Posted at 1:23 PM (CST) by & filed under Jim's Mailbox.

Dear Jim,

See the last sentence which implies that the Government /Treasury will make asset sales compulsory – at bid. This is more corporate welfare. Money from sales will go to the insiders at low prices and some banks may even swap paper (eg: I will sell mine to you cheap while you sell yours to me cheap). Another sign that the financial services lobby has a strangle hold on both the Democratic and Republican parties.

They win, taxpayers lose.

Monty Guild and Tony Danaher
www.GuildInvestment.com

Banks Holding Up in Tests, but May Still Need Aid
By ERIC DASH

For the last eight weeks, nearly 200 federal examiners have labored inside some of the nation’s biggest banks to determine how those institutions would hold up if the recession deepened.

What they are discovering may come as a relief to both the financial industry and the public: the banking industry, broadly speaking, seems to be in better shape than many people think, officials involved in the examinations say.

That is the good news. The bad news is that many of the largest American lenders, despite all those bailouts, probably need to be bailed out again, either by private investors or, more likely, the federal government. After receiving many millions, and in some cases, many billions of taxpayer dollars, banks still need more capital, these officials say.

The federal “stress tests” that the examiners are administering are the subject of fierce debate within the banking industry.

Regulators say all 19 banks undergoing the exams will pass them. Indeed, they say this is a test that a bank simply will not fail: if the examiners determine that a bank needs “exceptional assistance,” the government, that is, taxpayers, will provide it.

But the tests, which are expected to be completed by the end of this month, are being conducted out of public view. Federal law prohibits the unauthorized disclosure of the results of any bank examination, including the stress tests. Some investors wonder if the new tests are rigorous enough, given the potential problems lurking inside the banking industry.

Regulators recognize that for the tests to be credible, not all of the banks can be winners. And it is becoming increasingly clear, industry insiders say, that the government will use its findings to press certain banks to sell troubled assets. The hope is that by cleansing their balance sheets, banks will be able to lure private capital, stabilizing the entire industry.

In some cases, however, the investments of existing shareholders could be severely diluted by large sales of new stock.

Some of the banks could also face more stringent restrictions on employee compensation or be ordered to change their boards or management. In extreme instances, the government could wind up taking larger, perhaps even controlling, stakes.

The state of the industry will come into sharper focus next week, when big banks like Citigroup and JPMorgan Chase start reporting first-quarter results. Many analysts predict the reports will show banks are on the mend, with help from low interest rates, fat lending margins, dwindling competition and profits from trading in the financial markets in January and February. In the last six weeks, financial shares have soared on hopes that the worst for the industry is over.

But some analysts say investors’ hopes are misplaced. With the recession, banks are likely to record further large losses on credit cards, corporate loans and real estate.

“Nothing has changed with the fundamentals,” said Meredith A. Whitney, a prominent banking analyst who has been bearish on most financial institutions.

The stress tests are playing a pivotal role in the Obama administration’s sweeping plan to shore up the financial industry. Forcing many banks to raise capital might undermine the still-fragile confidence in the industry. But if only a few banks raise more money, the test might lose credibility with investors.

“Clearly there is a desire to put a seal of good bookkeeping on these banks,” said Lou Crandall, the chief economist at Wrightson ICAP. “Whether they will use this to select a couple of sacrificial lambs is unclear. It’s a big uncertainty hanging over the system right now.”

The tests, led by the Federal Reserve, rely on a series of computer-generated “what-if” projections in the event the economy deteriorates. Those include unemployment rising to 10.3 percent by next year, home prices falling an additional 22 percent this year, and the economy contracting by 3.3 percent this year and staying flat in 2010.

Top regulators say the effort could signal a new approach to supervising the risks that banks take. While federal regulators routinely monitor the financial condition of banks, one goal of the tests is to devise a common set of standards for judging losses across all 19 institutions. Examiners are also considering instruments that are not carried on banks’ balance sheets. They long escaped tough scrutiny.

As part of the tests, the banks analyzed each category of loans they held and compared their results with the “high” and “low” range of government loss estimates. If a bank expected fewer losses than the government, the regulators asked the institution to explain why.

The banks were also asked to project their earnings over the next two years to give the regulators a better sense of how much capital they would have to absorb the coming losses.

Several people involved in the process say there is a wide range of results among the institutions. Those that fall short will have six months to raise capital from private investors; if they are unable to do so, the Treasury Department has said taxpayer money will be available.

Some federal and industry officials say regulators may use the results to prod reluctant banks to sell assets under that program.

Michael Poulos, a director at Oliver Wyman, the consulting firm, said many big investors were burned after investing in financial companies last year and are averse to doing so again. The stress test findings, he said, could “make private capital more eager to come in because they will get a view of the bottom.”

At a recent breakfast with a dozen or so corporate and banking executives in New York, Treasury Secretary Timothy F. Geithner warned he would take a tough stance. Many banks, he suggested, believe the investments and loans on their books are worth far more than they really are, according to a person who attended the meeting.

Mr. Geithner said that was unacceptable. The banks, he said, will have to sell these assets at prices investors are willing to pay, and so must be prepared to take further write-downs.

Hi Jim,

Wells Fargo’s profit is obviously created through the easing of accounting principles. My question is do the bank officers realize it is BS or do they actually think they made a profit?

As always… thanks for all you do.

Regards,
CIGA Ron

My Dear Ron,

We live in a world of finance where ethics is considered criminal and should be punished and where absolute demonic criminality is considered desirable as long as the criminal is stealing on your behalf as a stockholder.

