Hey Rick it is OK to gloat

[ziggy]

Man this financial market meltdown is just unreal.  I thought we had the potential for a big correction, what with commodity boom of Sept 07 through May 08, and the heavy leverage used by the hedge funds to drive commodities through the roof, but this is truly as you described it "a meltdown". 

Currency markets are totally upside down, commodities are tanking, the world stock markets are crashing, the entire banking system is de-leveraging.  I posted a year ago that I thought we had the potential for a hedge fund meltdown similar to LTCM, but this one is far more systemic, and the banking and investment banking sectors cannot come to the rescue.  See
http://pensionpulse.blogspot.com/2008/10/hedge-hemorrhage-will-lead-to.html
This is guts of the shadow banking system.

One of the big things driving this right now I believe is the coverage of the Lehman Credit Default Swaps.  See http://www.bloomberg.com/apps/news?pid=20601103&sid=aiMj9KoKg_CM&refer=news
These are paying out at 90%.  This explains a lot about how things have gone last couple of weeks.  People need to borrow short term, and no one will lend because of the fear of just this scenario.  That is forcing people to sell assets as fast as possible, which is driving everything down and down.  Looks like Lehman truly was to big to fail.  I don't know maybe it was for the best, maybe this will clean things out, and force a change.  We have the same kind of settlement coming in a couple of weeks with WAMU CDS.

Even George Soros is getting drilled.
http://www.mffais.com/institutions/123750/

So anyway Rick, you are free to say "I told you so".

[rickortreat]

I take no pleasure in being right about THIS.  I didn't do it for props, I did it to warn you guys that the proverbial $hit would hit the fan.

Gold is the only safe thing out there, but if you try to find it, you will find they want a very high premium over the current spot price.  In a world where currencies have gone insane, printing themselves into worthlessness in order to make good on an obscene amount of debt, Gold will become the only honest money because it is based on nothing other than it's own existence for value.

The $700 billion dollar bailout is nothing to a multi-trillion dollar debt scenario. If they can do something about mark-to-market accounting (which I think is reasonable, to a certain extent), they can alleviate a lot of the current financial pressure on some of these firms.

Gold is stuck right now, itself. The last thing the powers that be want to see is gold going above $1,000. The range is between $825 and $925.  Eventually it will break out higher, but in the meantime the way to play the game is buy the stocks when gold is low and lighten out of them once it gets to $925, so that you get back what you put in, but leave the rest in case the break-out occurs. GG and RGLD are among the best since they move well during the day and are suitable for options trading.

The market is even lower than I originally projected, and it has fallen faster and farther than I imagined.  We are witnessing the crash of the market in our generation, and people who were ready for this made a fortune by buying puts. I think at this point good stocks are being sold to below fair value, which means that good buying opportunities are becoming available.

There's an old adage, never try to catch a falling knife, and right now that's what the market is. With that said, I'd be very surprised if Monday wasn't an up day.

IN case the intervention by the central banks doesn't work, make sure you have cash on hand to last you for a month's worth of expenses. Jim Sinclair is  predicting Bank Holidays which means your bank is closed and you can't get a withdrawal. 

Right now, ironically the Dollar is king, so get out of debt, and hold them. The Dollar is going up against everything, including the Euro, and the debt their banks are carrying is connected to the US subprime market. Cash is the most liquid form, and the safest if banks shut down for a while. It is not wise to leave too much in a trading account either, as your holdings are not segregated as in a true custodial relationship.

Very scary out there. They've really bollixed things up, and it's not going to go smoothly.

[ziggy]

I am surprised at Gold not going higher and in fact dropping today.  I believe it is all about generating cash to cover underwater CDS from Lehman.  Everyone is selling everything to get cash, including gold. That is why the carry trade is unwinding.  I have a hard time getting a read on the US$, but the US$ was oversold for months, solely because of high leveraged carry trade.  It is now reversing as everyone is getting out of carry, to get cash to pay CDS obligations, and support their balance sheet by reducing leverage.  The US is pumping out $ like crazy, but so is everyone else, so on a relative basis the $ isn't any worse off and all the carry trade currencies are taking a beating.  The Kiwi has gone from $0.6800 to $0.5800 in less than 10 days, that is 17.2%.  The Brazilian Real, the Aussie $, Chilean Peso, Icelandic Krona as well as the Kiwi were all carry currencies, and the US$ and Yen were funding it those 2 are great and all of the others are tanking incredibly.

