Monday, March 31, 2008

The Fed Leviathan grows

Well, it didn't take long for the rumors of a new Federal Reserve-led regulatory regime to blossom into a full blown policy announcement. Today, Treasury Secretary Hank Paulson announced plans for the an overhaul of the nation's financial regulatory structure.

In what MSNBC.com calls the "most sweeping changes since the Great Depression", the plan set forth by the Bush administration would enlarge the regulatory role of the Federal Reserve and the SEC and create a "superagency" to oversee financial markets.

Here's more from the LA Times:

"Treasury Secretary Henry Paulson today unveiled a 218-page blueprint for regulatory reform that would represent the largest federal overhaul since the Great Depression.

The blueprint, widely previewed before the secretary's remarks, would give the Federal Reserve more authority to oversee the markets and would create one superagency to oversee both investor protection and market stability, assuming many of the tasks of current agencies, such as the Securities and Exchange Commission and the Office of Thrift Supervision."

So as the Federal Reserve Leviathan looks to expand in size and scope, those who still have a sense of the risks inherent to capitalism wonder how increased regulation could ever help anybody outside of those being "regulated".

"Socialist-style Fed or financial saviour?

The cover of the latest issue of BusinessWeek shows Ben Bernanke in profile against a bright red and orange backdrop, pensively stroking his grey beard and looking remarkably like Vladimir Ilyich Lenin.

The imagery is intentional and pointed.

“Comrade Ben is determined that there will be no financial meltdown and no depression while he is in command,” economist Ed Yardeni wrote to clients. “Given the initial reaction [on Wall Street], I suppose this means we are all financial socialists now.”"

Unfortunately, you had to have seen this kind of thing coming down the pike. The current environment of Fed bailouts and increased regulatory powers started to take hold last summer as the debate over the Fed's liquidity injections and loan cap removals began.

The Fed/taxpayer-assisted bailout of Bear Stearns was just the most visible example of these actions to date. That is, until, today's announcement on the new regulatory overhaul was made.

What are the full implications of this newly proposed regulatory structure? What can we expect with the Fed guarding the henhouse?

We'll stay tuned to this issue, and I hope that some of our knowledgeable readers will help point the way by sharing their comments and insights.

Friday, March 28, 2008

Features of the week

Glad to see that we made it to the end of another week. Now, sit back and relax. Hope you enjoy our latest edition of, "Features of the week".

1. Whitney Tilson joins FT.com for "View from the Markets".

2. Wall Street firms cut 34,000 jobs, most since 2001 dot-com bust.

3. Jim Rogers sees investment opportunities in Taiwan, and a looming disaster in the Federal Reserve's recent efforts to prop up the markets and save the investment banks.

4. We're living in a bailout nation, says The Big Picture.

5. "Bailouts 101". Minyanville's Mr. Practical, via Bear Mountain Bull.

6. Mugabe's days are numbered regardless of vote, mining industry bets.

7. Famine, farm prices, and aid. Economist reports on rising food prices and resulting social unrest.

8. Globe and Mail on "G-d's Sugar Daddy", investor John Templeton.

9. Book review: The Complete Turtle Trader. M.A. Nystrom.

10. Lew Rockwell details the folly of, "The War on Recession".

11. A 1976 Francis Bacon painting may bring $70 million at auction.

12. Bloomberg profiles Nassim Taleb, whose recent best-selling book, "The Black Swan", has helped broaden his appeal outside the world of finance.

Thanks for reading Finance Trends Matter. Enjoy your weekend!

Thursday, March 27, 2008

Stock market wrap up

Are US stock markets set to go higher?

While the current financial environment is dominated by a wave of bad news related to the credit crisis and weaker corporate profits in the tech and financial sectors, recent action in the leading Dow Jones averages may be painting a different picture for US shares: one of strength.

Dow Theory Letters writer Richard Russell has recently made repeated references to the surprising strength in both the Dow Jones Industrial Average and the Dow Transports since the time of their January lows.

While the DJIA has been something of a laggard between the two, the Industrials have remained stubbornly above their January lows (Edit: this is true only in terms of intraday lows reached on January 22, and not in terms of closing prices. My apologies.).


Meanwhile, the Dow Transports continue to move higher, having recently broken through the 200-day moving average on the daily chart, and above their old February highs.

Are we witnessing a brief bear market rally in the leading Dow averages, or is this the start of something more?

As I noted in our January post, "Yeah, it's a bear market", Russell's reading of Dow Theory suggests that a primary trend bear market confirmation has been in place since November 21, 2007. So barring further notice (and a joint move by the Industrials and Transports to new highs), we remain, by Dow Theory standards, in bear market territory.

But the recent strength in the Transports and the Industrials has Russell wondering if stocks have seen their worst and are now discounting the gloomy news that continues to pour forth. As Russell noted in a recent letter to subscribers, "We have a bullish non-confirmation by the Transports and a rally on the part of both averages".

Since recording their January lows, the two averages have worked higher in the face of bad news. This curious strength in the face of overwhelming bad news leads Russell to wonder if maybe the stock market is signaling a light at the end of the tunnel?

