Monday, April 28, 2008

Winter Warning: Chaos Chronicled

Winter Warning: Chaos Chronicled
Click here for a link to complete article:

By Ian Gordon/Alf Field | 28 April 2008

Ed. Ian Gordon, Economic Forecaster & Interpreter of the Kondratieff Cycle: Winter Warning this week is entirely the work of Alf Field who has written a very good piece entitled "Chaos Chronicled" Alf leads you through the history of the world financial crisis. He begins with an explanation of Goldsmiths, the original bankers, followed by the development into the Fractional Reserve Banking system. Alf then discusses the International Monetary System based on the dollar and the inherent weakness in such a system due to the ability of banks around the world to consistently add massively to loans. This is followed by an explanation of the OTC derivatives market and the crisis which has developed in that milieu. "Chaos Chronicled" is a coherent and chronological evolution into the crisis that has now enveloped the world.

[ Normxxx Here:  The following is only the conclusion of this very erudite piece by Alf. See the link above for the remainder.  ]

It does not take a genius to work out that the US Dollar Standard (with the US dollar as the reserve currency) has to go, but it will take a genius to work out what the new system should be. The new system will require sound money that cannot be manufactured at will by Governments, money that performs the 3 basic functions of medium of exchange, unit of measurement and store of value. A new international monetary system needs to be developed. It seems that the eternal money, gold, will have to be returned to the monetary systems, both national and international, to provide the necessary discipline. That is all for the future. Meanwhile there is a mess to clear up and how that occurs will have investment consequences and implications.

There was a crisis in the US banking system during the 1970’s with major loans to South American Governments going sour. South American countries actually defaulted on their sovereign loans, leaving the American banks with large losses. If these losses were brought to account, the banking system would have wiped out its reserves. Special permission was granted to allow the loans to be carried at book value until the banks raised new capital and/or accumulated sufficient profits to write off their South American loan losses. The banks were allowed time to trade out of their losses.

The current situation is different. In the 1970’s crisis it was possible to identify where the losses would fall and the individual banks could quantify their losses. In 2008 it is impossible to identify the degree of loss within an order of magnitude or determine where or how they will fall. The US banking system has already recognised losses that have wiped out bank reserves to the extent that the banks can only continue operating with aid from the Fed. The losses written off to date are likely to be augmented by substantial additional sub-prime and CDS losses of presently unknown magnitude. Moreover, it is unclear where those losses will finally appear. Every bank is suspect.

The mountain of OTC derivatives is one of the major problems facing the world’s banking and financial systems. Unfortunately there is no easy way of getting rid of these derivatives. George Soros recently suggested that a clearing house system should be established for the OTC derivatives. This is an impractical suggestion as a brief example will quickly illustrate.

Assume that investor A buys $100m of 5 year bonds in XYZ Company. He is unsure of the strength of XYZ Co. so he also buys a 5 year CDS from B to cover any loss in the event of XYZ Co defaulting on its bonds. The investor pays a premium of say $2m per annum. Two years later it is desired to close down this transaction. If A and B were still the only parties to the transaction, they could sit around a table and discuss how to determine the current market value of the CDS. IF they could agree a market value for the CDS and IF both parties were willing to cancel the CDS, it could be cancelled by one party paying to the other the mutually agreed amount.

In reality B will probably have arbitraged its position to a number of other parties and the investor A may have sold his bonds to a number of other investors with the CDS protection attached. It is a practical impossibility to get all parties to this 'simple' transaction together to discuss a possible settlement and cancellation of the deal. This is just a single 'simple' transaction without the complication of additional features such as collars, caps, swaptions, etc. It is also only one of zillions of OTC transactions that are in existence. To expect any clearing house to be able to settle these derivative contracts is just wishful thinking.

Nevertheless, this mountain of OTC derivatives has the capacity to bring down the entire international financial system, including the banking systems of the key players in the event of the bankruptcy of one or more of the larger counter parties. Some way has to be found to reduce or eliminate this OTC derivative overhang which would otherwise eventually prove fatal to the present system [[In past, whenever a default threatened or was realized, this could be largely 'papered over' with further derivatives; this is no longer true.: normxxx]]. History has shown that when debt becomes excessive, the lenders almost always lose.

They lose either because their debtors go bankrupt or they lose because they are repaid in currency which has been debased by wholesale printing, making the currency worth very little in real terms. There is no doubt that the world has reached an extreme level of debt creation. The only question is whether the debt will be settled by bankruptcies or whether the debt will be repaid in largely worthless currency. Fed chief Ben Bernanke has made it quite plain that his plan is NOT to allow debt to be repaid by bankruptcy and deflation. All his actions to date are in line with his proclaimed policy. There is no reason to think that he will change his thinking or modus operandi. Thus we have to believe that USA has embarked on a voyage that will allow debts to be repaid in debased, largely worthless currency.

Jim Sinclair has drawn an analogy comparing the Weimar Republic in 1919 with the present mountain of OTC derivatives. After World War I the Allies imposed excessively large reparation claims on the German Republic. The Germans objected to the magnitude of the claims, but finally agreed when the Allies allowed the Germans to settle the reparation payments in Reichsmarks. The Germans then adopted the attitude that "if they want Reichsmarks, we will give them Reichsmarks". They then proceeded to print new Reichsmarks at an accelerating rate to settle the reparation debts and keep abreast of the ensuing inflation, eventually causing the classic hyperinflation that destroyed the German currency [[and, collaterally, the German economy, all Reichsmark 'savers' and, eventually, also the Weimar Republic: normxxx]].

Jim Sinclair suggests that if one crosses out the words "reparation payments" and replaces them with the words "OTC derivative contracts" one would have a clearer picture of the current circumstances. The suggestion is that the OTC derivative problem can only be settled by creating sufficient additional currency to inflate the current currency to the point where it is largely worthless. That would allow all these derivative contracts and other loans to be settled in debased currency [[where everyone shares in the world bankruptcy— many, by giving up eating. Too bad everyone didn't share in the preceding boom.: normxxx]]...

  Much, Much, M O R E. . .

Normxxx    
______________

The contents of any third-party letters/reports above do not necessarily reflect the opinions or viewpoint of normxxx. They are provided for informational/educational purposes only.
The content of any message or post by normxxx anywhere on this site is not to be construed as constituting market or investment advice. Such is intended for educational purposes only. Individuals should always consult with their own advisors for specific investment advice.

Saturday, April 26, 2008

Big News On The Gold Stocks

Big News On The Gold Stocks
And Notes On The Juniors You Need To Know


By Kenneth J. Gerbino | 26 April 2008

Here is my assessment of the current gold share market: The gold price is taking a much needed correction and bullion corrections are almost always severe and volatile and the shares follow.

Obviously gold coming down could mean less profits and cash flow for companies and this unnerves some holders to sell. With major investment banks projecting a long term gold price of $700, some portfolio managers that usually invest in GE or IBM are thinking that this may be the start of a major downturn. They are therefore selling. These managers don't understand that 95% of the mining analysts have never got it right on the metal prices the 35 years I have been investing in the mines. Analysts are conservative and they are cautious. They are usually from a geology or engineering background. What do they know about global economics? And if they are economists— God help us.

Lots of new money has come into the gold mining sector the past year and this is money that is not philosophically tuned into gold as money and most think the Fed can actually manage the currency and printing money is the normal thing to do. They saw gold going up and the stocks having positive momentum and this made sense for them to buy. When this momentum stopped they were ready to sell.

Good News

Currently there is plenty of money on the sidelines from gold share sellers that have been liquidating since November. There has been a 3-5 month topping formation in all the major gold shares (We will talk about the juniors later). Many of these sellers will most likely be back in the market for five reasons:

1. They did very well getting out at higher prices and are now somewhat familiar and comfortable with the valuations and the companies and after a 20-30% correction that is obviously overdone, they will be anxious to get back in.

2. Worldwide food riots, and the globally-reported inflation numbers from just about every country is a leading indicator of higher consumer prices and hence higher gold prices. This is easy for anyone to understand.

3. The financial situation with the banking system is without a doubt enough to convince even a small portion of these non gold bug portfolio managers that a small allocation to the gold miners is probably a good idea. Since they control tens of trillions of dollars, even a small portion in mining shares will eventually create a substantial market.

4. There are also thousands if not tens of thousands of money managers and hedge fund managers that totally missed the first leg up of the gold market and the gold shares and have been patiently waiting for a correction to finally get in. These people are now aware of how bad the possible financial repercussions of the leverage and derivative craze could become and will certainly want some exposure to the metals and the shares. This correction will allow them an entry point.

5. In March the PPI and CPI in the U.S. both annualized over
11%. This is a stat that money managers and global investors will not ignore. Inflation is heating up and the Fed is still lowering interest rates. Even establishment Fed lovers know that this means they should hedge a bit with some gold.

The Market Right Now

With the recent sell off in the gold shares this week plenty of short sellers, weak holders and investors that bought at the top are selling and creating a real wicked sell off. I would think that Friday the 25th or Monday the 28th will be the end of this sell off and a substantial rally could develop. The market is very oversold. If the sell off continues then it just means an even better entry point is coming up and probably very soon.

The Juniors

The Junior shares have been in the doldrums for two years and here are the reasons:

  • In the last three years there have been probably 3,000 new mining companies formed. Even with average $10 million market caps, this represents a $30 billion dilution to the junior market and a potential windfall to the promoters and insiders that are mostly dealing with moose pasture and geological dreams. Most gold bugs are suckers for a great gold story. So they sell 1,000 shares of a decent junior and buy a 1,000 shares of the moose pasture stock and when enough people do this the decent stock goes down and eventually the moose pasture stock collapses.

  • The Canadian mining industry was built on prospectors going out into the wilds with a mule and supplies for a season or so to explore and look for mineral traces on surface. This was high risk and speculators and investors for their grubstake were given a big piece of the action if anything ever developed. This tradition now continues but on a grander scale with the investment banks demanding cheap stock and warrants from the company for their own account and customers. The warrant kicker is now so prevalent in Canada that it has ruined the share structure of many small companies. Insiders sell the newly issued stock as soon as allowable and keep the warrant at no cost. If the deal works they have a free ride.

  • Drilling rig shortages, assay backlogs and permitting etc. now can add 1-2 more years for a successful discovery to become a buy out or a mine. Time is money and these delays dilute the present value of the company. Most management teams of small mining companies usually take very modest salaries. But they can own 2-3 million shares of stock at basically zero cost. They can't send their kids to college unless they sell some shares. They also can't wait 5-8 years for the mine they hope they will discover or for the ore body they actually have discovered to become a mine. When you are buying stock after a great press release the seller is most likely an insider.

  • After the last two years and lower junior stock prices people give up and start looking for larger companies. They then add selling to the market. Unfortunately all these factors have really hurt the junior sector so if you are not an expert you should be careful. Thinking of holding on to a loser means you will most likely have your capital die a slow death. Unless you own a junior mining company that is loaded to the gills with gold and silver reserves and resources you are in trouble. The ore body better be an economic ore body that actually without a doubt (almost) can become a profitable mine. The stock should be so undervalued that even the insiders are buying.

Most hard money investors would be well served to use these rules:

  • Sell any stock that is issuing warrants with their next financing and tell your broker why and have him call the company as well.

  • Never put more than 5% of your money in exploration stocks unless it is an advanced exploration play with plenty of prior drill success.

  • Look for developmental companies that are within a year from bringing on new production. This is my favorite area for our Fund and one that you should pay attention to.

  • Make sure that even with much lower metal prices (gold at $600) the company will still sell for less than 15 times after tax cash flow per share.

  • Always look for companies with giant deposits that have economic grades. Even if the company is small, a big deposit gets attention.

  • I hate to say good management because almost all companies can make it look like they have good management. But good people make things happen— not rocks.

In the coming years one of the best sectors for investors will be the mining industry for reasons you already know about. Progress in China and India, paper money, derivatives, insane governments, debt, etc. all point towards much higher metal prices for perhaps a decade. Don't short change yourself. Stay with the companies that have the real goods in the ground.

For other articles on gold, mining and the economy visit our archives. at

ß§

Normxxx    
______________

The contents of any third-party letters/reports above do not necessarily reflect the opinions or viewpoint of normxxx. They are provided for informational/educational purposes only.
The content of any message or post by normxxx anywhere on this site is not to be construed as constituting market or investment advice. Such is intended for educational purposes only. Individuals should always consult with their own advisors for specific investment advice.

Friday, April 25, 2008

Tell them, because our fathers lied.

Behind TV Analysts, Pentagon’s Hidden Hand
Retired Officers Have Been Deliberately Used To Shape Terrorism Coverage From Inside The TV And Radio Networks; or, How to Suborn a 'Free Press'.

Click here for a link to complete article:

By David Barstow, NYT | 20 April 2008

Epitaph, Iraq:
"If any question why we died;
Tell them, because our fathers lied."
— Rudyard Kipling


Corrections and Further Info Appended to Original at Link Address. Also, David Barstow answers questions there on this article about the Pentagon’s use of military analysts to create favorable news coverage.

In the summer of 2005, the Bush administration confronted a fresh wave of criticism over Guantánamo Bay. The detention center had just been branded "the gulag of our times" by Amnesty International, there were new allegations of abuse from United Nations human rights experts and calls were mounting for its closure.


Click Here, or on the image, to see a larger, undistorted image.


click to enlarge this image
Left, dining with Donald H. Rumsfeld, second from left, during his final week as secretary of defense were the retired officers Donald W. Shepperd, left, Thomas G. McInerney and Steven J. Greer, right.

The administration’s communications experts responded swiftly. Early one Friday morning, they put a group of retired military officers on one of the jets normally used by Vice President Dick Cheney and flew them to Cuba for a carefully orchestrated tour of Guantánamo. To the public, these men are members of a familiar fraternity, presented tens of thousands of times on television and radio as "military analysts" whose long service has equipped them to give authoritative and unfettered judgments about the most pressing issues of the post-September 11 world.

Hidden behind that appearance of objectivity, though, is a Pentagon information apparatus that has used those analysts in a campaign to generate favorable news coverage of the administration’s wartime performance, an examination by The New York Times has found. The effort, which began with the buildup to the Iraq war and continues to this day, has sought to exploit ideological and military allegiances, and also a powerful financial dynamic: Most of the analysts have ties to military contractors vested in the very war policies they are asked to assess on air.

Those business relationships are hardly ever disclosed to the viewers, and sometimes not even to the networks themselves. But collectively, the men on the plane and several dozen other military analysts represent more than 150 military contractors either as lobbyists, senior executives, board members or consultants. The companies include defense heavyweights, but also scores of smaller companies, all part of a vast assemblage of contractors scrambling for hundreds of billions in military business generated by the administration’s war on terror. It is a furious competition, one in which inside information and easy access to senior officials are highly prized.

Records and interviews show how the Bush administration has used its control over access and information in an effort to transform the analysts into a kind of media Trojan horse— an instrument intended to shape terrorism coverage from inside the major TV and radio networks. Analysts have been wooed in hundreds of private briefings with senior military leaders, including officials with significant influence over contracting and budget matters, records show. They have been taken on tours of Iraq and given access to classified intelligence. They have been briefed by officials from the White House, State Department and Justice Department, including Mr. Cheney, Alberto R. Gonzales and Stephen J. Hadley.

In turn, members of this group have echoed administration talking points, sometimes even when they suspected the information was false or inflated. Some analysts acknowledge they suppressed doubts because they feared jeopardizing their access. A few expressed regret for participating in what they regarded as an effort to dupe the American public with propaganda dressed as independent military analysis. "It was them saying, ‘We need to stick our hands up your back and move your mouth for you,’ " Robert S. Bevelacqua, a retired Green Beret and former Fox News analyst, said. Kenneth Allard, a former NBC military analyst who has taught information warfare at the National Defense University, said the campaign amounted to a sophisticated information [[or, DISinformation : normxxx]]operation. "This was a coherent, active policy," he said.

As conditions in Iraq deteriorated, Mr. Allard recalled, he saw a yawning gap between what analysts were told in private briefings and what subsequent inquiries and books later revealed. "Night and day," Mr. Allard said, "I felt we’d been hosed." The Pentagon defended its relationship with military analysts, saying they had been given only factual information about the war. "The intent and purpose of this is nothing other than an earnest attempt to inform the American people," Bryan Whitman, a Pentagon spokesman, said. It was, Mr. Whitman added, "a bit incredible" to think retired military officers could be "wound up" and turned into "puppets of the Defense Department."

Many analysts strongly denied that they had either been co-opted or had allowed outside business interests to affect their on-air comments, and some have used their platforms to criticize the conduct of the war. Several, like Jeffrey D. McCausland, a CBS military analyst and defense industry lobbyist, said they kept their networks informed of their outside work and recused themselves from coverage that touched on business interests.

"I’m not here representing the administration," Dr. McCausland said.

Some network officials, meanwhile, acknowledged only a limited understanding of their analysts’ interactions with the administration. They said that while they were sensitive to potential conflicts of interest, they did not hold their analysts to the same ethical standards as their news employees regarding outside financial interests. The onus is on their analysts to disclose conflicts, they said. And whatever the contributions of military analysts, they also noted the many network journalists who have covered the war for years in all its complexity.

click to enlarge this image

Right, appearing with Tim Russert on "Meet the Press" in 2005 were Wesley K. Clark, center; Wayne A. Downing; Montgomery Meigs, right; and Barry R. McCaffrey, foreground.

Five years into the Iraq war, most details of the architecture and execution of the Pentagon’s campaign have never been disclosed. But The Times successfully sued the Defense Department to gain access to 8,000 pages of e-mail messages, transcripts and records describing years of private briefings, trips to Iraq and Guantánamo and an extensive Pentagon talking points operation. These records reveal a symbiotic relationship where the usual dividing lines between government and journalism have been obliterated [[more than enough to have made Göebels proud: normxxx]].

Internal Pentagon documents repeatedly refer to the military analysts as "message force multipliers" or "surrogates" who could be counted on to deliver administration "themes and messages" to millions of Americans "in the form of their own opinions." Though many analysts are paid network consultants, making $500 to $1,000 per appearance, in their meetings at the Pentagon, they sometimes spoke as if they were operating from behind enemy lines, interviews and transcripts show. Some offered the Pentagon tips on how to outmaneuver the networks, or as one analyst put it to Donald H. Rumsfeld, then the defense secretary, "the Chris Matthewses and the Wolf Blitzers of the world." Some warned the Pentagon of planned network stories or sent copies of their correspondence with network news executives. Many— although certainly not all— faithfully echoed talking points intended to counter critics.

"Good work," Thomas G. McInerney, a retired Air Force general, consultant and Fox News analyst, wrote to the Pentagon after receiving fresh talking points in late 2006. "We will use it." Again and again, records show, the administration has enlisted analysts as a rapid reaction force to rebut what it viewed as critical news coverage, some of it by the networks’ own Pentagon correspondents. For example, when news articles revealed that troops in Iraq were dying because of inadequate body armor, a senior Pentagon official wrote to his colleagues: "I think our analysts— properly armed— can push back in that arena." The documents released by the Pentagon do not show any quid pro quo between commentary and contracts. But some analysts said they had used the special access as a marketing and networking opportunity or as a window into future business possibilities.

John C. Garrett is a retired Marine colonel and unpaid analyst for Fox News TV and radio. He is also a lobbyist at Patton Boggs who helps firms win Pentagon contracts, including in Iraq. In promotional materials, he states that as a military analyst he "is privy to weekly access and briefings with the secretary of defense, chairman of the Joint Chiefs of Staff and other high level policy makers in the administration." One client told investors that Mr. Garrett’s special access and decades of experience helped him "to know in advance— and in detail— how best to meet the needs" of the Defense Department and other agencies.

In interviews Mr. Garrett said there was an inevitable overlap between his dual roles. He said he had gotten "information you just otherwise would not get," from the briefings and three Pentagon-sponsored trips to Iraq. He also acknowledged using this access and information to identify opportunities for clients. "You can’t help but look for that," he said, adding, "If you know a capability that would fill a niche or need, you try to fill it… That’s good for everybody."

At the same time, in e-mail messages to the Pentagon, Mr. Garrett displayed an eagerness to be supportive with his television and radio commentary. "Please let me know if you have any specific points you want covered or that you would prefer to downplay," he wrote in January 2007, before President Bush went on TV to describe the surge strategy in Iraq. Conversely, the administration has demonstrated that there is a price for sustained criticism, many analysts said. "You’ll lose all access," Dr. McCausland said. With a majority of Americans calling the war a mistake despite all administration attempts to sway public opinion, the Pentagon has focused in the last couple of years on cultivating in particular military analysts frequently seen and heard in conservative news outlets, records and interviews show.

Some of these analysts were on the mission to Cuba on June 24, 2005— the first of six such Guantánamo trips— which was designed to mobilize analysts against the growing perception of Guantánamo as an international symbol of inhumane treatment. On the flight to Cuba, for much of the day at Guantánamo and on the flight home that night, Pentagon officials briefed the 10 or so analysts on their key messages— how much had been spent improving the facility, the abuse endured by guards, the extensive rights afforded detainees.

