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Bernanke Ease Makes Bulls out of Dollar Bears Seeing New Growth
**edit chart below.
By Bo Nielsen
Feb. 4 (Bloomberg) -- Ben S. Bernanke's decision to lower interest rates 1.25 percentage points last month will end the dollar's two-year slide, according to the world's biggest currency traders.
For the first time since 2003, investors are focused on relative growth prospects rather than absolute borrowing costs, according to Geoffrey Yu, a London-based strategist with UBS AG, the No. 2 trader. The steepest cuts by a Federal Reserve chairman in seven years will support economic growth in the U.S. as Europe slows, said BNP Paribas SA, the most accurate currency forecaster Bloomberg tracks. The dollar will gain at least 9 percent against the euro this year, UBS and BNP predict.
``We're not chasing dollar weakness any lower,'' said Robert Robis, a fixed-income manager in New York at OppenheimerFunds Inc., which oversees $260 billion. ``The Fed's actions have avoided a long recession and we may start to see a recovery later this year.''
Robis has reduced the share of euro-denominated assets versus those linked to the dollar in his $9 billion portfolio. It now holds less than the benchmark index because he expects the U.S. currency to outperform. As recently as November, he was ``overweight'' the euro against the dollar.
Futures traders cut the value of contracts benefiting from a drop in the dollar to $13.9 billion as of Jan. 29, according to Charlotte, North Carolina-based Bank of America Corp., the second-largest U.S. bank by assets. That's down from a record $32.3 billion in November.
Yield Advantage
The dollar has gained 1.1 percent versus the euro to $1.4802 since sinking to an all-time low of $1.4967 on Nov. 23. The currency appreciated even as the yield advantage on a two- year German bund more than doubled to 1.3 percentage points over a comparable Treasury note, making bunds more appealing to international investors. The last time the spread was so large was 2002, when the euro surged 18 percent against the dollar.
Paris-based BNP, the most accurate of 31 firms surveyed about their currency predictions for the second half of 2007, is among the most bullish on the dollar in 2008 with its forecast of $1.36 per euro by yearend. Zurich-based UBS predicts $1.35. The median estimate calls for a 5.4 percent increase to $1.40 by the end of this year and a 6 percent gain to $1.32 in 2009. The dollar weakened 10.6 percent in 2007 and 11.4 percent in 2006 after strengthening 12.6 percent in 2005.
Fed Versus ECB
While two Fed cuts slashed the target rate for overnight loans between banks to 3 percent in nine days, the European Central Bank kept its benchmark rate unchanged at a seven-year high of 4 percent in an attempt to curb inflation. The ECB will keep rates unchanged at its Feb. 7 meeting, according to all 55 economists surveyed by Bloomberg News.
``If aggressive cuts by the Fed can stimulate the economy, then the U.S. will definitely lead the way in terms of economic recovery,'' Yu said. ``The ECB is behind the curve, so it's time to move back'' into the dollar, he said.
Deutsche Bank AG, the world's largest currency trader, predicts an 8 percent gain in the dollar this year as the euro- zone economy expands 1.6 percent, lagging behind the 1.9 percent growth projected for the U.S. For 2009, Frankfurt-based Deutsche Bank puts growth at 2.6 percent in the U.S. and 1.9 percent in Europe.
Maxime Tessier, head of foreign exchange at Caisse de Depot et Placement in Montreal, isn't counting on Bernanke. It may be too late for lower borrowing costs to keep the U.S. out of a recession, he said. The Labor Department said Feb. 1 that payrolls fell by 17,000 in January, the first decline since August 2003.
2001 Reprisal
``From our vantage point it doesn't look very good and every week we re-evaluate the U.S. economy, it has deteriorated,'' said Tessier, whose firm manages $143 billion. ``It's too early to position your portfolio for a dollar rebound because a month from now the currency could be in rally mode, but it could also be a lot lower.''
The U.S. is entering the ``worst consumer recession since 1980,'' and the dollar will fall to $1.57 by the end of March before recovering to its current $1.48 by yearend, according to David Rosenberg, chief economist for North America in New York at Merrill Lynch & Co. The firm is the world's largest brokerage.
The dollar has benefited from Fed rate cuts before. During the first six months of 2001, the currency gained 10 percent against the euro as the central bank slashed its target 2.75 percentage points to below the ECB's benchmark refinance rate following the bursting of the technology bubble.
``We still believe the U.S. promises good returns,'' Sultan bin Sulayem, the chairman of state-owned investment group Dubai World, said Jan. 25 at the World Economic Forum in Davos, Switzerland. Dubai World agreed in August to invest as much as $5.1 billion in Kirk Kerkorian's Las Vegas-based casino group MGM Mirage.
Foreign Holdings
Middle Eastern and Asian investors have poured up to $39 billion into U.S. banks since August, according to Bloomberg calculations. Foreign holdings of U.S. securities rose a net $149.9 billion in November, the most in 22 months, the Treasury Department said last month in Washington. In October, the gain was $92.2 billion.
Investors say there are encouraging signs that business investment will hold up. Last week the House and Senate Finance Committees approved a fiscal stimulus package of as much as $157 billion proposed by President George W. Bush. The same day the Labor Department said the economy was shedding jobs, the Institute for Supply Management said its manufacturing index rose in January.
``A lot of the people are finding this is a good time to get back in the dollar,'' said Scott Ainsbury, a money manager who helps oversee $12 billion in currencies at FX Concepts Inc., a New York-based hedge fund.
To contact the reporters on this story: Bo Nielsen in New York at bnielsen4@bloomberg.net
Last Updated: February 3, 2008 10:49 E
**
Fleck: Did Greenspan push risky home loans?
