Minding the Shop

Reminder : this little blog is simply my tool to remind myself and any readers of my thoughts and anything else I deem important - more extensive charts and/or analysis takes place in the GMR Newsletter. This blog is periodic but usually updated once or twice a week.

My Market Notes:

• Not out of the woods yet with regard to gold and oil - both testing major support areas ; gold could still reatreat to 750 area and be in longer trend channel  √
  
• As stated in many of the last GMR Letters.... hearing more and more about rate cuts in Euroland and UK - even Australia and New Zealand ... has Kondratieff been correct all along ? ie. Reflation of the economy √
  
• In the GMR Letter I wrote about a foreseen rise in US bankruptcies in the business sector - happening now and likely to get worse before better  √
• US Housing : no floor yet
• Commodities : oversold + in down draft based on deflation psychology
• BEAR Market : in force ; DAX 5.700 , DOW  11.500  next stops
• Accumulate : Swiss Franc, physical silver, gold
• FED : likely there will be no rate cut today as this would signal further "moral hazard" and does not give the current measures time to take effect.  If further weakness is in the pipeline, there is still sufficient time to cut in October or Nov.  Likewise, a rate cut would worsen the outlook on the US Dollar and would imply even less of a reason to hold bonds.
• STRESS in the system is increasing as witnessed now by Central Banks forming "pools" of give-away funds to distressed companies and banks ; also private company pools are being formed.
• Current Outlook : weakness into 2009 ; commodity prices likely to be supressed
  
• VOLATILITY in all asset classes is here to stay - as I already spoke of ; there is a fundamental seismic shift in financial markets and nobody knows how it will end ; some say with Gold price and DOW at parity ... who knows.
• Flight to Safety : where ? 
  

My oh my, how the winds of change are blowing.  I've been keeping my head down and following all the pundits' remarks and their mantras of how the system is fundamentally solid, yaddi da.

Dear readers, the system is fundamentally rotten to the core because of the debt and more importantly because of the derivatives and only through excessive and unprecedented intervention of Central Banks and the US Treasury has total meltdown been thus far avoided.  I stress "thus far".

When Hank Paulson needs to give a press conference to tell the world that "all is ok", you can be sure they are trembling in their shoes - else why would anybody give a press conference in the first place ?

Lehman alone had $613 billion in debt.   That is the more than the entire GDP of most nations on this planet.  AIG is even worse - it's credit rating has now been reduced.  It will be tough.  But the real problem with AIG is that it is the insurance WALL guarding other companies on risk - if AIG fails it will domino across the financial world.

Now, I wanted to remind again what I have said in the past , and in fact, quite a while back, even I need a bit of credit when due :

• Banks would fail  √ - some thoughts are that up to 1000 regional banks in the US will bankrupt
• Central Banks (CBs) would start to lower rates as the economy starts to falter √ - this is now happening in major countries , China just lowered, Bank of England is under pressure to do so, ECB ditto, FED ditto
• While EVERYBODY else was talking about how rates MUST go higher to battle inflation, many CBs are now lowering, as I predicted, on the notion, well, we are going into a deflationary situation hence we must lower rates to help the economy √
• Needless to say, REAL rates are currently NEGATIVE (inflation is higher than ability to save at the bank) and may be even more negative on lower interest rates - there are many components to price inflation.
• Markets : DAX at 6.000 and DOW at 11.000 √ - these have now been reached ; I expect further downward pressure on the markets over the next 3 months
• The credit markets will take us into a continued recession into 2009 √ - I think this is now a given and well understood ; we are likely to see periodic bouts of a rally here or there but until psychology has been repaired, no bull markets for a long time
• I have said that the KEY to a recovery lies in the fact that the US is seen worldwide as the key and that until their markets (Banking Index - BKX) and Financial Sector have recovered there can likely be no worldwide recovery in the equity markets √ - I foresee a protracted muddle-through, weakness, broken psychology in the markets and likewise a broken consumer psychology due to housing losses, job losses
• The US election may bring a brief respite and "good feeling" until the "chosen one" is faced with an economic mess of unimaginable proportions - Paulson will have exited the stage
• Ps. My brother calls me Dr. Doom - in fact, I am not "doomy" just completely sober - we need to see this for what it is.  Your grandparents or parents talked about the "Great Depression" , well my friends, you may now takeover this role."I was there when it all blew up"
  

Why have the commodities been smashed ?  They have been smashed for two reasons : most hedge funds were very long oil, gold, silver, agro, etc.  This was the so-called "anti-Dollar" campaign and it was very profitable BUT many funds were leveraged in these vehicles.  As the US authorities recognized that inflation was ever increasing and the US dollar was weakening and threatening previous lows on the USD index, it became apparent that should these lows be taken out, it would trigger even more USD selling.  