I would imagine that all banks will show a good first quarter as they begin to mark up some of their inventory. It is not clear that they have as much of a free hand as the spin says they do.

The financial; industry welcomes the change which would indicate they will accept the lies as positive when the earning statements are issued.

Respectfully,
Jim

Jim,

I’ll drink to that!

Derivative Markets…an explanation

Heidi is the proprietor of a bar in Detroit. In order to increase sales, she decides to allow her loyal customers – most of whom are unemployed alcoholics – to drink now but pay later. She keeps track of the drinks consumed on a ledger (thereby granting the customers loans).

Word gets around about Heidi’s drink now pay later marketing strategy and as a result, increasing numbers of customers flood into Heidi’s bar and soon she has the largest sale volume for any bar in Detroit.

By providing her customers freedom from immediate payment demands, Heidi gets no resistance when she substantially increases her prices for wine and beer, the most consumed beverages. Her sales volume increases massively.

A young and dynamic vice-president at the local bank recognizes these customer debts as valuable future assets and increases Heidi’s borrowing limit. He sees no reason for undue concern since he has the debts of the alcoholics as collateral.

At the banks corporate headquarters, expert traders transform these customer loans into DRINKBONDS, ALKIBONDS, and PUKEBONDS.

These securities are then traded on securities markets worldwide. Naive investors don’t really understand the securities being sold to them as AAA secured bonds are really the debts of unemployed alcoholics.

Nevertheless, their prices continuously climb, and the securities become the top-selling items for some of the nations leading brokerage houses.

One day, although the bond prices are still climbing, a risk manager at the bank (subsequently fired due his negativity), decides that the time has come to demand payment on the debts incurred by the drinkers at Heidi’s bar.

Heidi demands payment from her alcoholic patrons, but being unemployed they cannot pay back their drinking debts. Therefore, Heidi cannot fulfill her loan obligations and claims bankruptcy.

DRINKBOND and ALKIBOND drop in price by 90 %. PUKEBOND performs better, stabilizing in price after dropping by 80 %. The decreased bond asset value destroys the banks liquidity and prevents it from issuing new loans.

The suppliers of Heidi’s bar, having granted her generous payment extensions and having invested in the securities are faced with writing off her debt and losing over 80% on her bonds.. Her wine supplier claims bankruptcy, her beer supplier is taken over by a competitor, who immediately closes the local plant and lays off 50 workers.

The bank and brokerage houses are saved by the Government following dramatic round-the-clock negotiations by leaders from both political parties.

The funds required for this bailout are obtained by a tax levied on employed middle-class non-drinkers.

Posted at 5:44 PM (CST) by & filed under Guild Investment.

Dear CIGAs,

THE WORLD ECONOMY IS WEAK AND GETTING WEAKER, BUT LET US FOCUS ON THE POSITIVE IN THIS MEMO.  IN SOME AREAS, IMPROVEMENTS ARE TAKING PLACE.

LAST WEEK WAS THE G-20 MEETING

The primary new event was the creation of 250 billion dollars from nothing via Special Drawing Rights (SDR’s), 250 billion dollars in all.  These SDR’s can be used as reserves by the countries that are granted this fantasy money.  Over 30 percent, about 85 billion dollars, of this fantasy money is meant for the emerging world.  This is enough to keep optimism increasing in developing world.

OTHER MAIN POINTS FROM THE G-20

1. Even though protectionism was evident in the agendas of the many of the large developed countries, a one trillion dollars package of financing and loans was enough to get commodity producers like Brazil and others to agree to the total package.

2. Smaller, weaker economies will benefit from more trade finance, and spurring international trade should help to thaw the world financial freeze.  Altogether, this is a positive event for the global markets.  The event was filled with bogus PR to be sure, but it did produce some consequential liquidity improvements for the small countries of the world and their banking systems.  This should benefit share prices in emerging markets.

EMERGING MARKETS STOCKS WILL DO VERY WELL AS A RESULT OF THE G-20 LOANS AND HANDOUTS

Mexico was the first to take an interest in the new IMF loans, and more countries will follow.  This can help backstop weaker emerging countries like South Korea, and is good for demand from China and India.  We like China very much here, and we will continue to buy Chinese stocks during periods of price weakness.

MONETARY AUTHORITIES OF MANY COUNTRIES HAVE CAVED IN TO QUANTITATIVE EASING (PRINTING MONEY)

We believe it is just a matter of time until the Western Europe’s European Central Bank goes for quantitative easing (QE). 

Thus far, Japan, the U.S., Britain, Switzerland, and many small countries, such as in Eastern Europe have opted for some form of QE.  The rest of Western Europe has been more responsible and has not done so.  When the European Central Bank joins the party, we expect gold will take off. 

It appears that the IMF is being groomed to be the world’s central bank, taking this responsibility from the other major central banks, which have failed miserably in their role.

Poor management coming from the central banks of Europe, Britain, the U.S., and Japan cannot be excused.  It is good that the IMF is being groomed.  The world is searching for an alternative to the U.S. dollar.  For example, currency swap arrangements organized by China and Russia with some of their trading partners (allowing the countries to bypass the dollar as the settlement currency for their international trade), argue for regional currency blocks to facilitate trade.

While it is clear that the world has no current substitute for the U.S. dollar as the world’s reserve currency, the day the dollar loses that status inches closer.  As the U.S. continues to bumble the banking system recovery, and continues to enrich the failed bankers at the expense of the taxpayers, the rest of the world will press for an alternative to the dollar.  Even if a few sacrificial bank CEOs are fired, the institutions which provide so much money to politicians’ re-election campaigns will continue to grow richer.

