The new week started off on an even wilder (than was to be expected) note, as various markets went off into different directions all at once, reflecting the huge amount of confusion, fear, greed, and lack of leadership that is currently visible out there. Gold prices first went into melt-up mode as soon as Asian markets opened for trading last night.
Echoes of the Bear falling rang loud and clear, and far away from Wall Street. The dollar plumbed new depths against practically every currency one can think of, and the Fed meeting is still looming. Spot gold prices reached into virgin territory overnight, recording a $1028.50 print on the offer side. Meanwhile, the dollar was in the ICU, quoted at 71.25 on the index, while crude oil remained above $110.00 per barrel, only to lose as much as $8 later on what took place today in commodities. Fed General Hospital has turned into an ER full of triage beds. Wall Street looks more like a bowling alley on the other hand.
We wrote this very morning that some of these individual commodities' owners may yet have to rethink the safe-haven buying surge and profitability of long positions, against the likelihood of much lower fundamental demand as the economy now looks set to tilt into negative GDP for at least the current quarter. Apparently, some such speculative owners decided today that the latter scenario will impact the 'stuff' they own far longer than the current frenzy/orgy of buy, buy, buy. In the interim, some groups on our forums are concerned about the fact that gold remained positive on a day when everything else fell in commodities.
As the New York markets opened for trading in what promises to be a tumultuous week, spot gold prices were still trading at $1015.30 up $12.80 in a show of force that, frankly, should have been seen last Friday. Some of last night's one-way euphoria dissipated soon thereafter and we saw the beginnings of a commodity market slump emerge during the day. Participants now await the Fed's meeting and rate decision, but the street talk keeps obsessing about who might be the next Bear to get stuck in the subprime cave. No news would, indeed, be good news in coming days. At last check, gold was up 50 cents at $1003.00 spot bid. Silver fell sharply, losing 76 cent to $19.91 and turned the safe-haven hard money argument on its ear for the day anyway, and the noble metals fell early, and fell hard on recession fears and fund liquidations. Platinum lost $117 to $1956.00 and palladium lost $43 to $466 per ounce, respectively.
In a quest for cash and for locking in handsome profits, hedge fund money started to flow out of oil, silver, platinum, palladium, base metals, agriculturals, etc. Gold dipped to near $993 but remained fairly well-bid as participants are not yet sure what the Fed offering will look like and what other firms, if any, may fall in the domino game unfolding on Wall Street. Much talk about Lehman today, no visible problems. Bear could likely still be alive today had the Fed done something last weekend, or (better yet) last August.
Some clear truths emerged in the wake of the last 72 hours. 1. A recession is now a fait accompli. What type, how deep, -these are details. First-quarter GDP might not remain in positive territory recent analysis from UCLA's Anderson School notwithstanding. 2. The era of drive-by appraisals, 105% home loans, stated-income lending, and a McMansion for everyone is over. 3. The Fed's rate cuts are not proving very effective anymore. When lending seizes up at any interest rate level and when liquidity is overtaken by solvency as the key worry, we can hang up that tool in the shed. Try something else.
So, should the Fed play the RTC in this current debacle? Financial Week opines that:
Proponents of the ongoing bailout contend that this is what a lender of last resort is supposed to do. But if, as some suggest, the central bank is effectively, albeit partially, nationalizing the banks, the federal government should be overseeing the job, just as the U.K. government is doing with Northern Rock. That way, not only can efforts be made to sell the bad loans to investors, but the banks' managers can be replaced (without receiving fancy exit packages) by executives beholden first and foremost to the public.
Socialism? Not at all. Nationalizing the banks would be akin to a Chapter 11 bankruptcy that wipes out shareholders. And there's ample precedent for proceeding along these lines. Consider the Resolution Trust Corp., which was legislated into being in the late 1980s after bad real estate investments decimated the savings and loan industry. To have the government bail out the banks instead through continued infusions from the Federal Reserve rewards bank managers and shareholders at the expense of the public.
Interestingly, the task of this ugly surgery may not fall on the Fed's shoulders alone. Some of our favorite targets of scorn may turn out to be white knights yet. Financial Week alerts us to the fact that:
About 60 other hedge funds are preparing to go bargain shopping for distressed (read: mortgage-backed) debt and leveraged loans for sale by besieged financial institutions. A London fund, Toscafund Asset Management, approached the board of Washington Mutual with an offer to participate in any consortium looking to recapitalize the mortgage lender, according to a report in the Wall Street Journal. Toscafund is part of Old Oak Holdings, which has a sizable stake in WaMu.
Such moves by hedge funds will help shore up the banks and begin to establish floors for toxic asset prices, industry experts say. They're going to be buyers of paper from other hedge funds and from the investment banks, said Mr. Snider. People are expecting about $200 billion worth of mortgages will be sold.
Good to know that creative minds are always at work. Where there is crisis, there is also opportunity.
Watch the Dow and keep glued to the TV for late breaking news on Fed measures and announcements. They are about to get quite creative too. As they say when it comes to foreign policy all options are on the table... Insofar as the dollar is not the Fed's responsibility but that of the Treasury, we have to look to Mr. P for any signs of a turn. Tomorrow's cut, whatever its size, is factored in to some extent but will still hurt the greenback unless we hear from other central banks (Europe) about coordinated rate moves.
Speaking of 'coordinated moves', just moments ago a talking suit on Bloomberg suggested gold sales (either by the US or others) as another form of intervention that should be considered. Wow. Let's sleep on that one.
Happy Trading. Please be careful.