"The market has gone up by more than $40 in the last few days, so it's taking a break. Weaker oil is also a factor."

Crude oil for April delivery slipped back below $107 per barrel after gaining 1.6% on Thursday's news of bomb attacks on the key Iraqi oil port of Basra.

Southern Iraq's oil exports have fallen to 1.20 million barrels per day, reports Dow Jones Newswires, down from the previous average of 1.56 million barrels a day.

"Higher oil prices tend to lift global inflation expectations," note Manqoba Madinane and Walter de Wet in today's Gold Market note from Standard Bank in Johannesburg.

"We expect further upside in the near term for gold," they go on, "although a short-term correction is likely ahead of the weekend."

Standard Bank today put support for Gold Prices at $938, with potential resistance at $951 per ounce.

Today's AM Gold Fix here in London was set at a three-day low against both US Dollars and the Euro ($944.50 and €598.28 respectively), but the Gold Price in British Pounds rose 0.5% from Thursday to £473.05 per ounce.

Sterling dropped sharply on the forex market Friday morning – losing 1.5¢ to the Dollar and falling to a fresh 12-year low vs. the Euro – after the UK's second-biggest mortgage lender, Nationwide, said house-price inflation has now slumped to its lowest rate since 1996.

But "the Euro, which is also based on low growth rates, is too strong," claimed French president Nicholas Sarkozy in a speech concluding his state visit to the UK last night.

Given the strength of China's economy, M.Sarkozy believes the Chinese Yuan is massively undervalued, and "the Dollar has never been weaker."

The Euro recovered yesterday's high above $1.5820 early this morning, while the US currency also struggled vs. the Japanese Yen below ¥100 per Dollar.

This week the European Commission said the Eurozone economy is starting to "feel the pinch" of the international banking crisis.

The EC then cut its estimate for GDP growth in the 15-member currency zone to 1.8% for 2008 – the slowest rate of growth since 2005.

Over in Tokyo, gold futures for delivery in Feb. 2009 held steady to equal $948.90 per ounce, while Japanese government bond prices rose in price – pushing the five-year yield down to 0.74% – on news that unemployment in the world's second largest economy rose in February.

The Nikkei stock index pushed higher regardless, closing the week 2.7% higher as Asian stocks ex-Japan also gained.

Only Australia's ASX bucked the trend, losing 0.3% for the day – and closing almost 16% lower for 2008 so far – after a "prime broker" serving hedge funds and other large speculators with securities lending and finance was forced into receivership.

The second Australian broker to hit trouble so far this year, Opes Prime Group also ran an asset management operation in Singapore. Now the receivers, Deloitte, have reported "a number of cash and stock movement irregularities in relation to a small number of accounts."

The administrators, Ferrier Hodgson, said today "the solvency of the business was under pressure due to a number of major clients not meeting significant margin calls."

Broad commodity indices fell as silver slipped but base metals rose. Soft commodity prices ticked lower, but soybeans were still heading for their biggest weekly gain in two years as farmers in Argentina continued to block roads and ports in protest against a rise in export tariffs.

The Chinese government yesterday raised the official sale prices of wheat and rice by 10% after consumer-price inflation for February was reported at a new 11-year high of 8.7% year-on-year.

Prices for pork have almost doubled since March 2007, reports Bloomberg, while soybean oil has risen by 64%.

"Food prices all over the world are going through the roof and so spread the risk of social unrest," says Jim Rogers, manager of the eponymous commodities fund and co-founder with George Soros of the Quantum Fund, which rose by 4,200% during the inflationary 1970s.

"It doesn't matter where, everybody has to pay higher prices for food and that's causing a problem."

Published on Fri, Mar 28 2008, 13:18 GMT

We had and still have a long-term negative view on the dollar, as we expect the fall-out of the credit- and housing crisis will continue to affect the US economy in the quarters to come. We were looking for a correction and got this last week. However, the fast pace of the recovery since early this week surprised us. Given this fast pace of the recent up-move and the looming all-time high of 1.8904, we suspect that some correction/consolidation is needed. So very short term players may want to sell the pair into strength. On the other hand, the short term picture remains euro bullish as long as above 1.5597 (MTMA). An eventual deeper retracement toward the 1.54/1.5340 area gives good euro entry levels for medium term players.

Looking at the graphs, the EUR/USD picture was euro constructive since the break above 1.4968/1.50. The latest correction drove the pair as low as 1.5341 in Monday’s thin trading, where the pair staged a powerful rebound threatening again the all-time highs at 1.5904. We suspect some renewed correction/consolidation is needed before the 1.60 might come under test, where Central Bank resistance may still become more vocal.

The USD/JPY pre-Easter rebound indeed ran out of steam, as the yen booked yesterday some additional gains. The driver behind the yen gains was generalized dollar weakness after the EUR/USD pair surged higher following the stronger IFO business sentiment. Later in the US session, EUR/USD continued to climb higher but USD/JPY stabilized. This meant that EUR/JPY moved mostly higher. Equity weakness played no meaningful role. In a daily perspective USD/JPY declined from 99.99 at the open to 99.19 at the close. Overnight, the yen tried to move higher against the dollar with an intra-day low of 98.57, but the yen gains have evaporated since and the pair trades around yesterday’s closing levels.

The Japanese Finance Minister said that a stronger yen will benefit the Japanese economy in the medium to long term, but it didn’t make much impression on traders. BOJ member Suda, seen as a policy hawk, said that the bank had still its sights set on raising rates from the current 0.5%, as monetary conditions are already very accommodative. However, he hedged his comment by adding that “what’s important is to share with markets the view that when negative economic signs become evident, the central bank will act quite decisively. So, concluding, Suda, the hawk, tried to warn markets that they shouldn’t count on a rate cut anytime soon. None of these comments affected yen trading in a sustainable way.

So also for USD/JPY, we got the pre-Easter dollar rebound we were looking at. The rebound extended to the obvious resistance that is at 101.40 (previous low), but it held and USD/JPY slid lower again. However, while EUR/USD is again at the highs, USD/JPY is still more than 2 yens from the lows. This might give the yen some leeway to outperform the euro against the dollar. We remain optimistic on the yen as long as the USD/JPY pair remains below 101.40 for a re-test of the cycle lows at 95.77.

Looking at the graphs, the longer term picture for USD/JPY is still very much downwardly oriented and the sustained break below the 1999 low only confirms this LT picture.

EUR/GBP went higher again and is approaching the highs. Generalized euro strength was a driver and the stronger IFO business sentiment was the trigger for euro strength. However, additionally, comments of BoE governor King were sterling negative. Indeed, King suggested that rates will be lowered further, even if it is not in the (aggressive) way the Fed is doing it. Listening to his speech, it is clear that he is very concerned with the credit crisis and is considering far-reaching measures to help the financial sector. This once more made clear that the UK, and the City, is one of the most hit by the crisis, a sterling negative factor. So, EUR/GBP moved from about 0.78 to 0.7890. Overnight, profit taking in euro also affected the EUR/GBP cross that trades marginally lower at 0.7871.

Today, the EMU calendar is thin, but in the UK the March distributive trades report may give us some timely evidence about the retail sales in March. In February, sales were very weak.

