Jim Sinclair’s Commentary

What derivatives failed to do to the financials, litigation will.

State Street Subprime Damages May Surpass Reserve
By Carlyn Kolker

May 8 (Bloomberg) -- State Street Corp., the largest money manager for institutions, may have to pay more than the $625 million it set aside for damages from lawsuits over losses from subprime-mortgage investments made for pension funds.

Prudential Financial Inc., the second-largest U.S. life insurer, is suing the Boston-based company on behalf of more than 200 retirement plans, alleging that State Street inappropriately invested their money in risky securities. Three other companies filed similar actions.

Neither side has disclosed loss estimates. State Street reported in regulatory filings that the value of assets ``adversely affected'' by the collapse in subprime mortgages fell $7.8 billion to $6.1 billion at the end of 2007, from $13.9 billion on June 30. State Street initially declined to be specific about how much of the drop might constitute damages. Spokeswoman Hannah Grove said today that ``most'' of the fall resulted from redemptions, declining to be specific on losses.

``We are talking very large in terms of damages,'' said Marcia Wagner, 45, a partner at Boston-based Wagner Law Group. The firm specializes in retirement fund and employee-benefit law. She called the $625 million a ``lowball'' figure.

Adam Savett, a vice president at RiskMetrics Group Inc., a New York firm that studies corporate risks, including legal issues, also said the amount at risk may top $1 billion. A sum of $1 billion is about 80 percent of the company's 2007 net income.

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Dan Norcini’s Commentary

Here is a perfect example of what Monty said would begin to occur in the commodity realm. Notice that both things Monty said would occur are taking place here. First, the speculators get blamed for the problem of high food and raw material costs. Second, government bureaucrats and officials begin meddling thinking that their intervention will cure the problem. What is not shown here but will most certainly follow is even higher costs as scarcity begins to develop in local areas.

Nice call Monty!

India suspends 4 commodity futures on price worries
By Sourav Mishra

MUMBAI (Reuters) - India has suspended futures trading in four commodities with immediate effect in its latest move to rein in soaring inflation, but industry officials said the step would not ease price pressures.

India has taken a series of fiscal measures to bring down prices recently, and the commodities market regulator said trading in futures contracts in soyoil, potato, chana or chick pea, and rubber had been suspended for four months.

The government, facing state and national elections in the next 12 months, is keen to show it is tackling rising food prices, which contributed to a surge in annual inflation to 7.57 percent in mid-April, its highest in more than three years.

"There was a perception in some political quarters that futures trading in agri commodities are responsible for a price rise in the spot... which led to suspension of four commodities," B.C. Khatua, chairman of the market regulator, the Forward Markets Commission (FMC), told Reuters on Thursday.

The ruling coalition's communist allies urged a ban on futures trading, saying it stokes inflation, and the government took the step although a panel it appointed found no clear link between futures and rising spot prices in a report in April.

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Click chart to enlarge today’s 6 hour action in gold in PDF format as of 12:30 pm CDT with commentary from Trader Dan Norcini.

 

 

Click here for today's action in Gold, Barrick Gold, GoldCorp, US Bonds, Streettracks Gold ETF and Unleaded Gasoline with commentary from Trader Dan Norcini

 

 

Dear CIGAs,

I know more than any other writer on the consolidator subject.

The Consolidator has made every effort to dress up as the quiescent producer.

Now the Consolidator has joined the Asians and Middle East in competition to consolidate the junior production and exploration industry.

This is fact. Believe me I know.

The stockholders of the junior exploration and production companies do not, nor do they believe this is the real reason behind the depression in prices.

The Consolidator is out there shopping hard.

Regards,
Jim

Dear CIGAs,

The entire reason for gold's price decline from its high was first the suspicion then the universal opinion that the ECB would race with the Fed to drop interest rates. The euro tanked against the US dollar.

Pundits declared a bull market was in place. This dollar bull news was blasted over the airwaves 24 hours a day to every corner of the globe.

They were WRONG!

Gold has bottomed in this reaction. It will go to a minimum of $1650 The euro will trade at USD $2

Trichet Sees `Rather Protracted' High Inflation
By Gabi Thesing and Christian Vits

May 8 (Bloomberg) -- European Central Bank President Jean- Claude Trichet said inflation will remain ``high'' for some time, signaling that the bank is in no rush to lower interest rates as economic growth slows.

