Bill Gross Wants PIMCO Bailout

PIMCO's Bill Gross was asking Where’s Waldo? in his investment outlook for September 2007.

A certain dose of market discipline in the form of lower prices might be healthy, but market forecasters currently project over two million defaults before this current cycle is complete. The resultant impact on housing prices is likely to be close to -10%, an asset deflation in the U.S. never seen since the Great Depression.

The ultimate solution, it seems to me, must not emanate from the bowels of Fed headquarters on Constitution Avenue, but from the West Wing of 1600 Pennsylvania Avenue.

If we can bail out Chrysler, why can’t we support the American homeowner? The time has come to acknowledge that there are precedents aplenty in the long and even recent history of American policy making. This rescue, which admittedly might bail out speculators who deserve much worse, would support millions of hard working Americans whose recent hours have become ones of frantic desperation.

Get with it Mr. President and Mr. Treasury Secretary. This is your moment to one-up Barney Frank and the Democrats. Reestablish not the RFC or the RTC, but create an RMC – Reconstruction Mortgage Corporation. If not, make some modifications in the existing FHA program, long discarded as ineffective. Write some checks, bail ‘em out, prevent a destructive housing deflation that Ben Bernanke is unable to do. After all “W”, you’re “the Decider,” aren’t you?

Mr. Practical, whom I seldom disagree with simply because he is too practical, commented on the situation and came to a conclusion that I 100% agree with: More Bailouts Could Bring Disaster Down the Road.

In my humble opinion Mr. Gross is right about only one thing: that Mr. Bernanke is unable to eventually stop a destructive housing deflation. At least now the pundits are admitting that a housing deflation is at the heart of the economic problems. That is a watershed event.

But for the “government”, which I thought was using taxpayer money (except for the $9 trln in debt it has borrowed), to bail out malinvestment is only to increase the problem. If you don’t punish your child for playing with matches, he may one day burn the house down.

Bailout for Who?

After reading Mr. Practical, inquiring minds might be wondering "Who does Bill Gross really want to bail out?"

That's a good question so I started looking for possible clues in Morningstar's snapshot of PIMCO Total Return Fund (PTTRX).

This is what I found:



I see the top bond guru in the world returned a three year average of 3.83% in his "Total Return" Fund. One could have parked money in a money market fund, CDs, a bank, or short term treasuries and done better than that.

Digging deeper I see the top five holdings of the Total Return Fund are as follows.

1) Fannie Mae
2) Fannie Mae
3) Fannie Mae
4) Fannie Mae
5) Fannie Mae

as shown in the following table:



Digging still deeper I see this breakdown:



Of the US Government breakdown I see the Total Return Fund is grossly overweight agencies (Fannie Mae) vs. Treasuries. This is really irritating. Shame on Morningstar for being willing to label Fannie Mae and Fredie Mac as "U.S. Government".

There are scores of so called "Government Bond Funds" out there chasing minuscule returns above treasuries when Fannie Mae (and brother Freddie Mac) are not even government backed. For more on this idea as well as a recommendation that everyone look into just what is in their Money Market and "Government Bond Funds" please see Flight to Safety.

The Total Return Fund does not present itself as a "government bond fund" but everyone by now should be wondering how the so called best bond trader in the world could get himself into this position.

And even worse is the fact that 40.20% of the Total Return Fund is invested in mortgages which from the above tables it would appear that most of that is not even "quasi-government guaranteed".

The logical conclusion is that Bill Gross is overweight mortgages and wants a taxpayer bailout of PIMCO. Is it any wonder then that he is asking Bush to "Write some checks, bail ‘em out, and prevent a destructive housing deflation that Ben Bernanke is unable to do."

The only thing Gross forgot to mention in his September Outlook was the return address on those checks needs to read "Bill Gross @ PIMCO".

Mike Shedlock / Mish
http://globaleconomicanalysis.blogspot.com/

Where's the Value?

Inquiring minds just might be asking "Where's the Value?"

I can't blame them either. Many who were recently "Seeking Alpha" (which by the way drove down risk premiums across nearly every asset class), are now concerned more about Safety and less about Alpha. Things have dramatically changed in one month flat. Let's call this sudden change in sentiment "Seeking Value".

So where's the value? That's clearly a good question so let's explore some potential answers.

The cynical might suggest "There's no value anywhere" and while I can certainly make a case for that, that does not give any hints whatsoever about what to do or where to go.

So let's change the question to "Where's the Relative Value?" That is clearly more fertile ground for intelligent discussion. Some might see the answer in energy, others tech stocks like Broadcom (BRCM), Apple (AAPL), Google (GOOG) or eBay (EBAY) as referenced in 21 Bullish Predictions For Tech, still others see gold, silver, and precious metals as the answer, even if still others within the precious metals sectors are looking for a A Safe Way to Own Gold and Silver.

Yikes!