The results came quickly. The analysts went on TV and radio, decrying Amnesty International, criticizing calls to close the facility and asserting that all detainees were treated humanely. "The impressions that you’re getting from the media and from the various pronouncements being made by people who have not been here in my opinion are totally false," Donald W. Shepperd, a retired Air Force general, reported live on CNN by phone from Guantánamo that same afternoon.

The next morning, Montgomery Meigs, a retired Army general and NBC analyst, appeared on "Today." "There’s been over $100 million of new construction," he reported. "The place is very professionally run." Within days, transcripts of the analysts’ appearances were circulated to senior White House and Pentagon officials, cited as evidence of progress in the battle for hearts and minds at home [[and, of course, we have no photos, as at Abu Ghraib: normxxx]].

Charting The Campaign

By early 2002, detailed planning for a possible Iraq invasion was under way, yet an obstacle loomed. Many Americans, polls showed, were uneasy about invading a country with no clear connection to the Sept. 11 attacks. Pentagon and White House officials believed the military analysts could play a crucial role in helping overcome this resistance. Torie Clarke, the former public relations executive who oversaw the Pentagon’s dealings with the analysts as assistant secretary of defense for public affairs, had come to her job with distinct ideas about achieving what she called "information dominance." In a spin-saturated news culture, she argued, opinion is swayed most by voices perceived as authoritative and utterly independent.

And so even before Sept. 11, she built a system within the Pentagon to recruit "key influentials"— movers and shakers from all walks who with the proper ministrations might be counted on to generate support for Mr. Rumsfeld’s priorities. In the months after Sept. 11, as every network rushed to retain its own all-star squad of retired military officers, Ms. Clarke and her staff sensed a new opportunity. To Ms. Clarke’s team, the military analysts were the ultimate "key influential"— authoritative, most of them decorated war heroes, all reaching mass audiences.

The analysts, they noticed, often got more airtime than network reporters, and they were not merely explaining the capabilities of Apache helicopters. They were framing how viewers ought to interpret events. What is more, while the analysts were in the news media, they were not of the news media. They were military men, many of them ideologically in sync with the administration’s neoconservative brain trust, many of them important players in a military industry anticipating large budget increases to pay for an Iraq war.

Even analysts with no defense industry ties, and no fondness for the administration, were reluctant to be critical of military leaders, many of whom were friends. "It is very hard for me to criticize the United States Army," said William L. Nash, a retired Army general and ABC analyst. "It is my life."

Other administrations had made sporadic, small-scale attempts to build relationships with the occasional military analyst. But these were trifling compared with what Ms. Clarke’s team had in mind. Don Meyer, an aide to Ms. Clarke, said a strategic decision was made in 2002 to make the analysts the main focus of the public relations push to construct a case for war. Journalists were secondary. "We didn’t want to rely on them to be our primary vehicle to get information out," Mr. Meyer said.

The Pentagon’s regular press office would be kept separate from the military analysts. The analysts would instead be catered to by a small group of political appointees, with the point person being Brent T. Krueger, another senior aide to Ms. Clarke. The decision recalled other administration tactics that subverted traditional journalism. Federal agencies, for example, have paid columnists to write favorably about the administration. They have distributed to local TV stations hundreds of fake news segments with fawning accounts of administration accomplishments. The Pentagon itself has made covert payments to Iraqi newspapers to publish coalition propaganda.

Rather than complain about the "media filter," each of these techniques simply converted the filter into an amplifier. This time, Mr. Krueger said, the military analysts would in effect be writing "the op-ed"for the war.

Assembling The Team

From the start, interviews show, the White House took a keen interest in which analysts had been identified by the Pentagon, requesting lists of potential recruits, and suggesting names. Ms. Clarke’s team wrote summaries describing their backgrounds, business affiliations and where they stood on the war. "Rumsfeld ultimately cleared off on all invitees," said Mr. Krueger, who left the Pentagon in 2004. (Through a spokesman, Mr. Rumsfeld declined to comment for this article.)

Over time, the Pentagon recruited more than 75 retired officers, although some participated only briefly or sporadically. The largest contingent was affiliated with Fox News, followed by NBC and CNN, the other networks with 24-hour cable outlets. But analysts from CBS and ABC were included, too. Some recruits, though not on any network payroll, were influential in other ways— either because they were sought out by radio hosts, or because they often published op-ed articles or were quoted in magazines, Web sites and newspapers. At least nine of them have written op-ed articles for The Times.

The group was heavily represented by men involved in the business of helping companies win military contracts. Several held senior positions with contractors that gave them direct responsibility for winning new Pentagon business. James Marks, a retired Army general and analyst for CNN from 2004 to 2007, pursued military and intelligence contracts as a senior executive with McNeil Technologies. Still others held board positions with military firms that gave them responsibility for government business. General McInerney, the Fox analyst, for example, sits on the boards of several military contractors, including Nortel Government Solutions, a supplier of communication networks.

Several were defense industry lobbyists, such as Dr. McCausland, who works at Buchanan Ingersoll & Rooney, a major lobbying firm where he is director of a national security team that represents several military contractors. "We offer clients access to key decision makers," Dr. McCausland’s team promised on the firm’s Web site. Dr. McCausland was not the only analyst making this pledge. Another was Joseph W. Ralston, a retired Air Force general. Soon after signing on with CBS, General Ralston was named vice chairman of the Cohen Group, a consulting firm headed by a former defense secretary, William Cohen, himself now a "world affairs" analyst for CNN. "The Cohen Group knows that getting to ‘yes’ in the aerospace and defense market— whether in the United States or abroad— requires that companies have a thorough, up-to-date understanding of the thinking of government decision makers," the company tells prospective clients on its Web site.

There were also ideological ties.

Two of NBC’s most prominent analysts, Barry R. McCaffrey and the late Wayne A. Downing, were on the advisory board of the Committee for the Liberation of Iraq, an advocacy group created with White House encouragement in 2002 to help make the case for ousting Saddam Hussein. Both men also had their own consulting firms and sat on the boards of major military contractors. Many also shared with Mr. Bush’s national security team a belief that pessimistic war coverage broke the nation’s will to win in Vietnam, and there was a mutual resolve not to let that happen with this war.

This was a major theme, for example, with Paul E. Vallely, a Fox News analyst from 2001 to 2007. A retired Army general who had specialized in psychological warfare, Mr. Vallely co-authored a paper in 1980 that accused American news organizations of failing to defend the nation from "enemy" propaganda during Vietnam. "We lost the war— not because we were outfought, but because we were out Psyoped," he wrote. He urged a radically new approach to psychological operations in future wars— taking aim at not just foreign adversaries but domestic audiences, too. He called his approach "MindWar"— using network TV and radio to "strengthen our national will to victory."

The Selling Of The War

From their earliest sessions with the military analysts, Mr. Rumsfeld and his aides spoke as if they were all part of the same team. In interviews, participants described a powerfully seductive environment— the uniformed escorts to Mr. Rumsfeld’s private conference room, the best government china laid out, the embossed name cards, the blizzard of PowerPoints, the solicitations of advice and counsel, the appeals to duty and country, the warm thank you notes from the secretary himself.

"Oh, you have no idea," Mr. Allard said, describing the effect. "You’re back. They listen to you. They listen to what you say on TV." It was, he said, "psyops on steroids"— a nuanced exercise in influence through flattery and proximity. "It’s not like it’s, ‘We’ll pay you $500 to get our story out,’" he said. "It’s far more subtle." The access came with a condition. Participants were instructed not to quote their briefers directly or otherwise describe their contacts with the Pentagon.

In the fall and winter leading up to the invasion, the Pentagon armed its analysts with talking points portraying Iraq as an urgent threat. The basic case became a familiar mantra: Iraq possessed chemical and biological weapons, was developing nuclear weapons, and might one day slip some to Al Qaeda; an invasion would be a relatively quick and inexpensive "war of liberation." At the Pentagon, members of Ms. Clarke’s staff marveled at the way the analysts seamlessly incorporated material from talking points and briefings as if it was their own.

"You could see that they were messaging," Mr. Krueger said. "You could see they were taking verbatim what the secretary was saying or what the technical specialists were saying. And they were saying it over and over and over." Some days, he added, "We were able to click on every single station and every one of our folks were up there delivering our message. You’d look at them and say, ‘This is working.’ " On April 12, 2003, with major combat almost over, Mr. Rumsfeld drafted a memorandum to Ms. Clarke. "Let’s think about having some of the folks who did such a good job as talking heads in after this thing is over," he wrote. By summer, though, the first signs of the insurgency had emerged. Reports from journalists based in Baghdad were increasingly suffused with the imagery of mayhem.

The Pentagon did not have to search far for a counterweight.

It was time, an internal Pentagon strategy memorandum urged, to "re-energize surrogates and message-force multipliers," starting with the military analysts. The memorandum led to a proposal to take analysts on a tour of Iraq in September 2003, timed to help overcome the sticker shock from Mr. Bush’s request for $87 billion in emergency war financing. The group included four analysts from Fox News, one each from CNN and ABC, and several research-group luminaries whose opinion articles appear regularly in the nation’s op-ed pages.

The trip invitation promised a look at "the real situation on the ground in Iraq."

The situation, as described in scores of books, was deteriorating. L. Paul Bremer III, then the American viceroy in Iraq, wrote in his memoir, "My Year in Iraq," that he had privately warned the White House that the United States had "about half the number of soldiers we needed here… We’re up against a growing and sophisticated threat," Mr. Bremer recalled telling the president during a private White House dinner.

That dinner took place on Sept. 24, while the analysts were touring Iraq.

Yet these harsh realities were elided, or flatly contradicted, during the official presentations for the analysts, records show. The itinerary, scripted to the minute, featured brief visits to a model school, a few refurbished government buildings, a center for women’s rights, a mass grave and even the gardens of Babylon. Mostly the analysts attended briefings. These sessions, records show, spooled out an alternative narrative, depicting an Iraq bursting with political and economic energy, its security forces blossoming. On the crucial question of troop levels, the briefings echoed the White House line: No reinforcements were needed. The "growing and sophisticated threat" described by Mr. Bremer was instead depicted as degraded, isolated and on the run.

"We’re winning," a briefing document proclaimed.

One trip participant, General Nash of ABC, said some briefings were so clearly "artificial" that he joked to another group member that they were on "the George Romney memorial trip to Iraq," a reference to Mr. Romney’s infamous claim that American officials had "brainwashed" him into supporting the Vietnam War during a tour there in 1965, while he was governor of Michigan. But if the trip pounded the message of progress, it also represented a business opportunity: direct access to the most senior civilian and military leaders in Iraq and Kuwait, including many with a say in how the president’s $87 billion would be spent. It also was a chance to gather inside information about the most pressing needs confronting the American mission: the acute shortages of "up-armored" Humvees; the billions to be spent building military bases; the urgent need for interpreters; and the overly ambitious plans to train Iraq’s security forces.

Information and access of this nature had undeniable value for trip participants like William V. Cowan and Carlton A. Sherwood. Mr. Cowan, a Fox analyst and retired Marine colonel, was the chief executive of a new military firm, the wvc3 Group. Mr. Sherwood was its executive vice president. At the time, the company was seeking contracts worth tens of millions to supply body armor and counterintelligence services in Iraq. In addition, wvc3 Group had a written agreement to use its influence and connections to help tribal leaders in Al Anbar Province win reconstruction contracts from the coalition. "Those sheiks wanted access to the C.P.A.," Mr. Cowan recalled in an interview, referring to the Coalition Provisional Authority.

Mr. Cowan said he pleaded their cause during the trip. "I tried to push hard with some of Bremer’s people to engage these people of Al Anbar," he said. Back in Washington, Pentagon officials kept a nervous eye on how the trip translated on the airwaves. Uncomfortable facts had bubbled up during the trip. One briefer, for example, mentioned that the Army was resorting to packing inadequately armored Humvees with sandbags and Kevlar blankets. Descriptions of the Iraqi security forces were withering. "They can’t shoot, but then again, they don’t," one officer told them, according to one participant’s notes. "I saw immediately in 2003 that things were going south," General Vallely, one of the Fox analysts on the trip, recalled in an interview with The Times.

The Pentagon, though, need not have worried.

"You can’t believe the progress," General Vallely told Alan Colmes of Fox News upon his return. He predicted the insurgency would be "down to a few numbers" within months. "We could not be more excited, more pleased," Mr. Cowan told Greta Van Susteren of Fox News. There was barely a word about armor shortages or corrupt Iraqi security forces. And on the key strategic question of the moment— whether to send more troops— the analysts were unanimous. "I am so much against adding more troops," General Shepperd said on CNN.

Inside the Pentagon and at the White House, the trip was viewed as a masterpiece in the management of perceptions, not least because it gave fuel to complaints that "mainstream" journalists were ignoring the good news in Iraq. "We’re hitting a home run on this trip," a senior Pentagon official wrote in an e-mail message to Richard B. Myers and Peter Pace, then chairman and vice chairman of the Joint Chiefs of Staff. Its success only intensified the Pentagon’s campaign. The pace of briefings accelerated. More trips were organized. Eventually the effort involved officials from Washington to Baghdad to Kabul to Guantánamo and back to Tampa, Fla., the headquarters of United States Central Command.

The scale reflected strong support from the top. When officials in Iraq were slow to organize another trip for the analysts, one senior Pentagon official fired off an e-mail message warning that the trips "have the highest levels of visibility" at the White House and urging them to get moving before Lawrence Di Rita, one of Mr. Rumsfeld’s closest aides, "picks up the phone and starts calling the 4-stars." Mr. Di Rita, no longer at the Defense Department, said in an interview that a "conscious decision" was made to rely on the military analysts to counteract "the increasingly negative view of the war" coming from journalists in Iraq. The analysts, he said, generally had "a more supportive view" of the administration and the war, and the combination of their TV platforms and military cachet made them ideal for rebutting critical coverage of issues like troop morale, treatment of detainees, inadequate equipment or poorly trained Iraqi security forces. "On those issues, they were more likely to be seen as credible spokesmen," he said.

For analysts with those military-industrial ties that Ike warned us against, the attention brought access to a widening circle of influential officials beyond the contacts they had accumulated over the course of their careers. Charles T. Nash, a Fox military analyst and retired Navy captain, is a consultant who helps small companies break into the military market. Suddenly, he had entree to a host of senior military leaders, many of whom he had never met. It was, he said, like being embedded with the Pentagon leadership. "You start to recognize what’s most important to them," he said, adding, "There’s nothing like seeing stuff firsthand." Some Pentagon officials said they were well aware that some analysts viewed their special access as a business advantage. "Of course we realized that," Mr. Krueger said. "We weren’t naïve about that."

They also understood the financial relationship between the networks and their analysts. Many analysts were being paid by the "hit," the number of times they appeared on TV. The more an analyst could boast of fresh inside information from high-level Pentagon "sources," the more hits he could expect. The more hits, the greater his potential influence in the military marketplace, where several analysts prominently advertised their network roles. "They have taken lobbying and the search for contracts to a far higher level," Mr. Krueger said [[I think he got the direction wrong: normxxx]]. "This has been highly honed."

Mr. Di Rita, though, said it never occurred to him that analysts might use their access to curry favor. Nor, he said, did the Pentagon try to exploit this dynamic. "That’s not something that ever crossed my mind," he said. In any event, he argued, the analysts and the networks were the ones responsible for any ethical complications [[and we were just following orders…: normxxx]]. "We assume they know where the lines are," he said.

The analysts met personally with Mr. Rumsfeld at least 18 times, records show, but that was just the beginning. They had dozens more sessions with the most senior members of his brain trust and access to officials responsible for managing the billions being spent in Iraq. Other groups of "key influentials" had meetings, but not nearly as often as the analysts. An internal memorandum in 2005 helped explain why. The memorandum, written by a Pentagon official who had accompanied analysts to Iraq, said that based on her observations during the trip, the analysts "are having a greater impact" on network coverage of the military. "They have now become the go-to guys not only on breaking stories, but they influence the views on issues," she wrote.

Other branches of the administration also began to make use of the analysts. Mr. Gonzales, then the attorney general, met with them soon after news leaked that the government was wiretapping terrorism suspects in the United States without warrants, Pentagon records show. When David H. Petraeus was appointed the commanding general in Iraq in January 2007, one of his early acts was to meet with the analysts. "We knew we had extraordinary access," said Timur J. Eads, a retired Army lieutenant colonel and Fox analyst who is vice president of government relations for Blackbird Technologies, a fast-growing military contractor.

Like several other analysts, Mr. Eads said he had at times held his tongue on television for fear that "some four-star could call up and say, ‘Kill that contract.’ " For example, he believed Pentagon officials misled the analysts about the progress of Iraq’s security forces. "I know a snow job when I see one," he said. But, he did not share this on TV. "Human nature," he explained, though he noted other instances when he was critical. Some analysts said that even before the war started, they privately had questions about the justification for the invasion, but were careful not to express them on air.

Mr. Bevelacqua, then a Fox analyst, was among those invited to a briefing in early 2003 about Iraq’s purported stockpiles of illicit weapons. He recalled asking the briefer whether the United States had "smoking gun" proof. " ‘We don’t have any hard evidence,’ " Mr. Bevelacqua recalled the briefer replying. He said he and other analysts were alarmed by this concession. "We are looking at ourselves saying, ‘What are we doing?’ " Another analyst, Robert L. Maginnis, a retired Army lieutenant colonel who works in the Pentagon for a military contractor, attended the same briefing and recalled feeling "very disappointed" after being shown satellite photographs purporting to show bunkers associated with a hidden weapons program.

Mr. Maginnis said he concluded that the analysts were being "manipulated" to convey a false sense of certainty about the evidence of the weapons[[remember, this was in 2003, before the invasion: normxxx]]. Yet he and Mr. Bevelacqua and the other analysts who attended the briefing did not share any misgivings with the American public. Mr. Bevelacqua and another Fox analyst, Mr. Cowan, had formed the wvc3 Group, and hoped to win military and national security contracts. "There’s no way I was going to go down that road and get completely torn apart," Mr. Bevelacqua said. "You’re talking about fighting a huge machine."

Some e-mail messages between the Pentagon and the analysts reveal an all but explicit trade of privileged access for favorable coverage. Robert H. Scales Jr., a retired Army general and analyst for Fox News and National Public Radio whose consulting company advises several military firms on weapons and tactics used in Iraq, wanted the Pentagon to approve high-level briefings for him inside Iraq in 2006. "Recall the stuff I did after my last visit," he wrote. "I will do the same this time."

Pentagon Keeps Tabs

As it happened, the analysts’ news media appearances were being closely monitored. The Pentagon paid a private contractor, Omnitec Solutions, hundreds of thousands of dollars to scour databases for any trace of the analysts, be it a segment on "The O’Reilly Factor" or an interview with The Daily Inter Lake in Montana, circulation 20,000. Omnitec evaluated their appearances using the same tools as corporate branding experts. One report, assessing the impact of several trips to Iraq in 2005, offered example after example of analysts echoing Pentagon themes on all the networks. "Commentary from all three Iraq trips was extremely positive over all," the report concluded.

In interviews, several analysts reacted with dismay when told they were described as reliable "surrogates" in Pentagon documents. And some asserted that their Pentagon sessions were, as David L. Grange, a retired Army general and CNN analyst put it, "just upfront information," while others pointed out, accurately, that they did not always agree with the administration or each other. "None of us drink the Kool-Aid[!?!]" General Scales said. Likewise, several also denied using their special access for business gain. Not related at all," General Shepperd said, pointing out that many in the Pentagon held CNN "in the lowest esteem."

Still, even the mildest of criticism could draw a challenge. Several analysts told of fielding telephone calls from displeased defense officials only minutes after being on the air. On Aug. 3, 2005, 14 marines died in Iraq. That day, Mr. Cowan, who said he had grown increasingly uncomfortable with the "twisted version of reality" being pushed on analysts in briefings, called the Pentagon to give "a heads-up" that some of his comments on Fox "may not all be friendly," Pentagon records show.

Mr. Rumsfeld’s senior aides quickly arranged a private briefing for him, yet when he told Bill O’Reilly that the United States was "not on a good glide path right now" in Iraq, the repercussions were swift. Mr. Cowan said he was "precipitously fired from the analysts group" for this appearance. The Pentagon, he wrote in an e-mail message, "simply didn’t like the fact that I wasn’t carrying their water." The next day James T. Conway, then director of operations for the Joint Chiefs, presided over another conference call with analysts. He urged them, a transcript shows, not to let the marines’ deaths further erode support for the war.

"The strategic target remains our population," General Conway said. "We can lose people day in and day out, but they’re never going to beat our military. What they can and will do if they can is strip away our support. And you guys can help us not let that happen."

"General, I just made that point on the air," an analyst replied. "Let’s work it together, guys," General Conway urged.

The Generals’ Revolt

The full dimensions of this mutual embrace were perhaps never clearer than in April 2006, after several of Mr. Rumsfeld’s former generals— none of them network military analysts— went public with devastating critiques of his wartime performance. Some called for his resignation. On Friday, April 14, with what came to be called the "Generals’ Revolt" dominating headlines, Mr. Rumsfeld instructed aides to summon military analysts to a meeting with him early the next week, records show. When an aide urged a short delay to "give our big guys on the West Coast a little more time to buy a ticket and get here," Mr. Rumsfeld’s office insisted that "the boss" wanted the meeting fast "for impact on the current story."