``Inflation rates have risen significantly since autumn,'' Trichet said at a press conference in Athens today after the ECB kept its key rate at 4 percent. ``As we have said, inflation rates are expected to remain high for a rather protracted period of time before gradually declining again.''

The ECB is reluctant to follow the U.S. Federal Reserve in cutting borrowing costs as soaring food and energy prices drive inflation above 3 percent in the 15-nation euro region. The International Monetary Fund estimates economic expansion will weaken to 1.4 percent this year from 2.6 percent in 2007 after the U.S. housing slump pushed up the cost of credit worldwide.

``The level of uncertainty resulting from the turmoil remains unusually high,'' even though ``the economic fundamentals of the euro area are sound,'' Trichet said.

The Bank of England also kept its benchmark rate unchanged today. The euro rose to as high as $1.5417 after Trichet started speaking from $1.5313.

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Jim Sinclairs Commentary
(Originally Posted May 4th)

According to the talking heads, the ECB is going into a race with the US Fed for lower rates. This has been the spin basis for the gold decline based on the spin of lower interest rates in Euroland to produce a euro decline.

1. Whatever the gold price was to do on the downside will end by the first week of May.
2. The US dollar is going to trade at .5200.
3. The euro will trade at a minimum of USD$2
4. The gold price will trade at $1650 on or BEFORE January 14th, 2011.
5. $1024 was the first price block on the first move above $1000.
6. My job is bottom identification, not tops, because there is no top to the gold price for a long time to come. I gave you $1024, but that is as close as I will come to calling any top before the top.
7. Even the article below is written backwards to confuse. If you can't spin it, confuse it. What it says forward is that the ECB will not get into a race with the US Fed on lowering rates.

Europe's Price Surge Persuades Politicians to Back ECB on Rates
By Ben Sills and Gabi Thesing

May 5 (Bloomberg) -- The European Central Bank is winning Europe's political leaders over to its policy of focusing on fighting inflation even as economic growth slows.
 
Politicians from France, Belgium and Luxembourg, who previously complained that the ECB paid too little attention to economic growth, have signaled increasing concern that inflation is eating away at voters' incomes.
 
``There isn't much appetite for having these inflation levels, whether you're the monetary authority or government,'' Robert Barrie, chief European economist at Credit Suisse Group in London, said. ``There's a recognition that inflation is too high and broader-based support for the ECB to do something about it.''
 
The ECB has refused to follow the U.S. Federal Reserve and Bank of England in lowering interest rates after inflation surged since August, to reach a 16-year high of 3.6 percent in March. The bank argues that rising prices are a bigger threat to economic growth than the increase in credit costs resulting from the collapse of U.S. subprime mortgages.

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Click here for today's action in Gold, US Bonds, Barrick Gold and GoldCorp with commentary from Trader Dan Norcini

 

 

Jim Sinclair’s Commentary

With credit default derivatives coming under FASB 133 and with FASB 157, you can be sure that you have not yet seen anything in the derivative meltdown which means somewhat more transparent valuation of the mountain of worthless mark to model WMDs.

The financial media commentators have declared the "Mother of all crises” (Volcker) over. The same commentators have unilaterally declared a bull market in the US dollar. These declarations are NOT supported by any single fundamental and are therefore hollow to short term ranting.

Fair Value Rule Triggers $800 Million Loss
American Capital explains the fair value hit to investors in its latest regulatory filing.
Stephen Taub, CFO.com | US
May 7, 2008

The new accounting rule on fair value measurement has caused a private equity firm to plunge into the red. American Capital Strategies reported a loss of $813 million for the first quarter of this year — compared with earnings of $134 million last year — as a result of implementing FAS 157, Fair Value Measurements, it reported in a regulatory filing.
 
The loss was tied to $997 million of unrealized depreciation, according to the company, which has $19 billion in capital resources under management and is traded on the New York Stock Exchange. "This depreciation was driven by declining trading prices, the continued widening of investment spreads and our adoption of [FAS] 157," said Malon Wilkus, chairman, president and CEO.
 
FAS 157, which went into effect for fiscal years that began November 15, 2007, requires companies to use a hierarchical framework to measure financial assets and liabilities. Securities considered hardest to value because they have unobservable inputs are dubbed Level 3 items by the rule, meaning that they are thinly-traded and measured using estimates based on the value the company believes a hypothetical third party would pay for them.
 