Contrarian Chronicles2/4/2008 12:01 AM ET
The former Federal Reserve chairman denies he encouraged adjustable-rate mortgages. Here's what he said; you decide.
http://articles.moneycentral.msn.com/Investing/ContrarianChronicles/DidGreenspanPushRiskyHomeLoans.aspx
Having just written a book on Alan Greenspan, I assumed I wouldn't have much more to say on the subject for quite some time. But a week and a half ago, the former Federal Reserve chief made a claim so outrageous I felt it needed to be discussed.
On a recent trip to Canada, I happened to read a story in The Globe and Mail, "Greenspan on the defensive," about a question-and-answer session he'd just done with Sherry Cooper, the chief economist at BMO Nesbitt Burns, before a Vancouver business audience.
Weapons of mass denial
Reporter Wendy Stueck described the chairman's version of a now infamous speech as follows: "Mr. Greenspan also denied being a booster for risky mortgage products, saying that while he noted advantages in some new mortgage products in an oft-referenced 2004 speech, he spoke in favor of conventional mortgages in an address a week later that has been ignored."
Being quite familiar with that 2004 speech -- in which the chairman had been rather emphatic -- I was shocked to read this claim. I decided to investigate, first by seeing what exactly Greenspan had said in the Q&A with Cooper.
Here is an excerpt of The Globe and Mail's raw Q&A transcript as captured by a court reporter; no audio recording was allowed. Though a bit rough, I have left the transcript in its original form, except for the removal of some nearly incomprehensible phrases in order to make it more readable.
MR. GREENSPAN: In 2004 I went before a Credit Union . . . and I discussed the pros and cons of various types of consumer finance, and I pointed out that . . . fixed rate 30-year mortgages cost a significant amount over the adjustable rate mortgages to buy the insurance against the rise of interest rates. And I said that there are occasions in which that would be a very good thing, and indeed I made a presentation which said that over the past 10 years it would have been very sensible to have taken them (ARMs) out and then at the end of it said of course if interest rates had gone up, it would have been something else.
MS. COOPER: That part was left out.
Bond Insurer Blame Game
Discussing the fate of bond insurers MBIA and Ambac and whether the SEC did enough to prevent the situation, with David Ruder, former chairman of the SEC, and CNBC's Charlie Gasparino
http://www.cnbc.com/id/15840232?video=632200049
Up Next: Dubai INC
This Sunday On 60 Minutes
DUBAI INC. - Oil-rich, a magnet for business and tourism and a stable island in the turbulent Middle East, the Kingdom of Dubai is the success story of the region. Steve Kroft reports. Harry Radliffe is the producer. (This is a double-length segment.)
http://www.cbsnews.com/stories/1998/07/08/60minutes/main13502.shtml
Mauldin: What Does a Recession Look Like?
by John Mauldin
February 02, 2008
What does a recession look like? How does it feel? What does it mean for your life and your investments? We explore these questions and more in this week's letter. I have been working on this letter all week, and think you will find it interesting.
http://www.safehaven.com/article-9383.htm
The Starbucks Index
But first, one interesting observation and a request for help on a fun project. Last week, I was in Europe. I walked across the street from my hotel in Geneva and was delighted to see a Starbucks. While I initially made fun of people who overpaid for a nickel cup of coffee (the price of my youth, which dates me), eventually I became hooked. I now have a venti decaf every morning on the way to work (venti being the Starbuck's code word for large). When I am feeling particularly adventurous I live on the edge and get a venti half-caf (half regular caffeinated coffee). The price in Dallas recently increased 5% to $1.95 or $2.11 after tax.
I ordered the same thing in Geneva and paid 6.7 Swiss francs which is like $6.43 or three times what I pay in Dallas. The fancy drinks were over $10. And the place was packed at 10 am in the morning. (Memo to returning Starbucks chairman and CEO Howard Schultz, the coffee was decidedly inferior.)
Then I traveled on to Barcelona. Father and son partners Antonio and Kai Torella of Interbrokers (and my new Spanish business associates) indulged me by walking to a Starbucks which was a nice hike away, but on a weather perfect day. There that same venti decaf was roughly $5.70, depending on which exchange rate you use, as it is jumping all over the place. The coffee was better. And the place was busy.
The next day in London I went to the Starbucks right next to the office of London partners Absolute Return Partners. I again ordered my usual venti decaf late in the afternoon. It was a bargain at 2 pounds or roughly $3.96 (although the cost to exchange currency runs it to over $4). The large store was crowded. And the coffee was perfect, except after repeating three times that I wanted decaf and being assured that was what I was getting, it turns out I got the full dose of caffeine. I am quite sensitive to the drug (caffeine), and was soon really, really wired, as my associates will attest for the rest of the night. It made for an interesting business planning meeting, and more than a few jokes at my expense.
Now I am curious. Everyone knows about the Big Mac Index as a way of comparing purchasing power parity comparisons from country to country. I want to create a Starbuck's Index for the 44 countries they are in. I am curious as to what people pay for a totally self-indulgent product that is offered right next door nearly everywhere at much lower prices. So, I would like readers outside of the US (I've got the US covered) to drop into a local Starbuck's and find out what a venti (the largest size) cup of coffee is. No latte's or fancy drinks. Just the basic cup of coffee. I will have my assistant put it into a spreadsheet and will post it in a later letter. Thanks. It should be fun.
What Does a Recession Look Like?
I have had a few emails (and lots of questions) like the following from readers the last few months. How can I still think the economy is simply going to be Muddle Through?
"What are the differences between the current state of the economy from that of the 1930s that would allow us to have a 'muddle through' instead of a deflationary depression? There seem to be many technical and fundamental similarities. We westerners having been living above our means for a long time and something is going to have to give. If history repeats itself then the cure to our addiction requires us to go 'cold turkey' with a deflationary depression. Is there hope that perhaps we could have room-temp turkey instead?" - Dr. John E.
Ok, John, let's see if I can get your heart rate down and make you feel better about the future.