It's an intriguing question, and one I will try and keep up with. You can subscribe to Russell's newsletter and do the same, or check out some periodic samplings of his work at 321gold.

For now, looking at that other well-known barometer of US stock market performance, the S&P 500 index (SPX), the overall picture remains bearish.

Since most professional money managers and investors use the S&P 500 to gauge US stock market performance, we'll continue to keep a close eye here as well and see whether it will follow the Dow Jones averages higher, or continue its move to the downside.

Stay tuned.

Wednesday, March 26, 2008

Hoarding by banks?

So now it seems the central banks are angry that they can't get banks to lend, in spite of the Federal Reserve's recent rate cuts and newfangled lending facilities.

For some strange reason (like, I don't know, fear of insolvency?) banks and other financial institutions don't want to make a bunch of new loans in the midst of a steadily worsening credit crunch.

Here's how the FT put it: "Hoarding by banks stokes fear over crisis".

"Central banks' efforts to ease strains in the money markets are failing to stop financial institutions from hoarding cash, stoking fears that the recent respite in equity markets may not signal the end of the credit crisis.

Banks' borrowing costs - a sign of their willingness to lend to each other - in the US, eurozone and the UK rose again even after the Federal Reserve's unprecedented activity in lending to retail and investment banks against weaker than usual collateral and similar action in Europe."

I see the word "hoarding" coming into play here, as it always seems to when demagoguery is the order of the day.

In this instance, it's the banks who are fearful to lend, and are now said to be hoarding cash. The implication here is that they should stop being so miserly and start lending like crazy again.

But is it wise for banks to start lending again at a time when the whole financial sector is trying to shrink its exposure to risk? It looks like the Fed and other leading central banks are hoping to pump the system back up with liquidity and keep the "good times" going at all costs.

So what we have is a battle between the central banks, who want to keep money and credit conditions easy, and the private sector, which wants to retrench and tighten liquidity.

For a more detailed examination of this idea, see our recent post, "Can't get a loan? You're not alone".

Monday, March 24, 2008

Wall Street, meet Fed

Are the Federal Reserve's recent efforts to stop investment bank failures, while providing credit to non-commercial banks, a sign of its future involvement on Wall Street?

Writers at the Financial Times and Barron's believe it is.

While doing a bit of weekend reading, I came across the following article in the weekend edition (March 22/March 23 2008) of the Financial Times.

Entitled, "Wall St detects shift in regulatory power", the piece outlined the possibility of a new "unified regulatory regime" that would involve closer Fed supervision over Wall Street investment banks:

"With the credit crunch worsening and public money at stake, the Fed and the Treasury are taking a hands-on approach to the oversight of Wall Street banks, whose primary regulator for the past 70 years has been the Securities and Exchange Commission.

Senior bankers say that officials from the Treasury and the Fed are in constant contact with Wall Street firms, checking on their liquidity and capital position, in an effort to avoid a repeat of the Bear disaster.

"There is a real sense that this group is now in charge," said a Wall Street banker. "They are committed to doing whatever it takes to sort this mess out, and feel they have real responsibility for dealing with global financial stability."

Fed policymakers acknowledge it is not ideal for them to lend funds to institutions they do not formally oversee and which are more lightly regulated than commercial banks.

And Wall Street observers note that the SEC is not equipped to deal with crises of this magnitude because its main role is to police trading and markets, not to supply liquidity to credit-starved investment banks.

The question is whether the increased involvement of the Fed in Wall Street's daily activities will raise the pressure for wholesale change in a US regulatory regime that dates back to the 1930s."

Barron's columnist Randall Forsyth was also on the trail of this new development, drawing parallels to the 1907 panic and the aftershocks which led to the creation of the Federal Reserve.

Here's an excerpt from his article, "Should the Fed regulate Wall Street?":

"JUST OVER A CENTURY AGO, THE PANIC OF 1907 LED TO the creation of the Federal Reserve, and with it, increased support and regulation of the U.S. banking system.

The Panic of 2008 has spurred a vast expansion of the Fed's powers and responsibilities, from traditional commercial banking to the entire financial markets. Already the calls are being heard for comparable regulation of institutions that now, effectively, have become the central bank's charges."

Meanwhile, today's FT Lex column wonders about the regulatory backlash that could come about if "private losses socialized by the public sector do become drastic".

"The severity of the fallout from today’s crisis partly depends on the scale of loss borne by the public sector. So far central banks can, just about, present their activity as that of lenders of the last resort: lending to banks (and now dealers) in return for good collateral. Even the UK Treasury says nationalised Northern Rock’s assets exceed its liabilities.

But it is easy to imagine scenarios in which the public sector bears large and explicit costs. The collateral’s value could fall; central banks might feel obliged directly to prop up the prices of risky assets; bailouts of clearly insolvent banks might occur. High inflation might conceivably be tolerated to cut the real value of private debt – as Professor Niall Ferguson puts it, a re-creation of the 1970s to avoid the 1930s."

Hmm. I thought this (central banks propping up risky assets, high inflation) was already happening.

