Commodities Unravel, Confidence Collapses

Commodities continue to plunge as MASSIVE speculative excess is forced out.

Platinum Futures in Tokyo Drop Amid Concern U.S. Growth Waning: “Platinum futures in Tokyo fell by the exchange-imposed limit after the Federal Reserve lent money to non-banks for the first time since the Great Depression, adding to evidence a recession looms in the U.S.

The Fed lent $28.8 billion as of March 19 to the biggest securities firms to try to stabilize capital markets stymied by losses on investment in notes based on subprime mortgages.

Platinum for February 2009 delivery dropped the daily maximum 300 yen, or 5 percent, to close at 5,745 yen a gram ($1,794 an ounce) on the Tokyo Commodity Exchange. The most- active contract has plunged 23 percent from the record 7,427 yen a gram set March 6.”

Investors should be worried about demand. Everybody and his momma is long. With nobody on the bid, getting out is going to be a real BITCH.

Oil Falls in N.Y. on Concern U.S. Slowdown May Limit Demand: “Crude oil fell for a second day in New York on growing concern a U.S. economic slowdown will curb demand for commodities.

Oil has dropped 8.9 percent from a record this week, tracking declines in gold, wheat and metals, as the dollar strengthened, reducing the need for hedges against inflation. U.S. fuel demand in the past four weeks averaged 3.2 percent less than last year, the Energy Department said yesterday.”

Fuel demand is just beginning to weaken. As the recession really starts to bite deep expect some fairly dramatic drops in demand… along with a serious plunge in the entire energy complex, from crude to gasoline.

“Commodities such as oil and gold, which reached records as equities and currencies tumbled, are no longer attracting demand as investors now need to free up money to cover losses in other assets, said Robert Laughlin, senior broker at MF Global Ltd. in London.”

What did you think would happen? That is EXACTLY how de-leveraging works. This is the correlation contagion. When forced liquidations hit some critical point, correlations across asset classes all approach one as everybody is forced out. Fundamentals become irrelevant. Capital preservation and return OF capital becomes the only thing that matters.

“Commodities are undergoing “cyclical weakness” and fundamentals will reach their “weakest point” in April as economic conditions and high prices weigh on demand, Goldman Sachs Group Inc. analysts wrote in a report today.”

You see, there never was supply shortage and if those feared geopolitical nightmares don’t actually occur, well then the entire energy complex will be re-valued. Quickly.

Dollar Gains Versus Euro, Yen as Fed Acts to Restore Confidence: “The U.S. dollar posted its first weekly advances against the euro and the yen in a month on speculation Federal Reserve moves to revive lending among banks will restore confidence in financial markets and the economy.

The greenback also strengthened to at least one-month highs versus currencies of commodity producing nations from Norway to Australia after raw materials including gold and oil tumbled the most in five decades. The Fed cut interest rates, agreed to accept a wider range on collateral on loans and extended credit to securities firms for the first time.”

I first wrote about the dollar strength on January 28th, 2008 in the post The Dollar Smile Theory and then again on February 11th, 2008 in the post Global Decoupling Theory, Correlation Contagion. That critical inflection point fast approaching now. Economic reality is slowly sinking in. In Euroland the economic numbers are coming dangerously weak. That will put the massively overvalued Euro into a swan dive as the ECB is finally forced to cut rates as well. Commodity producing economies will get whacked as their main engine of growth, Chindia, finally stalls out. These are export economies and the US and Euroland were their final destinations. It’s a closed system and the feedback loop is very real. Those economies will all be as badly off or worse. The US dollar will gain significantly as huge quantities of capital are repatriated, especially from emerging economies.

“The euro has some room to adjust lower. We're getting confirmation that subprime is shifting to the European financial sector. The euro-zone economy will start to slow from here on.” –Kengo Suzuki, Currency Strategist, Shinko Securities

“Commodities -- one of the few remaining long trades -- have turned south. The currency market is next in line, forcing investors out of yielding positions. We underline our bearish commodity currency call. The dollar will rebound.” –Hans-Guenter Redeker, Stragesit, BNP Paribas

Canada's Dollar Falls Most Since 1985 on Plunge in Commodities: “Canada's dollar plummeted the most in more than two decades this week as investors shunned commodities on concern that a slowing U.S. economy will curb global demand for energy, metals and grains.