I have long contended that a recession is a normal part of the business cycle. But it takes a major policy mistake by a government or central bank to create a depression. And while there is no doubt that there have been and will be mistakes, they are likely to be of a minor sort (as these things go) rather than something which would bring an out and repeat of the 1930's. And given the causes and problems attendant with the current slowdown, I think Muddle Through is a perfect description of the economy we will see over the next year or so. So, with that in mind, let's look at what a recession looks like.
First, I have already lived through 5 recessions. And every one was different in nature and cause. It is likely most of my readers, all except the youngest, have lived through at least 2 recessions, although the last two were rather mild, for reasons we will go into later. And this next recession, if we have one (and I think we are already in one) will be different than the past recessions.
But the operative words are "lived through." The US economy will come through this recession and enter a new period of growth, just as we have in the past. As will, by the way, the European economy, which I also think will encounter a recession. Again, recessions are a normal part of the business cycle. Congress can't repeal them, and central banks can only fight them, but not prevent them entirely. Clearly, though, they can mitigate the immediate problem (although the Austrian school of economics, otherwise known as the take-your-medicine-now school, contends that any such actions simply postpone the Day of Reckoning).
Consumer Spending Slows Down
Recessions are generally accompanied by a slowdown in the growth of consumer spending, although the last recession of 2001-02 saw consumer spending continue to grow at a very healthy pace, making that recession one of the mildest (and strangest) recessions in history, not just in the US, but in the history or the world (to my knowledge).
Of course, we now know why consumer spending did not slow down in the last recession. Consumers leveraged their homes to continue their spending growth, as well as increased their credit card debt. However, in the current cyclical slowdown, it is going to be harder to use mortgage equity withdrawals to bolster consumer spending, as home values are dropping. The piggy bank of increasing home values is shrinking.
While long time readers have seen this chart on a few occasions, it bears review. Notice that mortgage equity withdrawals (MEWs) accounted for 2-3% of the growth of overall GDP in 2001-6. Without MEWs we would have seen two solid years of recession (the red bars) rather than a few quarters, and a decidedly below trend economy. Such large MEWs were possible because of the bubble in housing prices and the availability of cheap and easy mortgages.
Today we are watching a slow motion bursting of the housing bubble. In data released this week, we learn that home values are down almost 8% nationwide, with many areas in double digit declines. And it is likely to get worse. 1.3 million homeowners are in some state of foreclosure, or about 1% of homeowners nation wide, and the numbers grows each month. Predictions of 2,000,000 homes in foreclosure made in late 2006 in this letter no longer look ridiculous. No wonder that many (including your humble analyst) forecast a drop of 20% or more in home values.
Further, there are 2.18 million homes that were vacant and for sale in the 4th quarter. That's 2.8% of all homes. We are edging ever closer to a national average of 12 months supply of homes for sale this spring, with many more home owners who would like to sell simply not bothering to list their home. The good news is that if you want to buy a home, you are likely to find a very willing seller at a very good price.
Sidebar: my daughter is quite happy about the house she and her fiancé are buying and getting close to a 5.5% 30 year mortgage rate! My father bought a home in 1966 and I am pretty sure they got a 5% mortgage, paying the home off in 1996. Interestingly, she now pays attention to the 10 year bond yield, cheering each time it drops as the closing date for her home gets closer. (There is a close correlation between the ten year bond and 30 year mortgages.)
But the point is that while MEWs will not go away, especially with low rates coming back, they are not going to be the consumer spending force they have been. So chalk this current recession into the slowing consumer spending category. One caveat. The Bush/congressional plan to air drop $150 billion into the economy should add about 1% of GDP into the economy over the last half of the year, and maybe even this spring if they can get it done fast enough, and that will be a boost to consumer spending.
(Quick aside: is it only me that sees the irony in that it is Congress that is dropping virtual $100 bills from the proverbial helicopter and not Bernanke?)
And all the recent data does indeed point to slower consumer spending. Foreclosures, increased credit card delinquencies and lower same store sales suggest that the consumer is getting closed to tapped out. Further, as housing values slide, I think it will slow even more. There was a positive wealth effect on the way up, and we will see the reverse on the way down.
Plus, the need to save more for retirement as homeowners realize that they cannot count on their homes to be their retirement plan. While saving more is a good thing for individuals, it means that for the economy as a whole there is less consumer spending. If we go simply back to trend it will mean that GDP will face at least a 1% drag over long term trend. Just one more reason why the next few years will be Muddle Through.
Rising Unemployment Starts to Show Up
Recessions are also associated with rising unemployment, and this one will prove to be no exception. We saw a large rise in unemployment applications this week to 371,000. Unemployment is at 4.9%, about 0.6% above the peak. That level of rise has always been associated with a recession in the post-WW2 period. It is likely unemployment will rise to over 6%, and 7% is certainly possible.
Now, I recognize that the old joke is still true: a recession is when your neighbor loses his job, and a depression is when you lose yours. But we have to keep in mind that 4% or so unemployment is "structural" or quite close to full employment. That is the normal level of people changing jobs, etc. This would suggest a rise of only 3% in unemployment, which is not a lot in the grand scheme of things, unless it is your job.
Why so low? Why won't we go back to the 9-10% unemployment of recessions in the 70's and 80's? Because we have shipped the cyclical manufacturing jobs offshore. In past recessions the US had a much larger percentage of its job tied to manufacturing. Now manufacturing jobs account for just 20% of the economy. Even if in the unlikely event that 10% of manufacturing jobs were lost, that would mean just a 2% rise in unemployment. And I say unlikely, because many manufacturing companies with large export components to their sales are experiencing growth due to a weak dollar.
This is just not the economy your father grew up in. It is quite different, and trying to go back and look at past recessions to figure out precisely what is going to happen in this one is futile. One can only hope to get the general direction right.