Last week’s sterling correction is over and the pair might be in for a test of the highs at 0.7913. The very tepid sterling correction last week shows how sterling negative sentiment is. Fundamentals (housing, economic growth, overextended consumer and the problems of the City) clearly support the weakening of sterling. So, we hold on to our long-term negative view for sterling. The risks for EUR/GBP are clearly to the upside, but after the sharp move in the past two days, the market may need to digest the sterling losses before attempting to break to new sterling lows.


Published on Thu, Mar 27 2008, 09:08 GMT

TheTechTrader.com board was mixed. On the plus side, Cree Inc. (CREE) was up 1.73 on rumors of a buyout by IBM. Converted Organics (COIN) snapped back sharply, up another 1.12, continuing its recent strong rebound, on 1.7 million shares. DryShips (DRYS) gained 1.14, and Ascent Solar (ASTI) was up 1.32 to 11.96.

CLWR closed up 80 cents on positive news, but that was nearly 1.65 off its earlier highs. Other stocks of note, JA Solar (JASO) was up 54 cents, but several others of the juniors solars were mixed today.

On the losing side, LEH lost another 2.72, Solarfun (SOLF) fell 1.19, WM, 1.20 to 11.50, and reverse oil instrument DCR, a portfolio position of ours, dropped 1.07 as the price of oil shot up back over $105 a barrel.

Other losses of note, Global Solutions (GSOL) lost 49 cents and MBI in a weak financial services fell 89 cents. Sigma Designs (SIGM) gave back 48 cents, and TBS International (TBSI) in the mixed shipping group was down 90 cents.

Stepping back and reviewing the hourly chart patterns, the indices came down hard in the morning, bounced around mid-day, rallied in mid-afternoon, and then backed off towards the end of the session to close with losses on the day.

But the key to today's session was that the rising moving averages on the hourly charts as well as lateral price support held. We'll see if that's meaningful or not, as the consolidation of the big run-up of the last few days continues, now 2 1/2 days into it.

Published on Thu, Mar 27 2008, 09:01 GMT

Prices paid by US residents rose sharply, however, increasing 3.7% year-on-year in Dec. Inflation over the late summer months was only 1.8% annualized.

An auction of $18 billion in five-year US Treasury bonds today will offer yields of barely 2.55% per year, "close to the lowest levels since 2003," according to Bloomberg.

In contrast to the Federal Reserve's aggressive rate-cutting, "the European Central Bank is trying, more than anything else, to prevent inflationary expectations," said ECB president Jean-Claude Trichet on German television last night.

The central bank of Brazil today raised its inflation forecast to 4.6% for 2008, while Taiwanese authorities raised their key lending rate to a near seven-year high.

Back in the metals market, the Gold Price in British Pounds today dropped below £470 as the Pound fell back from the morning's seven-session high of $2.0190.

All base metals rose except zinc at the London Metal Exchange, while Comex silver contracts dropped 0.6% ahead of the New York open as silver continued to out-strip and magnify the volatility in Gold Bullion prices.

"With the Dollar up, it shouldn't come as a surprise that Gold Prices are falling," reckons Peter Fertig at Dresdner Kleinwort's office in Hainburg, Germany.

Reuters reports strong Gold Buying by jewelers and investors in Indonesia, Thailand, Vietnam and India, where the spring wedding season is fast approaching.

"We heard Thailand was running out of gold bars this week," one dealer in Singapore told the newswire overnight, "because many refiners were closed over the Easter holiday, while demand was good.

"I would think physical demand is offering support for gold," he added, pegging $940 as the metal's lower limit for now.

Wall Street stock futures pointed higher ahead of Thursday's open, but Oracle – the world's third largest software firm – threatened to drag the Nasdaq lower after dropping 8.3% overnight on below-forecast earnings.

Crude oil meantime rose to a one-week high above $106 per barrel on news of a pipeline explosion near Basra in southern Iraq.

The country's second city has now been under attack from militia loyal to Moqtada al-Sadr, the Shi'ite cleric. Basra ships most of the 2.32 million barrels of oil Iraq pumps each day.

Pipeline disruptions continued to affect the world's major capital markets early Thursday as well, with the European Central Bank offering extra short-term funds before the end of March. Both the Bank of England and Swiss National Bank worked to ease short-term lending rates in the open market, according to a Reuters report.

"Normally the banks lend to each other," noted Gary Shilling of the eponymous finance consultancy to CNBC overnight, "but what [the Fed] are finding is the banks don't trust each other, so they've got to lend [directly] to the ones who need it."

Standard Fed procedure offers short-term loans to the big "money centre" banks, who are then supposed to pass these extra funds to smaller institutions. But with fear still blocking the inter-bank loans market, "the Fed are stepping in and providing the function of the banking system," says Shilling.

Published on Thu, Mar 27 2008, 14:28 GMT

We had and still have a long-term negative view on the dollar, as we expect the fall-out of the credit- and housing crisis will continue to affect the US economy in the quarters to come. We were looking for a correction and got this last week. The consolidation might be prolonged and we would be inclined to buy into euro weakness. We suspect levels below 1.54 would be sustainable for long. On the other hand, also the highs at around 1.59 will be tough to break through.

Looking at the graphs, the EUR/USD picture was euro constructive since the break above 1.4968/1.50. The correction drove the pair as low as 1.5341 in Monday’s thin trading. A drop below, which we don’t expect, would put the euro bullish picture into question, but the rebound above the medium term moving average (MTMA) at 1.5543 today is encouraging for the euro bulls and the first key support level.

The USD/JPY rebound seems to be running out of steam. The pre-Easter dollar correction brought the USD/JPY pair to a 101.04 high yesterday from a panic low of 95.78 one week earlier. Currently, the pair trades around 100.15, little changed from yesterday’s close.

Stronger equities in previous days were of course the main factor against the rebound in USD/JPY, but equities are trading more mixed today with the Nikkei down 0.3%. The Japanese trade surplus was considerably lower than expected, as a big rise in imports overwhelmed a small rise in exports. The USD/JPY pair shrugged off the overnight news and hovers in a tight range around 100. In other Asian markets, the yuan strengthened more than expected reaching a new high of USD/CNY of 7.028

Also for USD/JPY, we got the dollar rebound we were looking at. The rebound extended to the obvious resistance that is at 101.40 (previous low) and while the equity outlook is a bit of a wild card, we would cautiously start to buy the yen.

Looking at the graphs, the longer term picture for USD/JPY is still very much downwardly oriented and the sustained break below the 1999 low only confirms this LT picture.

EUR/GBP joined the overall euro rebound yesterday and moved from 0.7768 towards 0.7802 in the close after reaching an intra-day high at 0.7827. The rebound occurred in Asian trading hours and was driven by a rebound in the EUR/USD pair. Later on, trading was sideways oriented and technical in nature.

Today, the EMU calendar is interesting as it contains the business services, but also a testimony of ECB president Trichet that may affect the euro. However, in the UK, BoE president King and some colleagues appear before the Treasury Committee on the inflation report. We cannot imagine that King might give Sterling supportive remarks. While he may refrain from giving comments on interest rates, if he says something it should be dovish and thus sterling negative. If he would say something about financial markets, it will remind markets that the UK markets and the city are well in problems, something also negative for Sterling.