Last week, Robert Herz, chairman of the Financial Accounting Standards Board, said that the new rule was correct in how it pushed companies to disclose fair value measurement information — despite complaints from corporations about the mandate being too onerous. Herz said he also thought it would be useful if companies included a bit more supplemental information in this area, including valuation ranges and the length of time they expect to hold on to a financial assets. American Capital appears to agree with the FASB chairman.
 
In its earnings announcement released this week, Wilkus emphasized that the company expects the assets — that have experienced about $656 million of depreciation in this or a prior quarter — to appreciate as they are held to settlement or maturity. The filing explained that the company invests primarily in illiquid Level 3 assets, with the intention to hold the assets to settlement or maturity. "This is in contrast to the premise under GAAP that assets generally should be valued on the basis of their current market value and, if no market exists, on a hypothetical market value," the company stated.

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Jim Sinclair’s Commentary

What company issued the credit default derivatives on these municipal bonds? All trends start in the West of the US and move East, spreading like wildfire. Nothing is over.

Vallejo, California, Officials Vote for Bankruptcy (Update1)
By Michael B. Marois

May 7 (Bloomberg) -- Vallejo, California, officials voted to file for bankruptcy because the San Francisco suburb isn't able pay its bills after costs for police and firefighters soared and the housing market's slide cut into tax revenue.

The city council's unanimous decision last night will make Vallejo the largest California city to file for bankruptcy and the first in the state to seek protection from creditors because it ran out of money to pay for basic services. The decision came after it failed to win salary concessions from labor unions.

The city of 117,000 is facing ballooning labor costs and declining housing-related tax revenue that have left it with a $16 million deficit forecast for the year starting in July. In bankruptcy, creditors will be kept at bay while officials devise a plan to balance the books. City services would still operate.

``Nobody wants bankruptcy, but there doesn't appear to be a whole lot of options left,'' said city councilwoman Joanne Schivley. ``We are going to be out of money by June 30. It's all a numbers game now.''

Cities and towns rarely go bankrupt. Since 1937 there have been 543 municipal bankruptcies, two-thirds of which were small tax districts established to sell municipal bonds for projects, according to James Spiotto, a municipal bankruptcy specialist at Chapman and Cutler LLP in Chicago.

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Dear CIGAs,

One cannot view the gold model in isolation without key reference points.

This analysis is for the more advanced CIGAs.

The stock model continues to deteriorate, but this does not necessarily mean lower risk-free returns in the future. I wait patiently for statistically significant readings, (+/- 1.96 Sigmas). As we approach 1.96, the heading winds against stocks and bonds increases.

I calculate risk free returns because the potential for infinite liquidity (Weimar Republic) will destroy any nominal (unadjusted) model.

Nevertheless, the public has been trained to consider only nominal returns, so the game can be executed without knowledge of the masses.

Take care,
CIGA Eric

Click charts to enlarge

Dear Mr. Sinclair,

When looking at gold in terms of:

• The oil to gold ratio...
• The amount of US dollars in circulation...
• The current US economic and credit crisis...
• The external US debt held by foreign entities...
• The performance of gold vs. other commodities...
• The negative real interest rate environment...
• The severe levels of price inflation...

I can't help but become frustrated by gold's current value. When does the monetary market value of gold begin to show itself? What factors are required to break the price suppression? As I see it gold's current price relative to the dollar’s purchasing power and the performance of other commodities should be north of $1,200 easily.

Best Regards,
CIGA Marc

Dear Marc,

We were above $1024 only a short while ago. It is my opinion that the bottom of this reaction is accomplished.

I see gold at a minimum of $1200 in 2008.

This is gold. It is violent, political and as always, a bucking bronco determined to throw off every bull and bear.

We have come leaps and bounds from $248. Gold will trade at or above $1650 on or before January 14th, 2011.

Buy gold on weakness when the price action looks like a fishing pole and sell 1/3 (if you must trade) when in strength the price action looks like a rhino horn.

Regards,
Jim

 

 

Mr. Sinclair,

Can you please elaborate on your opinion as to why you think the current correction in gold will be over by the end of the 1st week in May?

Thanks,
CIGA Don

Dear CIGA Don,

For all the reasons given in depth here on JSMineset.

