4 days ago the US Federal Reserve announced a $600 billion program to buy mortgage-related debt and securities and a $200 billion facility to support consumer debt securities.The U.S. central bank said it would buy up to $100 billion in debt issued by Fannie Mae, Freddie Mac, and the Federal Home Loan Banks. The Fed also said it would buy up to $500 billion in mortgage-backed securities backed by Fannie Mae, Freddie Mac, and Ginnie Mae.
Popularity: 2% [?]
Once again we booked another wild market (the wildest in history) last week in the US and throughout the world…a week in which most analyst agree that the technicals are out the window, and the action is a rollercoaster of fear, panic, excitement, requiring nerves of steel to play. Traders are shaking their heads and dizzy…
Last Week’s Market Highlights.
Last week was a week that will go down in market history, chalking up the worst session since October 1987, not only that but it was the best week in the market since 2003. On Monday we saw a follow through on the previous Friday’s 1000+ pt action with another 1000pt swing in a mad rush of buyers, do you think Warren Buffett is leading the charge?. Then we saw a 700+ pt move to the Southside on Wednesday, followed by a 782 pt reversal to the Northside on Thursday. Last Friday was Options Expiration, we saw a 563pt swing.
It was the lowest volume, least volatile session on a super volatile week that perhaps set a classic double bottom pattern (W) on the major US indexes. It may only be an interim bottom, we have to wait to see as the Elliot Wave theory says we can go lower in here on the 4th and 5th wave…and many stocks are looking for a reason to run North off of their consolidating patterns. Remember that the market is always looking ahead and the stage could be set for a Bull Charge going forward, if that’s the case then October is the best month to begin.
Recap: The Dow Jones Industrial Average ended the week up 401 points, or 4.7 percent, closing the week at 8,852. The S&P 500 gained 41 points for the week, or 4.6 percent, finishing at 940. The NAS composite index ended the week up 62 points, or 3.7 percent, closing at 1,711. The Russell 2000 index finished the week up 4 points, or 0.76 percent, ending the week at 526. Year-to-date, the DJIA, S&P 500 and NAS are all down at least 30%.
Was it historic or hysteric…I say both, and this Bear Market action is making a lot of players a lot of money fast.
Daily Market Wisdom
As you allow your resistances to melt, clarity and spaciousness will arise, and you will be able to move through Life with graciousness, and ease, guided by the confidence and spontaneity that are the fruit of trusting Life, in other words go with the flow and don’t fight the tape.—GuruRR
Today in US Stock Market History
Today is the 21st anniversary of the 1987 stock market crash that happened on Oct. 19, known as “Black Monday.” On that date, the Dow fell a record 22.6%, the largest one-day percentage decline on record. Note: This October, the DJIA is down about 38 percent from its record closing high set a year ago on October 9, 2007.
These are the 10, sorry 15 Big Stories as the world’s markets try to sort out the chaos. (Another seesaw between Good, Grim, and just OK)
1. The Reuters/University of Michigan Surveys of Consumers said on Friday its index of confidence plummeted to 57.5 in October from 70.3 in September. The lowest since June. October registered its largest monthly decline in the history of the surveys. Indicating Fear and Panic gripping the consumer.
2. Construction starts on new homes fell to a 17-1/2 year low in September. Last Friday’s data was a stark reminder that the world’s economic and financial troubles all originated in the U.S. housing market.
3 The nation’s home builders (big and small) will have to consolidate and change business model
4. Crude Oil sinks on supplies and declining usage world wide. Gasoline in US fell to under $2.99 gallon in some areas for the first time in 8 months.
5. Morgan Stanley saved by the Japanese with US$9B investment at the 11th hour.
6. Credit crisis pounding an already weak economy.
7. So far earnings are not coming in too bad. Personally I always liked Coke better than Pepsi anyway.
8. The LIBOR rates and the TED spread improves some, this is real plus.
9. International credit freeze begins to thaw.
10. European central bankers calling for Euro Brand consolidation and regulation.
11. General Motors Corp and Chrysler LLC talk merger.
12. Prosecutors investigating the collapse of Lehman Brothers serve dozen subpoenas being including one to the investment bank’s chief executive, Richard Fuld. Will Dick Fuld to be the Gov/Street scapegoat?