Not wanting to get into a massive debate about sectors (can you blame me?) let's instead take a look at the bond market. An interesting thing happened on Thursday, and captured for posterity in the following chart.

Yield Curve as of 2007-08-23



What's interesting about the above chart is we are seeing a rally in yields at the short end of the curve, and a decline in yields at the long end of the curve. The pivot point is easy to see as depicted by the dotted line at 4.4%

Is there any value at the short end of the curve? I think not. On Monday in a Flight to Safety I noted "The yield on the one-month Treasury bill fell 160 basis points to 1.34 per cent in early trading. The yield on three-month Treasury bills tumbled to 2.51 per cent, 123 basis points below Friday's close – a sharper fall than during the October 1987 stock market crash."

There is simply no value at yields of 1.4%.

With the Fed Funds rate at 5.25% inquiring minds are asking "Is there any value anywhere?" Well the answer depends on where we are headed. If for example the curve flattens and the pivot point stays where it is, then there is indeed value on the right side of the pivot point. The entire curve could also shift lower in which case there is also value on the right side of the pivot point.

Only if there is a bond market revolt when Bernanke cuts rates (and he will) is there no value on the right side of the pivot point. So now the question becomes "Value" vs. "Safety". Safety (but not value) increases left of the pivot point. Relative value (but not safety) increases to the right of the pivot point.

This is seems to be a strange dichotomy. Relative value appears to be where the most risk is. When is the last time we have seen that?

Mike Shedlock / Mish
http://globaleconomicanalysis.blogspot.com/

Countrywide Bailed Out by Bank of America?

Forbes is reporting Bank of America Bails Out Countrywide.

Bank of America knows when it's time to buy.

The Charlotte, N.C.-based bank is making a $2 billion equity investment in the beleaguered Countrywide Financial. Bank of America will purchase $2 billion worth of preferred Countrywide stock yielding 7.3%, and that can be converted into common stock at $18 per share, giving the mortgage lender a much-needed cash infusion amid a crippling credit crunch.

Countrywide shares soared 20.01%, or $4.37, to $26.19 after hours Wednesday on the news. Bank of America shares rose 1.9%, or 98 cents, to $52.63.

Bank of America is buying low, and Peter Slatin, founder of the Slatin Real Estate Report, believes it’s a good bet on Countrywide, which he said has been an aggressive lender, not a stupid one.

“It’s not just propping up a bad company, but showing faith in a reasonable company,” Slatin said, “and I think the future of the American housing market, if not the immediate future.”

Well so much for that 20% after hours soaring of Countrywide. When the dust settled at the end of the trading day, Countrywide was up less than 1%. Let's see if it can hold that.

But the question remains was it a good opportunity or not and if so for who. While we ponder that Countrywide CEO Mozilo sees recession ahead.

Countrywide Financial Corp Chief Executive Angelo Mozilo said on Thursday the U.S. housing downturn is likely to lead the country into recession, but that the largest U.S. mortgage lender will survive.

In an interview, Mozilo also said that to promote liquidity, the U.S. Federal Reserve should cut the rate it charges banks to borrow.

Countrywide faced a credit shortage this month as mortgage defaults rose and capital markets tightened. On August 16, it announced an unexpected drawdown of an entire $11.5 billion credit line because it had trouble selling short-term debt.

But on Wednesday, Bank of America Corp said it would invest $2 billion in Countrywide, buying preferred securities convertible into common stock.

"I've seen this movie before, and the ending of the movie always ends up in some form of recession," he said. "I can see the economy slowing down substantially enough to give the regulators, the Fed some pause in what's going to happen next."

Mozilo called on the Bush Administration and Fed Chairman Ben Bernanke to state that they will not allow the housing environment to get out of control.

[Mish comment: Exactly what good would another fool yapping about control or containment do? And if Mozilo wants to know who is responsible for the situation at Countrywide he should of course look into a mirror. He made a ton of subprime mortgage bets that he simply should not have made. But he did learn how to cash out and that he did hand over fist]

In an interview with CNBC television, Mozilo said markets are in "one of the greatest panics I've ever seen in 55 years in financial services."

[Mish comment: Panic? This is just getting started. Watch what happens when commercial real estate blows up. For more on that idea see Foolish Concerns, Foolish Optimism, Foolish Logic]

Still, he rejected as "irresponsible and baseless" an August 15 report by Merrill Lynch & Co analyst Kenneth Bruce that downgraded Countrywide to "sell" from "buy" and said the company might face bankruptcy if market conditions worsen.

[Mish comment: Exactly what is irresponsible about telling the truth? Countrywide is not out of the woods yet.]

Herb Greenberg also defended the analyst in his Market Blog.

In his interview on CNBC today, Countrywide (cfc) CEO Angelo Mozilo said the analyst at Merill Lynch who put a "sell" on his company was "irresponsible" and not unlike yelling "fire in a crowded theater." Sorry, Angelo, you are wrong. The analyst, who used to work at Countrywide, was merely doing his job. At that point there was no telling what would happen to Countrywide -- a public company. The analyst's obligation was to his clients, not to Countrywide's customers or the image of Countrywide.

