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Ok, what about them White Cow With Gray Tattoos??

Thursday, March 8, 2007

So I have been asked why must that poor Moo-Moo Cow be Brown? Are all cows brown? And what about them White Cow with them cute little Gray Blackish tattooo all over their body? Yeah, what about them? Too sexy? :D

Anyway , yesterday I wrote about this:

Did you get to read it? No? Really no?

Let me paste it over here.

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JIM: Okay, lets take a look at the stock market sell off. The first thing you have to understand which is there was no immediate economic impact on the economy, other than probably shaking up investor confidence, and I would suspect, John, we're going to see that show up in the consumer confidence polls.

And the other thing that it did – remember, was volatility was virtually nonexistent here if you looked at the volatility indexes (either in the bond market or the stock market) – and I mean this week the VIX went from almost 10 to closing out Friday at almost 19. So you almost had a doubling of the VIX in a single weak. It went straight up like a NASA space launch. So with volatility up, the traders kind of like that and Wall Street does because with no volatility, it's very hard to make money in the market.

The other thing that's happening is you're starting to see this ocean of liquidity some of which is beginning to dry up, although I was reading – we follow global money flows – and you take a look at Europe, M3 is up 9.8% year-over-year. The money supply here is up somewhere over 11%. But there's something that I think is rather different this time. And this is a concept that I don't think anybody in the market gets yet. Unlike previous crises as we saw in the 90s – remember the Peso, derivative crisis in 94, we had the Asian crisis in '97, and then '98 it was Long Term Capital Management and Russia, then it was Y2K and then it was 9/11. Unlike previous crises, capital may not flow this time into the United States as a safe haven because the US itself may be what is unnerving investors; and especially when you consider, John, that foreigners own about 25% or more – I think I've seen that figure – of our mortgages, and they own over 50% of our Treasury debt, and about 25% of our corporate debt. So if they do not contain the stock market swoon within 10%, this could turn into something more serious: seeing a major asset decline leaning to widening credit spreads – and then, as they say in the movies, Houston, we’ve got a problem. [3:07]

JOHN: Yeah. It's important to recognize that the crises that we saw at the beginning of the 90s, they were happening elsewhere and people could look over here as more of a safe haven, I guess you'd call it, but now we are going to be the center of this crisis. Everything has changed here.

JIM: Yeah. And a lot of people are saying that there really isn't a problem. I mean there isn't an immediate impact when you see something like this happen, John. It's the after effects that come afterwards. It's like when the Fed stops raising interest rates, there's usually a 12- to 18-month lag period before you start seeing the full effect of that which is now unfolding. The Fed stopped raising rates in June of last year. Now you're seeing the problem surface in the subprime market in the mortgage market which will be the topic of our next segment here. But if you look at what happened in the 90s, profits peaked in 1997, and it wasn't until 2001 that the recession followed. Many things have to happen before profitability peaks and we see a recession – so it's sort of a slow unwinding process. And one of the things you want to see is increased corporate borrowing; you want to start seeing higher interest rates. So it's worth considering that what we're seeing here could be the beginning stages of what I call this final end game of the dollar that's going to begin here in stages because really, the epicenter of this whole problem area is the United States itself; and what they are going to do I suspect (and that's why I see another reinflation effort coming in this market) is try to contain it because they do not have a safety valve completely put in place. In other words, China doesn't have its safety valve put in place yet, nor does Russia, nor does India, nor does OPEC, and that's what they are scurrying around the globe trying to put in place and resurrect this system that will hold up for them when basically our financial system collapses here in the United States. [5:20]

JOHN: Well, you know, if we look at the whole situation, at least where it stands right now, it's not really in anybody’s interest to have this whole thing collapse. There were no capital inflows to speak of, but nevertheless the bond market did well but gold did horribly, and people have been scratching their heads on this little conundrum, so I think that needs some elucidation here.