Well, at least things are working out for JPMorgan. Despite having to raise their purchase price for Bear Stearns, they still have a little help from the Fed (and the taxpayers) in closing this deal.

It's no wonder that some at the investment banks are "relaxed" at the prospect of further Fed involvement on Wall Street.

Friday, March 21, 2008

Features of the week

Welcome to this Friday's edition of, "Features of the week".

1. The financial system: What went wrong. Economist report.

2. "Ask the oil producers to rescue Wall Street". FT Comment piece notes that, "banks' appetite for risk-taking has vanished", and that the recent crisis could signal, "the beginning of a massive global credit crunch".

A key paragraph explains the recent shift in risk appetites:

"Banks want to shrink risk exposure, not maintain or expand it. Liquidity support by the Fed is an invitation to borrow from the central bank for on-lending to others – that is, to expand balance sheets. On the contrary, the banks and brokers want to contract their balance sheets."

For more on this, see the following item.

3. "Can't get a loan? You're not alone". A follow-up to our recent post, "Money is cheap and unavailable", that explains why credit is suddenly so tight.

4. FT's John Authers on the recent drop in commodity prices.

5. NY Times on a global need for grain that farm's can't fill.

6. The Oil Drum looks at food to 2050.

7. Marc Faber on the problem with artificially low interest rates.

8. Politicians can get away with starting wars, but not with hiring a prostitute. Think about that one.

9. A new Great Depression? It's different this time. See also, "Here come the modern 1930s".

10. The bottom will remain elusive. Chris Puplava's recent FSO market wrap up.

11. Nimble and bold bond managers take advantage of mispricings.

12. "The time is now...Here's what to do...". The Financial Philosopher on living life in the present moment.

Thanks for reading Finance Trends Matter. Enjoy your holiday weekend.

Thursday, March 20, 2008

The Public Enemy (1931)

Do you ever get the feeling some days that you'd like to just take a break from what you're doing, and go take in a movie instead?

Well, today's your day. We're ducking out and going to the movies.

Found a good seat?

Allow me to present, with a little help from our friends at YouTube, our first film feature here at "Finance Trends Theater". William Wellman's 1931 film classic, The Public Enemy.

Here's a snippet from Allmovie.com's review:

"One of the great pre-Production Code gangster films, William Wellman's The Public Enemy made James Cagney a star, providing him with his defining role: Tom Powers, a bitter Chicago gangster driven to a tragic end.

Like its contemporaries Little Caesar and Scarface, The Public Enemy was surprisingly ambitious in its examination of the social causes that drive young men into a life of crime, closely examining the allure of street gangs to working-class youths."

The Public Enemy: Part one, two, three, four, five, six, seven, eight, nine.

Enjoy the film.

Wednesday, March 19, 2008

Can't get a loan? You're not alone

Can't get a loan? Don't worry, you're in good company. Neither can anyone else, and that's including some top-shelf investment funds and financial institutions. Today we'll continue to examine why this is so.

Recap

In our last post, "Money is cheap and unavailable", we highlighted comments from investor Wilbur Ross on the current availability of money and credit. In a recent interview with the Wall Street Journal, Ross noted the following:

"Usually when money is cheap, it's also very plentiful...now, it's cheap, except you can't get it".

It's an odd situation, and it led me to wonder how such a disparity came about. Was money being priced too cheaply as a result of artificial forces? If there is demand for money and credit, yet little availabilty, wouldn't that suggest high prices for access to credit?

Higher Rates, Nervous Lenders

Well, it turns out that banks are now charging higher rates to individuals seeking loans for new homes or for refinancing their mortgages, in spite of the latest Fed rate cuts.

Meanwhile, the recent credit crunch has also proved disastrous for mortgage lenders, hedge funds, and private equity firms, all of whom depend on short-term loans to drive their business models.

Washington Post columnist, Steven Pearlstein explains:

"The underlying problem is that, over the past 20 years, we've allowed the process of credit creation to be shifted from banks, which are regulated and required to keep a minimum capital cushion, to largely unregulated securities markets with no limits on the amount of leverage they take on.

Like banks, these markets borrow short and lend long, which creates profit margins but makes them vulnerable to an old-fashioned bank run if that short-term capital suddenly dries up. The first victims in such a scenario run the gamut from mortgage lenders like New Century and Countrywide, hedge funds such as Peloton Partners and Carlyle Capital and even venerable investment banks like Bear Stearns."

Following the rapid decline of blue-chip investment firms like Carlyle Capital and Bear Stearns, banks are now especially wary of any exposure they might to highly leveraged firms holding large amounts of illiquid and opaquely priced assets. Carlyle Capital was forced into insolvency after the value of their securities were called into question, and the firm was hit by a round of margin calls from nervous lenders.

A Lender's Strike

Dow Theory Letters editor, Richard Russell recently labeled the situation a, "lender's strike". While the Fed is trying to create a renewed environment of easy money and low interest rates, banks and the private sector, fearing for their very survival, refuse to make new loans.