The crazy part of this is that most companies are making money on a cash basis, but are losing huge amounts of money in asset write downs, because of margin calls.  I know you disagree, but I have read a lot about this, and I have yet to find anyone who believes that mark-to-market didn't either precipitate this crisis or at the very least make it much worse.  I have read a few articles about the benefits of mark-to-market, and expressing the belief that mark to market has been made as the super evil when it is a bit of a mis-characterization.  The vast majority all agree that it has been a horrible thing in this market, made it far worse, forced significant liquidations, forced deleveraging, and crushed balance sheets.  I believe that it has really precipitated this crushing crash.  This is my fear with regulation, they give us another mark-to-market rule which does it to us again.  As much as people want to blame the repeal of Glass-Steagal as being at the root of this banking crisis I disagree big-time.  If we still had G/S then this would have started with Bear Stearns (because they could not have been bought by Citi under G/S), which would have taken AIG down sooner, which would have lead to Lehman collapsing sooner, and then Merrill, Goldman, and Morgan would have all collapsed rather than being merged with a bank.  G/S would have caused the total destruction of everything a lot sooner.  We are not at total destruction yet in fact a long way from being there.  So regulation made it worse, and the ending of regulation at the very least held off total destruction.

[rickortreat]

I don't dissagree at all, Ziggy. I think you've got it right for the most part.  The dollar is up because everyone needs them to settle these contracts.

Gold is not going to be able to move up until the G-7 stops interfering with it. Commodities are very vulnerable now because of the perceived slow down in economic activity.  Rather than experiencing inflation, at present we are in a deflation because everyone needs dollars.  Eventually, Europe may decide to break away from the dollar-based trade system since having the US as the world's reserve currency when it's so unstable makes no sense.

It will take some time for the interventions by the banks to be felt in the general economy, but once they do, you'll see commodities go off again like they did previously.  It will be interesting to see how China and India adjust to a slowing global economy, and if they will be able to convert to a more domestic-growth oriented economic system.

Mark to market isn't really valid for options or derivatives.  I mean, I speculate in these things (the standard variety that trades on the open market) and I make money by buying the ones in the morning that I think will go up in value as the trading day plays out.  At any given moment, those options are changing in value as the stock moves, and therefore the mark to market changes.  The problem for the SIV's and CDO's is that no one knows what's in them, so there's no market for them.  In truth, some of them are going to be worth a lot more money than they're valued at now, it's a matter of being able to afford to hold onto them in the meantime.

When I trade options I plan on holding them only for a short time, but during the time I hold them they go from the price I bought them at to prices above (hopefully!) or below what I paid for them.  The whole way I derive value is from deciding when to sell them. The only problem with speculating in things like this is that you need a market to sell them in.  With exchange traded options that's easy, there is always a market maker who has to buy at some price.  With SIV's no one has to buy them and they are so complex that it takes a long time to figure out if they're worth anything.  No standards and an unwillingness to value risk more carefully is what has done these people in.  These things are now the equivalent of financial toxic waste, and no one knows how to get rid of it safely.   

[Lurker]

I have wanted to comment here but have been absolutely swamped at work.  Here is an article from the Wall Street Journal that encompasses a lot of my thoughts about where do we go from here.  Gold is not the answer as it is not what is actually being traded under any market.  And since no currencies are tied to gold any more it does not act as a safe harbor...the most telling sign: as the stock market plunged over 20% and investors have fled for safety gold has been flat.  Treasuries is the preferred investment for safety.

Keep Your Money in the Market
We've been through ups and downs before.
By BURTON G. MALKIEL
   
As the world economy reels under the weight of the worst financial crisis since the Great Depression, we have been left with a broken financial system. Financial institutions around the world have suffered life-threatening, self-inflicted wounds by purchasing over a trillion dollars of complex mortgage-backed securities backed by dodgy loans based on inflated real-estate values. These assets have been financed with enormous leverage and with short-term debt. Just prior to its "rescue," Bear Stearns had a debt to equity ratio of over 30 to 1, making it susceptible to a "run on the bank," although Bear was not a commercial bank but rather part of the "shadow banking system" built on derivatives.

The long-run solution to the present crisis must involve substantial deleveraging and a recapitalization of our financial institutions. In the meantime, credit has been essentially frozen and a world-wide recession seems almost inevitable.

