The Bear Market of 2007 - 2008 To Date

The Gold Spread Widens

Its hard to miss the disconnect between 'spot gold' prices, which are based off the gold futures front month adjusted for time, and the market prices for physical gold in any reasonable quantity and form.

What does this imply?

First, there must be forced selling of paper gold probably in hedge funds being attacked by bear raids from the other large hedge funds and bank trading desks as we noted in story about Goldman Sachs last week.

Secondly, the central banks are known to be selling and leasing gold into rallies, by the data and by their own admission on numerous occasion, to hold down the price of gold. Why? Because in their own words it is a signal of fear, and so the theory goes, by turning off the signals of fear you prevent the fear from becoming unmanageable.

But that is primarily a rationale, an excuse that ordinarily reasonable and lawful men use to justify unreasonable and unlawful actions to themselves and to a court of review in some imaginary future they play out in their minds.

So as such the spread between the price of paper and physical gold is a measure of the level of public confidence, or a lack thereof, in the ability of the world's central bankers to make a silk purse out of a sow's ear, and to keep the world marvelling at its craftsmanship and desirability of their rainments, as they prance naked through the streets.

"We looked into the abyss if the gold price rose further. A further rise would have taken down one or several trading houses, which might have taken down all the rest in their wake. Therefore, at any price, at any cost, the central banks had to quell the gold price, manage it. It was very difficult to get the gold price under control but we have now succeeded. The U.S. Fed was very active in getting the gold price down. So was the U.K."
Eddie George, Bank of England, September 1999

Or as the great stock market bear Daniel Drew once said in another context:

He who sells what isn't his'n
Must buy it back, or go to prison.

Hope to see you and your friends at some future financial Nuremburg, Sir Alan and Herr Doktor Bernanke.

Panic Selling Hits the World Markets

VIX jumped to record levels, although it is important to note that VIX is a 'replacement indicator' and has only an 18 year history. VXO, its predecessor, jumpt to 172 the day after the Crash of 1987.

Typically a VIX at these levels signals at least a short term capitulation by the bulls and a short term bottom is made.

The move lower is often exaggerated by margin calls and stop loss selling. Keeping an eye on the various trend charts helps one to maintain their bearings during a selling storm.

Its on the bounce if it comes where we see the character of the market. A dead cat bounce will take the SP futures back up to 1055, and a firm technical bounce is to the top of the short term trend channel which is around 1100. An important midpoint resistance is 1068.

Preserving capital is the order of the day, so try not to overtrade or outguess the market. The trend is still down until we see the market tell us otherwise.

VIX Jumps to Record, Topping 50, on Concern About Global Growth
By Jeff Kearns

Oct. 6 (Bloomberg) -- The benchmark index for U.S. stock options jumped to the highest in its 18-year history on concern that the global economic slowdown will continue on further credit-market losses.

The VIX, as the Chicago Board Options Exchange Volatility Index is known, rose 13 percent to 50.93 at 10:09 a.m. in New York. The index measures the cost of using options as insurance against declines in the Standard & Poor's 500 Index, which declined 3.6 percent to a four-year low of 1,060.15.

``It's scary the way the market is reacting,'' said Bud Haslett, director of option analytics at Miller Tabak & Co. in New York. ``The downturn in equity prices is broad-based, it has big repercussions for our economy and it's being experienced worldwide.''

The most-active contracts tied to the VIX were October 35 calls, which rose 30 percent to $5.18. The index has averaged 24.36 this year. November VIX futures rose 1.5 percent to 32.65.

The index eclipsed last week's record close of 46.72 on Sept. 29 when Congress voted against the Bush administration's bailout for financial companies, sending stock benchmarks down the most in two decades.

Before last week the VIX had topped 40 during four prior periods: the aftermath of WorldCom Inc.'s bankruptcy in 2002, the September 2001 terrorist attacks, Long-Term Capital Management's collapse in 1998 and the Asian financial crisis in 1997. The record intraday high of 49.53 for the VIX, whose history extends back to 1990, was set on Oct. 8, 1998.

Calls give the right to buy a security for a certain amount, the strike price, by a given date. Puts convey the right to sell. Investors use options to guard against fluctuations in the price of securities they own, speculate on share-price moves or bet that volatility, or stock swings, will increase or decrease.