At least that's the message I seem to be getting from some of the more seasoned observers, like investor Marc Faber, who recently offered a similar view in an interview with CNBC. Here's how Faber explained the recent money conditions:

"The Fed is pumping money into the system, and other central banks will do the same. But the private sector is tightening credit conditions, and as a result of that we have a relative illiquidity in the world that, in my opinion, will affect all asset markets..."

So in Faber's view, the Federal Reserve is trying to bring about continued liquidity and easy money conditions in an effort to keep things going, while the private sector is resisting these attempts. Clearly, the priority for private firms is a focus on survival and retrenchment, rather than expanding their business at this time.

What Started This Mess?

You might also be interested to hear Marc's views on the origins of this current financial crisis.

In short, Faber feels that the Fed's pursuit of easy monetary policies in the past fostered the growth of a gigantic credit bubble, and brought about the increased leverage in the financial system which led to many of the recent problems.

He also notes that the current financial crisis is "yesterday's story", and that we are now in a painful process of deleveraging, during which investors should focus on "other potential areas of danger" that could hit asset prices.

So, having covered all of that, we'll end here for now.

Join us tomorrow when we serve up a little break from the markets, and remember to stop in on Friday for our latest, "Features of the week". We hope to see you then.

Monday, March 17, 2008

Money is cheap and unavailable

Last week, in a post on the dollar and expected Fed moves on interest rates, we included a link to a recent Wall Street Journal interview with investor Wilbur Ross.

I mention this because Ross said something interesting during this interview about the availability of money and credit in recent weeks. Ross noted that we are currently in a period of very tight liquidity, and that money, while cheap, is practically unavailable.

This is an odd situation, because as Ross notes, "usually when money is cheap, it's also very plentiful". Today, this is not the case. Ross continues, "Now, it's cheap, except you can't get it".

This leaves me with a few questions to ponder over.

What's behind this tightening of money and credit? Why is money priced cheaply if you can't get your hands on a loan? Is money and credit artificially cheap? Has the Fed set short term interest rates at an artificially low level, thereby distorting the market for money and credit?

Also, how do these things factor into the ongoing credit crunch? Will cutting interest rates further do anything to solve the situation, or will this simply make things worse?

For now, one thing is certain. The rapid demise (and ensuing bargain sale) of investment bank Bear Stearns has got everyone's attention. Talk of a systemic financial crisis, which until very recently was the exclusive domain of "permabears" and "doomsayers", is now widely discussed in mainstream press.

"Citing a worsening “credit pandemic,” economists predicted the Fed would take more aggressive action tomorrow by slashing its benchmark rate by another full point - or even more.

“We are in the midst of the most pervasive financial crisis in a generation, which has destroyed untold sums of wealth in housing and financial assets and has driven the U.S. economy into recession,” said Sherry Cooper, chief economist at BMO Capital Markets."

Keep a sharp lookout. Rough seas ahead.

Sunday, March 16, 2008

Fed cuts, Bear $2 bucks

A weekend rate cut, and a cut-rate deal for Bear Stearns. Here's the latest.

The Fed has cut the discount rate to 3.25 percent.

Here's more from Forbes:

"In two emergency moves to bolster market liquidity on Sunday night, the Federal Reserve cut its discount rate for direct loans to banks by 0.25 pct point to 3.25 pct and created a special lending facility at the New York Federal Reserve Bank for primary dealers in the securitization market.

The two initiatives are 'designed to bolster market liquidity and promote orderly market functioning. Liquid, well-functioning markets are essential for the promotion of economic growth,' the Fed's statement said."

This most recent lending facility announcement means the Fed will accept a "broad range" of collateral from primary dealers. Guess this means that the pawn shop is growing in size...

As for the weekend discount rate cut, that's just a prelude to Tuesday's Fed meeting. Traders are still expecting a full percentage point cut in the Federal Funds rate, to 2 percent, down from the current 3 percent rate.

And the other big news item? Here you go: Bear Stearns is taken out at $2 a share. Here's more from Deal Journal:

"That means $236 million. Effectively zero. And with J.P. Morgan’s risk somewhat limited by the Fed, which is taking the extraordinary step of funding up to $30 billion of Bear Stearns’ less-liquid assets.

This is what they call on the Street “going donuts.” But there is nothing sweet about the thousands of employees who have lost much of their life savings and most likely their jobs, too.

The $2 per share basically sets down an important market marker: For now, being a Wall Street trading house is no longer a license to print money. It’s a license to absorb plenty of risks. Risks so presumably so toxic and unknown that J.P. Morgan had to turn to the Fed in the way it did."

This deal puts Bear at less than 1/10th its value from last week.

More background on the JPMorgan Chase buyout of Bear Stearns over at Bloomberg.

Hmm. Wonder what Monday will look like.

Friday, March 14, 2008

Features of the week

I'm going to try something different in today's "Features" post. Instead of the usual collection of articles, essays, and interviews, we are going to focus on a single item of interest.

Today we'll highlight a recent CNBC interview with Jim Rogers.

Rogers: "Abolish the Fed"

Here's the lead point in CNBC's article coverage: Jim Rogers: 'Abolish the Fed'.

