Rally of 1931 to haunt the markets this year, SEC hasnt really stopped anything, Fed must find a way to hide toxic assets, bear market not reversible, Currencies deprecate against gold, funding new health insurance initiatives not easy in times of debts, Monetary policy to become inflationary The next major move in the stock market will be down. We are seeing the last vestiges of a rally similar to what we saw in 1931. The rally we expected at 6600 up to 8500 will end as soon as all the financial institutions that need to sell what stock is necessary to bolster their balance sheets. Our guess is the rally has been aided in a big way by short covering and the participation of the US government. Those who believe the SEC has stopped naked short selling are sadly mistaken. Markets weaken during the summer as volume dries up during the vacation season. In addition, second quarter earnings will be very disappointing, especially in the financial segment. Unemployment continues to worsen and capacity utilization is at its lowest level in years. Banks continue to cut credit lines and not lend nearly as much as they did before. Citigroup’s earnings should turn down again. They won’t have another $2.7 billion gain or another $400 million mark-to-market fictitious gain. Absent those gains they would have lost $2.8 billion.
The credit crisis certainly isn’t over after 23 months. The credit markets are still very tight and the residential and commercial real estate markets are still in a state of collapse. In the midst of this ongoing fiasco the Fed is monetizing $2.2 trillion in treasuries, Agencies and CDOs, collateralized debt obligation, otherwise known as toxic junk. Our fiscal deficit for this year ended 9/30/09 will be between $2 and $2.5 trillion, followed by more than $2 trillion in 2010.
Times are tough, everywhere and export nations are determined to keep their products cheaply devaluing their currencies.
When all is said and done the Fed will have to remove hundreds of billions in toxic assets from lender balance sheets, get consumers to spend and allow banks to lend again. Ben Bernanke at the Fed would really like to see a lower dollar, to get consumers to spend. But if that happens interest rates will move higher hurting real estate sales. As Ben dreams, unemployment increases adding more downward pressure on home prices, causing lower prices and reducing equity. Congress is pushing to have returned TARP money back to the Treasury and the PPIP program looks like a nonevent, because it could cause insolvencies. Public funds would be used to protect bondholders of mismanaged companies. Ben and Tiny Tim want to reopen securitization markets that caused the problem in the first place. They have to be insane. They want to bring back leverage that caused this monstrous problem we have.
The TALF, Term Asset-backed Securities Loan Facility, makes non-recourse loans, willing to buy AAA bonds backed by consumer and small-business loans, in a market that is frozen. Then for private investors there is a guarantee because the loan recipients cannot pay the loans back. This would cost taxpayers hundreds of billions more dollars.
The public is de-leveraging, which means less consumption, less profits and more savings. The bear market is far from reversible. The rally is over. Dow 6600 will be retested. The basis and support for growth no longer exists. Credit markets are still semi-frozen and the financial system is no better off now than it was 23 months ago.
The big foreign lenders have brought a new global dynamic into the game. Rising yields are a signal that the unusual dollar rally that should never have been, is over. The safety of the dollar is no longer sacrosanct. In fact, it is being in some quarters perceived that the dollar is no longer safe and it has to vie with gold as the safe haven go to asset. Fiscal deficits are projected this year to be $2 to $2.5 trillion and well over $1 trillion annually for years to come.
Commodity prices have surged over the past several months as the dollar has weakened, which reflects anticipated future inflation as well as rotation. We have seen this reflected in precious metal prices as well. The leeway the Fed experienced some months ago via deleveraging has past making it much more difficult to employ quantitative easing, monetization. The job of pegging long-term as well as short-term interest rates will be difficult and very injurious to the value of the dollar, as more and more money and credit are made up out of thin air. Trillions of dollars of MBS, ABS and CDO being purchased by the Fed incurring long-term losses can’t be tolerated indefinitely.
Sadly as the Fed and the Treasury go so does most of the nations of the world. In that case most all currencies depreciate against gold. Yes, the Fed can drive rates down, but for how long? Especially as the economy fails to perform and taxes rise as do borrowing costs. Import costs are already rising as well. Foreign lenders, with each passing day, become more skeptical of monetization, the damage it will do to the dollar and the Fed’s ultimate ability to retire dollars from the financial system. Dollar selling will feed on itself under those circumstances pushing the dollar lower versus other currencies and gold. It is now only a question of when will the system break? We do not know that, but we do know it will break and the only safe haven to preserve wealth is in gold and silver.