The VXO Volatility Index, a predecessor to the VIX that reflects the price of using options on the S&P 100, jumped to the highest since the days following the 1987 crash, adding percent 57.65. That index peaked at 172.79 a day after the crash.

6 Oktober: Blutzeuge

Bankenputsch

Bloomberg
German Government Leads Hypo Real Estate Rescue Talks
By Hellmuth Tromm and Oliver Suess

Oct. 5 (Bloomberg) -- The German government led talks to salvage a 35 billion-euro ($49 billion) bailout plan for Hypo Real Estate Holding AG after the ailing property lender said commercial banks withdrew their support late yesterday.

``I'm pretty shocked that this bank's management has revealed another liquidity gap of an unforeseen size,'' German Finance Minister Peer Steinbrueck said in Berlin today in comments broadcast by ARD television. ``We will have to start over again from last weekend's meetings. Hypo Real Estate has to be stabilized otherwise the damage would be unpredictable.''

The government and the Bundesbank have repeatedly said that Hypo Real Estate, the nation's second-biggest property lender, is too big to fail. The negotiations to save it occur as the Belgian government is attempting to rescue Fortis, that nation's largest financial-services company, after a previous bailout also went awry amid the intensifying global credit crunch.

Steinbrueck's comments ``indicate that in the end it will boil down to a bailout,'' said Kerstin Vitvar, a Munich-based analyst at UniCredit SpA who has a ``sell'' rating on the shares. ``Shareholders will end up almost empty-handed.''

The government won't raise the size of its pledged guarantee, newswire Deutsche Presse-Agentur reported, citing Volker Kauder, parliamentary chairman of Chancellor Angela Merkel's Christian Democrats. Private banks promised to contribute their share to a rescue today, he added, without elaborating, DPA said.

Government Guarantee

The German government offered today to fully guarantee personal savings accounts in a bid to ease concerns about the stability of the nation's banking system amid the global credit crunch. Until now, private savings accounts, including the accounts of small, privately held companies, have been guaranteed by 180 banks in Germany. This covers 90 percent of an account's balance to a maximum of 20,000 euros.

Hypo Real Estate's shares have declined 79 percent this year, valuing the Munich-based company at 1.6 billion euros.

Hypo Real Estate's financing needs exceeded the bailout plan guarantee, German newspaper Die Welt reported yesterday, citing unidentified people in the finance industry. It will need 20 billion euros by the end of next week and 50 billion euros by the end of the year, according to the newspaper. As much as 100 billion euros may be needed to shore up the bank's finances by the end of 2009, Die Welt said.

`Absurd' Report?

``A financing need of 100 billion euros as reported by Die Welt is absurd from today's perspective,'' Hypo Real Estate spokesman Hans Obermeier said in a telephone interview today.

Heiner Herkenhoff, a spokesman for the German BDB banking association, declined to comment on the figures. Bundesbank spokesman Christian Burckhardt said Bundesbank President Axel Weber is participating as an adviser to the government in the discussions.

``The financing situation has further deteriorated over the past week because of the speculation about a possible wind-down of the company,'' Obermeier said.

In the failed rescue plan, the Bundesbank planned to help contribute 20 billion euros to a credit line for Hypo Real Estate, while a group of unidentified banks agreed to provide another 15 billion euros. The plan called for Hypo Real Estate to use 42 billion euros in assets, mostly debt owed by government borrowers, as collateral.

Funding Squeeze

The lender sought the lifeline after its Dublin-based Depfa Bank Plc unit, which specializes in government lending and depends on now-closed money markets for funding, failed to get short-term funding amid the credit crunch.

Failure to provide the rescue package ``may have triggered unpredictable consequences for the German financial and economic system similar to those of the collapse of U.S. financial group Lehman Brothers,'' the Bundesbank and BaFin said in a joint letter dated Sept. 29 and addressed to Finance Minister Steinbrueck.

``If we had not acted, the bank's crisis wouldn't have just hurt the financial sector, but its network of business would have hurt the real economy, in Germany and beyond,'' Steinbrueck said the same day.

Hypo Real Estate, run by Chief Executive Officer Georg Funke, 53, since it was spun off from HVB Group in 2003, reported a surprise 390 million-euro writedown on collateralized debt obligations on Jan. 15. The company said Aug. 13 that second- quarter pretax profit plunged 95 percent because of further markdowns on debt-related investments...