That same day, Pentagon officials helped two Fox analysts, General McInerney and General Vallely, write an opinion article for The Wall Street Journal defending Mr. Rumsfeld. "Starting to write it now," General Vallely wrote to the Pentagon that afternoon. "Any input for the article," he added a little later, "will be much appreciated." Mr. Rumsfeld’s office quickly forwarded talking points and statistics to rebut the notion of a spreading revolt. "Vallely is going to use the numbers," a Pentagon official reported that afternoon.

The standard secrecy notwithstanding, plans for this session leaked, producing a front-page story in The Times that Sunday. In damage-control mode, Pentagon officials scrambled to present the meeting as routine and directed that communications with analysts be kept "very formal," records show. "This is very, very sensitive now," a Pentagon official warned subordinates. On Tuesday, April 18, some 17 analysts assembled at the Pentagon with Mr. Rumsfeld and General Pace, then the chairman of the Joint Chiefs.

A transcript of that session, never before disclosed, shows a shared determination to marginalize war critics and revive public support for the war.

"I’m an old intelligence guy," said one analyst. (The transcript omits speakers’ names.) "And I can sum all of this up, unfortunately, with one word. That is Psyops. Now most people may hear that and they think, ‘Oh my God, they’re trying to brainwash.’ " "What are you, some kind of a nut?" Mr. Rumsfeld cut in, drawing laughter. "You don’t believe in the Constitution?" There was little discussion about the actual criticism pouring forth from Mr. Rumsfeld’s former generals. Analysts argued that opposition to the war was rooted in perceptions fed by the news media, not reality. The administration’s overall war strategy, they counseled, was "brilliant" and "very successful." "Frankly," one participant said, "from a military point of view, the penalty, 2,400 brave Americans whom we lost, 3,000 in an hour and 15 minutes, is relative."

An analyst said at another point: "This is a wider war. And whether we have democracy in Iraq or not, it doesn’t mean a tinker’s damn if we end up with the result we want, which is a regime over there that’s not a threat to us." "Yeah," Mr. Rumsfeld said, taking notes. But winning or not, they bluntly warned, the administration was in grave political danger so long as most Americans viewed Iraq as a lost cause. "America hates a loser," one analyst said. Much of the session was devoted to ways that Mr. Rumsfeld could reverse the "political tide." One analyst urged Mr. Rumsfeld to "just crush these people," and assured him that "most of the gentlemen at the table" would enthusiastically support him if he did.

"You are the leader," the analyst told Mr. Rumsfeld. "You are our guy." At another point, an analyst made a suggestion: "In one of your speeches you ought to say, ‘Everybody stop for a minute and imagine an Iraq ruled by Zarqawi.’ And then you just go down the list and say, ‘All right, he's got oil, money, sovereignty, access to the geographic center of gravity of the Middle East, blah, blah, blah.’ If you can just paint a mental picture for Joe America to say, ‘Oh my God, I can’t imagine a world like that.’ " Even as they assured Mr. Rumsfeld that they stood ready to help in this public relations offensive, the analysts sought guidance on what they should cite as the next "milestone" that would, as one analyst put it, "keep the American people focused on the idea that we’re moving forward to a positive end." They placed particular emphasis on the growing confrontation with Iran.

"When you said ‘long war,’ you changed the psyche of the American people to expect this to be a generational event," an analyst said. "And again, I’m not trying to tell you how to do your job…" "Get in line," Mr. Rumsfeld interjected. The meeting ended and Mr. Rumsfeld, appearing pleased and relaxed, took the entire group into a small study and showed off treasured keepsakes from his life, several analysts recalled. Soon after, the analysts hit the airwaves. The Omnitec monitoring reports, circulated to more than 80 officials, confirmed that analysts repeated many of the Pentagon’s talking points: that Mr. Rumsfeld consulted "frequently and sufficiently" with his generals; that he was not "overly concerned" with the criticisms; that the meeting focused "on more important topics at hand," including the next milestone in Iraq, the formation of a new government. Days later, Mr. Rumsfeld wrote a memorandum distilling their collective guidance into bullet points.

Two were underlined:

"Focus on the Global War on Terror— not simply Iraq. The wider war— the long war."

"Link Iraq to Iran. Iran is the concern. If we fail in Iraq or Afghanistan, it will help Iran."

But if Mr. Rumsfeld found the session instructive, at least one participant, General Nash, the ABC analyst, was repulsed. "I walked away from that session having total disrespect for my fellow commentators, with perhaps one or two exceptions," he said. Two weeks ago General Petraeus took time out from testifying before Congress about Iraq for a conference call with the military analysts. Mr. Garrett, the Fox analyst and Patton Boggs lobbyist, said he told General Petraeus during the call to "keep up the great work."

"Hey," Mr. Garrett said in the interview, "anything we can do to help."

For the moment, though, because of heavy election coverage and general war fatigue, military analysts are not getting nearly as much TV time, and the networks have trimmed their rosters of analysts. The conference call with General Petraeus, for example, produced little in the way of immediate coverage. Still, almost weekly the Pentagon continues to conduct briefings with selected military analysts. Many analysts said network officials were only dimly aware of these interactions. The networks, they said, have little grasp of how often they meet with senior officials, or what is discussed.

"I don’t think NBC was even aware we were participating," said Rick Francona, a longtime military analyst for the network. Some networks publish biographies on their Web sites that describe their analysts’ military backgrounds and, in some cases, give at least limited information about their business ties. But many analysts also said the networks asked few questions about their outside business interests, the nature of their work or the potential for that work to create conflicts of interest. "None of that ever happened," said Mr. Allard, an NBC analyst until 2006. "The worst conflict of interest was no interest."

Mr. Allard and other analysts said their network handlers also raised no objections when the Defense Department began paying their commercial airfare for Pentagon-sponsored trips to Iraq— a clear ethical violation for most news organizations. CBS News declined to comment on what it knew about its military analysts’ business affiliations or what steps it took to guard against potential conflicts. NBC News also declined to discuss its procedures for hiring and monitoring military analysts. The network issued a short statement: "We have clear policies in place to assure that the people who appear on our air have been appropriately vetted and that nothing in their profile would lead to even a perception of a conflict of interest."

Jeffrey W. Schneider, a spokesman for ABC, said that while the network’s military consultants were not held to the same ethical rules as its full-time journalists, they were expected to keep the network informed about any outside business entanglements. "We make it clear to them we expect them to keep us closely apprised," he said. A spokeswoman for Fox News said executives "refused to participate" in this article.

CNN requires its military analysts to disclose in writing all outside sources of income. But like the other networks, it does not provide its military analysts with the kind of written, specific ethical guidelines it gives its full-time employees for avoiding real or apparent conflicts of interest. Yet even where controls exist, they have sometimes proven porous. CNN, for example, said it was unaware for nearly three years that one of its main military analysts, General Marks, was deeply involved in the business of seeking billion dollar government contracts, including contracts related to Iraq.

General Marks was hired by CNN in 2004, about the time he took a management position at McNeil Technologies, where his job was to pursue military and intelligence contracts. As required, General Marks disclosed that he received income from McNeil Technologies. But the disclosure form did not require him to describe what his job entailed, and CNN acknowledges it failed to do additional vetting.

"We did not ask Mr. Marks the follow-up questions we should have," CNN said in a written statement. In an interview, General Marks said it was no secret at CNN that his job at McNeil Technologies was about winning contracts. "I mean, that’s what McNeil does," he said. CNN, however, said it did not know the nature of McNeil’s military business or what General Marks did for the company. If he was bidding on Pentagon contracts, CNN said, that should have disqualified him from being a military analyst for the network. But in the summer and fall of 2006, even as he was regularly asked to comment on conditions in Iraq, General Marks was working intensively on bidding for a $4.6 billion contract to provide thousands of translators to United States forces in Iraq. In fact, General Marks was made president of the McNeil spin-off that won the huge contract in December 2006.

General Marks said his work on the contract did not affect his commentary on CNN. "I’ve got zero challenge separating myself from a business interest," he said. But CNN said it had no idea about his role in the contract until July 2007, when it reviewed his most recent disclosure form, submitted months earlier, and finally made inquiries about his new job. "We saw the extent of his dealings and determined at that time we should end our relationship with him," CNN said.

  M O R E. . .

Normxxx    
______________

The contents of any third-party letters/reports above do not necessarily reflect the opinions or viewpoint of normxxx. They are provided for informational/educational purposes only.
The content of any message or post by normxxx anywhere on this site is not to be construed as constituting market or investment advice. Such is intended for educational purposes only. Individuals should always consult with their own advisors for specific investment advice.

Thursday, April 24, 2008

"Moscow Nights"

Is Moscow The New Big Apple?

By Celia Walden, Telegraph.Co.Uk | 24 April 2008

Moscow is being hailed by some as the new New York. Celia Walden samples its excesses and finds finds Muscovites are suicidally serious about fun

If you've ever worn tight shoes, you'll know that the relief you feel when you take them off is so akin to euphoria it leaves you dizzy. Imagine a whole capital city, hobbled for 72 years of communism, united in that sense of deliverance.

Then try to imagine waking up after a night out in that city— or don't: it's a painful business. Inky nightclub stamps in Cyrillic script brand the back of my hands; my hair and, by proxy, bedclothes reek of cigarette smoke: and my head reminds me why, even in binge Britain, we choose not to chase each glass of wine with a thimbleful of vodka.

"This city is a sick place," shrugs Elena, the biggest party girl I know and the perfect companion as I set about uncovering whether Moscow lives up to its claims as the new New York. She means sick in the LA sense of the word: when a place, style or person is so outlandishly hip, cutting-edge or viciously innovative that it prompts only that most contrary of adjectives. Others may prefer to use the same word in its original meaning. Not for nothing, I am about to discover, has Moscow been named the capital of excess.

My first night was gentle enough: dinner at Turandot (a new £30 million restaurant built in the style of an Italian palazzo, complete with waiters in 18th-century dress), followed by two bars and three nightclubs. "We'll ease you in," laughed Elena as we arrived at a rave in an old factory where pornographic pop-art lined the walls and strobes bounced off eyeballs avid and dry from drugs.

Two £25 drinks later and we were off again in search of transport. Nobody takes taxis in Moscow. So far, so very un-Manhattan. Instead, they hail down any car that will take them: a Skoda, a Lada or, occasionally, something fancier, courtesy of a dignitary's chauffeur doing a spot of moonlighting. We were in luck: a black Merc with leather seats and a siren on the roof pulled up. Members of Parliament in Russia are allowed them "for emergencies". "Can we have the siren on?" I joked, as we sped, at 120 miles an hour, past endless construction sites, towards Solyanka, Moscow's answer to Soho House. "Nyet," came the gruff reply. Two minutes and a 500 rouble note (£10) later, we were wailing past grey, gridlocked streets.

On arrival we were ushered through the VIP zone, into the VVIP zone, up a fire escape and through a kitchen into the VVVIP zone. You're nobody in this town unless you're forced to walk through a kitchen to get your shot of Stoly. There, a gaggle of women with machete-like cheekbones were dancing on the bar-top, below them a troika of men, looking directly up at them in awe as they guzzled champagne. Muscovites have waited so long for their time to come that they act as though it will all be taken from them come morning. "See those trapdoors?" grinned one clubber, pointing. "People climb on to the roof to have sex— even in December, when it's minus 10."

Dimitri, my taciturn photographer, shook his head. "Is any of it really making these people happy?" Looking at the panty-gazing businessmen by the bar, I'm fairly certain the answer is yes. "You guys seem to think our women are all prostitutes," said Artemy Troitsky, an outspoken music critic and writer, often described as the Russian John Peel. "And you're sort of right. They will establish early on what you can offer them and tell you what their previous boyfriends gave them. Russian men have grown quite wary, but foreigners are easy prey." The women are clearly high-maintenance: in clubs and bars, miniature chairs ensure that designer handbags— often worth as much as £2,000— never touch the floor.

Culturally the capital is a frenzy of amorphous creativity, with one art form bleeding into another: bars are selling books, nightclubs sell clothes. All-night contemporary art museums (with their own DJs) are springing up across the city. Norman Foster has been commissioned to build 20 new buildings, and Philippe Starck is designing a whole village just outside Moscow. "People forget that what Communism left behind was a skilled workforce," explains Tony Brenton, the British ambassador to Moscow. "Add limiless gobs of money, sex, and greed to that and it's an explosively productive combination."

And one that is attracting Brits with dollar signs in their eyes, such as Tony Blair, who is rumoured to have secured a £125,000 speaking engagement in the capital this summer, and Damien Hirst, who is to take his diamond-studded skull to Russia in June. One detail says it all: Moscow is the only place in the world where movie billboards have the film's budget in the same-sized type as the title, as though the fact the new George Clooney epic cost £65 million makes it worth seeing.

Contemporary art is also big business. "Over the past seven years we have had this new class of people who want to buy and collect art," says Igor Markin, owner of Moscow's Art4 museum. "Some chose to buy football clubs instead, of course… I just heard that Roman Abramovich's girlfriend, Dasha Zhukova, has bought a space to open her own museum." Abramovich's name is on everybody's lips: he is the ultimate success story, and a great supporter of the Russian contemporary art scene.

The following night, at the launch of the Moscow Photography Biennale, I met John Mann, Abramovich's PR director at his company Millhouse: "New York isn't as 24-hour as Moscow. I have two bookshops near my flat that are open all night, two supermarkets with everything you could possibly need, and I can have a drink at seven in the morning. In a few years' time, New York will be claiming it's the new Moscow, trust me." Even fashion has caught up. Tsum, the gigantic Moscow department store modelled on Selfridges, has a greater collection of Balenciaga, Miu Miu and Lanvin than Harrods or Harvey Nichols, as well as exclusive ranges designed by Daria Werbowy and Naomi Campbell. The clothes cost 40 per cent more than elsewhere, but people still buy them.

"Don't forget that Russians lost everything three times, in 1990, 1993 and 1998," said Natasha, a Russian model shopping for the latest designer gear in perilous stilettos. "Now they are happy with their lot and happy with Putin. Everything is not affordable but it's available, and that's enough." Russians are filling the capital's restaurants: at Sky Lounge, a huge New York-style eatery, businessmen tuck into millefeuille with sorbet of foie gras and fruit jelly. Vostok, another celebrity haunt, offers its cheapest starter at £30. Sushi is the latest craze.

Luxury has bred a new physicality. Men and women now work out, cut carbs and get mani-pedis in their lunch hours. But the real beauty staple is their weekly steam bath. "The winters are harsh on our skin," said Sandra Vermuyten of marka:ff, a Moscow-based arts PR company, as she led me into a room heated to 120 degrees and full of naked beauties. It looked like a slaughterhouse: 40 women, like me wrapped in sheets, were draped across benches or lying on the floor, trying to escape the crushing temperature.

"You can't be the first to leave— it's a matter of honour," whispered Sandra. Minutes later she started beating me with a birch branch— "to get the circulation going". I looked at her in disbelief. "Oh, I'm sorry— you would prefer me to use pine?" she replied. When I finally escaped I felt two kilos lighter. "Vodka cocktail sound good?" chirped Elena and we hitched a ride to Krisha Mira— a club filled with giant Buddhas, where, at 6am from a roof terrace, we watched the sun come up over the Moscow river.

I've spent all-nighters in New York and LA and been disappointed to discover only a forced, self-conscious attempt at hedonism. Muscovites are suicidally serious about fun. But if this is New York, then it's the New York of Brett Easton Ellis and Jay MacInerney, or the Chicago of the Twenties, where corruption and decadence, though spectacular to witness, can be a heartbeat away from despair. "The thing I have come to love about Moscow," says Ambassador Brenton, "is that it is a highly urban, highly unpredictable place with a slight undertone of danger."

"As long as the oil prices stay the way they are," sighs Troitsky, "this lifestyle will continue. Politically we are in limbo, but for you guys, for visitors? It may be a once-in-a-lifetime opportunity to visit a capital that burns money."

ß§

Normxxx    

Mortgage Time Bomb

The Trillion-Dollar Mortgage Time Bomb
Risks Are Rising That Fannie Mae And Freddie Mac May Need A Government Bailout That Could Cost Far More Than Previous Rescues.


By Chris Isidore, Money.Com | 25 April 2008

NEW YORK (CNNMoney.com)— Among the nightmares lurking around the corner for the already battered housing and credit markets would be a meltdown at mortgage financing giants Fannie Mae and Freddie Mac. Although few are predicting an imminent need for a bailout just yet, credit rating agency Standard & Poor's recently placed an estimated price tag on this worst case scenario— $420 billion to $1.1 trillion of taxpayer's money.

This dwarfs how much it cost to help banks during the savings and loan crisis of the late 1980's and early 1990's. That cost taxpayers about $250 billion in today's dollars. S&P added that saving Fannie (FNM) and Freddie (FRE, Fortune 500) might cost so much that the federal government's AAA credit rating, the top possible rating, might even be at risk. If that was lost, then all federal government borrowing would become more expensive. Without Fannie Mae and Freddie Mac, there would be no mortgage market; both facilitate the market function by purchasing pools of loans and packaging them into securities.

So it is crucial for the mortgage industry for the two agencies to continue functioning smoothly. The two companies are known as government-sponsored entities because they have Congressional charters, which implies that the federal government is behind them. Fannie did not comment about the S&P report. According to a statement from Freddie, the firm said the S&P report was just "a scenario analysis, not a prediction" and added that "Freddie Mac remains a well capitalized company."

Victoria Wagner, a S&P credit analyst who worked on the report, said S&P isn't predicting that Fannie and Freddie would necessarily need a bailout at this time. But she and other analysts are concerned about the impact more problems could have on the mortgage market since the two companies have become increasingly vital to the health of the industry. Both companies are forecast to report more losses this year due to declining home prices and rising mortgage defaults.

Risks Increasing

Wagner pointed out that at the end of January, 82% of all mortgages in the U.S. were backed by one of the firms, up from only 46% in the second quarter of 2007. Fannie and Freddie almost exclusively back so-called 'conforming' loans, those made to borrowers with good credit and large down payments. But even limited exposure to subprime loans hasn't stopped them from running up huge losses as home prices tumbled and foreclosures soared. And Fannie and Freddie's role in the mortgage and real estate markets is likely to grow, as Congress recently allowed them to back larger mortgages, up to $729,750, up from the previous limit of $417,000.

The Office of Federal Housing Enterprise Oversight (OFHEO), which regulates both firms, also recently lowered the capital requirements for Fannie and Freddie in an effort to pump $200 billion more into the credit markets. The new loan limits will increase the risks and losses for Fannie and Freddie, said Wagner and other experts. The high priced markets where homeowners and buyers need larger loans are now the ones seeing steep home price declines. And the default rates on larger loans are greater than the smaller loans that had previously been the core of their business.

"I don't think the message is a bailout is necessary or imminent," Wagner said. "But they're facing this increased role at a time that their own credit performance is suffering from the rifts in the housing and mortgage markets. They're both projecting much higher losses than we've seen in some time."

Some See Bailout As More Likely

But other experts expect that declining home values will force more borrowers who have a Fannie— or Freddie-backed loan to stop making payments in the coming months, rather than continuing to make payments on a home now worth less than their loan balance. Rising job losses may also make it difficult for other borrowers who formerly had good credit to stay current on their mortgage payments.

"The real fundamental problem is real estate prices have been falling and they might fall substantially more," said Robert Shiller, a Yale University economist who argued for years that a bubble was forming in real estate prices. "OFHEO and Fannie and Freddie never considered the possibility of a massive real estate correction." Some economists suggest that if investors start to see problems in the performance of loans backed by Fannie and Freddie, they'll dump them. And that would force the federal government to step in.

"I would say there's at least a 50-50 chance of some sort of bailout. I'm not saying it will necessarily cost $1 trillion, but they'll need some kind of help, and it very well could happen this year," said Dean Baker, co-director of the Center for Economic and Policy Research. Investors are signaling growing concern as well. The yield premium for securities backed by Freddie and Fannie compared to the yield on Treasury bills has grown to about 2.25 percentage points from 1.7 percentage points at the beginning of the year. That's a sign that the investors see a greater risk of Fannie and Freddie running into bigger problems.

And OFHEO, in its annual report this week, said that while Fannie and Freddie have made progress clearing up accounting problems that had dogged both firms, they remain "a significant supervisory risk." The agency added that since current home price declines are without precedent, the firms will have a difficult time correctly pricing the risk of the mortgages they're backing.

But Jaret Seiberg, financial services analyst for policy research firm Stanford Group, said Fannie and Freddie ultimately should be able to weather the storm though simply because there is no question that the government would bail them out. So there shouldn't be a crisis of confidence about their future in the way that there was for investment bank Bear Stearns before the Fed stepped in and agreed to back $29 billion in potential losses so JPMorgan Chase (JPM, Fortune 500) could buy Bear Stearns (BSC, Fortune 500). "What has allowed Fannie and Freddie to continue to operate when the private mortgage-backed security market dried up is their implicit government guarantee," said Seiberg.