Higher interest rates have to have caused great consternation in the banking community concerning their IRS and CDS swaps. This is an unregulated market so no one except the players know what is going on inside. For a number of years these contracts have caused interest rates to be abnormally low. If these swaps were to blow up interest rates could and probably would move substantially higher.
The big loser in all of this will be the dollar as more and more dollar owners become fearful and sell dollars. If you look at a USDX chart you will see what we mean. A total breakdown as the dollar struggles to begin momentum and break out over 81 again. It is not going to happen. The question is how long will it take to get to 71.18? We can list all the reasons for pressure on the dollar, but you already know them.
The Fed is monetizing about $2.3 trillion in Treasuries, Agencies and CDOs. We said week’s ago that these monetizations would be followed by an additional $2 trillion if not by the end of this year, by March 2010. The Fed has no other choice. This is going to go on indefinitely until the dollar reaches 40 on the USDX and at that point no one will want to buy dollar denominated securities or to even borrow dollars. That is when we’ll have our next Bretton Woods type conference where all currencies will devalue and default and gold and silver will reach great heights. We saw all this coming when we warned you earlier in the year that you had until June to refinance debt. We hope you did so. We are now entering a new stage in real estate. Price pressure is going to press a further downward bias that will last a minimum of 3-1/2 years. How long we will be on the bottom no one knows.
This is why you do not want to own US Treasuries or US corporate or municipal bonds. A better currency is the Canadian dollar if you must have money in Treasuries. All your funds should really be in gold and silver related assets.
Interest rates have now become a dummy’s game driven by derivatives. They are going to explode. It is only a question of when. All the major banks, holding 75% of US deposits are insolvent, and they will collapse when the derivative bomb explodes. In addition there are lots of other losses on the way as well. The ability of the Fed and the Treasury in the misuse of “The Working Group on Financial Markets” will come to an end. Much of what they have been up too will be exposed by an audit of the Fed, which we believe is on the way. As a result legislation will follow that and will bring an end to the criminally misused executive order number 1263, which Bill Keene and Sue Herrera tell us on CNBC doesn’t exist. It will be discovered that the swaps market has little or no collateral and as a result Goldman Sachs, Citigroup, JP Morgan Chase and Bank of America will meet their demise. The biggest positions reside with JP Morgan, thus they should be first to bite the dust. The losses are going to be in the trillions. The loss of capitalization when the bomb explodes will engulf the entire world financial system.
The Ron Paul strategy in HR 1207, now with 225 co-sponsors, the Federal Reserve Transparency Act of 2009, and the companion Bill in the Senate S604, The Federal Reserve Sunshine Act, sponsored by Bernard Sanders (I-VT) will uncover what the Fed and its owners – the major banks – have been up too; particularly in rigging markets.
It looks like HR 1207 will be passed in the House. Now train your guns on the Senate. Hit every Senator with: Dear Senator, Please co-sponsor S604, the Federal Reserve Sunshine Act of 2009, and make it become law. Sincerely, etc. Short and sweet and to the point. No comments or opinions.
The Fed is in a box and cannot get out. We have to make sure they do not get out by investigation, exposure and destruction. The Fed is the core, the nexus of the Illuminati. Few in the media or in business will tell the truth because they are either in on it or they are terrified to talk about it for fear of being destroyed. This is the kind of world we live in. you can still do your part by contacting the Senators. We want them buried in emails. This is our chance to finally win without bloodshed.
President Obama has begun selling his healthcare program. He presents it as a reduced cost, guaranteed choice, quality plan for all. The reality is government programs will result in higher costs, no choices and inferior care. The legislative vehicle for this health care deception is planned to be in the budget reconciliation bill, which requires only 51 Senate votes for passage instead of the 60 needed to authorize new programs.
The Kennedy Plan promises that all Americans will have health care, employers will have to contribute to the costs. A government program will subsidize premiums for people up to 500% of the poverty level, that is $110,000 for a family of 4, and private insurers will have to pay out a specified percentage of their premium revenues in benefits. There is no provision for funding the program, so it looks like perpetual deficit spending to cover the costs.
