THE INTERNATIONAL FORECASTER Part 1
September, 2002 ( 2 )
An international financial, economic,
political and social commentary.
Published and Edited by: Bob Chapman
Phone & Fax: 941 639 4756
E-mail: bif4653@comcast.net
U. S. MARKETS
As of this writing the FTSE, the Financial Times 100-share index, is trading at 3,813. If you remember over the past year we have made you aware of a formula we keep that gauges relative affect of the FTSE in relation to the Dow. We predicted that when the FTSE reached 3,772 it will have reached the level it was at in March 1994 when the bull market began. Thus at 3,772 all the gains of eight years will have been lost. At that same time in 1994 the Dow began its assent, yet the Dow is still up 3,981, which is the result of manipulation by the Working Group on Financial markets. It means that in order to reach the level that the FTSE has fallen to, the Dow has to fall 3,981 points to Dow 3,961. This gives you an idea of how overpriced the Dow is and it leads us to believe that the next downward move in the Dow will be a free-fall plunge. Perhaps a 3-4,000 point plunge in a matter of three to four weeks. It also means gold would quickly go to $512 an ounce and perhaps to $840 an ounce. We fully expect this to happen. Everyone should now be long gold and silver shares, short the market and own the Prudent Bear Fund, which can be purchased through Rich Radez at 800-285-1700. We bought this superlative investment fund at $4.75 a share in January. It passed $8.00 a share on Thursday. This is your last chance to buy for mega gains, don't hesitate, and act now.
As you may be aware Nasdaq has filed an application with the SEC to become a publicly traded exchange.
A small number of people and Wall Street companies stand to make a lot of profit by Nasdaq becoming a publicly traded exchange. This appears to be driving decisions that is causing Nasdaq staff to act against the public interest.
Part of Nasdaq's plan to become an exchange encompasses launching the BBX and terminating the OTCBB contrary to Congress' intent that a regulatory agency operate the OTCBB. Nasdaq predicts that less than 50% of today's OTCBB companies will list on the BBX. Mainly because it will cost these companies an additional $100,000 per year to maintain a BBX listing. Companies that don't list on the BBX will be forced onto the PinkSheets when Nasdaq terminates the OTCBB. Nearly 1,000,000 million investors will be affected when their OTCBB companies are forced onto the PinkSheets. The SEC has agreed to Nasdaq's plan with no public comment. Nasdaq is presenting their BBX plan to OTCBB market participants as a done deal.
Congress should conduct a hearing about the OTCBB issue and consider the greater public policy ramifications of allowing a small number of Wall Street insiders to profit by making Nasdaq a publicly traded exchange that has immense power over a large portion of our economy, 90 million investors and thousands of companies. Contact your congressmen and senators and stop them.
Ian Morris, chief economist of HSBC Securities USA says, home prices nationwide, particularly in the San Francisco Bay area, will follow stocks lower. As an example he cites the Japanese Nikkei drop from 39,000, which was followed for a year after with higher house prices that eventually peaked and then collapsed. A stock collapse is a signal of serious economic problems, which erases enormous amounts of wealth. Homes have risen in price because fearful investors divert their wealth into real estate as a safeguard, as well as move their funds into savings accounts and money market funds. The FED of course lowers interest rates in order to buoy a falling economy and in turn expedites real estate values. The record low interest rates and government interference in markets has simply prolonged the correctional process. Mr. Morris said, house prices would follow stocks because homes are worth about 1.6 times Americans' disposable income, a ratio virtually identical to levels when home prices peaked in 1989. It is even more stretched in the San Jose and Bay area.
The top elitist company in America, General Electric, is under investigation by the SEC for the retirement benefits it bestowed upon ex-CEO Jack Welch, some $2.5 million a year.