In this respect, we suspect that the sterling correction of last week that ran out of steam and partially reversed yesterday is over. So we are looking for EUR/GBP to be well supported and eventually re-tests the highs. So, we hold on to our long-term negative view for sterling. The risks for EUR/GBP clearly are to the upside.

On the graphs, EUR/GBP traded very volatile last week, but the rally ultimately ran out of steam and profit taking occurred, driving EUR/GBP from the 0.7911 high towards the 0.7746 low before a modest rebound occurred yesterday. The pair not even approached the obvious 0.7695- support area, which shows the underlying weakness of sterling.

For number-crunchers, Tuesday sees the latest Case-Schiller report on urban US real estate prices, due out at 08:00 EST. It last showed the steepest annualized drop in its two-decade history.

Yesterday's housing report from the National Association of Realtors showed existing US homes losing value at the fastest pace since 1968.

"The fall in the Gold Price in the past few days met with significant private investor interest in Germany," reports Wolfgang Wrzesniok-Rossbach for Heraeus – the German refinery group based in Hanau – particularly for "larger casted gold bars, usually of 100 grams and upwards."

"The tide of scrap gold, which [our Hong Kong office] witnessed at prices in excess of $980, has ceased," says the latest monthly Refining Monitor from Mitsui, the global metals dealer.

"In Dubai, our friends in the market saw a large amount of gold purchases [last Tuesday] as demand kicked in once gold fell through $970. In India, while demand was elevated...the bulk of possible buyers are still considering new purchases.

"The crucial element for these consumers is volatility," notes Mitsui, adding that Indian gold buyers – who accounted for one ounce in every five sold worldwide last year – usually "shun a market experiencing wild swings."

Indian gold imports in February were barely one-sixth of 2007 levels, notes Wrzesniok-Rossbach at Heraeus. Gold sales in Dubai fell by 15% in Feb. from the same month last year, while Turkish gold jewelry exports dropped 9.5% year-on-year.

Institutional investors, meantime, continued to reduce their gold holdings in the exchange-traded funds on Monday, with the total stock of bullion held by the GLD trust falling another three tonnes to stand 4.5% below last Tuesday's record high.

Latest data from the US gold futures market, on the other hand, showed that total betting rose 1.5% in the week ending last Tuesday. The biggest increase came in the bullish bets placed by commercial traders, up by 7%.

Often known as the "smart money" – apparently for their knack of getting on the right side of sharp moves in the Gold Market before they strike – the refineries, fabricators and miners who extended their long positions at the start of last week then saw the April gold futures contract drop almost 12% of its value inside two days.

And from the official sector, meantime, the member gold-sellers of the Central Bank Gold Agreement have sold only 191 tonnes so far in this, the fourth year of the CBGA that started in late Sept., the World Gold Council estimated today.

Mid-way through the CBGA year, it believes, the biggest seller so far has been France. With a ceiling of 500 tonnes for the 12 months ending Sept. 26th 2008, the 15 member banks have sold less than 40% of the permissible total so far.

In Beijing today, the China Banking Regulatory Commission (CBRC) said private banks can now apply for a permit to trade gold futures in the domestic market, provided their dealers are suitably qualified and the banks have a capital adequacy ratio of 8% or more.

Private individuals and non-bank institutions have been able to trade Shanghai gold futures since they launched in January.

Now "the commercial banks can offer more liquidity and stability to the market, as they hold huge capital," reckons Hu Yuyue of the Beijing Technology and Business University.

Published on Tue, Mar 25 2008, 12:58 GMT

But these models do not fully capture what I believe has been, to date, only a peripheral addendum to business-cycle and financial modelling - the innate human responses that result in swings between euphoria and fear that repeat themselves generation after generation with little evidence of a learning curve. Asset-price bubbles build and burst today as they have since the early 18th century, when modern competitive markets evolved. To be sure, we tend to label such behavioural responses as non-rational. But forecasters' concerns should be not whether human response is rational or irrational, only that it is observable and systematic.

This, to me, is the large missing "explanatory variable" in both risk-management and macroeconometric models. Current practice is to introduce notions of "animal spirits", as John Maynard Keynes put it, through "add factors". That is, we arbitrarily change the outcome of our model's equations. Add-factoring, however, is an implicit recognition that models, as we currently employ them, are structurally deficient; it does not sufficiently address the problem of the missing variable...

In the current crisis, as in past crises, we can learn much, and policy in the future will be informed by these lessons. But we cannot hope to anticipate the specifics of future crises with any degree of confidence. Thus it is important, indeed crucial, that any reforms in, and adjustments to, the structure of markets and regulation not inhibit our most reliable and effective safeguards against cumulative economic failure: market flexibility and open competition.

The writer is former chairman of the US Federal Reserve and author of The Age of Turbulence: Adventures in a New World

Copyright The Financial Times Limited 2008

What got people's attention was how quickly Bear Stearns, the nation's fifth largest investment bank, could go from a stock market value of about $3.5 billion when the market closed on March 14 to being sold at the bargain-basement price of about $236 million two days later.

The Federal Reserve rushed in to take unprecedented actions. It provided a $30 billion line of credit to facilitate the sale and is employing Depression-era provisions that for the first time are providing direct Fed loans to investment banks. Most analysts said the Fed was justified and that its efforts highlighted the severity of the dangers facing the financial system.

The turmoil produced wild swings on Wall Street this week with the Dow Jones industrial average surging on Tuesday after the Fed aggressively cut a key interest rate only to plunge on Wednesday on renewed worries about the economy and then to stage a 262-point gain on Thursday. Markets were closed Friday.

More turbulence is expected in coming weeks because there remains a great deal of uncertainty about how many more victims the credit crisis will claim.

The problems began last year with rising defaults on mortgages as a housing slump intensified, but they have now spread to other parts of the credit markets with institutions growing fearful about making other types of loans.

It is the ability to get credit that makes the financial system and the economy it supports function. When banks stop lending to other institutions that, like Bear Stearns, depend on credit to conduct their day-to-day operations, the results can be catastrophic.

"We can't afford to stagger from one day to the next without knowing what large financial institution might be the next to go down the tubes because of a lack of liquidity. That is way too dangerous a game," said Lyle Gramley, a former Fed board member who is now an economist with the Stanford Financial Group. "It is possible that we could be entering the worst recession of the post World War II period. The threat is certainly there."

Because of Bear Stearns, many analysts are raising the odds that a 2008 recession could be worse than expected.

"The potential freezing up of the financial system could have pretty negative ramifications on bank lending which would have negative ramifications on consumer and business spending," said Nariman Behravesh, chief economist at Global Insight, a Lexington, Mass., forecasting firm. He said he had upped the chances of a worse-than-expected recession to 40 percent, up from 25 percent odds before Bear Stearns.

David Wyss, chief economist at Standard & Poor's in New York, said he now has a worst-case-scenario in which the country could endure a double-dip recession in which the economy would briefly recover this summer, helped by the $168 billion in tax relief, only to quickly slip back into a downturn. Under this scenario, the economy's total output, as measured by the gross domestic product, would drop by 2.2 percentage points, making it the third worst recession in the post World War II period.

The worst recession in recent decades, in terms of lost output, occurred in the 1973-75 period of oil shocks, when GDP fell by 3.1 percent, followed by the 1981-82 recession, when GDP dropped by 2.9 percent.