Healthy people will be forced to pay more for their insurance in order to subsidize those not as healthy, those who have ruined their bodies and minds and the old.
Fines will be imposed if you do not provide health care for employees. That means the employers will not insure employees and pay the cheaper fine, or just go out of business.
That means 100 million people happy with their programs will have to take an inferior government plan. Then, of course, is the bureaucracy, which dictate treatment and who will live and who will die.
Part of the proposal includes a proposal to tax these health benefits with current employer-based health insurance.
We are promised cost savings by putting all Americans’ health records on a uniform computer system, which will be eventually mandatory for all countries. These totalitarian controls will be forced on all doctors and terminate all medical privacy.
Healthcare will be rationed letting bureaucrats decide who gets treated and how and who will be allowed to die. Seventy percent of medical lifetime costs occur in the last year of life. We already experienced this with a doctor and I asked him which side of his head he’d like his brains blown out of.
Part of the legislation would provide healthcare for illegal aliens, which 80% of American voters are opposed too.
It would be far more constructive to begin to fix the problems in Medicare and Social Security then try to create an expensive new system.
On the other side of the spectrum are those who want a single-payer-approach like those used in Europe. Congress has said they won’t even consider it, this in spite of the fact that any other plan will leave the big insurance companies in charge and keep hurting patients. Someone should tell these poor ignorant souls that both parties are promoting corporatist fascism.
The real deep-seated problem is that the health insurance companies and related industries are major campaign contributors to members of Congress on both sides of the aisle. Senator Grassley is a good example. Since 2005, he has collected $1.3 million in donations from industries related to the health insurance debate.
In a different perspective on healthcare the US will spend 15.4% of GDP both state and private. With that it gets 2.6 doctors per 1,000 people; 3.3 hospital beds and its people live to 78.2 years.
The question is how do we cut down medical costs? There has been some pressure to do so, but costs go relentlessly higher. Senators and congressmen receive hundreds of millions of dollars from the industry to continue their gravy train. Then there are the investors, bureaucrats and preexisting conditions.
Mr. Obama doesn’t have the answers and neither does the industry.
How can anyone not expect interest rates to rise? Mandated programs such as Medicaid, Medicare, Social Security and the FDIC and the Pension Benefit Guarantee Corp., and a host of others have us over $100 trillion the short-term.
We have been in a crisis financially and economically for 23 months. We were in recession from February 2007 to February 2009, and we have been in depression since this past February. The budget deficit for the fiscal year ended 9/30/09 should be about 15% of GDP the largest deficit since WW II or five times last year’s deficit. The Treasury and the Fed have created money and credit of some $14.8 trillion and next year we project over $20 trillion - this as our government acquires large stakes in banks, brokerage houses, insurance companies, health-care, mortgage companies and auto and truck manufacturers.
As a result of this dreadful profligacy last month in May we began the beginnings of inflation resumption that will soon become hyperinflation. Interest rates will continue to rise as will gold, silver and commodities and bonds, stocks and the dollar will decline against other currencies and gold and silver. Business will be forced to pass on price increases or go out of business. Currency in circulation, which nominally is 10%, is now 50% of the monetary base and bank reserves have risen by 20-fold. Banks have this huge position as a reserve against their liabilities. This allows banks to float or extend the day they’ll have to write off their losses.
Banks are able to expend their loan making abilities, but they have not done so as yet. As this loan constriction continues the expansion of money and credit is running at about 18% annualized. This will in time result in higher interest, which are underway and higher inflation, which we’ve begun as well. By way of example, M1 is near 15% the highest level in 50 years.
We are looking at a monetary policy far more inflationary than in the late 1970s, we know we were there. That wasn’t a pretty picture and neither will this be. We saw inflation at 13.5% and the prime rate at 21.5%. We saw gold rise from $35.00 to $850.00. This time it could go much higher.
Friday, June 19, 2009
Inflation Simplified!
TV Channels blaring that India's inflation rate slipped into the negative for the first time in 30 odd years. What does it really mean ? It really means nothing to the common man!
Prices are still soaring or atleast stable at their peak - and why is this not reflected in the Inflation numbers ?
