Oil companies and traders are storing at least 50,000,000 barrels of Crude Oil in supertankers, a clear sign of supply way over demand as the global economy slumps. The surge in floating storage the biggest since late 2001, is likely to push OPEC, which is due to meet on Wednesday in Oran, Algeria, to make a deeper production cut to reduce stocks. Storing Crude Oil in tankers is unusual as it is significantly more expensive than inland.
Popularity: 52% [?]
The US Indices Big Picture
After getting crushed during the month of October, the U.S. markets came to life last week.
Last week, the DJIA put on 114.32pts, 1.57%, to 9,325.01, the S&P 500 rose 14.66 pts,1.54%, 968.75, and the NAS rallied 22.43pts,1.32%, to 1,720.9 .
The Big Q: has the up turn marked an early sign of a market recovery or does it represents a consolidation before the next leg lower.
The Big A: Time will tell.
When we measure the up turn’s power, the following is a checklist to use in determining a MML (major market low).
Most of the following below have to happen:
• An off-the-charts strong-volume rally that is not driven by government intervention.
• The emergence of sector leadership. Along with the financials, the airlines are well, but these groups cannot do it alone, the techs have to really join the party.
• At least one, and preferably two, 20-to-1 up days to neutralize the October breakdown. Over the past many sessions, the U.S. markets have suffered three 20-to-1 down days from the breadth POV.
• A volatility drop to digest the market crash. For instance, a series of 100-point Dow moves, in either direction, uninterrupted by these 800-point intraday whipsaws.
• From a sentiment standpoint, analysts need to stop declaring how great this buying opportunity is. This is a must
• A decisive break through in overhead resistance.
That is it from the Technical POV.
Now, when considering the final point, a break through in overhead resistance, see the following areas:
• Dow resistance at 9,387, matching the two week prior closing high.
• NAS resistance initially at 1,844, matching two week prior closing high, followed by the 1,900.
• S&P 500 resistance spanning from 1,000 to 1,010, two week prior closing high held at 1,003.
From a technical standpoint, anything transpiring under these levels is little more than “noise” according to some analysts, and as these areas are approached, the risk of another sharp downturn increases.
The Big Q: What should we look for this week?
The Big A: Earnings season is winding down, and there are only few companies left to report results that have the potential to influence the broad market. Stay tuned…
.
My pal Wally Stein’s Words of Wisdom
Be curious, mistrust dogma and common assumptions, belief in free will, and be confident in the face of the unknown. Your biggest enemy in the stock business is opinions and emotion.
Err on the side of Green.
Last week’s 18 World Big Stories, Ok, it seems the markets have priced in the bad news.
1) World markets are stabilizing, Interbank interest rates are falling.
2) the US$ recorded its biggest monthly gain against a basket of currencies in more than 17 years last Friday, boosted by month-end demand and concerns about a deteriorating global economy.
3) US Stocks: On the Week: U.S. stocks posted their best week in 34 years last week with the first two- session gainer in a month. On the Month: the DJIA logged its biggest monthly decline in a decade, and the S&P 500 had its worst month since October 1987.
4) The Russell 2000 Index, where hedge funds own an average 13% of shares, lost 21 percent in October, ending a five- month streak of beating the Standard & Poor’s 500 Index,
5) The London FTSE 100 closed up 2 pct at 4,377.34, capping its best week ever.
6) Moscow’s stock exchange put in the best week on record with gains of close to 50%, buoyed by state purchases of stocks and corporate bonds.
7) Japan’s Nikkei index ended October down 24%, its biggest monthly fall in its 58-year history, on continuing fears over a global recession and profit taking ahead of a long weekend
Hong Kong shares fell 2.5 percent last Friday, posting its worst monthly slide since Oct. 1997, on worries over the global economy.
9) The US, China, India, Korea, and Japan cut central bank lending rates, and the door is open for more.
10) The US Commerce Department reported last Friday that consumers cut monthly spending for the first time in two years in September.
11) Saudi Arabia and other Crude Oil producing Gulf states voiced their interest is in a stable energy price, not huge volatility that has Crude Oil prices soar and collapse, and a well-functioning global economy.
