Ben Bernanke is now an even more-revered figure amongst traders and mere mortals. Why? With a few minutes on the television and a brief discussion about essentially how helpless FRB feels about the whole economy, typically the market falls about an average of 5% each time. (source: BNN and corresponding price chart vs schedules of his past speeches)
The curse seems to have been lifed yesterday with a promising rally of 688 points on the TSX and a nice 4% pop on the DOW.
Not so today.
As expected, yesterday's optimism stemming from possible rate cuts (confirmed) was irrational. This week is filled with earnings from major corporations in the US - and with softening demand from consumers the results are not likely to be good. With everything in sight dropping - it is a test of a goldbug (and commodity bugs)'s conviction in the tangible value of precious and base metals.
Stocks end lower amid mixed earnings reports
Tuesday October 21, 4:25 pm ET
By Tim Paradis, AP Business WriterWall Street declines as investors worry over earnings outlooks; credit markets ease NEW YORK (AP) -- Wall Street pulled back Tuesday as investors worried that companies' forecasts signal little easing of the weakness gripping the economy. After logging sharp gains in the previous session, the Dow Jones industrial average fell 2.5 percent, while the Nasdaq composite index lost more than 4 percent following a weak showing by technology names.
Strains in the credit markets eased further in response to a sweeping series of bailout measures by world governments, including a joint U.S. and European plan to buy stakes in private banks to boost to their lending. Demand for Treasury bills, regarded as the safest assets around, lessened further Tuesday in a sign that credit markets are gradually returning to a healthy state.
But analysts have warned that the market will see a stretch of volatile sessions as Wall Street recovers from this month's huge drop. Even though investors have been expecting third-quarter earnings, and even fourth-quarter forecasts, to reflect the damage from the financial system's problems, the reality of companies' reports have been unnerving.
"It's just this back-and-filling stuff. It's driven by earnings, yes, but also emotion," said Harry Clark, chief executive of Clark Capital Management in Philadelphia. "It's going to be this tug-of-war for a couple weeks at least."
The technology-focused Nasdaq saw steeper declines than the other major indexes after server and software company Sun Microsystems warned it would post a big loss for its fiscal first quarter and book a write-down. Texas Instruments shares fell to their lowest level in more than five years after the chip maker turned in disappointing earnings and issued a lackluster forecast amid slowing orders.
In other news, Mr. Helicopter Ben is now proposing a separate bailout package (yes, another one) in addition to the AIG, $700-850 billion, and other miscellaneous packages thus far.
The previous package had seemingly failed to do what they were designed to do, but instead reward the insider of the companies involved to unload toxic debts that will likely never amount to any "profits" as the official press records indicated. Thus, the baggage will be left again to the taxpayers. What's different about this package you ask? Hopefully instead of bailing out corporate insiders looking to dump their salary options onto the market - the money makes it to the lower income levels where they need it so badly - billions into food stamps, offset taxes and itemized mortgage, etc.
A step in the right direction - guaranteeing the GIC's and Money Market Funds are a must - investor confidence lost in equities and bonds will be devastating for everyone in the long run.
Our favorite mining juniors continues to take a beating, with TNR Gold holding at a low of $0.09 and Minera Andes dropping 10% to $0.60, a 3+ year low... and that was before any positive cash flow and 43-101 of 11.2 billion lb copper project Los Azules!!Fed would grant up to $540B to money market funds
Tuesday October 21, 11:52 am ET
By Jeannine Aversa, AP Economics WriterFed to provide up to $540 billion to help money market mutual funds WASHINGTON (AP) -- The Federal Reserve announced Tuesday that it will provide up to $540 billion in financing to bolster the money market mutual fund industry, its latest effort to get credit flowing more freely again.
The Fed's new program, called the Money Market Investor Funding Facility, will be used to support a private-sector initiative designed to provide liquidity, or cash, to money market investors. The Fed plans to back purchases of short-term debt including certificates of deposit and commercial paper that expire in three months or less from money market mutual funds.The funds are large buyers of commercial paper and CDs, which historically are considered safe investments. However, the credit crisis, which took a turn for the worse last month, has put money market mutual funds under pressure as skittish investors demand withdrawals.
"The short-term debt markets have been under considerable strain in recent weeks as money market mutual funds and other investors have had difficulty selling assets to satisfy redemption requests," the Fed explained.
On a brighter side of things, Barrick still holds on to nearly $2 billion in cash, and we are seeing some small moves into acquisition. Note: Barrick owns portions of TNR Gold.
Popular journalist Lawrence Roulston who has been taken some fire for recent picks in good country but facing downturn in market, has the following to say:
Investments are down Across the Board and Around the World, but the Worst Damage was Inflicted on Commodities.
