THE INTERNATIONAL FORECASTER - OCTOBER 5, 2002 (#1)
An international financial, economic, political and social commentary.
Published and Edited by: Bob Chapman Vol. 6- No. 10-1 (47 pgs.)
Phone & Fax: 941 639 4756
E-mail: bif4653@comcast.net or info@intlforecaster.com
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We were on a radio program in Vancouver on Monday, August 26th. You can access this program off the Internet by going to at www.howestreet.com. This interview will remain on this site until we do another one.
US MARKETS
We still recommend the following SHORT POSITIONS: The first number is the price when we recommended it, the second is the current price and the third is the price to cover.
GE $37.96, $24.66, $29.00; Citigroup $46.93, $29.35, $34.51; J P Morgan Chase $36.04, $17.98, $29.04 - stopped out – but re-short for $23.00, re-short for $12.00; Monsanto $54.00, $14.56, $19.75 - stopped out; Goldman Sachs $82.25, $64.06, $63.27; Amazon $6.71, $16.99, $3.00; Sun Microsystems $10.40, $2.57, $6.25 - stopped out – re-short at $6.00; Computer Associates $36.00 (more for subscribers...)
We recommend putting on PUTS or SHORTING these stocks. They are Lennar (LEN-NYSE) short at $40.92, $55.87, cover at $24.88; D. R. Horton (DHI-NYSE) short at $24.00, $18.78, cover at $13.64; Standard Pacific (SPF-NYSE) short at $21.41, $23.60, cover at $13.31 and Pulte Homes (PHM-NYSE) short at (more for subscribers...)
LONGS POSITIONS: *Power Technology $0.71, $0.16, $1.30; *Starfield Resources C$0.37, C$0.38, $1.25; Cusac Gold $0.10, $0.22, $0.30; *Agnico Eagle $7.49, $15.45, Open; *Goldcorp $4.00, $10.76, Open; Crystallex $0.625, $2.23, Open; Anadarko (more for subscribers...)
The mutual funds are almost out of ammo. They have 3.5% of their assets in cash. Speculative grade credit spreads in junk bonds are at record levels as defaults set records. Volatility and spreads such as these cause major derivative disruptions. Home sales valued at over $300,000 are at a virtual standstill. In Denver the average prices of existing single-family homes and condos in September fell about $5,000 from August. The market is heavy in inventory of some 23,400 homes up 2% from last month. A year ago unsold home inventory was 19,000 homes or 21.8% less than now. The average home price in September was $269,907, a 2.2% drop from a record high in August. Sales were off 13.1% from August but 8.9% more than in September 2001. We expect lower to much lower prices next year.
We are not at war, but in our on-going undeclared war Napoleon Bush last week had our planes bomb a mobile air defense radar system in Basra.
The Circuit Court of Appeals ruled that workers could claim damages under RICO against employers who knowingly and systematically engage in hiring illegal aliens. The judges said, “We are unable to discern a more direct victim of illegal conduct” than the workers who brought the suit against the fruit packers. We see no action by the court condemning the US government for deliberate violation of US law. Be that as it may the finding is a good one.
One of our subscribers offered the following: Sell my home and lease it back because I’d be out of debt; I’d get a cash infusion of a minimum of $300K; I’d avoid the cost/hassle of moving my family (nor would we want to as my parents are right down the street and I want to be able to take care of them “when the music stops”); I’d avoid the loss from the bursting of the housing bubble. The idea is the ultimate and if you can find that buyer you are in luck. If that type of buyer weren’t available we’d sell and find a nearby rental, that’s what we did.
You have all heard of the ancient custom of appeasing the gods, well it is now time to appease the regulators. Big investment banks are hurriedly drawing up plans to strip out their research operations, which is one of the greatest ideas since sliced bread. This comes in the aftermath of terrible damage done to the investing public, all of which profited the brokerage houses. Now those lucrative investment banking deals with the guarantee of a perpetual buy recommendation are at an end. All those bogus buy recommendations will never again see the light of day. We do believe though there should be criminal penalties just in case the industry flaunts the law again, something they are famous for. As usual the crooks at Merrill, Citigroup, Salomon, CSFB didn’t get to see the inside of Ruker’s Island, but knowing them they’ll take another shot at it. One of the positive outgrowths of the sad affair is that there now will be many independent research firms, which will assist brokerage houses in providing objective recommendations for their clients. All we can say is it’s about time.
In spite of Sir Greenspan’s protestations, the failing American economy has three problems it will have much difficulty overcoming; one is a capital-spending crisis, falling output per man hour, debt and a statistical mirage promoted by government. Until these problems are addressed there will be no recovery.
