S&GS Notes: I’ve struggled this week to try to determine which of the articles / commentaries to provide for readers. There is so much happening in the precious metals scene and economy in general, combined with the activities of JP Morgan Chase and Goldman Sachs short-selling massive amounts of precious metals to manipulate prices… Most of the experts like Ted Butler, Jason Hommel, David Morgan, are all still very bullish on metals… this week’s rapid price drop is something they say was ‘expected’… but noting that the drop wasn’t terribly significant in that metals are still rising and didn’t drop below previous highs (gold $1100, silver $18) … What they are still saying, in general, is to get as much as you can while you still can get it, because they expect prices to continue moving ever higher… and the dollar isn’t ‘improving’ as the media would have us believe.
Dubai’s Threat To US Banks
By Les Christie
From CNN Money
Although there's little direct exposure to Dubai World's default risk, U.S. financial institutions could take major indirect hits.
NEW YORK (CNNMoney.com) -- The news that the state-run investment company of Dubai requested a postponement of billions of dollars of debt this week could pose a big problem for U.S. banks.
Dubai World owes about $60 billion. It rang up much of that in a building boom that included the world's tallest skyscraper and the Palm Islands in the Persian Gulf, settlements shaped like palm trees.
According to CMA DataVision, which tracks credit markets, there's a 35.82% probability that Dubai will default on that debt.
What is Dubai World? - CNN
New York-based Citigroup (C, Fortune 500) has the most exposure to default risk at Dubai World, which a J.P. Morgan (JPM, Fortune 500) equity research note estimated at $1.9 billion. Citigroup declined to comment.
While other major banks in the United States are believed to have little direct exposure, the ripple effect could be more crippling, according to Richard Bove, a bank analyst with Rochdale Securities.
"There could be huge indirect exposure," he said. "One has to assume that U.S. banks will be hurt."
J.P. Morgan declined to comment, while Goldman Sachs (GS, Fortune 500) and Bank of America (BAC, Fortune 500) were unavailable for immediate comment. Morgan Stanley (MS, Fortune 500) said a Dubai World default "would have have no material impact on its earnings."
Bove said the underlying problem is that there is a lot of uncertainty floating around. For example, there's little information available about counterparty derivatives, guarantees that transfer default risk from lenders to other financial institutions. And it's unknown how much of Dubai World's debt guarantee is held by U.S. banks.
And while UK banks, such as Standard Chartered, HSBC (HBC), Royal Bank of Scotland (RBS) and Barclays (BCS) are much more exposed to Dubai World, with a total of more than $30 billion in default risk according to J.P. Morgan's note, U.S. banks have extensive dealings with UK institutions. Those include trading and guaranteeing debt, which could translate into losses for U.S. banks.
There's also U.S. banks' interactions with their German counterparts. Dubai has loaned a lot of money to Eastern European nations, as has Germany. Any losses from defaults there could expose U.S. banks to some risk. Finally, there's the impact of already reeling commercial real estate markets worldwide.
"Dubai may have to unload some very prestigious properties at distressed prices, and this will drive the price of all commercial real estate lower," said Bove. "That would clearly be a problem for American banks."
Bove also posited that the problems at Dubai World could add weight to the growing sentiment that is already strong in the U.S. Congress about beefing up regulation.
"Congress is demanding that anyone connected to the U.S. financial system has to be regulated," he said.
Rattling bank stocks
Bank stocks are particularly vulnerable to a market turndown triggered by the Dubai crisis, said Peter Sorrentino, senior portfolio manager at Huntington Asset Advisors. He said the run-up this year has led to an overvalued stock market.
"We had been looking for something to trigger a correction," he said. "This could be that catalyst."
It would add to a market already made volatile, especially with the approach of the end of the tax season for mutual funds, which has put a lot of money in motion. The impact could fall heaviest on the financial sector.
Sorrentino added that the risk of default will put a damper on all commercial credit markets. Institutions may have to set aside more reserve funds to cover default risk, leaving less cash to lend out, and, in general, take a more cautious underwriting approach.
If lending does decrease, that could cut into bank profits.
Commentary by Bret Rosenthal
Rosenthal Capital Management
Stock Market Investing: The above story, along with many others, has filled the airwaves and blogosphere over the last 4 days. I will refrain from adding my voice to the din. Moreover, endeavoring to postulate on the repercussions seems to me a fool's errand. The sheer plethora of moving parts and back room deals makes a supposition worthless.
I will, however, offer some insight to a more pressing question: How will this event effect the US$, the equity markets and the price of Gold?
An avid reader of this blog will find the answer both simple and familiar. Bad news on the global economic front equates to good news for the U.S. equity markets and the price of precious metals, Gold and Silver.
Investment Strategy: The legend for deciphering this market environment:
Neg.Eco.News = Con't.Q.E.; (Q.E. = Quantitative Easing; catchall for liquidity creation)
Con't.Q.E. = Con't.US$.Dval.; (US$. Dval = US$ devaluation)
Con't. US$.Dval = Exponential Gold and Silver price increases + higher US equity prices
This legend, in all likelihood, will remain in force until major policy changes occur within the White House, U.S. Treasury and Fed. Never in history has the systematic devaluation of a currency led to sustained economic recovery and long-term growth. However, without fail, said devaluation leads to inflation, often hyperinflation, and a flight out of the currency into hard assets. The move unfolding in the price of Gold and Silver will be for most unimaginable, but for the few, the proud, the aware, it will be a move of a lifetime.