A CALL TO ACTION

A group of experts assembled by the Wall Street Journal came up with twenty very thoughtful principles for rebuilding the financial system.  The piece titled A Call To Action helps explain what went wrong and why it behooves us to make sure that the principles are implemented.  In our cynical moments, we imagine that many of these principles will receive no more than lip service as they will be perceived to decrease the profits of those who have been successfully manipulating the system to their own advantage.

Here is the link to the top twenty principles as developed by participants in The Wall Street Journal:  A CALL TO ACTION

LONGER TERM, WE HAVE A BIG PROBLEM IN THE U.S…BANKS, INSURANCE COMPANIES, AND THE REST OF FINANCIAL SERVICE INDUSTRY THAT WIELD TOO MUCH POWER

Just as President Eisenhower warned about the military industrial complex, many wise writers (often financial, academic and non big bank types) believe that the banking system has too much power, and the current bailouts are being done in a way that emphasizes the big banks’ power.

We will paraphrase a major article on this subject in our next email.  In this letter, we want to focus on the positives, and explain why the current market environment will result in a continued stock market rally.

China’s Shanghai Composite Index

clip_image002

India’s Bombay Sensitive Index

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SUMMARY

Emerging economies, especially China and India have been benefited by the recent IMF meeting. 

After the recent rally, many world markets are overbought.  We expect the rally to continue after a short rest.  We are buying Chinese and Indian stocks on weakness to add to our existing positions.  We continue to believe that technology in the developed world will rally in the short term, and that oil and gold will rally in the long term.  We plan to use price declines to add to our oil and gold positions.

PORTFOLIO REVIEWS

We have been happy to review readers’ portfolios free of charge, and will continue with this offer for any portfolios submitted before April 30, 2009.  After that, we will be unable to offer the courtesy.

Thanks for listening.

Monty Guild and Tony Danaher
www.GuildInvestment.com

Posted at 3:17 PM (CST) by & filed under In The News.

Dear CIGAs,

FLASH COMMUNICATION:

Sir Richard Russel names Gold the "Ultimate Cash"

Click here to view the article…

Jim Sinclair’s Commentary

The key element of gold future strength ($1650) is the fact that all the financial needs of any entity that threatens the social order internationally will be met with bailout funds devoid of limits.

GM Pensions May Be ‘Garbage’ With $16 Billion at Risk
By Holly Rosenkrantz

April 8 (Bloomberg) — Den Black, a retired General Motors Corp. engineering executive, says he’s worried and angry. The government-supported automaker is going bankrupt, he says, and he’s sure some of his retirement pay will go down with it.

“This is going to wreck us,” said Black, 62, speaking of GM retirees. “These pledges from our companies are now garbage.”

As the biggest U.S. automaker teeters near bankruptcy, workers and retirees like Black are bracing for what may be $16 billion in pension losses if the Pension Benefit Guaranty Corp. has to take over the plans, according to the agency. As many as half of GM’s 670,000 pension-plan participants might see their benefits trimmed if that happened, an actuary familiar with the company’s retirement programs estimates.

The possibility that GM might dump its pension obligations is likely to intensify debate over the treatment of executives of companies that receive U.S. aid. GM Chief Executive Officer Rick Wagoner, ousted by the Obama administration last month, may receive $20.2 million in pensions, according to a regulatory filing.

More…

Fed Saw Downside Risks Predominating at March Meeting

April 8 (Bloomberg) — Federal Reserve officials feared the U.S. economy might fall into a self-reinforcing cycle of rising unemployment and slumping business and consumer spending, making credit tighter in a weak financial system, minutes of the Federal Reserve’s March meeting show.

“Participants expressed concern about downside risks to an outlook for activity that was already weak,” minutes of the March 17-18 meeting released in Washington said. “Credit conditions remained very tight, and financial markets remained fragile and unsettled, with pressures on financial institutions generally intensifying.”

The outlook prompted the Federal Open Market Committee in a unanimous vote to boost its open-market purchases of bonds by $1.15 trillion, continuing its unprecedented increase in money supplied to the economy. The U.S. central bank has used its own balance sheet to provide financing for markets in commercial paper, asset-backed securities and mortgage bonds, markets it deems critical for financial stability and economic recovery.e

More…

Jim Sinclair’s Commentary

It is not whether or not Bernanke’s plans succeed, it is the consequences of the monetary and in time fiscal actions taken that are the granite foundation of the gold price at $1650 or higher.

There is no practical solution that will permit the draining of the degree of liquidity already injected into the international monetary system. This concept is in place already, not even considering the additional funds that will be required over the next two years.

Monetary inflation is always followed by price inflation entirely independent of consideration of the level of business activity.

The two hyperinflations in the USA, the Continental and the Confederate Dollar, as well as all historically same/similar situations were currency events, not economic events. All occurred in recessionary to depression business conditions. The most recent example of this concept is the Zimbabwe dollar.

This is fact but brings no respect to the proponent that says nothing changes. It simply wears different attire.

Bernanke’s Deflation Preventing Scorecard

In case no one is keeping track, Bernanke has now fired every bullet from his 2002 “helicopter drop” speech Deflation: Making Sure "It" Doesn’t Happen Here. Bernanke’s Scorecard Here is Bernanke’s roadmap, and a “point-by-point” list from that speech.

