A Rational Day on the Irrational Market: MAI on Minesite UK, ABX, KGC, Noront NOT, AUY, NewMont - Miners up 15-20% on Interest Rate Cut

It's nice to see the nice jump on major gold producers yesterday. In a day when swings went from one extreme to another - the only solid rally was in precious metal and producers.

Shares of some top gold companies were up at the close of trading: Barrick Gold rose $5.21 or 17.1 percent, to $35.71. Gold Fields rose $2.17 or 32.1 percent, to $8.94. Goldcorp rose $5.11 or 19.7 percent, to $31.02. Newmont Mining rose $4.82 or 14.8 percent, to $37.33 

Kinross KGC was up almost 20% 

Yamana AUY was up 16%.. yet most of these companies are still at their 52 week lows!

As reality hits closer to home with unemployment rising and the irrefutable facts of rising daily expenses (food, gas, etc) - people are starting to lose trust in the government.

Today Paulson is stating that government may end up investing in banks directly.

Treasury officials say the just-passed $700 billion bailout bill gives them the authority to inject cash directly into banks that request it, and the right to take ownership positions in those banks, the New York Times reported in its online edition in a story citing unnamed government officials.

Such a move would quickly strengthen banks' balance sheets and, officials hope, persuade them to resume lending, the Times said.

The Treasury plan, still preliminary, resembles one announced on Wednesday in the U.K. 

Wasn't that what many already proposed they should have done for the massive bailout plan already? Not only have the FRB trapped themselves and future generations of taxpayers in a downward spiral of debt - the worst part is many of these investments are not being "marked to market" - but instead purchased at a reverse auction process where the original culprits (bankers, insurers, etc) tell the government the lowest price they would be willing to accept. 

There are a lot of issues with reverse auctions.  Bonds aren't stocks; there are a lot more of them, and they're much more idiosyncratic.  The securities that the government is proposing to buy are even more complicated than ordinary bonds.  

This means there's a gigantic asymmetrical information problem:  the owners of these securities know much more about them than the Fed.  And there isn't (obviously) a large liquid market for the Fed to check against.  So the Fed is likely to overpay, because there won't be a lot of bidders in any one auction.

Second, because there are so many different securities, auctions will take a lot of time.  The whole argument in favor of this bailout is that we don't really have a lot of time.

Third, the reverse auction arguably solves one problem--what are these securities worth?--by adding another:  the aid isn't targeted to the institutions that necessarily need it, or can use it the best.  It's targeted towards those who will bid the lowest.  Maybe that will be institutions in distress.  Or maybe it will be solvent firms looking to clean up their balance sheet.

Relatedly, using a price discovery mechanism means that the bailout may not give distressed firms enough capital.  There's no point in buying distressed securities if the banks go bust anyway.

Thus, while reverse auctions may feature in the final plan, they're unsatisfactory, and probably will not be the primary vehicle for recapitalizing banks.  So I still want to know:  what's the plan?

In other words, where's the free market mentality in that? If you are selling something that it has NO bids on it, one would realize perhaps you are asking too much for it. This is what a normal auction or sale should be like.

A reverse auction works against this logic and have the buyer state the lowest price he or she would be willing to accept for a certain item. While in auction scenario the buyer would have the freedom to choose, there's a high degree of doubt that the government would have that much resource to analyze most of the proposed costs of the bailout plan candidates... yikes.

Speaking of the bailout plan bailee's (parties receiving bailout plan budgets!), remember the Terminator Arnold? Well they are really asking the Feds to include California in the list of really needy people - as they can't even afford to keep their doors open until the end of October?

Is California too big to fail? Was Lehman LEH too big to fail? How about Washington Mutual? How about CalPERS, the huge $250 billion pension fund that bought Bear Sterns at $90+ a share?

Even before the vote on the $700 billion bailout bill last week, the wily Terminator of fiscal discipline had a letter on the desk of Treasury Secretary Henry Paulson making the case for a $7 billion loan to keep the nation's most populous state running past October. Arguing that California -- and many other states -- have been frozen out of the credit markets like a subprime homebuyer, Schwarzenegger said the state needs the money to pay teachers, cops, firefighters, nurses, and other state-funded enterprises of some importance.

California was quickly followed by Massachusetts, whose reputation as "Taxachusetts" hasn't seemed to help it stay above water. And now the race is on to see whether any of these states can tap into the bailout frenzy before all the money goes to save Iceland.

It was Jim Willie who said it recently... first it's the rapid inflation speed that the massive billion dollar bailout plans will stimulate, then comes state and possibly municipal level defaults on bonds, what's next? Possibly the worst time to be in the United States, period. Mr. Willie goes on to dramatize some more suggesting even the possibility of the next 3rd world country. 

While we here at Mining 101 are not nearly so pessimistic, some reasonable living supplies, precious metal bullions, and quality mining stocks would be our recommendation for the upcoming long weekend.