JIM: What they are trying to do, John, is I call this concept herding. And a typical response would be the stock market goes down, you flip out of your stock trades and you go over into Treasuries. Okay, it's a flight to quality as they say; there's a crisis. And that's exactly what they want done at this point. They want the dollar still to be viewed as a safe haven. So this whole kind chimera that is taking place here is they are herding people into bonds, trying to keep them into the dollar, into dollars even as the Dollar Index itself has been breaking down. And that's happened where we're now looking at interest rates that are almost all of the way back to the very low that they reached in December of last year. We're not quite there – we’d have to get another, let's say, go from 4.5 down to 4.4. But they are also herding. We saw that this week we had figures that were announced that inflation is still running high. What you don't want is people going into the gold market because that threatens the structure of dollar credibility and faith in the dollar. So as Nick Barisheff was commenting on how the PM fix was much higher and by the time they got to the United States, they hammered the gold markets here. That's what they are trying to do. And if they can hammer the gold markets, that forces liquidation. There were comments made that a lot of people were liquidating their gold stocks, their bullion holdings on margin calls if you were leveraged. So you saw a lot of that action take place in the hedge fund market as a lot of these guys that were leveraged, you know, where did they have profits? They had profits in energy, gold and precious metals. And so, that's what they were liquidating as they were covering margin calls that were presented against them. So that explained part of the movement, but it was also a herding movement that was done – I can remember I was being interviewed, I think it was Tuesday, by the Wall Street Transcript and he asked the comment (at the time of the interview, the Dow was down 524 points), “how bad do you think this is going to get?” And I said I would bet you we're going to see a miracle take place here very shortly. And that's exactly what happened. They came in. And Bernanke even mentioned this in his testimony this week that he's working very closely on the capital markets committee (or the Plunge Protection committee) in monitoring the situation. That’s because you could just see it take place; and sure enough in the middle of this interview as I was talking to the gentleman that was interviewing me, we went from being down 524 points to being down only 350 points – and that was where they managed to keep it contained. And I made another comment and I said I bet you it spikes in the morning and that would be a good time if you're short the market to go in and cover your shorts.

That's the thing. They’ve got to prevent this contagion from taking place, and they’ve got to keep the sheep contained and corralled. And that’s exactly what they are doing – they are trying to keep the sheep contained in the corral; they don't want them getting out of the corral and going across the road into the precious metals market. That’s because when that happens, it's a confidence and what they don't want to do is lose confidence in the dollar, so it's very important that they hammer the gold market. [9:12]

JOHN: Well, obviously, there's going to be an opening bell on Monday, and there's a lot of speculation as to where this is all going, so where do you see it all going? Obviously you're a big believer in metals, what did you do during this time when everybody else was saying, “well, see the metals aren't doing anything.”

JIM: Let's talk about where we're going. We're still seeing turmoil in the mortgage-backed markets, and so I would not be surprised in the weeks ahead if you're going to see somebody else in trouble whether it's a hedge fund, another subprime lender, or even a major lender. You're even starting to see the breakdown in stocks such as Countrywide. And all of this is going to spook investors and that's going to cause the markets to freeze up and everyone takes stock of the risks. And now people are paying attention to that risk, and you could see if this continues much longer that capital would begin to flow out of the United States, or at least not come in at the same rate. And once again, I go back to the month of December where we had interest rates spike – we had interest rates of 4.4% the first week of December – and during the month of December (remember, the United States needs to raise about 70 to 80 billion dollars a month just to pay its bills) we only had $15 billion in net foreign buying come into our treasury markets, and the dollar got in trouble. We also began to see interest rates rise, and that's when the Fed had to come out and start talking tough about interest rates – what they were trying to do was protect the dollar from collapsing even though what was happening is interest rates were going up. So they really need to be careful here that they keep this contagion contained, and it doesn't get out of control. That’s because one of the things they learned about the stock market crash in 87 when they went back and studied it, is you can't allow this thing to gather momentum as a snow ball running down a mountain because then they just lose control. So it was very important – you heard Bernanke talking wonderful things about the economy; the real estate market is self contained, it's not spilling over – we'll address that here in just a moment; and then also the turn around in the stock market the day it dropped 5 ¼ where you saw it in the futures pit, and they just turned it around intervening at the same time they had to hammer gold - you couldn't have gold spiking over 700 or we would have a real full-blown crisis on our hands. [11:46]

JOHN: So I'm going to gather from all of this, you're not panicked. You're enjoying this actually.

JIM: No. We were actually backing up the trucks on Friday, both in client accounts and myself personally, I bought silver bullion, bought a lot of it on Friday; and also my four favorite juniors, I loaded up to the gills; and I've got another semi-truck I'm sending down next week. [12:09]

JOHN: And I'm assuming it runs on ethanol, am I correct?

JIM: Yes. It's a green truck.

JOHN: It's a green truck. I'm assuming as well that when they do this type of thing, they hammer the energy markets, it's really a good opportunity is what it is.

JIM: It's an incredible opportunity. We're looking at revamping some of the things we have in energy because I expect more energy take overs. I've got one company I'm looking at now, John, that I'm going to buy at 25% of its enterprise value, so I don't expect this company to be around in the next 12 to 18 months. Same thing with late-stage juniors – we saw it with ago Agnico-Eagle; and you're going to see more and more of that as you take a look at these companies that are going to try to grow their resources, you're going to see more and more take overs. So you're absolutely right. I love it. The best time to buy is when there is blood in the street, when people are panicky and the sense of fear takes over, that's when we like to be buyers.

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