January, Wednesday 18, 2012

DOW + 96 = 12,578
SPX + 14 = 1308
NAS + 41 = 2769
10 YR YLD +.05 = 1.90%
OIL +.39 = 101.09
GOLD +7.30 = 1659.90
SILV + .46 = 30.62
PLAT +4.00 = 1527.00

"The global economy is entering into a new phase of uncertainty and danger," so says the World Bank's chief economist, Justin Yifu Lin. "The risks of a global freezing up of capital markets as well as a global crisis similar to what happened in September 2008 are real."

The bank cut its growth forecast for developing countries this year to 5.4% from 6.2% and for developed countries to 1.4% from 2.7%. For the 17 countries that use the euro currency, it forecast a contraction, cutting their growth outlook to -0.3% from 1.8%. For the United States, the bank cut this year's growth forecast to 2.2% from 2.9% and for 2013 to 2.4% from 2.7%.

In the event of a major crisis, "no country will be spared." "The downturn is likely to be longer and deeper than the last one." Many governments are in a weaker position than they were to respond to the 2008 global crisis because their debts and budget deficits are bigger.

The World Bank said slower growth is already visible in weakening trade and commodity prices. Global exports of goods and services expanded an estimated 6.6% in 2011, barely half the previous year's 12.4% rate, and the growth rate is expected to fall to 4.7% this year. Commodity exporters should brace for a fall in oil and metal prices of almost a quarter.

The bank says that "While contained for the moment, the risk of a much broader freezing up of capital markets and a global crisis similar in magnitude to the Lehman crisis remains. The willingness of markets to finance the deficits and maturing debt of high-income countries cannot be assured. Should more countries find themselves denied such financing, a much wider financial crisis that could engulf private banks and other financial institutions on both sides of the Atlantic cannot be ruled out. The world could be thrown into recession as large or even larger than that of 2008-09."

The consequences would be dire for 30-odd countries with external finance needs above 10pc of GDP. The bank advised these states to "prefinance" their needs while the credit markets are still open, reducing the risk of a sudden crunch.

I don't recall a similar warning from the World Bank. Maybe it's a response to the criticism against financial institutions that completely and wholly missed the crisis of 2008. It is rare to hear such strong words from an organization like the World Bank. And that makes the impact a bit more disconcerting. Bottom line – hope for the best and prepare for the worst.

Elsewhere, the International Monetary Fund is asking member countries to pony up an extra $500 billion dollars to stomp down the world's spreading fiscal emergencies. The IMF figures they will need to have about $1 trillion dollars for bailout loans over the next two years. The IMF didn't specify where the demand for $1 trillion dollars would come from, but it's a good bet that Eurozone countries will have their hands out for most of it.

Negotiations continue between Greece and its private sector creditors; still no agreement. The bond holders are willing to accept 50% haircuts, but even then Greece would be stuck with a debt load equal to 120% of economic output by 2020. In other words, the deal really sucks for Greece; and that means it is more and more likely that Greece will default; and the time-line for default is getting closer and closer. What would the default look like? We'll have to wait and see but it will affect a few big banks in the US. New estimates of net exposure of Tier 1 Common equity shows Citigroup with more than $16 billion still at risk, JPM facing losses of more than $15 billion, BofA at $13 billion, and Goldman Sachs at about $2.5 billion.

If you're having a hard time figuring out where to invest, you're not alone. The Masters of the Universe – Goldman Sachs was hit by global uncertainties. Goldman reported fourth quarter net earnings came in just above $1 billion, and the firm’s earnings per share of $1.84 were down 51% from a year earlier. For the full year, Goldman earned $4.4 billion, or $4.51 per share, down 65% from the prior year, on $28 billion in revenue.

GS + 6.63 = 104.31

Why was Goldman up 7%? Why was the S&P up 14 points?  Sometimes it seems traders are whistling past the graveyard. Maybe the traders are just trying to fill their pockets before they have to get out. Have you ever been in a bar at closing time? The bartender calls out “last call” and some people just finish up and leave, but there's always someone who orders two drinks and then chugs them down. Wall Street traders are a lot like those late night drunks; it's a short walk from gluttony to greed.

I'm familiar with the idea that Wall Street climbs a wall of worry, but I haven't quite figured out where the money for the current rally is coming from.  Over the first 11 months of 2011, plain-vanilla savings and checking accounts attracted eight times the money as stock and bond mutual and exchange-traded funds, and in September, October, and November the pace accelerated to 13 times the money going into checking and savings compared to stocks and bonds and funds. Most recently, investors took $9.35 billion out of equity funds — including more than $7 billion of U.S.-based funds — for the week ended Jan. 4.

And it appears that investors are just parking cash in money market funds, despite the Federal Reserve's Zero interest Rate Policy that means money markets pay essentially nothing. Bernanke has declared war on savers; he is pushing them out the door in search of higher returns, but it doesn't look like savers want to become investors. For many people, there's not enough Pepto to cover the volatility in equities. That Zero Interest Policy means that investing in bonds returns a negative interest rate after accounting for inflation.  Today the Producer Price Index showed core wholesale prices rose .3% last month, and 3% for the past 12 months. Overall, prices including food and energy were up 4.8% in the past year.

And then we learn that optimism is high. The American Association for Individual Investors sentiment survey is running at 49 percent bulls against just 17 percent bears. And the markets grind higher even though volume and breadth are not confirming the rally. Go figure.

For the past few months I have been cautiously bullish. I'm shifting toward more caution.

On March 20, 2003 silver traded at the fairly modest price of $4.35 per ounce. One year later, silver hit $8.00, for a gain of 83%. Put on your thinking cap and remember what happened in March 2003. The US invaded Iraq. Fast forward to 2012. The US is playing chicken with Iran in the Strait of Hormuz. And Iran is not Iraq. Iran is a much bigger player in the oil market. Iran is better connected with Russia and China and other Middle Eastern countries. If there is an armed conflict between the US and Iran we should all be worried. I pray it does not happen. But now you know why many people consider gold and silver to be a form of insurance for their portfolios. This does not mean that you invest 100% of your portfolio in gold or silver. It means that it is prudent to put a little into precious metals. In a crazy world, prudence is important. Hope for the best and prepare for the worst.