Rogers made this statement when a CNBC anchor asked him what he would do if he were appointed Fed chairman tomorrow. Rogers replied, "I would abolish the Federal Reserve and I would resign."

And why not lead with this? It's an outrageous suggestion, at least to the bubbleheads on CNBC, who increasingly cry out for intervention from the Federal Reserve whenever anything seems to "go wrong" in the markets or the economy. They can't imagine life without the Fed; who'll bail out Wall Street when the chips are down?

Bailouts and Interventions

But aside from Rogers' comments on the Federal Reserve and their inflationary money-printing, there are also some very instructive points made here on the problems of moral hazards resulting from bailouts, and the futility of fighting off recessions and depressions.

Note his references to Japan and their 18-year struggle to lift their moribund economy. You may have noticed a recent increase in warnings about the US possibly following down this same road of prolonged recession.

Fed officials claim this could never happen, because the US system would not allow it to happen. I'm sure the Japanese officials would have told you the same thing back in 1991.

Making Money

Of course, Rogers also has some ideas for making money during this crazy period, and he shares those here as well. He continues to cite agricultural commodities as a lucrative area for investment over the next few years, saying that prices will still go higher from here.

Just remember to check everything out for yourself and do your own research if you're inclined to follow his, or anyone else's, lead in these areas.

The Bottom Line

My overall opinion: ignore Rogers at your own peril. He may not be right about everything (who is?), his timing may be off or he may be too early in calling trends, but he will eventually be proven right about many of the important trends he sees and describes.

Rogers understands history, he understands mass psychology, and he understands markets and the difference between sound economic principles and economic fallacies. He also has a tremendous amount of investing experience, and is obviously a self-motivated learner. I would not want to be on the other side of too many of his trades.

Enjoy the video, pass it along to your friends and associates, and hope it stirs some thoughts and debate.

For more on Jim Rogers, just browse our search function for relevant posts and past interviews.

Thanks for reading Finance Trends Matter. Have a great weekend, everyone.

Thursday, March 13, 2008

Gold tops $1000

Yes, the long awaited milestone has been reached.

Today, gold reached a $1000 an ounce for the first time ever, as investors continue to regard precious metals as a safe haven in this current market environment.

Here's more from Bloomberg:

"Gold rose above $1,000 an ounce for the first time as mounting credit-market losses spurred demand for bullion as a haven from the sagging dollar and equities.

Silver and platinum also advanced as the dollar dropped below 100 yen for the first time since 1995 and to a record against the euro. Standard & Poor's increased its forecast for bank writedowns related to subprime mortgages to $285 billion. Gold is up 37 percent since the Federal Reserve began cutting interest rates in September, sending the dollar tumbling.

Gold futures for April delivery climbed $13.30, or 1.4 percent, to close at $993.80 an ounce on the Comex division of the New York Mercantile Exchange. The price earlier reached $1,001.50, the highest ever for a most-active contract."

Still buying this "strong dollar policy" stuff?

Meanwhile, the folks at Bespoke Investment are cautioning investors to look at the gold/dollar ratio, which now seems stretched to the upside, at least in their view. However, the chart doesn't seem to hold much sway with readers at Seeking Alpha, who note that gold is still well below the inflation adjusted peak of its 1980 highs.

In order to surpass the 1980 high in inflation adjusted terms, gold would have to reach $2,284 an ounce, or $6,255 an ounce, depending on the inflation measure used for price adjustment.

Similar criticisms of the value of this gold/dollar index ratio were leveled back when gold was trading below $750 an ounce.

For more background on gold's ongoing bull run, see our January commentary, "Gold's new high: a round up of views".

What are you investing in?

What are you investing in? That's the current topic of discussion over at the Mises Institute blog.

Lots of responses so far, too, especially for such a personal question. It seems that a lot of people are willing to discuss their money and personal finances with openness these days, at least that's what I've noticed on the internet.

And it's not the usual cocktail party chatter of, "I just got a tip on this great stock". I mean, people are talking full asset allocation here, which must account for a large chunk of their personal savings and investments. Interesting to note how willing some people are to discuss personal matters these days.

Maybe some of you would like to share some personal investment strategies here as well. I'm all for it; be as detailed or as nonspecific with the information as you like. Some of our readers might have some interesting ideas or valuable wisdom to share.

Wednesday, March 12, 2008

Dollar falls to record low

The US dollar has fallen to a record low against the euro today, as markets signal a vote of no confidence in the Fed's banking system money injections.

The dollar is currently trading at $1.55 per euro, the lowest level since the euro's debut in 1999. The US dollar index (DX) is also trading lower, at 72.512. Earlier today, it reached a low of 72.471, just above its record low of 72.462 set on March 7, 2008.

More from Bloomberg, "Dollar falls to record low...":

"The dollar fell to a record below $1.55 per euro as firms from Citigroup Inc. to Goldman Sachs Group Inc. said the Federal Reserve's plan to inject $200 billion into the banking system may fail to break the freeze in money-market lending.

