Let’s talk about precious metals for an instant. A week ago 2 US banks, held 38 contracts long silver and 38,375 contracts short silver for a total net short position of 38,337 short contracts. These are 5,000 ounce contracts – with just two reporting entities able to amass a net short position in silver of 38,000-plus contracts – (COMEX has a 6,000 contract accountability limit (for two traders) – so they’re outside that – and is that unusual - (unfortunately) it’s not.) For example: as of July 1, 2008, two U.S. banks were short 6,199 contracts of COMEX silver (30,995,000 ounces). As of August 5, 2008, two U.S. banks were short 33,805 contracts of COMEX silver (169,025,000 ounces), an increase of more than five-fold. Now - between July 14 and August 15th, the price of COMEX silver declined from a high of $19.55 to a low of $12.22 for a decline of 38%. This was almost a record fall – and was this coincidence? The SEC, the CFTC, and virtually every governing body has looked the other way, while 4 or possibly 5 major US banks have grouped together to ‘naked short’ silver into oblivion time and time again. The U.S. prosecuted the Hunt Brothers for attempting to ‘corner the silver market’ – and their entire holding of silver (even with millions of ounces on margin) was ONE FIFTH of the size of these two banks short positions. What’s interesting is that no one is ‘screaming’ about these banks.
The reason that this is important is that the end game could be ending. People all over the world are tired of the currency melt-downs, and are flocking to gold and silver to preserve their wealth. Can two or three banks naked short the market enough to offset millions of people clamoring for the metal? At some point the answer is no, and I think we're getting very close to that point. I have good reason to believe that during last months naked shorting binge on Gold, the COMEX had a fail to deliver problem with all that gold, and made deals to pay off in dollars instead of metal, simply because there was no metal left. Could this happen in silver - absolutely. Some sharp observers of the reported holdings in the GLD "vaults" noticed some incredible disconnects lately.
The bullion banks, along with the Fed Cartel, and Wall St, have been playing in the Gold and Silver markets for years. Now that the enormous demand for the metals (from all over the world) has hit, what we appear to think is a huge "short covering rush" – it’s causing everyone to scramble to secure enough metal to meet requirements. This is quite spectacular to watch and if the buying pressure continues, gold will roar higher, possibly taking out 1250 in a relatively short period.
Shifting gears a bit - our good friend Steve Forbes wrote us with the following: “(a) September year over year home sales were higher by 9.2 percent – with a corresponding median price decline of 8.5%, (b) Inventory levels were 7.8 months which are the lowest since March, 2007, (c ) The activity is largely at the bottom end of the market, in part to the 8k 1st time buyers (45 percent of all buyers) package offered, expiring at the end of November. And (d) In September, 70% of transacted homes were priced under $250,000 – with 29% of those being short or foreclosed sales. Now couple this with: (a) Industrial output is at 70% of capacity, lowest level in 2 decades, (b) Consumer credit is off 6.5% from Sept 2008, (c ) Unemployment continues to increase, (d) The stimulus packages have been "spent" with the biggest impact resulting in 49 of 50 states with higher unemployment then prior to TARP. It will be interesting to see if they extend the home-buyer tax credit – because without it – the housing market is potentially facing a double-dip recession. Unless we establish a firm foundation for middle-class wealth recovery, this post-recession economic growth will not be sustainable and shall be one of the weakest in U.S. history.”
Now the FHA is by far the largest mortgage lender out there. They simply require 3.5% down. 21% of the homes sold were between $0 and $100k. To be considered a first time home buyer, all it means is that you have not owned a home for 3 years. Okay, for example - take a foreclosed house that sold for $169K in the bubble, got foreclosed and the bank offloads it for $95K. That first time tax credit is almost 10% of the price of the house. In an interesting way, Uncle Sam is floating the banks loans - that are eating those types of losses, and then giving people on the lower end almost 10% of the price of the house. The bottom line, is that the taxpayer is putting up the down payments for these houses, AND (at the same time) insuring these homes via the FHA, AND on top of that, covering the spread via bail outs, to the banks that let those houses soar in the first place! My – we are a generous population!
And I do wish that I was in banking about now. As a connected bank – I can borrow from the Fed, at virtually zero interest. I can lend that right back to the "country" by buying short term treasuries, picking up say 2%. Then on top of that, I could use a type of leverage by simply "pledging" the notes I already have, as collateral to borrow even more. That creates many-many billions that I can use to do what ever they want with it. Since the money is FREE, my appetite for risk is fairly broad – so I use the bulk of the money to trade the markets. This is why banks are racking up hundreds of billions in profits, and it certainly explains a lot of the market movement over the past 6 months – yes? Unfortunately – our national debts are soaring, our deficits are out control – this makes Al Copone did look like Sunday school play.
Last week I was sitting here in almost stunned silence as CNBC was going absolutely gaga over Caterpillars earnings report – but alas – their year over year revenues FELL 44%. They did enjoy tax breaks, and due to currency differentials (selling in foreign currency's and repatriating into cheaper dollars) CAT did beat some very low estimates. Reuters (on Tuesday) said that earnings were lower by 22% for those companies reporting thus far which compares to 24% lower for the previous period. OK – now if earnings are coming in 22% lower (yet still beating analyst’s expectations), are we in growth mode, or are we in "make Wall Street look good" mode? Unless basic business is wrong – if my revenues keep falling by 44% - fairly quickly I’ll need to close up shop – yes?
Now our guess was that we would jockey around DOW 10k, struggle a bit, then move even higher, possibly to 10,300 or 400, pulling in all the "naysayers" and then once they were all back in the game, pull the rug out and we fall hard and fast for a while. And yes – I read a lot of the other newsletter editors out there - Ken Fisher for one – calling for the proverbial “V-shaped pattern – IF history repeats itself, expect another 25% upside gain by January.” But I must tell you – the market action recently just doesn’t feel right. Are we seeing a market moving up because of this dollar devaluing already – absolutely – but throw in interest rates at virtually zero, cost cutting via layoffs at half a million a month, direct stimulus payments, and never underestimate the power of fraud.
Currently we’re just under 10K again, and I wouldn't be surprised if they once again circle the wagons and try and drive us higher once again. If we cannot clear those intra day highs this week, I'm going to become incredibly defensive. We have very few trading positions open – and we’re in a no mans land of chop. I don’t think you can go legitimately short until we lose 9,800, nor long till we clear 10,157. If they clear 10,157 – then we should see 10,400, but at that point I'd think our smackdown would appear, seemingly out of nowhere. If we can't clear 10,157 and we lose 9,800, it could snowball us down to 9,400 quickly. Trade fast, use small positions and don't marry anything. This is a VERY dangerous market.
- we’re still holding MOO – agricultural space ETF)
- we’re still holding IPI – agricultural – potash arena
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Until next week – be safe.