1. Reduce nominal interest rate to zero. Check. That didn’t work…

2. Increase the number of dollars in circulation, or credibly threaten to do so. Check. That didn’t work…

3. Expand the scale of asset purchases or, possibly, expand the menu of assets it buys. Check & check. That didn’t work..

4. Make low-interest-rate loans to banks. Check. That didn’t work…

5. Cooperate with fiscal authorities to inject more money. Check. That didn’t work..

6. Lower rates further out along the Treasury term structure. Check. That didn’t work…

7. Commit to holding the overnight rate at zero for some specified period. Check. That didn’t work…

8. Begin announcing explicit ceilings for yields on longer-maturity Treasury debt (bonds maturing within the next two years); enforce interest-rate ceilings by committing to make unlimited purchases of securities at prices consistent with the targeted yields. Check, and check. That didn’t work..

. 9. If that proves insufficient, cap yields of Treasury securities at still longer maturities, say three to six years. Check (they’re buying out to 7 years right now.) That didn’t work…

10. Use its existing authority to operate in the markets for agency debt. Check (in fact, they “own” the agency debt market!) That didn’t work…

11. Influence yields on privately issued securities. (Note: the Fed used to be restricted in doing that, but not anymore.) Check. That didn’t work…

12. Offer fixed-term loans to banks at low or zero interest, with a wide range of private assets deemed eligible as collateral (…Well, I’m still waiting for them to accept bellybutton lint & Beanie Babies, but I’m sure my patience will be rewarded. Besides their “mark-to-maturity” offers will be more than enticing!) Anyway… Check. That didn’t work…

13. Buy foreign government debt (and although Ben didn’t specifically mention it, let’s not forget those dollar swaps with foreign nations.) Check. That didn’t work…

More…

Jim Sinclair’s Commentary

This is unusual in fighting between the Treasury and the FDIC over the substance of the upcoming Bank Stress Tests. The following are hard words: "It’s a sham," one source told The Post, describing the test as an "open-book, take-home exam" that doesn’t actually work."

FDIC BAIR(S) TEETH TAKES TREASURY’S TIM TO TASK ON TALF STRESS TEST
By MARK DeCAMBRE
Last updated: 11:13 am April 8, 2009

The stress tests the government are about to conduct on some of the nation’s largest banks is being blasted by insiders at Sheila Bair’s Federal Deposit Insurance Corp., who say it’s a pointless exercise that’s more sizzle than steak.

The FDIC’s basic beef with the stress test is that it is not a credible way to assess how much additional cash beaten-down banks will need to weather what many Wall Street experts predict will be more losses in the coming months.

The tests are conducted by the Treasury Department and the Federal Reserve on the nation’s 19 biggest banks, including behemoths Citigroup, Bank of America and JPMorgan Chase.

"It’s a sham," one source told The Post, describing the test as an "open-book, take-home exam" that doesn’t actually work.

More…

Jim Sinclair’s Commentary

Many of you have bought the case that the Euro zone has financial problems infinitely more serious than those of the USA. Few are focused on the simple supply of dollars hiding behind the scene awaiting their appearance on the Forex market even in a depression.

The dollar is in the process of declining in use and increasing in supply. I see this generational in nature.

Is the Almighty Dollar Doomed?

"There is also the possibility that the dollar, after its recent show of strength, will again weaken in value against other major currencies, eroding its attractiveness as a reserve currency. Confidence in the health of the U.S. economy, and therefore the U.S. dollar, could plunge because of continued large U.S. current-account deficits, an unstable banking sector and a recession-busting, expansionist monetary policy. The budget deficit, which the Congressional Budget Office estimates will reach $1.8 trillion this fiscal year, or 13% of GDP, is reaching heights not seen since World War II. (See the top 10 worst business deals of 2008.)"

I got an unexpected lesson in the power of the U.S. dollar during a visit to Tashkent, the dreary capital of Uzbekistan, several years back. While heading into town from the airport, my babbling taxi driver kept one hand (barely) on the steering wheel while his other shoved a stack of local currency, the som, into my face. He insistently urged me to trade the money for dollars. After checking in at the grim Hotel Uzbekistan, a nattily clad porter showed me and my wife to a room, fiddled with a broken TV set, and then reached into his jacket pockets for large bricks of som. He, too, persistently begged me for greenbacks. In Uzbekistan, the dollar ruled.

More…

Jim Sinclair’s Commentary

The demand for physical gold grows and grows, as the COMEX paper gold supply commands price. That is simply wrong. The only correction is taking delivery out of the COMEX warehouse on a continuous basis.

Going for gold: How the world’s mints are coining it
By Sarah Marsh in Vienna and Jan Harvey in London

The world’s mints are coining it as unprecedented numbers of savers search for safer investments

A few years ago his visits to the mint, founded more than 800 years ago, might have seemed eccentric. No longer. From the Russian Georgy Pobedonosets to the American Eagle, gold coin production is being cranked up in mints around the world to satisfy customers believing the assets may be immune to the global financial crisis.

Russia’s state-controlled Sberbank says it has never seen such strong demand for investment coins. In Australia, the Perth Mint had to suspend new orders for gold coins because it could not keep pace with overseas demand. And, in America, the US Mint says sales of its one-ounce American Eagle gold bullion coins rocketed by more than 400 per cent to 710,000 ounces in 2008. "The demand for gold and silver," said US Mint spokeswoman Carla Coolman, "has been unprecedented."