On Seeking Alpha, Robert Craig-Stephenson is asking Who Wins?

What comes to mind is that this is a really good deal for BAC- they can't lose under any scenario.

If CFC survives, then they collect a hefty coupon (at the time of this writing, the Fed discount rate is 5.75% and the CFC loan was 7.25%), and own a call to CFC stock at $18 strike. Effectively, assuming 2 yr holding period after the loan is made, BAC would earn about 10%+ effective interest rate.

If CFC fails (and my personal opinion is that they are very likely to do so), then BAC can still make a lot of money because I imagine they will hedge the position by selling CFC common stock.

Sorry. The terms of the deal do not allow for shorting. There are plenty of ways for Bank of America to lose.

On Minyanville, Todd Harrison remarked "Bank America, already a massive presence in the California real-estate market, is effectively doubling down on that bet. And suffice to say, after the MBNA acquisition, they've already got a fair amount of exposure to the consumer."

So Bank of America has indeed taken on risk, and lot's of it too. But the deal was struck at terms that show just how desperate Countrywide was for cash as the Wall Street Journal article Bank of America Invests $2 Billion In Countrywide shows.

Bank of America invested in Countrywide nonvoting convertible preferred stock yielding 7.25% annually. The preferred can be converted into common stock, subject to restrictions on trading for 18 months, at a conversion price of $18 a share. A full conversion would give Bank of America a 16% to 17% stake in Countrywide's common shares, Mr. Mozilo said.

See those "trading restrictions". No shorting for 18 months. And the shareholder dilution was massive.

As for 7.5% annual yield, is that enough yield for the risk Bank of America took on? Somehow I doubt it. Yes, the deal looks good right now, $4 in the money, but that can vanish in a day the way this stock is trading.

And what about the Class Action Lawsuit against Countrywide?

Thomson Financial - Law firm Lerach Coughlin Stoia Geller Rudman & Robbins LLP yesterday filed a lawsuit against mortgage lender Countrywide Financial Corp (NYSE:CFC) that seeks class action status.

The suit was filed in the US District Court for the Central District of California on behalf of purchasers of Countrywide common stock between Jan 31 2006 and Aug 9 2007, the firm said in a statement.

The complaint alleges that during the class period, defendants issued materially false and misleading statements regarding the company's business and financial results.

I do not have any idea of the odds of success of that lawsuit but between August 2nd, and August 9th there was a massive change in opinions presented by Countrywide as detailed in Countrywide Bets the Farm.

So who wins? Perhaps no one. There is certainly no guaranteed winner in this mess. OK, Countrywide stopped its short term slide but it paid a very hefty price to do so. If it runs into further trouble, who's going to stop it from sinking again? There are still massive problems in the sector and Bank of America did not change those fundamentals overnight. Yes, BAC has a free call option so to speak, but that option comes with restrictions for 18 months. And Bank of America had to take on a lot of risk at a time the market is not rewarding risk. On closer examination this deal does not look remarkably great for anyone.

Mike Shedlock / Mish
http://globaleconomicanalysis.blogspot.com/

Commercial Paper Tanks

Bloomberg is reporting Commercial Paper Has Biggest Weekly Drop Since 2000.

Outstanding U.S. commercial paper fell 4.23 percent, the biggest weekly drop in almost seven years, as investors fled asset-backed debt and opted for the safety of Treasuries. Commercial paper outstanding has fallen by $181.3 billion in two weeks. The most recent decline is the biggest by percentage since at least November 2000, according to data compiled by Bloomberg.

"The shrinkage of the commercial paper market will force companies to obtain money elsewhere" [said Tony Crescenzi, chief bond market strategist at Miller Tabak & Co.], "Some will be unable to obtain funding and will shut or scale back their operations."

"There is a significant amount of cash in the system, it's just not getting to the
parts of the market that need it," Conrad DeQuadros, a senior economist at Bear Stearns Cos., said in an interview today in New York.

Once again Bear Stearns gets it wrong. There is not a "a significant amount of cash" anywhere. In fact there is a mad scramble for cash as a Mad Dash For Cash and Sudden Demand For Cash both show.

DeQuadros is confusing cash with credit and by association credit with either liquidity or value. Professor Succo gave a timely warning about the latter in Don't Confuse Risk Taking With Value. Mr. Practical was right on time with Credit Crunch Not Going Away.

With the above in mind, let's change the statement made by DeQuadros so that it's accurate. This will take quite some doing. Here goes:

"Demand for cash has been rising fast but there is little cash to be found. The huge drop in commercial paper and the emergency funding of Countrywide (CFC) by Bank of America (BAC) are examples of what happens when there is insufficient cash. Yes there is credit available but at prices no one really wants to pay. Credit is only available at good rates to corporations that don't need it. Those who need a credit lifeline are struggling to get it. That's what happens in a credit crunch. If you need credit no one wants to extend it to but if you don't the Fed is begging you to take some".

