Meanwhile, back at the credit crisis...

[GRG55]

See what happens when we all get distracted by oil price spikes, the relationship to monetary policy, and Lukester's evangelism. :rolleyes:

From the UK Telegraph:

US and European debt markets flash new warning signals

By Ambrose Evans-Pritchard, International Business Editor

Last Updated: 12:38am BST 30/05/2008

The debt markets in the US and Europe have begun to flash warning signals yet again, raising fears that the global credit crisis could be entering another turbulent phase.

The cost of insuring against default on the bonds of Lehman Brothers, Merrill Lynch and other big banks and brokerages has surged over the last two weeks, threatening to reach the stress levels seen before the Bear Stearns debacle. Spreads on inter-bank Libor and Euribor rates in Europe are back near record levels...

...But there are now concerns that the Fed itself may be exhausting its $800bn (£399bn) stock of assets. It has swapped almost $300bn of 10-year Treasuries for questionable mortgage debt, and provided Term Auction Credit of $130bn.

"The steep rise in swap spreads this week is ominous," said John Hussman, head of the Hussman Funds. "The deterioration is in stark contrast to what investors have come to hope since March."...

http://www.telegraph.co.uk/money/mai.../cndebt129.xml

[Verrocchio]

Re: Meanwhile, back at the credit crisis...

See what happens when we all get distracted by oil price spikes, the relationship to monetary policy, and Lukester's evangelism. :rolleyes:

From the UK Telegraph:

US and European debt markets flash new warning signals

By Ambrose Evans-Pritchard, International Business Editor

Last Updated: 12:38am BST 30/05/2008

The debt markets in the US and Europe have begun to flash warning signals yet again, raising fears that the global credit crisis could be entering another turbulent phase.

The cost of insuring against default on the bonds of Lehman Brothers, Merrill Lynch and other big banks and brokerages has surged over the last two weeks, threatening to reach the stress levels seen before the Bear Stearns debacle. Spreads on inter-bank Libor and Euribor rates in Europe are back near record levels...

...But there are now concerns that the Fed itself may be exhausting its $800bn (£399bn) stock of assets. It has swapped almost $300bn of 10-year Treasuries for questionable mortgage debt, and provided Term Auction Credit of $130bn.

"The steep rise in swap spreads this week is ominous," said John Hussman, head of the Hussman Funds. "The deterioration is in stark contrast to what investors have come to hope since March."...

http://www.telegraph.co.uk/money/mai.../cndebt129.xml

Er, a little early in the game to have shot up all your ammo, isn't it Ben? What did we say in another thread a few months ago, that we're in about the third inning or so?

[GRG55]

Re: Meanwhile, back at the credit crisis...

Er, a little early in the game to have shot up all your ammo, isn't it Ben? What did we say in another thread a few months ago, that we're in about the third inning or so?

Let's hope it doesn't go into extra innings.

Read it and weep...:p

Kohn Signals Wall Street May Get Permanent Access to Fed Loans

By Scott Lanman and Anthony Massucci
May 30 (Bloomberg) -- Federal Reserve Board Vice Chairman Donald Kohn raised the possibility of giving Wall Street securities firms permanent access to loans from the central bank, as long as regulators tighten oversight of the companies.

Kohn also advocated continuing Fed auctions of funds to commercial banks and loans of Treasuries to Wall Street dealers even after markets stabilize. Such channels would stay open ``either on a standby basis or operating at a very low level,'' he said in a speech in New York yesterday.

The remarks go beyond Fed Chairman Ben S. Bernanke, who has indicated the central bank would shut lending to investment banks when the credit crisis passes. Lawmakers and regulators are debating how to approach the supervision of investment banks in the aftermath of the Fed's rescue of Bear Stearns Cos. in March.

``If you are a bondholder in one of these Wall Street firms, you know you have a big `Sugar Daddy' now called the Federal Reserve that's going to back you up,'' said Jeff Pantages, chief investment officer of Alaska Permanent Capital Management in Anchorage, which oversees $1.8 billion in assets...

...``The more extensive the access, the greater the degree to which market discipline will be loosened and prudential regulation will need to be tightened,'' Kohn said in his speech to a conference hosted by the New York Fed... [Ya figure?]
http://www.bloomberg.com/apps/news?p...d=a7EKKQuCqhUA

[c1ue]

Re: Meanwhile, back at the credit crisis...

Summer is coming.

Sell in May and go away... time is running out.

[Verrocchio]

Re: Meanwhile, back at the credit crisis...

Summer is coming.

...followed abruptly by [Kondratieff] winter!

[phirang]

Re: Meanwhile, back at the credit crisis...

been taking profits and shifting into beaten-up gold miners... hunker down for the shitstorm!