The U.S. currency erased almost half of yesterday's 1.6 percent rally versus the yen, the biggest in six months, which came after the Fed said it would lend Treasuries to financial institutions in return for mortgage debt. Traders bet the Fed will cut rates by as much as three quarters of a percentage point next week to avert a recession, while the European Central Bank keeps borrowing costs unchanged."

Plenty more in this article about how these central bank actions are more of a band aid than a cure for what ails the system. You'll see the phrase, "not a panacea", mentioned twice, by two seperate analysts, in the space of three paragraphs. Plus, details on what traders are expecting from the Fed in their March 18 meeting.

More commentary on the dollar and the problems facing the banking system from Reuters, Fintag, and investor Wilbur Ross, via the The Big Picture.

Monday, March 10, 2008

Credit market meltdown

Well there's a title designed to catch your attention. "Credit market meltdown".

It's always interesting to talk about turmoil and disaster, especially when it's the kind of disaster that's happening right before your eyes, as opposed to the more usually seen and heard theoretical musings on potential calamity.

You know the kind; it usually sounds something like, "well, we could be headed for disaster as a result of x...".

Well now "x" is here. And today's "x" is a fallout in the credit derivatives market that's spreading to other parts of the global financial system and driving up the cost of available credit.

Here's more from FT, "Credit derivatives turmoil bites":

"Turmoil in the credit derivatives markets is having an increasingly brutal impact on the wider financial system as a vicious cycle of forced selling drives risk premiums on company debt to new highs.

The trend accelerated on both sides of the Atlantic last week as investors rushed to unwind highly leveraged positions in complex structured products. The cost of protecting US investment grade debt against default soared to a high of 188 basis points, from 80bp in January.

In Europe, the cost of insuring the debt of the 125 investment-grade companies in the benchmark iTraxx Europe index surged to a new high of 156bp, before closing at 146bp on Friday.

A move above 150bp would spark the unwinding of structured trades, according to BNP Paribas."

If you read the full article, you'll note that the high-risk appetite of recent years has now given way to risk-aversion, as banks and financial institutions try to get rid of structured credit instruments and cut their losses. Problem is, the unwinding of some of these positions are bound to have an effect on the rest of the financial markets.

"Liquidating structured credit instruments requires buying large amounts of protection using credit default swaps. This, in turn, drives the cost of protection higher, potentially triggering a chain reaction. "There is potential for some wild and possibly inexplicable price movements as the unwinds get bigger," said Mehernosh Engineer at BNP.

The markets are so illiquid that a few trades can lead to sharp movements, producing violent price swings and knock-on effects."

As noted in last Friday's "Features" post, these problems in the credit markets have already caused big problems for top-notch firms like Carlyle Capital, which stands to lose billions as a result of its overleveraged play in agency-backed mortgage securities.

More on this from Forbes:

"Until last month Carlyle Capital had a $21.7 billion portfolio of securities backed by government agencies Freddie Mac (nyse: FMC - news - people ) and Fannie Mae (nyse: FNM - news - people ). However, as risk aversion has spread well beyond subprime, the value of these assets has plunged, leading to increased margin calls from lender banks.

Carlyle Capital, which had borrowed 32 times its capital to fund its investments, like other heavily leveraged funds been particularly vulnerable. Its troubles are similar to those of Peloton Partners, a London-based hedge fund which collapsed last week after creditor banks withdrew their funding, forcing the liquidation of assets."

You can also add Blackstone Group to the category of firms suffering from the credit market rout. As Bloomberg reports, fourth-quarter profits at Blackstone fell 89 percent in the wake of a "credit market meltdown". And top Blackstone execs are not expecting a rosy outlook any time soon.

"``Credit market problems persist and if anything have gotten worse,'' Tony James, president of the New York-based company, said on a conference call with reporters today after the results were released. ``We're looking to 2009 before we see much of an improvement.''

Blackstone, which has lost 55 percent of its market value since the IPO, hasn't completed a takeover of more than $2 billion in five months as credit costs doubled and the LBO market shut down. Chairman Stephen Schwarzman, who owns 23 percent of the company, is struggling to close the $6.6 billion buyout of Alliance Data Systems Corp., the Dallas- based credit-card processor, announced in May.

LBO financing evaporated last July as banks and investors pulled out of the market amid the fallout from rising subprime- mortgage delinquencies. The value of deals announced in the second half of 2007 plunged two-thirds from the first six months, according to data compiled by Bloomberg.

``We're a proxy for the credit markets,'' James, 57, said at the Super Returns private equity conference in Munich on Feb 26."

So as each stage of the financial crisis unfolds and spreads to new areas, it becomes more apparent that we are sledding down the other side of that great mountain of risk.

And now as fresh worries surround subprime-beleaguered bank Bear Stearns, emerging market bonds are falling, as investors demand more yield premium for risky bonds.

"Emerging-market bonds fell, sending yield premiums over U.S. Treasuries to their widest since July 2005, on speculation Bear Stearns Cos. lacks sufficient access to capital, drying up demand for higher-yielding assets.