Many businesses are complaining about their competitors using bankruptcy to return to the field virtually debt free, which gives the bankrupts the power to keep prices low and make existing competitors miserable. What these failed companies have done is a bankruptcy arbitrage to fund their business and for those who pay their debts it is grossly unfair. It rewards failure and forces healthy companies into bankruptcy. A one-size-fits-all bankruptcy system doesn’t work any more and has to be changed. There should be stricter rules for capital-intensive industries. This is another problem Congress will soon have to deal with.
Dick Cheney still refuses to hand his records to Congress. The GAO is demanding the White House reveal the identities of industry executives who helped the administration develop its energy policy last year. The case raises important constitutional questions, including whether the Vice-President can ignore a request for information from the GAO without the President exercising executive privilege. Of course, Mr. Cheney is attempting to hide the administrations relationship with certain executives, such as Enron’s Mr. Lay. On the other hand the GAO can’t do its job if the executive branch can tell them to take a hike whenever the GAO wants information it’s legally entitled too. Either our laws work or they don’t. If they don’t then we no longer have representative government, we have a fascist government. This is not some philosophical debate. Our country as a nation under law is at stake, imperfect as it is. Mr. Cheney told the judge that the GAO lacked the legal standing to bring the case against the Vice-President. This is the same tactic used by the judge in the GATA lawsuit brought by Reg Howe regarding the manipulation of the gold market. His case was thrown out of court also for lack of standing, which is a legal ruse. The GAO’s Mr. Phillips said how do you engage in a meaningful oversight function of the way public funds are spent if you cannot look at the highest level of the executive branch? This is not a democrat witch-hunt although there certainly are political overtones. This is about elitist abuse of our system of government and the plundering of the American people.
Americans who own stocks outside employer-sponsored retirement plans include 35.9 million households in this past January, down from 36.3 million in an earlier study, a 1.1% decrease. Those owning individual stocks fell 4.1% from 21.9 million households in 1999 to 21 million this year. If all participants are included American households with a stake in the stock market have risen from 49.2 million to 52.7 million. 95% believed that the value of their investments would recover after a bear market. Those willing to take above-average or substantial risk had fallen from 40 to 32%. As you can see the American public has bought the buy and hold propaganda of Wall Street and CNBC and they are in the process of being buried. Most will lose 40 to 95% of their invested assets.
We hear the US is going to merge Jordan and Iraq after they have conquered Saddam Hussein and make King Abdullah of Jordan the leader and Amman the capital. The plan’s goal is to create a united Hashemite kingdom embracing Jordan and Iraq’s Sunni areas to secure US & UK gains in the region. Abdullah will shift the balance of forces in the region heavily in the US’s favor. That will give the US control over Iraqi oil by Balkanizing the country and that will give the US a trump over Saudi oil in case of conflict with Riyadh or the overthrow of the Saudi government. This isolates Iran, Saudi Arabia and Syria and neutralizes them to an extent. This also gives the US an excuse to justify its long-term and heavy military presence in the region as a necessary defense of a young new state asking for US protection to secure the stability of all markets and supplies. The concept would then be offered to other Arab states, which would lessen Saudi and Egyptian influence in the region. All of this would be of great benefit to Israel. Most Palestinians live in Jordan. They’d become a minority in the new state with much less potential to stir-up trouble.
Last week another secret elitist meeting was held at Waddendon Manor in Buckinghamshire, England. Billionaire Warren Buffett accompanied by Arnold Schwarznegger, were the guests of honor at this ancestral home of the Rothschild banking family. They discussed economic and political issues, but as yet, like the Bilderberger meetings, no reporting has been done on what went on inside. These attendees were protégé James Wolfensohn, Rockefeller, Jarma Ollela, CEO of Nokia and DeBeers chairman, Nicky Oppenheimer. All the attendees arrive in limos with blackened windows so no one could see who the attendees were.
In the brokerage industry it’s called the kiss of death. It is reverse stock splits. Very few of these issues ever regain their former status and they are always the object of professional wholesalers and other shorts. Most rollbacks are to retain listing on several exchanges. It was unimaginable 30 months ago that technology darlings such as Nortel, Sun Micro and Lucent would be penny stocks that might be forced to do reverse splits. More than one-third of Nasdaq stocks are trading below $5.00 a share. The easy solution is for the NYSE and Nasdaq to drop their stupid $1.00 minimum share price rule. If they don’t they won’t have many listings left. We have a long way to go to the bottom.