13. Billionaire investor, Carl Icahn has put his 177 ft motor yacht, Starfire, up for sale. His WCI Communities Inc. (homebuilder) has filed for bankruptcy.
14. Mega Billionaire Warren Buffett comes on and tells investors, buy stocks now. “Exaggerated concern about the long-term prosperity of financially secure U.S. companies is foolish, and most probably will be setting profit records in years to come”, Buffett said. He may focus his personal investments on US companies only.
15. Action-packed “Max Payne” shot its way to the top of the North American box office, grossing $18 million during the video game adaptation’s first weekend in theaters, “Beverly Hills Chihuahua” moved to the No. 2 spot grossing $11.2 million, bringing its total receipts to $69.1 million.
Really Big Story: European leaders are pressing to convene an emergency meeting of the world’s richest nations, known as the G8, to be joined by India and China, to overhaul the world’s financial regulatory systems. Bloomberg reports today that President Bush and, French President Sarkozy and European Commission President Jose Barroso said in a joint statement after meeting yesterday that they will continue pressing for coordination to address “the challenges facing the global economy.”
The initial summit will seek “agreement on principles of reform needed to avoid a repetition and assure global prosperity in the future,” and later meetings “would be designed to implement agreement on specific steps to be taken to meet those principles,” the statement said. The summit is scheduled to take place after the elections on November 4th in the USA.
Big Breaking Story: OPEC says it may cut oil supplies in two rounds, one when they meet next week in Vienna and a second later on, to drain oil supply surplus off markets and firm up prices, Chakib Khelil told Algerian state television Sunday.
Food for thought from friend and fellow analyst Keith K. Hatanaka, international specialist in precious metals and soft commodities.
I mentioned to you before regarding Gold…… Maybe US$ peg to Gold????
European Central Bank President Jean- Claude Trichet said that reshaping the world’s financial system should try to return to the “discipline” that governed markets in the decades after World War II (WWII), creating stability by adapting frameworks that have worked historically.
At Bretton Woods, nations agreed to fix exchange rates, establish the International Monetary Fund, rebuilding Europe’s economy in the aftermath of WWII by encouraging coordinated economic policies.
After the collapse of Lehman Brothers, $638 billion in write downs make banks reluctant to lend. Therefore, the ECB and the Fed cut interest rates and this week agreed to flood the financial system with US$s.
Recent market turmoil is partly a consequence of the deregulation that occurred after Bretton Woods’ demise. That was triggered in 1971, when inflation forced the U.S. to abandon the US$’s peg to Gold, an anchor of the system, however, Bretton Woods II is the sign of the era of floating exchange rates.
Among these nations talk about the system should be going back to pegging the UD$ to Gold.
“The central bank is an institution of the most deadly hostility existing against the Principles and form of our Constitution. I am an Enemy to all banks discounting bills or notes for anything but Coin. If the American People allow private banks to control the issuance of their currency, first by inflation and then by deflation, the banks and corporations that will grow up around them will deprive the People of all their Property until their Children will wake up homeless on the continent their Fathers conquered.”— Thomas Jefferson, Founding Father, Third President of the United States, and the principal author of the US Declaration of Independence
Next, let your readers know the total potential cost of the financial rescue to the U.S. taxpayer is already rapidly approaching US$5T, over seven times as much as Congress’ $700B rescue bill.
Based on Reuter’s summary, here is a breakdown of the rescue’s cost to taxpayers so far.