12) Crude Oil fell about $2 last Friday pressured by a stronger US$, weak consumer demand and the global economic crisis putting it on track for the biggest monthly drop in history. In three months, Crude Oil’s slide has wiped out gains that took more than a year to build.
13) OPEC announced last week it would cut Crude Oil output by 1.5 million barrels per day (bpd), they have started. Venezuelan Oil Minister Rafael Ramirez said on Thursday that OPEC should cut Crude Oil output by another 1 million bpd, and should set a minimum price target of $70 or $80bbl.
14) Russia and Libya are negotiating a deal where Moscow would build, supply fuel, manage and operate nuclear research reactors for the North African state, Libya has Africa’s largest Crude Oil reserves and Russia is moving swiftly to participate in their energy projects.
15) Struggling auto makers GM and Chrysler are still in talks on a merger, but Bush administration ruled out providing government funding for it, so the deal will have to wait until after the presidential elections on Tuesday.
16) The US national debt has reached $10,523,955,355,856.66 as of October 24, an increase of 9% in about two months. So now each American citizen owes $35,079.85. (note the Pennies) http://www.treasurydirect.gov/NP/BPDLogin?application=np
17) The NFL, America’s most watched television sport, is borrowing $1.4 billion through a four-year term loan and another $460 million with a 10-year term note that will guarantee teams’ operating money through credit-market turmoil. This, even as the largest US banks continued to avoid the corporate bond market, showing the strength of the league in this environment.
18) Latest Bond outing, Quantum of Solace, starring Daniel Craig, smashed the previous record for a Friday opening of US$ 6.6MM, held by Harry Potter and the Goblet of Fire.
5 Big and Really Big Breaking Stories:
1) India’s central bank unexpectedly cut interest rates for the second time in two weeks and reduced the amount of money lenders must hold in reserve in a bid to protect the economy from the global slowdown. India’s Reserve Bank also reduced (the first time in 11 years) the statutory liquidity ratio, i.e., the amount of deposits that lenders need to invest in government debt or bonds of state run companies by 100 basis points. Also, the Bank of Japan’s interest rates may be headed back to zero, with the US Fed rate to follow.
2) The heads of Panasonic Corp and Sanyo Electric Co Ltd. have agreed in principle to a deal that would see Panasonic take over Sanyo, to create Japan’s largest electronics maker, three people familiar with the matter said.
3) Germany plans a 2 year program of investments and incentives to provide a 50B Euro (US$64B) boost to the economy that has been strangled by a freeze in global credit markets. “Measures to safeguard companies’ financing and liquidity are provided by funding investments worth slightly more than 20B Euros,” according to a joint paper by the economy and finance ministries, obtained by Bloomberg News. They “will encourage investments and orders by companies, private households and municipalities, totaling about 50B Euros.”
4) The Boeing Co. machinists start returning to work on Sunday after accepting a 4 year contract with 15 percent raises, ending a strike that idled the plane maker’s factories for eight weeks and cut profit by about $10.3 million a day, and sent BA shares South.
5) The China’s Purchasing Managers’ Index fell to a seasonally adjusted 44.6 last month from 51.2 in September, the China Federation of Logistics and Purchasing said today. That was the lowest since the gauge was launched in July 2005. (A reading below 50 reflects a contraction, above 50 a expansion)
China’s cabinet has pledged extra infrastructure spending to stimulate the world’s fourth-biggest economy amid the global slowdown.
+ Two big Qs: 1) the huge event that is on all of our minds: Tuesday’s elections, and 2) Is the worst over for markets? Stay tuned…
A bit on politics: Socialism refers to a broad set of economic theories of social organization advocating state or collective ownership and administration of the means of production and distribution of goods, and the creation of an egalitarian society.
Modern socialism originated in the late nineteenth-century working-class political movement. Karl Marx posited that socialism would be achieved via class struggle and a proletarian revolution, which represents the transitional stage between capitalism and communism. Source: Wikipedia
Joseph Schumpeter’s argument, set out in Capitalism, Socialism and Democracy (1941) that liberal democracies were evolving from “liberal capitalism” into democratic socialism, with the growth of workers’ self-management, industrial democracy and regulatory institutions.