Austria’s Philharmonic, named after the Vienna Philharmonic Orchestra, was the world’s best-selling gold coin in the last quarter and sales soared 544 per cent in the first two months of 2009. "There is no sign of demand abating," Austrian Mint’s marketing director Kerry Tattersall said. Sales this year are expected to exceed 2008’s record levels. "At present, production is struggling to keep up with demand."

Hans Dieter Rauch, who sells both collectors’ and investors’ coins in his boutique on Graben, one of Vienna’s most exclusive shopping streets, said revenues rose 300 per cent last year. "It’s the man in the street, not particularly rich people but normal citizens like you and me," said Mr Rauch, 65, monitoring the fluctuating price of gold on a screen in his back room.

More…

Jim Sinclair’s Commentary

Public and private, pension fund failure is the stuff that social unrest is made of.

Investment losses hit public sector pensions
By Deborah Brewster in New York
Published: April 7 2009 19:59 | Last updated: April 7 2009 19:59

The crisis facing pension plans for US state and municipal employees is deepening as investment losses deplete the resources of retirement funds for teachers, police officers, firefighters and other local government workers.

The largest state and municipal pension plans lost 9 per cent of their value of more than $2,000bn in the first two months of this year, according to data from Northern Trust. That followed a loss of 30 per cent in 2008, equal to about $900bn. Smaller funds, which underperform the larger ones, lost more, experts say. The losses have left retirement plans about 50 per cent funded – that is, they have only half the money needed to cover commitments to 22m current and former workers, experts say. State governments typically put the funding figures closer to 60-70 per cent, although most experts use different calculations.

“There is a massive national underfunding problem,” said Orin Kramer, chairman of the New Jersey pension fund. ”

Unlike company pension plans, state and municipal retirement funds have no federal guarantee fund. This has led to predictions of benefit cuts and possible federal intervention.

“The federal government will get involved, without question,” said Phillip Silitschanu, analyst at Aite Group, a consultancy. “They could provide federal loans, or demand cutbacks as a condition of stimulus money, or there could be a federalisation of some of these pensions.”

More…

Jim Sinclair’s Commentary

We all know this.

Gold ‘will exceed $1000’, bullion dealer predicts
2009/04/08 
Johannesburg – Gold prices could “easily re-attain the $1000-mark and may well push up towards and perhaps even through the $1100 barrier in the coming months”, precious metals consultancy GFMS predicted yesterday.

“The price may have pulled back a fair bit from the February highs, but that was largely just the market‘s reaction to jewelry demand crumbling and scrap booming,” said GFMS executive chairman Philip Klapwijk.

“It‘s far from game over for investors, and it will be that crowd which sets the price alight,” Klapwijk said.

Releasing its latest review on the gold market, Gold Survey 2009, GFMS singled out the fiscal and monetary policies currently being enacted, especially by the US administration, as the root cause of gold‘s potential.

GFMS also expects central banks to be reluctant to raise interest rates while the prospects for economic growth are shaky and says that the solidity of the US dollar has to be called into question, chiefly as a result of doubts over others‘ desire or ability to continue financing an explosion in US government debt.

“Strength in investment will certainly be needed to overcome weakness in the fundamentals.

More…

Jim Sinclair’s Commentary

Yes, a more transparent world, modestly delayed.

UPDATE 1-US to delay bank test results for earnings-source
Tue Apr 7, 2009 1:09pm EDT

WASHINGTON, April 7 (Reuters) – The U.S. Treasury Department is planning to delay the release of any completed bank stress test results until after the first-quarter earnings season to avoid complicating stock market reaction, a source familiar with Treasury’s discussions said on Tuesday.

The Treasury is still talking about how results of the regulatory stress tests on the 19 largest U.S. banks will be released, and may disclose them as summary results that are not institution-specific, the source said.

The government is testing how the largest banks would fare under more adverse economic conditions than are expected in an attempt to assess the firms’ capital needs. The tests are due to be completed by the end of April, but Treasury has said they may be finished before then.

More…

Jim Sinclair’s Commentary

You can be sure there will be many more trips to the bailout well.

Fed’s Fisher says U.S. economy grim
Wed Apr 8, 2009 4:25am EDT
By Leika Kihara

TOKYO, April 8 (Reuters) – The U.S. economy is grim, and the Federal Reserve is "duty bound to apply every tool" to clean up the financial system and clear a path for a return to sustainable growth, Richard Fisher, president of the Dallas Fed, said on Wednesday.

But he said monetary policy alone would not be enough to resuscitate the economy, adding fiscal stimulus was critical in providing a spark for U.S. growth.

"Monetary policy accommodative techniques are necessary but insufficient to the task," Fisher told a symposium hosted by a private think tank in Tokyo.

"The trick to fiscal policy is to provide the spark, to provide the right incentives, get the small and medium-sized firms create jobs again, create dynamism in the economy without planting the seeds of inflation."

Fisher, who is not a voting member on the Fed’s policy-setting committee this year, said the U.S. economy probably shrank in the just-ended first quarter of 2009 at a rate similar to the 6.3 percent annual decline posted in the fourth quarter of 2008. He gave no timeline for a potential recovery.

More…

Jim Sinclair’s Commentary

Keep this in mind as you listen to the party line.

Financial Crisis ‘Far From Over,’ Panel Says
Govt. May Spend More than $4 Trillion but Economy Faces ‘Prolonged Weakness,’ Oversight Panel Reports
By CHARLES HERMAN and ALICE GOMSTYN
ABC NEWS Business Unit
April 7, 2009

Though some economic measures are improving, the financial crisis "is far from over" and "appears to be taking root in the larger economy."