We have all heard enough about how bad the financial situation is. There is no question that the markets are in a terrible mess. The U.S. credit crisis is serious, it is spreading, and it’s not going to get better over night. The situation is worse than nearly anyone imagined.
However, there are some bright spots and those bright spots represent investment opportunities.
As so often happens, the markets act like pendulums, swinging from one extreme to the other. A year and a half ago, the U.S. economy was booming, fuelled by a fraud of gigantic proportions that pushed housing prices and debt to absurd levels. The bursting of that housing bubble saw the pendulum swing to the opposite extreme as investors panicked and sold everything.
There may be a long period of transition as the various bailout measures kick in and get the economy back on track. But, let’s not forget that the U.S. has been through a number of difficulties and always manages to muddle along and then recover to be stronger than ever. I don’t believe that the U.S. will ever regain the level of supremacy that it once held in the financial world but the current crisis will pass, as it has every time before.
Look, the U.S. economy is not going to drop into some great black hole in the ground and suck the rest of the world in as some would have you believe.
As far as the rest of the world is concerned, it doesn’t really matter a great deal if the U.S. economy grows by 1 or 2% or shrinks by 1 or 2%.
Looking at the metals: China has been and continues to be the most important driver in the metals markets. Headlines are now screaming out that the Chinese economy is slowing. Those few investors who read beyond the headlines will see that China’s pace of growth has slowed from more than 11% a year to just over 10%.
If you think about it further, you will realize that 10% growth, coming on the larger base, actually represents the same amount of real growth as last year. India is still growing strongly, as is much of Asia. Similarly, the pace of growth is slowing, but is still at a pace that developed countries can only dream of.
Similarly, the popular press trumpets the fall in the oil price. It is only down when stacked up against the spike earlier in the year when speculators pushed it briefly to $140. When measured against the level of a year ago and two years ago, the oil price is up. Huge amounts of money are flowing to oil exporting nations which, like the Asian nations, are building infrastructure.
We constantly hear about the bursting of the commodities bubble. Yet, metal prices are still well above long term trends. Iron ore prices are still rising sharply: and definitely not driven by speculators. The prices are set by producers dealing directly with users.
When President Bush and the Treasury Secretary were trying to sell the bailout package, they painted a picture of dire consequences if the measure did not pass. That message seems to have been taken literally by many investors who are now even more terrified than they were before.
Whether the U.S. grows by a couple of percent, or shrinks by a couple of percent, other parts of the world continue to grow. It is important to note that the emerging markets are far more intensive users of metals that the developed world. The U.S. is more of a service-oriented economy, whereas China and the other developing nations are more heavily involved in building factories, housing, infrastructure and other things that use a lot of metal.
The net result is that world-wide demand for metals continues to grow. New sources of supply are needed to match that growing demand and to replace older mines as they are depleted. Much of the mining industry investment in this cycle has been directed to buying existing production.
The major producing mining companies are being valued on the basis that metal prices will fall hard based on a U.S. recession impacting the rest of the world. That hasn’t happened, and will not happen. And that means that the mining companies are being valued at exceptionally low levels in relation to actual and projected earnings. Teck Cominco represents exceptional value.
The majors have suffered, but the smaller companies have been beaten down to absurdly low levels. We are already seeing takeovers as the larger companies go bargain hunting. The smaller and mid-tier companies are beginning to merge. Those deals will be accretive to shareholder value as they will create larger and stronger companies.
Recovery in the junior mining sector will not be the same for all companies. Those companies that need to raise money in the near term will continue to face real challenges. Many will have to look to joint ventures, asset sales and mergers to find the money they need to move forward.
There are many small companies with defined metal deposits, strong management, and cash. Those companies will come back early in the recovery.
Some commentator’s worry that there will be no money for mine development. Clearly, if a junior walked into a bank tomorrow and asked to borrow a few hundred million dollars to develop a mine, they would get a rather chilly reception.
However, the smelter companies, the metal trading companies, and the majors are awash in cash and are seeking new supplies. Once the panic subsides, there will be a great many banks and other investors who welcome the opportunity to invest in tangible assets instead of the alphabet soup of financial hocus pocus that was on offer for the past few years.
I believe that the current financial mess will result in a return to more fundamental-based investing and that move will benefit mine developers. It won’t happen overnight, but it will come.
The message here is that those juniors that hold metal deposits that can be developed into mines will see a return to more rational values. Those companies that are still hoping to find a metal deposit at some time in the future may have longer to wait.
There is lots of cash available among the larger mining companies. Just looking in Canada, we see Barrick with nearly $2 billion, and Teck, Goldcorp and Inmet all sitting on more than a billion dollars of cash.
