Weekend at Bernie's - Part II

A quiet weekend, this past one was certainly not. After last Friday evening's post-market post-mortem "R.I.P." declaration and takeover of California-based IndyMac Bank, the Treasury, the Fed, and the SEC spent their two days of rest...at work. The results of their laboring overtime were evident in the outcome: the failed IndyMac Bank will reopen today with the word "Federal" inserted into its name, and the other two institutions that appeared less than sound will have access to any kind of money that will keep them functioning, for as long as needed. Thus Freddie and Fannie will live see another day, and year.

The US monetary officials' extraordinary weekend bailout and shoring-up activities harked back to the mid-March days of the Bear Stearns short-circuit. Clearly, the holders of half of the mortgage debt in the US were not going to be let to just slip away in the quicksand that has been stepped into by firm after firm since about one year ago. Moreover, the SEC has stepped into the fray, and is actively looking for firms and individuals who may have spread false rumours about the integrity of financial institutions. Amid rising apprehensions about failures, analysts have projected about 100 US banks to bite the dust per year for the next two or three. To put that into perspective, there are about 7.500 financial firms in the US, and back in the S&L $150 billion crisis, about 1,000 firms closed shop.

Whether or nor such first-aid actions will be interpreted by the markets this coming week as sheer resolve, or futile leaky dike-plugging exercises by the authorities, remains to be seen. One certain thing is that Dr. Bernanke might have a more pleasant time were he to be facing the Spanish Inquisition instead of Congress this week. Finally, the financial packages which have been cobbled together for the doomed or nearly-doomed trio could either prove to de dollar-supportive and hurt gold (as they did after its March peak) or ignite a wave of wave of selling which could push it down to the 1.60 floor once again.

Disagreement continues to manifest itself as to the dollar's next track. Lehman Bros. London chief currency guru Jim McCormick sees "A solid case for a dollar uptrend. Should commodity prices ease, the market focus is likely to rapidly shift away from inflation concerns and towards growth, and on this metric, the dollar is beginning to look far better [than the euro]." Another expert, Bill Gross, the oft-quoted manager of the biggest bond fund on the planet, has now turned bearish on the euro for the first time since the unified currency made its debut back in 1999. The euro is seen as falling to between 1.30 to 1.45 by year's end, based on Euro-zone economic weakening. The Big Mac index shows the price of a burger is now nearly 25% higher across the Atlantic and has given some traders all the euro-selling signals they need. However, Sumitomo Mitsui Banking's chief economist envisions the dollar coming to the critical 1.599 pivot point this very week.

In overnight trade, the dollar's first reaction after the Paulson plan announcement for Freddie and Fannie was to rise. the Financial Times relays that: "The idea that policymakers would prompt a run on the dollar and US debt markets as they try to shore up the GSEs is unthinkable, analysts warn." Ajay Rajadhyaksha, head of US fixed income strategy at Barclays Capital in New York, said: "I don’t see any circumstance where the senior agency debt would default. A default would call into question the full faith and credit of the US government." Thus, oil first gave way, and gold dropped as well. The yellow metal visited lows near $953 overnight.

New York spot gold trading opened the week on a lower note, losing $8.60 at $956 per ounce as participants await the reception that a $3 billion securities offering from Freddie will get in the marketplace today. Focus was still on the dollar (at 72.22 on the index and at 1.585 against the euro) but declining oil (down $1.39 to $143.70) also assisted in gold's slippage early in the session. Silver lost 24 cents to $18.60 while platinum was off $24 at $1994 and palladium dropped $1 to $448 per ounce respectively.

All of the hot money that has been funneled into the commodities complex since last summer may either be coming in at a much slower pace, or could be looking for a trigger point at which to exit. While recent events are still keeping most of the longs on the "stay & play" course, the aforementioned dollar-euro flip on the event horizon is having would-be gamblers exhibiting caution.

This morning's focus story is from Reuters, whose Barani Krishnan reports that:

" Commodity investors whose bullishness helped push markets to record highs in the first half are rethinking how much to commit to a historically volatile sector that has largely gone one way of late: up.

Investors in raw materials futures ended the second quarter with some of their best gains in 35 years, thanks to a 40 percent jump in crude oil prices and new highs set in just about every commodity from gold to copper, corn and soybeans. But with crude prices, some metals and agricultural futures softening this [last] week, the correction could deepen if investors continue to see less upside potential in these markets in the second half, analysts said.

"If forced to pick, we would take our chances on the short side," Edward Meir, a New York-based analyst at MF Global, the world's largest retail broker of commodities, said in a commentary on crude oil Wednesday.

This week's data from the Commodity and Futures Trading Commission showed investors reducing their long, or bullish, positions in oil or other commodities or even taking short, or bearish, positions.

Crude oil speculators on the New York Mercantile Exchange, or NYMEX, cut their net long position by almost 3 percent in the week to July 1 after straight record highs in three sessions from June 26-30, CFTC data released on Monday showed. NYMEX crude, which surged from below $100 a barrel at the end of 2007 to a record of just under $146 last Thursday, has fallen almost $10 in the last two sessions. It rebounded $2 in Wednesday's early trade on geopolitical risks linked to Iran's missile tests, before scaling back on data showing a sharp build in U.S. gasoline supplies.

"In light of the negative environment that seems to be blanketing a number of commodities in recent days, we suspect that energy still has further room to fall," Meir said.

Adam Sarhan of New York's GlobalMacroResearch.com agreed.

"A lot of these moves are structured like a stair-step, where they rally a bit, consolidate, then rally again," Sarhan said. "If you're in a situation where you have a nice profit, you're going to want to walk them in. The last thing you want is to go round trip on a trade where you have a big winner, only to sit and watch it go all the way down."

Most investment banks have forecast that oil could trade between $150 and $200 a barrel in coming months due mainly to supply insecurities. But they also think world demand for energy could decline sharply at such prices.

"We believe at that point, we will start to see more signs of demand destruction and an eventual tipping point in oil markets," Deutsche Bank said in a late-June commentary that put a more conservative average of $120 for crude this year. Investors in industrial metals like aluminium and copper were turning cautious too, judging from the way such markets were retreating from recent highs, MF Global's Meir said.

Aluminium on the London Metal Exchange, or LME, has lost around 7 percent since hitting a record peak of $3,327 a tonne Monday. LME copper has fallen 9 percent since an all-time high of $8,930 a tonne on July 2.

On the agricultural front, corn has fallen more than 10 percent and soybeans 5 percent from recent record highs on the Chicago Board of Trade as more favorable crop weather came to the U.S. Midwest after spring rains delayed planting. Investors in commodities also were closely watching the dollar, which has been recovering on signs that there may be relief for the U.S. credit crisis in the long term.

The dollar has strengthened this week despite a recent rate hike by the European Central Bank which briefly propped up its rival, the euro. Weakness in the U.S. currency has been one of the main supportive elements for the bull run in commodities as prices of dollar-denominated raw materials rise each time the greenback falls.

"The dollar will surely play a big role on where commodities go from here," said Steve Platt, a veteran futures analyst at Chicago's Archer Financial Services. "The markets are still going through what I think is an adjustment phase."

Loading up on extra gold on the Friday evening news? Not to be a profitable move as the week got underway. Shades of March? Possibly. Having the core position of bullion already in place? Priceless. Watch stocks and their reaction to the Fed package, watch the dollar, and do not forget oil. Geopolitics may have taken a back seat to financial news this weekend, but they are still part of the landscape. Volatility will not be lacking as the week unfolds.

Happy Trading.