Friday, June 06, 2008

Canadian Silver Bug - this weeks stuff

Hidden Rot

One thing we have not seen much of so far is the mass of hidden paper held by non bank organizations like pension funds and Insurance companies. While some pension funds have reported lower earnings or in some cases real loses, few have actually fessed up and told the public how much exposure they have to CDOs. A friend who works for a major Canadian Insurance company tells me there is a large sum of CDOs on the ledger books which are still marked at book value not marked to market. Don't allow the lack of bad news convince you your insurance company or pension is secure especially with the news that MBIA and AMBAC have had their credit rating slashed from AAA down two levels to AA by Standard and Poor's, both companies are also on Credit watch from Moody's and could suffer further downgrades. Such downgrades change the rating on all the bonds these companies insured which represents around a Trillion U.S. dollars.

While I'm not sure of the mechanics or time frames to liquidate positions, I do know that pension funds cannot legally hold onto bonds that lose investment grade rating and should credit ratings continue to slip the market could be flooded with 10s or 100s of billions in mortgage backed paper. If such a glut of bonds hit the market there will not be nearly enough suckers willing to buy them, at least not anywhere near their book value. Once prices fall enough vultures will enter the market to snatch some of these up at a substantial discount in hope it they can be sold at a profit later. The result of this forced selling will gut pension funds and if like most people, you probably don't have an option of cashing out without losing money up front and/or without paying a huge tax bill to get at your cash.

While you may not have the means to buy a lot of metals for pure speculation both the U.S and Canada have ways to hold some form of metals in retirement accounts , see if you can find some way to divert a portion of your retirement funds in that direction as insurance against the threat of exploding pension funds.

General stuff

The economy is slowing in Europe, the U.S. and in Canada we actually announced a GDP contraction for the last reported month. I don't think this means we're in worse conditions than other countries I just believe our numbers a little more upfront and honest than the Bogus U.S. stats. Here in Ontario we've had a series of reported job cuts by automakers which is a very important segment of our economy but I can't get too worked up about it. I believe that between the coming financial crisis, oil prices and eventual fuel shortages the end of the car culture is in sight, and bail outs and bribes to GM to save jobs is just wasted money.

These most recent GM cuts are at plants that makes trucks and SUVs, but what would you expect? GM has been so intent on flogging these high end, high margin, gas hogs that they've neglected to keep up with Japan or Korea in making reasonably sized, efficient, good quality cars. How these north American automaker can continue to be so far behind the curve in reading the market for Gas prices and public demand is beyond me. Their vehicles are sized wrong, over powered, poorer quality and behind the Japanese in hybrid technology.

I have no doubt that the current recession will soon lead to GMs Bankruptcy so they can beat down the unions and shed their responsibility for a hugely under funded pension program. See how this meshes with my first warning, GM's pension is already massively under funded and what do you want to bet that the assets they do hold include a whack of these soon to be junk rated CDOs?
When you devalue the pension fund by 30-50% to cover bad investments what's left will be pitifully insufficient.

Don't expect a housing market rebound to save the CDO market, the value of the these bonds have no hope of recovering as housing prices continue to slump. There is no point in me showing you more stats when this sale that just ended in the San Diego area says it all; buy one 1.6 Million dollar home and get a second one worth $400,000 free.

Other builders have been offering mega upgrades to sell homes , lower prices, offers of a new car in the driveway and maybe some of those urban myths about agents who will do "anything" for a sale are finally coming true.

Many home builders are really hurting such as Oregon's Legend Homes which has failed to pay subcontractors after getting its main credit source cut off. Legend is playing down bankruptcy talk and has hired a restructuring expert.

Banks for the most part are still hemorrhaging but even then you can't trust their numbers as accounting loopholes are still allowing them to lie about the real damage to their books.

Lehman Brothers is facing an especially large problem as it finds itself being heavily shorted as investors either believe it's destined to crash or are encouraging it to do so. This heavy shorting follows the pattern that started the run on Bear Stearns and might be an attempt drive it into the hands of some other bank to consolidate the industry and the risk.

Money, crap and the real kind.

In the last couple of weeks the U.S. dollar has been irrationally strong but I'm not going to waste a lot of time explaining yet again why it's irrelevant to the long term trend of dollar meltdown. The last 24 hours has erased a weeks worth of hard fought dollar gains quite easily. Exuberance is one thing but when the job numbers are bad even after Government lying you know there is a problem.

Gold and silver have been bouncing around but I think they are just being played in a range while they consolidate. There have been some weird moves like the one Thursday where gold was down by a faction but silver was up by 2%. Today it looks like the dollar slap down will allow both Silver and Gold to make a strong week ending statement and hopefully signal an new up trend.

For those of you still trying to find Silver bullion

As of Wed the main Scotia Branch in Toronto, Bay and Adelaide does has some bullion but only in 100oz bars. I wanted to pick up a few small pieces but since I'm car shopping a 100oz purchase would not have been prudent. The Coin store in the arcade at Younge and Temperance has 100oz bars too, but nothing else.


I've not mentioned my stock holdings for some time as little was happening, but in the last month I sold my position in Quinto at about 300% profit because I was very disappointed that a low ball, all share takeout by Thompson Consolidated mines was accepted by Quinto's board. This company was worth more than this offer for just the iron ore resources and the takeover gave absolutely nothing for the graphite and titanium prospects which each could have been company makers. While there may be a secondary offer I'm not very hopeful so I sold Quinto and moved it into Minefinders and Silver Wheaton.

In the last two years with Quinto and Lionore, I've actually done better with base metals than the small Gold and Silver stocks which are suffering a lot of shorting in the market. This constant shorting on companies that are in production or on the verge is insane. The spring keeps getting wound tighter on this market as good juniors get undervalued even when they are showing profits and/or increasing resources. The value on some of these companies are just stupid cheap and represent a huge opportunity should the next leg up crush the shorts as I expect/hope.

I would recommend that anyone who is frustrated by the poor prices of juniors check out the discussions on the Financial Sense News hour the last couple of weeks on stock fraud, manipulation and illegal trading. It's definitely worth listening to and if you make complaints about such activity we might finally get regulators to deal with such obviously illegal activities.

It's finally hot where I live, so I'm gonna go look for a patio and a cold one, have a good weekend


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