October, Tuesday 25, 2011

DOW – 207 = 11,706
SPX – 25 = 1229
NAS –61 = 2638
10 YR YLD – = 2.12%
OIL – .55 = 92.62
GOLD + 51.30 = 1705.60
SILV + 1.53 = 33.37
PLAT + 19.00 = 1573.00
Tomorrow is the big European summit to resolve the sovereign debt crisis. The idea is to present a plan to reduce Greece’s debt burden, pump money into the European banks to cover their bond losses, and pump money into the EFSF rescue fund to prevent market contagion. Global equity markets have been jumping and retreating based upon the rumor of the day coming out of Europe. Today, the rumor is that there are many details to be worked out. There is a self-imposed deadline of tomorrow to iron out the details. We might not get everything worked out in the next 24 hours. The sky is falling.
My view is that the whole euro problem is getting a bit tiresome. The ECB and the Fed and the other central bankers will come up with some sort of a plan. The plan won’t really solve any problems. Right now, the real negotiation is to get the casino players to accept losses on bonds without triggering CDS defaults; in exchange, the plan will give away big gobs of FREE MONEY to the banks. Eventually, the cold, hard facts will hit – but I don’t think it will be tomorrow. For now the game plan is extend and pretend.
The best bet right now is that the financial sector will stage a bit of a rally over the next few days – but it is not what I consider a solid bet. Not the kind of bet I would want to take. The banks will likely rally; it would be irresponsible and foolish for the Euro-leaders to fail to come up with some sort of plan, but there is still a sizeable chance the whole mess could implode. I don’t think it will, but it could. Today, Italy’s cabinet couldn’t agree to economic austerity reforms that EU counterparts are demanding in order to support Italy’s bonds.  If you have to pick a horse – pick a rally, better yet – avoid this race. Even if there is a short-term rally, you still have the possibility of contagion, and then beyond that you have a significant slowdown in the European economies, and credit downgrades.
The facts of the current environment in Europe don’t equal the conclusion that a coordinated effort will restore confidence.  The facts are that European Sovereigns are massively indebted and European banks are massively under-capitalized.  The proposed solution of raising capital and issuing fresh debt to solve this issue is a joke.  The story could get nasty when credit insurance written against newly written down loans triggers a default on that debt, and the counter part demands cash settlement. Notional credit default swaps are massive and frightening; real exposure on CDS is a little less scary, but when you need to raise cash, that requires tapping the capital markets, that in turn scares investors because that means the countries or banks are under-capitalized, and so the investors get panicked and pull existing funds from whatever institution they’re invested in, and then you’ve got contagion.
OK, the more I talk, the more I scare myself into thinking the Euro could implode tomorrow – but let me get back to the real reason why the Euro probably will NOT implode tomorrow.
The Eurozone crisis gives central banks an excuse to crank up the printing press and pump out FREE MONEY. Now this only really works when there is the threat of a slowdown; it doesn’t work so well when the entire European continent crashes and falls into an abyss.

