Thursday, March 13, 2008

Financial ruin Another week a few more Casualties

It’s been a hard week of trying to do 3 people's job but I’ll squeeze in a post anyway. Just a warning, if there should be a long absence of posting any time soon it will be due to the fact my home computer is coughing up blood with each key stroke and likely to explode imminently.

Metals

For 4 of the last 5 trading days Silver and Gold have been stuck the same pattern of making gains overnight only to get kicked in the teeth once the N.A. trading began. After the morning shock they would spend the day trying to limit the damage. Thursday however the trend was broken and once again we are over $20 for silver and gold flirted close to and finally touched the $1000 in both futures and spot prices. While it did pull back a smidge what we saw was a historical high and something that many people would not even believe could happen. Maybe they'll listen now!!!1

The silver gold ratio is closing and if we can manage a weekly close above $1000 for gold and $20.50 for silver I will be quite content with this week. There still may be a sell off but just reaching this $1000 milestone will bring more press and public interest to the metals play.

While I've mentioned the evils of paper silver/gold a dozen times on this site there is also danger if you buy physical metals from just anyone. Here is a perfect example of why buying physical metals should be done through a legitimate vendor especially when dealing in big orders.

The old saying don’t take any wooden nickels comes to mind.


The US dollar

Brutal is the only way of describing the USD this week dropping at one point today to about 71.80 making new lows against the Euro and as one clever writer stated the Yen at parity with the penny(man I wish I'd thought of that one)

I did predict the US dollar index at 64 by year end but will it keep sliding in this manner or will something just cause a snap achieving or beating my benchmark in a matter of hours? Either way the it's going to change the way we see the world economic system.

Other things blowing up

Caryle Capital Corp is on the verge of collapse after failing to find new financing and apparently is failing to meet it’s margin calls. The most recent incident was their default on $16.6 Billion This collapse will cost clients an estimated $600 million. Oops! see here and here


This scenario is being played out throughout the hedge fund world as mortgage backed paper goes sour due to bad loans, deteriorating debt ratings and too much leverage. I have no doubt that there will a weekly failure or two from here on in until it snowballs, we have crash week and all hell breaks loose. Last week it was London hedge fund Peloton Partners that went belly up.

Who's next? maybe even a big bank?

Yep, big bank it as Bear Stearns who claimed earlier in the week that they were not in trouble were in fact bailout out today by PJ Morgan and the Fed.


The Fed's answer to the markets various illiquidity issues is to offer up to $200 Billion in loans to banks accepting mortgage backed securities as collateral. This is a great deal as the banks will offer up paper probably way over its real value and get treasuries in return making the liquid again. Until the next round of losses at least.


The European and Canadian Central banks are also adding an additional 45 Billion to the market. Now if you think that’s a large number your wrong. Bell Canada for example is the target of an equity/pension fund take over that will require $32 Billion in loans, considering all the other big deals going on, the actual size of the credit market and the rapid destruction of capital in the banking system there is no way this much money is going to fix the problem. It may not even hide it until the U.S. elections over.

There will be a constant theme of escalating loans made available to the banks this year just to keep them liquid, but as long as the banks are too fear stricken loan to each other nothing will be solved

Housing


The U.S. now owes more on it's homes than they have equity in those homes

“That marks the first time homeowners' debt on their houses exceeds their equity since the Fed started tracking the data in 1945.”


A nation of debtors indeed!!
The rate of late payments, delinquency and outright defaults and foreclosures are up all while the available resale homes still shows around 11 months supply. Recent Fed cuts have not translated to lower mortgage rates and in some cases they've inched up as banks pad their margins trying to save their asses. The next two months are expected to be the peak volume for ARM resets and nothing the Fed has done has made these renewals more affordable. The doom is far from over and various estimates on how far down the bottom is keep getting deeper.

So what’s next? How long before the U.S. Gov steps up to the plate with a real plan to solve the subprime mess? So far all we have heard about are unworkable plans like suggesting to the banks that they forgive a portion of defaulting mortgages.

What?

How the hell do you forgive a mortgage you’ve sold to someone else? I’m no brain surgeon but even I know I can’t renegotiate a 3rd parties debt obligation, besides in many cases the mortgages have been sliced up and distributed into different bonds at different debt ratings.

So the problems are

How do you isolate any 1 particular loan that is divided between several different CDOs?

How can you forgive or renegotiate the loans when you have no legal rights to change an agreement for the poor sucker you sold the original paper too?

How do you foreclose on someone when because of the CDO tranches , you can’t prove who is the real owner of the mortgage? In fact because of this issue and just plain bad paper work judges have thrown out some foreclosure proceedings.

Even if you can prove ownership, apparently in Florida it can take 2 years and $50k to get these squatters out of the homes they are not paying for.

Personally, if I had no equity in a house I’d love to live 2 years rent free. Tie your monthly savings into a Swiss or Cayman account and when it’s all over you’ve got $30-50k seed money for you next round. Of course many idiots who got themselves in this situation in the first place would probably just buy new cars with the new found cash flow.

Even better, I’d buy silver and hide it knowing that then the smoked cleared I’d probably be able to buy the house back for 1/3rd of its original price in cash.

What now?

Eventually the Government is going to take on these mortgages perhaps in some program like the one Rep, Barney Frank proposed on Thursday
(Sorry I can’t take anyone serious who’s called Barney, Mr Rubble and imaginary purple dinosaurs always come to mine.)

or a similar one Sen Dodd has been flogging

(As a member of the Banking Committee Dodd allowed most of this mess to happen in the first place and should not get any credit for solving the issue.)

What it all comes down to it, a bankrupt Government will take on a huge sum of bad mortgages and then they will create money to offset it. Inflation will run rampant as it taxes your savings and kills your buying power, they may as well just announce.

"Hello all responsible citizens, please get your chequebooks out and be prepared to write a cheque so your idiot Banker won't lose his job"



Bits and pieces,

Oil hits $110, nuff said there, with the exception of mentioning my shares in Oil Income Trusts so rudely taxed by a lying Canadian Conservative Government have finally passed my original buying price, $35 dollars a barrel later. Thanks a lot idiots!!!!!!

The U.S. posts a $175.56 billion deficit for February. Last year's Feb deficit was "only" $119 Billion. The loss was based on lower personal and corporate tax payments and some accounting issues.

Well I for one figure “there is no recession means” taxes should not have dropped, but what do I know.

The EUA is forming a task force to investigate the Dollar peg. As per my predictions for this year there will a lot less people trading with and pegged to the dollar by years end.
Yeah, like nobody saw that one coming, I'm just surprised others states are not yet following this example.


That's if for now, after 4 reboots, considerable cursing and finally having to return to my work computer I'm done. If any of you need a refresher on why having metals is important read this by David Morgan

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