Friday, March 21, 2008

Is the Credit Crunch Over?

The recent stock market & dollar rally, coupled with the massive commodity/metals sell-off, has led many to believe that the Fed & Plunge Protection Team (PPT) were able to sucessfully restore liquid credit markets and the turmoil is now over.

My Thoughts:

Aside from unprecedented/wide-scale PPT market manipulation, and a mere slowing of the credit implosion helped by new Fed lending apparatuses, nothing has been resolved. Homes are still foreclosing in record numbers, legislators are now calling for new regulations to prevent future “similar” banking/credit issues, lending standards are getting tighter, financial institutions still have no market (aside from the Fed monetization window) for their gargantuan off-balance sheet/tier-III toxic waste piles, and American consumers (trying to cope with huge inflation waves, combined with a collapsing wealth-effect brought about by falling home values and lack of available “new” credit) are starting to pull back on discretionary spending. Note: 70% of the US economy is consumer spending

Bottom line: Recent sentiment change created by Financial Wizard market manipulation is all smoke and mirrors – the PPT is trying to re-establish faith and trust in markets (and a currency) that are ready to implode.

What manipulation am I talking about?

Let’s look at the recent precious metals sell-off: Gold and Silver took their worst beating in years during the recent commodities smack-down. How in the world could these metals get crushed so badly when dealers are overwhelmed with orders and can’t get or keep enough products on their shelves?

Must see this link (and pictures below) to understand what I’m talking about: Silver Shortage: 19 dealers reported "Sold Out"

Bullion Direct


Additionally, I received this message via email from APMX just yesterday:

Due to the OVERWHELMING demand for precious metals, our online ordering system has been unable to keep up with our customers’ needs. We have had to disable the APMEX ordering system to allow us ample time to upgrade our site to accommodate the increased demand. We apologize for this temporary problem. In the mean time, we will be accepting telephone orders for the following items only as we have them available:1 ounce Gold American Eagles1 ounce Gold Canadian Maple Leafs1 Ounce Gold Krugerrands100 oz Silver BarsMisc Generic .999 Fine Silver90% Coin SilverDuring this time, we will have a minimum order of $5,000. We regret we have had to make this drastic change to our ordering process and rest assured, we are working expeditiously to correct the problem. As soon as we have our new site up and running, we will notify you via e-mail when you can again place orders online.

Or how about this one:

High Demand for 2008 Silver Maple Leafs: The Royal Canadian Mint has found itself unable to fully meet the unprecedented demand for silver Maple Leaf coins with its current supply, and has temporarily suspended shipments. This situation is temporary until more of this fine bullion product can be struck and shipped. Because many of our customers want to purchase this product at today's prices, Northwest Territorial Mint will accept orders now for shipment when the product becomes available, which we expect will exceed 30 days. If the wait for product proves too lengthy, we reserve the right to substitute a similar silver product.

OK, if there is such a supply shortage, why did PM prices crash this last week?

It was a PPT manipulated paper smack-down (through engineered margin call selling of futures, options, etc – to fry the longs, destroy prices and signal an end to the commodity boom) that has changed none of the underlying precious metals supply/demand/inflation-hedge/flight-to safety fundamentals.

But it did provide a great buying opportunity – could be a very good time to back up the truck and load up w/physical…

Take a look at who is taking advantage of this smack-down:

Asia jewellers on buying spree as price sinks-- It probably won’t be too long before PM prices regain their footing..

Jewellers across Asia rushed to buy gold on Thursday after prices tumbled more than $100 an ounce since spiking to a record above $1,000 an ounce this week, pushing up premiums in key bullion trading centres. Gold fell more than 2 percent to hit a 1-month low of $920.30 an ounce as funds sold bullion after pushing up the price to a lifetime high of $1,030.80 on Monday.

