RCM Reprint: Quantitative Easing by Karl Denninger

RCM Comment: We have been writing in this blog over the past few months about the inevitability of reaching the quantitative easing phase of this credit crisis. Well, here we are! The last Fed meeting ushered in an era of quantitative easing perhaps never seen before in history. In light of this sad fact we here at RCM feel it necessary to reprint this piece written by Karl Denninger of the blog The Market Ticker. Karl offers a comprehensive explanation of quantitative easing and how it works, or in this case, will not work.

Let's first talk about what "Quantitative Easing" IS.

That phrase applies to a central bank (in this case our Fed) lowering interest rates to zero. You can't lower rates below zero, so what comes next is to "quantitatively" ease money - that is, "in quantity" print up reserves and buy "assets", thereby throwing yet more money into the economy.

In theory, anyway. See, the economic theory is that when you lower interest rates people want to borrow more money, because it's cheaper to do so. Therefore, when you want the economy to expand (faster) you lower interest rates, which makes it more likely that people will borrow.
When people borrow they either spend or invest those funds, and both produce more GDP. If I buy a new flatscreen TV on credit that counts in the GDP of the economy, as does the farmer who borrows to buy seed and grows a crop of corn.

The problem is that the flatscreen TV purchase isn't really an increase in GDP; its a TIME SHIFT. Without borrowing the money, you see, I'd have to earn it first then buy the TV. By borrowing the money I am able to purchase the TV sooner than I would otherwise; ergo, I haven't actually changed demand in total, but instead have changed when the demand occurs.
Of course the downside of this little game is that the TV that I buy today is one I don't need to buy tomorrow. I'm robbing tomorrow's GDP to add to today's.

This is why I have maintained all along that the debt-to-GDP graph (which I know you are probably tired of seeing by now, but here it is again!) is so important:

Let's take GDP over a longer period of time - say, 10 years, and make a law that says there is no credit to be extended. That is, you pay cash or you don't buy. We add up all the output for the entire 10 year period and put it in a bucket.
That's the total output of the economy over the entire ten year period, along with all the productivity that enabled it. Now let's add credit to the system. What happens? Some people will immediately "pull from forward earnings" via credit. That is, they will purchase a TV they want today with earnings that they believe they will have tomorrow. This is the old "Wimpie" game from the Popeye cartoons - "I will gladly pay you Tuesday for a hamburger today!"

Now, here's the question - has the addition of credit actually added to GDP, or just shifted in time when the GDP is recorded? If - and only if - the credit extended is used for the purpose of producing additional output, then it is a net additive to GDP. If a farmer has 100 acres of land but only enough money to buy seed for 50 of those acres, his employment of credit to buy the other 50 acres worth of seed increases net GDP because he is using that credit line for the explicit purpose of increasing the net output of his labor. The credit extended to him is liquidated when the additional output is produced, but the output (less the cost of the credit) remains.
When credit is used in this fashion the debt-to-GDP ratio falls because the amount of debt outstanding remains the same or declines while the GDP increases. If you instead consume, however, you have only performed a time shift on demand, not added to actual demand. In fact due to interest cost you have shrunk the total (long-term) demand that exists in the economy because interest does not accrete to GDP.

We all recognize Wimpy from the Popeye Cartoons as a scam; why is it that we don't recognize that what Bernanke is attempting to do is precisely the same damn thing and demand that he stop it!
If you look at the GDP over a long enough period of time, this becomes obvious and indisputable - that which is demanded today isn't necessary tomorrow, and there is no long-term salutary impact on the economy.

The third condition is when debt-to-GDP expands dramatically, as it has been now for the last 30 years. In this case credit is being used to both pull forward demand and to pay the interest on previously-extended credit! This latter case is insanely destructive when maintained over a long period of time, because there is a natural limit beyond which credit cannot be expanded nor can demand be pulled forward. At some point the people have all the cars, IPods and flatscreen TVs they need, and their want for additional consumption becomes tempered by the pain of the debt service that came with "pulling forward" from an infinite future horizon. In short continuing demand becomes irrelevant because debt service chokes off available free cash flow.

"Quantitative Easing" into such an environment, which we are now in, is a complete and utter waste of time because it in fact requires that additional debt be taken on in the economy in order to do anything. That is, buying assets from banks and pumping reserves back into them so they can loan them out only boosts aggregate demand if there are in fact qualified borrowers who wish to take out a loan to buy something. Some so-called "economists" will argue that lowering borrowing costs acts as a stimulative effect in that interest costs come down. This is only true to the extent that there is unsatiated demand among unsaturated (by debt) consumers.

We have spent thirty years pulling forward demand at an ever-increasing rate. The graph above proves this. We have too many automobiles, flat-screen televisions and houses for the amount of aggregate demand that exists in the economy and the debt overhang has been left behind on consumer balance sheets - it has not been worked off. The "economics of more" have been pulled forward so far that there is nothing further to pull forward for those who have any hope of being able to pay the bill down the road. You can take me to the best restaurant in town but if I just ate my fill that $100-a-plate steak is going to sit and get cold in front of me. The paradox is that ever-increasing stimulus into such a condition will ultimately destroy the currency and economy where it is attempted.

As each attempt at "Quantitative Easing" fails to raise demand a more intrusive and expansive one will be demanded. As the velocity of money dwindles toward zero confidence is lost - a non-circulating currency is very difficult to value! This is what has happened over the last year and a half. Bernanke has cut interest rates from over 5% to zero and yet aggregate demand has fallen in the economy because those who can borrow to consume are sated and those who are either over-leveraged or insecure in their ability to pay will not (or cannot) borrow irrespective of the cost of money. In addition the very act of Quantitative Easing puts a hard "bid" into government bonds. As their yields collapse toward zero up the curve prices for those bonds skyrocket and blow off in a parabolic fashion. This sounds great for the holders of those bonds (e.g. foreigners), except for one small problem - all bubbles burst, sophisticated investors know this, and in order to realize those paper gains you have to sell! Anyone who has seen one parabolic blow-off top on a chart knows what comes after the peak is reached. Eventually someone comes to the conclusion that "it's just not going to go any further" and sells. This begins the collapse in price (and skyrocketing yield) which places the central bank in an extraordinarily-difficult position - if they "take up" all of the supply to prevent the yield from shooting higher they are printing money of zero velocity which does nothing, and once all that supply has been taken up they're out of ammunition and holding the bag on bonds that are worth nowhere near what they paid for them!

Oops.
It is time to face the facts - "Quantitative Easing" cannot and will not stimulate demand and "reverse a deflation" if there is no capacity (or desire) to borrow irrespective of how cheap you make the money or how much of it you pump into the economy.
To explain all this in one sentence:
You can't solve a drunk's alcoholism with a bottle of whiskey.
Bernanke's thesis has been debunked and both his doctorate and position should be revoked.

News that Moves: Japan/U.S. Debt Forgiveness & India/Pakistan Unrest

RCM Comment: Two new developments on the international front that could significantly shape the investing climate in the new year. Both add to the appeal of gold as a safeguard of wealth.