This, despite the government’s commitment to spend trillions of taxpayer dollars on a massive bailout of the financial system.

These were the findings released in a report today by the Congressional Oversight Panel, the body charged with overseeing the government’s Troubled Asset Relief Program, the $700 billion plan aimed at bailing out the country’s financial sector.

"We still have a long way to go. A very long way," Elizabeth Warren, the Harvard Law School professor who chairs the panel, said in an interview today with Bloomberg News.

The panel reported that the government has spent, lent or set aside more than $4 trillion through the Troubled Asset Relief Program, the Federal Reserve and the Federal Deposit Insurance Corporation.

Today, the "credit markets no longer face an acute systemic crisis in confidence that threatens the functioning of the economy," the report said.

More…

Jim Sinclair’s Commentary

Take a sharp pencil to any of this and another conclusion surfaces. The FDIC will be granted whatever funds are required. The implication here speaks only to more printing of money but that is what quantitative easing is all about. Nothing is going to fail to meet the needs created by the ongoing real implosion, the recognition of the worthless OTTIs, other than temporary impaired assets that have been permanently impaired from day one of this disaster.

FDIC’s Insurance Commitments 34% Higher Than Reported
April 6, 2009 – 4:00 am

[Reader note: I thought it useful to add commentary around the FDIC data. Those that would prefer to skip straight to it, see the chart and read paragraphs 4-9].

Conventional wisdom says that financial companies are having trouble borrowing because credit markets are broken. This is dangerously wrong. The credit market itself is fine. It’s balance sheets that are broken. They have so little equity relative to their assets, there’s no cushion to protect creditors from losses.  With few good borrowers available and with the price of credit being capped by government, naturally creditors have little inclination to lend.  Washington’s solution is to “guarantee” all manner of risky investments, to use the public’s balance sheet to absorb trillions of dollars worth of private sector losses.  We’re told this will “restore confidence” in borrower balance sheets, leading to increased lending.  But this policy is dangerously misguided and may very well lead to economic Armageddon.

In point of fact, our fractional reserve financial system is just a gigantic Ponzi scheme.  It can only survive as long as it expands, which is to say, as long as new debt is flushed through the system to finance old debt.  But like all Ponzi schemes, the larger it grows the more unstable it becomes.  Eventually, it collapses of its own weight.

With this in mind, government should be concerned with paying down debt, not expanding it.  Deficit-financed bailouts and stimulus only increase the size of the Ponzi.  The bigger it grows, the harder it will crash.

My thoughts came back to this recently when I looked at FDIC’s 12/31/08 balance sheet.  Note at the bottom of that link the estimate for total insured deposits: from Q3 to Q4 it increased only a smidge, to $4.8 trillion from $4.6 trillion.

More…

Posted at 3:02 PM (CST) by & filed under Trader Dan Norcini.

Dear CIGAs,

“Risk” came back into vogue today and with it up went the Euro, crude oil, most commodities and also gold. Down went the Dollar and up went the Yen as carry trades were favored. Copper topped $2.00 once again although it could not hold above that level on the close. Even lowly natural gas moved higher. Poor ol’ pork bellies were left out of the party however (folks – eat more bacon!).

Gold bulls have managed to push prices back above the broken neckline of the short-term bearish head and shoulders pattern shown on the daily chart. That is a minor victory but they will need to continue their push to get it back above $900 to give themselves a bit of breathing room. That would allow some chart interpreters to see a consolidation range trade set up especially after price bounced off of the 100 day moving average.

Gold is still caught in the tug of war between between risk and risk aversion with traders unsure exactly how to trade it. Physical buying of gold from overseas, especially India, is strong below the $900 level but that is insufficient in and of itself to push prices higher. It can serve to put a floor under the market but to take gold higher, it is going to require strong investment interest. Interestingly enough, the reported holdings of the gold ETF, GLD, have remain fixed for some time now.

A side note here is that a case can be made for gold forming a bullish head and shoulders pattern on the longer-term weekly charts. That would requires a close above the $1000 level, preferably nearer the $1030 level. That would provide a target near the $1360 level. Of course before that could happen, gold would first have to get back above $930 so do not get too excited if you are a bull. Plenty of technical work remains for gold bulls as bears are still in charge of the market for the short term as there is always the risk of further long liquidation if gold were to move below the 100 day moving average.

There were no deliveries for April gold reported today.

Silver drawdowns out of the Comex continue on their torrid pace with another 2 million ounces coming out yesterday. Whoever is taking the silver out of the HSBC warehouses has managed to draw down stocks from near the 80 million ounce mark (registered category) in December of last year to yesterday’s 63 million ounce mark. That is no small feat. I think it no coincidence that the reported holdings of the silver ETF, SLV, have also shown a reported increase since the first of this year of some 52 million ounces. If SLV is sourcing silver from the Comex warehouses, the paper silver shorts at the Comex would do well to begin getting nervous.  Still, silver is not yet acting like any of the shorts at the Comex are concerned – yet! This is a fascinating development to monitor. Keep in mind that the only way to effectively break the back of the paper shorts at the Comex is to strip the metal out of the warehouses. If this continues for silver, and that is a big “IF”, we are going to see just how effective that strategy will be. Only the risk of having to stand and deliver can force the shorts out of the game. They do not fear regulators.

Bonds were up on a day in which risk was back in and defied the general price action during such periods which usually sees selling hit that pit. The reason – The Fed was out buying bonds today (don’t you love our free markets?). Nothing like artificially attempting to work over the market rate of interest.

