Rules? We Don't Need No Stinkin' Rules!

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Following a day of double-digit losses, gold prices attempted to stabilize near $910 per ounce in overnight Asian trading. Equal attention was given to rising Eurozone inflation (coming in at 4.1% - more than twice the ECB's target and to the possibility that US GDP might have recorded a growth rate of anywhere from 2 to 4 percent during the second quarter. The US dollar thus marked time at 1.562 against the euro and at 73.23 on the index, while crude oil retreated by nearly $1 to $126.00 per barrel. Geopolitics remained relatively muted, albeit Iran did say that it had its own set of proposals to make regarding the bag of carrots it was recently handed by Western nations. The proposal offers...another set of talks and rejects the mere word 'deadline' from the vocabulary. Israeli politics face short-term turmoil as PM Olmert announced he would stand down.

Fallout from the mortgage crisis continues to batter various parts of the global financial and real estate scene. Deutsche Bank tossed more than $3 billion out of the windows of its Frankfurt offices, while declaring that it fared better than Merrill and UBS. True. Depending of one's definition of 'better.' UK real estate fell the most since 1991 and took consumer confidence right down with home prices. Who is doing extremely well? Try Shell, whose second quarter profits unsurprisingly rose by 33% to nearly $8 billion. Oil makes the world go 'round. It was the principal factor in bullion's comeback from the $890's yesterday afternoon.

New York spot trading opened on a slightly firmer note on Thursday, up $6.10 at $911.50 per ounce as players geared up for the release of the advance GDP estimate figures. At a juncture when many Armageddonistas were expecting numbers solidly in negative territory, growth rates twice as strong as those seen in Q1 could pump up the dollar a bit more and reinforce expectations that the Fed has room to wiggle as regards inflation fighting rate hikes- albeit it is not expected to avail itself of such room at next Tuesday's meeting just yet.

Silver lost 5 cents to $17.39 while platinum and palladium regained some lost ground by rising $21 and $5 to $1743 and $377 per ounce respectively. The fundamental picture in the noble metals' niche appears to have shifted dramatically. Mining Weekly reports that: "The South African platinum mining industry was expanding "too rapidly", making it "highly likely" that platinum and rhodium would go into "significant oversupply" in the medium to long term, negatively impacting prices, Credit Suisse Standard Securities research analysts Dr David Davis and Johan Bruwer said in a "shock" report released on Wednesday." In the interim, gold retains performance anxiety as it tries to regain the $915/925 level and could still revisit the high $800's in the event the dollar benefits from the US background conditions' apparent improvement. One of the items that helped the greenback on Wednesday was the extension of the Fed's TAFs & TSLFs through January of 2009.

Spain's El Economista reports that: "The U.S., European and Swiss central banks on Wednesday extended liquidity offerings to stressed banks and securities firms to ease credit strains that have weighed on the global economy for nearly a year. The central bank actions are intended to ease persistent global financial instability as institutions write down losses from exposures to delinquent U.S. mortgages.

The U.S. Federal Reserve said it was prolonging to January 30 an emergency credit facility that it provides for primary dealers in one of several steps to boost liquidity in financial markets. The facility was set to expire in mid-September. The Fed also said it would offer longer-term loans to banks under its Term Auction Facility, introducing 84-day offerings in addition to its current 28-day loans. The TAF was established in December to try to tamp down funding pressures. The U.S. central bank also said it would keep open its Term Securities Lending Facility, which provides liquid U.S. Treasury securities in return for harder-to-trade collateral, through January 30."

Everyone would like to know how things turned into this mess. One year ago, the tentacles of the housing Hydra became all too visible. Three years ago, unaware home sellers were cashing in on prices that have not been seen since. But, as always, there is more to this story. A lot more, and it goes back a lot further in time. In a must-read Bloomberg book review, Susan Antilla finds some of the painful truths about the issue that has shaken the global economy - and they are pointing in a familiar direction:

"In 2000, long before the phrase ``subprime mess'' replaced ``shock and awe'' as the most overused headline of the decade, mortgage wholesaler Richard Bitner concluded that somebody at one lending company had a screw loose. The company, Associates First Capital Corp. of Irving, Texas, was extending mortgages with only 5 percent down to struggling borrowers -- and was paying Bitner and other lenders fees of 600 basis points to use the product, compared with the prevailing maximum of about 500 basis points, he says.

``We thought someone in their trading department had spiked the water cooler,'' Bitner writes in ``Confessions of a Subprime Lender.'' The party at the cooler was just beginning.

Today, the U.S. housing market is in shambles and financial markets worldwide are cratering in response to mortgage excesses that implicated all the players in the industry, from fibbing borrowers and fudging appraisers to ratings companies that played a role in turning mortgage lemons into securitized lemonade. Bitner was the president and co-founder of a Dallas-based subprime mortgage company called Kellner Mortgage Investments. In ``Confessions,'' he provides a good education in the varieties of swine who fed at the housing trough.

