign "devolved into a contentious shouting match." And that's how McCain's own campaign described it.

The meeting revealed that President Bush's $700 billion bid to combat the worst financial crisis in decades had been suddenly sidetracked by fellow Republicans in the House, who refused to embrace a plan that appeared close to acceptance by the Senate and most House Democrats.

By midnight, it was hard to tell who had suffered a worse evening, Bush or McCain. McCain, eager to shore up his image as a leader who rises above partisanship, was undercut by a fierce political squabble within his own party's ranks.

The consequences could be worse for Bush, and for millions of Americans if the impasse sends financial markets tumbling, as some officials fear. Closed-door negotiations were to resume Friday, but it was unclear whether House Republicans would attend.

And this next part is very dramatic, and should make for a good scene when this fiasco is inevitably turned into a TV mini-series ...
Treasury Secretary Henry Paulson literally bent down on one knee as he pleaded with House Speaker Nancy Pelosi not to withdraw her party's support for the package over what Pelosi derided as a Republican betrayal, according to the New York Times.
Not all Republicans in the House are opposing the plan, but the conservative wing, led by House Republican leader John Boehner of Ohio, wants to take a different route, founded on more "conservative" principles.

Wait, it gets better! The New York Times reports that McCain sat silently at the meeting he'd called for about 40 minutes. So, Obama tried playing mediator. Again, witnesses report that Obama first tried to reason with Boehner, and asked him to detail what his plan was. According to witnesses at the meeting, Boehner put forth (somewhat heatedly) the right wing plan: deregulation, capital gains tax cuts, and an insurance plan. The new House Republican plan would have banks, financial firms and other investors that hold such loans pay the Treasury to insure them.

After he did this, Obama asked Paulson if it would work, and Paulson said that it would NOT work (which was why house Republicans didn't ask him about this at the meeting yesterday)

According to AP ...

Then Obama said it was time to hear from McCain. According to a Republican who was there, "all he said was, 'I support the principles that House Republicans are fighting for.'"

And that, say witnesses, is when the shouting started.

Now, Treasury Secretary Paulson has called the House Republicans' plan a non-starter. So where does this leave us? Maybe we'll go with a plan designed by the Democrats, like the one proposed by James Galbraith. Writing in the Washington Post, he said the bailout as proposed was
"A Bailout We Don't Need," and added ...

Now that all five big investment banks -- Bear Stearns, Merrill Lynch, Lehman Brothers, Goldman Sachs and Morgan Stanley -- have disappeared or morphed into regular banks, a question arises.

Is this bailout still necessary?

The point of the bailout is to buy assets that are illiquid but not worthless. But regular banks hold assets like that all the time. They're called "loans."

With banks, runs occur only when depositors panic, because they fear the loan book is bad. Deposit insurance takes care of that. So why not eliminate the pointless $100,000 cap on federal deposit insurance and go take inventory? If a bank is solvent, money market funds would flow in, eliminating the need to insure those separately. If it isn't, the FDIC has the bridge bank facility to take care of that.

Next, put half a trillion dollars into the Federal Deposit Insurance Corp. fund -- a cosmetic gesture -- and as much money into that agency and the FBI as is needed for examiners, auditors and investigators. Keep $200 billion or more in reserve, so the Treasury can recapitalize banks by buying preferred shares if necessary -- as Warren Buffett did this week with Goldman Sachs. Review the situation in three months, when Congress comes back. Hedge funds should be left on their own. You can't save everyone, and those investors aren't poor.

The rest of Galbraith's plan is investment in infrastructure and renewable energy to help pull us out of what he sees as an inevitable coming recession.

Now, I'm happy to see Paulson's plan, as proposed, go away. I'd be happier with other alternatives that have been proposed -- Galbraith's plan for example -- that probably have a better chance of success.

But we can't forget that the reason that Paulson, Bernanke and other leaders in Washington were so keen on their plan in the first place -- they are terrified of what comes next if some kind of bailout isn't passed.

What the Democrats are really trying to get is a bailout of Main Street, not Wall Street. Without credit, Main Street cannot function. Without it, as one observer said, "we are possibly looking at Great Depression II, and the sequel is always worse than the original."

What does this mean for investors?