The extra yield investors demand to own emerging-market bonds over Treasuries swelled 7 basis points to 3.03 percentage points at 1 p.m. in New York, according to JPMorgan Chase & Co.'s EMBI Plus index. A basis point equals 0.01 percentage point."

What a difference a year makes.

Friday, March 07, 2008

Features of the week

Welcome to our Friday edition of, "Features". Enjoy this week's collection!

1. "Europe's tiny tax havens should be left in peace", writes Bloomberg's Matthew Lynn.

For more on this issue, please see the first item in our Feb. 22 "Features of the week".

2. Commodites have been a saving grace for investors.

3. How have the S&P 500 and US home prices fared in gold and euro terms? FT's John Authers examines this question in Friday's "Short View" column.

4. A disappointing February payroll report has convinced the holdouts (and campaigning politicians) that the US is in a recession.

5. "Margin call, gentlemen". Carlyle Capital Corp shares were suspended on Friday after lenders marked down the value of the firm's residential mortgage-backed securities.

An excerpt from this FT article details the problem:

"CCC is the latest casualty of the banks’ increasingly unforgiving attitude towards even the most powerful private equity funds when the highly leveraged mortgage-backed securities fund said it had failed to meet margin calls from some of its lenders.

The fund, listed in Amsterdam by the Carlyle Group last year, has been hit by a fall in the value of its $21.7bn portfolio of AAA-rated residential mortgage-backed securities, illustrating that even the safest investments can be perilous when combined with the use of massive amounts of borrowed money. Carlyle had $28 of borrowings for every $1 of its own money."

Rubber stamped AAA ratings probably didn't help much either.

6. Matthew Simmons sees a tight oil market and tells Bloomberg, "I don't think OPEC has any spare capacity".

7. "Who is blowing bubbles in the commodity markets?", asks Gary Dorsch.

See also, "Fed rate cuts backfire, lift gold and oil into orbit".

8. Hedge fund manager set to sue SEC over marketing rules.

9. The struggle between inflating and lending. Marc Faber's recent article for Whiskey and Gunpowder describes why gold will continue to be a key investment in the months and years ahead. Thanks to reader Diel for the tip.

10. Bear Mountain Bull highlights a recent Marc Faber Bloomberg interview.

11. Forbes ranks "The World's Billionaires". Four of the top 10 are from India. Wealth, at least at the high end of the spectrum, is now distributed globally.

12. Forbes - "A Word From Ron Paul". Very important message for America.

Thanks for reading Finance Trends Matter.

If you've enjoyed this post and would like to see more, you can subscribe to our site feed or bookmark this site for future visits.

Enjoy your weekend, and keep the comments and ideas coming.

Thursday, March 06, 2008

Platinum and palladium revisited

Platinum and palladium have been on fire the past couple months, as you probably know.

We've recently highlighted platinum's surge here with some brief article mentions, but it's been a while since we covered the platinum group metals (PGMs) at length. And since platinum and palladium are probably both due for a nice short-to-medium-term pullback, you may take this post as an intermediate-term top signal!

Back in April and May of 2007, we highlighted the launch of the new platinum and palladium ETFs brought out by ETF Securities and Swiss bank ZKB. Demand for the new commodity ETFs was strong right out of the gate, and the recent upward move in the PGMs has generated more interest in these products.

Still, no platinum ETFs have been introduced in the US, a situation which is probably due to the metal's extremely tight supply and expected lobbying by industrial users against such a product.

And its not just the industrial users who would be upset by increased investment buying. It seems that platinum and palladium producers were also none too excited about the added buying and selling pressures that would result from new ETFs being launched.

With platinum currently trading at $2174 an ounce, and palladium trading at $514 an ounce, platinum commands a 4.2:1 premium over its complementary white metal. This premium for platinum over palladium has widened from a ratio of about 3:1 back in April of 2006, when we last covered the price action of the PGMs in some depth.

At that time, noting the possibilities for increased use of palladium as a substitute metal in industrial and jewelry applications, I wondered if the price disparity between the two metals might narrow in the not-too-distant future. So far, this has not been the case, as platinum still surpasses palladium in price terms, four-to-one.

However, palladium has enjoyed a remarkable run up in recent months, and its near-parabolic move towards $600 an ounce has been a boon to investors who bought in when the metal was trading between the range of $300 and $400 an ounce.

And since the price spread between the two metals persists, speculators and investors continue to focus on the future substitution value of palladium.

But speculators who bought in recent days had to be nimble or face quick losses, as palladium and platinum prices suffered sharp drops Thursday (March 6, 2008) on news that South African mines had regained power following recent power shortages. It seems that after such a sharp rise, the metals were due for a correction.

For more on the platinum group metals, and possible vehicles for speculation and investment in platinum and palladium, mining shares, and ETFs, please see the following articles. And remember the risks involved in speculating, and chasing any hot trend.

"Metals action and notes on palladium" - Finance Trends Matter.

"Got platinum/palladium?" - Finance Trends Matter.

"Platinum, Palladium are hot" - Financial Post.

"Palladium stars as investors focus on future substitution" - Mineweb.