By contrast, in the last two recessions output fell by 1.3 percent in the 1990-91 downturn, and a tiny 0.3 percent in the 2001 recession, making that slump the mildest in the post-war period in terms of lost output. The 2001 downturn lasted just eight months.

Wyss' baseline forecast calls for the 2008 downturn to trim GDP by just 0.5 percent and last for nine months, from last November until August.

Under that forecast, unemployment, which hit a low in this expansion of 4.4 percent and now stands at 4.8 percent, will rise to around 6 percent, meaning 1.5 million people will lose their jobs. Under the worst-case forecast, unemployment jumps to 7.5 percent, meaning 3 million people would be tossed out of work.

"There would be bigger drops in the stock market and in home prices than we are now anticipating and more people out of work," Wyss said. "There would be a lot of pain all the way around."

While they are developing worst-case-scenarios, Wyss and other economists said they still believe the balance has not tipped from their more benign main forecasts. One thing that gives them hope is the expectation that Congress and the Bush administration, having acted so quickly to pass the first stimulus package, will move quickly, especially in an election year, to pass a second package if needed.

Also, analysts said the Bear Stearns crisis, which has already prompted the Fed to move more aggressively, will also probably trigger a bigger response on the part of Congress and the administration in offering help to homeowners to keep them from losing their homes because of mortgage defaults.

"Historically, when policymakers have acted in a concerted and aggressive way, that signals that we are nearing the end of the crisis," said Zandi. "If that occurs this time and the financial markets stabilize in the next few months, then the economy will suffer but it won't a prolonged and severe recession."

TheTechTrader.com board, as you can imagine, was extremely negative with nearly all stocks down today, except for a couple standout issues. Portfolio position Macroshares Oil Down Tradeable Trust,(DCR) closed at 10.60, up 1.16 today, a strong percentage gain on the sharp drop in the price of oil today, which was down over $5 per barrel.

MF Financial gained 1.19 on 16 1/2 million shares, although that was more than a point off the high. Still, it was a very strong gain on a day like this. Chart of the Week Georesources (GEOI) at 12.48 was up 17 cents.

But most other stocks were down on my board today. Leading the way was LEH down 4.26, DryShips (DRYS) 4.38, Aluminum Corp. of China (ACH) 3.46, and Boxer Short Decker’s Outdoor (DECK) down 5.22.

In addition, Ascent Solar (ASTI) got hammered to 8 1/2 today, down 1.85, after announcing a secondary. Cree Inc.(CREE) lost 1.22, Converted Organics (COIN) 1.20, China Natural Resources (CHNR) 1.68, Canadian Solar (CSIQ) down 1.85, Energy Conversion Devices (ENER) 1.19, Excel Maritime (EXM) 2.16, TBS International (TBSI) 2.46. Sigma Designs (SIGM) dropped 1.36, and JA Solar (JASO) 1.13 in the continuing weak solar sector. Global Solutions (GSOL) was down 1.36.

Stepping back and reviewing the hourly chart patterns, the indices had one strong snapback rally in the morning, but after that one failed they sold off steadily all day to close at the lows for the day going away. The OEX S&P options had a big day today. For example, the March 620 OEX put (OEYOD) closed at 15.30, up 9 today.

So, with the indices closing right near key support levels in the NDX 1715-18 zone and just above the 1296-98 zone on the S&P 500, we have a key test coming tomorrow morning and probably early on. But today was a very poor follow-up to a very impressive day yesterday and obviously does not bode well for the bulls.

Good trading!

Gold for April delivery plunged $59 to settle at $945.30 Wednesday on the
New York Mercantile Exchange. The 5.9 percent decline was the largest one-day
loss since June 2006. Gold soared to an all-time high of $1,033.90 Monday,
following the Fed-approved bailout of Bear Stearns by JPMorgan Chase & Co.
"It's certainly a correction," said James Steel, precious metals analyst
with HSBC in New York. "The rate cut was less than expected and there seems to
be some relaxation in credit risk concerns today, so that's hurting gold."
Prior to the rate cut, gold had gained almost 20 percent this year, driven
by U.S. recession fears, record high crude oil prices and a tumbling dollar.
Some gold watchers in recent days even began whispering about $2,000 gold, a
level approaching the metal's inflation-adjusted high of 1980. But it's too
early to tell whether the metal's decline signals a protracted correction or
not, analysts say.
"We'll have to see where it bottoms out, but you can't by any means believe
the whole credit market issue has been resolved, and a resurfacing of worries
there would buoy gold," Steel said.
Other precious metals also traded sharply lower Wednesday. Silver for May
delivery lost $1.525 to settle at $18.445 an ounce on the Nymex, while May
copper dropped 11.30 cents to settle at $3.6335 a pound.
In energy markets, oil prices fell sharply Wednesday after the U.S.
government released data suggesting demand for petroleum products may be falling
amid high oil and gasoline prices.
Light, sweet crude for April delivery fell $4.94 to settle at $104.48 a
barrel on the Nymex. It was the largest one-day price drop for a front-month oil
contract since 1991. The April contract expired at the end of Wednesday's
session, and trading was much heavier in May oil futures, which fell $5.96 to
settle at $102.54 a barrel on the Nymex.
Other energy futures also fell. April gasoline futures fell 9.97 cents to
settle at $2.5603 a gallon on the Nymex, and April heating oil futures fell
12.12 cents to settle at $3.0167 a gallon.
The drop in metals and energy futures quickly spread to agriculture
products, which fell sharply after the dollar's rise against the euro. Wheat,
corn and soybean futures all fell the daily price limit in Chicago.
Wheat for May delivery lost 90 cents to settle at $10.74 a bushel on the
Chicago Board of Trade, while May corn fell 20 cents to settle at $5.2725 a
bushel. May soybeans declined 50 cents to settle at $12.57 a bushel.

The Fed's actions come as fears have spread that other financial houses
could also be on shaky ground.

"It seems as if Bernanke & Co. are pulling out all the stops to avoid a
serious financial market meltdown," Richard Yamarone, an economist at Argus
Research, said Sunday evening.

However on world financial markets, Asian stocks plunged Monday after the
JPMorgan and Fed announcements. Markets in Australia and New Zealand were also
off and European stocks fell in early trading.

Oil prices hit a record in Asian trading as the value of the dollar
continued its free fall and U.S. stock index futures were down sharply,
suggesting Wall Street would open lower after sinking Friday.

"There is persistent credit uncertainty. Market players have been repeatedly
let down which shows the subprime mortgage problems are so deep-rooted," said
Atsuji Ohara, global strategist of Shinko Securities in Tokyo.

President Bush has scheduled a White House meeting Monday afternoon with his
Working Group on Financial Markets, which includes Bernanke, Treasury Secretary
Henry Paulson and Securities and Exchange Commission Chairman Christopher Cox.

Paulson said Sunday, "I appreciate the additional actions taken this evening
by the Federal Reserve to enhance the stability, liquidity and orderliness of
our markets."

The new lending facility -- described as a cousin to the Fed's emergency
lending "discount window" for banks -- is geared to give major investment houses
a source of short-term cash on a regular basis -- if they need it.