But just because stock markets have panicked, investors should not. The best position for investors today is not "fetal and 100% in cash." We are not going to have a depression, and we have survived financial crises before. A century of investing experience, as well as insights from the field of behavioral finance, suggest that investors who bail out of equities during times like these are almost always making the wrong decision.

It is very tempting to try to time the market. We all have 20/20 hindsight. It is clear that selling stocks a year ago would have been an excellent strategy. But neither individuals nor investment professionals can consistently time the market. The herd instinct is extraordinarily powerful. When the economy and the stock market were booming in early 2000, investors could easily convince themselves that prosperity would continue without interruption and that stocks catering to the "New Economy" were surefire tickets to wealth. Individuals poured more money into equity mutual-funds during the last quarter of 1999 and the first quarter of 2000 than ever before. And not only was the timing wrong but so was the selection of funds. The money flow was directed to the hot Internet funds. Investors liquidated "value" funds that owned less exciting businesses, whose stocks sold at only modest multiples of their earnings and book values.

The herd instinct works exactly the same way in bear markets. Nervous investors convince themselves that every "light at the end of the tunnel" is a train coming in the opposite direction. Panic is just as infectious as blind optimism. During the third quarter of 2002, which turned out to be the bottom of a punishing bear market, investors redeemed their mutual funds in droves. My own calculations show that in the aggregate, investors who moved money in and out of equity mutual-funds underperformed the buy-and-hold investors by almost three percentage points per year during the 1995-2007 period.

Look at history: The market eventually bounded back from the damaging stagflation of the 1970s and the savings-and-loan crisis of the early 1990s, when a whole industry had to be rescued. Stocks also recovered from the Asian crisis of the late 1990s. Similarly, investors who held on after the more than 20% one-day stock-market decline in 1987 were eventually well rewarded.

So what should investors do? By all means, young 401(k) investors, and those in their prime earnings years, who are stashing away funds from every monthly paycheck, should stay the course. If you decide to eschew equities during periods of ubiquitous pessimism, you will lose all of the advantage of "dollar cost" averaging (buying more shares when prices are low than when they are high). Asset allocations should be shifted to safer securities over time as the investor ages, but only gradually and on a set schedule as through a "target maturity fund."

If you are now approaching retirement and failed to move to a more conservative asset allocation, you should not do so now in response to a time of panic. If anything, well diversified investors should, at the end of each year, consider rebalancing to ensure that your portfolio composition remains consistent with the risk level appropriate for your financial circumstances and tolerance for risk. But this is likely to mean shifting into equities and not out of them.

Suppose you started the year with a portfolio of half stocks and half Treasury bonds. You are likely to find that the value of your bonds has gone up, as Treasury yields have fallen, and your stock portfolio has declined. Suppose the allocation at rebalancing time is two-thirds bonds and one-third stocks. The appropriate strategy is then to sell safe bonds and buy more equities to bring the stock/bond ratio back to 50%. Over the past decade, rebalancing a 50-50 portfolio each year has added to investors' returns and reduced risk.

We will have a serious recession now, but a 1930s-style depression is highly unlikely. We will not let the money supply decline by 25%, as we did in the '30s, and automatic stabilizers (like unemployment insurance) are now a significant element of fiscal policy. Don't forget that the U.S. economy is still the most flexible in the world and our "innovation machine" is alive and well.

No one has consistently made money by selling America short, and I am confident the same lesson is true today.

Mr. Malkiel is a professor of economics at Princeton University and the author of "A Random Walk Down Wall Street," 9th ed. (W.W. Norton, 2007).

[ziggy]

This is a significant bit of news.  It is to little to late to save several trillion already lost, but it is a huge step forward.  The Dow is up $570 right now (that will change a lot).  Last week was all about covering Lehman CDS.  Every asset you owned was open for sale to cover potential liability from the Lehman default.  That event is over and the market will respond upward as a result.

The issues all over the world were directly related.  Iceland for example.  They were a carry trade currency, and everyone was unwinding carry to get cash to cover Lehman losses.  Because it was so heavily leveraged as a carry currency, when the trade unwound they didn't have the cash to cover it all and the banks collapsed.  Carry is a leveraged interest rate arbitrage bet, and when liquidity gets tight then leveraged arbitrage bets go south very fast.

Last week was a de-leverage moment driven by Lehman's default.  It may happen again with WAMU, but to nowhere near the degree of last week.