It is All About Valuations
And speaking of direction, let's return to a theme I spent almost six chapters on in Bull's Eye Investing, and numerous e-letters. It is my contention that there are very long term cycles in the stock market. But rather than look at bull and bear cycles in terms of price, we should look at them in terms of valuations. Markets go from high valuations to low valuations back to high valuations, as nauseum. You can measure it in price to book or price to earnings or whatever metric you want. The affect is the same. There has never been a time where markets started out from high valuations that they did not eventually end up with lower valuations. These cycles lasted on average for 17 years, with the shortest being 13 years (so far).
And this is important. There has never been a time when valuations dropped to the mean and then went back up again without visiting a much lower valuation. Never. Not one time. Zip.
We are now back to the mean P/E ratio. Now maybe this time it is different. But those are dangerous words.
Let's take a look at a chart from Dr.Woody Brock, of Strategic Economic Decisions (www.sedco.com) one of my favorite economists as well as one of the smartest I know.
If you invested in 1999, you are essentially where you were 8 years ago in terms of price. Note that Woody uses the third quarter of 1999 as his comparison, as the market was close then to where it is now. But earnings, as Woody points out, have risen by 110% since 1999. P/Es are now in the 15 range. But I contend they will go lower. How can we get to the low P/E ratios that have prevailed in all previous cycles?
Either one of two ways. The market can drift sideways for a long time while earnings continue to grow, or the market can drop enough to get us to lower valuations. And that is precisely what I wrote in this letter and my book 4-5 years ago. I said it would likely take two recessions (at least) to get us back to low valuations to set up the next bull market where the primary driving factor is expanding P/E multiples. Remember in the last bull market, 80% of the increase in the price of stocks can be explained as the P/E ratio rising from a low of 7 to a cycle high of 42.
If the stock market were to drop 20%, then the P/E ratio gets to 12, assuming earnings don't fall. Of course, they will, but they are also likely to rebound as quickly as they did after the last recession.
Now, let me speculate. Go back to 1974. Were we at the low in terms of valuations at that time? No, the P/E was 11, which is admittedly low, but it was going to 7 in 1982 (note that took another EIGHT years).
But the recession drove the S&P 500 to its cyclical price low, an average of 82, and a relatively young Richard Russell (he was just 48 or so) famously said a new bull market was beginning. It was another 8 years and two recessions until the absolute bottom in terms of valuation was reached, but the price bottom made its entrance in 1974.
Could that happen again? Could this current recession drive the market down enough to set a price low, even though it will take some time for valuations to reach their cycle lows (and who knows what that number is?) That is very possible. There is a buying opportunity in our future.
As I said in my annual forecast, I expect to turn modestly bullish on the stock market when this recession has played its course, and seriously bullish when valuations get lower. I am looking forward to it. It is more fun to be bullish. You get invited to more parties.
Why don't we just hit the mean P/E ratio and just bounce back on up? It is mostly psychology, and I spent a great deal of time in my book and in this letter trying to demonstrate the reasons behind these cycles. But in a nutshell, if you disappoint the market once, you get a small reaction. Disappoint investors again and the reaction is more pronounced, and don't even go there a third or fourth time.
Recessions produce earnings disappointments for a variety of reasons: reduced consumer spending, higher marginal cost of sales ratios, reduced business investment, etc. I think we are in for a few quarters of disappointment.
That being said, there is always a tug of war between the bulls and bears, as the data is rarely one sided. Let's go back to Woody's recent letter, which I think captures the spirit of the debate perfectly:
"First, the magnitude and indeed the nature of the credit market crisis is very hard to assess.... No one has a clue as to the extent of write-downs that will be incurred in the future. Also, from a Main Street perspective, no one seems to know how much the current or future financial crisis will impede the flow of credit needed to maintain real economic growth. The combination of diminished bank capital and tighter lending standards could prove fatal to credit creation.
"Second, the behavior of the economy -- the consumer in particular -- is completely paradoxical. On the one hand, the economy has not been that bad at all. As former Fed Chairman Greenspan pointed out on the 25th of January, there is still no hard evidence that a recession is underway. Indeed, personal income was up 6.1% for the year ending in November. Consumption growth in the fourth quarter of 2007 was up 2%, far higher than many bears predicted. Finally, the unemployment rate has not risen very much at all. Importantly, these conditions hold true two years after the advent of the housing crisis and four years after the advent of sharply rising oil prices.
"On the other hand, in contrast to this reassuring picture of macro-stability, the rate of loan delinquencies and defaults of household debt of all kinds is arguably at its highest level in history -- and this is true before the unemployment rate has risen cyclically, and before a recession has occurred. Specifically, delinquency/default rates have soared across the board on auto loans, credit card debt, home equity loans, prime mortgages, and of course subprime mortgages. All this suggests that certain bears may be right in arguing that the consumer has reached a breaking point."
"How might we read such confusing tea leaves? Economic bulls claim that macro-stability is once again in evidence, and that bears about the economy have been too pessimistic, as indeed they have been for a quarter of a century. But such bulls cannot explain the loan delinquency and default rate phenomena. Bears on the other hand have proven much too pessimistic in their forecasts to date. They were shocked by the 4.9% third quarter GDP growth rate, and cannot explain why the economy has remained as buoyant as it has been. Yet they can claim "I told you so!" when it comes to the household debt crisis."
So, John, back to your original question. Will we see a depression? The answer is it is very unlikely. Most of the economy is just fine. Yes, we have a housing bubble that will take at least another 12-18 months to work through the excess inventory. And yes, we do have a credit crisis that is the worst since the Depression.
But the monetary and regulatory authorities are quite aware of the problems. You are already seeing banks being allowed to borrow at special "windows" (the TAF or Term Auction Facility) to meet reserve requirements. Banks are being given time (as I understand it) to meet SIV problems. The Fed is lowering rates at a rapid pace.