If there is no bailout deal, it's probably bad for oil prices. It's certainly bad for stock prices, especially financial stocks. Industrial materials and industrial stocks are also going down. Short-term Treasuries and the yen will probably rally hard, as investors fly to safety.

That said, I still think we'll see some kind of deal over the weekend. There is too much at stake. If Paulson's plan is dead, and if the House Republican plan is a non-starter, maybe they'll go back to square one and start with a Democratic plan. We may not like a Democratic plan ... and it may not fix the problem either. But if we have a plan on Monday, oil will probably head higher, and we'll probably have a strong market rally.

I hate the fact that we have to rush into this. I'd like some careful deliberation ... a real attempt to find out what the problems are and find workable solutions. I hope we get the time we need.

We'll see. It should be an interesting day.


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Thursday, September 25, 2008

Waiting With Bated Breath

The world is watching what's going on in Washington today, Friday and through the weekend, as Treasury Secretary Paulson, Federal Reserve Chairman Bernanke, President Bush and the US House and Senate try to hammer out a bailout package for Wall Street. I do believe it's blackmail, but there are such things as successful blackmailers.

I've heard this financial bailout called TARP for "Troubled Asset Relief Program", and I've also heard it called MOAB -- The Mother of All Bailouts. Whatever you want to call it, $700 billion is a lot of money. Unfortunately, I don't think it will solve the problem.

Why? Because the crisis on Wall Street is not a liquidity problem as Paulson is saying. Instead, the real problem is massive deleveraging. This is not caused by lack of liquidity, but by risk aversion. In other words, investors no longer want to put their money into risky investment vehicles.

Throwing $700 billion of taxpayers' money at that problem won't solve it. Instead, the government will create cash which it will trade to the banks for assets that (mostly) aren't worth the paper they're printed on. Meanwhile, the real problem will run its own course.

So, we'll probably have to see another bailout after this one. It will be the latest in a long line.

Here are some signs that we are a long way from bottom.

Mike Larson sent me a story yesterday that put a lump in my throat -- "FDIC May Need $150 Bailout as Local Bank Failures Mount". Read that story and tell me it doesn't chill you as well. As one expert cited in the story predicts: "By the end of 2009, about 100 U.S. banks with collective assets of more than $800 billion will fail."

And Larry Edelson sent me a story this morning from Reuters -- "China Banks Told to Halt Lending to US Banks". Does that sound like the end of a crisis to you?

XX UPDATE -- CNBC now says this is not true. I'll let them work it out with Reuters.

Finally, Mr. Mortgage writes that "If defaults remain at roughly $20 billion per month in CA and $50 billion nationally and this new $700 billion bailout is suppose to clean up banks past troubles, what is left for the potential $1trillion in current defaults coming over the next two years?"source:

I think that we have yet to see the biggest floats in this parade of pain, and it is all inflationary -- and bullish for gold.

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Wednesday, September 24, 2008

Is "Large-Scale" Gold Buying Coming?

According to a story in Bloomberg ...

Barrick Gold Corp. Chairman Peter Munk said bullion prices will go higher, driven by large-scale buying by "major, major'' holders of dollars who fear the effects of the U.S. government's bailout plan on the currency.
Central banks or sovereign wealth funds are among those likely to buy gold to diversify their investments and hedge against the risk of a weaker dollar, given the government's $700 billion plan to support the banking system, Munk said today.

"That impact on holders of U.S. dollars in China or Russia or Abu Dhabi or Kuwait is that they're going to say, 'What is that going to mean for the U.S. dollar, and what alternative are we going to have?' '' Munk said in an interview in New York. "So gold is going to have very powerful support.''


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Good News for Solar Stocks

US Senate Passes Solar Tax Credit Bill
Energy Conversion Devices, Evergreen Solar Inc. and Akeena Solar Inc. surged after the U.S. Senate passed a bill that would extend tax credits on solar power installations through 2016.


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Interviews, Links and Wall Street Bail Out!

As you know (if you've been reading the issues), I'm watching the US dollar closely. Let's look at the daily chart again ... Nothing is certain, but I do expect the US dollar to go lower from here.