That's important because those big investment houses have key roles in the
financial system and if one fails or is having difficulty it could put the whole
financial system in jeopardy, said Mark Zandi, chief economist at Moody's
Economy.com. These big investment houses have complex relationships with many
players in the system, including hedge funds, commercial banks and others.

The lending facility will be in place for at least six months and "may be
extended as conditions warrant," the Fed said. The interest rate will be 3.25
percent and a range of collateral -- including investment-grade mortgage backed
securities -- will be accepted to back the overnight loans.

The "discount" rate cut announced Sunday applies only to the short-term
loans that financial institutions get directly from the Federal Reserve. It
doesn't apply to individual borrowers.

The Fed's actions are the latest in a recent string of innovative steps to
deal with a worsening credit crisis that has unhinged Wall Street.

The action comes just two days before the central bank's scheduled meeting
on Tuesday, where another big cut to a key interest rate that affects millions
of people and businesses is expected to be ordered. That key rate is now at 3
percent and is expected to be cut by at least three-quarters of a percentage
point on Tuesday.

The Fed said in a statement that the steps are "designed to bolster market
liquidity and promote orderly market functioning ... essential for the promotion
of economic growth."

Even with the Fed's aggressive moves, economic and financial conditions keep
deteriorating. An increasing number of economists believe the country already
has slipped into its first recession since 2001. Many economists think that the
economy is shrinking now in the January-to-March quarter. The first government
figures on first-quarter economic activity will be released in late April.

The Fed on Sunday also approved the financing arrangement through which
JPMorgan will acquire Bear Stearns. JPMorgan said the Fed will provide special
financing for the deal. The central bank has agreed to fund up to $30 billion of
Bear Stearns' less liquid assets, according to JPMorgan.

AP Business writers Joe Bel Bruno and Madlen Read contributed to this report
from New York.

Fed's announcement of the new Term Securities Lending Facility (TSLF), which will lend up to $200b of Treasury securities to primary dealers for a term of 28 days and increasing of swap lines with ECB and SNB to $30b and $6b only triggered brief rebound in the greenback. Markets speculated that Fed may substitute a 75bps cut by such new measures but the speculation quickly faded after a dismal retail sales report, default of Amsterdam listed Carlyle Group hedge fund and the bail out of Bear Stearns. The dollar was additionally pressured by speculation of depeg from gulf countries.

The highly anticipated retail sales report showed sales unexpectedly dropped -0.6% in Feb with ex-auto sales dropping -0.2%. Jobless claims was unchanged at high level of 353k. Tamer CPI, which eased from 4.3% to 4.0% yoy in Feb, and core CPI which eased from 2.5% to 2.3% yoy also opened the door for more aggressive rate cutting from Fed.

ECB Trichet's talk of concern on excessive moves in the forex markets and emphasis of strong dollar policy in US triggered some jitters in EUR/USD's up trend but the effect was brief. Data from Eurozone were stronger than expected, with Germany ZEW improving to -32 in Mar. HICP final was revised up from 3.2% yoy to 3.3% in Feb.

Yen's reactions to the brief but strong stock markets rebound during the week were mild, in particular in USD/JPY and GBP/JPY. Indeed, the yen seemed to be much more sensitive to stock bearish news instead. Upper house of Japan voted down BoJ governor nominee Muto and there are still much uncertainties on who will succeed Fukui when he retires in less than a week. There were some talk of extension of Fukui's responsibility but nothing is confirmed so far. BoJ minutes released today offered no surprise. Board member's view on the economy remains unchanged though downside risks to global growth is seen risen.The most important data from Japan last week was the less than expected downward revision in Q4 GDP growth.

From UK, Feb PPI report saw input price accelerated further to 19.3% yoy while output price was unchanged at 5.7% yoy. Core PPI growth slowed slightly to 3.0% yoy. Industrial produce dropped -0.1% mom in Jan comparing to expectation of +0.1%. Manufacturing production, on the other hand, rose 0.4% mom versus consensus of 0.2%. Trade deficit widened further to -4.29b in Jan.

SNB left the three-month libor unchanged at 2.25%-3.25% as widely expected, midpoint is kept at 2.75%. Inflation forecasts was adjusted up to 2% for 2008 due to rise in oil prices. Inflation is then expect to settle at 1.4% in 2009 and 2010. Economic growth was expected to be at 1.5% to 2.0%.

Canadian dollar lacked clear direction in last week's market. Housing start improved to 256.9k. Aussie firmed on better than expected job report, showing 36.7k job growth in Feb with unemployment rate dropped further to 4.0%.

The Week Ahead

It's a busy week, though shortened by east holiday, with jam packed economic calendar. Main focus is on Tuesday's FOMC rate decision. Markets are pricing 50/50 chance of 75bps and 100bps cut. In additional markets will pay close attention to growth data including Empire statement index, Philly Fed survey and industrial production. Housing data including NAHB survey and new residential construction will be featured. PPI inflation and TIC capital flow will also be released.

Some major banks and brokerages will report 1Q earnings this week, likely with additional write downs of impaired debt and probably quarterly losses at some firms too.

UK will be another major focus of the week, with Feb CPI, job report, retail sales and MPC minutes due. From Eurozone, main focus will be on PMI manufacturing and Services. Canadian CPI will also be featured.

USD/JPY Weekly Outlook

USD/JPY's down trend continued last week and extended further to as low as 98.89 last week, taking out the key psychological level of after just some brief hesitation. From a short term angle, there is no sign of reversal yet. Initial bias remains on the downside this week for 100% projection of 114.77 to 104.96 from 108.59 at 98.78 first. However, above 101.23 resistance will be the first alert that a short term bottom is formed. Focus will then be back to 103.59 resistance.

In the bigger picture, as discussed before above, there is no sign of reversal yet. At least, the fall from 108.59 is still in force as long as 103.59 resistance holds even in case of a strong rebound. As discussed before, sustained break of 100 psychological support will indicate firstly that underlying downside momentum in USD/JPY is still strong. Also, this will indicate USD/JPY has already broken out of multi year consolidation pattern that started in 98 at 147.68. Further steep decline should be seen until meeting another key medium term cluster projection target zone of 92.71/93.31 (200% projection of 124.13 to 111.59 from 117.94 at 92.86, 200% projection of 117.94 to 107.21 from 114.77 at 93.31 and 161.8% projection of 114.77 to 104.96 from 108.59 at 92.71).

However, strong break of 103.59 resistance will argue that fall from 108.59 has completed with at least a short term bottom in place. Outlook will be turned neutral in such case and stronger rally should then be seen to retest 108.59 resistance. Nevertheless, medium term outlook will remain bearish until at least a firm break of this resistance.

I think the answer is that it will not be before the latter half of the year and will take at least two years to get back to trend growth. The reason for such a drawn out recovery is simple. The twin causes (housing and the credit crisis) will take at least two years and possibly longer to normalize, and that process is going to negatively effect several other sectors of the economy.

But then I am an optimist. Duke University released a survey yesterday of Chief Financial Officers of major corporations. This is a gloomy bunch. 54% think we are already in a recession. My friend Duke Professor Campbell Harvey said: "In contrast, 90 percent of the CFOs do not believe the economy will turn the corner in 2008. Indeed, many of them believe it will be late 2009 before a recovery takes hold."