There is a serious effort to figure out how to capitalize the monoline insurance companies. I think it is not unlikely that public money will eventually be brought into play, much like the Savings and Loan Crisis on the late 80's. In short, and no matter what your view is, the Fed and the Treasury are going to do what they have to do to keep the game going. My bet is that the Sovereign Wealth Funds have just begun their fire sale investments, as there may be another few hundred billion to write down. So be it.
But it will mean that we Muddle Through in the meantime. It will probably not be pretty or elegant. It may not be fun. No one is going to guarantee your 401k accounts. Shareholders in large financial institutions that still have large write downs in their future will not be happy as some banks will just keep disappointing.
I still maintain the Fed is only marginally interested in the stock market. But the banking system is on their watch, and it is in a full blown crisis. They are paying attention. Can they do enough to avoid a recession? I don't think so. But they can keep it from becoming a major recession or depression.
In the meantime, 93% of people will have jobs (at the worst). There will be the usual lowered expectations, and businesses will have to adjust. New businesses will be started that will change the world. Entrepreneurs will see opportunity. Investors will see the auctions of foreclosed homes as opportunities to own rental property at once in lifetime values. Well, ok, maybe twice in my lifetime, as the above mentioned S&L crisis did create some great opportunities in specific locales.
It will take some time to work through the after shocks of two bubbles bursting. But we will. And thus, Muddle Through will be the operative words to describe the economy. And then things will return to "normal."
Remember, new opportunities will present themselves, just as they have after every recession. In fact, they are often the best ones, as you can find them at lower costs.
Breathe deep, Dr. E. It is just a recession. This will pass. Besides, you are a doctor. There will be no recession in health care. Party on.
Phoenix, Prime Rib and My Conference
I and my daughter Tiffani have spent the last few days with Jon Sundt and his management team from Altegris Investments. Jon has a retreat home at the Hollister Ranch north of Santa Barbara, high up in the mountains overlooking the ocean. It is one of the more beautiful places I have ever been to. I always look forward to going. We took turns cooking, and my prime was special as always. Sundt's wine cellar took a well-deserved beating. Good times.
We talked about the alternative investment world, and I have to admit I am pumped about the future. (I just came back from Europe with my partners there, and the general prospects are just as good there.) While there are always problems here and there when you deal with alternative investments (as with any investments), in general there are just so many good opportunities right now.
Our conference is shaping up to be one of the best. Don Coxe has just agreed to attend, and if you have not had the pleasure of hearing him, you are in for a treat if you can make it.
My Strategic Investment Conference is April 10-12 in La Jolla. As well as Don, Paul McCulley, Rob Arnott, George Friedman of Stratfor and another powerhouse speaker who I am going to personally strong arm into coming this week will be there. Plus 10 or more specially selected hedge funds will be presenting. Everyone who comes to one of these conference say they are the best they have been to.
Sadly, because of regulatory reasons, we have to limit attendance to investors with a net worth of over $2 million. It is frustrating to me, but we do follow the rules. If you are interested in knowing more, you can go to www.accreditedinvestor.ws and sign up and someone will contact you. Also, if you can't come, but would like to know more about the world of hedge funds, commodity funds and private offerings, just fill out the form and we will show you what is behind "curtain #3." (As I date myself.)
I will be in Phoenix this next weekend speaking several times at the Cambridge House Resource Investment Conference. This is a large, free conference with an outstanding line-up of speakers, mostly focused on natural resources and gold. If you are in the area, or simply looking for more information on gold and natural resources, you should consider attending. As noted, the conference is free if you pre-register. You can find out more by going to: http://www.cambridgehouse.com/mauldin/access.html and clicking on "Phoenix."
It is time to hit the send button. I started this letter on Wednesday in California, worked on the plane coming back and am finishing it in my home. If there are any mistakes, let's just blame it on too many time zones. Have a great week.
Your wishing the Cowboys were in the Super Bowl analyst,
John Mauldin
Frontlinethoughts.com
denmo83, direct ur post 4God, he is active
in those trades....be careful who you deal with.
#msg-26313726
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http://www.cbot.com/cbot/pub/page1/1,3248,248,00.html
Don Coxe:
Some text Courtesy....TheSlowLane @ SI
Just listened to Coxe this morning. The food inflation that is in the pipeline is getting very serious indeed. Corn at 5.25 is going to impact about 80% of everything on the supermarket shelves. Everyone should be praying for good weather in the Midwest or we will be eating cardboard. He also talked about an eventual 1% Fed funds rate. So, while a pullback is giving shorts an opportunity to run for cover, he is not at all concerned about his gold stocks.
Cheers,
==============================
Don Coxe: Fridays weekly audio program.
http://events.startcast.com/events/199/B0003/#
Don Coxe:
Some text Courtesy....TheSlowLane @ SI
Just listened to Coxe this morning. The food inflation that is in the pipeline is getting very serious indeed. Corn at 5.25 is going to impact about 80% of everything on the supermarket shelves. Everyone should be praying for good weather in the Midwest or we will be eating cardboard. He also talked about an eventual 1% Fed funds rate. So, while a pullback is giving shorts an opportunity to run for cover, he is not at all concerned about his gold stocks.
Cheers,
==============================
Don Coxe: Fridays weekly audio program.
http://events.startcast.com/events/199/B0003/#
W@G1 QQQQ 02/04/08 for a 02/06/08 close
46.25 bob3
46.01 ronnies
43.00 dr_sean
Fed. Ops: 17.00B Matures this week.
Mon: 12.00B 3day
Thu: 5.00B 14day
Float 22.00B
=========================================================
Temp Ops:
Perm Ops:
=========================================================
Public Debt:
Limit ~ $9,815 T
1/31 ~~ $9,238 T ~ New record High
=========================================================
The Slosh Report:
http://www.gmtfo.com/RepoReader/OMOps.aspx
Fed. Ops: 17.00B Matures this week.