This is why Bernanke's Bluff as depicted in Bernanke's 16 Gun Salute is doomed to fail.

Mike Shedlock / Mish
http://globaleconomicanalysis.blogspot.com/

A Safe Way to Own Gold and Silver

There is indeed a 100% guaranteed safe way to own gold and silver. But before addressing how, a basic question must first be addressed: Why Own Gold?

Why Own Gold

1) A Hedge against a Sinking Dollar

The following chart shows a general tendency (at least since about 2000) for gold to move in the opposite direction of the US dollar.



(click on chart to see a sharper image)

The above chart courtesy of Sharelynx Gold.

2) Global Currency Debasement

Yes the dollar has been sinking. But because of inflation the value of all currencies has been sinking. In 1970 a loaf of bread cost a quarter. What does it cost now? Gasoline was $.30 or so then. It is over $3.00 now. This is not unique to the dollar. The price of things has been rising nearly everywhere in every currency. All fiat currencies eventually go to zero, the only difference is the speed at which purchasing power declines. Gold has never gone to zero and never will either. While gold tends to follow an inverse of the US dollar, it can also disconnect against the dollar and the Euro as this chart shows.



(click on chart to see a sharper image)

The above chart, courtesy of Sharelynx Gold, shows the percentage move of gold (AU) vs. the inverse of the US dollar index (DX) vs. the Euro (EC). While the Euro and Dollar stayed inversely related, gold made a major move against both currencies. If gold can do that once, it can and likely will do that again.

3) Financial Deterioration in the US

The US keeps spending money it does not have attempting to be the world's policeman. And politicians keep making promises and adding to the national debt. This is financially destabilizing.

4) Portfolio Diversification

It makes sense to have some assets outside the conventional thinking of the financial touts on CNBC who generally only recommend one of two things (stocks or bonds). Gold has been acting well over the last seven years and deserves a spot in a diversified portfolio.

5) A Safe Haven from Geopolitical Instability

Gold typically performs well in times of geopolitical stress and certainly the US has made a lot of enemies recently with the invasion of Iraq. We are threatening Iran right now. In addition both Saudi Arabia and Pakistan are not the most stable of countries. If the Mideast blows up or oil is shutoff, gold is likely to perform very well. Safe havens are under appreciated until one needs them.

6) Increasing Investment Demand

There is increasing interest in gold and silver as an investment class. But there is tremendous room for more. The mainstream media still wants little to do with gold or silver. But that's actually a good thing. Remember what happened in 2000 after everyone fell in love with tech stocks? Remember what happened in 2005 when people were camping out overnight to buy Florida condos? The time to buy asset classes is when they are just being discovered and still unloved by most. The discovery process is just now happening in gold and silver.

7) A Hedge against Hyperinflation

Some think that Bernanke is going to print his way out of the next recession. Money will be flying everywhere. Prices of everything will soar and the only way to protect themselves is with hard assets like gold and silver. I do not subscribe to that view. I think deflation is coming. My reason is that so much credit has been extended on houses and boats etc, and there is no way to pay back what has been borrowed. We can certainly see a massive rise in foreclosures and rapidly dropping home prices as well. Bankruptcies are a destruction of credit (elimination of debt), and when people lose jobs in the upcoming recession bankruptcies will soar. Bernanke will no doubt cut interest rates in response. There is a chance, even if only a very small one that hyperinflation takes hold. On that chance, it's smart to have a certain percentage of assets in gold. Consider gold as an insurance policy.

8) A Hedge against Deflation

Deflation is the other end of the spectrum. For reasons outlined above I think that's where we are headed. Gold has done very well historically in deflation. Think of the great depression. Who didn't want gold coins? The purchasing power of gold soared in the depression. But isn't this contradictory? Can gold rise in all situations? The answer is that it's not contradictory because gold does not do well in all situations. Gold does poorly in "normal times". In normal times stocks and bonds are the place to be, not gold. Gold does well at the extremes, very well in fact. Hyperinflation and deflation are the extremes. Once again consider it an insurance policy, and one likely to be needed one way or another as well. Bankruptcies and rising unemployment with a consumer led recession is all that it may take to set thing off. I believe a severe consumer led recession is coming. With that recession, rising unemployment is a given. Once again consider gold as an insurance policy. I think it will be needed.

9) Gold, unlike the US dollar is not a claim on anyone else's liability. A fiat dollar is merely a claim on resources, and it is a liability of the Fed (while its government bond holdings are its assets). Gold is gold. It is not anyone else's liability. This is also why gold is the ultimate form of payment when everything else fails. One does not need to trust anyone when taking gold in payment. Whereas with all other financial assets you need some counterparty to perform.

Note that the dollar used to be a claim on gold or silver (but even that's not true anymore). The following images show how it used to be.