Bailout Type Cost To Taxpayers
Pelosi’s latest economic-stimulus package $300 billion
Paulson’s Bank Nationalization package $250billion
Bailout to the American car companies $25 billion
Nancy Pelosi’s bailout of the state and local governments $150 billion
Financial “bailout” bill $700 billion+
Bear Stearns financing $29 billion
Fannie Mae and Freddie Mac nationalization $200 billion
AIG loan and nationalization $85 billion (+ extra request of $35 billion)
Federal Housing Administration housing rescue bill $300 billion
Mortgage community grants $4 billion
JPMorgan Chase repayments $87 billion
Loans to banks via Fed’s Term Auction Facility $200 billion+
Loans from Depression-era Exchange Stabilization Fund $50 billion
Purchases of mortgage securities by Fannie/Freddie $144 billion
POSSIBLE TOTAL $2.56 trillion+
NUMBER OF HOUSEHOLDS PER U.S. CENSUS 105,480,101
POSSIBLE COST PER HOUSEHOLD $24,269
In addition, the U.S. government has said it will temporarily guarantee US$1.5T in new senior debt issued by banks, as well as insure US$500Bin deposits in non-interest accounts, mainly used by businesses. These figures take the potential cost to US$4.559T + - or US$ 43, 221 per household.
Furthermore, when we account for the fact that the credit default swap market is around US$62T, and that derivatives worldwide are worth between US$1 and US$2 quadrillion, can you count the Zeros?
A way out: close down the CDS market, net out all existing positions, and cancel contracts. Let CMBS holders hold their positions (there’s not enough money in the US Treasury plan to buy them up). Adjust the cost accounting basis on the books of holders so that they do not have to mark their securities down. Next, give the Fed and Treasury unlimited transparency into every financial firm’s books on a strictly private basis and let them manage, merge and close down the insolvent players while guaranteeing every deposit in every bank and money-market fund.
Some good advice in this Storm…
Let us assume that things will get worse before they get better, so here are some steps to take care of yourself and your family:
• Deal with Debt: If you have debt, pay it down. Better still, eliminate it completely. Going forward, pay cash for everything you buy. That may keep you from making some purchases; if so, that is good.
• Downsize Your Life - Before it Downsizes You: Differentiate between things that you want, and things that you need. By streamlining your life, you will rediscover that some “things” are more important than other things.
• Stay in, Don’t Cash Out: If you’re a decade or more away from retirement, everything we know about market probabilities and recorded history suggests the better option is staying in the market, as opposed to cashing out. But do not go crazy, either. We also know that balanced funds, hard assets and a solid emphasis on income offer the best shot at higher returns over time.
• Be Real: If you are already retired, and your “nest egg” has been eviscerated, conduct a realistic appraisal of your financing needs. If you realize you can’t risk losing part - or all - of the money that you still have invested in the markets, talk to your financial advisor immediately. It may be better to pull out of the markets and move on to safer choices.
Snap Shot of the Major US Market Indices
DJIA: All of the indices looked alike last week, including the small caps, though the DJIA lagged a bit.
Stats: last Friday-127.04 pts (-1.41%) close 8852.22 Volume: 360MM shrs Friday vs. 422MM shrs last Thursday
S&P 500: the index moved North to the 10 day EMA (980.50) last Friday, and finished flat on the day. It will try to cut thru the 10 day this week to continue the advance I believe…
Stats: Last Friday Stats: -5.88 points (-0.62%) close 940.55 NYSE Volume: 1.74B/shrs (-12.88%) Up Volume: 818.794MM shrs (-738.405MM) Down Volume: 913.803MM/shrs (+502.715MM/shrs) A/D and Hi/Lo: Advancers led 1.23 to 1
NAS: the NAS put in a good performance on an action packed historic market week, it moved up to the 10 day EMA last Friday faded closed flat. The pattern look like a short term double bottom that could send NAS North to the 2000/2100 level on this move, you know the techs love to lead. Case in point, last Friday earnings from IBM, AMD and GOOG, AMD, lit a fire under the techs. The NAS has the bit in its mouth and appears ready to lead off or the short double bottom. Keep AAPL in you sights.