Dec. 24 (Bloomberg) -- Japan should write-off its holdings of Treasuries because the U.S. government will struggle to finance increasing debt levels needed to dig the economy out of recession, said Akio Mikuni, president of credit ratings agency Mikuni & Co.
The dollar may lose as much as 40 percent of its value to 50 yen or 60 yen from the current spot rate of 90.40 today in Tokyo unless Japan takes “drastic measures” to help bail out the U.S. economy, Mikuni said. Treasury yields, which are near record lows, may fall further without debt relief, making it difficult for the U.S. to borrow elsewhere, Mikuni said.
“It’s difficult for the U.S. to borrow its way out of this problem,” Mikuni, 69, said in an interview with Bloomberg Television. RCM Comment: Can you imagine the response of other nations that hold a significant amount of U.S. debt? What will China's reaction be to U.S. debt forgiveness?

Pakistan moves troops toward Indian border - AP
AP reports Pakistan began moving thousands of troops away from the Afghan border toward India on Friday amid tensions following the Mumbai attacks, intelligence officials said. The move represents a sharp escalation in the standoff between the nuclear-armed neighbors and will hurt Pakistan's U.S.-backed campaign against al-Qaida and Taliban taking place near Afghanistan's border. Two intelligence officials said the army's 14th Division was being redeployed to Kasur and Sialkot, close to the Indian border. They said some 20,000 troops were on the move. Earlier Friday, a security official said that all troop leave had been canceled. The officials spoke on condition of anonymity because of the sensitivity of the situation... Prime Minister Manmohan Singh met Friday with the chiefs of the army, navy and air force to discuss "the prevailing security situation," according to an official statement.

News that Moves: China,Obama & the IMF, Commercial Property Woes, Meriwether

RCM Comment: The following three stories illustrate the desire for liquidity both here and abroad. And while billions of US$s & trillions of Yuan are created the IMF still feels this is not enough as they make their case for even more spending. As a reader of this blog you know that fiat currencies are easy to create. All you need is paper, ink and a printing press. I have highlighted in GOLD the sentences that hold a clue to the best investment vehicle during times of extreme currency printing. Can you guess which asset I am recommending?
China cuts rates, bank reserve ratio to boost economy - DJ
DJ reports China said it will lower deposit and lending rates as well as banks' reserve requirement ratio as part of continued efforts to boost liquidity and ease the country's economic woes. Analysts said more interest rate cuts are likely as China's government continues to worry about a sharp slowdown in the domestic economy, even after it recently launched a 4 trln yuan economic stimulus plan and eased restrictions on the development of the property market. The People's Bank of China said it will cut the one-year yuan lending rate to 5.31% from 5.58%, and the one-year yuan deposit rate to 2.25% from 2.52%, effective Tuesday. The PBOC said it is also cutting banks' reserve requirement ratio from Thursday by 50 basis points.

Obama expands goals of stimulus - Financial Times
Financial Times reports Barack Obama has expanded the goals of his proposed economic stimulus, with a plan to create or save an additional 500,000 jobs. The president-elect raised his jobs target over the next two years to 3 mln -- up from the 2.5 mln goal set last month -- after US unemployment hit its highest level for 15 years in November. Transition officials said Mr Obama had agreed the outlines of a $675 bln - $775 bln two-year recovery plan last week. But the price tag is likely to rise above $800 bln as Congress makes its own demands during the legislative process. The moves come amid a warning on Sunday, from the International Monetary Fund, that governments must act more aggressively to prevent a deeper slump. Dominique Strauss-Kahn, IMF managing director, told BBC radio that inadequate stimulus measures risked making the slowdown worse than expected next year. "I'm specially concerned by the fact that our forecast, already very dark.. will be even darker if not enough fiscal stimulus is implemented," he said.

IMF head worried about lack of fiscal stimulus - Reuters.com
Reuters.com reports International Monetary Fund chief Dominique Strauss-Kahn said a lack of fiscal stimulus by governments to tackle the global slowdown may make a bad 2009 even worse, according to an interview. Strauss-Kahn told BBC radio that the IMF may need to cut its next economic growth forecasts, due in January, referring to "2009 as really being a bad year." "I'm specially concerned by the fact that our forecast, already very dark ... will be even darker if not enough fiscal stimulus is implemented," he said in an interview. "The question of having social unrest has been highlighted by journalists and I can understand that, but it's only part of the problem," he said. "The problem is that all the whole society is going to suffer."

RCM Comment: I spent time at an investment conference recently and had the good fortune to meet some quality people involved in the commercial property market. This market had held up well vs other real estate assets until October at which point business froze seemingly over night. The key take away from this conference was the high likelihood that the commercial property market would be the next "shoe to drop" in this snowball of a financial crisis.
Times of London discusses commercial property sector pleas for help from Washington
Times of London reports America's commercial property industry got out the begging bowl yesterday as the credit crisis tightened its grip on the world's biggest economy. Amid grave warnings that thousands of office blocks, hotels and shopping centers are braced for bankruptcy, representatives of the industry went cap-in-hand to Washington. Henry Paulson, the US Treasury Secretary, managed to secure $700 billion of taxpayer funds in October to help to bail out Wall Street banks. It emerged yesterday that representatives of America's real estate bodies have written to Mr Paulson, who has only a month left in office before he is succeeded by Tim Geithner, requesting federal assistance. In a letter sent to Mr Paulson, signatories representing a dozen property trade groups, wrote: "We believe there is insufficient systemic capacity to refinance expiring, performing commercial real estate loans. For many borrowers, [credit] is not available."... In recent weeks, executives from the US commercial property market have been engaged in talks with the Treasury, Harry Reid (the Senate Majority Leader), the Federal Deposit Insurance Corporation and members of Barack Obama's transition team. As a result of those talks, it is understood that both the Treasury and the US Federal Reserve have agreed to consider assisting the commercial property market with loans. However, such a measure would not come into effect until February at the earliest.

Developers ask U.S. for bailout as massive debt looms - WSJ
... $530 bln of commercial mortgages will be coming due for refinancing in the next three years -- with about $160 bln maturing in the next year. To head off some of the impending pain, the industry is asking to be included in a new $200 bln loan program initially created by the government to salvage the market for car loans, student loans and credit-card debt. This money is intended to go directly to help investors finance purchases of securities backed by these assets. If commercial real estate is included, banks might have an incentive to make more loans to developers since they'd be able to repackage and sell them more easily to investors with the assurance of government backing. As part of their lobbying efforts, some industry representatives have asked lawmakers to explore the idea of setting up a separate program aimed at boosting lending to commercial real estate only.

RCM Comment: Will people never learn? From the Madoff case to Meriwether I find it amazing that investors willingly overlook major red flags in their quest for returns. Clearly the sickness of greed clouds judgement.
Meriwether Fund to cut staff over losses - WSJ
WSJ reports JWM Partners, a hedge fund set up by John Meriwether in 1999, told investors it will lose four partners and cut staff after the performance of its flagship fund plummeted this year. JWM Partners was founded by Mr. Meriwether after his previous hedge fund, Long-Term Capital Management, had to accept a $3.6 billion bailout by U.S. banks in 1998 after it ran aground with highly leveraged trading strategies. Connecticut-based JWM Partners said in its November letter to investors, seen by DJ, that its flagship fund, the Relative Value Opportunity Portfolio, fell 42.78% in the year to the end of November, to reach a net asset value of $554.8 million. Many investors have their funds locked into the company because of a system that allows one-eighth of the cash to be pulled out of the relative value vehicle at each quarterly redemption date, according to one investor in the fund.