Silver Certificate
Right beneath "Silver Certificate" is the text "This Certifies There Is On Deposit In The Treasury Of The United States Of America One Silver Dollar Payable To The Bearer On Demand".



Notice how the text reads there is one dollar in silver backing up that paper dollar. Now there is zero silver and zero gold backing up that dollar.

Take a look at the 1928 $20 Gold on Demand Note.
This series of $20 notes displays the phrase "Redeemable in Gold on Demand at the United States Treasury, or in Gold or Lawful Money at Any Federal Reserve Bank".



Take out a dollar bill now and look at it. What you will find is this statement "This Note Is Legal Tender For All Debts, Public and Private." Dollars are no longer backed by gold or silver or anything in fact. They can be printed at will by the treasury. Money (credit really - since nothing is backing it) can also be borrowed into existence by various lending institutions like Fannie Mae.

Now consider Constitution, Article I, Section 10, Clause 1. No State shall…coin Money; emit Bills of Credit; make any Thing but gold and silver Coin a Tender in Payment of Debt. Those interested in further discussion about gold and silver in the constitution might be interested in reading Honest Money by Douglas V. Gnazzo.

10) Gold is Money. How do we know that gold is money? The short answer is because it acts like it. The long answer can be found in Misconceptions about Gold and Why does fiat money seemingly work?

Arguments Against Gold

1) Gold does not pay interest.

1A) That's true. And stocks don't either although bonds, CDs, and money market accounts do. But remember the top two reasons to own gold were as a hedge against the dollar and to protect against global currency debasement. If the dollar falls in value by 10%, those making at 5% interest are losing wealth.

2) Gold does not pay a dividend.

2A) That's also true. But bonds don't pay dividends either. And the Dividend yield of the S&P is a mere 1.4%. Yes one can find higher yielding stocks, but those tend to be much riskier. New Century Finance was paying dividends in the teens before it went bankrupt a few months ago. With the possible exception of 1929 and the dotcom bubble of 2000, stocks have never been as risky as they are now.

3) Gold is risky.

3A) Typically the above statement is made in passing as if other things are not risky. But step back for a moment consider the debacle in housing. Some houses in bubble areas like Florida, Las Vegas, California, Boston, and DC are down 25-40% (condos even more). Remember how everyone thought housing prices only go up. It was true for so long that virtually everyone believed it. The models at Moody's, the S&P, and Fitch all counted on it. But over 130 mortgage lenders have now gone bust because of failed models.

Housing prices dropped for the first time since the great depression and are going to drop again, perhaps for another five more years, or more. One look at the swings in the stock market lately should be enough to convince anyone that the market is hardly risk free. A dozen hedge funds have now blown up with two prominent funds at Bear Stearns falling to zero (worthless). Can stocks fall again like they did in 2000? Of course they can.



(click on chart to see a sharper image)

Most people still do not realize how unusual the period from 1995 to 2000 was. Everything worked, until it didn't. It was a once in a lifetime opportunity to get in on a meteoric trend.

An echo bubble occurred when Greenspan cut interest rates to 1% in the wake of the dotcom crash. Housing took off, jobs were plentiful, and corporations made money hand over fist selling junk bonds to investors. The echo bubble is now over and the economy appears to be slipping into a recession.

But just because stocks are risky does not mean gold is necessarily safe in every form. Then again it's important to remember that reason number 4 to own gold was "Portfolio Diversification", and reason number 5 to own gold was to have "A Safe Haven From Geopolitical Instability".

But for those who want to eliminate as much risk as possible there is a perfectly safe way to own gold and silver. By perfectly safe I mean government guaranteed principle with no downside risk regardless of what happens to the price of gold or silver.

MarketSafe® Gold CDs

EverBank® is offering a MarketSafe® CD in gold, a new and completely safe way to invest in Gold, where yields are driven by the average spot price of gold bullion, and deposited principal is never subject to market risk.

Key details about MarketSafe Gold:

- CD Return: Tied to the upside performance in the average spot price of gold
- Deposited principal: 100% guaranteed
- Term: 5 years
- Minimum deposit: $1,500
- Account fees: None

The next Funding Date for Gold CDs is September 11.
They will be offered again in October (most likely the third week).
Money needs to be at Everbank by the Funding Date.

Click Here to Learn More about MarketSafe Gold.

MarketSafe® Silver CDs

EverBank® is offering a MarketSafe® CD in silver, a new and completely safe way to invest in Silver where yields are driven by the average spot price of silver bullion, and deposited principal is never subject to market risk.

EverBank® is offering a MarketSafe® CD in silver —where yields are driven by the average spot price of silver bullion, and deposited principal is never subject to market risk.

Key details about MarketSafe Silver:

- CD Return: Tied to the upside performance in the average spot price of silver
- Deposited principal: 100% guaranteed
- Term: 5 years
- Minimum deposit: $1,500
- Account fees: None

If the Spot Price of Silver has increased in value over the term of the CD, you earn a Market Upside Payment equal to 100% of the percentage change in the average Spot Price of Silver, calculated as an average of ten semiannual pricing dates.