A key measure of interest-rate risk at Fannie Mae widened last month, raising questions of negative exposure. The duration gap between its mortgage assets and debt liabilities ended August at the highest level ever, reflecting the recent sharp drop in mortgage rates. As always the company assured us all is well. We don't agree. They have been mis-hedging their derivatives of assets and liabilities. This is being caused by unexpected volatility namely the lowest mortgage rates in over 40 years. Borrowers are paying off old mortgages early and taking out new ones at a lower rate. This creates a derivative mismatch, which was not foreseen. The gap is now negative 14 months, which means their $747 billion portfolio has greater exposure to a sudden shift in interest rates. This means Fannie will have to get its assets and liabilities back in line. Sharply shifting interest rates played a role in the collapse of LTCM, which had to be bailed out by orders from the Fed. As we explained long ago, after a certain level in interest rate volatility the derivative formulas don't work any more and the whole debt edifice collapses. This happened during the 1980's when Fannie at one point was losing $1 million a day and was technically insolvent. We are told today they are far more sophisticated, yea so wasn't LTCM, headed by the two experts who pioneered derivatives. If they got trapped Fannie and Freddie can get trapped. If interest rates remain at current levels for a long period of time or if they fall lower Fannie and Freddie could be in trouble. In order to fix the problem they'd have to issue more short-term debt and restructure their derivatives, which is not as simple as it sounds. Pulling short-term money out of the market could deter market liquidity putting pressure on other borrowers forcing rates higher. They can add long-term mortgages or 10-year Treasuries, but that would force Treasuries up and bond yields lower, which would upset the bond market and send mortgage rates even lower, resulting in more refinancings making the problems even worse. Freddie is not in the same fix. They have only a one-month gap. This is only one phase of Fannie's problem. They are buying mortgages, of which 42% are sub-prime, which should never have been written in the first place. Foreclosures are picking up and Fannie is going to get stuck with lots of dead mortgages and that will further compound their problems. Fannie Mae will eventually collapse and the government is well aware of that. They'll simply take it over and the taxpayers will pay for the trillions of dollars in losses.
On another negative note, the asset-backed securities market experienced an unprecedented number of downgrades during the first half of the year as Corporations and finance companies coped with the recession that doesn't exist. There were 502 downgrades and only eight upgrades for the period, which is devastating. The number of downgrades accounted for 37% of the total downgrades since the market's inception in 1985. Prior to 2002, the greatest number of downgrades for a six- month period was 152 for the second half of 2001. 80% of the downgrades came from collateralized debt obligations; leveraged pools of corporate debt securities funded via the issuance of variously subordinated and rated amounts of debt. Their performance is closely linked to credit quality of corporate bonds and loans. This signals further deterioration in the quality of primarily US high-yield bonds or syndicated-loan collateral pools. Non-CDO ABS also showed a record 102 downgrades for the period test of the ABS asset-backed securities market and if it doesn't hold all hell could break loose in credit markets and the result would be soaring interest rates and a further flight to quality.
Marginal business borrowers are paying 6% over prime for loans. There isn't a credit crunch, it's that the companies have fair to poor credit. Borrower's fortunes are continuously re-evaluated by the markets for bonds, stocks and credit derivatives. Companies rated BBB by S&P one level above junk pay 1.1% over Libor, which is triple the cost a year ago. After these and other loans are made they are bundled by banks and resold as collateralized debt obligations. Banks want to lay-off part of their action and make most of their money on loan fees. When a company or industry is under stress lenders are well aware of it and act in their own self-interest. Lenders are also diversifying more for protection. Bank loans are down and will continue to be only a part of the bank portfolios. Banks and professionals have been stunned by the speed with which the reputation and financial vigor of some big, respected companies have deteriorated and are moving to protect themselves. There is plenty of money to be lent, but little is being lent. There has been a flight to quality and when good and marginal companies borrow they must pay more. When interest rates finally are forced up again it could prove very difficult.
Apache Corp (APA-NYSE) is on our buy list. The charts are showing a reverse head and shoulders for the year. A breakout over $52.00 could send it flying.
As you know Iraq has said it will allow inspections thereby derailing Mr. Bush's agenda. As we said some time ago among other reasons, the war was being used as a cover to divert public attention from the collapsing stock market and economy. There still may very well be a war because the elitists cannot allow themselves to be blamed for what has happened. They may very well end up on the end of a rope. Remember gold is not going to go up simply because we may have a war. Gold will go up for a myriad of other reasons. Don't be put off by the perhaps temporary change of war plans, buy on any weakness. What the enemy has been doing to our economy, way of life and freedom every day will become manifest in the eyes of Americans and they will demand changes. That is when all markets will fall except for gold and silver. Americans may well go from being clueless to being able to understand the problem in a matter of a few weeks and then watch the fur fly.