Crude oil continues trading as a currency and not a commodity moving inversely to the Dollar – the new “anti-Dollar” trade is apparently now crude oil….

Microsoft and IBM lifted the equity sector today which supported the generally optimistic view towards commodities.

Click chart to enlarge today’s hourly action in Gold in PDF format with commentary from Trader Dan Norcini

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Posted at 11:51 AM (CST) by & filed under Jim's Mailbox.

Dear Jim,

Here come the first downgrades of Commercial Mortgage Backed Securities. These are certain to play out just like the MBS downgrades, with billions of dollars worth more announced each week.

Best wishes,
CIGA Richard B.

Fitch Warns on $18.1B in Recent-Vintage CMBS
by Paul Jackson, HousingWire.Com
April 8, 2009.

Excerpts:

Fitch Ratings said Wednesday that it had placed 532 classes from 50 fixed-rate CMBS conduit transactions from the 2006 through 2008 vintages on Rating Watch Negative — meaning downgrades are highly likely in the next few weeks for affected deals. The rating agency said a recent review of the expected economic conditions and their effect on CMBS performance led the firm to estimate performance closer to a ‘moderate to severe’ scenario the agency had outlined last July, with commercial property values falling as much as 35 percent. . . .

A sharp decline in economic conditions and the lack of available real estate financing have begun to impact commercial property and CMBS loan performance, Fitch noted — echoing comments earlier in the week from Standard & Poor’s Rating Services, which said Tuesday that it, too, was likely to begin downgrading CMBS credits.

More…

Jim,

The key element of this report is encapsulated in the following; “it is possible that Treasury’s approach fails to acknowledge the depth of the current downturn and the degree to which the low valuation of troubled assets accurately reflects their worth.”

Congressional Panel Suggests Firing Managers, Liquidating Banks
by Robert Schmidt
Bloomberg, April 8, 2009,

The Panel’s views are refreshing in that they do not sign on to the ‘throw as much money as possible at failed management of failed banks’ approach espoused by Treasury and the Fed.  However, what I found most remarkable was the degree of understatement.

In the report, Warren’s panel said “it is possible that Treasury’s approach fails to acknowledge the depth of the current downturn and the degree to which the low valuation of troubled assets accurately reflects their worth.”

Two panel members found even that mealy-mouthed language too strong and wrote separately,

“We are concerned that the prominence of alternate approaches presented in the report, particularly reorganization through nationalization, could incorrectly imply both that the banking system is insolvent and that the new administration does not have a workable plan,” the two wrote.

More…

Perhaps the word "incorrectly" in that quote was a misprint.

I am extremely grateful to you and other contributors to this site for giving us the straight story. We are certainly not getting it from our representatives in Washington.

Best wishes,
CIGA Richard B.

Dear Jim,

The dreadful effects of OTC paper hit charities too…

The issuers must have no soul or conscience!

Click here to read the article…

Maybe they will have to get treatment in one of those hospitals someday?

Best,
CIGA BT

Jim,

Regarding the Lori Montgomery piece on the strain lowering payroll taxes puts on the SS fund:

I’m sure the consternation In Washington is much greater about the lack of funds going from the SS tax into the general fund. Now it’ll be even harder to get money for earmarks.

Also, you were spot on on the halo in the Obama picture. However, what is also unnerving is the pose he is in. Instead of facing the camera he is looking slightly above, probably seeing a vision of the ‘promised land of dollars and cents’ in the future.

Speaking of body language, what is it with our champion Tim. Every time I see him on TV he seems to be hunched over head cocked up wrinkling his brows akin to your dog guarding a favorite bone when you try to take it away.

CIGA A-Non-A-Mouse

Posted at 11:34 PM (CST) by & filed under In The News.

Dear CIGAs,

The geopolitical potential prior to January 14th, 2011 has been described here as:

  1. Pakistan goes Taliban.
  2. Israel makes a significant miscalculation.
  3. Turkey is a victim.

This article reveals the real G20 accomplishments and outlines Turkey’s present place of honor in the USA.

Obama’s Strategy and the Summits
By George Friedman
April 6, 2009

The weeklong extravaganza of G-20, NATO, EU, U.S. and Turkey meetings has almost ended. The spin emerging from the meetings, echoed in most of the media, sought to portray the meetings as a success and as reflecting a re-emergence of trans-Atlantic unity.

The reality, however, is that the meetings ended in apparent unity because the United States accepted European unwillingness to compromise on key issues. U.S. President Barack Obama wanted the week to appear successful, and therefore backed off on key issues; the Europeans did the same. Moreover, Obama appears to have set a process in motion that bypasses Europe to focus on his last stop: Turkey.

Berlin, Washington and the G-20

Let’s begin with the G-20 meeting, which focused on the global financial crisis. As we said last year, there were many European positions, but the United States was reacting to Germany’s. Not only is Germany the largest economy in Europe, it is the largest exporter in the world. Any agreement that did not include Germany would be useless, whereas an agreement excluding the rest of Europe but including Germany would still be useful.

Two fundamental issues divided the United States and Germany. The first was whether Germany would match or come close to the U.S. stimulus package. The United States wanted Germany to stimulate its own domestic demand. Obama feared that if the United States put a stimulus plan into place, Germany would use increased demand in the U.S. market to expand its exports. The United States would wind up with massive deficits while the Germans took advantage of U.S. spending, thus letting Berlin enjoy the best of both worlds. Washington felt it had to stimulate its economy, and that this would inevitably benefit the rest of the world. But Washington wanted burden sharing. Berlin, quite rationally, did not. Even before the meetings, the United States dropped the demand — Germany was not going to cooperate.