News that Moves: CDX Index Rally, Corp. Debt Rally, Auto Rescue, Obama's TARP, & Calpers

RCM Comment: In order for this equity market rally to actually have sustainability we need to see improving credit markets. The following two stories shed some light on this topic and suggest that the rally may have support from the credit markets albeit minor at the moment. We will need to monitor this relationship closely over the coming days and weeks.
M.S. Howells & Co.-
Specifically, the CDX IG11 Index rallied 22bps for the second straight day to bring total spread tightening to over 45bps since Monday’s close. The index has declined from 265bps to 220bps over the past two trading days. This is the tightest index closing level since November 18 – the day that US Treasury Secretary Paulson announced that the government would not be implementing its previously announced plan to purchase troubled bank assets. The CDX IG11 Index has tightened nearly 45bps since Mondays close and 50bps since last Wednesday’s close. The initial impetus of the rally – Fed action, planned Automaker support, successful GMAC tender- appeared to generate a considerable amount of momentum trading.
However, unlike Tuesday’s rally, Wednesdays rally was accompanied by an average of 20bps tightening in individual index members. This is a good sign, because many of the previous credit market rallies were short-circuited by the lack of single name CDS spread tightening

Higher-quality debt draws interest; cautious dabbling in junk bonds - WSJ
WSJ reports the Federal Reserve's interest-rate cuts are pushing some investors to seek higher returns in credit markets, driving down mortgage rates and yields on corporate debt. One side effect of that is to push fixed-income investors into slightly riskier assets where they can make more return, namely the highest-quality issues, which still are paying 6.5 percentage points over comparable Treasury bonds, according to Merrill Lynch. "There is relative value in the investment-grade market and sentiment is shifting that way," said Bill Larkin, fixed-income portfolio manager at Cabot Money Management. The risk premium on some bonds of J.P. Morgan, Bank of America, General Electric Capital and Morgan Stanley fell by a quarter of a percent, according to MarketAxess, a relatively big move relative to the slump of recent months, and given headwinds like losses and profit warnings that continue to plague these companies... Junk bonds saw modest improvement Wednesday, but investors in that market remain cautious on expectations for defaults to increase in 2009.

RCM Comment: Expect positive news spin going into Christmas as Bush tries to improve his legacy by playing Santa to the Auto industry.
Paulson takes lead in auto rescue talks - NY Times
NY Times reports the White House and the Treasury are deep into negotiations with General Motors (GM) and Chrysler over reorganization plans that could result in freeing up more than $14 billion in emergency loans to keep the companies afloat through the first quarter of 2009, according to industry executives and a senior administration official. The Bush administration appears to want an agreement with the automakers before Dec. 25. It was unclear, however, when all of the particulars might be worked out, said the senior official, who spoke on the condition of anonymity because of the delicate nature of the negotiations. But the official indicated that the administration was inclined to do more than just keep G.M. and Chrysler alive until President-elect Barack Obama takes office, saying, "Giving them enough money to limp along doesn't solve anything." In the negotiations, the Treasury secretary, Henry Paulson, is effectively taking on the role of "auto czar," which was envisioned in the carmakers rescue bill written by the White House and Congressional Democrats and approved by the House but blocked by Senate Republicans. In the days since the White House said it would step in to prevent the collapse of G.M. and Chrysler, Treasury officials have been poring over detailed financial data in a meticulous exercise that one G.M. executive likened to "putting on the aqualung" and diving deep into the companies' books.

RCM Comment: Don't forget to put on your gold colored glasses whenever you read stories about Obama's economic rescue plans. As owners of the precious metals we must stand and salute every time we read about these massive handouts.
Obama works to overhaul TARP - WSJ
WSJ reports the incoming Obama administration is considering a series of initiatives to combat the financial crisis, including some efforts to help banks that the Bush administration has tried with limited success. Among the plans being discussed are injecting more capital into banks, creating a market for illiquid assets clogging the books of financial institutions and helping borrowers who are having trouble making their mortgage payments... The new administration is "trying to put components together that...will be complementary...while recognizing there's no easy answer," said a person familiar with its plans. The Obama team, hoping to avoid the criticism leveled at Mr. Paulson by lawmakers that he lacks a consistent strategy, is also working to come up with a way to cogently explain the rationale behind its approach. One key distinction will be in the approach to helping homeowners facing foreclosure. Mr. Paulson and the White House have resisted calls to embark on a government rescue of homeowners. The Obama team, by contrast, sees that as a critical leg of its financial-crisis rescue plan, people familiar with the matter said. Democratic lawmakers are pushing for Mr. Obama to take steps quickly to help at-risk borrowers. Details of the Obama foreclosure plan aren't known, in part because they are still being hashed out.

RCM Comment: This story is a glaring example of what is inherently wrong with the real estate market and why the recovery will take a long time to develop. Calpers by definition was supposed to be a conservatively managed pool of assets and yet they employed an obscene amount of leverage during the time of free credit to purchase land at the top of the market. If Calpers was leveraged to this degree you can imagine the bellicose leverage used by aggressive pools of capital. Credit has now collapsed and there is a massive supply overhang so a recovery will be problematic.
Risky, ill-timed land deals hit Calpers - WSJ
WSJ reports at the height of the property bubble, Calpers, made a fateful decision: It aggressively poured money into real estate. As a result, today it's one of the biggest owners of undeveloped residential land in America. Partly because of these investments, California Public Employees' Retirement System is struggling to avoid one of its worst annual declines since its 1932 inception... The problems come at a time of uncertainty for the nation's largest public pension fund, which has been without its top two executives for nearly half a year. Calpers is poised to appoint a new chief executive as early as this week, people familiar with the matter said. Calpers is now warning California's cities, towns and schools that they may have to cough up more money to cover the retirement and other benefits the fund provides for 1.6 million state workers. Some towns are already cutting municipal services, and at least one is partly blaming the Calpers fees. Calpers in recent weeks said it expects to report paper losses of 103% on its housing investments in the fiscal year ended June 30. That's because Calpers invested not only its own money, but billions of dollars of borrowed money that must be repaid even if the investment fails. In some deals, as much as 80% of the money invested by Calpers was borrowed. In the latest wrinkle: To generate sorely needed cash, a troubled Calpers venture known as LandSource recently started the process of selling land during the worst property market in a generation. Calpers could potentially lose nearly $1 billion on LandSource, a $2.5 billion deal completed early last year, and one of the priciest U.S. residential-land transactions ever. LandSource is now under bankruptcy-court protection.

RCM Reprint: The Gold Rush Is On

Gary Rosenthal: Principal, Rosenthal Capital Managment --

We understand the Comex may have informed futures firms about the potential of a squeeze on the December gold contract. While we are unable to confirm the Comex alert we believe conditions in the gold/silver market are such that a squeeze of historical proportions could erupt at any point in time. Therefore, it is particularly timely to review the following article by Andrian Douglas:

THE GOLD RUSH IS ON!