The currency dropped 3.3 percent, the steepest since 1985, as commodities slumped. Gold declined 11 percent from a record earlier in the week, and copper posted its biggest weekly decline in 10 months. Crude oil fell more than $13, going below $100 a barrel for the first time since March 5. Commodities account for about half of Canada's exports. The oil sands in Alberta contain the largest crude deposits outside the Middle East.”

Duh. What did you think would happen to global demand? China isn’t building factories for internal consumption. Not yet. They’re building them for us. To make shiny, fancy stuff for us. We buy less and they buy and build less. That means demand for commodities drops PRECIPITOUSLY. Nuff said. Trade accordingly.

(In five or ten years China WILL build for internal consumption. But not yet. That is another rung up on the economic development ladder. THEN we will see real, sustained demand for commodities. But not yet.)

Don’t forget about them there ‘monolines’ either. Ambac, MBIA and others are still in the same stinking mess. NOTHING has been resolved yet although they haven’t been in the news for a couple of weeks now.

FGIC, Bond Insurer Unit Ratings May Be Cut by S&P (Update2): “FGIC Corp. and its bond insurance unit may have their ratings cut again by Standard & Poor's because of doubt about their ability to raise capital and take on new business.

Financial Guaranty Insurance Co.'s A rating and holding company FGIC's BBB ranking were put on CreditWatch with “negative implications,” S&P said today in a report.

FGIC, owned by Blackstone Group LP and PMI Group Inc., has proposed splitting in two to protect the ratings on municipal bonds it guarantees after the insurance unit lost its top AAA credit ratings. Bond insurers including FGIC and MBIA Inc. use their AAA ratings to back about $2.4 trillion of debt. Losing that imprimatur jeopardizes the debt rankings of thousands of schools, hospitals and local governments around the country.”

In fact that financial stresses are spreading. CIT Group Inc. (CIT), the biggest independent U.S. commercial finance company, said it expects to raise $5 billion to $7 billion in the first quarter from asset sales, which won't include the New York-based company's four “marquee” commercial finance units. CIT also tapped an emergency line of credit for $7 billion.

CIT Plans Asset Sales to Quell Concerns About Cash Shortages: “CIT Group Inc., trying to quell concerns about a cash shortage at the biggest independent U.S. commercial lender, may raise as much as $7 billion from asset sales and said it has enough money to last through 2008.

CIT Taps $7.3 Billion of Bank Lines Amid `Disruption' (Update3): “CIT Group Inc. shares and bonds plunged after the largest independent U.S. commercial finance company fell victim to the freeze in short-term debt markets.

The company drew on its entire $7.3 billion of emergency credit lines today after ratings downgrades left it unable to finance itself with commercial paper, or debt due in nine months or less. Chief Executive Officer Jeffrey Peek said the “protracted disruption” in capital markets may also force the New York-based company to sell assets. CIT has started seeking a “strategic funding partner” he said on a conference call.”

Considering the company WASN’T actually profitable going into this mess, I’m going to say ‘good luck’ to Mr. Peek and CIT shareholders because they are really going to need it.

Related Headlines:
Hungarian Retail Sales Fell for 12th Month in January (Update1)
Crude Oil May Fall as Dollar Rises, Demand Wanes, Survey Shows
Fed Denies Report It's Involved in Talks on Buying Mortgages

Massive De-leveraging Slams Commodities

Margin requirements have been raised at most of the major exchanges over the last couple of days. More importantly, margin requirements on CFD’s (Contract For Difference) have been raised DRASTICALLY. CFD’s are the weapon of choice for commodity investors. That is literally sucking the life right out of the usual suspects: Oil, and Gold. All other commodities, especially those that have gone parabolic, metals and softs, are getting the same treatment. This is MASSIVE de-leveraging at its best.

A simultaneous bounce in the US dollar isn’t helping any either. The US Dollar is bouncing from deeply oversold territory after a steep steady decline. A protracted bounce WILL SMASH commodities. A protracted bounce is quite plausible as the weakness in the Euro area economies becomes more obvious.

European March Services, Manufacturing Growth Cools (Update1): “Growth in Europe's service and manufacturing industries slowed more than economists forecast this month, a sign that the euro's appreciation to a record and oil prices above $100 a barrel are hurting economic expansion.