"ZKB palladium ETF beats target, platinum lags" - Reuters.

"Palladium: the other white metal" - Seeking Alpha.

"Palladium, Platinum, Gold, and Electricity" - Financial Sense Online.

"Platinum bull run to continue for many years" - 2007 Reuters article.

Wednesday, March 05, 2008

Dollar down, commodities up

Well, if yesterday's action in the commodity markets threw you, then today we're back on track with the main trend. The dollar is down against the euro (to a record of $1.53), and commodities are up. It seems, for now, that the trends for a lower dollar and higher commodity prices are intact.

Yesterday saw declines in some of the most actively traded commodities, with oil, gold, and corn falling from record levels on worries of a US slowdown.

But with today's action, we've seen a reversal of yesterday's declines. Oil, gold, and corn are now at new highs, and a weaker dollar is said to be fueling this rise.

Here's more from Bloomberg:

"Crude oil, gold and corn prices surged to records, leading a rebound in commodities on renewed concern that a slumping dollar and lower borrowing costs will spur inflation and increase demand for raw materials.

The UBS Bloomberg Constant Maturity Commodity Index of 26 futures contracts jumped 39.11, or 2.6 percent, to 1,546.74 at 1:20 p.m. New York time. The gauge has jumped 21 percent this year, reaching a record 1,573.8381 on Feb. 29.

The prospect of reduced borrowing costs in the U.S., where the Federal Reserve has cut interest rates five times since September, will continue to drive the dollar lower and boost prices of all commodities, said Michael Pento, a senior market strategist for Delta Global Advisors Inc. in Huntington Beach, California, which manages about $1.5 billion.

``Commodities are responding to the weaker dollar, and this trend will continue,'' Pento said. ``We're creating too many dollars. It's a secular downtrend in the currency that's going to boost commodities.''


The idea that commodities are being driven higher by a weaker dollar has been a popular sentiment in recent weeks. In fact, some of the more recent stories on rising commodities have stressed the theme of commodities as an inflation hedge. And we're not just talking gold and the other precious metals; the entire "asset class" is now seen as hedge for inflation.

To illustrate, here's another passage from the same Bloomberg article:

"Commodities have surged this year as the U.S. Dollar Index, a weighted measure against the euro, yen, pound and three other major currencies, slumped to a record.

``People are just jumping back into commodities,'' said Donald Selkin, a director of equity research at Joseph Stevens & Co. in New York. ``Everyone has this inflation-hedge mentality.'' "

We also saw this sentiment expressed in a seperate article on the price of base metals. Amazingly, it seems even the industrial metals are now being viewed as something of an inflation hedge.

Is this a sign of things getting a little out of hand? MF Global analyst Edward Meir offers his view:

“What we have been seeing in metals of late (and in commodities in general), is that the group is being viewed not as a proxy of global industrial demand, but instead as an inflation hedge and a lucrative investment choice for portfolio diversification,” Mr Meir said.

“How much longer this can continue is the big question, but we would suggest that the upward spiral evident in a variety of commodity markets, including metals, is assuming bubble-like proportions.”

You can find more of Meir's views on commodities in this interview with Hard Assets Investor.

That's it for now, but be sure to join us tomorrow. We'll have an update on recent action in the platinum and palladium markets, as promised earlier in the week.

Monday, March 03, 2008

Gold vs. paper assets

And the winner is gold.

Bloomberg - "Gold beats financial assets as investors seek safe haven".

"Gold, silver, platinum and palladium may be the best-performing financial assets this year as inflation and slowing growth erode the value of the world's major currencies, bonds and stocks.

Precious metals have risen at least twice as fast as the euro and yen in 2008 and returned six to 20 times as much as U.S. Treasuries. The Standard & Poor's 500 Index and all other major gauges of equities are down. Gold futures reached an all- time high of $992 an ounce today, while silver traded at $20.74 an ounce, the most expensive since 1980."

The idea that investors would increasingly seek out tangible assets and investments as inflation accelerated has been confirmed. Investor preference for gold and tangibles vs. paper financial assets is now a mainstream trend.

What a chart of the Dow versus gold has shown for years is now made more apparent by recent investor behavior. Investors and savers worldwide are waking up to the reality of a synchronised global inflation and the steadily-eroding purchasing power of their paper currencies. Preference is increasingly shifting to gold and tangibles, and away from paper assets.

"Investors are using metals to preserve their buying power as the U.S. Dollar Index falls to a record and inflation accelerates.

The U.S. Dollar Index, which tracks the currency against six major counterparts, touched 73.354 today, the lowest since its start in 1973.

Even gold traded in euros, yen and pounds reached records this year as consumer prices rose around the world, eroding the appeal of currencies as an asset."

So it's gold and tangible assets over paper money and financial assets, at least for now.

If you'd like to hear more about the Dow-gold ratio, and why it is an important gauge of market performance in real terms, check out this recent Bloomberg clip of Robert Prechter speaking on the subject.

I'll talk more about the other metals, especially platinum and palladium, later on the week. Hope to see you then.