RCM Editorial: The Redemption Wave -- Is It Ebbing? US$, US Treasury & Gold -- Changes Brewing

The key to successful position taking going forward is for us to identify shifts in investment psychology. We are looking for divergences from the trading pattern of the last few months. The pattern has consisted of the following to name just a few:

--Increasing credit spreads
--Strength in the US$
--Strength in US Treasury bonds
--Weakness in commodity prices; with emphasis on gold and oil
--Weakness in the equity markets
--Record number of redemptions from mutual funds (both equity and bond), hedge funds & money market funds

The redemption and repatriation wave have been the keys to the exaggerated equity market slide since September and have led to many of the developments listed above. If we can identify when this wave is ebbing then we may have a clue as to when markets will stabilize. The stories listed below may be offering us a glimpse of change. Of course, we will need to see more stories like these over the next few weeks to really build a case for a new direction.

Got Gold Report – COMEX Commercials Least Net Short Gold In Years. By Gene Arensberg The big news this week is that the largest of the largest traders for gold futures, the commercial traders on the COMEX, are now the least net short gold they have been in years. ATLANTA (ResourceInvestor.com) -- Regardless of whether or not the world is near the end of the giant financial "Charlie Foxtrot" we have all endured up to now, the largest of the largest traders of gold futures now have the fewest bets that the U.S. dollar price of gold will fall further than they have had in years. As of Tuesday, November 4, traders classed by the Commodities Futures Trading Commission (CFTC) as commercial held a collective net short position (LCNS) of just 76,406 out of a total 303,908 contracts on the COMEX, division of NYMEX in New York. A net short position means that the trader profits if the commodity goes lower in price.Yes, the current COMEX commercial gold net short positioning is the lowest in years. Indeed, we have to go all the way back to June 7, 2005 to find a reporting week which shows a lower LCNS (67,052 then), back when gold closed at $424.87.

Trim Tabs - Speculative traders seem to be growing concerned that the U.S. will resort to the printing press. The net position of speculative traders on U.S. dollar index futures fell to zero on November 4, down sharply from a peak of 2.3 million contracts on July 29. Note that speculative traders turned bullish on dollar index futures right before the dollar rally began this summer.

Greg Harris - I say the key right now is in the share markets. I realize the problems are stemming from the debt market, but the share market market cap restoration is what is needed to tilt the equation in favor of money creation as opposed to money destruction. A 2% move up in the US market along with corresponding moves in the rest of the global markets creates trillions of new wealth. This is one reason why the US dollar is currently inversely related to the stock market....when the market is going up the money creation is winning over the money destruction; given a more or less constant demand for dollars it goes down. Another major reason is that if you look at the whole thing as a giant debt balloon eminating from the US, which is what it is, when the balloon is inflating that means US dollars are being deployed into other currencies for investment, and vice versa.

Hat Trick - The high USTBond principal value and high USDollar exchange rate will encourage foreign bond holders to begin to “spend” their artificially high valued USTreasury Bond securities before events occur to greatly undermine their value. See for instance the Chinese announcement to spend $568 billion in a stimulus package. Although great news for the commodity and reflation trade, this cannot be seen as good news for the USTreasuries. They will lose a strong Chinese bid, or see outright selling. The Chinese plan calls for strong support of public housing, infrastructure, railways, and indirectly demand for commodities. Contrast theirs to US plans to support failed financial firms and deeply rooted corruption of marquee named financial firms, at the exclusion of mainstream businesses. Other nations will soon be forced to defend their own domestic currencies against an unreasonable decline in exchange rate, the result of the Black Hole in USTBonds. Currencies from nations ranging from Europe to Brazil to Russia will react by selling their USTBond reserves, and to use them for purposes consistent with why those reserves were accumulated in the first place.

Fleckenstein Capital - The long bond was particularly weak after a terrible 30-year auction that saw both a long tail and poor bid-to-cover ratio. I point that out because for those of us looking for a potential funding crisis, I am searching for clues as to when that might begin.

Banks keep lending, but that isn't easing the crisis - WSJ reports all around Washington, policy makers are scrambling to figure out how to get banks lending again. Lawmakers have criticized banks for not using new federal money to make loans and have threatened to place conditions on additional money. Regulators last week sent out a directive, encouraging banks not to hold back on lending. But there's a flaw in that logic. Banks actually are lending at record levels. Their commercial and industrial loans, at $1.6 trillion in early November, were up 15% from a year earlier and grew at a 25% annual rate during the past three months, according to weekly Federal Reserve data. Home-equity loans, at $578 billion, were up 21% from a year ago and grew at a 48% annual rate in three months. The numbers point to one of the great challenges of the crisis. The credit crunch is surely real, but it is complex and not easily managed. Banks are lending, but they're also under serious strain as they act as backstops to a larger problem -- the breakdown of securities markets. The worst of the credit crisis is being felt not in banks but in financial markets. Loans from a bank might stay on its books. Increasingly in the past decade, loans were packaged into securities and sold to investors around the world. Institutional investors gobbled up this and other kinds of credit that didn't come via traditional commercial banks, such as junk bonds or commercial paper. To get credit flowing, policy makers need to repair financial markets as well as banks. But investor confidence in credit markets has been shattered, in part because many debt securities performed so much worse than their credit ratings suggested they would.

RCM Comment: I can't believe it! The Wall St. Journal actually got a story right. In fact, the WSJ has put its finger right on the central nerve of the credit problem. Read this story closely and you will be able to understand why real estate prices will have a hard time recovering. Housing prices reached bubble levels because loans were bundled, securitized and sold through Wall St. to pension plans, endowments and other investors. This securitization process has failed and been destroyed. The investment banks that created the process are either out of business or trying to turn into banks to survive and the pension plans that bought the products have lost so much money they are in jeopardy of not being adequately funded.