Regards,
Jim

Dear Jim;

Ok, I've seen all the reasons, but I don't recall seeing anything as to the timing (1st week in May). Why is this special???

CIGA Don

Dear CIGA Don,

Does a martial artist teach or give away every move he knows?

This is my stock in trade.

In time I will give my timing to only the best students doing the hardest work before I step down at or above gold at $1650 on or before January 14th, 2011.

All the best,
Jim

 

 

Jim,

Inside this you have a head and shoulders pattern on Barrick. I expect it to fail.

I will look at other indicators now to see what will happen next.

Regards,
CIGA Alex

Click chart to enlarge in PDF format

 

Dear Alex,

Don't tell the French Curve what it is going to do. When it does it, know that this means a CHANGE, which can be up, down or sideways.

That information is extremely valuable because it shifts your attention to internal indicators. Your fit of the curve is getting better.

Note that the French Curve gave you the top of the Barrick rally quite well.

I am surprised you did not notice that the JS Mineset logo is a French Curve.

French Curves are dynamite if you will use logarithmic charts rather than arithmetic charts, even though they can both be utilized.

Well done.
Jim

 

 

Jim,

Extreme reading on my gold model. > 4 Sigma. This is a very extreme reading - much higher than the 1979 high.

The gold model employs very simple drivers (forecasters). Monetary inflation, monetary inflation relative to gold inflation (supply of money), confidence, and credit cycle.

The model tells me two things:

1. Gold is ready for a big-time move. This also implies that any effort to manipulate the price lower through gold sales or derivatives must aggressively escalate from already high levels.
2. Connected money must do something to reverse the model's drivers such as cutting back monetary inflation (doubt it), increasing the supply of gold (doubt it), restore confidence (aggressive propaganda already trying to do that), reverse the credit cycle (trying that).

I expect that they will have to release the price of gold higher very soon (within twelve months).

CIGA Eric

Click chart to enlarge in PDF format

Dear CIGAs,

Trade barriers to all commodities are becoming more prevalent. This creates inflation.

We anticipate that as politicians get more involved in all aspects of commodities, from delivery to imports, exports and other areas, they will cause dislocations in the free flow of markets and cause shortages and hoarding and thus leading to higher prices.

Speculators, who are really people trying to protect themselves for the stupidity of political manipulation, will be blamed.

THIS IS NOT NEW. From ancient times political powers have blamed speculators for the problems that they, the politicians, have created and politicians will continue to exercise their perceived right to continue to do so as long as people live.

Be forewarned. Expect higher commodity prices as politicians worldwide once again assert their right to dislocate markets with unwise statements and actions.

Later on when trade barriers cease to work, when they have created bigger problems and when blaming nasty speculators is ineffectual the politicians will rely more and more on direct stock, currency and commodity market intervention, market manipulation and scare tactic statements like” gold is a barbarous relic” or my favorite ”speculators will be punished”

Respectfully yours,
Monty Guild
www.GuildInvestment.com

 

 

Click chart to enlarge today’s 6 hour action in gold in PDF format as of 12:30 pm CDT with commentary from Trader Dan Norcini.

Dear CIGAs,

Fed mouthpiece Honig says the Fed might increase interest rates to fight inflation.

The dropping of rates has had no impact yet, but an increase in rates would have an IMMEDIATE impact called an IMPLOSION.

There is no chance in hell that the Fed will raise rates.

"Honig's Illusion" is another spin device to say all credit problems are behind us so the Fed can go hawk with no downside.

Food and fuel are the main ingredients of inflation so the Fed will have to stop people from eating and decrease fuel use in Asia in order to be effective. Rates will not do that. People may starve, but for other reasons.

All markets are casinos so the euro and gold drops, but let’s see if "Honig's Illusion" has legs. I rather doubt it.

 

 

 

 

Click here for today's action in Gold, Streettracks Gold ETF, US Bonds, Barrick Gold and GoldCorp with commentary from Trader Dan Norcini

 

 

Dear CIGAs,

Most jumbo mortgages are Alt-A type loans. Note that Fanny Mae has entered into this field, buying for the first time jumbo mortgages that are probably Alt-A types. Here is another sign of smoke where fire is apt to be.