Watching Treasury Secretary Paul O'Neil on CNBC reminded us of the sound track from "One Flew Over the Cuckoo's Nest." This sociopath spouted one lie after another like a possessed demonic madman. We wonder how he'll react at the War Crimes Trials?
Our government, which sees money launderers behind every pillar, wants to require offshore hedge funds to disclose to the Treasury identities of its owners if they have assets of over $1 million. Over the past 10 years assets in hedge funds have grown to $278 billion from $50 billion. The Treasury Department's hedge-fund proposal in one of several new measures to be announced that maintains the hard line on money-laundering the department adopted after last year's terrorist attacks. Casinos will be required to report suspicious transactions, life insurance companies will have to adopt money-laundering procedures and foreign banks will be forced to comply with US subpoenas through their US affiliates. How is that for a totalitarian state? We told you before the government wants to shut hedge funds down because they short the market. Proof of that is pressure being exerted by the President's Working Group on Financial Markets, better known as the Plunge Protection Team. In 1999 this illegal, unconstitutional group, alone with the GAO admonished top financial regulators for not making life more difficult for hedge funds and others who short the market. They figure disclosure might drive them out of business. The additional ruse is to force hedge funds to adopt money-laundering policies and controls, appoint compliance officers and spy on its investors like our banks are so willing to do. As you can see government is invading every facet of our lives, stealing our freedoms and sanctity and subjecting us to police state government, all in the name of terrorism. Our government manipulates all markets 24 hours a day all over the world and hedge funds are disrupting their control of these markets, so they must be destroyed.
The arrogance of government grows larger. A federal judge has held Interior Secretary Gail Norton and other agency officials in the error-prone trust fund system that handles over $300 million a year for individual Indians. What has really happened is that elitists have been looting the fund for years. It's expected the fund will be put under a court-appointed receiver. The fund has been robbed of $100 billion by various politicians over the years.
The Bush war administration is stepping up pressure to approve a $10 million slush fund, known as a Pentagon reserve fund to fund secret activities in Mr. Bush's relentless quest for war in the Middle East, particularly versus Iraq. That's in addition to the $355 billion the Pentagon received this year. Costs for preparing for a war, the administration would initiate as a preemptive war, are running $2 billion a month already and a war hasn't as yet begun. Mr. Rumsfeld says if he doesn't get the additional funds the war on terrorism will be shut down.
Housing promotion has left the FHA with 4.7% of borrowers at least 90 days late in their home payments, nearly twice the default rate of 1995. The Mortgage Bankers Association says the government figures are wrong and they believe the rate is almost one in eight or 12.5%. 1.23% of all US mortgages were somewhere in the foreclosure process during the second quarter. That is the highest rate since such statistics began in 1972. The previous record was 1.14% in the first quarter of 1999. The percentage of FHA-booked loans in foreclosure jumped 47 basis points to 2.79% while VA loans foreclosure rate hit 1.72%, increasing by 31 basis points. Private sector loans edged up six basis points to 0.87% FHA loans require 3% down and this home give-away financing is starting to come home to roost. Once this sub-prime lending stops the push-up affect that has created the real estate bubble will end.
An estimated 200,000 elderly and disabled Americans will be dropped from their Medicare HMO plans on 12/31/02. Since 1999, 2.2 million have been dropped. This is caused by inadequate government funding, while we spend $2 billion a day for a war that doesn't exist. Of 40 million on Medicare only five million have chosen the Medicare HMO option. All those being dumped will end up on Medicaid and the state and federal government will end up with the bill anyway. The difference is the states get to pay part of the bill. PPO plans will begin on 1/1/03 and will be available in 23 states. Beneficiaries will pay between $60 and $80 monthly in PPO payments, versus $54 monthly for HMO premiums. Our elderly are really getting screwed. There is plenty of money for war and illegal aliens, but no money for people who helped make this country great.