If the Spot Price of Silver has decreased in value, you will receive 100% of your principal at maturity.

The next Funding Date for Silver CDs is September 11.
They will be offered again in October (most likely the third week).
Money needs to be at Everbank by the Funding Date.

Click Here to Learn More about MarketSafe Silver.

Target Audience for MarketSafe® Gold and Silver

For those who would like to own gold or silver as a hedge, for portfolio diversification, or for any of the 10 reasons listed earlier, but do not want any downside risk, there is no better way that I know to achieve that goal.

These programs are aimed at investors with a 5 year time horizon who do not want any risk to principle. In return for the guaranteed principle offered by these MarketSafe® products, the tradeoff is the inability to attempt to time the market. For those whose primary concern is protection of principle this is a great product.

For Metal Investors Willing To Assume More Risk

Those desiring to diversify their portfolio with gold and silver and are willing to assume more risk can do so with an EverBank Metals Select Account.

POOLED ACCOUNTS (Unallocated)
A less expensive way to own gold or silver—your purchased metal is "pooled" with other investors, saving you from paying storage or maintenance fees.

HOLDING ACCOUNTS (Allocated)
Directly own gold or silver bars and coins with this storage option, which incurs a custodial fee.

Both options allow the buying or selling of bullion within 1% of the following day’s a.m. fixing price on the London Bullion Market Association. This is lower than the typical 4-7% commission charged by metals brokers and/or dealers.

Click Here For More Information About Opening an EverBank Metals Select Account.

How Safe is Everbank Itself?

Following are recent statements from Frank Trotter, Executive Vice President of Everbank, in regards to questions I asked about mortgages and the overall safety of deposits at Everbank.

Everbank does not originate or own sub-prime mortgages. And as a private company, EverBank is not subject to analysis by the public rating agencies like Standard & Poors or Fitch. However, EverBank has strong rankings from Weiss Ratings and IDC Financial Publishing and of course all deposits are FDIC insured.

In light of recent negative news reports surrounding the big three rating companies, we are proud of our safety rankings by truly independent rating agencies.

Following is a statement made in today's Daily Pfennig also by Frank Trotter.

Many people have asked about EverBank in the context of the happenings in the markets over the past several weeks. I would like to take this opportunity to make a couple of clear statements for customers and market watchers:

EverBank is a diversified financial services company engaged in retail and commercial banking, investments, and the production and servicing of mortgages. We have a balanced revenue stream that does not depend either solely or substantially on any one line of business.

EverBank is in a strong capital and liquidity position. Results through second quarter this year include an ROE of 16%, and a capital raise in June that enhanced our already strongly capitalized position. EverBank does not originate or own sub-prime mortgages.

EverBank is rated "Green Three Star" by Veribanc, and "Superior" by IDC. It has been and is the practice of EverBank not to seek additional return by taking on substantial credit risk; we have a conservative portfolio and are proud of the performance history of our high quality assets.

Disclosure

I do own some physical gold as well as a basket of junior miners. But inquiring minds are probably more interested in this question: "What's in this for you?"

The answer is a minimal amount per account and/or a slightly different arrangement that has actually yet to be negotiated. In other words, I don't know precisely. It is indeed something, but I'm sure not likely to get rich off it. But if I did not believe in these products I would not be doing this post.

Final Thoughts

Those investing in MarketSafe products do not really "own" gold or silver per se, but rather benefit from any upside moves in the metals, without having the downside risk. The principle is government guaranteed as stated before.

MarketSafe® CDs are certainly not for everyone, but they are right for some. Likewise owning physical gold straight up is not right for everyone but it too is right for some. Some prefer owning major gold mining companies like Goldcorp (GC), Newmont Mining (NEM) or Barrick (ABX) while still others prefer owning junior miners or explorers.

Individuals have to decide if and how they want to own gold, and what their time horizon and safety preferences are. With that in mind, I am pleased to be able to spread information about these new products as well as stating the case for gold in general.

As a disbeliever in both the Fed and fiat currencies I am and have been actively promoting gold. I am hoping the 10 reasons I listed above for owning gold speak for themselves.

Mike Shedlock / Mish
http://globaleconomicanalysis.blogspot.com/

Brave Face Masks Bold Lie

The Herald Tribune is reporting JPMorgan Chase, Bank of America and Wachovia join Citi in borrowing $500M each from Fed.

Four major banks said Wednesday they each borrowed $500 million (€370.5 million) from the Federal Reserve's discount window, lending weight to its efforts to restore liquidity to tight markets.

Citigroup Inc. (C), JPMorgan Chase & Co. (JPM), Bank of America Corp. (BAC) and Wachovia Corp. (WB) each stressed they themselves have "substantial liquidity" and the ability to borrow money elsewhere.