Traders have been hearing talk that the gold market could face a potential squeeze at the end of this year if market participants with futures position on New York's Comex exchange decide not to roll over their positions, because of concerns about counterparty risk and opt for physical delivery instead. But dealers dismissed the threat of a squeeze, pointing out that Comex gold stocks stand at 8.5 million ounces, well above the five-year average of almost 6 million ounces.

The 8.5 million ozs which is referred to here is the total COMEX inventory. This includes gold that belongs to customers who are storing it on the exchange. The amount that is registered to dealers, and therefore available for delivery, is only 2.846 Million ozs. The delivery notices that have been issued so far in December total 1.26 Million ozs which is 44% of the available deliverable gold. This assumes that the gold registered to dealers is totally unencumbered which is not necessarily a good assumption in the fuzzy accounting world that is now a Wall St. reality.

What is very telling is that the reason for investors taking delivery is given as "counterparty risk". They could have said that it was due to investors "wanting the safe haven of gold in times of financial crisis" etc etc. Stating unequivocally "counterparty risk" as the reason high delivery demands are occurring is the first reference to the possibility of COMEX going into default that has appeared in the mainstream press. It is also of note that it appeared in the FT which is traditionally anti-gold.

The pieces of the puzzle are falling into place:

--The CB’s are selling only a fraction of their WAG allowance
--Coin melt bars are showing up on the wholesale market indicative of the bottom of the barrel
--The US mint is rationing coins
--The Perth Mint has suspended taking orders for any bullion products
--Retail dealers are sold out and only small quantities of PM’s are available
--The traditional major shorts on TOCOM have covered their massive short positions
--Prices in the retail market are very much higher than COMEX spot
--Significant reduction in Contango has been observed and even some backwardation

A disconnect has formed between COMEX paper gold trading and physical gold markets
Ever since July when one or possibly two US banks sold short 10% of the annual global gold supply and 20% of annual global silver supply (as confirmed by reporting issued by the CFTC) the COMEX price has been disconnected from the physical market and has become the last bastion of the multi-year gold price suppression scheme. Without a doubt the hammering down of the paper gold price made many leveraged speculators head for the exits, as demonstrated by the fact that the Open Interest has reduced by 50%. However, the investors who remain are not leveraged and unfortunately for the Gold Cartel are taking delivery from the COMEX. Talk of a squeeze due to "counterparty risk" will no doubt encourage more investors to take delivery. We will probably see Contango in the further out months reduce and gold be purchased in the cash market as investors switch from future IOU’s to real metal. This may even provoke a much more pronounced Backwardation than we have already seen in recent days.

Make no mistake about this. We are seeing the early signs of a gold rush like the world has never seen before. Investors do not take physical delivery of gold to sell it back for a 10% profit. The inflation adjusted high of gold in 1980 is today $2500. However, today we are in the midst of a global financial crisis the likes of which we have never witnessed in the whole of recorded history. Simultaneously every country in the world is hell bent on currency destruction as an anti-dote to too much debt creation. What is gold worth in such a scenario? Who knows but it is multiples of where it is now. The precious metals that are being taken off the market will not see the light of day again for a long time. The Central Banks have almost stopped selling gold and mine supply is dropping year after year.

My unique analysis methods at http://www.mareketforceanalysis.com/ indicate that gold and silver are at very good buy points. Gold and silver are selling for almost their cost of production so the downside is severely limited because no commodity can trade below its cost of production for very long because producers go out of business thereby reducing supply which increases the price.

An ex-FED Governor, Lyle Gramley, appeared on Canadian TV yesterday and hinted that a big upward revaluation of gold may figure heavily in the Fed's attempt to rescue the U.S. economy.
This suggests that it is in the hands of the FED. If the shorts on COMEX get squeezed and COMEX defaults on physical delivery, the market not the FED, will decide the true value of gold.
How many times do you get advance warning of what will likely be the trade of the century? There is no such thing as a risk free trade but I think this is as good as it ever gets!
Investors should take physical delivery and not be leveraged. This way you will make sure you are around for payday and you will put more pressure on the shorts who have fraudulently sold gold and silver that they are unable to deliver.

Whether there is a massive squeeze on the COMEX in December or February is irrelevant. The Gold Rush is on!

When gold and silver become unavailable prices will have to go up by multiples. The beaten up mining sector will reach new highs. When the precious metals are not available in bullion form the next best alternative for investors will be companies who dig them out the ground.

By Adrian Douglas
December 13, 2008

News that Moves: Citadel, Madoff, Obama's Stimulus Plan, Bush Auto Rescue, MS & GS EPS, & Shipping Rates

RCM Comment: Good news/bad news on the investment management front as it relates to the redemption/repatriation trade. Citadel's decision to suspend redemptions until March will no doubt lead the way for others to do the same which should relieve some of the pressure on the markets. Of course, adhering to the cockroach theory (which states there is never only one) we now need to monitor the Madoff (pronounced Made Off, as in "he made off with the money") story. What will be the ripple effect?
Citadel suspends redemptions from two hedge funds - Reuters.com
Reuters.com reports Citadel Investment Group said it has halted redemptions from its two largest funds until at least March. The suspension affects the Kensington and Wellington funds. The decision was "driven by continued volatility in the market," Citadel spokeswoman Katie Spring told Reuters in an e-mail. The move was announced in a letter sent to investors on Friday by Citadel's founder and president, Ken Griffin, and reported by Crain's Chicago Business. "We recognize how a suspension impacts our investors, especially those with current financial obligations of their own to meet," Griffin wrote.

Losses in Madoff case spread - WSJ
WSJ reports investigators dug through financial records at Bernard Madoff's investment co as the list of victims of his alleged Ponzi scheme widened to include real-estate magnate Mortimer Zuckerman, the foundation of Nobel laureate Elie Wiesel, Sen. Frank Lautenberg and a charity of movie director Steven Spielberg. The scandal reverberated around the world, with banks including Spain's Grupo Santander (STD) and France's BNP Paribas saying that their clients and shareholders together face billions of euros of losses. Monday morning in Tokyo, Nomura Holdings (NMR) said its exposure to investments with Mr. Madoff totaled 27.5 billion yen ($302 million). A spokesman described the co's potential losses as "limited." At Mr. Madoff's office in midtown Manhattan, guards have been positioned 24 hours a day. Investigators from the Federal Bureau of Investigation, Securities and Exchange Commission and the Financial Industry Regulatory Authority are trying to identify if any assets remain, a person familiar with the matter said. (According to a DJ story, other companies that have disclosed exposure to Madoff's investment co include: RBS, AXA, BCS, UBS)RCM Comment: Is this a black eye for the hedge fund industry, or simply an example of investors not doing their due diligence? As the details are revealed we discover the following: 1) The Madoff fund was not registered with the SEC and there was a shocking dearth of information regarding the fund, 2) All the assets were held by Madoff, there was no custodian. This is a major red flag and one easy to identify, 3) The fund had no auditor!?!, 4)The investment strategy was shrouded in secrecy and investors were not allowed to know what the holdings were. Secrecy is a classic component of a Ponzi scheme.