What One Big Money Manager thinks:
“We could have a huge rally,” says David Corbin, chief investment officer of Corbin & Co. in Fort Worth, Texas, which manages about $75 million. “The Fed is pumping up liquidity, and sooner or later some of this is going to find its way into the market. I feel like a kid in a candy store. My biggest problem now is in deciding what to buy.” Corbin thinks the Dow will hit 11,000 by this year end, and rise to 11,800 by mid-2009.
4) There is a huge buildup of cash on the sidelines that points to a bounce for equities. Money-market fund assets totaled $3.4 trillion as of Sept. 30, vs. $13.3 trillion of stock-market valuation, leaving the ratio of liquidity to market value at a near-record 25%. That’s comparable to the ratio in the early 1980s, when money funds yielded double digits. According to Ned Davis Research, since late 1980, the market almost always rises at least 12% whenever money-fund balances reach about 11% of market value. “A lot of money is on the sidelines,” says David C. Hartzell, founder of Cornell Capital Management in Buffalo, N.Y., which handles about $50 million. “if you’re a money manager, you can’t afford to be out of the market, because you might miss the comeback.”
5) Based on the market’s 50% decline between 2000 and 2002, and its 48% drop in the 1973-’75 Bear market, some believe we’re most of the way through this downturn. The S&P 500 is trading at 12 times trailing earnings, the best valuations seen in almost 20 years.
Market Factbook:
1) October 2008 was a month to forget for global stocks, as the DJIA, and the S&P 500 mirrored the weak performances by other indexes around the world. The S&P 500 fell 16.83% in October, its ninth-biggest monthly percentage decline on record. The DJIA dropped 14.06% in October, its 17th worst month in its history.
2) Increasing US taxes is not consistent or appropriate to continue energy sector investment. If the big oil companies are not making the investment or increasing investment in discovery and infrastructure, it will impact jobs, and there will be fewer jobs. So, increased taxation leads to less Crude Oil supply, and ultimately higher cost of energy and fewer jobs.
3) Barron’s latest Big Money poll reveals unrelenting bullishness among many money managers, despite prognostications for a contagious recession and lame profits through 2009. Now that stocks have tumbled to five-year lows, 62% of Barron’s Big Money respondents say they are oversold and undervalued, up from 55% last spring. 7% think equities are overvalued at today’s prices and almost 70% say stocks will be the best-performing asset class in 2009, 13% favor cash, and 11% favor bonds.
More of Keith K. Hatanaka’s Food for Thought on S&P 500 Valuations and Gold.
S&P 500 is undervalued. However, M3 levels became so high, and when you factor that in, perhaps it may not be undervalued; remember, Cash is still King.
The US government stopped reporting M3 money supply in 2006. M3 Money through Oct. 10th is sitting at approximately $14 Trillion, and 16% year over year rate of increase. If money supply is expanding at 16% annual rate that means your investments must grow at more than 16%.
Gold supply worldwide is short, below is from a recent letter from Bill Murphy over at the GATA (blog):
I talked to the chief broker in charge of the precious metals dept. of one of the largest metals banks in the Netherlands this morning. He told me that his bank had no gold in the vault for the first time in one hundred and forty seven years of its history! He had clients waiting in line for bullion coins of any type, and for the first time in his career, he had No supply! None, zero, zip, nada! I called a broker in West palm beach, Fl. and he confirmed he also had no supply! He also said he had funds of two and one half million dollars in his acct. from one client, and could not find product to fill his order! Bewilderment is a term he used! He asked me how silver and gold could be so cheap in the markets when there is no supply! That discussion I will have with him another day!
Precious metals refinery capacity maxed out globally in recent weeks due to record levels of investor demand in the metals.
Recent currency volatility and financial institution fragility has been cited as the driving reasons for the record numbers of investors flocking to silver and gold in recent weeks looking for the stability and safe haven the metals have traditionally offered. Global bullion refining capacity has been quickly overwhelmed by the sudden spike in demand for physical bullion supply.