Meanwhile, I did an interview with Phil at yesterday. You can listen to that here:

And my column is up. It's about the Wall Street bail out ... and go-o-o-o-old...
Government Debt Rescue a Boon for Gold!
by Sean Brodrick
Wednesday, September 24, 2008 7:30 AM
Treasury Secretary Paulson and Congress are hammering out details of the government's rescue plan for financial institutions, and we don't know what final impact it will have on the debt crisis ...

Finally, if it's not clear that I'm not in favor of the Wall Street bailout as it is proposed now ... and that I am very suspicious of the circumstances surrounding it ... Representative Marcy Kaptur (D-Ohio) says it better than I can. You go, girl!

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Tuesday, September 23, 2008

Energy News Roundup

Mexican oil production falls 9 percent
Mexico's state-run oil company says output fell 9 percent to 2.83 million barrels a day in the first eight months of the year. Petroleos Mexicanos says sagging oil production is due a drop at its main Cantarell oil field. Output there was down by 26 percent to 998,000 barrels a day. The company said Monday that the decline helped cut exports to 1.43 million barrels a day, down 16 percent from the year-ago period.

Saudis Cut Oil Sales To Large Global Customers - US Refiner
Saudi Arabia is cutting oil exports to some of its biggest global refining customers, but not in the U.S., an independent U.S. refiner said Monday. "There are Saudi cutbacks, but it did not affect us," a person familiar with the refiner's crude purchasing said. "It affected some of their big global customers."

Not All Oil Sands Plans Face Huge Costs Hikes
The multibillion-dollar cost jump that has hit the Fort Hills oil sands development is not representative of other proposals in the industry, which is struggling to deliver projects on time and on budget, the new head of Canada's main oil and gas lobby said Monday.

China's August Oil Demand Strong But Outlook Muted
The stockbuilding has given an injection to apparent demand growth, which in July soared to a two year high even as oil hit a record above $149 a barrel and China's drivers wrestled with a surprise rise in state-set fuel prices.

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Are Commodities Bottoming? Keep Your Eye on the Dollar

After the market seemed to suffer cardiac arrest last week, it quickly developed a split personality on Monday, as traders waited to see how the Federal bail-out of bad bank debt shakes out. Many stocks had a miserable Monday … but not commodities.

Indeed, gold, oil, silver and more all headed higher, with gold futures rising more than 5% on Monday to end above $900 an ounce for the first time in seven weeks. Oil went up by a single-day record. And the Reuters/Jefferies CRB Index soared to its biggest gain in more than five decades!

Sure, part of it was that Monday was the last day of trading for the October oil contract. But the fact is, commodities seem to be bottoming. Why is this happening? Because A) the government is injecting hundreds of billions of dollars into the system to provide liquidity, B) the wave of selling by hedge funds seems to be over for now and C) the US dollar pulled back and could go lower. In fact, Monday saw the U.S. dollar’s biggest one-day decline against the euro since 2001.

Just take a look at this daily chart of the US dollar Index and you’ll see what I mean. You can see that the US dollar has broken its short-term uptrend. At the same time, RSI, a momentum indicator, has made a double-top. This can be an indicator that a significant top has been put in.

And by looking at a weekly chart of the dollar we can get a view of the big picture. You can see that the dollar broke out of its long-term downtrend, but is now going lower. Oftentimes, after a breakout, a future, stock or index has to go back and test its former downtrend as support. That may be what’s happening here.
Just to make things more interesting, stocks, futures and especially currencies never travel in a straight line. So, after Monday’s sharp sell-off, we could see a rally in the greenback before it continues its downward path.

Commodities are priced in dollars, so usually, as the dollar goes down, commodity prices go up and visa versa. A lower dollar also makes US grains more affordable for foreign buyers because the price doesn’t go up so much for them as the greenback falls against their currency. So, this can ignite another round of commodity buying. Gold in particular seems to be reacting very positively to the dollar's pullback.

Indeed, strong-dollar talk from Washington is just that, talk. A weaker US dollar was a tremendous boost for US exporters, and was finally starting to have an effect on our trade deficit. So it wouldn’t be surprising to see the White House quietly encourage the dollar to go lower and lower still.

News You Can Use

Dollar Trades Near Weakest in Month Before Testimony by Bernanke, Paulson The dollar traded near a one-month low versus the euro as Federal Reserve Chairman Ben S. Bernanke said in the text of his Senate testimony that failure to pass the U.S. financial bailout would threaten the economy
XX Sean's note -- the dollar has rallied from its lows. Lately, I've noticed that Bloomberg offers plenty of news but little insight.