Let's look at a chart courtesy of John Burns Real Estate Consulting. This shows that part of the bubble in housing was in the number of transactions that occurred during the bubble years. In 2005 alone, there were 48% more housing transactions that occurred than should have been expected based on historical average sales per household. In large part this was caused by "investors," many of dubious financial strength, buying homes and condos on readily available credit with no real lending standards and no way to pay the loans if they were not able to sell them at a higher price.

As a result, there are now 3.5 million excess homes that need to be filled by qualified homeowners. Over time, due to growth in the population, the demand will eventually catch up, but that will be a process of several years. Housing prices will have to fall by another 15-20% or so to get to a place where homes become affordable to the marginal buyer. And that assumes rates can stay low.



Annual new and existing home sales are currently running at about 5.5 million. John Burns expect that will fall to about 4 million before we see the bottom of the market. Notice, in the above chart, the drop in sales after the increase in housing sales above the trend projection in the 70's. We have a long way to go to correct the recent bubble, and Burns's research suggests that we will get there sooner rather than later.

But this means that home values will drop another 15% or more. Homeowners are going to see $5-6 trillion in home equity vanish in the next year. Remember that point as we will address it in a minute.
Honey, I Vaporized My Customers

By now, everyone knows that the subprime crisis started with non-existent lending standards which resulted in the large numbers of foreclosures we are seeing today. Those foreclosures will be rising throughout the year. We are not near anything like the top of the rising number of foreclosures. Ben Bernanke said last July that losses from the subprime would be in the $100 billion dollar range. True confession. I think I wrote six months earlier that it would be $200 billion. I point that out to make the point that I am an optimist by nature. The latest "bidding war" number for the amount of total losses is about $500 billion from Goldman Sachs, and a neat $1 trillion from uber-bear Nouriel Roubini.

Add in hundreds of billions from losses which are piling up in other credit markets and you can easily get to $1 trillion in losses which are going to have to be eaten by all sorts of financial institutions, without being all that pessimistic.

Banks are being forced to reduce their loan and margin books in order to get the necessary capital required by regulatory authorities. Plus, credit is now more expensive as risk premiums rise from absurdly low levels in what more than one authority called a "new era of finance." Turns out it was just normal old era greed.

It is not just the mortgage market. It is commercial mortgages, safe municipal bonds, credit card debt, student loans and a host of credit that is under fire and cannot find a buyer at what should be a realistic price.

We should not be surprised at the lack of liquidity in the credit markets. We have essentially vaporized 60% of the buyers of debt in the last six months. The various alphabet of SIVs, CLOs, CDO, ABS, CMBS, and their kin that were the real shadow banking system are either gone or on life support. It took decades to build these structures and it is not realistic to think we can replace them in six months. This is going to take some time.

And time is what the Fed has bought this week by offering to take AAA mortgage paper and swap it for T-bills. They will start with $200 billion on offer. Remember you read it here first that that number will be increased and increased again. From the markets initial euphoric response, you would think the problems have been solved and banks will once again start lending. Sadly, this is probably not true.

This is similar to the action by the bank regulators in 1980, when nearly every major bank had losses that were greater than their capital on Latin American loans which had defaulted. The Fed, with a wink and a nod, allowed the banks to carry these worthless loans on their books at full face value. It took six years before they started to actually write them down. But without that measure, every major bank in the US would have gone bankrupt. And technically, they were for several years. But the Fed action simply bought the banks time to re-liquefy. It was the right thing to do.

This week's action by the Fed is essentially the same thing. It buys time. This 28 day auction will be around for a long time. If the banks had to write down the potential losses on their AAA Fannie Mae paper and other similar assets, it could have brought the banking system to its knees. Eventually, we will get a market clearing price for all this paper, but the key word here is eventually. We are going to see foreclosures and losses for another 18 months. It is going to take a long time to know exactly what the losses will be.

I think the losses on many of the various forms of debt have been marked down way too far by the various derivative markets. (I would hasten to add this does not include the subprime markets, as many of those assets are going to zero.) I doubt the loss in a lot of the debt paper will be nearly as much as the current credit default swaps prices indicate. For instance, some municipal bond debt is priced for 10-15% losses, when losses of less than 0.5% are normal. When there is a buyers strike, prices fall, and sometime to quite low levels. In the fullness of time, the price of these bonds will rise back to "normal" levels. There is a reason Bill Gross is buying municipal bonds by the train car load. Many are simply at the best prices we will see in my lifetime.

But if that debt is now on a bank's capital books, they have to write it down to the latest mark-to-market. The Fed's move simply allows the banks to move what will eventually (or maybe the better word is should eventually) be marked back to reasonable values. It avoids a crisis today.

The next crisis? I read a very chilling piece from Michael Lewitt this morning. He speculates on what if the rumors were true that Bear Stearns is basically bankrupt. Bear is in the too big to fail category. They are at the heart of the chain of Credit Default Swaps which run like fault lines throughout the world's financial system. If Bear were allowed to collapse, it would simply cascade throughout the world so fast it would truly make the current level of the credit crisis seem small potatoes.

So, why can I be so sanguine? Because the regulators (the Fed and the SEC) would step in and whatever large bank was failing would be merged or bought very fast. Liquidity and assets would be provided. The Fed and the rest of the world's central banks get that we are in a crisis. They will do what is necessary. Those of us sitting in the cheap seats in the back of the plane may not like it, as it will look like a bailout of the big guys who caused the problem, but you have to maintain the integrity of the system. A hedge fund here or there can go, but not one of the world's premier banks.

I wrote the above paragraphs on Thursday, and sure enough, the NY Fed and JP Morgan stepped in to bail out Bear. This will not be the only time or bank. The regulators may have been asleep, but the depth of this crisis has awakened them.

But this is a boost for my contention that we will be in a Muddle Through Economy for a long time. This latest Fed actions simply draw out the time over which the market will correct. But that is a good thing, as a too swift, dead drop correction could spawn a very deep recession, destroying vast amounts of capital, which would take much longer to come out of.

Now, let's look at the implications of this crisis on our long term returns and retirement portfolios.
Consumer Spending is Going, Going...South

I have used this graph before, but it bears keeping this in mind. Mortgage Equity Withdrawals (MEWs) accounted from 1.5%-3% of overall GDP from 2001 through 2006, as the US consumer used borrowed on the equity in their homes to spend.



And it's not just MEWs weighing on the consumer. Higher energy costs are just as effective as a tax in lowering consumer spending. If oil stays where it is today, gasoline will be $4 a gallon this summer. Unemployment is slowly rising, which of course is not good for consumer spending. Inflation is hurting, especially in light of the very low growth in real consumer income. Combine that with less availability of cheap and easy borrowing and the consumer is clearly going to have to re-trench.

So, what does that mean? Two things. I think it will mean lower corporate profits for a variety of US corporations, and as we will see, in a normal recessionary pattern pull the stock market lower. And that is going to lead to less than expected long term returns on retirement portfolios, which will have its own consequences.

Let's review some basics. I made the contention in Bull's Eye Investing that we should look at bull and bear market cycles in terms of valuations rather than price. Stock markets go from high valuations to low valuations and back to high valuations over very long term cycles, averaging around 17 years. That would mean we are roughly halfway through this secular bear market which began in 2000. I also pointed out a few weeks ago that the bottom in terms of price in the last secular bear market (1966-1982) was made in 1974, but it was 8 years later than the bottom in valuations as expressed by Price to Earnings Ratio was reached. These periods of low valuation are the springboard for the next bull market rise, so there is a bull market coming. We just have to be patient.