[The Outback Oracle]

Re: Meanwhile, back at the credit crisis...

I hope you're right about beaten up Gold miners!!! Fred took me to task at one stage for buying the miners instead of the metal itself. At the time of his comment he was certainly correct. I had been doing really well prior to July last and I am still well in front but these days i bleed about $5000 per day...it's not a lot of fun!!!

[Guest]

Re: Meanwhile, back at the credit crisis...

Aussie Oracle -

No matter how beaten down or cheap the miners are today - how much "extreme value" they represent, I think the metal itself is incomparably better insurance - because it's not just for the next "year or two". If you listen to Stephen Leeb's forecasts of a terminal bull market in commodities as we cruise up to 7-8 billion people in a mere 25 years, these are hedging strategies for the next two decades. I think some of the Aussie metals shares are some of the best relative strength in the world. I track a basket of uranium shares I sold in the past 18 months, and the Australian ones are among the strongest. Having said that, all these mining shares may well soon have a fantastic rebound. Given the depth of their current washout, that rebound should be one for the story books. It's just my preference, but if I were in your shoes, I'd look for the sweet spot of that rebound and SELL THEM into that big rally. Then pile a large percentage of my proceeds into the precious metals.

Why? Quality of life - aka "freedom from future stress". You'll capture a truly cornucopian return from simply holding the metal even from today's apparently "lofty" levels (n.b. ! no pooled accounts, and stay away from the Perth mint which is playing hanky panky with it's physical stores!!), because the macro trends in motion are not solely centered around credit and monetary dysfunction. They are (as Dr. Stephen Leeb noted) centered around resource markets dysfunction - a.k.a. petroleum is about to go on strike - permanently.

A lot of people believe that all these issues merely dance around the monetary aggregates. I don't agree. The resources already dwindling relative to demand, have much bigger problems ahead - all centered around oil. - They already have, and will have much more in future years, to do with out of control mining and mining infrastructure costs, and it is the fiat money which will dance around that issue not vice versa! Example: Oil drilling infrastructure costs are inflating about 40% a year. That is the real "inflation" underpinning gold prices. Hence a purchase of any precious metal today is a simple, clear eyed bet that the fiat currencies will be thoroughly trashed, (as in taken out to the woodshed and SHOT), to serve as mere "shock absorbers" for the coming massive dysfunction (economic heart attack) brought about by oil going into permanent decline and shooting up to $300 and then $500 a barrel.

Is anyone really suggesting those prices are not plausible in scant six to ten years, denominated in today's dollars ... I would not want to put any real money on a bet we see an oil glut when this speculative oil peak finally "breaks". In a world of $500 oil, the real "leverage" will consist of owning gold that was mined when oil only cost $65 a barrel, a scant 8 months ago. And in that sort of world, the gold price is not merely keeping up with the mining production costs inflation - it is a premium hedge in that environment which requires a hefty premium to that inflationary oil price trend ...

No investment thesis was ever more utterly simple. If someone handed you an investment idea, cast in stone for the next twenty years (peak cheap oil), and that investment offered you the opportunity to make ten to twenty times today's dollars in something which had absolutely zero to do with any financial institutions, with the stock markets, with second guessing world stock market cycles - would you take it?

That is the promise of precious metals in a world of peak oil, where paper money MUST act as a buffer to the economic stress of the event . And who imagines this transition will require less than TWENTY YEARS? Meantime, there is likely a notable difference of effect upon one's nerves (and not much difference in the end upon one's profit), between holding the actual metal through that event, or holding the shares, which are inexorably tied to the cost of fuel to keep their profit margins. I don't know about you, but to my view, anything that has the word "mining" written on it, has the words "eroding profit margins due to input costs" written on the reverse side of the certificate. If it were my money, I'd hold the shares a while longer, and expect to be provided an excellent exit point sometime in the next year to eighteen months (maybe even very soon?). I'd then convert all those grimly held shares to cash (and selling the stocks after a mammoth run-up probably provides a great leverage to buying more bullion).