Alt -A Loans

Alt-A loans (Alternative-documentation loans), have been around awhile. In recent years, however, their meaning has become somewhat blurred. Alt-A loans are primarily credit-score driven, since the candidates for these loans tend to lack proof of income from traditional employment. The Alt-A loan reduces the gathering of documentation associated with fully documented loans, such as providing income verification and documentation of assets. On the other hand, borrowers do pay a slightly higher interest rate, often from a quarter, up to half-point more than fully documented loans.

Alt-A mortgage loans are usually much more flexible that traditional loans. Commissioned employees are usually good candidates for Alt-A loans due to the inconsistency in their income each month. Alt A might even be considered as a short-term solution, entered into with the understanding that the borrower will refinance later. Employees are usually prime candidates for Alt-A loans due to the instability of their income. For Banks and borrowers alike, Alt A programs are appealing because they are easier to document and have fewer restrictions than conventional loans.

Investors and Self Employed borrowers are often the likely candidates for this type of mortgage financing.

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Jim Sinclair’s Commentary

Remember the Formula? (Click here to review Jim’s Formula). There will come a time when dollar fundamentals will have influence in dollar valuation. That time is near.

U.S. April Business Bankruptcy Filings Increase 49% (Update2)
By Bill Rochelle and Bob Willis

May 6 (Bloomberg) -- Business bankruptcy filings in the U.S. increased 49 percent in April from a year earlier, the biggest gain so far in 2008, as the slowing economy prompted more companies to shut down.

Business petitions rose to 5,173 during the month, according to statistics compiled from court records by Jupiter eSources LLC in Oklahoma City. Total bankruptcy filings, including those by individuals, were up 31 percent from a year earlier to 93,096, the group said.

Signs of distress, such as bankruptcies and foreclosures, are rising as economic growth has slowed to its weakest pace since the last recession in 2001. The economy lost jobs in April for the fourth month in a row, for a total of 260,000 jobs cuts so far this year.

The latest casualty is Tropicana Entertainment LLC, the owner of 11 casinos that filed for bankruptcy reorganization last night. Tropicana blamed its filing in part on a $2.1 billion cash acquisition of five casinos two years ago which company President Scott Butera said represented, in retrospect, the ``height of the real estate market.''

``When you go into a downturn, the cyclical industries tend to get hit,'' said Mike Englund, chief economist at Action Economics LLC in Boulder, Colorado. ``Any sudden downshift in growth will generate rises in these numbers.''

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Dear CIGAs,

Today Goldman Sachs called for oil at $150 to $200. We have been bullish on oil for 6 years now, all the way from $25 a barrel. We could not agree with Goldman more. The same price drivers continue, including increasing demand from China, Brazil and India, less new discoveries, and continuing declines in reserves worldwide.

WITH OIL RISING… GOLD WILL ALSO RISE AND DEMAND FOR THE SECURITY OF GOLD WILL CONTINUE, ESPECIALLY FROM THE MIDDLE EAST AND CHINA.

Your friend,
Monty Guild
www.GuildInvestment.com

 

Goldman's Murti Says Oil `Likely' to Reach $150-$200 (Update5)
By Nesa Subrahmaniyan

May 6 (Bloomberg) -- Crude oil may rise to between $150 and $200 a barrel within two years as growth in supply fails to keep pace with increased demand from developing nations, Goldman Sachs Group Inc. analysts led by Arjun N. Murti said in a report.

New York-based Murti first wrote of a ``super spike'' in March 2005, when he said oil prices could range between $50 and $105 a barrel through 2009. The price of crude traded in New York averaged $56.71 in 2005, $66.23 in 2006 and $72.36 in 2007. Oil rose to an intraday record of $122.49 today on speculation demand will rise during the peak U.S. summer driving season.

``The possibility of $150-$200 per barrel seems increasingly likely over the next six-24 months, though predicting the ultimate peak in oil prices as well as the remaining duration of the upcycle remains a major uncertainty,'' the Goldman analysts wrote in the report dated May 5.

A report yesterday showed U.S. service industries expanded in April, signaling higher energy use. The Institute for Supply Management said its index of non-manufacturing businesses, which make up almost 90 percent of the economy, grew for the first time since December. China is increasing refining capacity and boosting imports to meet rising demand for the Olympic Games.