Monday Morning Outlook

--------------------------------------------------------------------------------
FASB Pivots on Mark-to-Market
Brian S. Wesbury - Chief Economist
Robert Stein, CFA - Senior Economist
Date: 10/13/2008


On Friday, the Financial Accounting Standards Board (FASB) voted to release a staff proposal that strongly suggests companies may use contractual cash flows to value an asset that does not have a liquid market. Although this is being described as a ?clarification? rather than an outright change in mark-to-market accounting rules, it has the potential to curtail the financial crisis without spending another dime of taxpayer funds.
 
The story was first reported in the mid-afternoon on Friday. While the market did not react immediately, late in the trading session the Dow Jones Industrials Average surged 800 points. It faded in the last 25 minutes of trading as investors took cover going into the weekend. At the close, the Dow was still up about 400 points from the bottom, and it has continued to rally Monday morning.
 
While many accountants argue that mark-to-market accounting provides transparency, the markets know differently. Fair value accounting in the past year has caused nothing but problems, and in the end has created the opposite of clarity.
 
In illiquid markets, short-sellers can use fair value accounting as a tool to destroy the financial firms in which they are short. Short-sellers are sophisticated enough to understand that if they put a low-ball bid on securities held by the firms they are short this could force assets to be written down with mark-to-market accounting rules to the level of the low-ball bid.
 
An interesting debate between James Chanos, president of New York City-based short seller Kynikos Associates, and William Isaac, former Chairman of the FDIC took place on CNBC last Thursday. Isaac argued that fair value accounting based on asset prices in illiquid markets has destroyed $5 trillion in bank lending capacity, while Chanos argued against any change in the rules.
 
Chanos interrupted Isaac consistently, and said at one point, ??mortgage pools that we [Kynikos] might be interested in at 10 or 20 cents on the dollar are being offered at 70 cents?they are illiquid if the spread is so wide. If the bid was 20 and the offer was 25, we might have liquid markets??
 
We take this to mean that Chanos understands the impact these prices have on vulnerable financial firms. He believes the offer side should come down to 25 cents to make a liquid market. But his argument can also be made the other way, in that if he lifted his bid to 60 or 65 cents, the market would be liquid as well.
 
So far, the short-sellers? view of the world has dominated, with many pundits arguing the ?real? price of subprime loan pools should be down in the 20s, where the bids are found. However, with at least 75% of subprime loans still performing, a cash flow analysis of these pools would allow them to be priced closer to the 70 cent offer.
 
What this means is that if financial institutions are able to argue cash flow analysis to the auditors, the fire sale write downs of illiquid loan pools will no longer erode financial market capital. This will not impede transparency because knowledgeable investors understand how to value assets. What they can?t deal with is the risk that an accounting rule could drive a firm out of business. The short sellers gorged themselves on this accounting rule, while potential investors ran away from it.
 
With FASB suggesting to auditors that maybe they have been too hard-nosed, and seemingly offering them a safe harbor interpretation, the balance of power will no longer be tilted toward the short sellers.
 
But this does not mean all the problems in our economy are magically over. There has been serious damage done to consumer psychology. For the first time in possibly 100 years, a serious credit crunch has impeded the normal working of the economy. We still expect fourth quarter real GDP to fall at an annual rate of 1.5%, but, if firms avail themselves of the breathing room provided by FASB, financial markets could heal relatively quickly.
 
With the Federal Funds rate at 1.5%, a commercial paper support operation at the Fed ramping up, and the Treasury prepared to provide capital directly to financial institutions, the major dominoes should stop falling. We suspect the worst of the financial mess may be behind us.
 
It is now our view that a bottom in equity prices was found on Friday with the Dow down at roughly 8,000. Despite what many believe, the US economy is more resilient than it appears. It?s hard to say we will go straight up from here, but the odds of that are much better now that FASB has finally understood the damage that its accounting rules have caused.
 
There is one potential problem. It is clear that FASB is acting in this way because it does not want egg on its face. It does not want any part of the current financial crisis laid at its doorstep. As a result, it is trying to allow flexibility in an innocuous way, while at the same time telling anyone who will listen, that it has not changed the rules. If this keeps auditing firms from actually allowing the use of cash flows to value assets, the problems may not yet be solved.
 