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If the West Coast port strike is not settled the damage it inflicts each day will grow exponentially. If the lockout strike goes just one or two weeks, it will take a month to unsnarl the backlog of idled or ruined goods. It will also produce ruined goods and stop delivery of goods for the holiday season. A further two- week stoppage would put 240,000 people out of work all over the country. If it goes on longer it could take the entire economy down. It’s currently costing the economy $1 billion a day. That includes a daily loss to importers and exporters of $886 million. The total reduction in tax revenue after five days is expected to reach $115 million. If the strike lasts any longer it will be devastating, especially for perishable agricultural products, 50% of which is exported from the West Coast. After 10 days, the shutdown could cost $1.94 billion every day, 91,000 jobs would be lost, as well as $693 million in taxes. Cumulative job losses would be about 240,000. All states will have a tough 2003 financially and Florida is no exception. The 2003-4 budget will be $2 billion short. Lost revenues from tax cuts (intangibles, estate and corporate) could reach $630 million. Another $500 million to a billion dollars could be lost to E-commerce, which allows consumers to bypass the state’s sales tax. The state must cover up to $400 million in Medicaid costs not covered by the federal government, much of it the result of treatment of illegal aliens. On the ballot is a constitutional amendment backed by Gov. Bush (FL) and challenger Bill McBride that would provide universal pre-kindergarten education for all the state’s four-year olds that will cost $650 million and has 70% support. The cost of the new bullet train hasn’t been calculated. The legislature’s one-time financial chicanery will cost $300 million and 8.5% of this year’s general revenue budget was funded by non-recurring revenues. When all is said and done the state will have to find $3 billion. This is typical of what is happening across America.
Investors removed $45.6 billion from money market funds over the past week leaving $2.12 trillion. Institutions removed $37.67 billion and retail investors $7.95 billion, 30-day compound yields fell to 1.24 from 1.25% and 7-day were up to 1.26% from 1.23%.
The Mortgage Bankers Association weekly refinanced index jumped 12% to its highest level ever. However, its index of home purchases fell to 359.4 from 359.7. Refinancings represented 77% of all applications for loans, up from 75% the previous week. Considering buyer’s risk we expect a low on mortgage rates of 5-1/4%, a rate lower than that simply engenders too much risk. That’s in tune with a FED cut in interest rates of 3/4% in total.
Moody’s has downgraded $4.5 billion in mortgage-backed securities because owners of some high-profile skyscrapers haven’t been able to buy terrorism insurance. It involves 13 issues backed by such high profile properties such as Rockefeller Center, Citigroup Center and the Times Square Marriott Marquis. There is virtually no insurance available. Many of the securities are trading at a discount. All are waiting for Congress to lay the responsibility on the American taxpayer.
The meeting of the Group of Finance Ministers in Washington was another non-event except for a million protestors in Washington and London.
The kickback scheme of major brokerage houses to preferred clients is turning out to be massive and stretches back years, as we have reported since 1967. The criminality is massive, demonstrating that these firms cared little for the welfare of their average client. Some of the executives, with whom these investment bankers had business arrangements, received as many as 100 IPO’s. What a blatant payoff scheme.
The housing boom is finally beginning to fade. Out-of-proportion prices are causing weakness in Atlanta, Las Vegas, Denver, Houston, Tucson, Phoenix, Charleston, Maine, Washington DC and Los Angeles. This year will be another record sales year but lenders are beginning to tighten credit, with mortgage delinquencies near their highest level in a decade at 1.23% of mortgages in the foreclosure process. We predict in 2003 they’ll pull back and pull back fast. Unemployment is starting to be a factor. Since January 2001 Boston has lost 85,000 jobs and Seattle 66,000. Atlanta has a 21-month supply of homes on the market over $500,000. Dallas listings are up 25%. In March 2000 it took 3.9 months to sell a home, now its five months. Americans seem to forget that there has not been a protracted period of falling home prices nationwide since the 1930’s. We believe a repeat has already begun and homeowners will find themselves stranded in homes they cannot sell as happened in the 1980’s and 90’s in California, Texas, Massachusetts and New York. That means major foreclosures and a collapse at Fannie Mae and Freddie Mac. During the 1980’s home prices grew 73% and income 42%. Home prices fell 10-30%. In the early 1990’s California home prices rose 89% while income grew 37%. Home prices then fell 25 to 55%. Home prices will deteriorate over the next two years and once interest rates begin to rise again the final surge downward will begin.
65% of CEO’s say the economy will grow –1.5 to 3% in 2003. 18% saw a sales decline next year, 43% saw stable profit margins and 38% saw them improving. We’d say they are in denial and out of touch with reality.