ß§

Normxxx    
______________

The contents of any third-party letters/reports above do not necessarily reflect the opinions or viewpoint of normxxx. They are provided for informational/educational purposes only.
The content of any message or post by normxxx anywhere on this site is not to be construed as constituting market or investment advice. Such is intended for educational purposes only. Individuals should always consult with their own advisors for specific investment advice.

Monday, April 21, 2008

In The Eye Of The Housing Hurricane

In The Eye Of The Housing Hurricane
Other Voices Views— From Beyond The Barron’s Staff

Click here for a link to complete article:

By Mike Morgan | 21 April 2008

(Link to October 2006 Barron's Article— Click Here)

Here’s a lesson many Floridians have learned the hard way: All hurricanes have three parts— the front half, the eye and the back half. The eye is a deceiving quiet period at the center of the hurricane. The eye lulls you into believing the storm has passed and all is well. In fact, the back half of a hurricane can be far more devastating than the front half. The front half of a hurricane does a lot of damage and weakens many structures. Then, when the back half hits, houses, buildings and personal property teetering on the brink of failure are utterly destroyed. Moreover, since the wind is coming from the opposite direction, anything strong enough to resist the first half is more than tested again by the back half.

This is exactly what’s happening in Florida’s housing and financial markets. We are in the eye of the hurricane, and the back half will hit us twice as hard as the front. The front half of the Florida real-estate hurricane was fed by a bidding frenzy that drove prices to a peak far above real demand: Flippers were not buying homes for function, just for trading. And with the Fed’s free-money policy, flippers were leveraging themselves at the same 30-to-1 and 50-to-1 levels as the financial wizards on Wall Street.

This artificial demand created an inflated supply of homes. By 2006, the inventory of unsold real estate reached a crisis level ("Florida’s Housing Hurricane, Other Voices, Oct. 2, 2006"— Click Here). The combination of rising inventory and prices, which had no relation to demand for housing that people wanted to live in, fed the front side of the hurricane.

Recently, however, there has been a lull in the windstorm. Would-be buyers are returning to the market. Over the past few weeks, we’ve been seeing 300% increases in traffic at our open houses from a year ago. Builders and real-estate agents report that offers are up, along with traffic.

But this is not the end of the hurricane; it’s still the eye. What the builders and agents neglect to report is that most of the traffic couldn’t qualify to buy a moped. Nor do they report rising rates of pending contracts that fail to close. And they don’t mention the damage being done by falling prices, which put more and more homeowners into negative-equity positions and make it more and more likely that more and more property gets pushed back to the lenders.

Nor do the builders dare to mention the bulk sales of inventory homes they are making to a new generation of giddy flippers with deeper pockets. This nonsense not only forces prices down further; it also creates a new competitor for the builders’ remaining inventories. The bulk buyers still have to sell these homes to end-users.

This twist is not all that new, but it is continuing to feed the overall problem of inventory glut. However, this is not what we should be focusing on as we enter the back half of this hurricane. Almost nobody is reporting on how the inventory problem of 2006 has moved from builders to lenders, and how this new generation of citizen-lenders has no clue about what to do with the surge of defaults and foreclosures. The reason the back half of the hurricane will be such a devastating wipeout: The failure of the lenders to address their issues with defaults is compounding the inventory problem to the point where we will see a tidal wave of inventory hit the market. As a real-estate broker in Florida, I have first-hand experience with homeowners defaulting on mortgages and lenders who appear to be far too confused to develop a clear plan for avoiding foreclosure auctions.

Buyers now realize lenders are going to take weeks or months to review and respond to offers that often reflect market value but fall short of covering the balance on the mortgage. Such "short sales" should be the easiest way for lenders to move inventory at market prices— but the lenders have not faced reality [[any more then those defaulters: normxxx]]. And now, most buyers who have had experience with short sales no longer want to look at short-sale properties because of the long and convoluted process involved. Instead of using this tool to realize market values, the lenders are allowing property to go to below-market foreclosure auctions, which then creates another new downward spiral for prices.

Lenders’ failure to address these issues has forced more defaults, which lead to skyrocketing foreclosure rates. Defaults and foreclosures mean huge expenses for the lender, and significantly lower values. And it gets worse for lenders. In the most extreme examples, lenders cannot even foreclose because the documents have not followed the mortgage.

Lenders may be telling Wall Street and Capitol Hill that they are developing plans to keep owners in their homes, but we are seeing the exact opposite in the real world. Even when we try to work with lenders, most of the time there is no one at the helm with the authority to process a cup of coffee, let alone the sale of a property in default. The easy answer is to simply let the property flow through to the foreclosure auction, even when that means 30% to 50% less in sale price.

Commercial and retail property are also becoming casualties in the back half of the hurricane. Drive through just about any Florida market to see all the For Lease signs on commercial property. Real-estate agents, lawyers, builders, contractors, mortgage brokers, insurance companies, furniture stores and all the rest are going out of business and leaving a flood of office and commercial inventory vacant.

The condo market? Do you really want to hear anything about the devastation that the lenders and local municipalities are facing over the collapse of the condo market? That’s like adding a Class 5 tornado to the Category 5 hurricane over Florida.

— — — — — — — — — — — — — — — — — — — — — — — —

MIKE MORGAN is a real-estate broker in Stuart, Fla. and owner of Morgan Florida, which offers residential, commercial and investment real-estate services and research.


  M O R E. . .


Normxxx    
______________

The contents of any third-party letters/reports above do not necessarily reflect the opinions or viewpoint of normxxx. They are provided for informational/educational purposes only.
The content of any message or post by normxxx anywhere on this site is not to be construed as constituting market or investment advice. Such is intended for educational purposes only. Individuals should always consult with their own advisors for specific investment advice.

Tuesday, April 15, 2008

Investment Strategy: "GE’d!"

Investment Strategy: "GE’d!"

By Jeffrey Saut | 15 April 2008

We began last week thinking the S&P 500 was poised to finally break out above the often discussed 1370 pivot-point and scoot into the mid-1400s. And that was the way it looked like it was going to play last Monday until the early session surge, which took the S&P up to 1386, failed to sustain, leaving the index back at that "sticky" 1370 level by the closing bell. "Oh well," we thought, "If at first you don’t succeed try, try, again!" Here too, that was the way it looked to play as the indices backed and filled into last Thursday’s session as they stored up "energy" for another assault on 1370, or at least so we thought. Indeed, Thursday seemed to be the set-up for the envisioned upside sequence, but early Friday morning we got GE’d!

Readers of these missives know that after shunning General Electric (GE/$32.05) since 1998, for the past few quarters we have periodically recommended purchase of these shares. GE was rated Outperform by our various research correspondents, and our sense was, and remains, that the sector-spanning conglomerate plays to a number of themes we embrace, its shares are statistically cheap, it possesses a bond-like dividend yield of 3.9%, it is a proxy for international growth, and it appeared to be a consistent "grower" and despite that growth its share price was 40% below where it was in the spring of 2000. On Friday, however, GE shocked the investment world by "missing" its earning’s estimate as the cry erupted, "If you can’t trust GE, who can you trust?!" And with that, the market mauling was "on," causing a Dow Dump that would leave the senior index 257 points lower for the session.

Speaking to GE’s ill-fated earnings report, 1Q08 EPS were reported at $0.44 versus expectations of $0.51. Most of the shortfall was attributed to its financial-services unit, GE Capital, which accounted for $0.05 of the $0.07"miss." Also on the softer side were GE’s Healthcare and Industrial divisions, all of which offset double-digit growth at the Infrastructure division. GE’s shares now trade for a reasonable 14.2 times 2008 estimated profits ($2.25E), and just 13 times 2009 estimates, making the risk/reward ratio look pretty attractive given the 3.9% dividend yield. Fortunately, our investing strategy is always, and everywhere, to not buy ANYTHING all at once, but rather to scale buy into a situation three or four times. We think this is just such a time, for as Barron’s noted, "General Electric’s First-Quarter profit shortfall Friday shocked Wall Street, embarrassed the company and hurt the credibility of CEO Jeff Immelt. But it doesn’t kill the investment case for the company, whose shares now trade about where they stood a decade ago."

Speaking of "things" that trade where they stood a decade ago, there was an interesting article in the Wall Street Journal titled, "Stocks Tarnished By [the] Lost Decade." The article pointed out that atypically, the S&P 500 has made NO progress over the last nine years. To wit, "When dividends and inflation are factored in, the S&P 500 has risen on average 1.3% a year over the past ten years, well below the historic norm"[[NOT true! that IS the historical norm, inflation adjusted: normxxx]]. The article further notes, "Over the past nine years, the S&P 500 is the worst-performing of nine different investment vehicles tracked by Morningstar, including commodities, real-estate investment trusts (REITs), gold and foreign stocks." Of course, this should come as no surprise to clients of Raymond James since we first wrote about the Dow Theory "sell signal" in Q4 of 1999 and advised participants not to let anything go more than 15%20% against them, reduce high beta stocks in portfolios, and overweight REITs, as well as defense-related stocks. We modified that strategy following the tragedies of 9-11-01 by suggesting the bear market was ending, but we were likely entering a trading range environment and NOT a new secular bull market. And that, ladies and gentlemen, is why we have eschewed index investing since the late 1990s in favor of a more proactive approach using select money managers, mutual funds, exchange-traded funds (ETFs), closed-end funds, and yes, individual stocks. Moreover, in 4Q01 we adopted the strategy of overweighting "stuff stocks" (energy, metals, timber, cement, agriculture, etc.), which certainly "foots" with what the good folks at Morningstar are referencing.

Interestingly, however, the trading range environment could be coming to an end over the next few quarters, for as the insightful "Bespoke Investment Group" wrote in an piece titled "Rolling 10-Year Market Return Hits 30-Year Low:"

"In early March [2008], we performed a similar analysis in our "The Lost Decade" post that highlighted the weak performance in equities since the new millennium began. We took the 10-year total return performance of the S&P 500 back to 1900 (non-inflation adjusted) and charted the results below (see the nearby chart). When the line is highlighted in red, 10-year returns were lower than they are now. As shown, periods where returns were lower occurred in 1914, 1921, 1932, 1938, 1974 and 1977. We also highlight years where returns peaked— 1929, 1959, 1992 and 2000. While the returns could easily get worse, periods that have been this bad have not lasted longer than 4 years (1937-1941) before they've started to get better."

As for the short-term direction of the equity markets, while GE’s 13% session swoon contributed only 36 negative points of the Dow’s 257-point Friday Flop (because the DJIA is a price-weight rather than market-capitalization weighted), GE’s psychological impact was much more severe. As Barron’s put it, "If GE got stung, how will lesser companies fare?" With the parade of upcoming earnings reports that question will likely get stress-tested this week. Unfortunately, the stock market has the right to change its mind on a dime and GE’s "hairball" could be the linchpin that swings sentiment back to the negative side of the equation. While only time will tell, we are still hopeful that the late-January "lows," and the subsequent March retest of those "lows," will prove to be the intermediate-term lows.

Reinforcing that view is the fact that despite all the consternations, last week’s wilt merely pulled the major averages back into the middle of their respective three-month trading ranges. Moreover, while the DJIA (12325.42) and S&P 500 (SPX/1332.83) ended below their 50-day moving averages (DMAs), the D-J Transportation Average (DJTA) (DTX/481.39), the NASDAQ (2290.24), and the Semiconductor Index (SOX/358.68) remain above their 50-DMAs. Further, the DJIA is some 350 points above its January closing low, while the DJTA is a whopping 642 points above its January low. This is pretty amazing given soaring crude oil prices and all the bad news that has been thrown at the equity markets over the past few months.

Nevertheless, last week’s failure by the S&P 500 at the 1370 level leaves a glaring upside failure in the charts, suggesting the rectangle formation of the last three months continues with the potential, repeat potential, of a downside retest of the lower-end of said rectangle. Consequently, we are raising stop-loss points on ALL trading positions. As for our investment positions, we remain comfortable with those positions, thinking our averaged-in prices on names like Schering-Plough’s (SGP/$17.21/Strong Buy) 8%-yielding convertible preferred "B" shares, Covanta (CVA/$29.15/Outperform), Delta Petroleum (DPTR/$26.03/Strong Buy), Johnson & Johnson (JNJ/$66.00/Strong Buy), et all, afford attractive risk/reward levels for investors. We continue to invest, and trade, accordingly.

The call for this week: Gee . . . no GE; we got GE’d last Friday, and the psychological damage has the potential to change the near-term investment sentiment. Combine that with this morning’s negative Wachovia (WB/$27.81) news, and what is likely a 90% "down day" last Friday (I just got back from the conference in Palm Springs and have not had a chance to run the numbers), and is it any wonder the pre-opening S&P 500 futures are off 8 points?! Therefore, it is important for the S&P 500 to gather itself "up" quickly, and rally, to regain its former health. If that doesn’t play, the averages should revisit the lower end of the rectangle formation in the charts.


Click Here, or on the image, to see a larger, undistorted image.

Source: Bespoke Investment Group.


Click Here, or on the image, to see a larger, undistorted image.

Source: Reuters.

"The Letter"
April 7, 2008

. . . The Box Tops (1967)

Last Monday we received "The Letter" except in this case it wasn’t The Box Tops’ hit tune of 1967, but "the letter" from one of our financial advisors. Said letter read like this:

"Jeff, what a dilemma we advisors face these days. Now about to enter my 10th year, I'm experiencing a truly perplexing market. Sure, 2000-2002 was tough, but there were asset classes that held up in that time. Stuff stocks, large-cap value, small-cap, REITs . . . you know the story.

Now in 2008 nothing seems to be the
‘it’ asset class. Most all stocks (any cap), beaten up REITs (even the new international REITs), and deep-discounted closed-end funds can’t find any upside traction. Adding to misery, the defensive healthcare and utilities sectors are languishing. The news on Merck (MRK/
$40.00/) and Schering-Plough (SGP/$16.12/) was surprising and a brutal hit to two stocks that you'd think investors could find safety in in these times. Treasuries are spooky with inflation and future higher rates a real threat. One financial advisor in our office, with over 35 years of experience, told me today that I'm living through one of the worst (if not the worst) market illness' he can remember.

With all this frustration and concern, one has to wonder if we are close to the turnaround. I agree with your pro-dollar, pro-U.S. stock stance. The crowd is heavily occupying the other side of these trades. But, what about inflation? All the fiscal stimulus and rate-dropping may soon come back to haunt us. Being only 5 years old or so when the mid-70s bear market was going on, I have little street cred for such a repeat. Alas, I cannot imagine a return to such dismal times in light of the global growth that has occurred. As for our team, we continue to rely upon Raymond James’ Freedom Account for a diversified approach for our clients' core money and a controlled use of annuities for protection. So far that strategy has been a good one!

As for tactical plays, we have been investing in a number of the more nimble mutual funds you have been recommending and nibbling on municipal bonds due to the recent spike in spreads. No big bets, but a way to further diversify clients. Cash and short-term CDs play a role too, but both are producing negative
‘real’ returns when inflation and taxes (non-qualified, of course) are factored in. Quite the dilemma and I apologize for the diatribe. As always, Jeff, I look forward to your guidance and thank you in advance for your time."

As I read the letter, I reflected back on the era between 1973 and 1974 thinking, "boy that was by far THE worst time I can recall in the equity markets." The DJIA had peaked on February 9, 1966 at 995.15 and in the process ended the great bull market of 1949 through 1966. At the time the Dow’s P/E ratio was 24x, and despite the ubiquitous belief that the bull market would continue, stocks began to decline. It was a deceptive decline, for while many of the previously "hot" stocks (the "onics" stocks, which were the internet issues of their day) shed more than 50% of their value; the DJIA vacillated between roughly 800 and 1000. That vacillation lasted into 1972, but when the Apollo Astronauts walked on the moon in April 1972 a "cry" was heard on the Street of Dreams that the sideways market was over and a new bull market had begun. Emboldened by such sentiment, the Dow stutter-stepped higher into November of that year and breached the 1000 barrier for the first time. The celebration continued into January 1973, where the senior index closed at 1051.70, a peak that would not be bettered for eight years.

From that January 1973 high the DJIA would lose some 45% of its value by December 1974 (1051 to 577). And while the 1973/1974 Dow Dive was only the sixth worst percentage decline in history, when impacted for double-digit inflation the erosion of "real value" in investors’ portfolios was more like 80% plus. Indeed, it was an era where ALL interest rates rose, punctuated by T’bill yield yelp from 3% in 1972 to over 10% in 1974. Similarly, crude oil surged from $3 per barrel in 1972 to more than $10 by 1974. Consequently, there were not a lot of places to "hide," or as our letter writer notes— there weren’t many "it" asset classes. As I recall, it was a heavy weighting of precious metals securities, energy stocks, a few special situations, and some "shorts" that kept me in this business back then.

Eerily, in today’s Barron’s, there is an article titled "Everything Looks Up From Here," with the subtitle, "It was just plain ugly for mutual funds in the first quarter. With the exception of gold, bonds and short-selling, no strategy worked well." Ugly, indeed, for save bonds and precious metals most other asset classes (large-cap growth, large-cap value, small/mid-cap, etc.) had negative returns last quarter. Yet, we are hopeful that things will get better from here and evidently we are not the only ones, for surprisingly perma bear Doug Kass, President of Seabreeze Partners, turned positive last Tuesday, which was dubbed one of the reasons for the April Fool’s pyrotechnical pop (+391 DJIA). More specifically, Doug announced that stocks would rise 26% by year-end, the housing slump had bottomed, oil prices would fall by 50%, and corporate earnings will surge. Whether it was just an April Fool’s joke or not, we sure hope that’s the way it plays in the short/intermediate-term. As for the longer-term, we remain cautious due to the November 21, 2007 Dow Theory "sell signal."

Whether it was Doug, or the myriad of other positive developments, last Tuesday’s "jubilee jump" further reinforced our conviction that the near-term lows are "in." Verily, it was the best April Fool’s fling since 1938. Coincidentally, the year 2008 likewise experienced the most 1% daily price movements since 1938, so we "dialed up" that year only to find the Dow bottoming at the end of March and leaping on April 1st to begin a rally that would leave the senior index 20% higher by mid-month. Is this déjà vu all over again? We doubt it, but the stock market’s ability to shake off the worst employment report since Hurricane Katrina last Friday further emboldens us. "So what are we to do?" asked one of our friends at last weekend’s Grand Prix of St. Petersburg.

Speaking to that, as well as our frustrated letter writer, we have a cadre of mutual funds that we believe can be bought ANY day of the week. The list begins with Quaker Strategic (QUAGX/$25.61), captained by the adroit Manu Daftary, who by our pencil is one of Wall Street’s most gifted stock pickers. Also from Quaker is the more conservative Quaker Capital Opportunities (QUKTX/$9.77), managed by our friend Charlie Knott. Two long/short funds also remain high on our "hit" list, those being Diamond Hills (DIAMX/$18.64) and Icon (IOLIX/$16.56), since such funds have the ability to make money in both "up" and "down" markets. As always, there are a number of mutual funds managed by the skilled Ivy Funds, as well as the Pimco organization, which embrace our "stuff stock" theme. And while they are not managers of a mutual fund, our friends at Atlanta-based Equity Investment Corporation (EIC) released this prose, which we find politically timely and investingly compelling:

"If it's 3 AM, and the Asian markets are collapsing, who do you want making your investment decisions? There have been 253 rolling 12-month periods since our firm's inception in 1986, and the S&P 500 declined double-digits in 27 of them, versus 6 for EIC. Those aren't just words, but fewer painful experiences like today, when most indices are down double-digits year-to-date, but EIC is not."

As for our individual stock selection, for the last few quarters we have tried to emphasize large-cap, dividend yielding, international earning, thematically selective type stocks. Some names often mentioned in these missives have been General Electric (GE/$37.56), Microsoft (MSFT/$29.16), and Wyeth (WYE/$41.56/Strong Buy), which "caught" a bullish write-up in this week’s Barron’s based on its Alzheimer’s drug. Yet by far the most questions we received last week centered on our "buy" recommendation of controversial Strong Buy-rated Schering-Plough’s convertible preferred "B" shares. Given last week’s downside consternations, is it any wonder our phones lit up? Still, we recommended yet another one-third purchase of those convertible shares that should leave longer-term investors "averaged in" around $175 per share with an 8% yield. Our analyst thinks SGP is worth mid-$20s even if ALL the sales of Vytorin and Zetia go away.

The call for this week: Rally time!

ß§

Normxxx    
______________

The contents of any third-party letters/reports above do not necessarily reflect the opinions or viewpoint of normxxx. They are provided for informational/educational purposes only.
The content of any message or post by normxxx anywhere on this site is not to be construed as constituting market or investment advice. Such is intended for educational purposes only. Individuals should always consult with their own advisors for specific investment advice.
ç

Smart Money Got It Wrong

How The Smart Money Got It Wrong

By Jon Markman | circa January 2008

Top value funds had a terrible year, but they're not backing away from the battered financial sector. Here's the logic of managers who are still buying. The past 12 months may go down in some circles as the era when alternative energy caught a spark or the era in which the term "subprime" went prime time. But in the history of investment management, 2007 will go down as the one in which some of the brainiest, battle-tested value managers in the country got absolutely shellacked [[not to mention quite a few 'quants', who are usually after the 'growth' stocks: normxxx]].