So, I ask the investing public to cut the hedge fund industry some slack on this one and instead do a little introspection. Perhaps, the time has come for the investors in the Madoff fund to do the difficult and honorable thing and take responsibility for their own actions. For more on my thoughts of this novel idea, please see this Rosenthal Rant.

RCM Comment: Only a week ago we observed that politicians never overestimate the size of a spending package. Well, that observation is proved out by the following story. If the Obama administration continues to spend at this licentious rate I will be forced, as a precious metals advocate, to bumper sticker my car proclaiming Obama support. Meatier stimulus plan in works - WSJ The Wall Street Journal reports Obama's economic team is considering an economic-stimulus program that will be far larger than the two-year, half-trln-dollar plan under consideration two weeks ago, according to people familiar with the team's thinking. The president-elect is expected to be briefed on the broad parameters of the plan next week, with aides still hoping for Congress to pass a bill by the time Mr. Obama takes office Jan. 20. With the unemployment rate now expected to hit 9% without aggressive intervention, Obama aides and advisers have set $600 bln over two years as "a very low-end estimate," one person familiar with the matter said. The final number is expected to be significantly higher, possibly between $700 bln and $1 trln over two years. Transition spokeswoman Stephanie Cutter denied any decisions have been made on the scope of the plan. "Any speculation on size or scope is premature at this time," she said.

Bush administration is weighing a much larger rescue effort for U.S. automakers than originally envisioned - WSJ WSJ reports in weighing a much larger rescue effort for U.S. automakers than originally envisioned, the Bush administration faces a complex set of decisions over what terms to seek -- including whether to push the companies to file for bankruptcy -- and how to raise necessary funds. The administration is trying to determine how much money it will take to help the car companies, and is discussing a rescue totaling $10 billion to $40 billion or more. One possible source of funding is the Treasury Department's $700 billion fund set up to rescue the financial industry. Only about $15 billion remains uncommitted from the first tranche of $350 billion, so the Bush administration could be forced to request the second half to cover the car companies' needs, people familiar with the situation said. That likely would compel the administration to outline its plans for a range of other needs, including mortgage-foreclosure prevention for struggling homeowners and possibly aid for state and local governments. That could spark another confrontation with lawmakers, who are increasingly divided over industry bailouts... On Sunday, a person familiar with the situation said the companies' collective needs could range from $10 billion to more than $30 billion. The administration spent the weekend poring over the automakers' books to assess their financial needs. This person said the decision-making could stretch out for several more days.

RCM Comment: The last two weeks have been marked by the dexterous ability of the market to overcome bad news. We know the earnings of the big investment banks will be poor; the question will be how the markets react.
MS Morgan Stanley expected to ring up loss of about $1 bln - NY Post (13.85 )
NY Post reports Morgan Stanley (MS) is expected to ring up losses of about $1 bln when it reports its fiscal fourth-quarter earnings Wednesday. Continued fretfulness in the stock market magnified by the latest $50 bln scandal with New York money manager Bernard Madoff, and a seizing up in credit markets, has found Morgan CEO John Mack slammed. Morgan is said to have been particularly hard hit this quarter in areas including emerging markets and interest rates as the mortgage-inspired flu that infected the US spread to other countries. Goldman Sachs (GS) Chief Executive Lloyd Blankfein this week also is expected to see his marquee franchise whacked by a roughly $2-3 bln loss.

RCM Comment: Now here is news that actually moves markets. You won't hear about this on CNBC, they would rather debate the auto bailout ad nauseam, which will not help you the investor make money. The prevailing wisdom of the financial news media tells us that deflation is upon us and commodity prices will head lower. However, read the following story carefully and you will see the nascent commodity rally may have legs.
Shipping charter rates soar - Financial Times
Financial Times reports one of the world's key shipping markets has begun to recover from a slump, with a revival in Chinese demand for iron ore and coal pushing some average charter prices up almost threefold in the past week. The revival in prices, after a disastrous six months for the industry in which charter rates fell nearly 99% for the largest vessels, could encourage shipowners to bring mothballed vessels back into service. One participant said 12/13 that some owners were able to charge enough to cover the costs of operating Capesize ships, the largest dry bulk carriers. Average rates for these ships, which move coal and iron ore, have nearly tripled over the past week. However, smaller ships have yet to show the same recovery as Capesize vessels. Average spot rates, or the cost of carrying a single cargo immediately, finished the week at $8,261 a day for Capesizes, according to figures from Pareto Dry Cargo, an Oslo shipbroker. The previous week's average was $2,763, one of the lowest yet seen. Pareto reported a long-term charter of a Capesize ship at $17,500 a day for a year, more than the daily basic operating costs of such a ship. Long-term charter rates are, unusually, higher than those in the spot market because of expectations that the spot market will recover.

News That Moves: Citadel, Fed Debt Sale, TrimTabs Short Interest & Verizon's $17 bil. Loan

RCM Comment: We have begun to turn more positive on the equity markets as it appears the redemption and repatriation phase has started to wind down. However, we must stay diligently aware of the events unfolding in the hedge fund world that could adversely affect the early stages of the equity markets' recovery. The following Citadel story and the developing story of Bernard Madoff (and the fraud that could cost individual investors and hedge funds $50 billion) are the real stories that could affect the markets.
Citadel is facing the prospect of a dismal December - NY Post
NY Post reports Ken Griffin thought November was bad. The embattled head of Citadel Investment Group, whose flagship funds declined 12% last month, is facing the prospect of a dismal December. Though we're only 10 days into the month, sources said a drop in the value of leveraged loans might further pinch Griffin's hedge fund, whose Kensington and Wellington flagships have shed $10 billion year-to-date - nearly half their value. On Wall Street, both Griffin's friends and foes are closely watching the health of the firm. The worry is that an escalating crisis might trigger another tidal wave of trouble for the market, given the hedge fund's size and scope.

RCM Comment: Interesting development. Our analysis of this important event awaits further definition.
Fed weighs debt sales of its own - WSJ
The Wall Street Journal reports the Federal Reserve is considering issuing its own debt for the first time, a move that would give the central bank additional flexibility as it tries to stabilize rocky financial markets. Government debt issuance is largely the province of the Treasury Dept., and the Fed already can print as much money as it wants. But as the credit crisis drags on and the economy suffers from recession, Fed officials are looking broadly for new financial tools. Fed officials have approached Congress about the concept, which could include issuing bills or some other form of debt, according to people familiar with the matter. It isn't known whether these preliminary discussions will result in a formal proposal or Fed action. One hurdle: The Federal Reserve Act doesn't explicitly permit the Fed to issue notes beyond currency.