“People are often surprised to learn there are less than seventy industry accredited refiners in the entire world” said AFE’s bullion treasury manager Simon Heaps this week; “refineries have been running three fully-staffed shifts most of the year. The industry is just not geared for such huge spikes in demand as we have seen in recent weeks”.
Many refineries are announcing long delivery delays and many are taking no further orders till Q1 quarter of 2009, particularly for refining of smaller investor type bars and coins, while North America coin dealers have been out of all stock for many weeks.
AFE announced this last week, after weeks of record demand, it continues uninterrupted supply to its clients with allocated good delivery bars through its network of long term supply relationships and unique global infrastructure. “In peak times like these, long term multi-decade relationships are critical” commented AFE’s Founding Director, Philip Judge. Posted by Alex Stanczyk on Oct 26, 2008
Article from US Constitution Section 10.
No State shall enter into any Treaty, Alliance, or Confederation; grant Letters of Marque and Reprisal; coin Money; emit Bills of Credit; make any Thing but gold and silver Coin a Tender in Payment of Debts; pass any Bill of Attainder, ex post facto Law, or Law impairing the Obligation of Contracts, or grant any Title of Nobility.
In other words, Gold and Silver is the money, not paper money (fiat money equals debts). There is no place in the US Constitution that says paper money can be circulated as the official currency. As matter of fact it prohibits a bill of credit (paper money) from being used as legal tender between the States.
I am sure that Gold and Silver will be back, and back strong.
God Bless, KK
Snap Shot of the Major US Market Indices
DJIA: Most agree that DJIA was the main indicator on the test of the early October low. Last Tuesday it held above that low and reversed on good volume. This is positives action that indicates more to the Northside on this move with the 50 day EMA (9966), and 10,000 within reach.
Stats: +144.32 pts (+1.57%) close 9325.01 Volume: 311MM shrs last Friday vs. 267MM shrs on Thursday.
S&P 500: the S&P 500 closed the week by breaking through the 18 day EMA (962) as it sets up to move North in here.
Stats: +14.66 points (+1.54%)close 968.75 NYSE Volume: 1.563B/shrs (+13.68%). up Volume: 1.16B/shrs (+17.856MM/shrs) down Volume: 399.02MM/shrs (+174.456MM/shrs) Last Friday Advancers led 2.68 to 1 Last Thursday:: Advancers led 4.11 to 1
NAS: the NAS made a new closing low on the year last Monday and rocketed North on Tuesday moving up to the 18 day EMA where it closed last Friday. The NAS is still trending South but it is trying to set up for a move North. It is lagging the others but in position to make the break North too.
Stats: +22.43 points (+1.32%) close 1720.95 Volume: 2.488B/shrs (-1.95%). Good volume on Tuesday’s reversal putting it position to move North too, up Volume: 1.451B/shrs (-466.722M/shrs), down Volume: 1.011B (+356.449M), Last Friday advancers led 2.99 to 1, Thursday’s session: advancers led 2.67 to 1
The Charts*
DJIA Chart: http://stockcharts.com/h-sc/ui?s=djia
The S&P 500 Chart: http://stockcharts.com/h-sc/ui?s=sp500
The NAS Charts: http://stockcharts.com/h-sc/ui?s=NAS
Stock Chart School: http://stockcharts.com/school/doku.php?id=chart_school
Stock Charts Glossary: http://stockcharts.com/school/doku.php?id=chart_school:glossary_s
*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: 59.89; -3.01. Typically, the highs on VIX are reached weeks before the bottom auguring for a bounce in here and then a test of the early October lows thus confirming the bottom.
2) VXN: 60.3; -2.89
3) VXO: 61.38; -3.93
4) Put/Call Ratio (CBOE): 0.96; +0.16. last Friday marked 3 days below 1.0 on the close after three weeks closing above that mark. The indicator is working fine.
*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 & Poor’s 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: The Bulls ended the week at 21.3%, fading from 22.2% last week, this is way below the 35% level considered bullish.
For your reference: The Bulls bottomed in the Summer 2006, the last major round of selling ahead of this 2007 high, near 36%, and 35% is considered Bullish.
Bears: The Bears ended the week at 52.7% down from high of 54.4% on this move, this too is way above the 35% threshold considered Bullish.
