Dear Clients,
This letter summarizes one of the most stunning weeks in the history of financial markets.
On Sunday, March 16th, it was reported that Bear Stearns, the 5th largest brokerage firm, was being acquired by
JP Morgan for merely $2 a share. Bankruptcy rumors surfaced the prior Friday for the second-biggest
underwriter of U.S. mortgage bonds, causing the stock to drop from $55 to $30; a far cry from the $175 Bear
Stearns traded at in February, 2007. As suspected, the balance sheet was loaded with highly leveraged, illiquid
subprime mortgages, creating massive losses for the firm. Urgently, the Fed orchestrated a bailout involving
JP Morgan and $200 billion of financial support from the U.S. Treasury. The parties rushed and completed the
deal before the opening of the Tokyo stock exchange, amidst fears of a meltdown in financial markets.
Simultaneously, the Fed cut the Discount Rate and announced that they would now allow non-bank financial
institutions (brokers) to borrow from the Fed’s Discount Window.
Gold promptly and appropriately soared over $21/oz. to $1033/oz. as foreign capital sought the safety of real
money. U.S. stock market futures were naturally projected to open sharply lower, and the U.S. dollar tanked
overseas.
Now, let me stop for a moment and forewarn you that for the rest of the week, price action of gold/silver as
well as U.S. stocks, bonds, and the dollar proved to be the most illogical, irrational, counter-intuitive, and
government/Wall Street manipulated market performance that you will ever witness!
To jumpstart market “control” Monday morning, President Bush gathered the President’s Working Group on
Financial Markets, an organization that everyone affectionately (sic) refers to as “The Plunge Team.” In
addition to Bush, Sec.-Treasurer Paulson, and Fed Chairman Bernanke, the group also includes the heads of
the S.E.C. as well as the Commodity Futures Trading Commission (CFTC); two individuals whose inclusion
would be peculiar were it not for the need to make them aware of the forthcoming market manipulative action.
Immediately Monday morning at 8:30am EST, upon the opening of the COMEX market where “paper” gold
and silver are traded, the price of gold was slammed! It reversed $25/oz. in a mere hour, while silver fell
nearly $1/oz. to $20/oz. before both metals traded sideways the rest of the day. Sunday, Paulson had vowed,
“The government is prepared to do what it takes to maintain the stability of our financial system.” Thus, if
gold is the leading indicator of economic and financial stress in the global markets, then I guess it is awfully
important to prevent that (yellow) “canary in the mine” from signaling shock waves! The overnight collapse
of the 5th largest brokerage firm certainly qualified as a shock wave. Also part of the scheme, the DJIA
reversed a 300pt. decline, closing up 21 pts., while the U.S. dollar index also recovered.
According to Marketwatch.com, a 420 pt. rally in the DJIA on Tuesday, March 18th, was attributed to the
following:
U.S. stocks on Tuesday blasted skyward, with the Dow rocketing to its fourth-largest point
gain ever after earnings from Goldman Sachs and Lehman Bros. Holdings, Inc. proved better
than expected and a rate cut by the Federal Reserve.
Seriously, this is one of the most absurd statements I have ever heard from the financial media. Goldman
Sachs and Lehman Bros. both reported an earnings decline of over 50%, with warnings of further
deterioration. As for the rate cut, indications on Monday were for a full 1% cut. Those “expectations” were
clearly already priced into the market. The fact that the Fed cut it a lesser ¾% in no way could be construed
positively by the equity market. Of course, a panicky 75 basis point cut, down to a mere 2.25% is significant
and should have caused the U.S. dollar to plummet and gold soar. However, in these “managed” markets, the
dollar actually rallied while gold was hit for another $25/oz. to $978/oz. over a 2-hour period Tuesday. Lower
interest rates are extremely positive for gold. In fact, it’s obvious that Bernanke has abandoned the fight
against inflation (both monetary and consumer price) in order to save the economy. That is why so much
fiscal and monetary stimulus has been applied.
Once again on Wednesday, March 19th, upon the opening of the COMEX “paper” market, gold was slammed
for $58/oz., down to $920/oz. Gold continued to be pushed lower by another $10/oz. Thursday, down to
$910/oz. Thus, from its overnight high March 16 at $1033/oz., gold fell $123/oz. or 12% during a week when
every fundamental factor was positive for the metal. Silver fared even worse! After trading at a high of
$21.26/oz., silver plunged to $16.70/oz., down $4.56/oz. or 21%. Needless to say, the mining stocks fell
sharply last week as well.
|
The DJIA fell 300 pts. Wednesday when additional adverse financial news came out of Europe, involving
major banks; however, not to be outdone, the stock index recouped that decline on Thursday for no apparent
reason. So, in a week which began with sheer “panic” of a global financial meltdown, the DJIA rallied 410
pts., +3.4%. There’s not a lot of guesswork here.
Bloomberg issued a report over the weekend entitled, “Commodities Drop, Rally in Dollar, Stocks Vindicate
Bernanke.” It goes on to say, “The biggest commodity collapse in at least five decades may signal Federal
Reserve Chairman Ben S. Bernanke has revived confidence in U.S. financial firms.” Furthermore it says,
“Bernanke took care of the commodity bubble.” And, “commodities are coming back to earth. The stock
market looks OK, and Bernanke is starting to look a little better.”
I’m sorry clients, but this is “bass-ackwards!” If Bernanke wanted to bring inflation down and pop a soaring
commodity market, he should raise interest rates sharply like Paul Volker did in 1980-81, not cut them at
record pace from 5 ¼ to 2 ¼%. The disinformation and “spin” reported by Wall Street is truly amazing!
“Moral Hazard” is defined as the probability that a party insulated from risk will behave differently from the
way they would behave if fully exposed to the risk. Moral hazard arises because an individual or institution
does not bear the full consequences of its actions, and therefore has a tendency to act with increasing
recklessness, literally “without reckoning.” Paulson claimed in a CNN interview Sunday March 16th, “I’m
aware as anyone of moral hazard.” He goes on to say, “I’m also aware of the importance of keeping our
economy strong, of orderly capital markets, of the stability of the financial system doing things that promote
orderliness and minimize disruption.”
I’m sorry Mr. Paulson, I don’t buy that argument. We probably wouldn’t be in this mess today if you, your
associates, and your predecessor were not constantly rigging the gold, currency, stock, and interest rate
markets all of these years. Free markets work, ridding the system of its excesses. Perhaps if gold had been
allowed to trade freely, the balance sheet deterioration at institutions like Bear Stearns would have been
apparent to you and the market much sooner.
|
According to Bloomberg, as an indication of the anxiety existing in the marketplace, “Investors seeking the
safety of government debt amid the loss of confidence in credit markets pushed rates on three-month bills to
0.387%, the lowest level since 1954.” In a sign of desperation, not only is the Fed now making loans to Wall
Street, but it is suddenly accepting securities linked to commercial real estate as collateral! Furthermore,
there’s now a report circulating in the London Financial Times that “the U.S. Federal Reserve and its
European counterparts are talking about the practicality of using public money to buy large quantities of
mortgage-backed assets to clean up the credit mess jeopardizing global economic growth.”
Watching all of this charade are those in India, China, the Middle East, Turkey, Russia, Korea, Argentina, and
other countries where gold (and silver) is worshipped, respected, and urgently accumulated with fiat paper
U.S. dollars floating around the world. While thankful for the recent $123/oz. decline, making new purchases
cheaper, due to their collective demand, they know that it is just a matter of time before the price explodes and
the dollars they hold plummet.
Wistar W. Holt
March 24, 2008
|
|