Oil Falls on Concern U.S. Economy Won't Avoid Recession After Bailout Plan Crude oil fell for the first time in a week, paring yesterday's record gain, as declining stock indexes signaled investor concern over a U.S. government bailout plan for financial companies.

XX I believe this is incorrect. It's more likely that oil is pulling back because of A) its strong rally yesterday and B) a counter-rally in the US dollar today.

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Monday, September 22, 2008

Another Wild Week Begins


Last major investment banks change status

The Federal Reserve said Sunday it had granted a request by the country's last two major investment banks -- Goldman Sachs and Morgan Stanley -- to change their status to bank holding companies. The change in status will allow them to create commercial banks that will be able to take deposits, bolstering the resources of both institutions.

The change continued the biggest restructuring on Wall Street since the Great Depression.

Paulson: We can’t wait for regulatory reform

The federal government stepped in with an emergency bailout of collapsing financial institutions on Wall Street last week because it could not wait for regulatory agencies to sort through the “crisis situation,” Treasury Secretary Henry Paulson said Sunday.

“Financial institutions [were] clogged with illiquid loans,” Paulson said in an interview on NBC’s “Meet the Press,” effectively freezing credit markets and choking off money to keep Wall Street humming. “This is an urgent matter, and we need to move quickly,” Paulson said.

A $1.8 Trillion Bailout: Where the Money’s Going

Here’s a great list of how Washington is planning to spend your money trying to save Wall Street.

Three Times is Enemy Action

"Once is happenstance. Twice is coincidence. Three times is enemy action."
-- Auric Goldfinger

This blogger starts back in the early '80s with the deregulation of the Savings and Loan industry, and walks us all the way to today's crisis. Familiar characters like John McCain, Charles Keating, and Phil Gramm pop up along the way.


South Copes With Severe Gas Shortages

Drivers throughout the South have faced gasoline shortages, closed stations, high prices and long lines at the pump for the last several days. Hurricanes Gustav and Ike slowed production at oil refineries on the Gulf Coast and knocked out power along many pipelines to the South.

Saudis trim oil supply

DUBAI – Top oil exporter Saudi Arabia has trimmed oil supplies to international majors and U.S. refiners since the start of September, industry sources said on Monday.


Commodities Bottom as Speculators Vanish After Slump

The worst may be over for commodities after the steepest rout since at least 1956 drove out speculators and the U.S. government unveiled a plan to end the worst credit-market seizure since the Great Depression.

Gold Rises, Extending Gains, on Demand for a Haven Asset; Silver Advances Gold rose above $900 an ounce, extending a rally after its biggest weekly gain in almost nine years, as investors shifted assets into precious metals as a haven from market turmoil. Silver gained more than 7 percent.

XX Sean’s note – I really hope this next guy is joking. Still, it’s good financial humor.

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Friday, September 19, 2008

Nice Finish to Gold ... ARGH!

It's been one hell of a week. And today, September 19th, is Talk Like a Pirate Day. Argh, Matey! In that spirit, I notice a very nice finish to gold today ...
Gold finished near its highs, and has closed (again) above the 50-day moving average. I'd wait for a pullback, but maybe the fact that the US government printing presses are running at full speed is revving up the yellow metal. I'm glad we bought Agnico Eagle Mines in Red-Hot Canadian Small-Caps yesterday -- nice finish to that, too, as well as the entire portfolio.

Also, since it's Talk Like a Pirate Day, here's a video to set you sailing off into a nice weekend.


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What's Up With Oil

Oil got a big boost today thanks to the government bailout plan. But what number should we watch? I'd say keep your eye on overhead resistance at 102.89. If oil can close above that in the next couple trading sessions, we can go higher. Otherwise, we're looking at a trip back to 90 or even strong support at 87.
Here are some stories to keep in mind ...