It is still preferable that the SEC exercise its right to suspend mark-to-market accounting for illiquid assets. No auditor wants to be ?Arthur Andersen-ed,? and the easiest way to relieve them of that fear, and therefore the least costly approach to solving our problems is to put the rule to rest for good. It makes things look better than they should in the good times and much worse than they actually are in the bad. Get rid of it. We?ve run out of time and space to worry about who gets the blame.

[westkoast]

Market just made a crazy push today, what do you guys think?

[Lurker]

Market just made a crazy push today, what do you guys think?

I think that most of last week's decline was panic selling by Joe Six-Pack...or in more techinical terms there was a "run on the mutual funds".  Those funds then had to keep selling stock into a falling market to meet redemptions. 

In addition the ban on short sales was lifted which added to the volatility.  There were stocks that were hammered so hard that they had more cash in the bank than their stock was worth...for example Schwab & Co had approx $28 million in the bank but their market cap was $21 million.  There were several companies that were generating positrive cash flows but panic selling pushed their prices down. 

See the above article that I posted.  At this point if you are working and contributing to retirement/savings then the best thing you can do is keep working and saving.  As well as having a balanced portfolio (it can be as simple as 50% stock/50% bond) and a regular regiment of rebalancing.  For simple sample portfolios you should read some articles by Scott Burns about what he calls "couch potato investing".  He has shown over 20+ yeears that a simple 50/50 mix of stock/bond index funds will beat over 75% of managed funds with less volatility.  Here is a link to his articles:

http://www.dallasnews.com/sharedcontent/dws/bus/scottburns/columns/2007/vitindex.html

He also writes for this investment management site:

http://assetbuilder.com/

[ziggy]

Market just made a crazy push today, what do you guys think?

It my opinion last week was all about covering Lehman CDS's.  Cash wasn't just king it was the only thing.  Now that people are past that then they will start buying.  Last week was virtually all about selling.  The fact that the Dow & S&P are both up over 11% shows that the market was oversold, and it was oversold for a one time event.  That explains why gold went down on Friday.  It wasn't a safe haven it was about getting cash.

I read where a German finance minister said that the fall of Lehman cost $300 billion outside of the US.  His exact quote
"We're still licking the wounds of Lehman," said Jochen Sanio, president of the German Federal Financial Supervisory Authority, at an international banking conference. "It caused international damage of $300 billion outside the U.S."  How much was lost inside the US?  Basically the $700 billion Paulson was talking about was to cover Lehman's default obligations.

[Lurker]

Here is a link to another article about "Lazy Portfolios" and how to whether this storm.  Also I quote what I consider a very relative portion....

http://www.marketwatch.com/news/story/welcome-new-world-lazy-portfolios/story.aspx?guid=948951C8-D191-4582-BEC1-7DB75CE596B6&dist=SecMostRead

What a historic moment to launch the online updates for the Lazy Portfolios: Yes, you can now check your favorites every day.
 
The markets are down more than 40% since last year's peak. And yet, while all of the "Lazy Portfolios" are also down this year, they're all beating the S&P 500, and six of the eight are beating the S&P 500 by 11 to 17 percentage points on a 1-year basis and all eight are in positive territory on a 5-year annual average, beating the S&P 500 by 2 to 5 percentage points.

Still we're all looking at our 401(k)s, IRAs and pensions wondering: "Should I sell? Buy? Hold?" So I put the question to Ted Aronson, whose AJO Partners manages $20 billion in pension and institutional money. For over five years we've followed his Aronson Family Portfolio, where he puts his family's taxable investments separate from this firm's client assets.  As recent as this July, before the current declines, his portfolio and several other Lazy Portfolios sported 5-yr annual average returns in the 10%-11% range.

So what should investors do? Back in June 2005 when first predicted a coming "Global Mega-Meltdown," Aronson anticipated the current meltdown and offered this strategy: "If you have a well-diversified portfolio, cashing out may be costly in the long run: For good reasons and bad, I'd hold tight. The good include my faith in capitalism and its ability to weather a storm, even one of biblical proportions. The bad reason is, I have no faith in my ability to time this sort of thing. Even if I got out in time, I probably wouldn't be able to correctly time getting back in!" Flash forward three years to last week's historic crash. Even now Aronson says: "The markets' meltdown reminds me of my youth and my favorite TV show -- when Rod Serling would welcome you to "The Twilight Zone." It's truly other worldly. The magnitude, pervasiveness, extent -- and especially the rapidity -- of this decline is shocking. (And I say that having lived through all the bear markets of the past 35 years.)"