Stats: last Friday -6.42 points (-0.37%) to close at 1711.29 Volume: 2.765B/shrs (-18.89%) Up Volume: 1.323B/shrs (-1.586B) Down Volume: 1.417B/shrs (+959.974M) A/D and Hi/Lo: Decliners led 1.29 to 1
Previous Session: Advancers led 1.21 to 1
The Charts*
1) DJIA Chart: http://stockcharts.com/h-sc/ui?s=djia
2) The S&P 500 Chart: http://stockcharts.com/h-sc/ui?s=sp500
3) The NAS Charts: http://stockcharts.com/h-sc/ui?s=NAS
*Charts from Stockcharts.com
The Sentiment Indicators: These indicators are psychological indicators that attempt to measure the degree of bullishness or bearishness in a market. These are contrary indicators and are used in much the same fashion as overbought or oversold oscillators. Their greatest value is when they reach upper or lower extremes.
1) VIX: 70.33; +2.72 on Friday after hitting record high of 81.15 on Thursday.
2) VXN: 71.26; -1.13
3) VXO: 71.06; +0.72
4) Put/Call Ratio (CBOE): 0.97; -0.18
Note: A contrary POV; when everybody bets one way it is likely to go the other, stay tuned
*The Market Volatility Index (VIX) measures the volatility of the market. A recent news story described it as “the options market’s gauge of investor fear.” Traders use VIX as a general inverse indicator of market volatility and sentiment. High numbers mean that there’s excess bearishness, and low numbers indicate excess bullishness. The VIX is updated intraday by the Chicago Board Options Exchange (CBOE), using Standard & Poors 500 Index (SPX) bid/ask quotes. It was created in 1993.
**The CBOE NAS Volatility Index (VXN) employs the same formula used to calculate $VIX, which is based on the implied volatility of S&P 500 index options. This formula is derived from a basket of put and call options. Some are out of the money, some in the money, and some at the money. The resulting $VXN represents the implied volatility of a hypothetical 30-day option that is at the money.
***The VXO is the ticker created to track the “original VIX” that was calculated using the prices of S&P 100 options. The new VIX uses the ticker $VIX and is calculated using the prices of S&P 500 options. The fundamental nature of the VXO is the same as the VIX, but it is less robust and not as simple as the VIX.
Bulls vs. Bears:
Bulls: 22.4%. The Bulls are down from 25.3% below the 35% level considered bullish and from 40.7% on the high from the rally off the July 2008 lows.
For your reference: The Bulls bottomed in the Summer 2006, the last big selling before the charge to the October 2007 high.
Bears: 52.9%. The Bears declined a bit off of a high 53.0% high above the 35% level a bullish indication; this is the highest Bear number since 1995 and negative in the very extreme. 35% is the point indicating too much pessimism.
For your reference: the Bears hit a high of 37.4% in September of 2007. 53.0% Bearishness is way above their 2005 high and that is what ignited new rallies.
What to expect this week, and down the line…
Earnings and LIBOR, earnings and LIBOR.
Most analysts believe that earnings will turn in their 5th straight Q of declines, but last week the Icons KO, JNJ, GOOG, IBM) beat. If the LIBOR continues to ease, and earnings continue to please, the market will begin settle and find some upward direction yet this October as it seeks to set a bottom.
With this kind of action look for traders to play the short term and scalp profits if they can going North or South.
Not Warren Buffett though, he is not a trader but a long term investor, that’s his secret. The market could very well get serious in here and rally North off of this short double bottom (W) pattern. Lot’s of analysts are saying no to the financials, that being the case, you should be looking at the big guys from a contrarian POV. Real rallies are lead by the financials, so watch them carefully.