RCM Comment: We have begun to take a more bullish stance for a number of reasons. Technically, it would appear that the US$ and Treasury bonds are forming a top that has coincided with strength in Gold and a possible bottoming in Oil. These developments suggest the ebbing has begun in the tide of redemption and repatriation. The following stories shed some more light on this emerging positive story:

TrimTabs reports net short selling of $11.9 billion in 2nd half of November
TrimTabs reports that US equity traders opened $11.9 billion in new short positions in the second half of November (November 15-28), driving the aggregate short interest on the Russell 3000 stocks to a six-week high of $236 billion. Short interest increased in eight of the ten major sectors with Financials and Industrials receiving the largest short interest inflows of $6.3 billion and $2.9 billion, respectively. The only two sectors with net short covering were Consumer Staples and Energy, in which traders covered $1.7 billion and $1.5 billion, respectively.


VZ Verizon: Verizon Wireless in $17 bln loan - FT (32.74 ) -Update-
FT reports the moribund market for corporate finance received a boost on Wednesday when Verizon Wireless, a joint venture between Verizon Communications and Vodafone Group (VOD), closed a $17 bln syndicated loan, the largest in the US this year. The deal, arranged by Morgan Stanley, Bank of America and Citigroup, will enable Verizon Wireless to refinance the debt it took on in June when it bought Alltel, a regional telecoms group, for $28.1 bln from TPG and Goldman Sachs. The one-year loan, which was syndicated to a dozen US and foreign financial institutions, is a rare sign of life in a market that has been paralyzed by banks' unwillingness to extend financing at a time of extreme financial turmoil. Bankers said the decision by Morgan Stanley, BofA and Citi to arrange the loan underlined the fact that many financial groups remained open to lending to their best customers and at the right price. People close to the situation said the loan would pay an interest rate of around 3% above the London interbank offered rate.

RCM Editorial: Gary Comments on The Future of Gold Prices

Gary Rosenthal, Principal at RCM-

The article below is much more than a treatise on the manipulation of gold prices. It is a detailed explanation of the bailout money flows between the Fed and the banking system. The author makes it very clear how the Fed has liquefied the banking system to be able to fund the forthcoming $1 trillion plus Obama infrastructure spending program (see previous blog entry). Very little of the bailout funds are ever going to find their way into the housing market. However, the most important part of this article is the author's documentation of Bernake's plans for the role of gold in the reflation of the U.S. economy. We don't want to steal his thunder but here is a snippet to wet your appetite...

"Anyone who reads the written works of our Fed Chairman knows that Bernanke’s long term plan involves devaluing the dollar against gold. This is the exact opposite of most prior Fed Chairmen. He has overtly stated his intentions toward gold, many times, in various articles, speeches and treatises written before he became Fed Chairman. He often extols the virtues of former President Franklin Roosevelt’s gold revaluation/dollar devaluation, back in 1934, and credits it with saving the nation from the Great Depression."

This article should relieve you of any doubts as to why we maintain precious metals as a major pillar to our core investment philosophy in Fortune's Favor I. For clients who wish an even greater exposure to precious metals we would call your attention to the Fortune's Favor Precious Metals Fund, where your management team maintains significant personal exposure.

The full article can be viewed here.

A follow up by James West of Seeking Alpha:

Disregard the spot price as quoted by COMEX for a moment. Demand for physical delivery from futures contracts traders has risen from a traditional average of 1% to over 16% last Friday, and the price of gold for delivery in the future is cheaper than the spot price is now – a situation known as backwardation, and indicative of traders preferring retaining gold in favor of a paper profit. It is symptomatic of a confidence crisis building in the ability of COMEX to continue to deliver physical gold.

If COMEX does end up in default, the suppressive influences will be severely encumbered, if not completely overthrown, and the result may be the breakout of gold that has long been anticipated....

RCM Editorial: Three Cheers For The President-Elect

Today, I am announcing my elephantine (this is what happens when a Republican supports a Democrat) support for Barak Obama. As a major holder of precious metals how could I not show my support after this weekend's announcement? Had Obama kept any of his campaign promises and brought "change" by "sharing the wealth" I would not be able to write this today. However, he has brought back the Clinton cronies and through this weekend's story announced the sharing of the world's wealth. He stated unequivocally he will not be worried about the deficit and that it will grow to over $1 trillion before his stimulus plan, which means it will be at least $2 trillion. (When have you ever known a politician to overestimate a deficit number?) In order to fund this deficit the U.S. will collect the world's wealth by selling debt. And in the end, the only way to work out from under this gargantuan deficit will be to devalue the currency. No matter how you look at it, these developments are breathtakingly bullish for the future price of gold and commodities in general.

Obama to focus on stimulus not deficit - Financial Times
Financial Times reports Barack Obama on Sunday spelled out his plans for the biggest infrastructure investment in the US for half a century. The president-elect argued that with the economy reeling, his incoming administration could not afford to worry about a spiralling budget deficit. Mr Obama's proposals for government works on roads, bridges, internet broadband and school buildings, together with energy efficiency measures and health spending, are far more detailed than the normal announcements during a time of transition. Noting the US budget deficit might surpass $1,000 bln before his spending plans are factored in, Mr Obama added: "We understand that we've got to provide a blood infusion to the patient right now to make sure that the patient is stabilized. And that means that we can't worry short term about the deficit. We've got to make sure that the economic stimulus plan is large enough to get the economy moving." He wanted a strong set of financial regulations to make banks, credit ratings agencies, mortgage brokers and others "much more accountable and behave much more responsibly". "I am absolutely confident that if we take the right steps over the coming months that not only can we get the economy back on track but we can emerge leaner, meaner and ultimately more competitive and more prosperous," Mr Obama said at a subsequent press conference.

News That Moves: Nov. Hedge Fund Numbers, Huge Treas.Sales, & Fleckenstein

RCM Comment: While some of the biggest and best hedge funds saw "double digit losses" in November we at RCM posted our second consecutive gain, up 5.67% for the month. We offered to advise Citadel at the end of October, but the phone has yet to ring. Perhaps the investors in Citadel should give us a call.
Cold November for hedge funds - WSJ
WSJ reports November rain poured down on hedge-fund managers as market turmoil and increased demands from investors wanting their money back deepened problems for funds already facing their worst year on record. The largest hedge funds run by Toscafund Asset Management and Kingdon Capital were among many funds with heavy losses in November, according to investors. Satellite Asset Management, founded by former Soros Fund Management traders, saw double-digit losses during the month and is reportedly among a handful of funds that have tried to stem investors' redemptions.

RCM Comment: The key to this story is the $400 billion number. The WSJ's opinion that rates will not rise is wrong, like so much of their reporting.
Huge Treasury sales benefit from yields - WSJ
WSJ reports the U.S. government could sell more than $400 billion in Treasury notes and bills in the final weeks of the year to cover its soaring funding needs, and it looks like it will continue to get the money on the cheap. In normal times, digesting such a massive amount of supply in such a short period would send yields soaring, as investors usually demand higher returns to accommodate the flood of securities. But these are far from normal times. Not even such a staggering amount of paper is expected to curb the government-bond market's move toward lower yields. Last week, Treasury yields, which move inversely to prices, hit record lows as bleak data pointed to a deepening recession and persistently falling prices in the U.S. That helped the long end of the yield curve in particular, which suffers the most from rising prices, as these eat into bonds' fixed returns. These trends should remain in place in the final weeks of the year, when demand for Treasurys also tends to rise as investors tidy up their books ahead of year-end accounts closing.