Gasoline Supply May Fall `Substantially,' Energy Official Says
(Bloomberg) -- The Energy Department's Sept. 24 inventory report may show that U.S. gasoline supplies fell 8.5 million barrels from a four-decade low as Texas refineries assess damage from Hurricane Ike, a department official said.
"Probably the max is an 8.5 million draw in gasoline because demand is down, and it could be as low as 6.5 million'' barrels, John Duff, survey manager for the Energy Department's weekly petroleum status report, said in an interview. The report will show "the real impact of the hurricane on the refining sector,'' he said. Supplies will fall "substantially.''

Hurricane Ike destroys 49 oil platforms in Gulf

The Interior Department said in the latest hurricane damage assessment that the platforms altogether accounted for 13,000 barrels of oil and 84 million cubic feet of natural gas a day. There are more than 3,800 production platforms in the Gulf producing 1.3 million barrels of oil and 7 billion cubic feet of gas each day. About 93 percent of the Gulf's crude oil production remains shut down as does 77.6 percent of its natural gas production, said the Minerals Management Service

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Battalions of Trouble & Grim Choices

"When troubles come, they come not single spies, but in battalions." -- William Shakespeare

The “RTC-type” bailout of the financial industry proposed yesterday has expanded to a team effort by the Treasury, Federal Reserve, White House and Congress.

As part of the effort, the Federal Reserve is shooting out money through a fire hose …

Hoping to shore up confidence with a show of financial shock and awe, the Federal Reserve stunned investors before dawn on Thursday by announcing a plan to provide $180 billion to financial markets through lending programs operated by the European Central Bank and the central banks of Canada, Japan, Britain and Switzerland.

This comes ON TOP of what Reuters estimates that … so far … are bailouts that put taxpayers on the hook for more than $900 billion!

Add it all up, and we’re probably looking at $2 TRILLION in bailout money … so far.

Paul Krugman notes that there is precedent for a government takeover of the financial industry … a Swedish precedent …

Thursday night Ben Bernanke and Mr. Paulson met with Congressional leaders to discuss a “comprehensive approach” to the problem.

We don’t know yet what that “comprehensive approach” will look like. There have been hopeful comparisons to the financial rescue the Swedish government carried out in the early 1990s, a rescue that involved a temporary public takeover of a large part of the country’s financial system. It’s not clear, however, whether policy makers in Washington are prepared to exert a comparable degree of control. And if they aren’t, this could turn into the wrong kind of rescue — a bailout of stockholders as well as the market, in effect rescuing the financial industry from the consequences of its own greed.

Furthermore, even a well-designed rescue would cost a lot of money. The Swedish government laid out 4 percent of G.D.P., which in our case would be a cool $600 billion — although the final burden to Swedish taxpayers was much less, because the government was eventually able to sell off the assets it had acquired, in some cases at a handsome profit.

I will point out that the Federal Government lost (roughly) about
$126 billion on the RTC takeover of bank debt. So happy endings aren’t guaranteed.

Now, why is everyone from both sides of the political aisle lining up behind this? I think they believe they don’t really have a choice. They are really afraid the financial system could unravel.

And in that case, ask yourself: Why isn’t gold already at $2,000 per ounce?

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Goodbye, Free Market! SEC Says It Will Ban Short-Selling on Financial Stocks!

From CNBC last night ...

The Securities and Exchange Commission says it will issue a temporary ban on short-selling CNBC has learned. SEC Chairman Christopher Cox briefed Congress late Thursday of the agency's plans to take the extraordinary step of interfering with the market's regular functioning. Short-selling is a trading strategy of selling borrowed stock in hopes it falls and can be repurchased at a lower price.

This morning, the SEC elaborated that the ban is on 799 financial stocks for 10 days. But it reserves the right to extend the ban to all stocks, and for 30 days, if it sees the need.
"This action, which would not be necessary in a well-functioning market, is temporary in nature and part of the comprehensive set of steps being taken by the Federal Reserve, the Treasury, and the Congress," [SEC Chairman Christopher] Cox said.

The market sees this as good news. In fact,combined with the new Federal bailout for failing financial companies, this is a 1-2 boost for the markets and the greenback. See: US Drafts Sweeping Plan to Fight Crisis and Dollar Soars Against Euro, Yen on U.S. Asset Plan. But is this a free market? No!

How does this affect you? Well, if short selling is effectively banned, the longer that ban holds, the more the risk that the capital markets as we know them will cease to function.

In the short-term, we should see ...