Remember that the sentiment is extreme, the action is extreme, and the financial fix is in, all that said the markets are setting up for a move that may fool the talking heads. Warren Buffett is not Dope. Stay tuned…
The Major Indices Resistance/Support Levels
DJIA: Close 8852.22
Resistance:
8985 the closing low in the 2003 consolidation
9200 the July high in the 2003 consolidation
9211 the10 day EMA
9323 June 2003 high
9575 September 2003, May 2001
9631 the 18 day EMA
9814 August 2004
9937 the May 2004 low
10,100 to 10,000
10,127 April 2005 low
10,215 4thQ 2005
10,365 new 2008 low
10,459 the September 2008 low
10,503 the 50 day EMA
10,827 the July 2008 intraday low
10,962 the July closing low
11,061 from February 2006
11,127 the 90 day SMA
11,317 March 2006
11,388 the August 2008 low
Support:
8626 December 2002
8521 interim high in March 2003
8197 2nd October 2008 low
7882 early October 2008 low
7702 the July 2002 low
7524 the March 2002 low
7282 the October 2002 low
S&P 500: Close 940.55
Resistance:
965 the 2003 consolidation low
981 the 10 day EMA
995 from June 2003 high
1031 the 18 day EMA
1065 the 4th Q 2003 point that the S&P 500 started the run to the 2007 high.
1075 from August 2004.
1106 the late September 2008 low
1133.50 the mid-September 2008 low
1142 the 50 day EMA
1200 the July 2008 intraday low
1226 the 90 day SMA
1243 the 2002/2003 up trendline
1244 August 2005 high
1257 the March 2008 low
1270 the January 2008 low
1285 the July 2008 high
1302 the 200 day SMA
1313 the August 2008 high
1317 the February 2008 low
1324 the April 2008 low
1348 an old trendline
Support:
889 an interim 2002 high
866 2nd October 2008 low
853 the July 2002 low
839 the early October 2008 low
800 the March 2003 post bottom low
768 the 2002 Bear Market low
NAS: Close 1711.29
Resistance:
1752 from 2004
1768 the 10 day EMA
1782 August 2004
1859 the 18 day EMA
1882 from October 2003
1900 the gap down to point in October 2008
1912 from April 2005
1947 gap down from point in October 2008
1984 the late September 2008 low
2070 from September 2008
2070 the 50 day EMA
2099 the mid September 2008 closing low
2155 the March 2008 low
2167 the July 2008 low
2202 the January 2008 low
2261 a March 2008 interim low
2286 the 1st April 2008 gap up point.
2300 mild resistance
2132 the 200 day SMA
2340 the March 2007 low
Support:
1644 from August 2003
1620 from the early 2001 low
1565 the 2nd October 2008 low
1542 the 1st October 2008 low
1521 the late 2002 high following the bounce off the Bear market low
1387 the 2001 low
1253 the March 2003 low
1108 the 2002 low
This week’s Economic data (these are expectations complied from various reliable sources and official reported data often vary). The calendar is light again this week.
Monday, October 20
Leading Economic Indicators, September (10:00): -0.3% expected, prior -0.5%
Wednesday, October 22
10/18 Crude Oil inventories (10:35): 5.61M prior
Thursday, October 23
Initial Jobless Claims (8:30): 461K prior
Friday, October 24
Existing Home Sales, September (10:00): 4.93M expected, prior 4.91M
Popularity: 2% [?]
What Went Wrong (W3) and More…?
These are some of the recent big stories:
1) Fannie Mae and Freddie Mac rescued, Lehman Brothers in Chapter 11, Merrill Lynch sold to Bank of America, AIG, Washington Mutual and Wachovia all being rescued in different ways.
2) Morgan Stanley and Goldman Sachs relinquished their investment bank status.
3) The Fed rescue plan proposed was turned down by Congress and then passed.
4) Central banks around the world made massive liquidity injections, and cut interest rates (except the BoJ)
5) Stock shorting rules were introduced and interbank lending seized up.
6) Bradford and Bingley failed, HBOS was effectively rescued by Lloyds TSB, Fortis was rescued by three governments and Dexia was rescued by two.
7) Stock markets around the world are in major oversold mode, in the final minutes of today’s US market session stocks headed due South, the DJIA closed - 679 points to its lowest level in five years after a major credit ratings agency said it was considering cutting its rating on General Motors Corp.
For the last 30 years The American economy and increasingly the World’s economies have bee built on credit, and that credit is used for everyday needs and thing, but can also be used to purchase Big Ticket items, over time this access to Credit was broadened, loosened and ran unchecked in the US and EU.