RCM Comment: I find it is always important to note when a well respected manager dramatically changes his stance. You will notice that Fleckenstein's website is listed on this blog under the 'Favorite Links' section. We have become more bullish on the markets over the last week, so this story comes as a sort of confirmation.
Hedge fund manager Fleckenstein closing down Short Fund - DJ
DJ reports hedge fund manager Bill Fleckenstein writes in his Daily Rap column that he's closing down his Fleckenstein Capital fund because he no longer wants to run a short fund. Describing running a short-only fund as "stressful, nerve-wracking and generally not very much fun, he said he became a short seller in part because of the "bubble" he saw forming because of Alan Greenspan-era policies and because of widespread lack of respect for risk. "However, the recent carnage in the stock market, real estate market and the financial system (as well as the job losses) has washed away those excesses to a large degree and it has violently demonstrated the risks associated with investing," he wrote. He said that though he believes the stock market "still has unfinished business on the downside," he said 2009 will be the time "to prepare for a return to managing money in a more balanced fashion, with longs (and some shorts), as there are currently plenty of interesting ideas that appear to offer a margin of safety." Fleckenstein said he'll return to investing using a more balanced investing approach in a vehicle that will not be a hedge fund.

Quote of The Week

Quote of The Week:

"The person who is waiting for something to turn up might start with their shirt sleeves."

- Garth Henrichs

News That Moves: Mortgage Origination, TrimTabs Data, Citadel & Fortress, Direction of Gold

RCM Comment: This story is a classic example of the misinformation that the financial news media spews on a daily basis. Yesterday, all we heard on CNBC and other networks was the excitement over the "record volume" of mortgage origination. Both the TV anchors and the interviewees talked about the 'light at the end of the tunnel'. Yet the commentary below, from a respected mortgage insider, tells the true story behind the data.
MORTGAGE ORIGINATORS ANNOUNCE RECORD VOLUME ON 11-25…NOT SO FAST I emailed a good friend at a national mortgage bank yesterday and asked…

Mark: Of all your loan locks today, how many were re-locks of loans already in process with other lenders. If it was heavy, it would show that yesterday’s massive mortgage action was not a bunch of new loans but just an aggregation of that past 30-days of production at higher rates that all moved to other lenders on the same day (today) for lower rates? I am trying to validate that on days where rates drop through the floor in a single day, very few new loans are originated. Rather all bank lose their present portfolio as borrowers and brokers go elsewhere to capture the new pricing.

David: Most were re-locks from other lenders on loans already in process. Some were refi-churns from the past 6 months originations including some of the re-locks. Another problem on days like today is that brokers lock everything in their systems without checking with their clients first because their computer tells them that John Smith can benefit from a refi if rates fall to a certain level. They lock up the loan to protect the rate and then call John Smith to find out he is delinquent, unemployed or the home value has dropped to a level at which he can’t refinance using new guidelines. Days like today feel great when they are happening but end up being costly.

TrimTabs estimates all equity mutual funds post outflow of $12.1 billion in week ended Wednesday, December 3rd
TrimTabs Investment Research estimates that all equity mutual funds posted an outflow of $12.1 billion in the week ended Wednesday, December 3rd, versus an inflow of $10.4 billion in the previous week. Equity funds that invest primarily in U.S. stocks posted an outflow of $8.3 billion, versus an inflow of $6.8 billion in the previous week. Equity funds that invest primarily in non-U.S. stocks had an outflow of $3.8 billion, versus an inflow of $3.6 billion in the previous week. In addition, bond funds had an outflow of $6.8 billion, versus an outflow of $7.4 billion in the previous week, and hybrid funds had an outflow of $2.2 billion, versus an outflow of $2.4 billion in the previous week. Separately, TrimTabs reports that exchange-traded funds that invest in U.S. stocks posted an inflow of $920 million, versus inflow of $4.3 billion in the previous week. ETFs that invest in non-U.S. stocks had an inflow $643 million, versus inflow $1.5 billion in the previous week.

RCM Comment: The theme continues with two more stories about top tier hedge funds in serious trouble. Notice the red highlighted part about the funds being forced to "dump positions."
WSJ reports a bad year for hedge-fund titan Kenneth Griffin got much worse last month. Griffin's Citadel Investment Group lost about 13% in November, bringing the Chicago hedge fund giant's investment decline this year to 47%, according to investors. Citadel's mounting losses have come from declining values of convertible bonds, bank loans and other investments as global markets strain. Much of the losses stemmed from credit holdings during the last week of the month, investors say. Continued pressure on those assets, particularly as other hedge funds fail and are forced to dump positions to raise cash, is compounding Griffin's efforts to engineer a rebound during what is by far his firm's worst year ever. Citadel, which manages roughly $16 billion, has cut about 20 employees in its trading operations in recent weeks, including some in London, and also is trimming its back-office and human-resources rolls by roughly the same number, according to people familiar with the matter. Citadel has about 1,300 employees worldwide.

Cracks are spreading throughout theFortress Investment Group, once a leading player in the worlds of hedge funds and leveraged buyouts. On Wednesday, Fortress’s shares fell 25 percent to $1.87, a new low, after the company temporarily suspended withdrawals from its largest hedge fund. Investors had asked to withdraw $3.51 billion from the money-losing fund, Drawbridge Global Macro.
But Wednesday’s slide was just the latest turn in a long, downward spiral for Fortress. The once-celebrated company has lost 89 percent of its market value over the last year as hedge funds and private equity, once lucrative businesses that helped define an era of unrivaled Wall Street wealth, have crumbled in the credit crisis.
It is a remarkable turnabout for Fortress, which less than two years ago was soaring along with the rest of Wall Street. Its debut as a public company, in February 2007, was heralded as the dawn of a new age of big hedge funds and buyout firms. Mr. Edens, a former executive at Lehman Brothers and BlackRock, and his fellow founders became instant billionaires. Their deal paved the way for even splashier initial public offerings by the likes of the Blackstone Group.

RCM Comment: Interesting view on the direction of gold prices. It is also important to understand the magnitude of the debt increase our government is creating.
Commentary From Alf Fields:
Major ONE up from $256 to $1,015 (actually 4 times the $255 low);
Major TWO down from $1015 to $699, say $700 (a decline of 31%);
Major THREE up from $700 to $3,500 (a Fibonacci 5 times the $700 low);
Major FOUR down from $3,500 to $2,500 (a 29% decline);
Major FIVE up from $2,500 to $10,000 (also a 4 fold increase, same as ONE)
We have already blown through waves one and two. Wave three is projecting out to $3500 and wave 5 to $10,000 for an ounce of gold. This is the point. Last year we had a $400 billion deficit. Next year we will have a $2.5 trillion deficit and in the next four years a minimum of $10 trillion deficit. It is not hard now to see why the price of gold would go to $10,000 per ounce.
What this means is that the Federal government will burn the house down printing dollars which will lose value at a dizzying rate. Conveniently, this unbridled printing will allow the US government to pay all its bills domestically and to foreign holdings by simply printing away debt. This will also have a massively negative impact on all our creditor nations. I would not be surprised if they ended up in far worse shape than us.
We have seen it time after time when a big debtor runs its creditors into the ground and ends up smelling like a rose. This is most likely what will happen to the US although the citizenry will also go through some real tough times.
What to do? Find those asset classes which will hold their value during this process. It sounds ridiculous, but it is that simple and you will prosper.