I'd let the dust settle on that move and then smile, anytime in the next fifteen to twenty years I chanced to read of the continuing heartburn of mining stock shareholders. I figure peak oil (or Peak Cheap Oil, take your pick) is coming, sure as the sun rises in the east. And it's going to TRASH GLOBAL CURRENCIES. Gold and silver win, not just while the US Fed is in it's death throes, but while our entire global petro-economy is gasping through the most traumatic transition in the industrial age's history. I look at the inevitability of that event, and figure we can bank on it, while telling all those beguiling stock brokers to go get stuffed. How sweet is that? Silver tarnishes (a bit) but is quite nice to have. Gold does not even tarnish. And given the severe crimp on mining with oil at $300 a barrel, these 5000 year old money proxies promise to look a heck of a lot more "expensive" in 15 years than they are now, due to peak oil. Stands to reason, and that is one trend we absolutely don't need any financial analyst to discover for us.

http://www.financialsense.com/fsu/ed...2007/0601.html

And then McKillop, describing why oil is still so cheap, why significant US oil demand destruction is a pipe dream, and why gold is dirt cheap compared to oil, therefore dirt cheap in it's own right. Now if you put "two and two together", how cheap does that make silver, currently dirt cheap to gold?

http://www.financialsense.com/editor...2008/0602.html

[phirang]

Re: Meanwhile, back at the credit crisis...

re: mines:

stick to juniors!!! hunt for the beaten-up african junior with an excellent deposit and reasonable infrastructure. make sure your investment has M&A appeal, and you will do well.

[Chris]

Re: Meanwhile, back at the credit crisis...

re: mines:

stick to juniors!!! hunt for the beaten-up african junior with an excellent deposit and reasonable infrastructure. make sure your investment has M&A appeal, and you will do well.

Perhaps its just the sites I read but almost everyone is on the junior bandwagon. My question is, if so many people are piling in to the junior sector why have the stock prices moved sideways or down for over a year?
Doug Casey talks about how we are entering the "wall of worry" stage and that the easy money has already been made from these stocks, but if that is the case, and one is not yet invested, why take the huge risk in trying to get in and out during the mania (if there is one) when sitting on a pile of Troy ounces would do just as nicely?

[GRG55]

Re: Meanwhile, back at the credit crisis...

Perhaps its just the sites I read but almost everyone is on the junior bandwagon. My question is, if so many people are piling in to the junior sector why have the stock prices moved sideways or down for over a year?
Doug Casey talks about how we are entering the "wall of worry" stage and that the easy money has already been made from these stocks, but if that is the case, and one is not yet invested, why take the huge risk in trying to get in and out during the mania (if there is one) when sitting on a pile of Troy ounces would do just as nicely?

The "easy money" has probably already been made across much of the commodity sector, including gold bullion and crude oil. The time to be entering them for the "easy money" was 1999 to 2001.

But we do not have the ability to go back in time (at least I don't), so we have to choose from the investment opportunities available to us at the moment (and yes, I regard cash as an investment alternative). I am not at all questioning your choice regarding bullion; everyone has to choose what they are most confident and comfortable with.

What phirang is trying to point out is the enormous valuation differential between the price of bullion and the price of many of the junior companies that hold resource/reserves in the ground. In this instance I happen to agree with phirang, and that valuation gap causes me to be more comfortable adding select juniors to my holdings instead of adding more bullion exposure. This is similar to what I did with Canadian natural gas producer stocks late last year...they own an asset in the ground that is valued at an abnormal discount to the commodity itself, at a time when the fundamentals for that pure commodity appear favourable (as you point out in the case of gold bullion)

To each their own.

[Guest]

Re: Meanwhile, back at the credit crisis...

re: mines: stick to juniors!!! hunt for the beaten-up african junior with an excellent deposit and reasonable infrastructure. make sure your investment has M&A appeal, and you will do well.

Make sure you are not buying juniors in a country with any whiff in the air of potential government repo's or prohibitive future taxation of mines, too. A certain "Chavez" character and an "Evo Morales" character come to mind from the other sde of the world, hungrily eyeing the mine resources which foreign mining companies have obligingly discovered and developed for them. We will probably see a growing popularity of this type of resource nationalization in future years, and it does not discriminate between juniors, midcaps or largecaps. Geopolitical risk. Point being, with mines anywhere, you have a hundred highly skittish variables. With the metal, all you have is an inert, extremely well behaved hedge against an utterly inevitable ocean of fiat currencies, with all those currencies in the hands of inept bureaucrats, reacting in shock and panic to soaring real energy prices. This is one of those "as far as the eye can see" situations which confer a great sense of investing tranquility. Bullion can go the distance.

This quote illustrates a potential core problem with resource stocks during peak cheap oil's progression (mining stocks of any type):

<< On May 29, ConocoPhilips officials commented that they can profitably increase oil production only if prices remain over $100 a barrel. Below that, America's 3rd largest oil company would have to cancel exploration and development projects. This is the first time we've heard a major U.S. oil company suggest a $100 floor would be necessary. >>

As the prices of these various commodities soar, it's clear that at least to some extent, the profit margins these resource producer companies will come under an increasing squeeze due to out of control energy input costs. Here is Conoco, barely six months since the nominal oil price doubled, already stating they will require oil prices over $100 to profitably increase oil production? How is this then a secure investment to ride oil's bull market? Sure, it has a great shot at outperforming the petroleum itself. It's a great company. But that is a damned short time interval within which it's threshold of profitability rose from $50 per barrel (barely a year ago) to a "new profitability threshold" of $100 per barrel. The profit margin window just narrowed with stunning speed. Therefore we might see a paradox in the next decade - sky-high resource prices, and the producer companies struggling to extract a profitable margin as the industry costs soar right up along with the commodity itself. Who wins? At least to a more secure extent, the sure bet play is to own the commodity itself, purchased back when it was dirt cheap.