It is entirely possible that we see the bottom of the market in terms of price this year as the market falls due to the pressures of the recession we are in, yet valuations continue to fall even as prices rise. In fact, that is typical of the secular bear cycles. This happens as earnings rise faster than stock prices.

And why is that important? Because the returns on your stock portfolio are closely and highly correlated with the P/E ratios at the time of your investments. Besides the following chart, you can go to www.2000wave.com and look at the stock market charts on the right side to see what kind of returns you would have had over any given period during the last 100 years. Notice on those charts that if you start with high P/E ratios, your returns could be negative for 20 years! Not quite the 10% compounding that many planners promise.



So, where are today's P/E ratios? Let's go to the data provided by Standard and Poor's for the S&P 500. In January of 2007, S&P estimated that earnings for 2007 would be $89. Earnings for 2007 were actually $71.56, down about 20%. Last year about this time S&P estimated that earnings for 2008 would be $92. Today they estimate 71.20 for 2008. Lately every time new estimates come out they are down. But that is typical in a recession. Analysts are generally behind the curve.

But as the table below shows, we are now at P/E ratios that are back up over 20, and going to 22 by the middle of the summer. That would suggest that total returns are going to be under pressure for the next few years at a minimum and maybe for a decade. That does not bode well for retirees who are expecting the stock market to compound at 8-10% annually in order for them to be able to retire in the style to which the want to be accustomed. Real (inflation adjusted) returns of between 0 and 4% are more likely based on historical returns from today's valuations.



The Boomers Break the Deal

I have good news and bad news. First, the good news. Basically, my generation – the Baby Boomers- is going to break the deal my Dad's generation made with my kids. They agreed to die on time. The Boomer Generation and subsequent generations are going to live longer –potentially much longer - than the current actuarial tables suggest because of major breakthroughs in medicine and health care. It is quite conceivable that we will see another average ten years of average life for the Baby Boomer Generation. I personally fully intend to enjoy those years.

But the bad news is that many have not saved enough for an extended life span, let alone 30 years of retirement. My friend Ed Easterling at Crestmont Research did some very interesting analysis a few months ago. You have saved and invested, and now you want to retire. You decide to take out 5% of your total portfolio to live each year and increase the amount for inflation, so that you can maintain your lifestyle (a number which a surprising number of investment advisors would say is ok). Let's say you are an aggressive older couple and decide to stay in the stock market because that is where you are told that you can get the best returns over time. And you know that at least one of you have the probability of living 30 years. On average you are going to get 7-8% or more on your stock portfolio, right?

Ed calculates what you would get for 78 different 30-year periods since 1900. Let's say you start with a million dollars. On average, this has been a good bet. You could maintain your lifestyle and end up with $3.6 million. You've been pretty conservative, right?

Wrong. Because the returns you get over the next 30 years are highly dependent on the P/E ratios at the beginning of those 30 years. Let's break up those 30-year periods into four quartiles of beginning valuation. If you start in a period when P/E ratios are in the highest quartile, you find that over 50% of the time you end up penniless, on average within 22 years. Here's that data from Ed:



As we saw above, valuations are well into that top 25% quartile. Notice that even when starting with the lowest-quartile valuations that 5% of the time you ran out of money within 23 years. Want to take a lifestyle bet that you have a 1 in 20 chance of losing? It will not be fun to have to go to work as a Wal-Mart greeter at 80.

Of course, there are other implications. A generation living longer means that the seemingly pessimistic forecasts of doom and gloom for Social Security and Medicare are not pessimistic enough. Defined benefit pension plans will be in real trouble at the end of the next decade.

So, what should you do? In secular bear cycles like we are in now, you should look for absolute return style investments, like income portfolios, hedge funds and other alternative style investments, be more nimble in your stock picking rather than using index funds and expect overall lower returns. We need to be patient and wait for the lower valuations which have always eventually made themselves evident.
Mexico, London, and Switzerland

The Newport Group brought in Chris Gardner to speak after me. It was one of the most inspirational stories I have ever heard. Chris was the man who wrote the Pursuit of Happyness which was the basis for the movie of the same name with Will Smith playing the role of Chris. As he related his life, it was even tougher than the movie. It makes me realize how important being a father is, and how much we owe to our parents who stayed with us, and how incredibly important it I to be there for our kids. Get the book and see the movie, and if you ever get a chance to her him speak, do so.

I get more than a few letters from readers who think my Muddle Through Scenario is a little too optimistic. If you want to read the bearish case, you can sign up for my friend Bill Bonner's the Daily Reckoning. It is a free service and very well written. Bill and his associates are from the Austrian economic camp, and go through a lot of data in an entertaining manner. You can subscribe for free at: http://www.dailyreckoning.com/Sub/MWAVEsignup.html

As noted above, I am in Orlando and getting ready to go to the Arnold Palmer Invitational Golf tournament in a few minutes. The speech went well, and now it is R&R time. It looks like I will be going to Playa del Carmen in Mexico (south of Cancun) in a few weeks over a weekend to speak to a group of NFL football players. Now that should be interesting. Then I will be in London for two days April 15-16 and then on to Switzerland for the rest of the week. Drop me a note if you want to meet.

Lunch and golf are calling, so I am going to his the send button early. Have a great week, and remember to have some fun on the way as we Muddle Through.
Your life is getting better every week analyst,

John Mauldin
John@FrontLineThoughts.com

Investing requires diligent work and research before putting your money in quality investments with a long-term perspective. Speculating is attempting to make a relatively quick profit by monitoring the short-term price movements of a particular investment. Investors seek to minimize risk, whereas speculators don�t mind risk because it can also magnify profits. Speculating and investing have clear differences, but investors frequently become speculators and ultimately put themselves and their wealth at risk. Consider the married couple nearing retirement who decided to play with their money to see about making their pending retirement more comfortable.

They borrowed a sizable sum by tapping into their home equity to invest in the stock market. What did they do with these funds? You guessed it they invested in the high-flying stocks of the day, which were high-tech and Internet stocks. Within eight months, they lost almost all their money. Understanding market risk is especially important for people who are tempted to put their nest eggs or emergency funds into volatile investments such as growth stocks (or mutual funds that invest in growth stocks or similar aggressive investment vehicles). Remember, you can lose everything.

Inflation risk

Inflation is the artificial expansion of the quantity of money so that too much money is used in exchange for goods and services. To consumers, inflation shows up in the form of higher prices for goods and services. Inflation risk is also referred to as purchasing power risk. This term just means that your money doesn�t buy as much as it used to. For example, a dollar that bought you a sandwich in 1980 barely bought you a candy bar a few years later. For you, the investor, this risk means that the value of your investment (a bond, for example) may not keep up with inflation.

The dollar remained under pressure Friday after touching new lows against the euro and Swiss franc, undermined by cool inflation data and weakness on Wall Street as the market digests news of Bear Stearns' bailout. The dollar index was at 71.656, down from 72.047 in London earlier Friday.

On Thursday, gold futures surpassed the psychologically key level of $1,000 an ounce for the first time.

