Wednesday, December 19, 2007

Butterfly Bandages And Carpet Bombs

Bumbling Big Ben Bernanke and his Band of Blundering World Bankers have decided that fighting the global credit crisis with money dropped from helicopters might be more successful if the money were dropped by B-52's in a wave of carpet bombing instead. Yeah, and a butterfly bandage will stop the bleeding of a severed limb... Folks, the term "inflation" is being redefined before our very eyes. An arsonist would have a better chance of putting out the fire he started by pouring gasoline on it, than these Wizards of Economic Destruction will have by pouring more money into a system that is already flooded by it. Easy money created the problem, creating more easy money is only going to make the problem bigger, not make it go away.

Investors Stunned by ECB's E350 Billion

Short-term market interest rates in the eurozone plunged at their fastest rate for more than a decade on Tuesday after the European Central Bank stunned investors by pumping a record E348.6 billion worth of funds into the markets.

The size of the injection -- which was intended to calm the markets over the critical year-end period -- was twice as big as the ECB had indicated would have been needed in normal circumstances.

The bank said some 390 private-sector banks in the eurozone had requested funds, which have been offered for two weeks at 4.21 per cent, well below the previous prevailing market rate.

"The sheer magnitude of the operation caught the market off guard," said Win Thin, Brown Brothers Harriman's senior currency strategist, who said there was talk that banks from the US and UK might have taken funds at lower rates than they could secure from their own markets.

The emergency operation, which followed last week's co-ordinated effort by Western central banks to ease pressures in the financial system, prompted the two-week euro London interbank offered rate (Libor) to fall a record 54 basis points to 4.40 per cent. The one-month and three-month rates recorded their biggest falls for nearly six years.

Fed Loans Banks $20 Billion

WASHINGTON (AP) -- Cash-strapped banks took the Federal Reserve up on its offer of $20 billion in short-term loans to help them overcome credit problems, but the interest rate wasn't as low as some had hoped.

The central bank said Wednesday that it had received bids for $61.6 billion worth of loans, more than three times the amount that was made available. The loans carried an interest rate of 4.65 percent, which is slightly less than the 4.75 percent the Fed charges banks on emergency loans through its "discount" window.

There were 93 bidders for the loans, the Fed said. Each bank could submit up to two bids. The auction for the 28-day loans was conducted on Monday, and the results released on Wednesday.

Asked how the first auction fared, T.J. Marta, a fixed-income strategist at RBC Capital Markets, replied: "I was standing next to two seasoned traders and one thought this auction was fantastic and another one thought it was horrible."

For his own part, Marta said it was "unsatisfying" because investors had thought the rate on the loans would have been lower, around 4.30 percent or 4.40 percent, rather than 4.65 percent.

"There was a hope that things really weren't that bad and that the market would have been able to bid down the Fed and take the money at a cheaper rate," Marta explained. "The fact that the market wasn't really willing to, was evidence of the stress."

GOLD AND SILVER – Green Flags!

Throughout history, once a nation embarked on the inflationary route, there has only ever been one final outcome: total destruction of the currency. Since 1913 the Fed, (supposedly created to protect the US dollar – must read: ‘The Creature of Jekyll Island”), has managed to destroy 95% of the purchasing power of the dollar. Does anyone really believe the remaining 5% is safe?

Currencies in a number of countries are being inflated at double digit rates, while the gold supply can only be increased at about 1.6% per year. All the gold ever mined, piled up, would form a cube of less than 20 meters, growing by 12 cm per year. Most of the gold in this hypothetical cube is in the form of jewelry. The driving force behind the current bull market in gold is the fact that fiat money is being created some twelve times faster than gold. In 1980, when gold topped out at 850.00, the US M3 money supply was 1.8 trillion dollars. Today gold is pegged at 800.00, but M3 is now 13 trillion dollars ( A ratio similar to 1980 puts the potential gold price at $5,600.00.

Morgan Stanley's Subprime Submergence

On Wednesday, the investment firm announced a jaw-dropping $9.4 billion in write-downs for the fourth quarter.