Smart money? Not so much. A review of the one-year results of value-focused funds with some of the best long-term records shows that a virus of total stupidity savaged their ranks as one after another bought into banks, credit card providers, home builders and retailers at bargain-basement prices that seemed too good to be true— and were.

In a year when the Nasdaq-100 Index ($NDX) rose 18% and the S&P 500 Index ($INX) went up 3.5%, the $4 billion-in-assets John Hancock Classic Value (PZFVX) fund defied its tremendous long-term record by plunging 19.7% in 2007. (The fund was No. 1 or No. 2 in its category in the bear years of 2000, 2001 and 2002.) Long-term standout Weitz Value (WVALX) sank 13%. Even Legg Mason Value Trust (LMVTX), led by venerated manager Bill Miller, lost 12.2%.

Going into 2008, none of these funds appears to have altered its approach to value investing one iota. All continue to be heavily invested in banks and brokerages despite their multibillion-dollar losses, management chaos and extreme legal exposure— at the onset of a recession. So the question naturally arises: Are these guys insane, or could they possibly come out ahead once the credit storm passes?

Would you touch financial stocks now?

My own research suggests a few of the big banks are technically bankrupt and shouldn't be approached until they trade in the single digits, if ever, as you know from my previous columns. We're barely into the start of the unwinding of a credit bubble of historic proportions that is murdering household wealth and consumer spending and is likely to send corporate earnings into a tailspin all year.

Yet I'm also cognizant that down cycles turn higher when you least expect it, so you at least have to listen to the successful value guys. Although they clearly erred by jumping into financials way too early, if the Federal Reserve wakes up and slashes interest rates [[they did! : normxxx]]— creating instant yield-curve profits for the banks— they might have the last laugh after all, bitter as it may be.

A Citi revival?

Early this year, I talked with Richard Pzena, one of the deans of the value camp. His company, Pzena Investment Management (PZN), which I've mentioned as a buy on big dips, runs $25.5 billion in value money for clients worldwide, including that once-sterling John Hancock fund that's now in the tank. He was defiant, contending that he expects to double his money on such road kill as Citigroup (C), Fannie Mae (FNM) and Freddie Mac (FRE) over the next three years. I think he's dreaming, but he does manage $25.49 billion more than I do, so perhaps you should lend him an ear. Pzena's main point is that though losses in subprime mortgages have generated the most headlines in the sector, few banks actually have much exposure to them. He sees Citigroup, for instance, as a global consumer-credit business that generates most of its money by issuing plastic overseas. The way he sees it, virtually every adult has a credit card while few have subprime loans, so what's the problem?

To be sure, Citigroup has had monumental write-downs on its mortgage portfolios and gotten stuck with illiquid structured investment vehicles on its books, and credit card defaults will lead to more losses. But before too much longer new management will have taken out the garbage, and the remainder of the company will have a chance to shine again. "We view it as a great global franchise that's inefficiently priced," Pzena says. "We don't think the real value of the firm has come down at all, even though it's lost over $125 billion in market cap."

Pzena says he doesn't know how long he will have to wait to be right— and if he did know, the stock wouldn't be cheap. His analyst team has torn the company's financials apart, stress-tested them to the most outrageous negative cases and sees its business getting back on track in every scenario.

Will the dollar rebound in 2008?

The US dollar could turn out to be the big comeback surprise of the year. One reason: As foreign investors put big money into US companies, those foreign countries are less likely to dump the dollar, MSN Money's Jim Jubak says. "The reason it's so depressed is that no one really knows how bad it will be, but we think that sometime in 2008 there will be clarity and we'll start to see buyers come back," he says. "Corporations, and especially the financials, might have to cut their dividends— which would not be so terrible— to shore up their capital base, but they're not going out of business. They will weather this storm."

Pzena says his analysts have put their money where their spreadsheets are— buying more Fannie, Freddie and Citi for their personal accounts than at any time in the past five years. "They believe they have properly analyzed these franchises and should buy even though they don't know when the turn is coming… There's no dissension about this position within the firm.Buying low is a strategy that has never failed to work."

No Competition Left For Fannie And Freddie

Catching falling knives is a strategy that has never failed to leave your hand in shreds, either. But Pzena insists he has history on his side. Financial stocks got extremely cheap in the year before the past five recessions, he says, then began to outperform the market about three months after the recessions' official start dates, as determined later by the National Bureau of Economic Research.

If the current recession began in the fourth quarter, as many independent experts believe, then it could be time for Citi, Fannie and Freddie to start bucking up. The idea is that when people fear the unknown, they sell. But in the reverso-world logic of Wall Street, once a recession becomes evident, investors begin anticipating a recovery. The worst companies to own during a recession are often growth and momentum plays that are the strongest in the pre-recession period, such as Research In Motion (RIMM) and Intel (INTC). That might account for the scorching 9.4% decline in the Nasdaq-100 this year. And if this plays out as it did in 2000, then we might look back and see that a hidden hand flipped a switch that sent investment dollars surging out of highflying Nasdaq stocks and into beaten-down value plays.

So if you fancy yourself a contrarian, put on an armored oven mitt and consider joining Pzena and his peers by grabbing Fannie and Freddie in free fall. The value manager says these two government-sponsored home lenders ought to be the biggest beneficiaries of the subprime meltdown because the breakdown of the asset-securitization market has left them virtually the only home lenders and mortgage insurers left standing.



10 Market Predictions For A Glum '08

It'll be a year of stock upheavals, especially in banking, but with great bargains along the way. And if I'm wrong about prognostication No. 10, I'll eat this column on a live webcast. For investors, the new year will be defined by a titanic struggle between governments' efforts to flood the world's faltering financial system with cash and banks' efforts to hoard it all for themselves. Commercial banks are stashing instead of using the cash infusions because leveraged mortgage bets gone bad are shrinking their capital bases faster than central banks and foreign investors can refill them.

So what are the prospects for investors in this unhealthy environment? Here are the surprises that I see lying ahead:

1. Bank Bankruptcy
Every financial crisis of the past 200 years has resulted in the bankruptcy, merging and closing of many banks. Sometimes even very large ones. This crisis will be no exception. Bankruptcy is an efficient means of clearing deadwood out of the forest, where it is purposelessly hogging resources, so that newer, stronger competitors can thrive. Expect at least one major bank to fail in 2008 as high-risk mortgage and business loans made in the mid-2000s by more than 2,500 U.S. financial institutions lead to lethal losses. Citibank (C), which may already be technically insolvent, is probably too large to be allowed to fail.

But smaller institutions such as Countrywide Financial (CFC) and Washington Mutual (WM) could certainly go under or be purchased for loose change by larger competitors. The nation has far more banks than it really needs, and these two institutions— and many others— could easily have their books of business absorbed by competitors.

2. Banking Bargains
Growing fears of bankruptcy will have devastating effect on all financial institutions regardless of their solvency and relative merits. Expect the bargains of a lifetime to develop in the stocks of certain financial companies as babies, plumbing, bathmats and floor tiles are thrown out with the bath water. A couple to consider are Leucadia National (LUK) and Pzena Investment Management (PZN). On any big down day or series of them, buy some shares, throw them in a drawer and don't look at them again for three years.

3. Food Rules
In 2008, grain will become recognized as the new gold, agriculture companies as the new tech stocks and the Mississippi basin as the new Silicon Valley. Many fertilizer and seed companies' shares did very well in 2007, yet you ain't seen nothin' yet. Farm-focused companies combine innovation with scarcity, and the result is strong growth that's unlikely to abate. Droughts in Australia, China and Ukraine have slashed crop yields this year, pushing wheat and soybean prices to record highs. Meanwhile, the demand for corn and sugar cane as feedstock for soaring U.S. and South American ethanol use is hitting a wall in the lack of cropland and water. Since ethanol use is mandated by government and has become an increasingly inexpensive alternative to crude oil, thinning supplies are being allocated by price.

Schroders asset manager Christopher Wyke told Bloomberg he believes "we are in the early stages of a rally that could last 20 years in agriculture" as prices "are historically cheap." Commodity experts say agriculture rallies typically last two to four years and push prices up as much as three times. My list of companies to take advantage of this trend hasn't changed since I first wrote about it last year. On dips only, consider Monsanto (MON), Mosaic (MOS), Potash of Saskatchewan (POT), Bunge (BG), CF Industries Holdings (CF), Terra Nitrogen (TNH), Deere (DE), CNH Global (CNH) and AGCO (AG).

4. Credit Crunch, The Sequel
We already know that mortgage-payment and home-equity-line-of-credit delinquencies are rising steeply along with home foreclosures. Starved of funds by banks, many strapped individuals turned to credit cards, and now delinquencies in these payments are also rising rapidly. Hedge funds, which heavily borrow to augment returns, are also feeling the effects of credit starvation, as are ordinary folks like dentists, attorneys and manufacturers who depend on easy access to loans to expand and fund their businesses.

Expect credit card companies such as Capital One Financial (COF) and American Express (AXP) to sink to new lows in the first half of the year as they write off losses from deadbeat customers and announce a shrinking of lending opportunities. While investors are still wondering how big the losses in the home-mortgage market will get, the problem is spreading to commercial mortgages, MSN Money’s Jim Jubak says. Meanwhile, expect to learn a new term for your growing credit lexicon this year:Pfandbrief is the term for a type of European asset-backed security that has long been considered the safest type of bond on the planet. Stresses are developing in its $2 trillion market, however, as home loans sour across the continent, so beware of major German banks, including Deutsche Bank (DB), that trade on U.S. exchanges.

5. Default Swap Snafu
A relatively new security called the credit default swap, or CDS, is the bond market's equivalent of homeowners insurance. If you own a corporate bond and worry that it might default, you buy CDS contracts to hedge your exposure. If the bond fails, an investor to whom you've been directly paying the equivalent of insurance premiums owes you, typically, $10 million per contract. Hedge funds have run the market for these puppies way past the $1 trillion range because they've also become a way of betting on the potential for bonds' default. Yet there's one teeny-tiny problem: CDS contracts are largely unregulated and have never been tested in a crisis. No one really knows if they are enforceable or what will happen if counterparties suffer bond losses so great that they're unable to make good on their CDS obligations.

If CDS contracts are not fulfilled, banks' exposure to losses might be much higher than anyone has anticipated. That's just another reason to continue to avoid the bank stocks this year or bet against all of the banks in the S&P 500 Index ($INX) by shorting Select Sector SPDR-Financial (XLF), an exchange-traded fund.

6. Alternative Lifestyles
Adding the word "alternative" to your business plan these days is the equivalent of adding "dot-com" a decade ago. Makes you sound like you're swingin' with the cool kids. Alternative energy, one of the biggest areas for faddish investor behavior, is likely to have its comeuppance before too long as outlandish claims for making material amounts of energy out of algae, ocean waves, sun, wind and animal droppings are laid to waste. [[Water-based, non-selenium (evaporation) process: normxxx]] solar is likely to be the only longtime solution, since it does the most efficient job of turning the energy of the sun directly into power, but valuations of companies in the sector are overheated. Expect a brief surge in alt-energy stocks at the start of the year followed by a long period of sideways action as proponents lose steam. To play it safe, buy ETFs such as Market Vectors Global Alternative Energy (GEX) rather than individual companies in the sector— but only on significant dips similar to the ones in August and November.

7. Equity Abyss
Even though earnings growth for major U.S. companies in aggregate came in at a lousy 2.3% in 2007, annualized growth estimates for 2008 are perched at 14%. That's setting up the market for a huge disappointment just as the virtual elimination of two key props of the market last year— corporate share buybacks and private-equity buyouts— are felt the most acutely. Expect stocks to surge on undue optimism at the start of the year [[boy, was he ever in for a surprise!: normxxx]] but then sink during at least the remainder of the first half as earnings growth continues to slide, the country slips into recession, energy costs remain stubbornly high and new threats to financial companies emerge. The key moment will come when the major market indexes approach their August lows and investors hold their breaths wondering whether central banks and major value-seeking buyers will ride in to save the market with the S&P at 1,400 and the Dow Jones industrials ($INDU) at 12,500. Those levels may hold for [[for some time: normxxx]], but the best opportunities to make money on the downside will come as those levels are breached and a great sucking sound takes the two indexes down to 1,250 and 11,500 or below.

8. Submerging Markets
One of the most optimistic views of world equities these days contends that the rise of the middle class in the emerging markets of China, South America, India and Eastern Europe has "decoupled" their markets from those of the developed world. This is absolute rubbish that will bring great pain to those who believe the suppliers of raw materials will not be affected if demand for finished goods wanes. The middle classes of these countries are definitely strengthening but are in no way capable yet of standing in for U.S. and West European customers. Derivatives expert Satyajit Das, who lives in Australia, calls the decoupling hypothesis a narrative fallacy in which a "convincing but meaningless story is shaped to fit unconnected facts." The exchange-traded fund Short MSCI Emerging Markets ProShares (EUM) delivers the inverse return of the main emerging-markets index, so consider it if you want to make a targeted speculation on this theory's demise.

9. Dow Bow
Top stocks in the Dow industrials this year are likely to be the least economically sensitive, so place your bets on Johnson & Johnson (JNJ), Altria (MO), Merck (MRK) and McDonald's (MCD), and possibly, as long shots due to their construction exposure, Honeywell International (HON), United Technologies (UTX)and 3M (MMM).

10. A Pledge
If Citigroup or JPMorgan Chase (JPM) beat any of the above-mentioned defensive stocks this year in a freakish turnaround, I will eat this column on a live webcast at noon Wednesday, Dec. 31, 2008.

Sorry to sound so glum, but I just don't see the market discounting an earnings slowdown yet. I'll update my view in six months, on June 26, and would be absolutely delighted to concede then that my forecast was way too dour.

Fine Print

To learn more about Leucadia National, visit its Web site, which has to be the sparsest of any major U.S. company. . . . To learn more about Pzena Investment Management, visit its Web site. . . . To learn more about the ag companies, visit some of their Web sites here: Potash, Mosaic, Monsanto and Case IH. . . . Learn all about the wonders of anhydrous ammonia here. . . .

Van Eck has turned out some of the most interesting and tradable ETFs in important niches such as agriculture, hard assets and nuclear energy. Visit its Web site here. Its world agribusiness fund has the best ticker symbol of all time: MOO. Read about it here.

ß§

Normxxx    
______________

The contents of any third-party letters/reports above do not necessarily reflect the opinions or viewpoint of normxxx. They are provided for informational/educational purposes only.
The content of any message or post by normxxx anywhere on this site is not to be construed as constituting market or investment advice. Such is intended for educational purposes only. Individuals should always consult with their own advisors for specific investment advice.

Saturday, April 12, 2008

Food Riots Spread

Food Riots Could Spread, Un Chief Warns

By Gary Cleland, Telegraph.Co.Uk | 12 April 2008

Rising food prices could threaten political stability around the world, the UN's leading humanitarian official said yesterday. Sir John Holmes, the undersecretary general for humanitarian affairs and the UN's emergency relief co-ordinator, was speaking after two days of rioting in Egypt over the soaring cost of basic foodstuffs.

He told a conference in Dubai that rising prices would spark unrest across vulnerable nations. Average prices have risen 40 per cent across the world in less than a year. Sir John said: "The security implications should also not be underestimated as food riots are already being reported across the globe.

"Current food price trends are likely to increase sharply both the incidence and depth of food insecurity." As well as the riots in Egypt, rising food costs have been blamed for violent unrest in Haiti, Ivory Coast, Cameroon, Mauritania, Mozambique and Senegal. Protests have also occurred in Uzbekistan, Yemen, Bolivia and Indonesia. China, India, Pakistan, Cambodia and Vietnam have curbed rice exports to ensure there is enough for their own people.

Experts believe food insecurity should be treated as seriously as climate change.



Demand For Rice Threatens Global Food Supplies

By Telegraph.Co.Uk | 12 April 2008

The run on rice is threatening to disrupt world food supplies as much as banks' lack of confidence in each other has seen global credit markets dry up. Rice is the staple food for half the world's population. China, Egypt, Vietnam and India, representing more than a third of global rice exports, curbed sales this year, and Indonesia says it may do the same.

The price of rice, the staple food for half the world, rose 2% to a record $20.910 per 100lbs in Chicago, double the price a year ago and a fivefold increase from 2001. "Rice will gain substantially over the next two years," said Roland Jansen, chief executive of Switzerland-based Mother Earth Investments, which holds 4% of its $100m funds in the grain.

He believes governments will maintain curbs on exports as they "want to be able to continue to feed their own populations". The World Bank in Washington says 33 nations from Mexico to Yemen may face "social unrest" as food and energy costs have risen for six straight years. "High and volatile food prices will be with us for years to come," according to World Bank president Robert Zoellick, who urged wealthy nations to cut agricultural subsidies and open markets for food imports.

Rice-growing nations are driving up prices for producers that want to sell abroad. The Vietnam Food Association last week asked members to stop signing export contracts in June, following China, which has imposed a 5% tax on exports. Egypt banned rice shipments until October. Record grain prices are stoking inflation. Wholesale costs in India rose 7% in the week ending March 22, the fastest pace in more than three years, underscoring the threat from rising food costs, the ministry of commerce and industry in New Delhi said.

The increase may boost profits for suppliers. Shares in Padiberas Nasional, Malaysia's only licensed rice supplier, rose the most in seven years on the Kuala Lumpur stock exchange last week. Goldman Sachs forecasts that all agricultural commodities it covers, except sugar, will rise during the next six months. Global cereal demand will expand 2.6% this year, 1.6 percentage points above the 10-year average, according to the Food and Agriculture Organisation in Rome.

The UBS Bloomberg Constant Maturity Commodity Index of 26 raw materials has gained for six consecutive years and advanced 15% this year. "We have some very serious problems developing globally for food and energy," said Greg Smith, executive director of Global Commodities in Adelaide, Australia. World rice stockpiles are at their lowest levels since the 1980s, and the UN forecasts that exports will drop 3.5% this year.

"A constant price rise of rice can't be viewed as sustainable," said Abah Ofon, a commodities analyst with Standard Chartered in Dubai. "As with any staple commodity, there's a risk of social tension when prices begin to rise."



Price Shock In Global Food
Riots Over Grain Prices Call For A Rethink Of Global Stability Based On Better Farming.


By The Christian Science Monitor | 12 April 2008

Americans may fret that Wheat Thins cost 15 percent more than a year ago but in poor nations, such price hikes aren't taken lightly. In Ivory Coast last week, women rioted against higher food costs, leaving one person dead. In Haiti, four people were killed in protests last week over a 50 percent rise in the cost of food staples in the past year. From Egypt to Vietnam, price rises of 40 percent or more for rice, wheat, and corn are stirring unrest and forcing governments to take drastic steps, such as blocking grain exports and arresting farmers who hoard surpluses. The UN International Fund for Agriculture predicts food riots will become common on the world scene for at least a year. The World Bank says 33 countries face unrest from higher prices in both food and energy.

Even in grain-rich America, wholesale food prices are rising at a rate not seen in 27 years. The most acute "ag-flation," however, is in Asia and Africa, where food costs take up a higher proportion of family income. And the face of hunger is now seen more in cities as a historic shift takes place with more than half of the world's population soon to be living in or near urban areas. The food price hikes may not be temporary, according to the UN World Food Program, which sees long-lasting causes, such as spreading deserts and more demand for grain-fed meat. The WFP itself, which feeds about 73 million of the most destitute people, warns its rich donor nations that it will require more money for some time to come. Its latest need: $500 million more by May 1.

The food price crisis has created a welcome stir about government policy. Last week, World Bank President Robert Zoellick called for increased agricultural production in poorer nations while warning rich countries not to set up more trade protection and subsidies for farmers. "This economic isolationism signals a defeatism that will reap losses, not the gains, of globalization," he said.

Indeed, a government's attempt to control food markets, either for farmers or for urban dwellers, often creates the kind of distortions that contribute to higher prices. One of the worst examples is a rush by Europe and the US to devote more farmland to growing biofuels— a dubious action to curb greenhouse gases. In 2008, about 18 percent of grain in the US will go to make ethanol and, according to the Earth Policy Institute, such production over the past two years could have fed nearly 250 million people.

UN officials are split over their high priority given to biofuels in the fight against climate change, with Secretary-General Ban Ki Moon now suggesting a review of that policy. But international bodies also need to review reduced investment in agricultural productivity. A second "green revolution" from scientific research, like that seen during the 1960s, could transform farming once again. In Asia, where two-thirds of the poor live, growth in farm productivity is down to 1 percent a year compared with 2.5 percent two decades ago. More money needs to go toward research in creating new strains of grain and toward better irrigation. Too many nations are rushing to industrialize and urbanize at the expense of farmers.

Food riots signal the need to rethink global stability and the critical role of those who till the land and feed us all.

ß§

Normxxx    
______________

The contents of any third-party letters/reports above do not necessarily reflect the opinions or viewpoint of normxxx. They are provided for informational/educational purposes only.
The content of any message or post by normxxx anywhere on this site is not to be construed as constituting market or investment advice. Such is intended for educational purposes only. Individuals should always consult with their own advisors for specific investment advice.