A preliminary estimate of Royal Bank of Scotland Group Plc's composite index fell to 51.9 in March from 52.8 in February, Reuters Plc reported. Economists expected a decline to 52.4, according to the median of 14 forecasts in a Bloomberg News survey. A reading above 50 indicates expansion.”

Dollar Rises Against Euro, Yen as Oil, Commodity Prices Decline: “The dollar rose to its strongest in a week against the euro as speculation a global economic slowdown will reduce demand for raw materials pushed gold and oil lower.”

This morning oil went deep into the $99 handle and gold is pushing to get below $900. What did you think a global economic slowdown would do? Duh.

On 03/11/08 I warned of this sudden break in my post Parabolic Commodities: The End is in Sight. There will be spectacular bounces, but they will be nothing but shorting opportunities. Recent price action in equities is a perfect example. Strength is now to be sold, not weakness bought.

Check out Bespoke’s Commodity Snapshot for another closer look.

The Fed cut 0.75, unleashing a massive short squeeze in the S&P 500 (SPX). Prices jumped 4% plus only to stall out yesterday around the 1340 area. Failure around the 1270 area would result in a cascade of selling that NOBODY can halt. The Fed is almost out of ammo and tricks. It is now only a matter of time before the final rinse cycle...

How do we know it was nothing but a short squeeze? How do we know it wasn’t REAL, SUSTAINABLE buying? The folks at Bespoke did all the hard work and collected the data in Short Covering Rally?

Bernanke May Run Low on `Ammunition' for Loans, Rates (Update1): “Federal Reserve Chairman Ben S. Bernanke may be running out of room to pump money into the financial markets and cut interest rates to rescue the economy.

The Fed has committed as much as 60 percent of the $709 billion in Treasury securities on its balance sheet to providing liquidity and opened the door to more with yesterday's decision to become a lender of last resort for the biggest Wall Street dealers. The central bank has cut short-term rates by 2.25 percentage points since September and will probably reduce them again tomorrow.”

This has been picked up by others, but is important enough for me to stress again here. The Fed has FINITE resources. They are being RAPIDLY DEPLETED. With rates now at 2.25 there is not much left on the rate cut front. With 60% of the balance sheet committed, there is not much left there either. The markets are LARGER than the Fed. There is a limit to how much the Fed can do.

“The actions mean the Fed, and consequently U.S. taxpayers, are assuming additional credit risks.”

In the end, the US taxpayer WILL get stuck with any bill.

Hellasious over at Sudden Debt got it right in his post: The Fed As Bank: “The Federal Reserve may be a central bank with special rights and obligations, but in the end it, too, is a bank and has to be very careful who it lends to and what kind of collateral it accepts in exchange.”

Bernanke has been anything but CAREFUL. The Fed is now sitting on all the junk NOBODY else wants. Hopefully it can give it all back in time…

Related Posts:
The Truth About Our Financial Problems In America

TAF, TSLF, PDCF Explained

Ben Bernanke and the Fed continue to flail desperately. The Fed has now put in place three new and different programs in an attempt to inject liquidity in to the financial system.

Below is everything you ever wanted to know about all of them:

Primary Dealers Credit Facility (PDCF): “The Federal Reserve has announced that the Federal Reserve Bank of New York has been granted the authority to establish a Primary Dealer Credit Facility (PDCF). This facility is intended to improve the ability of primary dealers to provide financing to participants in securitization markets and promote the orderly functioning of financial markets more generally.

The PDCF will provide overnight funding to primary dealers in exchange for a specified range of collateral, including all collateral eligible for tri-party repurchase agreements arranged by the Federal Reserve Bank of New York, as well as all investment-grade corporate securities, municipal securities, mortgage-backed securities and asset-backed securities for which a price is available.

The PDCF will remain in operation for a minimum period of six months and may be extended as conditions warrant to foster the functioning of financial markets.”

PDCF FAQ

Term Securities Lending Facility (TSLF): “In addition to the daily Securities Lending program, the Bank will provide Treasury general collateral financing though a weekly Term Securities Lending Facility (TSLF) to promote liquidity in Treasury and other collateral markets and thus foster the functioning of financial markets more generally. The program offers Treasury securities held by the System Open Market Account (SOMA) for loan over a one-month term against other program-eligible general collateral. Securities loans are awarded to primary dealers based on a competitive single-price auction held on Thursdays at 2:00 pm eastern standard time.”