Before, the opening bell, Morgan Stanley said it lost 3.6 billion, or $3.61 a share, versus a profit of $2.0 billion, or $1.87 a share, a year earlier. It also announced it was turning to China to help shore up its balance sheet.

The rapidly depreciating value of mortgage-related assets and the general turmoil in the credit markets has punished Morgan Stanley and most of the rest of Wall Street. On Wednesday, the firm said it took $5.7 billion in write-downs in November. This loss is on top of the $3.7 billion already announced, putting the total for fourth quarter write-downs at $9.4 billion. The new batch of write-downs will be in addition to the $940 million announced in the third quarter.

Meanwhile, Morgan Stanley is mobilizing to improve its cash position. As investment firms lick their wounds, a bevy of foreign investors from China and Middle East have swooped in with cash infusions. On Wednesday, the investment firm also announced that the Chinese government-owned, China Investment will be injecting $5 billion into Morgan Stanley, for a maximum 9.9% stake in the company. The company said CIC will have no special rights of ownership and no management role. Morgan Stanley is far from alone. Last month, the an Abu Dhabi investment fund injected $7.5 billion into Citigroup.

By Dr. Marc Faber

Will rate cuts be of much help to the asset markets and the economy? I believe we are in a war between two major adversaries. On the one side we have the Fed (and other central banks) pumping liquidity into the system in a desperate attempt to support the asset markets and the economy. On the other side we have the private sector, which, as Hatzius explained, is being forced to curtail lending due to heavy losses in the credit market and to fight the Fed's reflation efforts by widening credit spreads. Complicating matters is the fact that both adversaries have powerful allies.

The Fed has the Treasury and the government, as well as the Wall Street elite, as allies. The government could implement massive tax cuts in order to stimulate economic activity; the Treasury could bail out financial institutions, which in reality should be punished by bankruptcy; and the monied Wall Street elite will ensure that politicians and the Fed make it possible for them to continue their con-game. The private sector has allies in the form of inflation, a weak dollar, and a dissatisfied public (declining consumer confidence and lack of trust in government, which is reflected by the strong showing of Ron Paul), all of which form a powerful phalanx when battling the Fed's reflation attacks. Inflation is a powerful ally for the private sector because it squeezes corporate profits and curbs personal consumption.

According to David Rosenberg, with 90% of companies reporting, third quarter operating EPS fell 8.5% year-on-year; while reported earnings, which include charge-offs, fell 28% year-on-year! Rosenberg also notes that "at $15.29 reported EPS for the S&P 500 in the third quarter of 2007, the P/E multiple on this basis is a lofty 23x - not the 18x 'cheap' multiple (or 14x on forward estimates) that is constantly being bandied about in the media." He adds dryly: "[T]he current $15.29 estimate for reported EPS is the lowest level of earnings since the fourth quarter of 2004. And where was the S&P 500 trading at that time? Answer: It averaged about 1,162 that quarter - just in case you were thinking of buying this dip." (I can't wait to hear the Goldilocks' crowd's positive spin on these dismal earnings.)

The war between the Fed and the private sector will, in my opinion, be very protracted. The Fed will win some battles, which - along with much brouhaha in the media - will see Pyrrhic victories such as the stock market rally of August to early October, which led in dollar terms to new highs but failed to do so in Euro and gold terms, and was followed in Euro terms by renewed severe weakness. (Just for the record, as of this writing, the S&P 500 is down 9% year-to-date in Euro terms, having peaked out in June.)

Other battles will be won by the private sector, which through its contraction (recession) amidst inflation will lead to sharp downward movements in equity prices.

I am well aware that the Bureau of Labor Statistics and the Bureau of Economic Analysis will continue to use bogus figures when reporting inflation, and hence real GDP growth, but they won't be able to hide the squeeze on corporate profits and the consumer from rising prices. I am writing this report at Thanksgiving, an opportune time to point out that the American Farm Bureau Federation has calculated that the cost to feed ten people dinner in 2007 is US$42.26, up 10.9% from last year and the biggest year-on-year increase in over ten years (David Rosenberg has compiled a Thanksgiving cost-of-giving index, which amalgamates the prices of turkey, sweet potatoes, cranberries and gifts, as well as travel expenses: it rose this year by 7.9%.) I don't suppose these indexes took into account the rise in heating and electricity costs for the festivities, or the cost of a nice Bordeaux wine and bottle of Cognac, due to the weakness of the dollar. (I might add that in Switzerland it wouldn't be possible for ten people to be served Christmas dinner for that amount.)