Superb comment from a reader at a PM blog I routinely visit -- summarizes the situation perfectly: Somebody took advantage of a short trading week to slam PMs - on options expiration week (saving the shorts' shorts!) - and by the same token make a "double-top" appear out of the blue - to signal "an end to the commodities bull" and "an end to the bearish dollar" - based on NO REAL PHYSICAL TRADING - just "PAPER"...

With our manipulation discussion out of the way, what about the credit crisis being resolved?

Bloomberg Today:

Goldman, Lehman Rating Outlook Cut to Negative by S&P (Update3)

March 21 (Bloomberg) -- Goldman Sachs Group Inc., the biggest U.S. securities firm, and smaller rival Lehman Brothers Holdings Inc. had their credit-rating outlook cut to negative by Standard & Poor's, which said Wall Street banks' profits may fall as much as 30 percent in the coming year.

``Our current expectation is that net revenue could decline'' at least 20 percent for independent securities firms, S&P said in a statement today.

Or this one:

Big U.S. finance company faces credit crisis, and shares fall

The crisis in the credit markets is threatening to engulf one of the largest commercial finance companies in the United States.

The CIT Group, a century-old company that lends money to small businesses and midsize corporations, drew on $7.3 billion of emergency bank credit lines on Thursday, causing its shares and bonds to plummet.

CIT, whose businesses range from making student loans to financing purchases of airplanes and railroad cars, announced that it would try to sell some assets or businesses to raise cash and repay its debts. Analysts said the tightening credit squeeze could drive the entire company into the arms of a bidder.

The developments at CIT suggest that the credit troubles that felled Bear Stearns this week continue to spread, despite efforts by the Federal Reserve to encourage banks to lend to other financial companies.


Credit crisis puts vise grip on leveraged companies

There are 93 US companies at risk of defaulting on $53 billion in debts, a new report shows, marking a 50 percent jump since last June, when the credit crisis started. Many of these debt-laden companies were involved in giant leveraged buyouts.

Standard & Poor’s ‘‘weakest links’’ report is forecasting that 75 US companies will default on their debts in the next 12 months. Of the 93 companies at risk, more than half were involved in takeovers by big-name private equity firms, including Boston’s Thomas H. Lee Partners, Bain Capital, and J.W. Childs Associates.

The sectors worst hit are media and entertainment, and consumer and retail. Many of the names are familiar to consumers, like Uno Restaurant Holdings Corp., the Boston-based pizza restaurant group; Linens ‘n Things Inc., the home goods chain; and Univision Communications Inc., the Spanish-language television and radio company.

‘‘This is just the beginning,’’ said Diane Vazza, managing director and head of Global Fixed Income Research at Standard and Poor’s in New York. For companies struggling with debt payments, she said, ‘‘There’s no way in a slowing economy, potentially a recessionary economy, to grow out of that.’’

I could go on with additional links to illustrate the depths of this credit crisis, but I think you get the point—the recent smoke and mirrors caused by PPT market manipulation has solved nothing. Our banking system is still insolvent and the fed is pumping money into a bottomless pit.

BOTTOM LINE: A one or two day turn around for stocks and commodities means little.

NOTHING, absolutely nothing regarding underlying fundamentals has changed from last week, except the titanic has taken on a bit more water, and the captain is desperately trying to reassure us by saying -- "it's only a small leak and lifeboats (PM's) won't be needed."

Go ahead and trust the captain -- but at your own peril...

OK, my doom and gloom is out of the way -- how about some closing funnies?

Regards and happy easter to all!



xavier said...

Thanks for this excellent blog. I've been reading it for the last weeks.

Here, in Spain we've got a similar situation.
1. Housing bubble rising since 1.999. (+300% in Barcelona), and collapsing since 2007.
2. Real inflation growing for consumers since we use euro currency
3. Unemployment rasing since last december.

Still havent seen a financial crash but most of the saving banks that finance homebuilders and housing speculation are in trouble. Housing prices are artificially supported, but the sales are stopped for more than a year, and expect prices falling for next year.
The thing is that media here does not talk at all about the troubles we have to face right now and in the future.
Seems like we have to pass for similar siatuation as in USA, with some lag in time.