News That Moves: More Hedge Fund Woes, Muni Bond No Bids, Begging For Gov't Handouts & PHM CEO Prepares For More Housing Trouble

RCM Comment: I continue to print these stories in the blog because these are the facts that are truly responsible for the markets' movement. Major media outlets will have you believe that the auto companies appearance on capital hill today will determine market direction; wrong.

Think of it in terms of the ocean: the stories we print here determine the current and tide action of the market; stories about auto companies and recession worries are like a light wind that ripples the surface. Until the hedge fund implosion has run its course we can expect continued violent swings in the market and possibly new lows.
JPM JP Morgan Chase seizes fund's collateral - WSJ (30.25 )
WSJ reports the co seized tens of millions of dollars of collateral from a commercial-property debt fund run by Guggenheim Partners and started to auction it off this week following the fund's failure to come up with additional capital to meet margin calls, according to people familiar with the matter.

Buyout Titan weighs hedge-fund revamp - WSJ
WSJ reports leveraged-buyout legend Thomas H. Lee, who barreled into hedge funds when the market was booming, is considering shrinking or even shutting down two funds that had $1.5 billion in assets after suffering losses of about 40% this year, people familiar with the situation said. Mr. Lee's battered hedge funds farmed out investor money to about 110 other funds, including SAC Capital Advisors and D.E. Shaw Group. While he designed the so-called funds-of-funds to have low volatility with steady, consistent returns, Mr. Lee borrowed heavily to multiply the size of his bets, piling up debt of as much as $3.2 billion, these people said. That strategy has backfired, with the leverage causing losses equal to about 14% of total assets in the two funds to roughly triple in size. As a result, the net asset value of the hedge funds has tumbled to slightly below its level when the funds were launched in 2005, according to one investor.

GS Goldman Sachs: Another Goldman unit hit by decline - FT (68.95 ) -Update-
FT reports the co's plans to expand its wealth management operations have been dealt a potential setback by a dramatic decline in the value of another of its funds. Goldman Sachs Liquidity Partners 2007, which received $1.8 bln in initial funding during the summer of 2007 to invest in the credit markets, is down 55.3% this year through the end of October, according to investors. Fund management has become a key area of opportunity for Goldman since it responded to the credit crisis by becoming a bank holding company. As part of the move, it has been seeking to reduce its dependence on high-risk proprietary trading and increase revenues from fee-earning businesses such as wealth management. However, this strategy has arguably been endangered by continuing difficulties of funds under Goldman Sachs Asset Management. Last year, for example, its flagship Global Alpha Fund lost 40% of its value.

RCM Comment: Those of you who are holders of Muni bonds please read this story closely. We have entered a new era in the financial markets and old beliefs about what is safe and secure may be detrimental to the preservation of capital.
Buyers shun Port Authority note sale - WSJ
WSJ reports the Port Authority of New York and New Jersey received no bids for $300 million of taxable notes it put up for sale. The bistate agency, which manages bridges, tunnels, airports and transit in New York City and northern New Jersey, said the lack of buyers Wednesday will have "no impact" on current Port Authority capital projects because the sale was held well in advance of the need for funds. The lack of bids for the three-year securities, which boast the highest short-term ratings from leading rating firms, reflects how few buyers are left in the $2.7 trillion municipal-bond market. Traditional large buyers have all but vanished, as some dealers already have closed their books for the year, and as remaining buyers seek only the cream of the crop in highly rated bonds.

RCM Comment: Beggars are coming out of the woodwork. The more the government hands out, the more hands will be held out and the steeper the impending decline in the value of the US$. The printing presses can't continue to print unabated without consequences. Gold is the only true currency of value in this bankrupt world.
Nonbank cos like Avis seek to broaden U.S. relief on credit - WSJ
WSJ reports commercial and industrial companies are clamoring for more federal action to unlock credit markets, saying that moves to prop up the banking sector haven't done enough to jump-start lending to businesses. Among the latest seeking relief is car-rental chain Avis (CAR), which wants to turn the Troubled Asset Relief Program, or TARP, into a bigger tent. The Treasury's TARP and Federal Reserve programs to ease the financial crunch have focused on banks and, more recently, consumer-based lending. Nonbank companies now are vying for relief, taking the lead of the Big Three auto makers, which are seeking a combined $34 billion federal bailout. "It's great that [TARP is] helping the banks...but it's doing nothing for industry in general because of the freeze in the capital markets," said Arnold Klann, chief executive of ethanol producer BlueFire Ethanol Fuels. Avis, a subsidiary of Avis Budget Group, is floating a plan to have the Treasury and Fed purchase the debt issued by fleet purchasers. The plan also calls for Congress to authorize direct loans to such companies for the purpose of buying cars and trucks. Because of the credit freeze, trucking companies and car- and limousine-rental companies haven't been able to raise enough cash to finance their fleets. Such companies are "critical to the overall stability and long term sustainability" of the U.S. auto industry, reads a legislative proposal that Avis has circulated on Capitol Hill.

Michigan Blue Cross makes bid for aid - WSJ
WSJ reports as Detroit's auto makers seek aid in Washington, Michigan's biggest health insurer is arguing that it needs a rescue of sorts too. Blue Cross Blue Shield of Michigan has asked state lawmakers to give it more flexibility over the premiums it charges, reduce regulators' power to intervene and toughen regulations for its rivals. If the not-for-profit insurer's controversial plan succeeds, the Michigan insurance market for individuals -- one of the most affordable in the country -- will be revamped. Blue Cross says the changes, which could be voted on as early as this week, are necessary to curb the mounting losses that result from its status as the state's insurer of last resort. But the company's push has sparked a political showdown with the state attorney general, for-profit insurers and consumer groups. They argue that Blue Cross is exaggerating its financial problems and that the proposals would lead to higher premiums for sicker customers and permit Blue Cross to skirt its social mission.

RCM Comment: Typically at market bottoms CEOs buy their own company stock. The do not set up hedges to protect against further downside. This story should be viewed as a major vote of no confidence in the housing markets.
PHM Pulte Homes' founder and Chairman filed a Form 144 with SEC covering 5 mln shares of company stock and intending to sell up to that amount through a prepaid variable forward contract (11.14 +1.32)
William J. Pulte, founder and Chairman of Pulte Homes filed a Form 144 with the Securities and Exchange Commission covering 5 mln shares of company stock, or ~12% of the shares controlled by Mr. Pulte, intending to sell up to that amount of shares through a prepaid variable forward contract. The prepaid variable forward contract allows Mr. Pulte to receive cash now while also giving him the right to retain ownership of these shares at the end of the two-year term of the forward by settling the forward with cash. The transaction also allows Mr. Pulte to retain an interest in a possible increase in the shares' value over that two-year period and provides protection against a potential decline in value of Pulte shares during that same timeframe.