Over the past 2 years there appeared a dramatic change in the ability to create new lines of credit, that credit constriction dried up the flow of money, slowed new economic growth and the buying/ selling of assets all level of assets, especially visible has been the mortgage backed assets.
That said, many financial institutions were left holding mortgage backed assets that had dropped precipitously in value and were not bringing in the amount of money needed to pay the loans.
Thus, drying up the institutions cash reserve, resulting in their credit, and ability to continue to make new loans.
For many years the cheap credit which made it very easy for people to buy houses and make other investments was based on pure speculation. Cheap credit created more money in the system and people wanted to spend that money, they did spend it.
They bought houses on the theory that the price would go up and then flip to another buyer, that practice increased demand and caused “Bubble.”
Also, private equity firms leveraged billions of dollars of debt to purchase front line companies, and by doing so created hundreds of billions of US$s in wealth by simply shuffling paper, while not creating anything of hard value.
Then there came the speculation in commodities, especially in Crude Oil and energy, the prices skyrocketed North in response.
With all of the continuing demand that resulted in expanding supply and the credit drying up the housing market turned sour and turned South. This housing market slump set off a chain reaction in our economy, that of the UK and Europe.
When individuals and speculative investors were no longer able to flip homes for a quick profit, the adjustable rates mortgages adjusted higher, and those mortgages were no longer affordable for many homeowners, thus 10s of thousands of mortgages went into default, leaving investors and financial institutions holding the bag.
This action caused massive losses in mortgage backed securities and many banks and investment firms began bleeding money due to mark to market accounting rules (since relieved some), and caused a glut of new on previously owned house unsold on the market depressing housing prices, and slowing the growth of new home building causing many home builders to go out of business, and sending the laborers to the unemployment lines.
The depressed housing prices caused further complications as it made many homes worth much less than the mortgage value and some owners chose to simply walk away instead of pay their mortgage, the latest figure is 10MM families and homeowners in the US have properties that are valued at 20% less than the 1st mortgage, and many have 2nds, 3rds and home improvement loans. It is grim.
These massive losses caused many banks and lenders to tighten their lending requirements, but it was already too late for many, the damage had been done, leaving many financial institutions saddled with risky mortgage backed securities that is not sufficient collateral to exchange, and thus can no longer afford to extend new credit, and the main business of Bank’s is lending, remember you cannot sell out of an empty store. Again, current loans are not cash flow positive, hence banks cannot (or will not) make loans to individuals and businesses, and thus the banks and financial institutions are weakened and consolidating globally.
One analyst that I read put it this way: It’s a war zone out there, and the better part of valor is to keep your head down and your powder dry, and live to fight another day.” Stay tuned…
Now here is the And More part…
By: KK Hatanaka, Guest World Markets Analyst
Number 1, The World is reacting
The central concern among investors over the last few days has been the freezing of the interbank market.
Lending between banks has virtually stopped as the banks confidence in their counterparties has drained as more and more financial institutions have let the community know that they are in trouble.
Three-month euro interbank rates are now at an all-time high and three-month dollar interbank rates are currently 4.32 percent, up from 2.82 percent in mid-September.
Interbank rates are a key determinant of lending rates, so higher interbank rates combined with an aversion to lending is having a clear impact on the broader economy world wide
Interbank markets are also a vital tool for banks to manage their liquidity. In this climate, the huge injections of liquidity from central banks are vital.
The chances of a large-scale coordinated rescue package across the leading global economies is growing daily.
Yesterday there was a coordinated interest rate cut (except by the Bank of Japan) and G7 leaders meet on this Friday, and global financial leaders meet at the IMF/World Bank meetings on Saturday and Sunday this week. We should be closely watching these events as they unfold.
Some very important announcements over the past 60 hours:
The U.S. Federal Reserve announced it will buy commercial paper (short-term debt issued by corporations and banks).
Many companies rely on commercial paper to finance their day-to-day operations, effectively using it as a credit line. The extreme aversion to risk in the markets means that investors have significantly scaled back their purchases of commercial paper and interest rates have jumped. The intervention in the commercial paper market is separate to the $700 billion that has been allocated to buy up distressed financial assets in a plan approved by the U.S. government on Friday and marks the first time that the Fed has assets that not backed by collateral.