And yet, Aronson's advice is as consistent now as it has been since I first interviewed him: "I suggest the same asset mix -- with new money or rebalancing to within a close approximation. (Obviously, this refers to a long-term investment portfolio, which assumes that cash needs be handled via adequate reserves.) I firmly believe that the superdiversified, low-cost, equity-oriented -- and, yes, a lazy portfolio -- will be rewarding."
 
Then, in a lighthearted moment, from a guy who knows that eventually even this market will come back stronger because they always do, he added, "And to paraphrase a colleague, if the world really is coming to an end, then hoard ammo and put aluminum foil on your head! Because it's either the end of the world as we know it or the investment opportunity of the century (with the only competition being the lows of 1932). I chose the latter."

[rickortreat]

This market has been the best shorting opportunity of a generation. (Actually, several) But the market fell so far so fast, that it had to have a technical bounce, which was what that 900+ up day was all about. But the market is NOT out of the woods by any means yet, although my best guess is that we did see an interim bottom last week. 

Nothing has changed in reality. The derivative contracts are still out there, sucking capitol out of the markets and into a black hole. They have not solved the problem, they are pretending things will work themselves out. It's just more debt. No jobs mean people can't afford to pay their mortgages, which means the loans go bad and the homes get foreclosed. That makes every country and entity who invested in these loans looking at serious losses. I don't see more people getting hired. I keep hearing about companies laying employees off.  The problem is not solved, they're just pushing off the consequences.  The cost of doing so will result in serious and severe inflation.

Don't kid yourself about Gold, it is the only thing that you can trust because it is valuable in itself.  Every currency can print itself into oblivion, but Gold is finite, and therefore absolutely trustworthy.

None of you lived in Germany when it was in the Weimar Republic days and the Mark notes were circulating with over a Million on them.  The inflation was so dramatic and so quick that people would run to cash their checks and get to the store before the prices were raised.  You can't imagine what it is like to live with a currency that you know will be worth less tomorrow than today.  The reality today is that the currency has been in a decline for three years until very recently, and it is inevitable that the dollar will continue to decline unless something fundamental changes in the way the US does business.

In that period in Germany the stock market went up.  But in terms of value in other currencies, they declined. The entire world will end up like that Weirmar republic and inflation will be the force behind any rise in the market, not actual profits.

Just watch Gold, and buy at $825 or so and prepare to sell at $920 and take profits. Leave some in play in case the Gold breaks out above $920. Once it does it will hit $1,000 in short order, hesitate there and then head straight to $1200.  Probably January or February next year.  The Comex is a piece of crap as it is being manipulated and no one is buying with intent to take delivery at least at present. If you try to buy physical gold, you will find it very hard to get and only available at a significant premium over the current spot price.  The market is supposed to reflect reality and in this case it is not, at least not in dollars.  In every other currency, however, Gold is currently making new highs and once the dollar starts to fail you will want gold too.

The stocks are exceptionally cheap, and I'm talking about good quality stocks, like GG and Freeport MacMoran, Barrick and Newmont. 

Understand that we have been through a gigantic market crash.  Even with the huge gain yesterday the market is at 9310. That is lower than it has been for over three years. The bottom of that range was 10,210, and we're almost a thousand below that.  If the market doesn't get back above that level and hold, it will be time to short again.  It is a bear market until it isn't, and until the fundamentals change, it is a bear market.

[Lurker]

NEW YORK (MarketWatch) -- Gold futures fell Friday for a seventh straight session, with the benchmark contract marking its biggest weekly decline in two months as investors flee into cash.

Gold for December delivery lost $16.80, or 2.1%, to $787.70 an ounce on the Comex division of the New York Mercantile Exchange. The contract has lost $71.30 this week, or 8.3%.

Gold fell 8.4% in the week ended Aug. 15, the biggest percentage drop since 1984, according to FactSet Research Systems.

and from the same article

Analysts had projected gold prices to rise as demand for the precious metal as a safe haven is expected to increase amid the financial turmoil, but gold has repeatedly defied their expectations and has lost nearly $120 in seven sessions. 

Gold is now more than 20% lower than its record high above $1,000 an ounce hit in March.

IMHO it seems like gold isn't doing any better than stocks...


link to article:
http://www.marketwatch.com/news/story/gold-drops-biggest-weekly-loss/story.aspx?guid=%7BCAE4BC11%2DFD94%2D4FA5%2D9726%2DB3D758BD84F5%7D

[rickortreat]

Gold is having real problems at the moment, it appears that there is some forced selling going on, and insufficient demand to stabilize prices.  Next support is at $730 which was already tested once.  Cash is the best place to be at the moment, with some available for put options on various stocks.