Financial Black Death

The Black Death Of Financial Collapse

By James Cumes | 12 April 2008

The financial and economic crisis now upon us is by far the most menacing of the past century— even more so than the Great Depression of the 1930s. It is not just a "subprime" crisis; it is systemic— affecting the entire financial system. It is also global, affecting various countries in various ways but affecting them all. In achieving a certain "globalization", we have been uniquely successful in globalizing collapse, chaos and misery. It is a globalization which, in our short-sighted negligence, we never envisaged.

In this crisis, even a country such as Australia is no more than a subordinate, neo-colonial, financial and economic dependency. In essence, we have reverted to what we were before and during the Great Depression of the 1930s, when Whitehall, Westminster and the Bank of England played the tune to which we jigged. Then, from 1945 to 1969, for the first time, we played our own tune of full employment and stable economic growth. Wild radicals such as minister Eddie Ward in the governments of John Curtin (1941-45) and Ben Chifley (1945-49) warned us to be wary of Wall Street. The cynics might now say that Eddie, who died in 1963, was right. But, after 1969, we forgot his warning. Indeed, the Americans themselves forgot to guard against the chicaneries of Wall Street, where eternal vigilance should always be the watchword. They forgot what the mania of Wall Street can do to the reality of Main Street; and we shared their amnesia.

From 1969 and especially from 1971, when the United States cut the dollar link with gold, Australia surrendered any worthwhile independence in its economic and financial thinking. We swallowed American financial and economic formulae, whether we were academics or policymakers, industrial entrepreneurs, banks or providers of "financial services." We did not entirely switch off tunes played by Britain, the more so as its prime minister Margaret Thatcher formed her slapstick band with US president Ronald Reagan to drum up support for "free" markets, "free" trade, privatization, globalization and the free flow of almost everything, including speculative capital in unqualified pursuit of private profit. Corporation and consumer greed marched in step towards global disaster.

Rational economics based on real investment, productivity and production died in favor of speculative and often Ponzi pretensions. The cowboy junk-bond merchants of the 1980s metamorphosed into respectable, mostly young and usually idolized financial wizards who "perfected" sophisticated, highly complex credit devices. From the 1990s, these highly leveraged instruments took the form of derivatives, private-equity, hedge-fund and mortgage securities, abbreviated to CDOs, SIVs and the rest. Allied with "free" markets, deregulation and the uninhibited flow of all kinds of finance, those financial devices destroyed industries and the jobs that go with them. With casual indifference, they also destroyed the self-reliant working and middle classes until then typical of robust free-enterprise economies.

Theirs was not Joseph Schumpeter's "creative destruction" but wholesale destruction of their own economies and, eventually, their own financial "system". They destroyed personal savings and created massive indebtedness. They undermined the power and security of the United States itself as they "outsourced" real economic strength and stability to other countries, especially in Asia. The Asian Tigers, China and others grew into "powerhouses" whose creation, historically, would otherwise have taken them generations. Our eminently creditable aim of peaceful change through development of developing economies was distorted, largely through negligent inadvertence, into financial, economic and social self-destruction. Looming global collapse, with political and strategic uncertainties, are our inevitable legacy.

Consumerism Rages, Industry Gutted

The speculative, Ponzi mania spread especially to Anglo-Saxon countries and to other developed countries in lesser degree. Australia took to "free" markets, "free" trade, free-floating currencies, deregulation, privatization, globalization, derivatives, hedge funds, private equity, wildcat mortgages and leverage-without-limit as a duck to water. Consumerism raged. Industry was gutted. Debts ballooned. The value of the currency fell at home and abroad. Despite low-cost imports, inflation flourished. In 2008, the Australian dollar can perhaps buy as much in real terms as five or 10 cents did in 1969.

A situation in which real public and private investment was replaced by "ownership investment", massive leverage and speculative finance, in which consumption grew and debts spread, could not persist, except so long as ever more money flooded in to support the insupportable. Once the flood slowed or stopped, a Ponzi-type collapse was inevitable. But few saw it that way. Warren Buffet belatedly called derivatives, weapons of mass destruction; but most saw the financial devices as belonging to a "new era". They represented a "new paradigm". Far from being a threat to stable growth in a stable financial system, they "spread risk" and made everyone "more secure" and, of course, more wealthy.

The wealth effect was a particular feature of the residential mortgage business. Funds were available from many new banking and non-banking sources, including hedge funds and private equity, as well as pension and mutual funds; and sources that, in their magnitudes, were new, such as the carry trade. Funds marketed wholesale and retail mortgages. Liability could be shifted even or especially for debt in the deepest sense sub-prime. Mortgages also enabled homeowners to expand consumption through Mortgage-Equity Withdrawals (MEW).
[ Normxxx Here:  And, once "debt instruments", such as derivatives, came to be used interchangeably with "money", almost any creditworthy(?) source could generate as much "money", aka "credit", as they desired— all that was needed was a printing press and some paltry underlying debt instrument. Tens of millions of dollars in derivatives could be (and was!) generated against a paltry $100,000 bond issue!  ]

In a real sense, MEWs were symptomatic of multitudes of individuals— and, in effect, whole societies— high-living it off their capital. That enabled a process of growth that was both irresistible and inherently unsustainable. However, the Ponzi scheme to shame all others may yet be waiting to deliver its coup de grace. One commentator has drawn attention to "the bad news [which] is the US$500 trillion derivatives market". He says that "This is an area that the general public does not even know exists. Few professionals understand this market. There is no regulation as government just let it go ... and go it did. You must expect a 5% default problem. That is a $25 trillion number ... It can create insolvent institutions all over the world ... It is the making of the first global depression. The world is not ready."

Unprepared For Depression

Australia is not ready either. Prime Minister Kevin Rudd told us late in March that Australia's economic prospects remain "sound, strong and good". The Reserve Bank of Australia shares that view. Eerily, they echo US President Herbert Hoover in 1929 immediately before the stock market crash of that year.

Australia's situation contains some positive features. High commodity prices, it can be argued, are likely to persist, even though volatile, at least in the short term. A member of Iceland's central bank board recently said that "fears of a meltdown in my sub-arctic homeland are vastly overblown. True, the current account deficit was 16% of GDP last year, but that's an improvement from more than 25% in 2006. And while net private-sector debt is about 120% of GDP, there is virtually no public debt in Iceland. This is largely the result of unparalleled political stability and continuity."

Australia's situation may not be as dire as Iceland's; or indeed as dire as that of the United States or New Zealand; but all three of us have some negatives like those of Iceland. Like all booms of such size and speculative character, the Australian housing boom must soon demand payment of its account. From their peak, prices could fall 30% to 50%. Industry researcher BIS Shrapnel does not agree; but we must expect that our housing boom, even more robust than the American, will collapse along the same general lines as the bust occurring right now in the United States.

The high "unaffordability" of housing for the average home-seeker, as distinct from speculator, suggests that the bust will be savage. The real-estate, building and associated industries will suffer severely, with massive job losses. Simultaneously, profitable investment opportunities elsewhere may have vanished with the widespread collapse of the "financial services industry".

How likely is such a collapse? So far, although some non-banking financial institutions have gone to the wall, the four major banks have seemed largely immune. "The take-up of the Australian economy is still good," Rudd said last week in New York. Australia had "limited exposure" to the subprime mortgage woes that erupted in the United States last year, he said. "We have excellent balance sheets in terms of our principal corporates and the banks themselves ... The default rate in Australia is minuscule by Organization for Economic Cooperation and Development standards."

We don't know how far banks and other potentially exposed institutions have concealed their liabilities and to what extent and how soon they will be forced to reveal whatever bad news there is. Within this broad question, we also do not know how far they are exposed to losses from the massive and still largely mysterious menace of derivatives.

In some measure, Australia's major banks have certainly been involved in the wide range of structured securities— CDOs, SIVs, and the rest. A report on April 4, 2008, that local councils in New South Wales have lost US$200 million and perhaps up to $400 million on investments in CDOs is a worrying sign that other and even bigger losses may yet be revealed in a variety of institutions, including banks. It seems scarcely credible that an economy which, for so many years, has absorbed so much of American theory and practice— so much of the American financial character— can be wholly immune from the penalties inflicted on its American model.

The subprime crisis first hit the United States after a housing about-turn that began as far back as 2005 or 2006. An unequivocal downturn in housing in Australia has yet to check in; but non-bank lenders are already withdrawing from the market. Wholesale mortgage lenders are closing shop, perhaps as a prelude to a sharp housing decline. The carry trade which has presumably provided funds for mortgages and other financial services in Australia has been volatile for some time. If it unwinds completely, that could not only intensify mortgage problems but also impact on Australia's external balances.

Our deficits have so far tended to persist at a less healthy level than the commodity boom might have encouraged us to hope. Our aggregate private overseas debt is said to amount to the order of half a trillion dollars. Against that background, the current depreciation of the United States dollar might foreshadow what awaits our own currency.

Lagging Impact

Economic and financial change in the United States tends to have a lagging impact on Australia. An acute awareness of the severity of our crisis may consequently not emerge before the second half of 2008.

When it does, what will the Rudd government do? Currently, it seems as unaware of the magnitude of the challenge it faces as the James Scullin government was in 1929. So the present government might become just as bewildered as Scullin and stagger just as blindly and ineffectually when they are called on to act. In the 1930s, we listened to the likes of Otto Niemeyer of the British Treasury who was also a director of the Bank of England. Will the Rudd government this time listen to the Americans and the likes of US Federal Reserve chairman Ben Bernanke? If they do, catastrophic outcomes might not be in short supply.

Our only real hope lies in clear, independent thinking by those not too steeped in the flawed policies responsible for our current crisis. We must see clearly that fundamental, comprehensive financial and economic reform is imperative. We must adapt that fundamental reform to our own needs, as the John Curtin and Ben Chifley governments did between 1941 and 1949. As we did then, we must simultaneously try to guide the international community out of the calamitous course that has evolved since 1969, and return it to the goal of stable, peaceful, global change which, as a primary objective, we pursued between 1945 and 1969.

While we embark on this journey, a high level of political volatility in Canberra is inevitable. Rudd might succeed; but the Labor Party and government might split two or three ways as they did between 1929 and 1932. Another Joe Lyons, prime minister from 1932 to 1939, might emerge. Whoever he might be, the odds are that he will be even less likely to find quick or easy solutions than Lyons was during the long and bitter years of depression. Those years ended only in the even deeper tragedy of world war.

James Cumes is a former Australian ambassador to the European Union and Australian representative at the United Nations. He is the author of among other works The Human Mirror: The Narcissistic Imperative in Human Behaviour.

ß§

Normxxx    
______________

The contents of any third-party letters/reports above do not necessarily reflect the opinions or viewpoint of normxxx. They are provided for informational/educational purposes only.
The content of any message or post by normxxx anywhere on this site is not to be construed as constituting market or investment advice. Such is intended for educational purposes only. Individuals should always consult with their own advisors for specific investment advice.

Wednesday, April 9, 2008

Volcker Decries Fed Response

Barron's: Up And Down Wall Street
Volcker Decries Fed Response To 'Mother Of All Crises'

Click here for a link to complete article:

By Randall W. Forsyth | 9 April 2008

Former federal reserve chairmen, unlike the old soldiers cited by Douglas MacArthur, rarely fade away. Still, it's unusual for two of them to make news in a single day, and rarer still that they both deliver pointed comments about the crisis that besets the current chairman. But Tuesday, former Fed chief Alan Greenspan was continuing his campaign to counter his critics, who assert his policies inflated the credit bubble, and in so doing, are responsible for the current bust. Then Paul Volcker, Greenspan's predecessor as Fed chairman, delivered a sharply critical assessment of the recent steps taken by the central bank in addressing what he called "this current mother of all crises."

At the same time, the current Fed under the leadership of Ben Bernanke is trying to cope with credit crisis and the weakening economy feeding on each other in a vicious circle— even as inflationary pressures intensify. In an op-ed piece in Monday's Financial Times and a page one story in Tuesday's Wall Street Journal, Greenspan defended his record against critics who contend the Fed pushed short-term rates too low and held them down too long in 2003-2005. In so doing, they say, the Greenspan Fed helped to ignite the boom in mortgage lending at adjustable rates and to subprime borrowers that now is coming unraveled. Of course, Greenspan bristles at this version of history.

Meanwhile, Volcker, in a speech to the Economic Club of New York, took issue with the Bernanke Fed's response to the current crisis, especially in lending to investment banks and in its role in the takeover of Bear Stearns by JPMorgan Chase. "The immediate response to the crisis has been to resort to untested emergency powers of the Federal Reserve. Out of perceived necessity, sweeping powers have been exercised in a manner that is neither natural nor comfortable for a central bank," Volcker said [[but much to the advantage of the member and other 'large' banks— a bailout with taxpayer's money: normxxx]].

Referring to the Fed's role in financing JPMorgan's acquisition of Bear, Volcker said: "What appears to be in substance a direct transfer of mortgage and mortgage-backed securities of questionable pedigree from an investment bank to the Federal Reserve seems to test the time-honored central bank mantra in time of crisis— 'lend freely at high rates against good collateral'— to the point of no return."

The former Fed chief, whose defeat of inflation was the signal accomplishment of his tenure from 1979 to 1987, worried about that particular risk as a result of this rescue effort. "The apparent pressure of the Federal Reserve to take many billions of uncertain assets onto its own balance sheets raises questions that must be decisively answered by demonstrating the commitment to deal with emerging inflationary pressures— that is all the more important in the midst of the weakness of the dollar internationally and our dependence on foreign capital," Volcker added.

Yet, as minutes of the March 18 meeting of the Federal Open Market Committee indicate, the central bank was wary of inflationary pressures but felt it had to grapple with a downward spiral of tightening credit exacerbating weakness in the economy. "Indeed, some believed that a prolonged and severe economic downturn could not be ruled out given the further restriction in credit availability and ongoing weakness in the housing market," according to the FOMC minutes, which were also released Tuesday. Thus, while the Bernanke Fed grapples with arguably the worst financial crisis since the Great Depression, the most recent former chairman claims it wasn't his fault while the one before charges the present one is in danger of doing too much.

Of course, they all have a point. Up to a certain point.

Greenspan continues to assert that it's impossible to spot a bubble before it bursts. He also had said the central bank can counter busts after they happen, but the current episode suggests it isn't so easy. Volcker, for his part, says the current crisis has its roots in the lack of restraint inherent in the highly leveraged system that evolved, one in which winners were rewarded exorbitantly but the inverse didn't [[and doesn't: normxxx]] seem to hold [[the Fed is currently in process of rewarding the worst malefactors of our recent debacle: normxxx]].

All the while, the Bernanke Fed had to deal with the risk of the collapse of one of the major counterparties in credit derivatives, which had the potential to produce a meltdown of the financial system. Could that have happened? Maybe not, but it wasn't a chance worth taking. So, Bernanke & Co. erred in that direction [[but they could have made it a lot more painful to JPM, who stood to lose the most in a BS/CDS market meltdown (JPM is said to be involved in some 55% of all CDS swaps): normxxx]].

A repeat of the rescue of Bear Stearns is made less likely by the innovative new mechanisms put in place by the Fed— its Term Auction Facility of loans, its Term Securities Lending Facility, which swaps illiquid MBS for Treasuries, and the Reporting Dealer Credit Facility, which effectively opens up the discount window to investment banks.

Volcker pointed out much has changed since the time when finance revolved around regulated entities with tight regulatory oversight and a safety net, notably commercial banks. Central banks were created to provide liquidity when large banks faced too high withdrawals (i.e., a 'run on the bank') of their short term deposits funding their illiquid assets, such as long-term loans[[and, strangely enough, less necessary for this purpose in today's world, where there is normally a market for such long-term debt, at a discount: normxxx]]

Securities firms are funded through the market, mainly through repurchase agreements, which are short-term and can be pulled in an instant, as Bear Stearns can attest. In the 21st century finance system, where most credit is created outside of commercial banks, it's arguable that central banks should provide the same backstop for repo lines as they did for bank deposits.

Clearly, as Volcker suggests, this is not a change to be undertaken lightly. But as he also noted in his speech, the notion of returning to the old days of regulated, purely domestic banks is mere nostalgia.

  M O R E. . .

Normxxx    
______________

The contents of any third-party letters/reports above do not necessarily reflect the opinions or viewpoint of normxxx. They are provided for informational/educational purposes only.
The content of any message or post by normxxx anywhere on this site is not to be construed as constituting market or investment advice. Such is intended for educational purposes only. Individuals should always consult with their own advisors for specific investment advice.

New Uptrend In Gold?

How To Spot A New Uptrend In Gold

By David Nichols | 9 April 2008

Gold is one of the best markets for trading because its patterns are usually clear and uncomplicated, with prices following the expected fractal path with a great deal of precision. This happens because the underlying conditions in the gold market change at a relatively slow pace, as opposed to the more rapid information flow in equity markets. This allows gold to develop its patterns more endogenously, where equity patterns are constantly buffeted by exogenous forces. In my experience, endogenous patterns allow much greater forecasting precision. In equities, market fractal patterns are also there, but they are significantly noisier, and the short-term moves can be quite exaggerated.

The recent spike top in gold above $1,010, and the accelerated weakness off $992— as well as the sudden drop from $940— $882— are pertinent recent examples of how gold moves predictably at critical times. So when a pattern veers off into more complicated territory— as this new down pattern could be doing now— it's important to recognize when that's happening so we can adjust our strategy.

In the current case, long positions may come right back into the picture if gold can prove this isn't merely a rebound in a bigger down pattern. At this point I still think it's just a counter-trend bounce, and there will be significantly more pressure on gold bulls prior to the next major buying opportunity. It's important not to dogmatically hold on to that opinion if the market is suggesting otherwise.

But we won't know if this is a serious upside move until gold survives another situation that could easily "snowball" into another free-fall decline. In other words, gold has 'to prove' that it can survive another downside scare, and that it won't again fall like a rock. Only then can we deem it safe to go back into significant long positions. The sell-offs in gold are so brutal— and so fast— that it pays to be cautious at turning points. Since we just got out at $992, it's essential that we protect those profits for the next major buying opportunity, and avoid putting ourselves in harm's way.

This is also the rationale behind my buy signals, because if such a signal triggers then by definition the market is proving that the reversal is not just a counter-trend bounce. So right now we need to see gold hold on during a downside move, and not go crashing down to new lows. More specifically, this current pattern will need to survive a hard test down to the $910 area before we'll know that prices are really ready to go back up in earnest.



If gold crashes down to $910 and bounces strongly, then that will be a sign of real strength, and long positions can be entered on an hourly buy signal from there. (I'll go over this in my daily reports in more detail if it starts to play out like this.) Then if gold moves up to a new high— particularly a breakout move over the critical $940 area— then we can double that initial position.



The bearish scenario would be if gold slices right through $910 and keeps on going. Then a quick free-fall to $852 is in the works, and we'll want to stand aside until gold hits bottom around $852. As always, I'll keep subscribers updated in my daily reports if there are any changes in this outlook.

ß§

Normxxx    
______________

The contents of any third-party letters/reports above do not necessarily reflect the opinions or viewpoint of normxxx. They are provided for informational/educational purposes only.
The content of any message or post by normxxx anywhere on this site is not to be construed as constituting market or investment advice. Such is intended for educational purposes only. Individuals should always consult with their own advisors for specific investment advice.

Lenders Of Last Resort... To Themselves

Lenders Of Last Resort... To Themselves
With US Taxpayers' Dollars!

Click here for a link to complete article:

By Randolph Buss | March 2008

Notes:
Markets: I do not foresee the BEAR going away anytime soon right now. The crisis has not ended— it's only taking a rest. In fact, Goldmans Sachs and JP Morgan have stepped right up to take advantage of the Fed's lending window. I believe the DAX may be headed to 6000 as stated last week and DOW 11,000 is a target and I foresee a weakness throughout 2008 in major markets.

ALL COMMODITIES: My warning from 3 days ago should/would have been well heeded— the parabolic run-up in prices was unsustainable ... volatility in gold, silver and oil have seen large corrections. Most likely this is due to hedge fund coverings as the crisis takes effect and some cashing out was required to cover margin calls. I DO NOT believe that these were due to markets believing that inflation is under control. I address this further in the blog below.

INVEST:
I remain long oil, gold, silver, alternative energy, agro, petrol energies.

In case you may have not fully understood the slyness of what the Fed is doing, it has now by-passed its own lending policies and allowed primary dealers the same reduced borrowing rate as for commercial banks. Under a private Fed— which is under NO control mechanism of the real US Federal government— it has in fact decided to simply save its own neck by mandating policy for which a) it saves itself, and b) the US taxpayer shall pay. How is this possible? Because the Fed is a private company owned by many of those listed as Primary Dealers ... so in company terms, the Board of Directors has voted to give itself (each Primary Dealer member) a billion dollar raise, or some multiple or portion thereof[[sounds like under BB, they are running riot: normxxx]].

In deciding to charge securities firms such as Goldman Sachs Group Inc., Morgan Stanley and Lehman Brothers Holdings Inc. the same rate as commercial banks, the Fed used 1920s-era authority provided by Congress to set interest rates that the law says "shall be fixed with a view of accommodating commerce and business," the Fed staff official said.

