Monday, December 28, 2009

Up The Creek Without A Paddle

Volume in all the markets is extremely thin this holiday season. I would not read too much into the markets moves up OR down here. It was exciting to see Gold rise $18 on Christmas Eve, but I wouldn't stake a long position on that move, we need to see some credible follow through. This being the case, I will refrain from commenting on the Precious Metals.

Something to consider regarding the Dollar. How much of this "rally" in the Dollar is because of US companies repatriating Dollars in year-end moves to "bring home overseas profits"? Companies operating overseas must sell the local currency and buy Dollars to "cash in". There is not a single fundamental reason for the Dollar to be rising. It is interesting to note regarding the Dollar that the rally has begun to fade right at it's 200 DAY moving average.

Did you see the sneaky move by the Treasury on Christmas Eve to give Fannie Mae and Freddie Mac a blank check towards their bailout? The Treasury announced that it would provide unlimited support to Fannie Mae and Freddie Mac for the next three years. All losses they incur will be funded by the taxpayer.

U.S. Treasury Department Office of Public Affairs
FOR IMMEDIATE RELEASE: December 24, 2009
At the time the Federal Housing Finance Agency (FHFA) placed Fannie Mae and Freddie Mac into conservatorship in September 2008, Treasury established Preferred Stock Purchase Agreements (PSPAs) to ensure that each firm maintained a positive net worth. Treasury is now amending the PSPAs to allow the cap on Treasury's funding commitment under these agreements to increase as necessary to accommodate any cumulative reduction in net worth over the next three years. At the conclusion of the three year period, the remaining commitment will then be fully available to be drawn per the terms of the agreements.

Neither firm is near the $200 billion per institution limit established under the PSPAs. Total funding provided under these agreements through the third quarter has been $51 billion to Freddie Mac and $60 billion to Fannie Mae. The amendments to these agreements announced today should leave no uncertainty about the Treasury's commitment to support these firms as they continue to play a vital role in the housing market during this current crisis.

Let there be no more doubts...control of residential mortgage finance now rests firmly with the federal government. How long will it be before the government tells us what "kind of " of house we can live in?

Oh, what's this? Fannie and Freddie will receive $42 MILLION in salaries and bonuses?

Fannie and Freddie to Get Unlimited Aid…and Huge Executive Bonuses
The Obama administration made like Santa Claus just before the Christmas holiday, enlarging the potential bailout of mortgage giants Fannie Mae and Freddie Mac—and approving Wall Street-like compensation packages for their leaders. On Thursday, President Barack Obama unilaterally raised the $400 billion cap on emergency aid to the companies, which were heavily criticized for helping bring about the housing crisis.

Prior to the announcement by the White House, the
Federal Housing Finance Agency approved $42 million in salaries and bonuses to the top 12 executives at Fannie Mae and Freddie Mac. Fannie Mae chief executive Michael J. Williams and Freddie Mac chief executive Charles Haldeman each will receive a base salary of $900,000 and bonuses and incentive payments of up to $5 million for running companies that might have collapsed had it not been for the federal government’s rescue in 2008.

Oh, to be such a successful failure....

I try to stick to the Precious Metals and currency markets, but I can not pass on the opportunity to pass along a little "truth" about the lie the US Senate touts as "health care reform". Sen Dodd said after passing the Senate version of "health care reform", "This will be a day all Americans will remember." Yes it will, just like the attack on Pearl Harbor was. Christmas Eve will be remembered as the day the American taxpayer went to war with their government. The 2010 mid-term elections should prove to be a bloodbath for the Democratic Party.

Change Nobody Believes In
The rushed, secretive way that a bill this destructive and unpopular is being forced on the country shows that "reform" has devolved into the raw exercise of political power for the single purpose of permanently expanding the American entitlement state. An increasing roll of leaders in health care and business are looking on aghast at a bill that is so large and convoluted that no one can truly understand it, as Finance Chairman Max Baucus admitted on the floor last week. The only goal is to ram it into law while the political window is still open, and clean up the mess later.

Dropping the Bomb on Health Care
By Peter Schiff
While ramming their new legislation through Congress, the Democrats have taken great pains to point out that they do not intend to "socialize medicine." But make no mistake, that's where we're headed. Even if some naïve centrists believe that their efforts have denied the Left a total victory, the practical implications of the current legislation sow the seeds for complete capitulation.

This first round of reform could be labeled as the 'neutron bomb' of the insurance industry: it leaves some of the private apparatus standing, but it irradiates whatever remains of the industry's market viability.

The bill's centerpiece is a clause prohibiting insurers from denying coverage based on a pre-existing medical condition. However noble and marketable an idea, this proscription removes the very basis upon which any insurance model operates profitably.

A system of insurance requires that premiums be collected from a pool of low-risk people so that funds are available in case a high-risk event befalls a particular person. In that way, premiums can be low and coverage can be widely available, even if the benefits offered are hypothetically unlimited.