U.S. gasoline demand typically climbs going into the summer season when Americans take to the highways for vacations. The peak-consumption period lasts from the Memorial Day weekend in late May to Labor Day in early September. Monthly fuel sales were the highest during August in five of the last six years, according to data from the Department of Energy.

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Click chart to enlarge today’s 6 hour action in gold in PDF format as of 12:30 pm CDT with commentary from Trader Dan Norcini.

My Dear Extended Family,

I join Monty and Dan is sending you comforting wishes as we navigate through upcoming economic conditions where no Western man has ever gone.

Keep in mind that the fundamental reason for gold’s normal violent reaction was the euro coming off the $1.60 level, seen by some as a top. It is NOT!

If you took a glance at the 35-year synthetic chart my dog Mia could have told you that. As the major un-dollar and with Europe and China having experienced both currencies evaporating to zip, it is unlikely that the ECB will join the Fed in the race to 0%

Considering inflation even at the manufactured rate the PPI and CPI show, the Fed is giving away money in exchange for garbage paper at ZERO percent.

I dare to say the bottom in gold has occurred this week.

Gold will take out $1024 on the third try. Now the magnet is at $980 to $985.

Gold will rise, kicking and gouging its way to at least $1650.

Gold shares will, as they did in 1979-1980, outperform gold as they will return to asset based situations in a hard asset demand environment.

While the shorts play their game and the consolidators lick their limp, international capital is all over the exploration companies. Just go back to the Reuters article printed here about the major recourse firm in China and read for yourselves.

Black boxes have no brain so they do not factor in that the reason for the fall was the incorrect belief that the ECB would drop rates quickly, often and significantly.

The article below states the exact opposite, saying that politicians recognize in Euroland the great risk perceived by the public is inflation, not slow business and therefore support the ECB in not wishing to drop rates to satisfy political demands for a better economic condition.

The bottom is in and the market for gold will have to repair the damage done by the black boxes.

Again review the article posted below. Look at how it is truthful but presented backwards to confuse. It denies that the ECB will cut aggressively and often, as did the Fed. It removes the fundamental reason for gold’s decline and the infinitesimal dollar improvement that is being declared as the beginning of a dollar bull and therefore the beginning of a euro bear.

 

 

Jim Sinclair’s Commentary

According to the talking heads, the ECB is going into a race with the US Fed for lower rates. This has been the spin basis for the gold decline based on the spin of lower interest rates in Euroland to produce a euro decline.

(Originally Posted May 4th)

1. Whatever the gold price was to do on the downside will end by the first week of May.
2. The US dollar is going to trade at .5200.
3. The euro will trade at a minimum of USD$2
4. The gold price will trade at $1650 on or BEFORE January 14th, 2011.
5. $1024 was the first price block on the first move above $1000.
6. My job is bottom identification, not tops, because there is no top to the gold price for a long time to come. I gave you $1024, but that is as close as I will come to calling any top before the top.
7. Even the article below is written backwards to confuse. If you can't spin it, confuse it. What it says forward is that the ECB will not get into a race with the US Fed on lowering rates.

Europe's Price Surge Persuades Politicians to Back ECB on Rates
By Ben Sills and Gabi Thesing

May 5 (Bloomberg) -- The European Central Bank is winning Europe's political leaders over to its policy of focusing on fighting inflation even as economic growth slows.
 
Politicians from France, Belgium and Luxembourg, who previously complained that the ECB paid too little attention to economic growth, have signaled increasing concern that inflation is eating away at voters' incomes.
 
``There isn't much appetite for having these inflation levels, whether you're the monetary authority or government,'' Robert Barrie, chief European economist at Credit Suisse Group in London, said. ``There's a recognition that inflation is too high and broader-based support for the ECB to do something about it.''
 
The ECB has refused to follow the U.S. Federal Reserve and Bank of England in lowering interest rates after inflation surged since August, to reach a 16-year high of 3.6 percent in March. The bank argues that rising prices are a bigger threat to economic growth than the increase in credit costs resulting from the collapse of U.S. subprime mortgages. 

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Dear CIGAs,

Before we get started, we would like to extend our best wishes for health, happiness and success to all of you.  There is much anxiety and hyperbole in the news, and we wanted to take a moment and say that we wish everyone all of the best in life.

 

FASB'S NEW ACCOUNTING RULES SHOULD CAUSE BANKS TO STOP THE BEHAVIORS THAT LED TO MANY OF THE CURRENT MORTGAGE PROBLEMS.