This is because India calculates Inflation differently than other countries
India uses something called the Wholesale Price Index (WPI) to calculate and then decide the inflation rate in the economy.
Most other developed and developing countries use the Consumer Price Index (CPI) to calculate inflation.
Whats the difference between the two ?
Wholesale Price Index (WPI)
WPI, published in 1902, is a economic indicator that was used by many policy makers and it was replaced by CPI by most countries in the 1970s
WPI measures the change in the average price level of goods traded in wholesale market. In India, about 435 commodities data on price level is tracked through WPI. This price index is published on a weekly basis with a lag of about 2 weeks.
Consumer Price Index (CPI)
The CPI or the Consumer Price Index is a statistical time-series measure of a weighted average of prices of a specified set of goods and services purchased by consumers. It tracks the prices of goods and services that consumers actually buy therefore providing a more accurate picture of the inflation.
Although India doesn't officially follow CPI - they do publish the CPI index numbers - however, only monthly with a delay of more than 2 months
While the WPI Inflation numbers have slipped into the negative and is reported to be at -1.6%, the CPI numbers are at a whopping 8.7% as declared for April 2009
Next time the inflation numbers are announced - you know what to make of it :)
Prices are still soaring or atleast stable at their peak - and why is this not reflected in the Inflation numbers ?
This is because India calculates Inflation differently than other countries
India uses something called the Wholesale Price Index (WPI) to calculate and then decide the inflation rate in the economy.
Most other developed and developing countries use the Consumer Price Index (CPI) to calculate inflation.
Whats the difference between the two ?
Wholesale Price Index (WPI)
WPI, published in 1902, is a economic indicator that was used by many policy makers and it was replaced by CPI by most countries in the 1970s
WPI measures the change in the average price level of goods traded in wholesale market. In India, about 435 commodities data on price level is tracked through WPI. This price index is published on a weekly basis with a lag of about 2 weeks.
Consumer Price Index (CPI)
The CPI or the Consumer Price Index is a statistical time-series measure of a weighted average of prices of a specified set of goods and services purchased by consumers. It tracks the prices of goods and services that consumers actually buy therefore providing a more accurate picture of the inflation.
Although India doesn't officially follow CPI - they do publish the CPI index numbers - however, only monthly with a delay of more than 2 months
While the WPI Inflation numbers have slipped into the negative and is reported to be at -1.6%, the CPI numbers are at a whopping 8.7% as declared for April 2009
Next time the inflation numbers are announced - you know what to make of it :)
Monday, May 25, 2009
Opportunity lying outside the index
Who says Black swan events always have a negative impact? They
can also work well on the positive side, as is the case of the
outcome of the Indian general elections. Who could have predicted
the clean sweep by the UPA in the elections? However, the UPA is
indeed about to form a government at the Centre with the Indian
National Congress being the major political party in the coalition
with 206 seats.
Much to the consensus relief, the new government formed will not
need the support of the Left and the alliances of local regional
parties, which would have otherwise impacted the decision making
process of the government had they been party to the coalition. This
will indeed send huge positive signals to the economy and the
capital markets.
So, the big question that remains is where does the market head from here?
In our recent strategy report, we had mentioned that if the election results are favourable then the markets
may reach 14500 levels on the upside in the short run. It did that within two trading sessions after May 16
2009. However, on the first day when markets opened, within a few seconds, for the first time ever, the
market hit the 15% upper circuit followed by an additional 5% rise. This gave no chance to the investors to
buy into the markets. As large caps have rallied substantially, mid caps soon followed suit. Since the
substantial appreciation in large caps has created a huge valuation divergence between large caps and mid
caps, the ongoing run in the mid caps is simply a case of catching up.
We believe that within the midcap universe only quality midcaps will witness sustainable buying interest.
Within this segment, PSU banks, private regional banks, power companies and high leveraged plays will
be preferred. In addition, we are of the view that one should view any deep correction in the markets as an
opportunity to accumulate quality stocks at reasonable valuations.
However, one thing is for sure. This black swan result has indeed increased the visibility of the India
growth story in front of the international investor community. Now, on the back of expectations of better
policy reforms, increased focus on fiscal deficit and high probability of PSU divestments and prudent &
speedy executions related to the important bills like that of FDI in insurance will result in increased FII
participation in India.