Mon: 12.00B 3day
Thu: 5.00B 14day
Float 22.00B
=========================================================
Temp Ops:
Perm Ops:
=========================================================
Public Debt:
Limit ~ $9,815 T
1/31 ~~ $9,238 T ~ New record High
=========================================================
The Slosh Report:
http://www.gmtfo.com/RepoReader/OMOps.aspx
Fed Plans $60B Auctions to Banks in Feb.
Friday February 1, 10:09 am ET
By Martin Crutsinger, AP Economics Writer
Fed Announces Auctions Totaling $60 Billion in February to Combat Credit Crisis
WASHINGTON (AP) -- The Federal Reserve said Friday it will provide $60 billion in fresh cash to commercial banks in two auctions in February and will keep holding auctions every other week for as long as needed to ease the credit crisis.
The new auctions, to be held on Feb. 11 and Feb. 25, will mark the fifth and sixth times the Fed has used a new auction process announced in December to provide cash-strapped banks with extra reserves.
In a brief statement, the Fed said that it intended to keep holding the auctions every other week "for as long as necessary to address elevated pressures in short-term funding markets."
The Fed said that the minimum bid amount for the February auctions will be reduced to $5 million, down from $10 million in the previous auctions, to "facilitate participation by smaller institutions."
The Fed's hope is that the increased resources provided to the banking system will keep banks lending and prevent a severe credit squeeze from pushing the country into a recession.
On Wednesday, the Fed announced that it was cutting its federal funds rate, the interest that banks charge each other for overnight loans, by a half-point to 3 percent, marking the second big rate cut in just over a week.
Those two reductions in the federal funds rate represented the most aggressive rate cutting by the Fed in a quarter-century and underscored the Fed's resolve to battle the current economic slowdown.
In its statement Friday, the Fed said it would announce the size of the March auctions by Feb. 29.
The Fed started the auction process in December with two auctions of $20 billion each. It boosted that size to $30 billion each for the two January auctions, an indication of the success it was having with the new process.
The Fed went to the innovative auction procedure after it had only limited success in encouraging banks to use its "discount window," where the Fed makes direct loans to commercial banks.
Banks had been reluctant to use the discount window out of concern that they would be perceived as having trouble raising money through other avenues.
http://biz.yahoo.com/ap/080201/fed_credit_crisis.html?.v=7
end of month time to drain see drain
#msg-11379252
Fed. 3day RP + 12.00B [net Add +1.00B
Fed. 3day RP + 12.00B [net Add +1.00B
Fed.(2) 1day RP + 4.50B [Net Drain
Fed.(2) 1day RP + 4.50B [Net Drain
Fed. 14day RP + 5.00B [so Far
Fed. 14day RP + 5.00B [so Far
SignalWatch(EdDowns):Break Through 12,500
http://www.signalwatch.com/markets/markets-dow.asp
Fed. Opps HelicopterBen 45.00B
Thu:
6.00B 14day
8.00B 7day
14.00B 2day
6.00B 1day
Fri:
11.00B 2day
Fed. Opps HelicopterBen 45.00B
Thu:
6.00B 14day
8.00B 7day
14.00B 2day
6.00B 1day
Fri:
11.00B 2day
Fed.(2) 1day RP + 6.00B [net ADD + 17.00B
Fed.(2) 1day RP + 6.00B [net ADD + 17.00B
Fed. 2day RP + 11.00B [ net add all
Fed. 2day RP + 11.00B [ net add all
Fed Holds Fourth Credit Auction
Tuesday January 29, 10:20 am ET
By Martin Crutsinger, AP Economics Writer
Federal Reserve's Fourth Auction of Short-Term Loans Sees Interest Rate Drop to 3.123 Percent
WASHINGTON (AP) -- The Federal Reserve, working to combat effects of a serious credit crisis, said Tuesday it had auctioned $30 billion in funds to commercial banks at an interest rate of 3.123 percent.
It marked the fourth in a series of innovative auctions the Fed began last month in an effort to provide cash-strapped banks with extra reserves. The Fed's hope is that the increased resources will keep banks lending and prevent a severe credit squeeze from pushing the country into a recession.
The latest auction results indicated that the Fed's program is having success. The 3.123 percent interest rate for the $30 billion in short-term loans marked the lowest rate of any of the four actions. The previous auction resulted in a rate of 3.95 percent and the first two saw rates at 4.65 percent and 4.67 percent.
Bids for the current auction were received on Monday. The sharp drop in rates had been expected. Analysts said it reflected the fact that the central bank cut a key interest rate last week by three-fourths of a percentage point, the biggest reduction in more than two decades.
That signaled that Federal Reserve Chairman Ben Bernanke and his colleagues intend to move aggressively in an effort to prevent a steep slide in housing and the severe credit crunch from pushing the country into a recession.
The Fed's rate cut last week represented the first emergency move between meetings since September 2001. Fed officials are meeting again Tuesday and Wednesday and financial markets are expecting that another rate cut, probably by a half-point, will be announced at the end of those discussions.
Bernanke has said that the current auction process will continue for as long as needed to make sure that banks have sufficient reserves. He said the auctions might become a permanent addition to the Fed's "tool box" of strategies it can employ when credit markets have seized up.
But he said before that occurs, the Fed would seek comments from the public on how the auctions should be designed so that they can be best used by financial institutions.
The Fed went to the auction process in December after it had had only limited success in encouraging banks to use its "discount window" where the Fed makes direct loans to commercial banks. Banks had been reluctant to use the discount window out of concern they would be perceived as having trouble raising money through other avenues.
The Fed on Friday will announce the schedule and amounts for upcoming auctions. The first two auctions in December made $20 billion in short-term loans available and the two January auctions each provided $30 billion in loans.