During the election period, the powers that be are going to extraordinary lengths to keep things together.  Since in theory they have a bottomless supply of dollars, they can bull the market around quite a bit, but all that does it put money back into the pockets of people who have seen the value of their shares plummet.

A very dangerous market at this time- the trend is still more down than up, and very vulnerable to more bad news, which seems likely.

[ziggy]

Got this from the Stefan Karlsson blog

 Monetary Conditions Turn Deflationary
This evening's statistics on U.S. monetary statistics show that MZM fell sharply in the week to October 6, from $8693.3 billion to $8638.6 billion (My own calculations based on numbers available here. To calculate MZM, you subtract small time deposits from M2 and then add Institutional Money Funds). That's a decline of more than 0.6% in a week. It is now down 1.2% from its peak in July.

Even M1 and M2 fell back last week, though they (particularly M1) are unlike MZM still up significantly compared to late July.

This provides an explanation of the massive combined stock- and commodity price sell-off in recent weeks. As long as this monetary contraction continues, we will likely see a continued bear market in stocks and commodities.

This decline has happened despite the record fast expansion of the monetary base created by the Fed's various schemes to prop up the banking system. It thus seems that at least for now, the inflationary effects of the Fed's various schemes have been overwhelmed by the deflationary effects of the increased risk premiums created by the recent financial distress.

One thing interesting to note is that even as the quantity of deposit money is declining, traditional paper and metal money (aka cash aka currency in circulation) is increasing at a record fast pace, being up nearly $10 billion or 1.25% in 3 weeks. This mirrors the development during the Great Depression when currency in circulation increased rapidly even as overall money supply fell fast, as popular mistrust in banks caused people to withdraw their deposit money and hold them as notes and coins. These numbers indicate a similar development (although so far much less dramatic, but that might change).

Got this from Calculated Risk

Friday daily info

Credit Crisis Indicators: More Progress

Here are a few indicators I'm watching for progress on the credit crisis.

# The yield on 3 month treasuries: 0.79% up from up from 0.40% (BETTER)

# The TED spread: 3.59 down from 4.11 yesterday (BETTER)

# Activity in the Treasury's Supplementary Financing Program (SFP). This is the Treasury program to raise cash for the Fed's liquidity initiatives. If this program slows down borrowing, I think that would be a good sign.

Here is a list of SFP sales. No announcement today have to wait for progress.

# The A2P2 spread is 4.49 for Thrusday up from 4.4 for Wenesday. slightly worse.

# Industry contacts. I'm tracking some financing deals there are being held up right now. If these deals complete that would be a good sign (I'll post something when this happens). No improvement yet.

The two year swap spread from Bloomberg: 122.2 down from 138.38 BETTER


Thursday info

# The yield on 3 month treasuries: 0.40% up from 0.14% (a little better)

# The TED spread: 4.11 down from 4.38 yesterday (a little better)

# Activity in the Treasury's Supplementary Financing Program (SFP). This is the Treasury program to raise cash for the Fed's liquidity initiatives. If this program slows down borrowing, I think that would be a good sign.

Here is a list of SFP sales. Two more $30 billion auctions announced today. NO PROGRESS.

# The A2P2 spread is 4.4 for Wednesday up from 4.32 for Tuesday. slightly worse.

# Industry contacts. I'm tracking some financing deals there are being held up right now. If these deals complete that would be a good sign (I'll post something when this happens). No improvement yet.

The two year swap spread from Bloomberg: 138.38 slight improvement

Wednesday info

# The yield on 3 month treasuries: 0.14% (UGLY - Worse today)

# The TED spread: 4.38 (UGLY - Worse today)

# Activity in the Treasury's Supplementary Financing Program (SFP). This is the Treasury program to raise cash for the Fed's liquidity initiatives. If this program slows down borrowing, I think that would be a good sign.

Here is a list of SFP sales. Two more $30 billion auctions announced today. NO PROGRESS.

# The A2P2 spread is 4.32 for Tuesday. A slight improvement over Friday.

# Industry contacts. I'm tracking some financing deals there are being held up right now. If these deals complete that would be a good sign (I'll post something when this happens). No improvement yet.