Key expectations from the new government:
• Improvement in fiscal management/public
finances via disinvestments
• Increased focus on infrastructure spending
especially power and road/highways.
• Thrust on agriculture and rural development
• Financial sector reforms like increasing FDI in
retail and insurance sector
• Increased focus on education and healthcare
• Providing ample liquidity to corporates and
individuals at affordable rates
We believe the above factors will help in bringing
fresh capital into the country in terms of FDI, FII flows
and ECB flows
Key Beneficiaries
- Insurance plays like SBI, Kotak
Mahindra Bank and Reliance
Capital
- Infrastructure plays like Bhel.
L&T, NTPC etc.
- PSU banking stocks with trigger
of government stake dilution for
example: OBC, Dena Bank, etc.
- PSU space will be in limelight
on expectations of divestments
and new IPOs
can also work well on the positive side, as is the case of the
outcome of the Indian general elections. Who could have predicted
the clean sweep by the UPA in the elections? However, the UPA is
indeed about to form a government at the Centre with the Indian
National Congress being the major political party in the coalition
with 206 seats.
Much to the consensus relief, the new government formed will not
need the support of the Left and the alliances of local regional
parties, which would have otherwise impacted the decision making
process of the government had they been party to the coalition. This
will indeed send huge positive signals to the economy and the
capital markets.
So, the big question that remains is where does the market head from here?
In our recent strategy report, we had mentioned that if the election results are favourable then the markets
may reach 14500 levels on the upside in the short run. It did that within two trading sessions after May 16
2009. However, on the first day when markets opened, within a few seconds, for the first time ever, the
market hit the 15% upper circuit followed by an additional 5% rise. This gave no chance to the investors to
buy into the markets. As large caps have rallied substantially, mid caps soon followed suit. Since the
substantial appreciation in large caps has created a huge valuation divergence between large caps and mid
caps, the ongoing run in the mid caps is simply a case of catching up.
We believe that within the midcap universe only quality midcaps will witness sustainable buying interest.
Within this segment, PSU banks, private regional banks, power companies and high leveraged plays will
be preferred. In addition, we are of the view that one should view any deep correction in the markets as an
opportunity to accumulate quality stocks at reasonable valuations.
However, one thing is for sure. This black swan result has indeed increased the visibility of the India
growth story in front of the international investor community. Now, on the back of expectations of better
policy reforms, increased focus on fiscal deficit and high probability of PSU divestments and prudent &
speedy executions related to the important bills like that of FDI in insurance will result in increased FII
participation in India.
Key expectations from the new government:
• Improvement in fiscal management/public
finances via disinvestments
• Increased focus on infrastructure spending
especially power and road/highways.
• Thrust on agriculture and rural development
• Financial sector reforms like increasing FDI in
retail and insurance sector
• Increased focus on education and healthcare
• Providing ample liquidity to corporates and
individuals at affordable rates
We believe the above factors will help in bringing
fresh capital into the country in terms of FDI, FII flows
and ECB flows
Key Beneficiaries
- Insurance plays like SBI, Kotak
Mahindra Bank and Reliance
Capital
- Infrastructure plays like Bhel.
L&T, NTPC etc.
- PSU banking stocks with trigger
of government stake dilution for
example: OBC, Dena Bank, etc.
- PSU space will be in limelight
on expectations of divestments
and new IPOs
Oil Oil Oil!
Prices end week more than 8% higher
Crude oil prices ended substantially higher on Friday, 22 May, 2009 after the dollar dropped to its lowest level of the year. Credit rating concerns over US increased the pressure on dollar after Standard & Poor's Ratings Service warned Britain that it may lose its triple-A rating. Prices also rose as energy department's weekly inventory report showed earlier during the week that there was more than expected drop in crude inventories for last week.
On Friday, crude-oil futures for light sweet crude for June delivery closed at $61.67/barrel (higher by $0.62 or 1%) on the For the week, crude ended higher by 8.2%.
Crude ended April higher by 2.9%. Previously, March trading ended up 10.9%. It rallied 11.3% in the first quarter. For the month of February, crude prices had ended higher by 1.5%.
Oil prices had reached a high of $147 on 11 July, 2008 but have dropped almost 57% since then. Year to date, in 2009, crude prices are higher by 28.6%. On a yearly basis, crude prices are lower by 51%.
