I found this piece which comes from extremely insightful Jim Grant and his publication the Interest Rate Observer.
"The liberating feature of Basel II is that the financial institutions to which it applies may hold more assets per dollar of equity captial than they previously could-provided a ratings agency judges the assets to be top-flight. Specifically under Basel II a broker must set aside just 56 cents in capital to hold $100 in triple A rated securitizations-but $4.80 to hold $100 of triple B rated securitizations."
Now just as mortgage brokers prodded and coerced home appraisers to make the number to get the deal done is it a stretch to believe what many have suspected that the same was going on with the ratings agencies like Moodys, Fitch, and S&P? Is it any wonder that global derivatives, or weapons of mass destruction that Warren Buffett called them, have swollen to $345 TRILLION which represents about 9X world GDP !
This months piece by Bill Gross which is always worth the read is especially so this month. He mentions the Bank of America report that $500 billion is adjustable rate mortgages set to re-set up in 2007 by an average of 200 basis points (2%) and another 700 billion in 2008. The kicker here is that 3/4 of the 700 billion are sub prime. What about all the people that won't even qualify for the mortgage under the new guidelines. If Gross is right (he is an extremely bright mind) and the Fed cuts, then gold and silver could be ready to rock and roll.
Robert Prechter, about whom you can argue with his inflexibility but not his extensive homework with which he is without peer, had a chart that outlined stock market peaks coinciding with skyscraper projects. Is the planned tallest building in the world out of Dubai a sign of the times?
I heard Amex increased loan loss reserves 85%. Wachovia tripled theirs the other day, now why would they be doing that if the housing problem is contained. Just being prudent you say, well actually the time for prudence was when they were lending the money not now after the horses are out of the barn. And to think of all the wasteful spending on a 'risk management' that seems to be there for esthetics only.
Caterpillar's gap is open now 3 days. Very bad sign. Was this not an international company that is immune to bad things.
Back on July 10th I called Home Depots stock buyback announcement a gift. It was and still is, sell it while you can as these prices will look awfully good compared to $20 which is where we are headed. We are now well below $40 which is where the Depot was prior to the announcement. Short term gain for long term pain... or was it supposed to be the other way around.
The euphoric high of J&J's announced stock buyback has worn off and the hangover is setting in, we are now below $62 which is where the stock was prior the debt laced announcement.
Streettracks Gold trust (ticker GLD) $69 and $72 that's it, gotta get thru. Just trying to keep it simple.
Dennis Gartman brought the above Yen/Euro cross (chart top) to attention which he called,
"a barometer of the world's risk appetite. That when healthy and rising the yen weakens relative to the Euro and global equities have tended to rally. When the appetite is constained the Yen gains on Euro and carry trade is imploded and global equities put under pressure."
The trend line from the low June has been broken and he is watching 166.50 so I will too. Good trading to you all.