Matt said...

Local NC news I heard on the radio yesterday:

Home Sales Down In Triad, Triangle

Sales of existing homes in the Triad dropped 10 percent in February, as prices rose 4 percent compared to 2007. The Triad had 1078 sales in February with an average price of just under $169,000 according to figures released by the North Carolina Association of Realtors. Triangle data, which includes new homes, showed home sales were down 16 percent in February, compared to February '07, while the average price was up 25 percent. For the first two months of the year, sales were down 10 percent in North Carolina.

What happened to supply and demand? Now, I am not a home owner, in fact I was going to buy this year but now I will not be (I will rent gladly.) And I do not claim to know the housing market or how to value a house, but nobody is buying these houses yet they are up 25% from last year? Huh? Also, when I drive around Raleigh, all I tend to see are houses in the 400s and 600s and higher being built. Who is living in these houses? Who can afford that? I know that the housing crash has not affected Raleigh yet to the extend of other places, but are people still dumb enough to get into these houses that they can't afford with the dollar going through what it's going through and the economy on the brink of disaster? Geez!

Randy said...

Xaviar--Thanks for posting up. I think US housing woes are merely the opening salvo for G7 nations and the EU. Housing bubbles are present around the world and will all be popping in due time. Bottom line: This won't be just a US financial crisis--we're talking a global crisis.


I believe you're doing the right thing. Sit tight and rent till prices come down--which they will..


reality said...

Great blog. I found, bookmarked, and have been following for the past 3-4 weeks!

My situation is a little different with regard to the real estate market. I purchased my moderately priced home ($285,000) in 2001, so have not been hurt too much by the downfall of prices. I could probably still command $265,000 today, and am I free of a mortgage.

Wanting to move back to my home in the Dallas, TX, area, I'm challenged by the fact that homes there have not yet reached the bottom, and even though I have no mortgage debt, it's difficult for me to envision moving to a home that will lose potentially 20% of it's value over the next year or so.

Re: investments. I currently hold 90% of my liquid assets in gold bullion, the bulk of which was purchased in 2002 at an average of $321/oz., so am fine there too.

My further frustration stems from the (perceived?) power the PPT, etc., have in 'smacking down the price of gold.' Since I'm retired, this is the vast bulk of my net worth, and could vastly affect my family's standard of living.

Housing here in NE Ohio is stagnant. In the metro areas, it's dying, with Cleveland (60 miles away) in death throes! Still the 'rust belt' area it was in the 80's.

How long do you feel these 'powers' (PPT, etc.), will be able to hold down the gold price? I guess the longer they are successful, the worse will be the total destruction of the present economy. Like a beachball held will eventually rise with force!

Sorry for the long (and personal) comments but I wanted to let you know that I believe your articles to be right on. Please continue to edify those of us that have less understanding of the markets/economy. The only other 'advisor' I'm trusing in is Jim Sinclair (and his group). Been following him since 1999 prior to his having his own website.

Be well and buy gold!


Randy said...


Appreciate the kind words. Sounds like you're in a far better position than most--congrats and good on you.

With regard to your question: How long do you feel these 'powers' (PPT, etc.), will be able to hold down the gold price?

I wish I knew, but think they spent quite a bit of their ammo on this take-down.

If the physical markets continue with product shortages and the PPT keeps up their game, it would likely lead to a divergence between physical and paper prices, as people become more aware of the PPT con game and shun the manipulated paper market for physical (creating a wider imbalance and much higher prices).

BTW: I too follow Jim Sinclair and feel that very few understand the predicament we're in better than him...

Thanks again for the kind words and for posting up your thoughts.

Happy Easter

Domenic said...
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Reginald said...
This comment has been removed by a blog administrator.

The credit crunch is far from over.


Its not over.