1) An enormous short-covering rally
2) Once the shorts have covered, then fund managers will be able to sell their holdings at valuations much higher than they should be. So, effectively, it's a bail-out for Wall Street's fat-cats (again).
3) Once that's done, with the short-sellers out of the market, we will have fewer participants in the market and less liquidity. International funds will likely go where the rules are more free and fair -- aka not where the government comes in and waves a magic wand to change the rules every day.
4) Larry Kudlow, you can sit down and be quiet now. Free market capitalism is essentially suspended in the US ... at least for the near term.

And here’s a question for you: What if it doesn’t work? What happens next?

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Thursday, September 18, 2008

Commodities -- Up, Down and All Around

Here's an excerpt from my second Red-Hot Commodity ETFs issue for today ...

Central Banks around the world have apparently decided it’s “free money day.” I’m thinking of driving by the Federal Reserve, just to see if they throw a billion dollars at me when I make a sad face. Hey, the First Bank of Sean could really use that kind of cash infusion. Anyway, needless to say, this is supportive for gold.

And you want to know what is REALLY supportive for gold? British regulators just banned short-selling of financial stocks. Why don’t they write “PANIC!” on their foreheads with magic markers and run around screaming on the trading floor? It would have the same effect.

If paper gold keeps going higher -- and it certainly could -- we may suddenly see gold eagles available on the market again. The disconnect between paper and physical gold was something I touched on in my Wednesday column, which you can read here:

In other news ...

Russian President Threatens Arctic Annexation
Russia's long-term development and its competitiveness in global markets depends on developing Arctic resources, President Dmitry Medvedev said Wednesday, demanding that Russia mark its Arctic territory so it can claim a large share of the region's mineral resources.

XX Sean's note -- if they go ahead, what are we going to do? All our troops are tied up imposing freedom on the ungrateful in Iraq.

Russia in Georgia separatist pact
Russia has signed friendship treaties with Abkhazia and South Ossetia, sealing diplomatic ties with the breakaway Georgian regions. The accords include a pledge of military assistance from Russia.

XX Sean's note -- gosh, somebody needs to blink in this US/Russia New Cold War. There is a gold miner I really want to recommend but can't, because it has a big honking mine in frakkin' Russia! The potential geopolitical fallout is brutal.

Russia to help Cuba build space center
Moscow is ready to help Cuba develop its own space center, Russia's space agency chief said on Wednesday after talks in Caracas with Venezuelan and Cuban officials, Itar-Tass news agency reported. Russia has stepped up efforts to develop closer links with both countries, which are ideological enemies of Washington, including sending Russian strategic bombers on a mission to Venezuela this month.

XX Sean's note -- they're driving cars from the 1950s in Cuba and they're going to build a space center? Why not build something a little more practical, like a GM plant?! Will their spaceships look like classic Plymouth cruisers? Holy mother of God, this world is out of whack! By the way, did you hear that Fidel Castro bedded 35,000 women? Apparently he had them delivered to his office twice a day -- "one for lunch and one for supper". And yet he was so obviously an angry person. How is that possible?

Corn, Soybeans Slump as Report Shows Slowing Export Demand for U.S. Crops Corn fell the exchange limit in Chicago and soybeans dropped to a nine-month low after a government report showed a slowdown in overseas sales from the U.S., the biggest producer and exporter of both crops.

Mining Stocks Price in 50% Drop in Commodities, Sanford C. Bernstein Says Mining stocks are discounting as much as a 50 percent decline in commodity prices as the market factors in ``a significant cyclical downturn,'' Sanford C. Bernstein & Co. said.

Gold rush drives into second day
After a $70 rally on Wednesday, the biggest one-day gain in dollar terms, gold futures rose $50.20 to $900.70 an ounce after jumping as high as $926 on the Comex division of the New York Mercantile Exchange. Gold bugs have been proven correct in the contention that "an overwhelmingly vast and complex pool of nested financial derivatives would ultimately result in cascading defaults and ruin for major portions of the banking system," wrote Citigroup analyst John Hill.
"Frankly, we're surprised that gold is not already at $2,000 per ounce," he added.