Fed Chairman Ben Bernanke signaled a shift in policy at a speech on Wednesday, October 8th, 2008 commenting that the outlook for economic growth has deteriorated and that inflationary pressures have eased. This gives a strong indication that there will be further interest rate cuts. The futures market had already priced in lower rates, but previous Fed comments had been careful to balance concerns about the economy (which call for lower interest rates) with concerns about inflation (which call for higher interest rates).
This morning the UK government announced a financial support package for domestic banks. GBP50 billion of government money has been made available to eight of the country’s largest financial institutions, who in return for access to this funding will give the government shares that guaranteed a fixed rate of interest but do not have voting rights. A further GBP200 billion of short term financing has been made available to provide liquidity. Share prices of commercial banks plunged on Tuesday; HBOS was down by 40 percent and Royal Bank of Scotland down by 39 percent. Share prices of the companies with access to the support package are currently registering double-digit gains.
A summit of EU finance ministers on Wednesday, October 8th, 2008 agreed to a set of principles for government action in rescuing financial institutions. These principles were reasonably broad and did not amount to a formal EU-wide action pan. Instead the region will deal with banks on a case-by-case basis. In addition, deposit insurance in the EU was increased yesterday from Euros 20,000 to Euros 50,000 ($68,000). This move was designed to reassure savers and prevent potentially destabilizing withdrawals from the banking sector and follows Ireland and Greece guaranteeing all depositors’ savings in the last few days.
Number 2, on Gold…
Since we are now part of the Global markets for a clearer understanding one must look at EU, UK, Asian economy, currencies and stock markets.
Turmoil and chaos abound now, as the domino effect will continue to effect to the world for a while. I do not think the markets have hit the bottom yet.
Obviously banks are leveraged up on loans an extent that easily exceeds the leverage of at risk banks in the U.S. and are in the process of deleveraging.
For example, more than 11 billion Euros were pumped into Fortis SA (Belgium - an international provider of banking and insurance services to personal, business and institutional customers) so far this week.
Furthermore, Belgium and France will pump more than 6 billion Euros to Dexia SA (Belgium - the provision of banking, financial and insurance services)
The German government helped out Hypo Real Estate (Germany - responsible for strategic guidance and acts as a gateway to equity and debt markets) with a loan guarantee of 15 billion Euros, addition to 35 billion Euros.
Ireland’s government will guarantee 400 billion Euros of deposits and debts belonging to its domestic banks for a period of two years. (they have already rescued Glitner Bank).
By the way, Gold could go higher in here and into 2009, but watch dollar movement……Investors are pouring money into Gold ETFs (Exchanged Traded Funds). For example, in the five trading days from September 17th to September 23rd, some $3.2 billion poured into the major gold funds.
In fact, Gold ETFs are now one of the biggest drivers of Gold prices. And the amount of Gold they hold continues to soar.
As of the end of September the biggest gold ETF, SPDR Gold Shares (GLD), held over 724 metric tonnes (23.3 million ounces) of gold
G5 (US, Germany, France, Italy, Japan) are major holder of Gold.
Gold (Tonnes) Q1 2008
United States - 8133.5
Germany - 3417.4
IMF - 3217.3
France - 2568.3
Italy - 2451.8
Switzerland - 1113.2
ETF - 879.0
Japan - 765.2
Netherlands - 621.4
China - 600.0
ECB - 563.6
Russia - 457.0
Taiwan - 423.0
Portugal - 382.5
India - 357.7
Venezuela - 356.8
United Kingdom - 310.3
Lebanon - 286.8
Spain - 281.6
Austria - 280.0
Belgium - 227.6
Algeria - 173.6
Sweden - 146.6
Libya - 143.8
Saudi Arabia - 143.0
BIS - n.a.