In a joint statement, the latter three said they decided to borrow directly from the central bank to demonstrate "the potential value of the Fed's primary credit facility" and encourage its use by other banks. It was not clear if other banks had also decided to borrow from the Fed.

Citigroup was the first to announce its decision to borrow the money, "on behalf of its clients" at Citibank.

"Citi is pleased to inject liquidity into the financial system during times of market stress and to support creditworthy clients," the company said. "Citibank stands ready to continue to access the discount window as client needs and market conditions warrant."

It was followed minutes later by the three other banks.

"The companies believe it is important at this time to take a leadership role in demonstrating the potential value of the Fed's primary credit facility and to encourage its use by other financial institutions," their statement said. The three added that they hoped their actions would "promote broad acceptance of the use of the facility."

This is either blatant stupidity or a bold face lie. I believe the latter. How can one "restore liquidity" by borrowing money that one supposedly does not need? The statement makes no sense.

As for Citigroup, what exactly does borrowing money "on behalf of its clients" mean? What clients? Who is in trouble here?

By making this look like a respectable thing to do (it's not), it likely covers up the likely fact that someone is in trouble. Inquiring minds might no be saying "Mish, you are talking conspiracy". Of course I am. But like most conspiracies this one is in plain sight. We simply do not have all the i's dotted and t's crossed in regards to the details.

A well respected source whose opinion I respect offered this viewpoint anonymously: "Basically this is a PR move coordinated by Fed to hide the fact that going to window is emergency move. It hides the fact that some banks have to."

Mr. Practical Chimes In

Minyanville's Mr. Practical had this to say:

"When a bank borrows from the discount window, that normally means they have no alternative for funds. Borrowing directly from the Fed in this way is more expensive and cuts into margins.

If Citi really needs that liquidity it is very negative. If they do not then what is the reason for doing so?

Perhaps psychologically the Fed is asking them to so that others that do it don't look so bad. Whatever is happening is highly unusual. Do not let market pundits tell you otherwise"

Minyanville's Todd Harrison had this to say in Bullets Over Broadway: The Street Taps the Discount Window:

While you were sleeping. Citigroup (C) has announced that they've tapped the Fed Discount Window for $500 bananas on behalf of its clients. Again, be wary of a cornered animal (they've got sharp claws) but add it to the list of things that make you go hmmm…

Hey now, so did JP Morgan, BankAmerica, Wachovia … y'all think that they got a phone call from Hank & Ben?

Professor John Succo on today's Buzz: "There is a huge dichotomy in the marketplace. On one hand, the market in general is being bid back up while government officials try to reassure investors as to the soundness of the financial system. Some of the same officials that originally didn't see a problem.

On the other, investors are paying prices in options on bank stocks and other financials that indicate bankruptcy. We can't have both.

This is not a 'wall of worry'. I have never seen option prices this high in big capitalization financial companies. Take what you want from that. Either the stock market in general is going to correct massively, or the buyers of this protection are really making a mistake."

My friend "Trotsky" offered the following opinion about options pricing: "The options market is acting quite rationally." The implication is that something big is coming down the pike even if we do not know exactly what it is.

For now anyway, the market is once again climbing a "wall of complacency" as opposed to a "wall of worry" as some cheerleaders seem to think. How much longer this lasts is of course a guess. But my guess is "not much".

But let's return to the lead article for one more look at something: "Three [banks] said they decided to borrow directly from the central bank to demonstrate 'the potential value of the Fed's primary credit facility' and encourage its use by other banks."

The idea of no one wanting to borrow is of course mistakenly viewed as an "ominous threat". The real threat of course is if foolish lending and foolish borrowing continues unabated.

But my how quickly we have gone from Chuck Prince Citigroup CEO saying No End Soon to Buyout Boom: “When the music stops, in terms of liquidity, things will be complicated. But as long as the music is playing, you’ve got to get up and dance. We’re still dancing" to several major banks borrowing money they supposedly do not need in a foolish effort to "encourage" others banks to do so as well.

Questions for Chuck Prince

• Have you stopped dancing yet?
• Why are you borrowing money for clients at 5.75% when the Fed Fund's rate hit 4.5% today and in theory you could have got it close to that?
• Exactly how is paying 1.25% too much for money benefiting either you or your clients?

Mike Shedlock / Mish
http://globaleconomicanalysis.blogspot.com/

Leading Indicators Suggest Expansion

I cannot help but laugh at the latest leading index headline: Index Suggests U.S. Economic Expansion.

A gauge of future economic activity inched up in July, a research group said Monday, indicating economic growth may pick up slightly in coming months despite turmoil in the housing market. The Conference Board's index of leading economic indicators rose 0.4 percent in July, as analysts were expecting.

The report is designed for forecast economic activity over the next three to six months.

Over the past few months, the rise and fall of the index "reflects the yo-yo situation in terms of the overall economy," said Brian Bethune, an economist with Global Insight. July's uptick was driven by the employment market and high consumer expectations, he said.