Gold redefined: the price correction is over, some analysts say
Jon Nadler, a senior analyst at Kitco Bullion Dealers, said it's "not clear whether or not the rally is broad-based retail buying or just another profit-oriented fund play." He said that at the moment, it "appears to be more of the latter than people lining up in front of their coin shop after having lined up to make a run on their respective banks."

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Wednesday, September 17, 2008

Charts on Gold

We've had some publishing problems at Weiss Research headquarters today, and had to leave some charts out of issues.

Here is a chart that was supposed to be in Red-Hot Commodity ETFs
Here is a chart that may/or may not have made it into Red-Hot Global Small-Caps.
This market is volatile, scary and risky. This gold rally may have legs .. or it could turn around the next time that the Fed or Treasury waves a magic wand, which those clowns are doing with increasing frequency.

Ask me tomorrow.


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If it's Wednesday, It's Catastrophe Day

So, the government bailed out AIG to the tune of $85 billion, AFTER saying in yesterday morning that a federal bailout was off the table. Don't you like how Uncle Sam keeps changing the rules from hour to hour.

Anyway, have you heard about this? Wednesday catastrophe: breaking the buck. Click through and you’ll read how Reserve Primary Fund - a $64.8 billion money market mutual fund – has seen its net asset value fall below $1 a share. The fund held $785m in Lehman commercial paper and MTM notes.

And that’s not the only piece of interesting news. Russia’s stock market has shut down. Yep, shut down in the middle of the day after big losses. To be sure, the Russian stock market is less important than you might think. Still, I think this could really hamper development of Russian oil resources, don’t you?

In other, less scary news …

US lawmakers vote to end 26-year ban on offshore drilling

The new bill, which was put forward by the majority Democrats in the House of Representatives, was approved by 236 votes to 189. It would allow drilling off the US coastline up to a distance of between 50 to 100 miles (80 to 160 kilometers) overturning a 1981 federal moratorium.

XX Sean’s note – at last we’ve gotten this red herring out of the way and we can talk about real energy solutions. And if you think opening up more areas to offshore drilling is a real answer, I challenge you to try to find drillships for hire, or spare crews to man them.

As Oil Speculators Lose Backing, Market Exodus Could Ripple

Evaporating access to credit and fears of an economic washout are taking a toll on oil prices, forcing speculators using borrowed money out of the market. Lehman Brothers Holdings Inc.'s sudden bankruptcy filing and Merrill Lynch & Co.'s pending sale to Bank of America Corp. suggest big banks may be less willing or able to absorb debt to boost trading positions, with implications for the inherently leveraged oil-futures markets. Analysts believe that could have a ripple effect on other speculative investors in the market.

XX Sean’s note – this is exactly the point I make in today’s column … “Global Margin Call Pushing Oil Prices Lower”

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Tuesday, September 16, 2008

Maelstrom Tuesday

What a wild day it was today. I published one Red-Hot Global Small Caps issue, one Red-Hot Commodity ETFs issue, and two Red-Hot Canadian Small-Caps Issues -- all of them trading issues. I also put out another update for my most recent oil report.

So, I didn't have time to blog until the trading day ended. Here's what caught my eye today ...


Gold, Precious Metals Fall in New York as Investors Sell to Raise Cash Gold fell as investors sold commodities to raise cash and cover losses in other markets. Silver fell a two-year low and platinum dropped the most since at least 1986.


Oil at 7-month low on Wall Street woes
Oil prices settled at a seven-month low Tuesday as the meltdown on Wall Street pulled the oil market's focus to the economic slowdown that has already been cutting away at demand for energy.

XX Sean’s note – I think oil is due for a bounce, but just in case, I’ve taken protective action in the RGS and RCE portfolios. Once these sell-offs get started, they can go further, faster, than might seem logical or even possible.

Saudi Arabia Will Probably Cut Oil Supply, Riyadh Banker Says
Saudi Arabia, the world's biggest crude oil exporter, will probably reduce supplies before the next OPEC meeting in December after the group pledged to respect output quotas, a Riyadh-based banker said.

XX It’s like we’re buying oil from a split personality. Will the Saudis cut production?
They’ve muddled the waters so much that it’s impossible to tell. Maybe that was their aim all along.

By the way, The new
OPEC Monthly Oil Market Report came out this morning. OPEC cut its 2008 forecast oil demand growth. OPEC now expects that Oil demand will rise by 880,000 barrels per day (bpd) this year, 120,000 bpd less than the previous forecast.