Philippines - 129.6
Singapore - 127.4
Dollar reserves
Rank Country/Monetary Authority billion USD (end of month)
1 China $ 1809 (June)
2 Japan $ 997 (August)
3 Russia $ 563 (September 26)
_ Eurozone $ 555 (July)
4 India $ 291 (September 19)
5 Taiwan $ 282 (August)
6 South Korea $ 243 (August)
7 Brazil $ 205 (Aug 31)
8 Singapore $ 175 (July)
9 Hong Kong $ 158 (August)
10 Germany $ 137 (August)
Number 3, on the US$ and Saudi Arabia
As we all know the Saudi Riyal (SDA) is pegged to the US$, but if the US budget deficit enlarges and interest rates go down, then Saudi may not be able to continue pegging to the SDA to the US$, just like what Kuwait did in May 2007, when its central bank parted company with its GCC partners and switched its exchange rate mechanism to a basket of currencies, and thus it became highest valued currency in the world.
Saudi Arabia’s banks are feeling the pinch from the global liquidity crunch as the government is caught between efforts to manage inflation and lending to private-sector banks.
There is a liquidity management problem in Saudi Arabia and in other countries around the world.
The Saudi Arabia Monetary Agency (SAMA), the kingdom’s central bank, may lower its bank lending rate if it finds that the banks face a cash shortage.
Record Crude Oil prices have flowed huge monetary liquidity through the Saudi economy, fuelling the highest rates of inflation in decades.
SAMA has repeatedly said the economy is insulated against the global financial meltdown because of a conservative monetary policy, however, liquidity is tightening because the situation with the US$ has created concern and raised the likelihood of the Riyal appreciating against the US$, making it difficult to lend in US$s, and as borrowing from international markets has grown more difficult, Saudi banks are finding increasingly difficult to face the crisis.
As I write this the Saudi banks still do not have a strategy to deal with the unprecedented global crisis, but the kingdom’s strategic Crude Oil reserves mean it is in a better positioned than many others countries.
Note: The Saudi Arabia’s economy is still fundamentally solid based on its hydrocarbon exports, but it is not completely insulated against the world crisis.
Number 4, what is in store
The US has not exhausted its remedies, the Fed can cut interest rates from 1.5% to zero. If that fails, it can inaugurate a mass purchase of the US debt.
As you know, the US government has a technology, it is called the US$ printing press, as said in Fed chief Ben Bernanke, helicopter speech, in November 2002.
The US Treasury/Fed can jump into any market to firm up the asset prices.
For example, the Fed can buy Florida property, SUV gas guzzlers from the used car lots, send them to the crusher and reclaim them as scrap. Plus the Fed can expand its menu of assets.
However, the question is will the US’s foreign creditors tolerate such action.
Have a look at what happened in Japan…they lost decade as the world’s top creditor, and they were bolstered with a vast pool of household savings to cushion the slump.
Now, America must start its purge with net external liabilities of $3T, and a savings rate near zero.
Foreigners own over half the US Treasury debt, and two thirds of all Fannie, Freddie, and other US agency bonds.
That is why the risk of a US$ collapse is one for the distant future. Right now the world faces the opposite problem.
There is a wild scramble for US$s as a $10T pyramid of global lending based on US$ balance sheets will create another chaos. This is a short squeeze on those who have used the US$ for a global carry trade.
International banks are facing margin calls on their dollar leverage. This is the reason why the Fed has to provide $1.25T in dollar liquidity for the entire global banking system.
But check this: The crisis will swallow up the UK, EU, Asian and emerging markets. Thus, making life easier for Washington, D.C. as the United States is again becoming a safe-haven, allowing the Fed to pursue monetary stimulus without being slapped down by the currency, debt, and commodity markets.
This weekend is very important for the world economic turmoil.
The world economy is entering a major downturn in the face of the most dangerous financial shock in mature financial markets since the 1930s.
Global growth is projected to slow substantially in 2008, and a modest recovery would only begin later in 2009.
The immediate policy challenge is to stabilize financial conditions, while nursing economies through a period of slow activity and keeping inflation under control. Stay tuned
Popularity: 2% [?]