List of the Primary Government Securities Dealers Reporting to the Government Securities Dealers Statistics Unit of the Federal Reserve Bank of New York:

BNP Paribas Securities Corp.
Banc of America Securities LLC
Barclays Capital Inc.
Bear, Stearns & Co., Inc. (bankrupted ... bought by JP Morgan)
Cantor Fitzgerald & Co.
Citigroup Global Markets Inc.
Countrywide Securities Corporation
Credit Suisse Securities (USA) LLC
Daiwa Securities America Inc.
Deutsche Bank Securities Inc.
Dresdner Kleinwort Wasserstein Securities LLC.
Goldman, Sachs & Co.
Greenwich Capital Markets, Inc.
HSBC Securities (USA) Inc.
J. P. Morgan Securities Inc.
Lehman Brothers Inc.
Merrill Lynch Government Securities Inc.
Mizuho Securities USA Inc.
Morgan Stanley & Co. Incorporated
UBS Securities LLC.

The Federal Reserve Bank is a private company, authorized in 1913 by a Congressional Act called the Federal Reserve Act of 1913. In a very real sense, the US Government under President Woodrow Wilson outsourced the control of U.S. money and banking to the bankers themselves. Some of the Fed's large (officially) non-voting stockholders as of 2006 are:

  • Citibank

  • Bank of America

  • UBS Warburg

  • JP Morgan/Chase

  • Wells Fargo

A true lender of last resort .... too f* right. Video on the Fed

  M O R E. . .

Normxxx    
______________

The contents of any third-party letters/reports above do not necessarily reflect the opinions or viewpoint of normxxx. They are provided for informational/educational purposes only.
The content of any message or post by normxxx anywhere on this site is not to be construed as constituting market or investment advice. Such is intended for educational purposes only. Individuals should always consult with their own advisors for specific investment advice.

Friday, April 4, 2008

Pessimism Become A Positive?

Being Street Smart: At What Point Does Pessimism Become A Positive?
Click here for a link to Sy Harding's Site:

By Sy Harding | 28 March 2008

The economic slowdown continues. The housing collapse that started the whole thing continues. Home prices are dropping, and forecasts are for more price declines before houses will be affordable (now that normal financing has returned). The rate of foreclosures soars. The debt problems are spreading from home mortgages to car loans to credit-card debt and business loans. The credit-crunch continues as lenders are reluctant to loan to anyone.

Every week brings headlines of another well known financial firm being in so much trouble that a meltdown of the financial system is feared. Is it any wonder then that consumer and investor confidence is declining? Not just declining, but plunging to multi-year lows.

On Tuesday the closely watched Conference Board's Consumer Confidence Index showed the index fell to 64.5 in March from an already gloomy 76.4 in February. Consumer confidence is now at its lowest level since the Iraq War began in 2003. Even worse, the 'economic expectations’ poll within the overall index, plunged to 47.9. That is its lowest level in— get this— 35 years. Investors are just as gloomy as consumers. In only four previous periods since the American Association of Individual Investors began polling its members in 1987, have those who are bearish exceeded 55%. The poll reached a very extreme 59.2% bearish two weeks ago.

The Investors Intelligence sentiment survey two weeks ago showed more bears than bulls for the first time in 5.4 years, and by the highest plurality of bears since October 11, 2002. And no wonder there’s so much pessimism among investors. The stock market is experiencing its biggest quarterly drop in the first quarter of this year since the second quarter of 2002.

No doubt about it. Gloom and doom are thick enough to cut with a knife.

But wait a minute! Maybe I can give your spirits a lift. In market analysis, investor and consumer sentiment are considered ‘contrary’ indicators. That is, confidence is always at an extreme of optimism at economic and market tops. In the other direction, consumer confidence tends to reach a level of extreme gloom and pessimism about the time steps have been taken that will soon have the economy recovering. And investor sentiment usually reaches an extreme of pessimism and bearishness about the time the stock market has reached a significant bottom and, looking six months or so ahead, is ready to anticipate that economic recovery.

For instance, while it’s sounds scary to hear that consumer confidence is now as low as it was in 2003, it might be helpful to recall that 2003 was when the economy began roaring back from the 2001 recession, and was the first year of the bull market that followed the 2000-2002 bear market. Investor and consumer confidence, which had been very high prior to the 2001 recession and 2000-2002 bear market, had become very low just about at the time the recession and bull market were ending. Thus is consumer and investor sentiment deemed a ‘contrary’ indicator.

I mentioned the Investor Intelligence survey as having the highest plurality of bears over bulls since October 11, 2002. Perhaps we should keep in mind that the severe 2000-2002 bear market had ended fourteen trading days earlier (on September 21, 2002), and the rip-roaring new bull market had already begun. I mentioned that the poll of its members by AAII, which reached an extreme of 59.2% bearish a couple of weeks ago, had only exceeded 55% bearish four times since 1987. Well, each time the market was within a couple of weeks one way or the other of a low.

So there, I offer you a few rays of hope in the midst of the extreme levels of doom and gloom in the rest of the news.

Sy Harding publishes the financial website Street Smart Report Online, and a free daily Internet blog at http://www.SyHardingblog.com. In 1999 he authored Riding The Bear— How To Prosper In the Coming Bear Market. His latest book is Beating the Market the Easy Way— Surprising Seasonal Strategies that Double the Market's Performance.

  M O R E. . .

Normxxx    
______________

The contents of any third-party letters/reports above do not necessarily reflect the opinions or viewpoint of normxxx. They are provided for informational/educational purposes only.
The content of any message or post by normxxx anywhere on this site is not to be construed as constituting market or investment advice. Such is intended for educational purposes only. Individuals should always consult with their own advisors for specific investment advice.

Thursday, April 3, 2008

Wagging The Dog

Wagging The Dog

By Contraryinvestor.Com | 3 April 2008

Wagging The Dog...Assessing what we know and what we don't know is the ever-present and ongoing psychological battle in investment management, now isn't it? Trying to make an assessment of the fundamental facts and then reconciling this view of life with the reality of very short term financial market outcomes can be quite the trying challenge psychologically, emotionally, and even physically, to be honest. If we accept the fact that the financial markets are theoretically always looking ahead (which we do) and discounting in current price what they are seeing in the future. This provides the perfect backdrop for the personal tension of trying to "guess" what the markets may be seeing ahead that we cannot— buried as we are in the day-to-day minutia of (mostly meaningless) current data, presented to us in economic stats, corporate earnings reports, etc.

Nothing like starting the discussion with a bit of personal philosophical meandering, now is there? But in this very special current environment, we suggest we need to broaden our thinking and "field of vision", if you will. Although traditional and time-tested financial market signposts are indeed quite important to monitor, we suggest that the financial market environment of the moment has the capability to perhaps blur or bend our vision in a manner quite unlike anything we have lived through in many a moon, if ever. This is what we want briefly to discuss.

Okay, at least from our perspective, here's what we think we "know" about the present. It's our view that until proven otherwise, we are in a macro bear market for equities. We detailed in a discussion on our subscriber site literally on the first day of this year that collectively all of our favorite long-term equity market indicators have turned bearish. Not a few, not a lot of them, ALL of them. Trying to keep it simple, we will not argue with unanimity in longer-term market message. In terms of the macro, it's a time for meaningful caution regarding equities. Secondly, we believe the US economy is in recession right now. Although we've detailed so many of the now current reasons why in discussions over the recent past, a standout anecdote is the fact that the LEI (leading economic indicators) report for February that hit the Street a few weeks back has now shown us a consistent five straight months of decline.

We'll spare you an exhaustive look at historical precedent when we tell you that the LEI of the last half year is completely consistent with initial recessionary periods past. In essence, it's corroborating the fact that recession has already arrived, although "officially" that fact will be revealed some time in the future when its usefulness as a piece of factual investment information will be essentially useless. By the way, if the LEI deteriorates meaningfully further from here in the coming months ahead, it will be suggesting a severe or lengthy recession to come, as opposed to the mild recession we believe the consensus is expecting (if any recession at all) and the LEI suggests for now.

As we've bludgeoned you to death with for far too many times now, the evolutionary character of the credit markets is THE issue to focus upon, an issue that is clearly driving both broader financial market and real economic outcomes of the moment. It's our belief that a credit cycle of really generational proportion has now given way under its own weight to an elongated process of systemic (and systematic) deleveraging. A process that has really just begun.

In question ahead will be the sustainability of the very props that built this credit cycle, such as the entire concept and faith in securitization, the integrity of and trust in the credit rating agencies, the trustworthiness of the brokers/investments banks, and faith in the regulatory oversight of the US financial system itself. Against this backdrop we also do indeed know that literally ALL guns are being brought to bear upon the continually unfolding credit market issues of the day by the Fed/Treasury/Administration.

In the past seven months, the Fed has cut the Funds rate 300 basis points (a near 60% decline) and the discount rate 375 bps. For the first time in the illustrious history of the Fed, these merry pranksters have truly flown over the cuckoo's nest and will now accept asset-backed commercial paper and mortgage-backed securities as collateral for borrowing at the discount window. The TAF (Treasury Auction Facility) has been set up along with the TSLF (Treasury Secured Lending Facility) to swap sows ears for silk purses, at least for a while. Moreover, the Fed has remodeled and essentially put in a larger discount "window" borrowing mechanism in place to now include the primary securities dealer participation (the first time in the history of the venerable Fed whereby they have acted to financially backstop the non-bank financial system).

As you know, this has been termed the PDCF (primary dealer credit facility). More broadly, the government has kindly offered to drop tax rebates in $600 increments to various wealth demographics using the US mail as opposed to helicopters. And perhaps one of the largest "stimulus plans" of all has been to have the OFHEO ("regulator" of Fannie and Freddie) acquiesce in terms of lowering the capital requirements of the two mortgage credit market behemoths in allowing them to immediately expand their already questionable balance sheets. With the relaxing of these capital ratios, these two fun loving mortgage paper collectors and guarantors will be more highly levered than Bear prior to that company going on to its greater rewards. We could go on and on, but you get the picture. We're witnessing unprecedented action right before our very eyes.

And it's against this set of "what we think we know" circumstances that we try to assess and make sense of the day-to-day movement in financial asset prices. What we don't know is when what we believe to be a bear in equities and an economic recession stateside will end. Sooner? Later? We have no idea. What we don't know is whether what has been brought to bear on the problem by the Fed/Treasury/Administration will be effective in turning the credit market, and by direct linkage real world broader economic health, anytime soon.

Will broadened lending/investment/financial guarantee limits of Fannie and Freddie truncate and turn the physical housing price reconciliation cycle set against the truly powerful forces of debt deflation? Can all of these monetary policy and GSE balance sheet expansion/explosion efforts act as a spark to reaccelerate and return the now crippled US credit cycle to its former unfettered and "sky's the limit" glory? Will leveraged asset backed credit securities buyers who have not already been taken off the playing field on stretchers remerge from their newly dug bomb shelters, confident in the knowledge that the Fed/Treasury/Administration now really, really has their collective backs and will essentially monetize any and all losses? For the answer to some of these questions, we necessarily have to watch and listen to what the financial markets are telling us, all the time realizing that short-term investment performance is THE only concern of so many investment "professionals" in the modern era. Whoever said life was easy?

The Dream Team...Having said all of this, we have to say that the financial market events of the last month particularly paint quite the important and relatively large question mark. How about the largest one day drop in the gold price in over a quarter century? Did that catch your attention? Or was it the intra-week doubling (from low to high) in stock prices of some of the financial sectors finest such as Lehman, Fannie, Freddie, etc. that you might have seen out of the corner of your eye? Regular ho-hum everyday type of market events, no?

Of course what accompanied these more than noticeable events, as well as many others, were cries from far and wide that the Fed has restored financial market confidence by its decisive actions (panic), the Fed is correct in its assessment that inflation will fall as witnessed by the commodity price bludgeoning late in the month, and maybe most importantly that THE bottom is in on the stock market given that the financials appear to have been saved and the fact that we never violated the January lows. Wow, from the end of the world to an all-new magnificent bull market and economic/credit cycle recovery in one short trading month. Imagine that. Are the Fed, Treasury and Administration official’s miracle workers, or what? Once again, the dream team has saved the world!!!! Kinda makes you proud to be an American. Don'tcha wish every kid could be one?

The point of this discussion is to blatantly remind you that we need to think long and hard about what we are "seeing" as we monitor ongoing and short term financial market activity in our current circumstances. Again, at least in our minds, incredibly important in the current environment. Specifically, intermarket cause and effect, intended and unintended consequences, and even direct cross asset class pricing fallout has been and will continue to shape equity and bond market outcomes in what remains a very important forward macro environment of credit cycle reconciliation and broad investment constituency deleveraging.

Before rushing to judgment about new bull markets and new cycle credit market and economic expansions based on what we may have "seen" in short term financial market movement, at least personally, we're going to need a little more corroboration. Yes, call us conservative. Yes, call us skeptical. Extremely guilty as charged. Why? First have a peek at the following table.

Asset Class/Investment Vehicle

Price Change From 9/18/07 to 3/14/08

Gold 38.1%
Crude Oil 35.5
Natural Gas 38.0
CRB Index 30.0
XLF — Financials (30.2)
XLY — Consumer Disco (19.9)
XBD — Brokers (33.8)
FRE (63.7)
FNM (63.6)
US Dollar (9.5)
Philly Housing Index (24.2)


Now imagine for a second we could turn back the hands of time to the date of the first Fed rate cut in September of last year. Imagine further that you had suddenly and miraculously been blessed with omniscient financial market foresight that was set to expire, if you will, on Friday the 14 of March in this year. You are a hedge operator and need to structure a leveraged portfolio for this duration of time. As you already know by now, the absolute dream levered portfolio would have been long oil, gold, commodities in general, and short financials, discretionary stocks, the brokers, the GSE's and the housing related stocks.

You would not just have hit a home run with a portfolio like this— rather, you would have been viewed on par with the second coming of the Messiah. Long the top four asset classes you see above and short the bottom five could have been close to a career maker for many an investor up until a few Friday's ago. Do you think trends in these asset class prices escaped the notice of the levered speculating community? Do you believe those chasing short term performance would not have signed over their first born children to have participated heavily in these trends? Do you really think the ship was not meaningfully listing to one side by those who had collectively put this very trade on since the first Fed rate cut?

Before answering these questions, have a look at the next table.

Asset Class/Investment Vehicle

Price Change From 3/14/08 to 3/20/08

Gold (8.0)%
Crude Oil (6.3)
Natural Gas (8.2)
CRB Index (7.0)
XLF — Financials 10.6
XLY — Consumer Disco 4.2
XBD — Brokers 3.7
FRE 53.8
FNM 53.4
US Dollar 1.5
Philly Housing Index 9.2


We're sure you are fully aware of what we are getting at here. What occurred in the week after the Bear Stearns debacle was simply the dream levered hedge portfolio of the last six plus months being turned completely on its head. And what it clearly suggests as one potentially very meaningful driver of performance during that week was levered speculating community leverage unwinding. A leverage unwind that is not finished— as we're sure you already know, if indeed you were a levered fund either choosing or being forced to unwind a portfolio perhaps due to the heavily increased margin/collateral capital calls from the prime broker community in the wake of Bear's sudden submergence.

The influence of collective levered portfolio unwinding (raising liquidity) might have looked exactly as is detailed in the table above. To delever you would have sold what you were long and bought what you were short. So although the CNBC fan club may indeed have tried to celebrate the big bear market bottom for the financial markets, what we may have indeed experienced is simply more significant major macro credit cycle reconciliation— levered investment position unwinding (the hedge and levered speculating community). Seems relatively logical, no?

And this is the very reason why we suggest meaningful reluctance in proclaiming an all healed and ready to head higher credit cycle that has all of a sudden been reborn due to the fact that a few financial stocks jumped off of their collective death beds. Although the Fed members have apparently been reannoited as miracle workers, have they really addressed and/or ameliorated THE real problem of the moment which is financial sector balance sheets still loaded with problem credits? Balance sheets now problem long and capital short.

Quite unfortunately, and we simply wish along with the Street that it weren't true, a one week change in stock prices does not change balance sheet asset values, especially those values tied to real world residential real estate prices and increasingly commercial real estate values. So for now, despite the emotional and financial price roller coaster ride of recent weeks, we reserve judgment on the true character of fundamental credit market, financial market and real economic change that has taken place. We watch and learn.

"Bear"ied Below The Headlines?...We want to briefly take these comments just one step further in light of a number of financial sector acquisitions we have witnessed this year that would most clearly have had an influential outcome in a good number of credit default swap positions. Further, why the credit default swap market may indeed be influencing financial market outcomes well beyond the singular world of derivatives. We'll make this quick. You may remember that just last month we devoted an entire discussion to credit default swaps, the leverage that had been built up inside of these contracts, and the potential for risk and unintended consequences therein. We showed you US banking system derivatives exposure numbers through the third quarter of 2007, as well as what has been the growth in this segment of the broader derivatives world globally.

Please remember, as we described, this derivatives neck of the woods has moved well beyond simply acting as a form of insurance against long oriented bond or credit market positions held by investors to a world of growth in credit default contracts outstanding dedicated to nothing more than the trading of these vehicles themselves. As we told you then using GM as an example, the credit default vehicles written against real world outstanding company bonds is probably near three times the volume of actual bonds outstanding. Like many derivatives vehicles, these derivatives products have become an end in and of themselves as opposed to the purity of use of these vehicles to simply insure or hedge against adverse outcomes protecting larger financial asset positions actually held. Simple translation? The credit default swaps world has taken on a life of its own.

Alright, fine, so how does the credit default swap market relate to equity market sector volatility of the moment? It is absolutely clear that the "acquisition" of Bear avoided triggering Bear Stearns related credit default swaps and swaps against CDO, SIV, etc. positions they may have held (assuming a potential Bear BK would have forced a mark to market event), which would indeed have happened had Bear formally entered bankruptcy and their bonds/debt became potentially very meaningfully impaired. There is simply no question whatsoever in our minds that this was the key reason a theoretical acquisition of Bear HAD to happen. Remember the details. JPM took out Bear for a couple of hundred million at the headline $2 per share initial offer level, but concurrently announced it was going to need to charge off about $6 billion as a result of the so-called acquisition.

Even at the ultimate $10 level (which is basically shut up money offered to help prevent litigation, which might also have led to asset price discovery) JPM was "telling" us Bear was worth far less than zero by the charge-off number alone. Of course the truth simply had to be that if Bear had filed bankruptcy and the credit default swaps written against their bonds/debt/asset positions had been triggered, the credit default swap liabilities in the market would have been well north of a $6 billion hit to whomever had written those Bear specific CDS contracts. Well north. And that simply could not have been allowed to happen. By the way, just as an item of curiosity, JP Morgan has exposure to over 55% of the total banking system credit default swaps outstanding. Are we connecting the dots clearly enough for you?

Sorry, back to the issue at hand. So Bear avoids formally blowing up and the credit default swaps written against their liabilities/investment positions, etc. now become a moot point as JP Morgan (or for the true problem credits, should we say the Fed) is the new creditor and market based asset price discovery is avoided. Hurrah for those folks who had written these default swap contracts. They dodged a massive bullet that was heading one hundred miles per hour directly to a certain spot between their eyes.

But what about those "investors" who had purchased the CDS contracts/insurance against a potential Bear default? Whether they did this against existing credit market investment positions for insurance reasons or were simply holding them as a trading position is immaterial. Those CDS contracts purchased which probably had been very profitable, and zoomed straight up in value as Bear was in the process of disintegrating, became worthless with the stroke of a pen (and a $6 billion write down to come).

Now put yourself in the position of a meaningfully levered hedge fund who had purchased CDS contracts against Bear credit vehicles. You had levered up against what was continually becoming very profitable CDS positions or credits as Bear was heading nose first into the tarmac. Who knows, you might have even increased the position prior to the weekend based on info your fellow good buddy hedgies were feeding you about Bear's imminent demise. When those long CDS contracts against Bear credits/positions went to zero virtually the Monday after the JPM acquisition announcement, all you were left with was massively deflated CDS asset values relative to the prior Friday and still in place leverage.

So what do you do when you get up in the morning on Monday after the Bear acquisition announcement (assuming you slept Sunday night, that is)? You start delevering. You start unwinding in place inflation themed trade positions to raise liquidity. You sell what assets you can (gold, oil, commod's, etc.) and get less short those sectors you have heavily shorted (financials, brokers, consumer, etc.) to raise liquidity and decrease total leverage against a now immediately diminished asset base. Who knows, maybe this was exacerbated if your already freaked out prime broker sponsor put in a call or two demanding more margin now that your assets had deflated post the Bear related CDS contracts nose diving.

And it was not just Bear credit default swaps that plummeted. As you know, with the Bear deal the Fed put in place the primary dealer credit facility, minutes before both Lehman and Goldman showed up at the window with hands held straight out. Unquestionably CDS values related to Lehman, Merrill, Goldman, etc. evaporated for many a levered investor long those contracts. And wouldn't ya know it, it was only one week later, after their earnings were reported, that S&P revised its "outlook" for both Lehman and Goldman to negative from stable.