In the currency market on Friday, the U.S. dollar index, fell 0.9%. The greenback fell to the lowest level this year against the euro as worries increased that the U.S. could lose its triple-A credit rating.
EIA reported on Wednesday, 20 May, that crude inventories decreased by 2.1 million barrels in the week ended 15 May, 2009. Market was expecting a decline of 1.5 million barrels. Despite the decline, crude inventories, at 368.5 million barrels, were still above the upper boundary of the average range for this time of year. Refineries, meanwhile, operated at 81.8% of their operable capacity last week, slightly higher than a week ago.
Lower refinery production pushed gasoline inventories down by 4.3 million barrels to 204 million barrels, falling below the lower limit of the average range. The EIA also reported distillate stockpiles rose by 600,000 barrels. Motor gasoline demand had averaged about 9.1 million barrels per day over the past four weeks, down by 1.2% from the same period last year. Demand for distillate fuels, which include heating oil and diesel, fell 12%, and jet fuel consumption dropped 9%.
Last week, the International Energy Agency reported that it now expects demand to fall 2.6 million barrels a day from 2008 levels. This is 200,000 barrels more than the IEA had projected a month ago. This perhaps kept further rise in crude prices from check.
Also at the Nymex on Friday, June-reformulated gasoline rose 4.11 cents, or 2.3%, to $1.8408 a barrel, and June heating oil gained slightly to $1.538 a gallon.
Natural gas for June delivery fell 8.8 cents, or 2.4%, to $3.515 per million British thermal units.
Crude prices had ended FY 2008 lower by 54%, the largest yearly loss since trading began at Nymex.
Crude oil prices ended substantially higher on Friday, 22 May, 2009 after the dollar dropped to its lowest level of the year. Credit rating concerns over US increased the pressure on dollar after Standard & Poor's Ratings Service warned Britain that it may lose its triple-A rating. Prices also rose as energy department's weekly inventory report showed earlier during the week that there was more than expected drop in crude inventories for last week.
On Friday, crude-oil futures for light sweet crude for June delivery closed at $61.67/barrel (higher by $0.62 or 1%) on the For the week, crude ended higher by 8.2%.
Crude ended April higher by 2.9%. Previously, March trading ended up 10.9%. It rallied 11.3% in the first quarter. For the month of February, crude prices had ended higher by 1.5%.
Oil prices had reached a high of $147 on 11 July, 2008 but have dropped almost 57% since then. Year to date, in 2009, crude prices are higher by 28.6%. On a yearly basis, crude prices are lower by 51%.
In the currency market on Friday, the U.S. dollar index, fell 0.9%. The greenback fell to the lowest level this year against the euro as worries increased that the U.S. could lose its triple-A credit rating.
EIA reported on Wednesday, 20 May, that crude inventories decreased by 2.1 million barrels in the week ended 15 May, 2009. Market was expecting a decline of 1.5 million barrels. Despite the decline, crude inventories, at 368.5 million barrels, were still above the upper boundary of the average range for this time of year. Refineries, meanwhile, operated at 81.8% of their operable capacity last week, slightly higher than a week ago.
Lower refinery production pushed gasoline inventories down by 4.3 million barrels to 204 million barrels, falling below the lower limit of the average range. The EIA also reported distillate stockpiles rose by 600,000 barrels. Motor gasoline demand had averaged about 9.1 million barrels per day over the past four weeks, down by 1.2% from the same period last year. Demand for distillate fuels, which include heating oil and diesel, fell 12%, and jet fuel consumption dropped 9%.
Last week, the International Energy Agency reported that it now expects demand to fall 2.6 million barrels a day from 2008 levels. This is 200,000 barrels more than the IEA had projected a month ago. This perhaps kept further rise in crude prices from check.
Also at the Nymex on Friday, June-reformulated gasoline rose 4.11 cents, or 2.3%, to $1.8408 a barrel, and June heating oil gained slightly to $1.538 a gallon.
Natural gas for June delivery fell 8.8 cents, or 2.4%, to $3.515 per million British thermal units.
Crude prices had ended FY 2008 lower by 54%, the largest yearly loss since trading began at Nymex.
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