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Bankers Were Victims of Their Own Negligence
Mr. Harrison, JP Morgan CEO, wants to keep Glass-Steagall in the closet, claiming his bank was simply a victim of “outright fraud.” His argument is not compelling. How did his bank engage in hidden lending transactions that were disguised as low-risk derivatives? How did his bank become one of the most leveraged banks with one of the highest derivatives to capital ratios in the industry? How did his bank overlook the proper due diligence on Enron and others?
Was it a failed self-policing that was advocated by Paul Volcker and the JP Morgan study after the Bankers Trust debacle? Was it the lack of regulation of derivatives that got the bank into the earnings quagmire? Was it a misunderstanding of leveraged transactions with non-linear market risks that were concocted by twentysomethings who lack business experience? Was it the up-front fees vs. the recognition of loan spreads over time that made such transactions so attractive? Did officers whose bonuses were determined by Morgan’s deal arrangers give credit approvals?
Glass-Steagall was a reaction to excesses that occurred by a blurring of the line separating commercial banking from investment banking. How ironic that one of the worst offenders was Albert Wiggin, chairman of Chase Bank from 1904-1933. While a leading member of the famous bankers consortium organized to stabilize the market after the crash, Wiggin had been selling his own bank’s stock short using various shell corporations. When he covered his short sales on Dec. 11, 1929, he made a personal profit of more than $4 million.
Just wait until the gold manipulation is exposed and then the fir will really fly.
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GOLD, SILVER, PLATINUM, PALLADIUM AND DIAMONDS
Swiss voters recently killed a government plan to use billions of dollars worth of so-called excess gold to help people in extreme need at home and abroad by a vote of 52-48%. The Swiss elitists and their liberal and socialist counterparts wanted to sell $13.4 billion in gold reserves and spend the interest through a foundation, with one-third going to the Swiss social security program, a third to regional governments and a third to people in need at home and abroad. At least for the moment the Swiss have retained their sensibilities.
We hear many stories and suppositions and this is one of the latest regarding Barrick Gold. Supposedly they have hedged part of their production through a spot deferred forward sale contract. Barrick makes a forward contract with a bank to deliver gold at a certain price at a certain date. But what makes these contracts different and also dangerous for counter-parties is that Barrick has the right to defer the delivery of gold for periods ranging from five to ten years. More recently, they may have entered into contracts that allow them to defer delivery for 15 years. Rather than give you the details, these kinds of contracts would be beneficial for Barrick and if Barrick decides to defer the sale there would be trouble. One bank, probably JP Morgan Chase, has $41 billion in gold derivatives, a portion of which is with Barrick. If gold goes up and Barrick defers, which we are sure they would, Morgan would have to find $5 billion in gold. If Morgan buys in the market it would force prices considerably higher, either that or the US government, which we believe is guaranteeing Morgan’s action, would deliver the gold, which we doubt because they may not have it or they may not want to face the public’s wrath for selling it or Morgan reneges and goes into liquidation. If Morgan goes down the entire derivative structure goes with it. It could be that the Congress could take Morgan into receivership and allow the American taxpayer to pay the debt, but that would cause a number of Senators and Representatives to lose their jobs. Whatever the outcome in a situation like this we believe all derivative positions would be cancelled or zeroed out. That means all hedgers would no longer be hedged and they world have to return to a receiver part of the funds they received, which would put them all in a precarious financial position. The ensuing financial chaos would send gold prices considerably higher. It could be that in cutting such a sharp deal for itself that Barrick may have laid the groundwork for the destruction of the derivative market and the financial system. It won’t now take much to create a crisis.
The silver situation is still a bit confusing. It seems the Chinese are delivering against contracts sold some time ago at higher prices and they may very well be re-accumulating at these levels. Internal demand in China seems to be about 1,000 tons annually. As former sellers they probably know more about supply and demand than anyone else, so that puts them in a commanding position to buy and force prices considerably higher if they choose too. They may also simply curtail silver exports, which would have somewhat the same affect. If they bought silver at these levels, stopped exports and sold dollars it could have a major affect on the silver price and also the gold price. We still believe that above ground supplies will be exhausted next year. We would be long silver and silver shares on a long-term basis.
Canadian authorities are opening an investigation on the .925 Sterling Silver fraud. We would think some major manufacturers will be put out of business and silver consumption for jewelry would increase, which would offset lower sales.