A follow-up to last Friday’s program when I talked about the possibility of establishing a Military Bank to offer active duty military banking services without the crazy fees being charged by Bank of America and the other banksters, plus offering credit to active duty military at the same rates the Federal Reserve offers to banksters. The Fed makes loans at one-quarter of one percent. Why not offer that rate to our soldiers? I know some of you listened to me and thought – well that’s interesting but it is nothing more than a rant by Sinclair, but I’m going to hit you with the idea again.
So, I get a note from one of our smart listeners, which details where the Fed has actually been giving out loans. Now you know that Ron Paul and Bernie Sanders have been looking into the Fed and here’s part of what they found out: Approximately one-third of the bailout money went to foreign banks. 
The Federal Reserve also bought more than $2.2 billion in commercial paper from the state-owned central bank of Bavaria, and it gave more than $23 billion in loans to the Arab Banking Corp. based in Bahrain, with an interest rate as low as a quarter of a percentage point. The Federal Reserve also lent more than $9.6 billion to the Central Bank of Mexico.
Banks worldwide tapped into the Federal Reserve’s emergency lending programs more than 4,200 times for a total of $3.8 trillion, estimates show.
Senator Sanders’ staff found that “several billionaires and tens of multi-millionaires received cheap loans from the Fed to invest in securities backed by auto, mortgage, credit card, student and mortgage loans,”
Senator Sanders also says that it appears the Fed provided loans to over 100 separate hedge funds, offshore funds, and other investment funds located in the Cayman Islands and other tax havens.
The Federal Reserve bailed out the Korea Development Bank, the state-owned bank of South Korea, by purchasing more than $2.2 billion of its commercial paper, and it also extended more than $40 billion to the central bank in South Korea.
And here is the kicker; when Moammar Kadaffi was still the dictator of Libya, the Federal Reserve bailed out the Central bank of Libya with $26 billion in loans, At a time when the Untied States had imposed sanctions on the Libyan government.
So, back to my idea of offering loans and credit to active duty military at the same rate – one-quarter of one percent – the same rate the Federal Reserve offers to foreign banks and dictators – sworn enemies of the Untied States. I think offering a good rate on a loan to Navy Seal or an Army Ranger or a Marine is smart – as opposed to offering good deals to Moammar Kaddafi. I would like to get a little support on this idea.
My email address is Sinclair@moneyradio.com. Tell me what you think.
Meanwhile, the Federal Reserve Banks pay interest on required reserve balances–balances held at Reserve Banks to satisfy reserve requirements–and on excess balances–balances held in excess of required reserve balances and contractual clearing balances. Very simply this means US banks can borrow money from the Federal Reserve and then park that money with the Federal Reserve and get paid for just letting the money sit.
The banks don’t need to loan the money out. The money does not circulate through the economy. Currently the banks are holding more than $1.1 trillion in Reserves, or approximately 200 times more than they are required to hold in reserves with the Federal Reserve.
I bring this story to your attention because yesterday, President Obama announced a plan to make it easier for people to refinance, even if they are underwater. Obama’s plan does nothing to address principal forgiveness.
We hear that principal forgiveness would create a moral hazard – it would encourage people to walk away form their mortgage. My question is what is the moral hazard of paying the banks to park money on the sidelines?
Here is today’s headline on the gold markets form Reuters:

Gold surges over 3 pct as haven bid restored

Gold prices roared to one of the biggest one-day rallies in years on Tuesday, as euro zone jitters and gloomy U.S. consumer data rekindled a dormant safe-haven bid and triggered a flurry of technical buying.
The Conference Board said its index of consumer attitudes in October fell to its lowest level since March 2009 as consumers fretted about job and income prospects. The index dropped to 39.8 from 46.4 in September. Consumer confidence does not always correlate well with consumer spending or retail sales. When confidence lags, we tend to go out and buy knick-knacks and gee-gaws.
The S&P/Case-Shiller home price index rose 0.2% in August, for the fifth straight monthly gain, however the index of prices in 20 metropolitan markets is still down 3.8% form one year ago. A separate home price index from the Federal Housing Finance Agency showed prices declined 0.1 percent in August from July. Home prices in Phoenix fell 0.1 percent in August and they are down 7.7 percent from the same month last year.
Just by way of comparison; property values in China’s big cities are holding flat, btu the suburbs are reporting price declines in the 30% to 50% range. Builders are facing financing rates in the 30% range and they’re desperate to move inventory.
What are we hearing in the third quarter earnings calls:
Caterpillar says: 9 months have been better than any full year in our history. CAT – 1.88 = 89.89
General Electric reports that margins hit a low for the year in the third quarter.  GE -.23 = 16.22
Texas Instruments lowered production in response to weaker demand. TXN  -.72 = 30.97
McDonalds notes that economists say we’re out of recession but it hardly feels that way. MCD -.24 = 91.77
The nation’s largest solar company is First Solar, based in Tempe; they announced a management shakeup today. Rob Gillette is out as CEO. Board Chairman and company founder Mike Ahearn will take over temporarily as CEO.
FSLR – 14.68 = 43.27
Have you noticed the price of oil? Back up above $90 a barrel. Whatever stimulus the government has tried to inject into the economy probably isn’t enough to offset the price of oil above $100 a barrel. Just a thought.

On the occupy wall street front; last week I mentioned the Gandhi quite “First the ignore you, then they laugh at you, then they fight you, then you win. The establishment is starting to move beyond the laughing stage. In Oakland California, the mayor sent in riot police in the pre-dawn hours to break up a couple of protest camps. Apparently they fired tear-gas canisters into a camp that included young children. The protesters responded by throwing bottles at the police. If the protesters turn away from non-violent principles – they will lose.  Occupy Atlanta is being threatened by the mayor of Atlanta. Here in Phoenix, well, the protests have been weak. The weekend crowds are decent sized. During the week it drops down to just a few guys; the parks department comes in and plants winter grass and demands no one can walk on the lawn. Cesar Chavez park is the cleanest park in the city. The parks guys was the sidewalks daily, sometimes several times per day. It’s hard to hold a protest when the parks department is hosing you down.
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