What I’m saying here applies equally to precious metals, base metals, minor metals and uranium. We aren’t looking to gains in the commodity prices. We are looking to companies that are adding value to their assets.
The most immediate market action is likely to come in the gold sector.
The cost of the financial bailout in the U.S. is measured in the trillions of dollars. The latest bailout package was $850 billion, including the tax breaks thrown in to get it approved. Add in the earlier bailouts and recognize that nationalizing Fannie Mae and Freddie Mac added $5 trillion dollars of liabilities to the U.S. government, bringing the total debt to $14 trillion.
Don’t forget the on-going wars in Afghanistan and Iraq and the huge trade deficit. The dollar was falling sharply before the burden of the bailouts was added. European governments are also conducting bailouts of failed banks.
Ironically, the bailouts have hurt the price of gold. That is a short term reaction, as traders seem to reason: “OK, the U.S. financial system isn’t going to collapse this week, I don’t need to own gold”, and they dump their holdings.
Anybody who takes a longer term perspective will realize that if a government simply keeps spending enormous amounts of money that it doesn’t have on things that do not generate a return for the economy, then the value of the currency will decline.
The whole financial mess, for many investors, has destroyed confidence in the global financial system.
Right now, investors seeking safety are flocking to U.S. treasury bills. That is particularly ironic, as the dollar, in the longer term, will suffer the most from the bailouts and the plummeting confidence. In time, gold will be the biggest beneficiary.
I can’t tell you what the gold price will be tomorrow, or next week or next month. Nobody can. I can tell you with certainty that the gold price will be high enough that the major gold producers will continue to mine it.
As long as gold companies are mining gold, they will be looking for new deposits to at least offset the amount mined each year. The juniors will continue to play an important role in finding and developing new gold deposits.
It doesn’t really matter what the gold price is: a new discovery will generate big returns for shareholders of a junior gold company. Advancing a deposit toward production will generate returns for shareholders of a junior gold company.
It’s not hard to make the case that the situation in the junior mining sector will improve in time. Of course, we all want to know precisely when the markets will turn around.
Just remember that the situation always looks bleakest at the bottom of the market and it looks rosiest at the top of the market. It requires a lot of nerve to invest contrary to what appears to be the right thing to do. At present, at least on the surface, this appears to be a really bad time to be investing. And that makes it the best time to be buying.
The greatest gains come from buying at the bottom of the markets and selling at the tops. That means buying when prevailing wisdom says it is a bad time.
We will never know exactly when the bottom is. Here are some things to consider at present. Over the past few weeks, Warren Buffet has invested $12.7 billion into the markets, including $5 billion into Goldman Sachs, one of the investment banks. The popular press thinks it strange that Buffet is investing at a time when things are so bad. But, that is precisely how he became the world’s richest investor.
Other signs that the worst may be over: the U.S. bailout has been approved. It will take some weeks for the program to be implemented, but at least bankers know there will be relief coming.
The failed banks are being snapped up quickly by other banks. In the latest deal, Citigroup tried to scoop up Wachovia within a day of its collapsing, but they were outbid by Wells Fargo.
Citigroup, which had the smarts to avoid the moves that led other banks into trouble, published a report last month that examined the commodities. They concluded:
"It is important not to lose sight of the long term picture. We regard these conditions as a correction ... in a secular bull market. The drivers of the super cycle - urbanisation and industrialization in China and supply shortfalls are intact. … Indeed the next up-cycle could be even more powerful than its predecessor."
If that report had come from one of the failed banks, I would not have paid much attention. Citi had enough smarts to avoid the mistakes that overtook so many of the other banks.
Investors are not going to suddenly rush back into the junior resource markets. But, those who buy the solid companies at the present severely depressed prices stand to enjoy big gains in the fullness of time.
The most immediate reaction will come from within the industry. Smaller companies will merge in deals that add shareholder value. The larger companies will be taking over smaller companies with good deposits.
To give an indication of the valuations: At present, major gold companies are valued on the basis of just under $200 per ounce of total gold resources.
Juniors, on average, are valued at a mere $29 per ounce. At prices like that, the juniors must look extremely enticing to the larger companies. Obviously, there would be takeover premiums that would generate returns from the current price levels.
Another interesting area is platinum: the price is down 60% from the $2,300 level earlier this year. Demand is growing and supplies are constrained. The market was clobbered by a big selloff by a platinum ETF.
It’s a similar situation for silver.
Uranium is going to come back in the not too distant future. Soon enough, investors will again wake up to the fact there is an energy shortage and uranium stocks will again become popular.
Panic selling at this stage is definitely the wrong thing to do. Taking advantage of the panic selling of others could net you some good companies at attractive prices. Be selective. Be patient. The market will come back.
Lawrence Roulston
http://www.kitco.com/ind/Rouls.....52008.html
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