The elitists led by Napoleon Bush were planning a premeditated attack on Iraq to assure regime change before Mr. Bush was elected. This "global pax Americana" was drawn up for Dick Cheney, Paul Wolfowitz, Jeb Bush and Louis Libby, Cheney's Chief of Staff. The document entitled Rebuilding America's Defenses: Strategies, Forces and Resources for a New Century, was written in September 2000 by the neo-conservative think tank "Project for the New American Century." This cabal was going to take control of the Gulf region whether Saddam Hussein was in power or not. This document supports an earlier document written by Wolfowitz and Libby that said the US must discourage advanced industrial nations from challenging our leadership or even aspiring to a larger regional or global role. The American role would supersede any UN role. It puts US troops in Saudi Arabia and Kuwait permanently. It sees Iran as big if not bigger threat than Iraq. It spotlights China for a regime change, which bears out our synopsis of outflanking China from west, south and east. It calls for US Space Forces to dominate space and total control of the Internet. It considers electronic and biological weapons, because N. Korea, Libya, Syria and Iran are dangerous regimes and their existence justifies the creation of a "world-wide command and control system." This is quite a mouthful from a group of draft dodgers. This is part of the blueprint for the new world order and a world police state.
As we write JP Morgan Chase is breaking support trading under $19.00 a share headed for $12.00. Earnings will be lower than anticipated and S&P has reduced their credit rating one level to A+, citing a worsening of the bank's credit quality.
Calling President Clinton "Mr. Flip-Flop" was something the Republicans did with great joy every time Mr. Clinton appeared to change a policy. We thought we should examine President Bush's record.
1) Yucca Mountain will not become the burying place for nuclear waster. The President announced that Yucca Mountain will become the burying place for nuclear waste.
2) I will veto the McCain-Fiengold campaign finance reform bill. The President signs the McCain-Fiengold bill.
3) The President said, "I do not support import fees." The President puts import fees on Canadian lumber and steel imports.
4) He said "as soon as I take office, I will begin the process of moving the US Embassy in Israel to Jerusalem. Almost two years later and nothing has happened.
5) The President promised to stop the waivers on sanctions against Cuba. Mr. Bush has extended the waivers twice.
6) The President promised to place restrictions on carbon dioxide emissions. Guess What? There are no restrictions on carbon dioxide and we can also have more arsenic in our drinking water.
The list could go on and on. We think the title of "Mr. Flip-Flop" now belongs to President George W. Bush.
JP Morgan Chase's credit rating downgrade, which knocks them from the AA pinnacle to the A+A1 level, prohibits them from dealing with central banks, which in turn should mean they couldn't lease bullion unless dealing with another bank. Do other banks have bullion to lease? We don't think they do. That also raises the questions what becomes of the leased gold bullion position and what happens to their derivative positions? Must they unwind them? Due to the downgrade do counter parties have the right to alter their positions? Morgan's shares have been trading under $20.00. If $19.00 breaks will that drive gold over $330 an ounce? There is a good chance the event will do that. All this is exacerbated by a current account deficit, which means a lower dollar, which puts further upward pressure on gold and further downward pressure on Morgan's share price.
We recommended a short on Fannie Mae at $79.00 a share with a cover at $48.13. It has broken down through its 50-day moving average as the world finally realizes Fannie is in deep trouble. Hang on; we will see $48.13 and then some.
The article by JP Morgan Chase CEO, William B. Harrison, Jr., in the Wall Street Journal, entitled "Banks Were Victims in Fraud Cases, Not Accomplices" was an insult to our intelligence. These elitists must believe they can get away with anything and that we are stupid.
Congress would have us believe that US Intelligence failed regarding 9/11 events. Our Congress is a disgrace. We are presented with another whitewash of the evil machinations of the elitists controlling our country.
Child-care prices in 75 cities rose an average of 6.4% last year, more than twice the consumer price inflation rate. Nanny salaries and fees for family child-care homes are rising at a 5% per year clip. Parents are paying $200 a week for a family child-care home, average prices are $6,000-9,000 a year for child-care centers, $3,600-$7,800 for a family child-care home and $18,000 to $30,000 a year for a live-in Nanny. Families with incomes below $25,000 can receive some federal child-care aid. Due to the costs some families are using savings to maintain the situation and some are going bankrupt. US families pay 8.7% of their income for child-care, but in poor families that percentage is 25%. We expect these costs to average 16% of income in five years.