Nigerian militants say Shell pipeline destroyed
LAGOS (AFP) - A Nigerian rebel group said Tuesday it had blown up and destroyed a Royal Dutch Shell pipeline in the latest attack in its "oil war" on western firms.

Weak oil and debt markets may bedevil oil sands plans
CALGARY, Alberta (Reuters) - A double whammy of tumbling crude prices and shaky credit markets could force some companies to delay multibillion-dollar Canadian oil sands projects, cutting the country's overall output forecast.

XX Sean’s note – this applies to oil sands companies that use bucket loaders to move tons of sand, not SAGD companies like the one in the RCS portfolio – that has a much lower cost structure.


U.S. Stocks Climb on Speculation Fed Will Rescue Insurer AIG From Collapse U.S. stocks rose, helping the Standard & Poor's 500 Index rebound from its steepest drop in seven years, as expectations grew the Federal Reserve may rescue American International Group Inc. from collapse.

Consumer Prices in U.S. Fall First Time in Almost Two Years as Fuel Drops U.S. consumer prices fell in August for the first time in almost two years as fuel costs declined from record levels.

Texas Struggles to Prevent Health Crisis After Ike Cuts Off Water, Power Three days after Hurricane Ike delivered a less-powerful punch than predicted, coastal Texas is struggling to fend off a health-care crisis.


China May Cut Rates Again, Increase Lending, Spend More to Boost Economy China may cut interest rates again, ease limits on bank lending and boost spending to spur economic growth after lowering borrowing costs for the first time in six years.


Canada July Factory Sales Gain More-Than-Expected 2.7% on Metals, Vehicles Canadian factory shipments rose 2.7 percent in July, almost three times as much as economists anticipated, on higher sales of metals and motor vehicles.

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Monday, September 15, 2008

Monday Meltdown?

Dow futures are way, way down this morning as the US financial sector careens toward a ditch. On the other hand, gold started the morning up $14, but it's only up $5 as I write this as the US dollar rallies. We'll sit the morning out -- I may have trading recommendations for my services later.

Source: Chart of the Day/Bloomberg

“Despite all the rhetoric, with the rally in the dollar index, OPEC is still saying `thank you very much,''' Olivier Jakob, managing director of Petromatrix Gmbh in Zug, Switzerland, said. “For OPEC, $80 now is the same as $100 two months ago.''

Loss of Merrill, Lehman Signals `Tectonic' Shift in Wall Street Landscape In the biggest reshaping of the financial industry since the Great Depression, two of Wall Street's most storied firms, Merrill Lynch & Co. and Lehman Brothers Holdings Inc., headed toward extinction.

Chance of Rate Cut at Fed Meeting Now Set at 88%

Fed funds futures contracts attached an 88 percent chance the Fed will lower rates by 25 basis points at or before Tuesday's Federal Open Market Committee meeting.


Western Australia Set for Uranium Mines as Liberals Win State Government Western Australia's uranium-related companies are set for a boost after the Liberal Party, which favors ending a ban on mining the nuclear fuel, yesterday won the backing of the Nationals to form government.

Toro, Energy Rise on Optimism Western Australia Will Open Uranium Mining Toro Energy Ltd. and Energy & Minerals Australia Ltd. led gains in shares of Western Australian uranium explorers as the Liberal Party, which has indicated it will allow mining of the fuel in the state, won the right to govern.


Crude Oil Falls Below $97 as Ike Spares Texas Refineries, Lehman Collapses Crude oil fell below $97 a barrel to the lowest in seven months as refineries along the Gulf of Mexico coast escaped major damage from Hurricane Ike and Lehman Brothers Holdings Inc. filed for bankruptcy.

Emerging-Market `Panic' Masks Record Profits, May End With 20% Stock Rally Emerging-market companies, earning more for shareholders than ever before, are getting no respect just as their stocks drop to levels that preceded rallies.

Lehman is Suspended From ICE Energy, LME Metals Trading After Bankruptcy Lehman Brothers Holdings Inc., the fourth-largest U.S. investment bank, was suspended from energy and metals trading in London after Europe's biggest clearing house declared the company a defaulter.

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