Whether you want to call it "financial engineering" or blatant manipulation is up to you - the drop in silver and gold and even oil was manufactured such that the leveraged positions had to be unwound quickly in order to cover pending losses in US Dollar short positions AND gold, as the antithesis of the USD, could not be shown as being an attractive quasi-currency verses the US Dollar.  In a panic, many institutions had to exit positions and this boosted the short term USD outlook.

Hence, in an environment of higher inflationary pressures along with an absolutely poor outlook on the US economy and its financial institutions one would have expected, at a minimum, is that commodities would stabilize far above current levels.  The other reason, I believe, for the poor performance has been the long-held view that in a contractionary or recessive environment, there will be less demand for materials.

I believe this can only be partially true. In a world which is heading toward 8 billion people, the stress on materials to be mined, drilled, extracted and put into the market has never been higher. BUT, equally, with higher operating costs, this is being somewhat strangled, and in conjunction with the shrinking credit markets, as I have already said in previous pieces, the unwillingness to lend will lead to a contraction in business as money sources balk or dry up altogether.

This hurts mining companies and especially the junior exploration companies.  This will likely trigger a contraction in supply and further an upward price pressure as demand outstrips supply and lead times are extended.  We are obviously not there yet - we are currently in the psychological soup of CASH is King and risk investment to be avoided.  This too shall pass - but likely not for a long while until the Banking and Financial Sectors have sufficiently recovered.

What does all this mean ?

I have been mailed by some readers asking for my opinion on buying now.  My immediate response is to hold off on buying until more blood-letting has occurred.  The markets are so nervous and so oversold - yet, being oversold can happen indefinitely in a BEAR market and will likely provide even more ridiculous entry points in metals, energy and agro - the current drop in commodity equities has erased nearly 7 years worth of profits and prices in many of the metals companies and agro companies have dropped 30 - 50% in the last 3 months, some juniors are off 66% !! Nothing has changed in world food demand, nothing has changed in world demographics - the equity markets are simply in the grip of FEAR - it is illogical from an investment viewpoint - but it is so.

I remain steadfast, at least for the moment, that the Central banks of the FED, ECB and Bank of England will likely be cutting rates in Q4 as I have already said.  I remain uncertain on gold and silver but will venture that gold has reached a floor buttressed by the outlook on interest rates, real inflation, partially a safehaven function and partially by nothing else being better.   The biggest downward pressure remains the BEAR market forces. And, people have been duped and forgotten that gold is "keeper of value" - that's what your grandfather said and knew ... only that 75 years of central banking has weakened that view.  People need to re-learn - until now, gold and silver are so miniscule in proportion to overall assets ; likewise commodities in general. 

Courtesy of : Dundee Wealth Economics

More info shortly in the upcoming GMR Letter.  PS. I have been extremely busy with travel and few other projects lately and will get back to more Blogs and Letters shortly.  It's been exhausting, frustrating and almost surreal these last weeks to see commodities hit so hard - it is what it is - we need to see the silver lining.  Commodity stocks are so cheap now as they were back in  2001.  Buy, but not on leverage - stop.  Don't buy - wait for the fallout from all this AIG, Washington Mutual, etc.  It may get worse.  Buy when nobody else wants to.   As I said in the last entry, there is no bull market anywhere right now - the markets are in complete limbo.

A final word : in the interview today - at the site - of Steve Forbes mentioned a "suspension of mark to markets" for the in-trouble companies.  That is outright baloney - if we could simply wipe off our debt too, and not pay our creditors, we would be in jail. Period. 

And a final final word : I have heard "below the radar" rumblings, that FED aligned banks are sniffing around gold mining companies.  What would happen if the ultimate insiders were to struggle control of major gold mining companies and their production ?  My first thought : there would be a revolution.   Something to watch...