"We are seeing encouraging recent trends particularly in the investment sector, in a number of the world's key gold markets as investors take 'flight to quality' in the face of the credit squeeze and ongoing financial turbulence," said James Burton, CEO of the World Gold Council, a gold mining industry group.

HUI EXTENDS BREAKOUT

The HUI has once again made new highs, showing some reluctance along the way. The HUI index has eclipsed intermediate targets. Without any doubt, the mining companies face uncertain costs, made clear by the rise in both crude oil and natural gas prices. The cyclicals show strength, and can remain overbought for some period of time, like in the late summer. If an extension to this breakout does not occur imminently, it will soon enough after a visit to the uptrend support offered by the 20-week moving average, which has provided excellent support since December. Numerous reasons for the stock breakout catching up to the physical metal are possible. The USFed is finally setting the stage for delivering some meaningful liquidity to the upside-down banking sector. The hedge funds are receiving margin calls, which are likely to force them to cover widespread short positions in a wide assortment of juniors. Institutional investors are heeding the rally cry for commodities, the latest big ones being CALPERS and the Texas Teachers Union. Alternatives to numerous conventional failed strategies are being sought. With a recession more widely perceived and admitted outside the halls of frontmen in the USGovt and conmen on Wall Street, commodities generally, but precious metals and energy specifically, are being recognized as having tremendous future prospects. Up ahead lies a crossroad, as a wedge is forming. Moving averages look stable and rising. It could turn into a more stable uptrend. Time will tell.



S&P STOCK INDEX BREAKS DOWN

The S&P500 stock index displays a strange pattern, one inherently suffering a breakdown though. A deadly crossover of the 20-week moving average below the 50-wk MA was seen in January, but the big plunge occurred just prior to that signal, now a confirmation. This chart might be described as a Head & Shoulders bear pattern with a built-in positive tilt. The neckline broke at that time, one that featured an upward bias trendline. Next to break was the shoulder line, also with an upward bias but with bigger spacing. The S&P chart screams bear market with a loud echo of USEconomic recession. The next downside targets are 1230 and later on, 1180. The Dow Jones Industrial index shows a much clearer gigantic Head & Shoulders ravaging bear pattern, featured in the March Hat Trick Letter report this weekend. My belief is that the prevailing knucklehead opinion being put forward in end of year, of problems finally resolved and admitted, was smashed quickly in the first month of the year. The breakdown has been powerful, at its worst a 17% decline. That is minor compared to the nasty 30% plunge in the Japanese Nikkei stock index. Much worse is yet to come. This is a multi-year bear reversal breakdown, one to require a couple years to clean up.



TIDE TURNS TOWARD MINERS

A very significant breakout is plainly evident in the ratio of the HUI index to the S&P index. The conclusion is that mainstream stocks stink on ice, while gold & silver mining stocks shine brilliantly. Since August when the serious bank & bond problems surfaced, the mining stocks have comparatively outstaged the paper chase stocks of the S&P index, laden with financials, techs, retailers, drugs, consumer goods, builders, as well as the strong energy group. The trend has extended with strong cyclical behavior in the stochastix indicator. This moment has been sought for months. Clear dominance has begun to be demonstrated, as the mining stocks thrive when the mainstream stocks suffer. This theme will likely dominate for most of the year 2008. As the crises with banks and housing and mortgages and household bankruptcies and consumer downturns become entrenched, and as the official response is seen as not providing much remedy, gold & silver will continue to fire on both cylinders, unencumbered by paperweights.



LARGE & SMALL TIDBITS TO FEED THE FIRE

The USFed sequence of lower interest rates will surely continue, possibly to the 1% mark, but hardly a guarantee to fix a single thing!!! Bank insolvency benefits little from cheap money when willingness to lend vanishes. The growth of the money supply has reached ridiculous desperate level of growth at 16.7% in February, even as the US banking system operates with a negative capital core. That is, excluding borrowed funds by banks from the USFed itself. Even the TIPS is showing negative bond yields, an embarrassment. The catch phrase ‘Pushing on a String’ might be better described as ‘Cramming Napkins down Man Hole Covers’ instead. This is getting really ugly. Even the estimates are rising for total bank center losses, working its way to my initial $1 trillion estimate. It will reach $2 trillion easily. The Resolution Trust Corp platform is also beginning to take shape. Too bad it is to be built atop a bankrupt duopoly cesspool factory known as Fannie Mae & Freddie Mac. Come to think of it, a cemetery next to a sewage treatment plant is not all that impractical. Dead entities do not require fresh air, rich food, or clean living spaces after all. As far as gold advocates are concerned, the retreat in interest rates makes money cheaper for speculation in gold and related stocks. As far as gold advocates are concerned, the desperate measures to redeem broken mortgage bond provides an opportunity for massive spillover of relief cash above and beyond their targets into the same speculative arenas.



Countless major and minor stories can be told, for fuel to the fire. DeutscheBank projects the crude oil price to hit $150 by the year 2010. Nigeria no longer wants USDollars in their financial system, preferring domestic naira currency instead in a chest pounding exercise of national pride. Iran now takes in 75% euros and 25% yen for crude oil transactions, having circumvented US efforts to stymie their financial network. Venezuela, Colombia, and Ecuador are dealing with skirmishes on the borders. An important Colombian oil pipeline was blown up by the rebels who have sympathetic support by Venezuelan tyrant Chavez. The Persian Gulf Arabs continue to ponder and debate the inevitable. They must strip the tentacles of the US$ peg. A horrible mismatch exists. The increasingly inappropriate monetary policy of the United States is the penalty imposed upon their powerful little sheikdoms. Imagine a falling official interest rate in boom towns like Abu Dhabi and Dubai, a grotesque misfit when price inflation ramps up to almost 20-year highs. Steering clear of the peg will open the floodgates for more diversification when revolt is worldwide already against the beleaguered USDollar. In time only the Saudis will stand in the US green corner, hardly a Green Zone.



The next few months are certain to see continued breakdowns, rescue attempts, more fire trucks, and vast hoses spewing fake money. Distortions are growing worse from imbalances pushed to the brink, then beyond. An historic dismantlement of a mismanaged corrupted diverse bank & bond & risk management system is underway. It makes great theater to watch powerful institutions attempt to repair an irreparable vast apparatus, like a Greek Tragedy. The Yankee Acropolis is melting down. The Hat Trick Letter tracks the saga, with many events foreseen in advance. Almost everything attempted will fail unless and until a big bad bond cemetery is constructed, one fitted with a new centrifuge that churns mortgage money outward. The ultimate priority is to halt the housing decline. Housing was the grand reckless foundation to an economic recovery since 2002. The main beneficiaries of continued rescue attempts will be gold, silver, and crude oil. When the housing decline is halted, the trio of primary commodities will still be rising in price, since a successful price inflation episode will be accomplished. Then, the big question is what happens to long-term USTreasury Bond yields.

Jim Willie CB is a statistical analyst in marketing research and retail forecasting. He holds a PhD in Statistics. His career has stretched over 25 years. He aspires to thrive in the financial editor world, unencumbered by the limitations of economic credentials. Visit his free website to find articles from topflight authors at www.GoldenJackass.com . For personal questions about subscriptions, contact him at JimWillieCB@aol.com