FASB stands for Financial Accounting Standards Board.  This board creates accounting policies for CPA's, corporate accountants and auditors.

The CPA profession is making big changes in their allowed accounting procedures for off balance sheet companies.  These changes will continue, and it will accelerate the de-leveraging process that is underway in the world of finance.  Many financial companies have been using off balance sheet companies to hold speculative investments...on big margin.  There are several reasons these speculative positions (one could call them gambles) were put off balance sheet.

1. To circumvent banking regulations which are meant to  limit leverage
2. To help minimize taxes
3. To allow the institution to take bigger risks that would not sit well with shareholders, regulators and other stakeholders, but which have the potential to make (or lose) a lot of money.  If they make money, the operators get big bonuses   and profit sharing, if they lose...well the shareholders would have to bail it out...in the long run.  In short run, the incentive to speculate in these off balance sheet entities was huge.

In essence, these new accounting standards which the CPAs are promulgating under pressure from the U.S. Securities and Exchange Commission will insert some sanity by disallowing these off balance sheet, highly speculative investment vehicles called SIV's, or special investment vehicles.

The institutions will be required to reflect all new vehicles on their balance sheets.  We believe that since some companies may not survive if they have to insert the old vehicles into their balance sheets today, the old vehicles will be allowed to be wound down without being inserted into the balance sheet.  Of course the ultimate effect is the continued de-leveraging of the world financial institutions, which has been going on for several months.

To read more on FASB's proposed changes, click the following link to an article in the Friday, May 2nd edition of the Wall Street Journal. 
http://online.wsj.com/article/SB120969084241961495.html

 

WE OFTEN ASK OURSELVES "WHY IS INFLATION RISING SO RAPIDLY IN THE COUNTRIES LIKE INDIA AND CHINA, AND SLOWLY IN U.S., EUROPE AND BRAZIL?"

In our opinion, there is an obvious answer to this.   Brazil, Europe and the U.S. have more sophisticated management of their economic data's construction and how it is distributed to the public.  The article by the famous political commentator Kevin Phillips to which we supplied a link to in our last letter [see archives] continues to be the key.  Mr. Phillips points out that U.S. economic statistics have been actively manipulated by presidential appointed economists and statisticians since John F. Kennedy's administration in the early 1960's.

Europe and Brazil are much the same.  They are very good at denying the facts and manipulating the statistics to do so.  Argentina is a champion of such behavior...today Argentina's admitted inflation is 9%, but The Economist magazine estimates that the true figure is 25%.  India and China admit to inflation today of about 8.5%.  This is probably fairly accurate.  Today, the U.S., most of Europe and Brazil are claiming about 4% inflation.  In our opinion, 4% is understated.  Inflation in these countries today is probably approaching 8%.  Globally, inflation is rising.  Thus, we are continuing to invest with high inflation expectations as we have been saying for 2 years.

 

BRAZILIAN GOVERNMENT BONDS GET UPGRADED BY S&P...AND BRAZIL'S STOCK MARKET CONTINUES STRONG

We have liked the economy of Brazil, and things within Brazil continue to improve. Banks, consumer and base metals companies should do very well for some time.  We are buying Brazilian banks and consumer stocks, and we continue to favor Brazilian base metals companies.  Brazil is not suffering from the western problem of bad mortgage investments.  Their real estate market is strong, their consumers are spending, and their industrial machine is growing.  Many do not realize it, but Brazil is an industrial powerhouse which manufactures many large machines, computers, and aircraft; and of course Brazil exports many farm and mineral products to the rest of the world.

 

CHINA IS DOING VERY WELL...QUIETLY...AND ITS STOCK MARKET IS AGAIN ROLLING ALONG

As we have mentioned, we have re-entered China during the recent decline in their market.  Since October, the Chinese stock market fell 50% while corporate profits moved along at about a 25% annual rate.  In the last twelve months, their GDP growth was over 10.8%, and inflation (which is more accurately reported than in the west) was 8.5%.  This GDP growth and inflation have allowed the average company to continue to grow at about 25% a year.  How do you beat that in the U.S., or Europe where the average company is growing at about 5%?
 
