8/22/08 (Gold? Lehman Rises? Game Over Fred & Fan!)

Traders,

Yesterday was another day flirting around the “unknown” support levels, while the INDU and SPX gained a little the NDX and RUT pulled off. We also saw a massive move in oil to the up side and a huge drop in the dollar against foreign currencies and metals. The Fannie and Freddie news put serious questions on the line as to the economic backdrop of the US and the FED – it would put huge pressure on the dollar – taking on that level of debt.

An interesting side note – which to many is not making sense – is we have seen a HUGE drop in Gold and Silver recently (ironically at the same time as a big gap up in the dollar). As a buyer of physical gold and silver – newer minted coins are coming harder and harder to come by. The turnover at my local dealers is intra-day – he has NO gold and the silver goes back out the door as fast as it comes in. So physical minted coins are becoming harder to come by. Also dealers (on the internet) have posted messages that purchases of many coins are on back order. This doesn’t seem to make sense as to the laws of supply and demand. If silver and gold prices are coming off – one would think that people are unloading gold and silver and that would mean MORE should be available – however that is NOT the case.

Yesterday, Reuters issued a story http://www.reuters.com/article/ousiv/idUSN2140103820080821 that the US Mint has stopped producing Gold Eagles – WHY? Well – it’s important to note that Metal Futures and ETFs are PAPER silver and gold – not physical. That also means that have one interesting component that you can NOT do with actual physical gold and silver – and that is to SHORT it. The short open interest in many precious metals is enormous. I recently saw a report in silver indicating that all the open short interest is equivalent of the world’s mining production for over 100 days. Another interesting fact is several issuers of ETFs do NOT actually own the silver or gold – but rather have contracts to purchase actual silver or gold. These contracts come in all forms from short puts too long futures. I contacted the issuer of DBS – a Silver ETF – they actually do not own ANY silver, but rather spreads in silver future contracts. After looking further into this interesting paradigm – silver and gold prices are not driven by physical demand, but rather paper trading in the ETFs and Futures.

The massive short future positions have driven down prices – but good luck at actually buying in PHYSICAL quantity in size – there is not much out there. The real interesting thing is that the US MINT has halted or stopped shipping Gold Eagles – that is rather concerning. Now – I like many are on the waiting list. As silver and gold has dropped in price – I am on a waiting list to buy it. There is definitely two different supply and demands out there – physical and paper. And the paper contracts have massive short positions. I mentioned earlier when Silver got in the $12s it was a time to buy – now it’s hard to even find any. Weird.

Some theories about propping the dollar up by shorting the metals - interesting. One thing is for sure – something is a foot.

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Lehman the Knight in Shining Armor?

Just yesterday Lehman got hit as two possible buyers stepped away from the table and Citi downgraded the company. But a new rumor hit the street that a Korean Bank is “open to” an acquisition. Shares have jumped in the pre-market – while the company has not SAID they will buy the bank or even invest in the bank, they did say they are studying all the possibilities including buying the company.
Both Lehman and the Korean Development Bank have declined comments as to the story – but volatility is abound in the underlying – yesterday down and now a huge rally in the pre-market this morning. Some are saying that Lehman is an excellent target at these prices – but others indicate the huge debt that remains on the books – not to mention the additional borrowing costs (interest payments).

What IS interesting is that the Financial times reported yesterday that both Korean Development Bank and China’s Citic Securities walked away from a deal to buy 50% of the company- because Lehman wanted too much money. Now the Korean Development Bank is back (a day later) with rumors to buy out the entire firm? Seems like there is a lot more to this story.

At this point expect to see volatility in Lehman continue as so far the stories are conflictive and coming from two sources. No doubt that they are on the block – but for a an acquirer to step away from the table to purchase 50% of the company because price is too high to come back the next day to buy out the whole firm – seems strange. Would be nice to be a fly on the wall in those meetings.

Anyway – Lehman is up big in the pre-market.

Traders come and play – investors stay away! Anything goes!

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Freddie & Fannie – Game Over

Buffet this morning on CNBC pretty much said that Fannie and Freddie are DONE – Stick a fork in them. He said they do NOT have any NET WORTH. He blamed Congress for giving them the latitude to borrow without any restraints and the Federal Government gave them a blank check. Now the tax payer is going to have to pay for it.

It was interesting that Buffet said they had been the largest investor in Freddie and Fannie up until about 2001. He started unloading all their shares in Freddie and Fannie as he started seeing the writing on the wall. The only reason they continued to exist was they had the federal government behind them – allowing them to borrow more and more. Fannie was created as part of the New Deal in the 1930s when socialism swept this country, Freddie came about during the height of the Vietnam war when inflation was heading through the roof. Now they are both coming back to bite us as we are ready to start the NEW NEW DEAL – with MORE government programs that we don’t have money for.

It is now just a matter of time before Freddie and Fannie are nationalized and we begin to see the birth of the New New Deal.

Buffet was speaking at the premier of the movie I.O.U.S.A – which I think everyone should see before they vote this year.

Watch the Preview: http://www.iousathemovie.com/

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Futures Pre-market

We are getting a good pop in the futures in the pre-market. Some of that is coming from the rumors that Lehman might of found it’s White Knight – also oil has come off after its massive run yesterday. Expect a small gap to the upside if the spread remains.
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Support / Resistance

We are still flirting with these support levels – which are more straddle levels than anything else. Any single news event can drive this market up from support and break down through them.

INDU 11250-11400 / 11500 (We closed above that 11400 level again – floating in the support valley. 11500 needs to be broken through to see any strength return.)

NDX 1900 / 1950 (Just above the support area – we are looking a little higher in the pre-market. Watch the close.)

SPX 1275 / 1300 (We are just above the support area – again watch the close)

RUT 720 / 740 (We gave up a lot of ground in the RUT from the run up to 760 – just above the 720 level after another fall off yesterday. Watch the close.)

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Conclusion

The gap up and back down from 120 to 140 to 120 in oil seems to of been caused by the SemGroup massive short covering of over 1 million barrels of oil ($3 billion loss), the dollar gap up (biggest in years) was created by a massive unwind of shorts that triggered in the currency trade, Silver and other metal futures are seeing massive short positions drive down the price – but physical minted circulation is hard to come by. I am just trying to point out that we are seeing huge moves in commodities, currency, and metals not because something has fundamental shifted in the economic landscape, but rather we have seen massive unwinding of positions and huge deleveraging as well as a rush to liquid capital to maintain any leverage left.

All this means there is HUGE volatility that has not surfaced in the market – it only takes one SemGroup with 100,000+ future contracts to cause a massive gap in Oil. It only takes one major financial bank to unwind billions in currency. It only takes one massive short metals position to cover. The positions by some of these firms out strip their capital by 10:1, 20:1, 50:1, and even 100:1. If you want to see proof positive of those massive results of leverage – look no further than Freddie and Fannie at 100:1 leverage on positions. They are done – according to Buffet and Nationalization or failure is their only options. Lehman is probably done – if they don’t get a buyer or bailout – they still have massive positions on the books. Economist just reported that Wachovia has over 45% of their loans in option arms that will begin to reset to possibly great disaster.

We are watching deleveraging unwind and that will send massive volatility moves in the market. Be prepared!