But the point is simply this: cost-of-living increases vastly exceed the reported inflation figures and are squeezing the consumer, which leads to revenue pressure for the corporate sector. (According to the Kaiser Family Foundation, health insurance premiums have risen 78% since 2001, while wages have gained only 19% and "the government's inflation measure during that stretch was 17%".) At the same time, corporations are faced with a squeeze on margins due to rising costs.

Pressure on revenues and cost increases contributed to the dismal performance of earnings in the third quarter of 2007. For example, Starbucks (SBUX) increased prices by an average of 9 cents a cup in July. However, customer visits to US stores fell 1% for the quarter ended September 30. Starbucks' CFO noted that a "similar decline may occur in the fourth quarter although they will be positive for the full year". (This would seem to indicate that the economy slowed down considerably in the second half.) According to him, "unbeknownst to us, we saw economic headwinds that quite frankly came up probably stronger than I thought." Earlier, Starbucks' CEO had remarked: "The consumer is being faced with rising costs in every sector of their lives, and so part of that is reflecting on us." An informed friend of ours suggested that declining traffic at Starbucks stores in the US is of particular concern, since Starbucks serves all income levels.

Therefore, declining traffic is not just a "sub-prime problem"! I should now like to reiterate what I have explained on a number of previous occasions. Rather than paying too much attention to the media and to analysts' positive spins, it will pay to watch the market action of equities as a forecaster of business prospects. Starbucks' stock made a double top between May 2005 and November 2006. After that its shares went downhill, although the stock market continued to rise to its final peak in mid-October 2007. This should have been a warning sign that Starbucks fundamentals were deteriorating.

Similarly, the fact that retail stocks failed to better the July high in the recent August 16 to October 11 rally, which led to a new all-time high for the S&P 500 in dollar terms (but not, as we have shown, in Euro terms), isn't a good omen for retail sales, consumption, and the economy. I am not the only person who questions the economic statistics published by the US government: writing recently for Kate Welling (, Lee Quaintance and Paul Brodsky of QB Partners observed:

"…the credit markets finally clogged towards the end of Q2 2007, closing the major private sector artery policymakers had been using to synthesize domestic output (expressed in nominal dollar terms through nominal GDP growth). True to form, they began creating U.S. dollars out of thin air at an accelerated rate in Q3 2007 (14.7% annualized). The Bureau of Economic Analysis (BEA) published nominal U.S. GDP growth at an annualized rate of 4.7% in Q3 2007. Taking the BEA's figure at face value and subtracting the annualized rate of monetary inflation, we believe inflation-adjusted U.S. GDP contracted at about a 10% annual rate in Q3 2007. This rate of economic contraction would seem to be consistent with the analysis of the corporate profit slump discussed above, and with the observations made in earlier reports that the US economy is already in recession.

One in Five Expect to Borrow to Heat Homes This Winter

For perhaps as many as 27 million American adults, keeping warm this winter will mean borrowing money and 20 million will use credit cards to be able to afford their heating bills, according to a poll.

Nearly 12 percent of Americans say they will need to borrow money to pay winter heating bills; 9 percent will need to use credit cards to be able to afford their heating bills.

A world-wide credit crisis has only just begun. A world wide Bull Market in Gold has only just begun. Ignore the spin. Stick to your convictions. Gold Bulls are taking year end profits. Dollar Bears are taking year end profits. Nothing, absolutely NOTHING, has changed fundamentally that will lend support to the US Dollar, or steal it from Gold. If the PPT and the Gold Cartel could really suppress Gold, it would still be $260 an ounce. Take advantage of the Holiday Sale Prices, back up the truck, and hang on for the most profitable ride of your life.

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