Also, because Brazil and China were booming along, they did not drink the poison of subprime real estate loans and leveraged bets on mortgages as their economies had plenty of profit potential and smart ideas unfolding before them.

 

CHINA AND SAVINGS...CHINA IS THE KING OF SAVINGS AND WILL INFLUENCE THE WORLD A GREAT DEAL IN THE COMING TEN YEARS

According to a recent report by Merrill Lynch, China is now the world's leading saver and will be the biggest investor offshore.  Today, China's resources are very conservatively managed, primarily in low yielding government bonds.  However, now that they have surpassed Japan as the world's largest offshore saver, Merrill believes that they will move toward more aggressive management of their assets.  We believe that they will hold lesser amounts of conservative U.S. government debt, and more global stocks and bonds.

We believe that if China follows the traditional pattern, about 25% will go into foreign stocks and 75% into foreign bonds.

Chinese banks will probably expand their offshore lending as has been the case with banks in other countries in the past.  China, both alone and with Chinese entrepreneurs, will make more direct investments in offshore companies.

 

GLOBALLY IN THE MEDIA...A DRUM BEAT CONTINUES... PROMOTING BUYING THE US DOLLAR

This is an obvious effort to rig the dollar up by changing investor psychology.  It may work for a few months, and the dollar may rally for a while as it did for about a year from late 2004 until late 2005 before resuming its recent major decline.  In our opinion, the dollar may rise versus some European currencies but will likely fall versus the Chinese Yuan and some other Asian currencies, especially those of developing countries.

 

GOLD AND THE U.S. DOLLAR

In our opinion, if the U.S. dollar rallies against the European currencies, and falls against the Asian currencies, we expect that it will not be bearish for gold.  Many of the biggest buyers of gold are in China and the Middle East (two areas where we expect the currencies to continue to rise versus the U.S. dollar).  Investors should be alert to this change, and look at the rise in currencies of countries which are big gold buyers, China, Middle Eastern countries, and India among others.

 

OUR THEMES...WE CONTINUE TO EXPECT INFLATION GLOBALLY

In general, our themes remain the same.  Several of them have been six year themes, and others have been two to four year themes.

Inflation - We remain focused on dealing with the current and oncoming inflation that the world is experiencing and will continue to experience.
Energy - Energy resources are needed to meet the huge and growing demand from China and other developing nations.
Food - Companies which serve the food production industry are attractive as global increases in wealth lead to upgrades in diet.
Precious Metals - Precious Metals are being bought in the Middle East and China, but being sold in Europe.
Chinese and Brazilian stocks - We have favored the stocks of the faster growing countries for years.  Recently, we stopped viewing Russian stocks as attractive.  India is good long-term, but we believe it is overpriced short term.
Asian currencies - The currencies of the faster growing developing nations in Asia, especially the Chinese Yuan, are attractive, but the Yuan's rise will likely continue to be managed by the Chinese officials.
Base Metals - To meet the huge infrastructure building driven demand from India, China and other developing nations, base metals in massive quantities will be needed.

Thanks for listening

 

 

Dear CIGAs,

NEWS FOR THOSE WHO INVEST IN BASE METALS SHARES AND MINING SHARES IN GENERAL

 

Point #1

There is a great deal of mining news in the world today, much of it centered around the problems caused by a lack of electricity in mineral producing countries. Recently, base metal production, especially aluminum and copper, has been impacted by electricity shortages in Congo, South Africa and Chile. Supplies have been limited by poor rainfall in Chile (reducing hydroelectric power) and poor planning in Africa which left South Africa unable to meet its contractual obligations to deliver electricity to other African nations.

 

Point # 2

China is consuming a lot more electricity as are Congo, South Africa and many other mining provinces worldwide.

1. China is engaging in a huge power plant construction program and India is upgrading their infrastructure.
2. 80% of the electrical grid expenditures in China are for copper.
3. $64 billion was spent by China alone on the grid in 2007.
4. $79 billion was spent on the grid in China total in 2007.
5. When any country improves their electrical system, their rail road system, housing, office and industrial buildings or many other industries, copper is consumed in huge amounts.

We mention China only because the data is available. Many other countries also consume a lot of steel, aluminum, zinc, nickel, iron ore and copper to upgrade infrastructure, thus base metals have held up much better than many skeptics believed they would.

Respectfully yours,
Monty Guild
www.GuildInvestment.com