For your reference: This is the highest the Bears have climbed since 1995 and is negative in the extreme. Again, 35% is the level that indicates extreme pessimism.
What to expect this week, and down the line…
As earnings season comes to a close there is little in the numbers that could have any real impact on the markets.
The consensus is that the market is in position to continue North in here perhaps after a pause to refresh, but last week’s action points us Due North. The market always looks out 6 to 9 months and not to the last GDP scrapbook.
The move North is a bounce off of the lows and is usually a set up for a test of the October lows, nevertheless, this is a tradable range.
DJIA 10,000-10,100 (get the DJIA 10,000 Cap out) is the rally target in here and with that it is likely that if you listen to the talking heads you will hear that the bottom is in, that’s about the time that most analysts including yours truly will be looking for that test of the October low. That kind of action will be what may be needed to establish the bottom and set up a Bull charge North, though it is not necessary. Stay tuned
The Major Indices Resistance/Support Levels
DJIA: Close 9325.01
Resistance:
9323 June 2003 high
9575 September 2003
9814 August 2004
9852 25% off of the October 2008 low
9937 May 2004 low
9966 the 50 day EMA
10,000 to 10,100
10,127 April 2005 low
10,215 Q4 2005
10,365 a 2008 low
10,459 a September 2008 low
10,776 the 90 day SMA
10,827 the July 2008 intraday low
10,962 the July closing low
11,060 February 2006
11,317 March 2006
11,388 the 2008 August low
Support:
9200 the July 2003 consolidation high
9141 the 18 day EMA
8982 the 10 day EMA
8985 the low in the 2003 consolidation
8626 December 2002
8521 interim high in March 2003
8197 the second October 2008 low
7882 the early October 2008 low
7702 the July 2002 low
7524 the March 2002 test low
7282 the October 2002 low
S&P 500: Close 968.75
Resistance:
995 June 2003 consolidation high
1065 the Q4 2003 level marking the run to 2007 high.
1071 the 50 day EMA
1075 August 2004.
1106 late September 2008 low
1133.50 mid September 2008 low
1181 the 90 day SMA
1200 the July 2008 intraday low
1244 an August 2005 high
1245 the 2002/2003 up trendline
1257 the March 2008 low
1270 the January 2008 low
1279 the 200 day SMA
1285 the July 2008 high
Support:
965 the 2003 consolidation low
938 the 10 day EMA
889 an interim 2002 high
866 the 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 1720.95
Resistance:
1752 2004
1782 August 2004
1882 October 2003
1900 the October 2008 gap down level
1912 April 2005
1930 the 50 day EMA
1947 the gap down point October 2008
1984 the late September 2008 low
2070 September 2008
2099 the mid September 2008 closing low
2155 the March 2008 low
2167 the July 2008 low
Support:
1669 the 10 day EMA
1644 August 2003
1620 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 on the test of the rally
1108 the 2002 low
This week’s Economic data (these are expectations complied from various reliable sources. (These, and official reported data often vary). Once again, lots of data this week.
Monday, November 3
September Construction Spending (10:00): expected -0.8%, prior 0.0%
ISM Index, October (10:00): expected 42.0, prior 43.5
Tuesday, November 4 (Election Day)
October Auto Sales: 4.3M prior
Truck Sales, October: 5.3M prior
Factory Orders, September (10:00): expected -1.5%, prior -4.0%
Wednesday, November 5
October ADP Employment (8:15): expected -80K, prior -8K
ISM Services, October (10:00): expected 48.5, prior 50.2
Crude Oil inventories (10:30): 493K prior
Thursday, November 6
11/01 Initial Claims (8:30):
Productivity Q3 Preliminary (8:30): expected 1.0%, prior 4.3%
Friday, November 7
October Average Workweek (8:30): prior 33.6
Hourly Earnings, October (8:30): prior 0.2%
Nonfarm Payrolls, October (8:30): prior -159K
Unemployment Rate, October (8:30): prior 6.1%
Pending Home Sales, September (10:00): prior 7.4%
Wholesale Inventories, September (10:00): prior 0.8%
Consumer Credit, September (3:00): prior -$7.9B
John Mauldin is back this week with: Electing the Janitor-in-Chief and a tribute to Tony Bennett
That’s all for now Readers, have a great week, and always remember take what the market gives…
Have a great week and stay tuned.