The second issue was the financing of the bailout of the Central European banking system, heavily controlled by eurozone banks and part of the EU financial system. The Germans did not want an EU effort to bail out the banks. They wanted the International Monetary Fund (IMF) to bail out a substantial part of the EU financial system instead. The reason was simple: The IMF receives loans from the United States, as well as China and Japan, meaning the Europeans would be joined by others in underwriting the bailout. The United States has signaled it would be willing to contribute $100 billion to the IMF, of which a substantial portion would go to Central Europe. (Of the current loans given by the IMF, roughly 80 percent have gone to the struggling economies in Central Europe.) The United States therefore essentially has agreed to the German position.

Later at the NATO meeting, the Europeans — including Germany — declined to send substantial forces to Afghanistan. Instead, they designated a token force of 5,000, most of whom are scheduled to be in Afghanistan only until the August elections there, and few of whom actually would be engaged in combat operations. This is far below what Obama had been hoping for when he began his presidency.

Agreement was reached on collaboration in detecting international tax fraud and on further collaboration in managing the international crisis, however. But what that means remains extremely vague — as it was meant to be, since there was no consensus on what was to be done. In fact, the actual guidelines will still have to be hashed out at the G-20 finance ministers’ meeting in Scotland in November. Intriguingly, after insisting on the creation of a global regulatory regime — and with the vague U.S. assent — the European Union failed to agree on European regulations. In a meeting in Prague on April 4, the United Kingdom rejected the regulatory regime being proposed by Germany and France, saying it would leave the British banking system at a disadvantage.

Overall, the G-20 and the NATO meetings did not produce significant breakthroughs. Rather than pushing hard on issues or trading concessions — such as accepting Germany’s unwillingness to increase its stimulus package in return for more troops in Afghanistan — the United States failed to press or bargain. It preferred to appear as part of a consensus rather than appear isolated. The United States systematically avoided any appearance of disagreement.

More…

 

Jim Sinclair’s Commentary

The Times of India is one of the most respected publications internationally.

Pakistan could collapse within six months: US expert
7 Apr 2009, 0149 hrs IST, TIMES NEWS NETWORK & AGENCIES

NEW YORK: Pakistan could collapse within six months in the face of the snowballing insurgency, a top expert on guerrilla warfare has said.

The dire prediction was made by David Kilcullen, a former adviser to top US military commander General David Petraeus.

David Kilcullen is the best known practitioner of counter-terrorism and counter-insurgency operations and had advised Gen Petraeus on the counter-insurgency programme in Iraq. Few experts understand the nature of the insurgency in Af-Pak as well and he is now advising Petraeus in Afghanistan.

Petraeus also echoed the same thought when he told a Congressional testimony last week that the insurgency could "take down" Pakistan, which is home to nuclear weapons and al-Qaida.

Kilcullen’s comments come as Pakistan witnesses an unprecedented upswing in terror strikes and now some analysts in Pakistan and Washington are putting forward apocalyptic timetables for the country.

More…

 

Jim Sinclair’s Commentary

Estimates of Toxic paper has grown from $2.2 trillion one week ago to $4 trillion today.

Toxic debts could reach $4 trillion, IMF to warn
Gráinne Gilmore, Economics Correspondent

Toxic debts racked up by banks and insurers could spiral to $4 trillion (£2.7 trillion), new forecasts from the International Monetary Fund (IMF) are set to suggest.

The IMF said in January that it expected the deterioration in US-originated assets to reach $2.2 trillion by the end of next year, but it is understood to be looking at raising that to $3.1 trillion in its next assessment of the global economy, due to be published on April 21. In addition, it is likely to boost that total by $900 billion for toxic assets originated in Europe and Asia.

Banks and insurers, which so far have owned up to $1.29 trillion in toxic assets, are facing increasing losses as the deepening recession takes a toll, adding to the debts racked up from sub-prime mortgages. The IMF’s new forecast, which could be revised again before the end of the month, will come as a blow to governments that have already pumped billions into the banking system.

Paul Ashworth, senior US economist at Capital Economics, said: “The first losses were asset writedowns based on sub-prime mortgages and associated instruments. But now, banks are selling ‘plain vanilla’ losses from mortgages, commercial loans and credit cards. For this reason, the housing market will play a crucial part in how big the bad debt toll is over the next year or two.”

In its January report, the IMF said: “Degradation is also occurring in the loan books of banks, reflecting the weakening outlook for the economy. Going forward, banks will need even more capital as expected losses continue to mount.” At the same time, there is a clear shift in congressional attitudes in the United States about simply pumping money into the system, Mr Ashworth said. The British Government is also under pressure to repair its tattered finances. Injecting more money into the banks could further undermine its fiscal position.

More…

Posted at 11:30 PM (CST) by & filed under Jim's Mailbox.

Dear Mr. Sinclair,

There is the Black Hole solution proposed by a CIGA yesterday. Here is another tack at how the world’s problems will be solved, economic and otherwise… by Orwellian re-branding (spell: SPIN). Examples:

War on terror is over… it is now officially an "Overseas Contingency Operation."

No more terrorism… it is now "man caused disasters"

Toxic assets are now… "legacy assets."

Click here to view the video…

Unfortunately, it is not funny, it is sinister.

Warm regards,
CIGA Annette