Monday's upbeat report follows the Federal Reserve's decision Friday to cut its key discount rate by a half-percentage point, a dramatic move meant to stabilize financial markets pummeled by a rapidly spreading credit crisis.

In a statement explaining the action, the central bank said that while incoming data suggest the economy is continuing to expand at a moderate pace, "the downside risks to growth have increased appreciably."

The Fed said it was "monitoring the situation and is prepared to act as needed to mitigate the adverse effects on the economy arising from the disruptions in financial markets."

The credit crunch started with rising defaults in subprime mortgages -- home loans made to people with weak credit histories. Analysts believe these problems, along with declining consumer confidence, could lead to a recession.

Rising Components

• consumer expectations
• vendor performance
• unemployment claims
• real money supply
• stock prices
• manufacturers' orders for consumer goods and materials

Falling Components

• housing permits
• manufacturers' new orders for non-defense capital goods
• interest rate spread

Neutral Components

• Weekly manufacturing

That data is for July but it is just being presented now. In the past month stock prices have fallen like a lead balloon as have yields on the short end of the yield curve. Of course one could subscribe and get these reports quicker but that would not have changed the prediction of economic expansion any.

Besides, the stock market is no more of a leading indicator now than it was back in 2000 or for that matter anytime in between. See Leading Economic Indicators for more discussion of leading indicators that simply do not lead.

Consumer Sentiment is an interesting indicator. There are several measures of "consumer sentiment": The consumer confidence index, the University of Michigan index, and recent national polls.

In Consumer Sentiment vs. Gasoline Prices I showed a stunning inverse correlation between gasoline prices and the University of Michigan index. Gasoline prices have been dropping and that has a tendency to make some consumers feel better.

But a recent Wall Street Journal/NBC News poll shows America's Economic Mood: Gloomy. "More than two-thirds of Americans believe the U.S. economy is either in recession now or will be in the next year."

If that number is even in the ballpark (and I'm sure it is), the Conference Board has consumer sentiment in the wrong column. A second problem is that consumer confidence is not a leading indicator either (it is closer to being a coincident indicator if indeed it indicates anything at all), and a third problem is obviously the reporting delay.

The Yield Curve

The yield curve is indeed signaling something and that something begins with "R".



The above curve is thanks to Bloomberg and is as of 2007-08-20. Things have settled down a bit and as of 2007-08-22 the 3 month T-Bill yield is sitting at 3.78 and the 6 month T-Bill is sitting at 4.09 That's lot of rate cuts priced in.

Speaking of rate cuts check out the September Meeting Implied Probability.



The above chart suggests an impending recession not an economic expansion.

One thing that is a leading indicator and is not even on the Conference Board's list of leading indicators is corporate bond credit spreads. They have been blowing out so fast that it caused a complete collapse and bankruptcy of Sentinel. See Duration Mismatch to Bankruptcy (in one week flat) for more details.

I also see that one of the reasons given for the rosy outlook was based on jobs. This too is amazing for multiple reasons. For starters unemployment claims are ticking up as the August 20 report of weekly claims shows.

In the week ending Aug. 11, the advance figure for seasonally adjusted initial claims was 322,000, an increase of 6,000 from the previous week's unrevised figure of 316,000. The 4-week moving average was 312,500, an increase of 4,750 from the previous week's unrevised average of 307,750.

But more to the point housing is still anemic, corporate capital spending is not robust, there is overcapacity literally everywhere and certainly businesses are not going to be expanding in the face of a credit crunch. The unemployment rate has only one way to go from here and that is up.

For more on jobs please see Employment on Pluto Rises.

I also touched on jobs as well as commercial real estate in Foolish Concerns, Foolish Optimism, Foolish Logic. My outlook for commercial real estate is particularly grim.

Financial Services Job Cuts

• Accredited Home Lenders (LEND) 1600
• Bear Stearns (BSC) 240
• Capital One (COF) 3,900
• Citigroup (C) 17,000 with another 9,500 moved to low cost locations
• Countrywide (CFC) 500 with 7,000 workers added in 2007. Those jobs are at risk.
• First Magnus (private) 6000
• H&R Block (HRB) 615 but expected to grow
• HSBC (HSBA) 600
• National City (NCC) unspecified eliminations coming
• SunTrust (STI)2,400
• Wachovia (WB) 4,000
• Washington Mutual (WM) 10,688
• Wells Fargo (WFC) 237

Supposedly there was a positive outlook for jobs in the leading indicators. As it stands that is sure going to be revised away as is the stock market. When it comes to consumer sentiment the report must be a survey of Martians and/or a simple measure of falling gasoline prices.

But all things considered it's a fool's mission to try and predict economic activity 3 months into the future based on data that is already one month old. It's even more foolish when many of the leading indicators chosen have no past history of actually leading anything while other indicators that do lead are left out. I hope no one takes the economic headline seriously.

Mike Shedlock / Mish
http://globaleconomicanalysis.blogspot.com/