And that, folks, is how it works. Without question, the fallout from cascading CDS values for Bear and the other assorted brokers could easily have caused liquidation of meaningfully levered equity positions, both short and long, causing the very movement in sector prices we saw in the latter weeks of last month. Believe us, we're dragging you through this line of reasoning because we believe in the current environment it is nothing short of critical to understand and keep in mind these very important intra market relationships. We need to understand how what we see in one sector of the financial market can have meaningful implications for asset price movement in many other parts of the very same broader financial market. What we see in the headlines on TV is shallow, and what we "hear" on CNBC is almost meaningless.

It is the actions and unintended consequences underneath the headlines that are crucial to "see" and understand. Can the CDS and other derivative markets influence equity market outcomes? The derivatives tail is indeed wagging the greater financial market dog. And it is understanding this that we believe is the key to both risk management and successful investment outcomes as the process of credit cycle deleveraging and reconciliation is sure to continue to play out ahead. Be surprised at nothing. Do not let short term financial asset price movements that appear illogical throw you off emotionally from remaining focused on the greater credit cycle reconciliation and deleveraging environment that now reigns the day.

Okay, now that we've dragged you through this, let's have a quick look back at another "acquisition" of a financial services company clearly on the ropes earlier this year— Countrywide. On January 11 of this year, BofA announced the shotgun marriage of the two. And what did we see after that? Have a look at the table below.

Asset Price Movements Post the 1/11/08 BofA Acquisition of Countrywide

Asset/Investment Vehicle

Price Movement

   
Crude Oil (7.0%) in 6 trading days
CRB Index (2.2%) in 8 trading days
Gold (4.4%) in 6 trading days
XLF — Financial Sector ETF 7.9% in 15 trading days
XBD — Broker/Dealer Index 9.7% in 15 trading days
XLY — Consumer Discretionary ETF 8.6% in 15 trading days


Notice anything special? In the spirit of complete honesty, we intentionally picked a few subsequent price high and low points for each asset class really in order to get the point across that short term events in the CDS market can indeed influence broader financial market outcomes. With the decline in gold and oil in the week after the Countrywide acquisition (which would likewise have shattered Countrywide CDS values), was it really the beginning of a straight downhill run for each asset class from there to the present? Far from it as both turned right around and ran to all time new highs before the recent corrections. How about the financials, brokers and discretionaries? Was this three week nicely positive move the bottom of the bear market and economy with an all new bull market commencing thereafter?

You get the picture. As you know, we wish we knew with absolute certainty where the equity market and the economy are headed, but no one does. We just need to have a broad enough field of vision to hopefully ask the right questions. And one question of the moment is the influence of interconnected leverage unwinding and derivatives markets on more conventional equity and bond market short term pricing outcomes.

If we are even close to being correct in terms of this interpretation of CDS and leverage unwinding fallout effects, we need to watch firms such as Wamu, Indymac, etc. They might not be too big to fail as corporate entities in and of themselves, but are the CDS and other assorted derivative contracts written against or with folks like this too big to allow them to fail and trigger default swap contracts and/or counter party failures? Talk about the derivatives market tail wagging the proverbial financial market dog. This is where we are.

So as we move forward in the conventional US equity and debt markets, we need to remember that THE BIG INVESTMENT THEME we are going to be living with for some time to come will be deleveraging. The wild west, devil may care credit cycle the US has grown to know, love and embrace over the last few decades is over. We are now embarking upon and in the midst of important secular credit cycle change. Change which will bring with it important consequences and opportunities very different than what we have come to know and expect over the past. Will the short-term influence of now in place systemic deleveraging affect short term financial market pricing outcomes as we have already seen in recent months and as we tried to describe in this discussion? You bet.

Please keep this in mind as you watch the blinking lights on the screen day-to-day. We suggest that continually remembering the big and now primary investment theme of deleveraging will serve us very well in the months, quarters, and yes even years ahead. What we are living through now is unlike any cycle of the past few decades where credit cycle reacceleration was key to forward outcomes. Stand that on it’s head. That’s in the past. Deleveraging is the future. The world is not about to come to an end, just the type of thinking and actions of the last few decades in response to the greater credit cycle that has peaked.

Bank Shots…We’ll leave you with one last thought about the near term before signing off. Indeed it appears as though at times over the past month, we have been staring into the financial system abyss, so to speak. Why has it felt this way? Probably because in many senses we have been staring into the abyss. Right to the point, at least in our minds, the near term critical issue for the financial markets is bank capital. The commercial and investment banks absolutely must raise capital. And that’s not going to be a fun experience. Fed actions are only buying time. Watch for this to come and soon.

Lehman's quarter end announcement simply reinforces this message/theme in our minds. Why? Because if the banks/investment banks don't act to raise capital and do it quickly, financial market and credit cycle troubles will accelerate meaningfully downward. If indeed the capital raising process comes to pass, as we believe, the markets will stop trying to discount a crisis environment and can more realistically begin to asses by sector the implications of a very slow and drawn out economic recovery brought to you by the key investment theme of the moment which is deleveraging. You know we’ll be talking a lot more about this ahead.

ß§

Normxxx    
______________

The contents of any third-party letters/reports above do not necessarily reflect the opinions or viewpoint of normxxx. They are provided for informational/educational purposes only.
The content of any message or post by normxxx anywhere on this site is not to be construed as constituting market or investment advice. Such is intended for educational purposes only. Individuals should always consult with their own advisors for specific investment advice.

Bear Market Rallies?

Bear Market Rallies Only Delay Day Of Reckoning

By Ambrose Evans-Pritchard, Telegraph.co.uk | 31 March 2008

Every slump is punctuated by exuberant bursts of optimism, known to traders as "bear market rallies". Japan had four false dawns during its long slide into the abyss. Each lifted Tokyo's Nikkei index by an average of 53%. Such bounces can be quite intoxicating.

Teun Draaisma, Morgan Stanley's stock guru, expects the current rally to boost Europe's MSCI 600 index by 21% from its trough in late January, with similar moves on the S&P 500. The battered shares do best: builders and banks this time. There have been nine bear rallies since 1970. The average length is four months. The surge misleads investors into believing that sunlit uplands lie ahead. Then the sucker punch hits.

"The Federal Reserve's actions have averted financial Armageddon, but they cannot avert an earnings recession. We don't expect a new bull market until early 2009," he said. Morgan Stanley says earnings will fall 16% this year as debt leverage kicks into reverse. Investor psychology is "asymmetric". The market discounts trouble in advance. Share prices start falling a year before earnings peak. In a downturn investors keep selling until earnings hit bottom. "Bear markets are terrible for the human psyche. You get one profit warning after another. People see their hopes dashed so many times that they stop believing," said Mr Draaisma.

"You have got to be very disciplined and not buy shares too early just because they look cheap. Things can go down further than you ever dare believe," he said. He is not predicting a bloodbath along the lines of 1929-1933 (-88%) or 2001-2003 (-49%): just a long slog, with failed rallies. For now, the markets are flashing a tactical buy signal. Mr Draaisma's "capitulation indicator" has crashed to the lowest level since the 1998 LTCM crisis: the share "valuation indicator" is near an all-time low. UBS is also gearing for a big rebound, convinced that the Fed's move to shoulder $30bn of Bear Stearns liabilities has changed the game.

In its latest report— "Ready for a Rally"— it said financial shares rose 448% in the 12 months after the Swedish rescue in 1992, 88% after Japan's Revitalisation Law in 1998; and 82% after Roosevelt's Emergency Banking Act in 1933. The pessimists at Société Générale remain sceptical, even though the Fed has gone nuclear. "We expect global equity prices to fall by up to 75% from their peaks as a deep global economic downturn unfolds over the next few years," said Albert Edwards, their global strategist. He fears a 50% collapse in earnings, compounded by an "Ice Age derating of equities".

It may echo the Lost Decade in Japan, where stocks fell 80%. The yields on state bonds kept falling as debt deflation engulfed the banks, thwarting efforts to nurse lenders back to health by the usual device: "steepening yield curve". The authorities were left chasing their own tails. Having lived through this, Japan's chief regulator Yoshimi Watanabe has advised Washington to go for a quick taxpayer rescue, rather than trying "to fix the hole in the bathtub".

Whatever happens, there will always be tactical rallies. Mr Edwards cites four Wall Street bounces above 25% in the 2001-2003 bust. The buying cue is when investor gloom nears black despair. The put/call ratio on options is now at a bearish extreme of 0.90. "That would historically suggest that a joyous 25% spring rally is close at hand," he said. Yet Mr Edwards remains wary as long as analysts cling to their belief that earnings will rise 11% in 2008. This is not the sort of "washout" level of gloom required to clear the air.

Still, the oldest adage on Wall Street is "never fight the Fed". In short order, Ben Bernanke has slashed interest rates by 300 basis points to 2.25%, and invoked the emergency clauses of Article 13 (3) of the Federal Reserve Act for the first time since the Great Depression to take on direct credit risk. The Bush administration has told the housing agencies Fannie Mae and Freddie Mac to absorb $200bn of extra mortgage debt. It has implicitly nationalised them in the process. The network of Federal Home Loan Banks has mopped up $900bn of mortgage securities. Congress has rushed through a $170bn fiscal blitz.

This is not to be sniffed at. It is worth a good spring rally, until the inexorable logic of a 25% house price crash prevails once again. Bernard Connolly at Banque AIG, who foresaw this crisis with uncanny accuracy, believes central banks will resort to full-throttle reflation, setting off a fresh boom in shares and gold. But this will occur only after the economic slump has spread to Europe and beyond.

The authorities will wait too long to act, believing their own decoupling myth. Unemployment will ratchet up. Civil unrest may rock Latin Europe. In the end, the whole industrial world will stoke a fresh credit bubble to put off the day of reckoning, for another cycle. The capitalist system is now so deformed by debt that it requires ever lower interest rates to keep going. It survives on perma-bubbles. Monetary rigour at this late stage would endanger democracy.

How did we ever let matters reach this pass?




Iceland Contagion May Spread Far And Wide

By Ambrose Evans-Pritchard, Telegraph.co.uk | 27 March 2008

As Iceland goes, so go the Baltics, the Balkans, Hungary, Turkey, and perhaps South Africa. All are living far beyond their means, plugging the gaping holes in their accounts with fickle flows of foreign finance. All have let credit grow far above the safe "speed limit", some exceeding 50% a year. Iceland's precarious economy is a warning to other deficit nations about breaking the safe credit 'speed limit'.

For Iceland, the high-wire act of the last five years may have finally reached its limits. The central bank was forced to raise interest rates to 15% this week in an emergency move to halt the collapse of krona, which has fallen 18% since mid-March. The country's all-conquering banks— led by Kaupthing, Glitnir, and Landsbanki— have pushed the asset base of the Icelandic banking system to a world record of eight times GDP, tapping the global capital markets to launch Viking raids across Britain, Scandinavia and beyond.

This spigot of easy credit has now been turned off. The spreads on Icelandic bank debt have risen above 800 basis points, near levels seen in Bear Stearns' debt before the Federal Reserve's rescue. Which raises a thorny question: Is the Icelandic government— which presides over an economy the size of Bristol— big enough to underpin its encephalitic banks if push ever comes to shove?

"There are clearly limits to what the government can do," said Paul Rawkins, an Iceland expert at Fitch Ratings. "If the government tried to raise billions in the markets it would damage its own credit worthiness. In any case, these debts are in foreign currencies. The central bank has just $2bn (£1bn) in reserves," he said. The banks insist they are well capitalised, with enough liquidity to tide them through to 2009. If the credit crunch subsides, the issue will never be put the test. But Iceland is more than just a Nordic hedge fund masquerading as a country. It is also the first of the deficit states to succumb to investor flight, sending an early warning signal of potential troubles across a great swathe of Eastern Europe and the Mediterranean.

Turkey is first in line for any stress test, said Neil Schering, an East Europe expert at Capital Economics. "I wouldn't want to keep any money in the Turkish lira: the puzzle is how it has stayed so high for so long. There are huge imbalances in the economy. The current account deficit is nearly 8% of GDP, and the chief prosecutor is trying to shut down the government," he said, referring to last week's court move to ban the ruling Islamic AKP party, as well as the president and prime minister, for alleged breach of the country's secular laws. Turkey has a foreign debt of $276bn. The Istanbul bank YapiKredi says Turkish companies may have great difficulty raising some $48bn of fresh loans needed this year to stay afloat.

Until now the country has been the darling of the yen 'carry trade', offering irresistible yields to Japan's army of investors. But the yen's surge in recent weeks has played havoc with these flows. The unwinding of yen positions has undoubtedly been key factor in the sudden capital flight from Iceland this month. Fitch said countries that run current account deficits above 10% of GDP for any length time almost always come to grief. East Asia's debt crisis in 1997 erupted before any state reached double digits. Iceland's deficit is now 16% of GDP. Latvia is at 25%, Bulgaria 19%, Georgia 18%, Estonia 16%, Lithuania 14%, Romania 14% and Serbia 13%. The region will need $337bn in foreign loans this year.

Borrowing in foreign currencies was all the rage in the heady days of the credit bubble. Most mortgages in Hungary over the last two years have been in Swiss francs, with the Balkans and Poland not far behind. This is now turning into slow torture. The franc has risen 5% against the euro since October. The real level of the debt is ratcheting up. The foreign debts have reached 122% of GDP in Latvia, 101% in Estonia and 73% in Lithuania, mostly in euros. For now the debtors are shielded by fixed exchange rates in Europe's ERM system, but this could make the shock even worse should the currency pegs start to snap.

"It's all looks like a pretty ugly cocktail," said Mr Schering. "The good side is that the Baltic banks are not exposed to toxic mortgage securities, and a lot of them are owned by foreign banks, so they are protected." Ed Parker, head of Fitch for Eastern Europe, said the agency had already downgraded Latvia to BBB+ and issued a further alert in January. Turkey is even lower at BB-. "There's now a risk of psychological contagion from Iceland. People are starting to look more closely at all these countries. The deficits were easy to fund in times of abundant liquidity, but we think the global credit crunch is going to make it a lot harder," he said. "The history of financial crises suggests that it can be dangerous to think 'it's different this time'."

ß§

Normxxx    
______________

The contents of any third-party letters/reports above do not necessarily reflect the opinions or viewpoint of normxxx. They are provided for informational/educational purposes only.
The content of any message or post by normxxx anywhere on this site is not to be construed as constituting market or investment advice. Such is intended for educational purposes only. Individuals should always consult with their own advisors for specific investment advice.

Signaling All-Clear?

Signaling The All-Clear Horn?

By Chuck Butler, President | 3 April 2008
Everbank World Markets


Good day... And a Tub Thumpin' Thursday to you! Well… You heard it! Big Ben B. says that everything is going to be all right! Man, do I feel better about that! Just when I was getting all nervous and out of whack because of the debt situation, the jobs situation, the war situation, the credit situation, the housing situation, and the awful state of financial institutions… Whew! Everybody back in the pool! Big Ben says the water is fine!

Whoa! (in my best John Wayne)… Now, just wait a minute there, pa-ahdna… Haven't we heard these words of euphoria before from Big Ben? Hmmm… Seems to me that last July, he told us that the mortgage meltdown wouldn't filter out into the rest of the economy… And then he followed that gem up with the August all-clear sign that the housing meltdown had bottomed… Now… He expects us to believe him that the economy will be strong again in the second half of this year? Hmmmm… OK… But before I go on, I had better tell you what happened so you can catch up… I just realized I immediately went into level 4 on Big Ben…

OK, so, yesterday, Big Ben was talking to Congress about the economy… He admitted that the economy would contract (notice the mass media didn't pick up much on that last). He also said that the there are
"downside risks"… But then he put lipstick on the pig by quickly switching to statements about how the economy would be strong in the second half of this year…
[[a-a-ah, the infamous second half of the year! : normxxx]] Well… You know my old saying, folks… You can dress up the pig… You can put lipstick on the pig… But in the end… You still have a… PIG!

I want to know and I can't understand why the lawmakers don't ask him this stuff… But I want to know where this growth that he's spouting off about is going to come from? Or how about this one, B3… Why don't you SHARE with us what you feel the downsides risks are? Nah… You wouldn't want to do that, because it would expose the awful job you and your Fed Heads have done!
I feel like Ricky Ricardo… Hey Lucy, you got some 'xplainin' to do!

I could go on… But I've had it with this guy! He has begun to give me the same kind of rashes Big Al Greenspan gave me!

So… The currencies gyrated all over the place yesterday… First rallying on the Triple B words of a contracting economy, but then seeing the dollar rally on the "recovery" words. At the end of the day, the euro was back to rally mode, moving close to the 1.57 handle once again. Then came a report on Reuters that the Eurozone was going to voice concern at the euro's gains at the next G-7… That sent the euro back down.

This morning… The euro saw further selling when Eurozone Retail Sales unexpectedly declined in February, thus signaling to the markets that the U.S. recession is spreading to Europe… That news was followed by a German bank announcing a $6.7 billion write-down… So… The euro has taken on some water from the weakening of the economy… But, hey! We all knew the U.S. recession would spread to other parts of the world… What I kept thinking, though, was that it would not be as devastating to other parts of the world, especially the Eurozone, as it had in the past. So much for that…

I know, I know, I too dislike the saying, "But this time will be different…" That saying cost people trillions of dollars a few years ago… But my point here is that one of the reasons the Eurozone was created was to buffer the countries from suffering along with U.S. slowdowns… 80% of all Eurozone trade is amongst themselves… And let's face it, the exports of BMW's, Mercedes, and other high-end cars shouldn't see that much of a shift… Rich people don't suffer recessions!

So… We have the euro trading in the mid 1.55 handle… IT'S NOT A TREND REVERSAL! I said this the other day, but it's worth repeating… We've seen these "flash in the pan" dollar rallies several times over the past 6 years of the weak dollar trend… Nothing, fundamentally has changed… So, why would the dollar reverse the trend? OK… Another note on Iceland this morning… Yesterday, there was an OP-ED in the Wall Street Journal titled: Iceland Isn't Melting… Here's a snippet.

"But fears of a meltdown in my sub-arctic homeland are vastly overblown. True, the current account deficit was 16% of GDP last year, but that's an improvement from more than 25% in 2006. And while net private-sector debt is about 120% of GDP, there is virtually no public debt in Iceland. This is largely the result of unparalleled political stability and continuity."

That's all nice… But it was written by an insider… A board member of the central bank of Iceland… I detect a note of "homerism"… But… Soothing words nonetheless, eh? George Soros, a guy that I personally wouldn't have over for dinner, called the current financial crisis "the worst since the Great Depression"… He also noted that the "markets will fall more this year after a brief rebound." Well… I may not like the guy, but I agree with him on the second statement… Seems the markets are getting all pumped up on the kool-aid Big Ben is serving up… But these are just words, folks… We'll see who's right and who's wrong on this… His track record isn't so good!

The Carry Trade is back on the books after spending the month of March getting unwound… This is good news for Aussie and kiwi… And should be good news for South Africa and Iceland… But I think the "once bitten twice shy" campers have had enough of the volatility of these currencies and are sticking to Aussie and kiwi… So… Aussie and kiwi rallied yesterday, bucking the sell-off of euro, yen, francs, and sterling.

Remember what they taught you in 6th-grade science… A star burns brightest right before it burns out… And I think this can be applied to the Carry Trade… But we'll have to wait-n-see, eh? One of my fave currencies… The Norwegian krone has held strong during this euro weakness… And this morning, Norway reported that Retail Sales jumped 5.6% in February… Seems that the recent wage increases there, the largest in 5 years, spurred consumer spending… Hmmmm.

That would work here too… EXCEPT! Wages haven't increased in the U.S. in so long, people have forgotten what that looks like! My friend Bill Bonner of the Daily Reckoning had this to say about wages yesterday… "The part of the economy in worst shape now is the consumer. He’s the one whose salary has not gone up. He’s the one whose house is being foreclosed. And he’s the one who’s got to buy gas and food."

Here's another note Bill made that I believe is important to note: "Again, we see the sad evolution of the U.S. of A. since the end of the ’60s. Then, fewer than five million people received food stamps. Now, nearly six times that number are living on them… after what was supposed to be the biggest boom the world has ever seen."

But not to worry, Bill… Big Ben, or B3, as I like to call him, tells us that it will be alright on that night in the second half of this year… I sure hope he's right! That would certainly make things easier for me and my family! That's it for today… I found out yesterday that I will be doing a joint presentation with my friend Addison Wiggin at the Agora Vancouver Investment Conference in July… Addison, by the way, has done an update of his best seller, "Demise of the Dollar," and it should be available soon… I was honored to write the foreword for the book! You'll need to check that out when available! So… If you're interested in the Vancouver Investment Conference, check it out.

ß§

Normxxx    
______________

The contents of any third-party letters/reports above do not necessarily reflect the opinions or viewpoint of normxxx. They are provided for informational/educational purposes only.
The content of any message or post by normxxx anywhere on this site is not to be construed as constituting market or investment advice. Such is intended for educational purposes only. Individuals should always consult with their own advisors for specific investment advice.