Goldcorp seen eager to sell Silver Wheaton stake
Tue Jan 29, 2008 12:01pm ESTORONTO (Reuters) - Goldcorp Inc.
(G.TO: Quote, Profile, Research) may be on the verge of selling its 49 percent stake in Silver Wheaton Corp (SLW.TO: Quote, Profile, Research), the Financial Post newspaper said on Tuesday, while analysts agreed the timing is right for a sale.
Selling the stake could raise around C$1.8 billion ($1.8 billion), based on Silver Wheaton's stock price. The Post said Goldcorp has begun hiring investment bankers for a sale likely by way of a secondary offering.
According to Reuters data, Goldcorp owns 108 million shares of Silver Wheaton, which was at C$16.58 on the Toronto Stock Exchange on Tuesday, down 31 Canadian cents. Goldcorp was off 51 Canadian cents at C$37.93.
Goldcorp did not return calls seeking comment.
Speculation that Goldcorp might sell the stake has increased over the past year as Silver Wheaton's share price has been boosted by rising silver prices.
Barry Allan, an analyst at Research Capital Corp, said such a deal makes sense, as the market has never properly priced the value of the Silver Wheaton stake into Goldcorp's shares.
"Any time that I've ever talked about Goldcorp, people are always confused about how much is the value actually made up of Silver Wheaton shares versus fundamental underlying value of Goldcorp," he said.
Allan compared the possible sale to Newmont Mining's (NEM.N: Quote, Profile, Research) recent spinoff of mining royalty firm Franco-Nevada FNV.TO, which raised about C$1.1 billion.
"You've got a subsidiary here where you've got some huge gains built up. You can take those gains into your income statement over the next couple of quarters, where the quarters are going to be your high-cost quarters," he said.
Silver Wheaton buys and resells silver produced by several miners. Goldcorp is the world's second-largest gold producer by market capitalization.
RBC Capital Markets said in a recent note that Silver Wheaton's sharp rise over the past year -- up 40 percent on the Toronto Stock Exchange coming into the session -- makes a sale by Goldcorp more likely.
John Ing, president of Maison Placements, said Goldcorp's need for cash is also a motivation to sell.
"They have a big (capital spending) program, as they bring on huge mines, and Silver Wheaton is a logical source of funds."
($1=$1.00 Canadian)
(Reporting by Cameron French; editing by Rob Wilson
http://www.reuters.com/article/marketsNews/idCAN2960054120080129?rpc=44&sp=true
Goldcorp seen eager to sell Silver Wheaton stake
Tue Jan 29, 2008 12:01pm ESTORONTO (Reuters) - Goldcorp Inc.
(G.TO: Quote, Profile, Research) may be on the verge of selling its 49 percent stake in Silver Wheaton Corp (SLW.TO: Quote, Profile, Research), the Financial Post newspaper said on Tuesday, while analysts agreed the timing is right for a sale.
Selling the stake could raise around C$1.8 billion ($1.8 billion), based on Silver Wheaton's stock price. The Post said Goldcorp has begun hiring investment bankers for a sale likely by way of a secondary offering.
According to Reuters data, Goldcorp owns 108 million shares of Silver Wheaton, which was at C$16.58 on the Toronto Stock Exchange on Tuesday, down 31 Canadian cents. Goldcorp was off 51 Canadian cents at C$37.93.
Goldcorp did not return calls seeking comment.
Speculation that Goldcorp might sell the stake has increased over the past year as Silver Wheaton's share price has been boosted by rising silver prices.
Barry Allan, an analyst at Research Capital Corp, said such a deal makes sense, as the market has never properly priced the value of the Silver Wheaton stake into Goldcorp's shares.
"Any time that I've ever talked about Goldcorp, people are always confused about how much is the value actually made up of Silver Wheaton shares versus fundamental underlying value of Goldcorp," he said.
Allan compared the possible sale to Newmont Mining's (NEM.N: Quote, Profile, Research) recent spinoff of mining royalty firm Franco-Nevada FNV.TO, which raised about C$1.1 billion.
"You've got a subsidiary here where you've got some huge gains built up. You can take those gains into your income statement over the next couple of quarters, where the quarters are going to be your high-cost quarters," he said.
Silver Wheaton buys and resells silver produced by several miners. Goldcorp is the world's second-largest gold producer by market capitalization.
RBC Capital Markets said in a recent note that Silver Wheaton's sharp rise over the past year -- up 40 percent on the Toronto Stock Exchange coming into the session -- makes a sale by Goldcorp more likely.
John Ing, president of Maison Placements, said Goldcorp's need for cash is also a motivation to sell.
"They have a big (capital spending) program, as they bring on huge mines, and Silver Wheaton is a logical source of funds."
($1=$1.00 Canadian)
(Reporting by Cameron French; editing by Rob Wilson
http://www.reuters.com/article/marketsNews/idCAN2960054120080129?rpc=44&sp=true
Fed. 2day RP + 14.00 [net add +4.25B
Fed. 2day RP + 14.00 [net add +4.25B
Fed. 1day RP + 10.25B [net Add +6.50B
Fed. 1day RP + 10.25B [net Add +6.50B
Looking @ calls on both march strike
Gold Trades Near Record on Rate Cut Expectation, Africa Outage
By Feiwen Rong
"Interest-rate futures show traders see a 100 percent likelihood that the Fed will cut rates by an additional half percentage point this week."
http://www.bloomberg.com/apps/news?pid=20601012&sid=akk7GrUEiRII&refer=commod
Gold Trades Near Record on Rate Cut Expectation, Africa Outage
By Feiwen Rong
"Interest-rate futures show traders see a 100 percent likelihood that the Fed will cut rates by an additional half percentage point this week."
http://www.bloomberg.com/apps/news?pid=20601012&sid=akk7GrUEiRII&refer=commod
Will Gold Crash in a Recession?