The price of gold has been trading in a tight range this week between $320 and $325 an ounce, as have the gold shares. Compared to bullion the shares are very reasonably priced and most are not far from their highs. Speculators and hedge funds recently added 1.7 million ounces to net long positions last week and open interest increased by 188,000 contracts, the highest level since May. We recommend long positions for those stocks listed in this issue. The gold and the shares are strong and the stock market and the dollar are weakening. We see a good week ahead. Don’t forget the Prudent Bear Fund that hits new highs almost every day. You can purchase the fund by contacting Rich Radez at 800-285-1700.
Managing Director Graham Birch of Merrill Lynch Investment Managers said about $150 million of new money came into his unit’s London-based gold funds in the month of September. Birch manages about $1 billion in the natural resource sector. There are an increased number of participants and they are allocating more money to the gold sector.
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“We have mentioned the Prudent Bear Fund numerous times over the last two years as an excellent way to play the market in these unusual and confusing times. Unusual inasmuch as deep recession/depression have not been as frequent in this past century as they were in previous centuries. Confusing because of the mammoth propaganda machine operated by GE, CNBC, Wall Street and government. You seldom get the truth and that is confusing. We believe this is the perfect time to purchase the Prudent Bear Fund and the Safe Harbor Fund. The market has just experienced a strong 30% bear market rally and precious metals stocks seem poised to go higher. The Prudent Bear Fund shorts the market and goes long precious metal stocks. As the market falls and gold and silver move higher those shares will also move higher. It is a perfect and simple way to invest during these troubling times for those who don’t have the experience and fortitude to pick individual stocks. The Prudent Safe Harbor Fund (PSAFX), which invests in high quality debt instruments, denominated in currencies other than the dollar, gives you an exceptional alternative to a falling dollar. You may purchase these funds though Rich Radez at 800-285-1700.”
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*Goldcorp Inc. Chief Executive Officer Robert McEwen, who calls hedging "toxic," said companies would be better off considering other funding alternatives such as selling an equity stake to finance a project rather than going to a bank which will insist on a hedge.
"The industry says 'don't worry about a hedge, we can roll it over and avoid a margin call.' But if the price of gold rises $70 an ounce you're wiping out shareholder value," he told Reuters.
He rejected the idea that with gold prices recently doing better it may be time to reinstate hedges. "It's too early. We're going to have another eight years of a strong market," he said. He said about two-thirds of the industry was hedged.
McEwen said gold producers have cash on hand and should not be compared to high-technology companies that saw incredible stock price rises based on a hope that they would make money in the future.
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The following is from LeMetropolecafe.com
26/9/2002 - THE RBA GOLD VAULT IS EMPTY
The Reserve Bank of Australia has stated that their official gold holdings was 79.9 tonnes of bullion at the end of 2001(World Gold Council stats), this was after they sold off about 167 tonnes in 1997. Their gold holding is worth about $1.5 billion on today’s gold price
During research for a television advertising campaign for Gold Report, in June 2002, the RBA was asked if it would be possible to shoot some footage beside their gold holding and Gold Report was told that, "we only have about 20 bars left".
It was then explained that the RBA leases their bullion to Bullion banks and Producers. The bullion banks or producers then take physical delivery, sell the bullion on the open market and reinvest the proceeds in a higher yielding investments or use the proceeds to fund a mining venture (in the case of producers).
The idea is that at a later date the lessors will buy back the bullion from the market and return it to the RBA vault.
To back this information up, the RBA released their Annual Report on Wednesday, 28/8/02. This report states that the RBA has made $22 million from its leasing arrangements. To make a $22 million return, they must have 100% of their gold holding (still $1.5 billion) leased at an average of 1.47%, which has been approximately the average lease rate for the last year.
As the gold price continues to improve, this looks like creating a problem for the RBA, bullion banks and producers, by making it increasingly expensive to buy back the RBA bullion and return it to their vault. If the large bullion banks go to the wall, where does this leave the RBA? Still empty, that’s where! (luckily, the RBA still has the bullion on paper!)
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I wish to point out that the RBA’s $22 million in gold loan balance sheet assets are not assets at all in today’s $325 per ounce gold market. In order to replace the loans with the gold, the RBA is obliged to enter the open market at prices much higher than when the loaned the gold out. The difference is not an asset but a liability for the RBA. These central bank gold loans are really liabilities in a rising gold regime and they should be treated as such under GAAP rules.
This is exactly what GATA has been reporting for 6 years. The problem at the Royal Bank of Australia can be multiplied by over 10,000 tonnes of gold loans and swaps conducted by central banks including the US Treasury.
Best,
Mike Bolser
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