There was, for example, the big-shot mortgage broker Bitner dined with in Cleveland, only to learn that the guy had done ``a few years in the Federal pen.'' Another broker, Angelo, brought Bitner a client named Rock whom he'd met at a strip club. Rock was an ex-con trying to buy his girlfriend's house to help her free up some cash. Though the deal closed, it turned out that Angelo worked with Rock only because he was trying to score with Rock's girlfriend. When she rebuffed him, he threatened to kill her. (Rock, by the way, stopped paying the mortgage.)

If you're wondering how deals like these get done, Bitner provides tips in a chapter on ``the art of creative financing.'' Too many bounced checks in the customer's history? Rogues simply omit all but the first page of the checking account. Had your car repossessed? Bitner describes a case where a collection agency reports the repo to only one of three credit agencies. An unscrupulous broker could make the collection disappear by filing just the reports from the two other bureaus, turning a losing loan application into a winner.

Bitner pulls no punches in recounting how Wall Street firms -- and the ratings companies they hired to value mortgage securities -- took advantage of the dysfunctional mortgage world. The days when banks ran the whole mortgage process are gone, he writes. Today, a broker originates the loan, a lender funds it, a financial institution packages it into securities, and investors buy the securities.

The upshot: Investment firms and ratings companies have become ``the unofficial regulators of the subprime industry.'' That makes them most to blame for the housing crisis, he argues. What about the destruction wrought by mortgage wholesalers like Bitner? While he's generous in criticizing others for lowering standards, his own ``confessions'' fall short of confessing, barring a mea culpa in the book's last two pages.

In 2005, for example, Bitner was forced to repurchase a loan from an investor to whom he'd sold a mortgage. The borrowers were a South Carolina couple who had a credit score in the 500s (out of a possible 850) and $250 left in their checking account after the closing. They never made a single payment. Bitner goes back to review the files, searching for what he may have done wrong.

``Then it hit me,'' he writes. ``We did nothing wrong. Our underwriter approved the deal, we funded it, and the investor purchased it from us because it fit their guidelines.''

And there you have it: In this business, the players wrote the rules and no one asked whether the rules made sense. Including Bitner. As for that South Carolina couple, Bitner got them to sign the deed back to him -- after agreeing he wouldn't report it to the credit agencies.

``Confessions of a Subprime Lender: An Insider's Tale of Greed, Fraud and Ignorance,'' is published by John Wiley & Sons, Inc."

A great deal of similar institutional money went into the commodities markets right after it became apparent that the upside in real estate was becoming...tenuous. And now, we have this - from Bloomberg's Millie Munshi:

"Tumbling prices for natural gas, nickel and corn are turning July into the worst month for the Reuters/Jefferies CRB Commodity Index in 28 years. The CRB Index of 19 commodities slumped 9.7 percent since June 30, the biggest decline since a 10.5 percent drop in March 1980, when the U.S. economy was mired in recession. Natural gas plunged 31 percent to lead July's biggest losers. Corn and nickel slumped 14 percent.

The dollar's rebound from a record low against the euro eroded the appeal of raw materials as an alternative to stocks and bonds, especially for investors who snapped up commodities earlier this year and sent prices to records. Demand also is easing in China, which expanded at the slowest pace since 2005 in the second quarter, Lehman Brothers Holdings Inc. analyst Edward Morse said in a report on July 23.

``This is one of the biggest tests in this cycle because the economic background is so poor,'' said Sean Corrigan, who helps oversee $8.5 billion at Diapason Commodities Management SA in Lausanne, Switzerland. ``Many don't like the fact that they missed the boom, so there's a great deal of rejoicing when there is a big correction.''

Commodities may face ``a very severe correction,'' said Dennis Gartman, an economist at the Gartman Letter in Suffolk, Virginia, who said in June that prices for gold and other commodities may fall. ``The unwillingness of the dollar to hit new lows and the idea of slower demand means it won't be surprising if these markets have further down to go.''

At the same time, the outlook for the dollar and the prospect for rising interest rates hurt demand for commodities as an alternative asset class. The U.S. currency has rallied 2.9 percent from a record low of $1.6038 per euro on July 15 and may reach $1.50 per euro by the end of the year, according to the median of 36 forecasts in a Bloomberg survey. ``A speculative bubble could be bursting,'' said Stuart Flerlage, who helps manage more than $600 million at NuWave Investment Corp. in New York. ``People had been pouring money into commodities over the last couple years, and especially earlier this year. That might have been the last big push.''

While GDP stats (showing a 1.9% growth pace) and oil could still be calling the shots today, the immediate focus is on the 44,000 additional jobless claims figures. Resistance remains at $925/932 while a close above $915 would be beneficial. As mentioned yesterday, bargain hunting sprees ought not to be discounted.

Happy Trading.