Investors removed $18.1 billion from money-market funds last week. Institutional investors were responsible for $16.31 billion and retail $1.8 billion. Seven-day compounded yields stayed at 1.25% and 30-day yields were down to 1.25% from 1.26%.
Merrill Lynch has fired two executives, one a corporate vice-chairman and the other from its Houston-based energy group for refusing to testify for the SEC and the Justice Department. We would expect that if both parties are vindicated it will cost Merrill Lynch a substantial amount of money.
Lucent Technologies at $.94 is now a penny stock and 97% of stockbrokers are forbidden by their firms to purchase the stock for their clients. Nortel Networks is in the same boat at $.81.
We are being asked who will follow JP Morgan Chase into financial trouble and that answer is Citigroup and BofA, both of which we believe have been under Fed supervision for over a year. They share the same problems JPM has and those are lack of trust, their derivatives books, venture capital markdowns, credit recognition, foreign exchange risk, criminal involvement with other corporations and their gold bullion derivative exposure. That is in addition to a negative overall outlook, further rating downgrades, liquidity problems, a further cut in dividends, falling profits, criminal actions and a loss of public confidence. Morgan will be merged into another bank to disguise its losses, as will Citicorp and BofA. Loan syndication has spread the risk and the big questions is no one knows for sure how badly other banks are ensnared in bad loans and in the derivative daisy chain. A confirmation of the two could be in the many billions of dollars. There are $2 trillion in loan commitments out there as well as $80 trillion in derivatives. If that doesn't frighten you it should. Due to the spread of the risk philosophy, not only are these big three banks in terminal trouble, so are many others. In the second quarter alone BofA reported almost $5 billion in bad loans. All we can say is unfortunately this is just the beginning. You'll be reading about this debacle for the next five years.
22% of the 1,842 fledgling companies that received an initial round of funding in 1999 are out of business, versus 15% launched over the previous seven years. That 22% loss equals $15.3 billion lost forever.
The chairman of the House Immigration Reform Caucus says it is wrong for politicians to assume that all Hispanic Americans are against America defending its borders. Colorado Congressman Tom Tancredo has been one of the most outspoken proponents of putting U.S. troops on the U.S.-Mexican border to slow the flow of illegal aliens and to cut down on drug trafficking. But the Republican lawmaker says too many of his colleagues are afraid of offending Hispanic voters. He says although other politicians are not going to say it out loud, they are going to vote against every single attempt to try and secure America's border because of they are afraid of the politics. Tancredo says Hispanics are just as loyal Americans as anybody else. He says they have a great pride for America and it is demeaning to assume that just because someone is Hispanic they do not have these same concerns. Tancredo says he believes there are literally millions of Hispanic citizens who support the idea of limiting illegal immigration.
The trade gap narrowed slightly in July to $34.6 falling from $36.8 billion in June. Exports rose $1.1 billion or 1.3% to $83.2 billion, while imports fell $1.178 billion almost the same amount. China exports almost as many goods to the US now as the Japanese. Chinese exports jumped $474 million over July to $11.2 billion.
The beat goes on. HPL Technologies has signed a consent order with the SEC, which alleges 80% of its nearly $14 million in annual revenue was bogus. The crooks are everywhere.
The socialists and Marxists in the People's Republic of California are at it again. Voters in Los Angeles County will decide in November on a record $22 billion in bonds to be sold by state and local governments for infrastructure projects - including new schools to teach the hordes produced by the millions of illegal aliens inhabitating the state, water treatment plants and seismic upgrading of cultural institutions - that will eventually cost $42 billion to pay off over the next 20-30 years. This is basically another bill for illegal immigration to be paid by the citizens of California. The State has a record deficit for 2002-3 of $24 billion. Veteran Democrat -liberal Zev Yaroslowsky says, this is the way it is going to be in every election for the foreseeable future. The politicians and assorted liberals of one form or another just love bond issues, they can go right on doing what they want and not have to raise taxes, cut spending or lay-off their overstuffed staffs. Needless to say in now very liberal California 54% of those polled think the bonds are a great idea and of course the brokerage firms are licking their chops waiting for their underwriting fees. This time around there are enough bonds to make everyone happy. Fitch's Investor's Service says the state's annual debt load is only 3% of total personal income and that the state will be able to handled the debt. No one told them a depression was coming. And, so it goes in the people's republic.