[c1ue]

Re: Meanwhile, back at the credit crisis...

I'm absolutely not a gold bug, but one item I saw some time ago did catch my eye:

That buying juniors in a time of increasing energy prices as well as increasing commodity prices is not necessarily the best thing.

The existing companies already have large surveys of mineable assets along with both experience and economies of scale to minimize costs.

The majors thus can benefit from price consistent price upticks much more than juniors; the juniors relative gain might be large because they are essentially like 'out of the money' options but inherently they are equally as safe as said options.

[The Outback Oracle]

Re: Meanwhile, back at the credit crisis...

Thanks lukester for your reassuring words. Three of my Juniors put out really good reports today, one went down and the othertwo went sideways....I need a bit of 'irrational exuberance'.
I think the whole cost thing is a worry as pointed out by you and the other contributors.

[GRG55]

Re: Meanwhile, back at the credit crisis...

Make sure you are not buying juniors in a country with any whiff in the air of potential government repo's or prohibitive future taxation of mines, too. A certain "Chavez" character and an "Evo Morales" character come to mind from the other sde of the world, hungrily eyeing the mine resources which foreign mining companies have obligingly discovered and developed for them. We will probably see a growing popularity of this type of resource nationalization in future years, and it does not discriminate between juniors, midcaps or largecaps. Geopolitical risk. Point being, with mines anywhere, you have a hundred highly skittish variables. With the metal, all you have is an inert, extremely well behaved hedge against an utterly inevitable ocean of fiat currencies, with all those currencies in the hands of inept bureaucrats, reacting in shock and panic to soaring real energy prices. This is one of those "as far as the eye can see" situations which confer a great sense of investing tranquility. Bullion can go the distance.

This quote illustrates a potential core problem with resource stocks during peak cheap oil's progression (mining stocks of any type):

<< On May 29, ConocoPhilips officials commented that they can profitably increase oil production only if prices remain over $100 a barrel. Below that, America's 3rd largest oil company would have to cancel exploration and development projects. This is the first time we've heard a major U.S. oil company suggest a $100 floor would be necessary. >>

As the prices of these various commodities soar, it's clear that at least to some extent, the profit margins these resource producer companies will come under an increasing squeeze due to out of control energy input costs. Here is Conoco, barely six months since the nominal oil price doubled, already stating they will require oil prices over $100 to profitably increase oil production? How is this then a secure investment to ride oil's bull market? Sure, it has a great shot at outperforming the petroleum itself. It's a great company. But that is a damned short time interval within which it's threshold of profitability rose from $50 per barrel (barely a year ago) to a "new profitability threshold" of $100 per barrel. The profit margin window just narrowed with stunning speed. Therefore we might see a paradox in the next decade - sky-high resource prices, and the producer companies struggling to extract a profitable margin as the industry costs soar right up along with the commodity itself. Who wins? At least to a more secure extent, the sure bet play is to own the commodity itself, purchased back when it was dirt cheap.

All good points Lukester. Political risk, cost of extraction, availability of experienced personnel, and a point I have posted about before...too many resource companies that are run with the objective of supporting the lifestyles of the management team and Board members, and not for the benefit of shareholders [IMO the biggest danger of all ].

Having said that, the reason to consider owning resource companies instead of [just] the commodity alone is that the very best of them, with real reserves in the ground, in politically secure areas of the world represent a long-dated option on that commodity. In the meantime, if they can't produce so what. All they are going to get for it is depreciating American Dollars, and besides the stuff stays in the safest place possible...in the ground.

The BHPs and Rio Tintos of the world trashed their exploration depts during the latter stages of the commodity crash. They have limited to zero ability to add new reserves beyond what they can find through extensions and additions to their existing properties. That's why they have been funding junior explorecos and most of them have a financial portfolio of equity interests in junior explorers. Neither of those assure financial success for minority investors, but there is a fundamental play that offers a risk/reward different from holding the pure commodity. It's not for everyone by any means, and neither the pure commodity nor the companies the find and develop it should be eliminated from consideration in one's portfolio.

People here suggesting it's an either/or decision, or that holding one over the other is "better" are trying to compare apples and oranges. The two investments are not the same thing.