Popularity: unranked [?]
After getting crushed for a month, the U.S. markets came to live last week.
On the the week, the Dow industrials put on 114.32pts, 1.57%, to 9,325.01, the S&P 500 rose 14.66 pts,1.54%, 968.75, and the NAS rallied 22.43pts,1.32%, to 1,720.9 .
The Big Q: has the up turn marked a early sign of a market recovery or does it represents a consolidation before the next leg lower.
The Big A: Time will tell.
When we measure the upturn’s power, the following is a checklist in determining a MML (major market low).
Most of the following below have to happen:
*
An off-the-charts strong-volume rally that is not driven by government intervention.
*
The emergence of sector leadership. Along with the financials, the airlines are well, but these groups cannot do it alone, the techs have to really join the party.
*
At least one, and preferably two, 20-to-1 up days to neutralize the October breakdown. Over the past many sessions, the U.S. markets have suffered three 20-to-1 down days from the breadth POV.
*
A volatility drop to digest the market crash. For instance, a series of 100-point Dow moves, in either direction, uninterrupted by these 800-point intraday whipsaws.
*
From a sentiment standpoint, analysts need to stop declaring how great this buying opportunity is. This is a must
*
A decisive break through overhead resistance.
That is it from the Technical POV.
Now, when considering the final point, a break through over overhead resistance, see the following areas:
*
Dow resistance at 9,387, matching the two week prior closing high.
*
NAS resistance initially at 1,844, matching two week prior closing high, followed by the 1,900.
*
S&P 500 resistance spanning from 1,000 to 1,010, two week prior closing high held at 1,003.
From a technical standpoint, anything transpiring under these levels is little more than “noise.”, and as these areas are approached, the risk of another sharp downturn increases.
Popularity: unranked [?]
Wilshire Total Maket Index
The Wilshire 5000 Equity Index, often referred to as the Wilshire Total Market Index, is probably the largest stock Index in the world. Wilshire Associates stated out in 1980 tracking 5000 stocks. Since then the Wilshire 5000 has ballooned to cover more than 7000 stocks. The advantage of the Wilshire 5000 is that it’s very comprehensive, covering nearly the entire market. For investors and anlaysts that seek the greatest representation performance of the general market, they would check out this index. (At the very least, the Wilshire 5000 tracks the largest publicly traded stocks.) It includes all the stocks that are on the major stock exchange (NYSE, AMEX, and the largest issue on NASDAQ) which by default also include all the stock covered by the S&P 500. The Wilshire 5000 is a market-value weighted index.
Popularity: unranked [?]
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
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Stock investing
Whether you are already to invest Penny Stock or you are looking to get into stocks, you need to find out about how much money you can afford to invest in stocks. No matter what you hope to accomplish with your stock investing plan, the first step a budding investor should take is figuring out how much you own and how much you owe. To do this prepare and reivew your personal balance sheet. A balance sheet is simply a list of your assets, your liabilities, and what each item is currently worth so you can arrive at you net worth. Your net worth is total assets minus total liabilities. I know that these terms sound like accounting mumbo jumbo, but knowing your net worth is important to your future finiancial sucess, so just do it.
Composing your balance sheet is simple. Pull out a pencil and piece of paper. For the computer savvy, a spreadsheet software program accomplishes the same task. Gather all your finanicla documents, such as bank and brokerage statements and other such paperwork. Then follow the steps and update your balance sheet at least once a year to monitor your financial progress.
A second document to prepare is an income statement. An income statement lists your total income and your total expenses to find out how well you are doing. If your total income and your total expenses to find out how well you are doing. If you total income is greater than your total expense, then you have a net income. If you total expense is meet or exceed your total income then you have some trouble. You better look into increasing your income or decreasing your expenses. You want to get to the pint that you have net income so that you can use that money to fund your stock purchases.
Your personal balance sheet is really no different from balance sheets that giant companies prepare. In fact, the more you find out about your own balance sheetk the easier it is to understand the balance sheet of companies.
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