By Bud Conrad and David Galland
26 Jan 2008 at 09:46 AM GMT-05:00
STOWE, Vt. (Casey Research Advertorial) -- From the 1990s until today, Americans have maintained their life style by borrowing. As the American consumer is about to find out, the bill for that life style is coming due.
So where will that lead the U.S. economy? Simply stated, surveying the landscape of current events, many of which are a direct consequence of excessive debt and an inevitable slowdown in consumer spending, we expect stagflation ahead. Loosely defined, that term refers to a general economic slowdown – a recession – but coupled with rising prices triggered by massive infusions of liquidity into the market.
That liquidity can come from governments – witness the billions upon billions now being thrown into the fray by the world’s central banks – or it can come from, say, some percentage of the 6+ trillion in U.S. dollars held by foreigners coming home to roost. On that latter point, in recent weeks there has been almost daily news about foreign corporations and sovereign wealth funds unloading their greenbacks in exchange for shares in some of America’s largest financial institutions. Doug Casey has correctly pointed out that it is when the trade deficit starts to shrink, which it recently has, that you need to look for cover... because, among other things, it means the tide of U.S. dollars is beginning to wash back up on U.S. shores.
Our view that the stagflationary scenario is the most likely is supported by a steady stream of data. For instance, despite an obvious slowdown in 2007 holiday season shopping, the Bureau of Labor Statistics reports that producer prices in November increased at the fastest rate in 16 years.
Rising prices make a stagflationary environment positive for gold, if for no other reason than that investors reallocate depreciating paper-backed investments into tangibles with a demonstrated ability to float as the intangibles sink.
So, our view remains that we are headed for a stagflation. But what if we are wrong?
What happens if the global economic crisis gets so bad that it trumps any and all inflationary influences and we enter a straight-up deflationary recession?
That is, we are sure, a question on the minds of many gold investors.
Some quick thoughts....
Gold in a Recession
Traditionally, gold has been a safety net against inflation. Inflation is good for gold, a case we don’t need to make again here.
But, in a typical recession, the demand for everything slows and the prices of many things fall. The knee-jerk reaction of most casual market observers, therefore, might be that if inflation is always good for gold, then the opposite is always bad.
Historically, however, that is not the case. The chart below shows the price of gold overlaid against official periods of recession as defined by the National Bureau of Economic Research. As you can see, about half the time gold actually rises in a recession.
(Note: this chart uses monthly averages, so you can see that current prices are, in nominal terms, higher than the 1980 high, based on those averages.)
Simply, there isn’t a specific historical precedent that demonstrates that gold will fall during a recession.
But could we have a general deflation, one that might tip gold into one of the down cycles? Of course.
The developing recession, based as it is on a global contraction in credit, looks to be especially long and deep. Almost daily now we learn of multi-billion-dollar debt defaults. Those, in turn, trigger both a freeze-up in easy credit and a flight from risk.
In response, the government has responded with its predictable "fix-it" tools – stimulus and bailouts. The tools of government stimulus are lowering the Fed funds interest rate, and potential new large-scale bailouts like the Resolution Trust Corporation (RTC) that was put into action to straighten out the Savings and Loan crisis of the 1980s, to the tune of $200 billion. While the Europeans have just unleashed an amazing $500 billion in new liquidity, so far, U.S. Treasury Secretary Paulson and Fed Chairman Bernanke and friends have been surprisingly slow to act. They started with denial and have moved to inadequate band-aids.
In the absence of any concentrated and well-funded program – such as the RTC – to try and keep the wheels on (and, at this point, it is not clear that any imaginable measure will suffice), the deflationary pressures of the housing collapse are winning.
But there is an important, longer-cycle pressure that is not talked about much, although it is increasingly obvious to the American consumer: the dollars they're spending are buying less. They see gasoline and heating prices rise, but don’t think much about the dollar itself as the underlying source of price inflation.
This decline in the purchasing power of the dollar is extremely important for the price of gold. That’s because the pressures on the dollar seem overwhelming when aggregated: huge budget and trade deficits, wars and retirement demands of baby boomers, unprecedented foreign holdings of U.S. dollars. Watching the prices of internationally traded goods, including oil at $90 per barrel and wheat at a record $10 per bushel, it is hard to imagine a situation of serious deflation emerging.
Looking for Alternatives
The flight to quality by investors who no longer trust packages of mortgage loans, or anything that is not strictly labeled as government backed, is unprecedented. The interest rate on government-issued two-year Treasuries dropped to 3%, reflecting the demand for safety. Concurrently, other interest rates have risen in response to increasing mistrust and uncertainty.
Gold, of course, provides a different form of safe harbor alternative – an asset that is not only readily liquid but, unlike government paper, positively correlated with the very same inflation that will erode the purchasing power of paper assets.
Right now, gold is not on the front burner, but this is only to be expected because of the state of flux of global financial markets. Like observers of a war of Titans, the market is confounded by the sheer magnitude of all that is going on, from the devastation being wreaked on the world’s best-known and most established financial institutions, to the unleashing of billions upon billions in experimental new liquidity measures by central banks.
As the fog of war begins to clear and it becomes obvious that not only will economic growth be severely curbed, but that the fiat currencies are going to be sacrificed in the fight, some percentage of the funds now sitting on the sidelines – much of it in U.S. Treasuries – will begin to move into gold and other tangibles. In the face of limited gold supplies, this surge in demand should create strong upward pressure on the price of gold and, for leverage, gold shares.
In sum, even though the relatively sluggish and inept responses from the U.S. government in the face of the current credit crisis could produce a severely slowing economy, creating periods of deflationary fears that put stress on the price of gold, we continue to believe that the most likely case is for massive inflationary bailouts that support a positive outlook for gold.
© Casey Research LLC. 2008
http://www.resourceinvestor.com/pebble.asp?relid=39855