For example, homeowners buy fire insurance even though their houses are very unlikely to burn down. Recognizing that a fire could wipe them out financially, most homeowners endure the cost of coverage even if they never expect to collect. The same model applies to health insurance in a free market.

However, the health care bill removes the need for healthy individuals to carry insurance. Knowing that they could always find coverage if it were eventually needed, people would simply forgo paying expensive premiums while they are healthy, and then sign on when they need it. But insurance companies cannot survive if all of their policyholders are filing claims!

Correctly anticipating this incentive, the Senate bill imposes an annual fine which gradually escalates to $750 for those who fail to buy coverage. So what? I would gladly pay $750 in order to avoid the $8,000 per year I pay now for personal health insurance. Currently, I'm relatively healthy for a 46 year old and I don't anticipate making a big claim. But if I do, under the new rules I can always get 'insurance' after the fact. Heck, if I can stay healthy for the next couple of decades, I'll save a fortune. Think about how much easier the decision would be if I were 20 years younger! Since most people are capable of figuring this out, the entire insurance industry would collapse under such a system.

Compulsory Private Health Insurance: Just Another Bailout for the Financial Sector?
By Ellen Brown
Dr. Benjamin Rush, a signer of the Declaration of Independence, is quoted as warning two centuries ago:

"Unless we put medical freedom into the Constitution, the time will come when medicine will organize into an underground dictatorship. . . . The Constitution of this republic should make special privilege for medical freedom as well as religious freedom."

That time seems to have come, but the dictatorship we are facing is not the sort that Dr. Rush was apparently envisioning. It is not a dictatorship by medical doctors, many of whom are as distressed by the proposed legislation as the squeezed middle class is. The new dictatorship is not by doctors but by Wall Street - the FIRE (finance, insurance and real estate) sector that now claims 40 percent of corporate profits.

Healthcare Reform is a Lump of Coal
by Dr. Ron Paul
Such is the arrogance of politicians. There seems to be no end to the problems they feel capable and duty-bound to solve through legislative proclamation and plenty of your money. To hear them talk, one might think that a few words spoken on Capitol Hill would make problems just disappear. All it takes it good intentions.

But no good can come from 2400 pages of Washington's good intentions.

I have observed quite the opposite throughout my political career in the House of Representatives, and fear that with this immense legislation, our healthcare problems are only just beginning. Over the last few decades, I have seen healthcare subjected to more and more creeping red tape that only creates bottlenecks and increases costs as new bureaucratic hurdles are put in place.

Politicians cannot solve the problems created by ever-increasing intervention by exponentially increasing their intervention. Similarly, they cannot improve the quality of healthcare and expand access to it for all Americans simply by legislative decree. If only it were that simple! The reality is the free market, when allowed to function, naturally increases access and drives prices down through competition. The free market keeps service providers accountable by allowing people to take their business elsewhere.

The historian William Lecky said, "Truth is scattered far and wide in small portions among mankind, mingled in every system with the dross of error, grasped perfectly by no one, and only in some degree discovered by the careful comparison and collation of opposing systems."

The Truth About The Comex
Aside from the extreme manipulation that is going unenforced here, if enough silver longs were to stand for delivery, theoretically JPM would blow up - or be forced to cover - driving the price of silver significantly higher.

My fund partner and I were just discussing the idea that ultimately, just like in 1980 when the Hunts tried to corner the silver market from the long side, the Comex will change its rules in order to avoid a default. This time around the rule change I anticipate will allow JPM to settle those contracts in cash OR, as they've already done in terms of changing the rules, allow JPM to settle those contracts using the SLV ETF. The Comex may even go as far as allowing JPM to "force settle" its silver shorts using SLV. Remember, there is precedence for the Comex's changing the rules in order to protect itself.

IF/When this occurs, it will send a big signal to the global market about the true condition of the growing scarcity of physical gold/silver. But in the meantime, as JPM has shown with its ever-increasing weekly silver short position, JPM can just keep selling as many contracts as it wants to try and keep a lid on the price of silver knowing that it ultimately will never have to deliver the underlying amount of silver.

We have already seen the Comex bailed out of a gold squeeze last May when Deutsche Bank, a large gold futures short seller, suddenly transferred 800,000 ounces of gold from London to the Comex, alleviating a potential blow up delivery short squeeze.

So, the short answer to the issue is that I don't believe the Comex will "blow up" any time soon because the CFTC refuses to enforce market manipulation standards on the gold/silver market. And I don't believe it ever will enforce those standards, contrary to Ted Butler's dreams, and I think the Comex will continue being an illegal short-selling operation of gold and silver until there's a "de facto" default, which will occur when JPM has to force-settle its silver shorts with either a huge cash premium offer or several 10's of millions of shares of SLV.
Eventually Comex will be rendered useless. I don't know if this will occur from a physical squeeze, or if the cause will be the Comex changing the rules - as they've done in past - to allow for cash settlements, or if global players will just ignore the Comex altogether.

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