Refinancing activity represented 73.6% of total mortgage applications increasing from 72.5% the previous week. The share of over activity increased slightly to 12.5% from 12.3% the previous week with points increasing to 1.59 from 1.54. The 30-year fixed mortgage rate sunk to a new record of 5.90%. The 15-year also hit a record low of 5.34% down from 5.44%. The average contract rate for one-year ARMS was 4.22% up from 4.16%, with points remaining at 1.10 including origination fees on 80% LTV loans.
In Atlanta sellers of some of the areas most expensive homes are not getting the message, the market has depreciated, so prices are at a standstill. There are 742 houses priced at more than $1 million and 243 are in Buckhead alone. In that enclave there is a 37-month supply of mansions priced at more than $2 million and a 16-month supply priced from $1 to $2 million. A six-month supply of houses in any price range is more typical. High-end housing is hurting everywhere with corporate profits off and stock options too low to exercise. Those that were hot properties 18 months ago are languishing. Buyers just be patient, these expensive homes will drop 40-70% in value over the next few years, then you can consider buying them as cash and gold will be king.
As we predicted months ago Fitch Ratings downgraded 35 North American life insurance groups that have combined assets of $1.1 trillion. The cuts affect 42% of the 83 life insurers that Fitch rates and will increase borrowing costs as insurers lose money on many stocks and bonds in their portfolios. Our question is will they still be in business after more bond failures and a Dow at 4500?
College Loan Corp. has filed a lawsuit in Federal Court against Sallie Mae alleging that it improperly denied borrowers the right to consolidate education loans with the lender of their choice. Salle Mae has violated the trust placed in them by thousands of students and their families. The suit alleges that Sallie improperly diverted loan applications to its affiliates without borrowers consent and attempted to pressure credit-reporting agencies into blocking its requests for borrower financial data. What else would you expect from your government?
If you want to get misused or defrauded just go to Citicorp. They have agreed to pay customers $215 million to settle federal charges that they overpriced mortgages and credit insurance. They screwed two million people. This is the largest settlement in FTC history. Of course they neither admit nor deny, they just pay the fine for being guilty and no one goes to jail.
Fannie Mae, after the expose of their durational problem and the burden of sub-prime loans, the mortgage buyer has rushed headlong into the bond market buying like there was no tomorrow. The result was major disruption and yields of 3.78% on the 10-year Treasury and 4.71% on the 30-year, the lowest yields since May 1961. Investors are not panicked yet, but they will be shortly. Fannie's exposure is tremendous as is JP Morgan Chase's in the $150 trillion derivative market. They are huge and if they go down the system collapses. The price of insurance in the credit derivatives market against default by Fannie Mae and JP Morgan Chase has been rising. The price on $10 million of Fannie Mae loans and bonds costs an investor $30,000 a year up from $25,000 last week and $20,000 three months ago. Similar insurance for JP Morgan Chase is now $95,000 a year, up from $80,000 last week and $50,000 three months ago. Default insurance on a basket of 50 companies also has jumped. Finally the stability of the derivative market is coming into question and once it has started you can't stop it. In the midst of this near chaos Fannie sold $5 billion in new paper. As long as interest rates stay at current levels or go lower Fannie Mae is going to be in trouble. It has a lot of debt outstanding at higher rates, putting the company in a potentially vulnerable position, next to mention its poor to very poor loan quality.
Next come the loan defaults and the cascade of collapse. The prosperity, or the instruments used to keep the economy afloat for the last four years have been Fannie Mae and JP Morgan Chase, who has been the derivative provider in what is a government elitist led 3-card Monte game. It is now only a matter of when before the financial system collapses and gold soars.
The NASD is preparing to file administrative charges of securities fraud against Salomon Smith Barney and its former telecommunications analyst Jack Grubman. Our question is where was the NASD for the past five years, sleeping? They have plenty of time to harass small brokerage firms and small brokers but are conveniently unable to see blatant fraud starring them in the face. This can't be incompetence. Mr. Grubman will neither admit nor deny and pay a fine and get his hand slapped. Why isn't this case being referred to the US Attorney's Office? It's no wonder white-collar crime flourishes on Wall Street - and where is the SEC, hiding somewhere?
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