TSLF FAQ

Term Auction Facility (TAF): “Under the term auction facility (TAF), the Federal Reserve will auction term funds to depository institutions. All depository institutions that are eligible to borrow under the primary credit program will be eligible to participate in TAF auctions. All advances must be fully collateralized. Each TAF auction will be for a fixed amount, with the rate determined by the auction process (subject to a minimum bid rate). Bids will be submitted by phone through local Reserve Banks.”

TAF FAQ

Bear Stearns is Dead, Lehman is Probably Next

Fed Cuts Discount Rate, Lends More to Avert Meltdown (Update2): “The Federal Reserve, struggling to prevent a meltdown in financial markets, cut the rate on direct loans to banks and became lender of last resort to the biggest dealers in U.S. government bonds.

In its first weekend emergency action in almost three decades, the central bank lowered the so-called discount rate by a quarter of a percentage point to 3.25 percent. The Fed also will lend to the 20 firms that buy Treasury securities directly from it. In a further step, the Fed will provide up to $30 billion to JPMorgan Chase & Co. to help it finance the purchase of Bear Stearns Cos. after a run on Wall Street's fifth-largest securities firm.”

This is historic… and insane. The Fed is taking on real risk now by putting that $30 billion on its own balance sheet. That just screams desperation.

Also, WTF was Bear Stearns into? JPMorgan was obviously unwilling to take ANY risk on Bear Stearns. None. What do they know? Things are obviously quite bad. A couple of detonations in the Level 3 asset sphere perhaps?

“We learned that Bear Stearns's balance sheet on close examination was worth a 10th of its market value.” -Vincent Reinhart, former director of the Division of Monetary Affairs at the Fed and now a scholar at the American Enterprise Institute in Washington.

Yup. Definatley the Level 3 assets bomb.
See my post Level 3 Rules for more on Level 3 hocus pocus.

JPMorgan Agrees to Buy Bear Stearns for $240 Million (Update2): “JPMorgan Chase & Co. agreed to buy Bear Stearns Cos. for $240 million, about 90 percent less than its value last week, after a run on the company ended 85 years of independence for Wall Street's fifth-largest securities firm.

Shareholders of Bear Stearns will get stock in JPMorgan equivalent to about $2 a share, compared with $30 at the close on March 14, the New York-based companies said in a statement late yesterday. The Federal Reserve is providing financial backing to JPMorgan, the second-biggest U.S. bank, and also cut the rate on direct loans to banks in its first emergency weekend action in almost three decades to stave off a broader market panic.”

Well, that was quick. The implosion I mean. It took 83 years to build Bear Stearns up to $158 a share and only a year or two to secretly destroy that wealth and take Bear Stearns down to $2 a share.

As far as “staving off a broader market panic”, not going to happen. Lehman brothers is next in line. Rumours already abound that Lehman doesn’t have sufficient liquidity.

Brokerage Stocks May Drop 50% More, Oppenheimer's Whitney Says: “Banks and brokerages may fall by half because Bear Stearns Cos.'s sale to JPMorgan Chase & Co. for $2 a share will create a "major negative revaluation'' of financial shares, Oppenheimer & Co.'s Meredith Whitney said.

“Financial stocks have further downside of as much as 50 percent based upon 1990/1991 multiples of tangible book values,” Whitney, the analyst who correctly predicted Citigroup Inc. would reduce its dividend, wrote in a report today.”

Price in a good 2 or 3 years of recession and you’ve got to seriously cut estimates and multiples.

BOE Offers Banks Emergency Cash to Ease Money Markets (Update2): “The Bank of England offered extra cash to banks, the first short-term emergency operation in six months, to alleviate tensions in money markets.”

More cash and more liquidity is being tossed at the problem. This is yet another attempt to bring LIBOR down and to get the banks lending to each other again.

LIBOR is seriously spiking right now. MASSIVELY.

Related Headlines:
Bear Stearns's Schwartz Fought Collapse as Cayne Played Bridge
Buy Signals Abound in U.S. Stocks Near Bear Market (Update1)