Monday, September 15: Week in Review

Oil pricing and precious metals continued to exhibit “joined at the hip” trading patterns last week. Crude oil slid in price by 4.8% for the week closing at $101.18 a barrel. At the same time, bullion spot gold fell 4.7% to close at $767.50 an ounce. Silver moved in tandem, dropping more than 12% for the week to close at $10.80 an ounce. In addition, NYNEX announced it will start trading energy products 8 hours earlier on Sundays, at 10am versus 6 pm.

While the Dow Jones Average advanced almost 2% last week, the broader market, as measured by the S&P 500 index, gained less than 1%. The tech-laden NASDAQ was essentially flat, advancing 5 points, or 0.2%. Overseas, stocks were pretty solid in the Eurozone…gaining 2% - 3% for the week, while in Asia, more losses, with China’s stocks dropping ANOTHER 5% for the week. With China closing at 2080, it is falling below levels last seen in 2006.

The table below vividly illustrates three critical developments (i) what the markets have done during the Bush Presidency; (ii) the subsequent effect on the markets after Bush declared “Mission Accomplished” on May 1, 2003; and (iii) what markets have done since the start of this year.

Since George Bush was inaugurated President, the major stock market averages immediately began to swoon, reaching bottom by May 1, 2003. That was the day Bush, dressed in an Air Force flak jacket, made an appearance on an aircraft carrier to declare “Mission Accomplished”. Such a declaration was enough for the financial markets.

Unnoticed by most in the media, the broad-based S&P500 advanced a stunning 60% from the declaration of Mission Accomplished to the end of 2007. NASDAQ gained an astounding 80% after that declaration --- almost returning to where it began at the start of the Bush Presidency.

Stock market gains from Mission Accomplished to the end of 2007 confirm that Government rhetoric CAN influence markets because it influences investors, for a bit. Eventually, however, financial reality surfaces, and since the start of this year, it has been a dismal story in stocks.

click to enlarge images

The first quarter brought the country the collapse and government takeover of Bear Stearns (BSC). Q-2 was a rolling thunder of bank failures and more write-offs.

The table following shows that since the start of the year, the three major stock markets are off about 15%.

Given the now widely-recognized emptiness of that Mission Accomplished declaration, it is understandable that other government declarations about the financial system have fallen on deaf ears. Gold, which closed at $803 in December, was flat until just this week, when it closed at $767.50. Silver, which closed at $14.30 in December, increased to $14.69 in August (up 3%) before getting hammered this month.

The point is this --- while the recent price weakness in precious metals can be unnerving, recognize that precious metals prices have been moving up aggressively all year long as stock markets have deteriorated. We refer to these upward price movements as the safe haven from the rhetoric coming out of Washington…!

Here are the links for historical silver and gold prices to do your own research.

One final hole to identify for you --- the FDIC, the government agency that insures customers’ bank deposits up to $100,000. If you think that the FDIC has a pile of reserves to pay out to depositors in failed banks, you are wrong. Here’s a link, and direct quotes.

Excerpt from article:

As a former FDIC chairman, Bill Isaac, points out here, the FDIC Insurance Fund is an accounting fiction. It takes in premiums from banks, then turns those premiums over to the Treasury, which adds the money to the government's general coffers for spending ... on missiles, school lunches, water projects, and the like.

All of this negatively impacts working Americans. Here is a link that highlights details.

We close with a quote from U.S. Congressman and former presidential candidate Ron Paul, in his "Texas Straight Talk" column on his House of Representatives website on September 8th:

Can sound money give you financial security? There is something very comforting in knowing that what you earn today will retain its purchasing power in the years to come.  Indeed, the same silver dime that bought a loaf of bread in the 1960's can still buy a loaf of bread with its precious metal content - which is worth about $1.00 today.  An ounce of gold has always been about evenly exchangeable for a finely tailored men's suit, which these days is roughly $800.  And in these days of fluctuating gas prices, when priced in gold, oil has been stable.  Meanwhile, since the creation of the Federal Reserve, the fiat dollar has lost 94% its purchasing power.  The erosion of purchasing power rapidly accelerated when it was completely uncoupled from gold in 1971.  This sort of fluctuation in the medium of exchange creates a lot of uncertainty in the marketplace and necessitates that you either take extraordinary defensive maneuvers, or face financial ruin.  Trusting in government for financial security in retirement is not a safe option.

After the bailout of Fannie (FNM) & Freddie (FRE) last week, markets rebounded, momentarily. This won’t last. The bailout, in effect, will prolong reaching a bottom as government actions seek to stem the essential decline in housing prices to get to the bottom. More National Funk.

Comments

[ev:]

Well you may be surprised to know that Bush was a strong proponent of separating the government from Freddie and Fannie back in 2003 recognizing the inherent risk associated with the quasi backing of the US Gov't for these institutions. (Truly free markets would have required better oversight of risk management without the backing of the US Gov't.) In fact he is the 1st president not to assign members to the board of directors for these organizations since Fannie and Freddie were created in an effort to separate the two. (Gov’t assigned board members were had a fiduciary duty to act in the best interest of shareholders, just as the regular board, rather than as a Gov’t oversight, however lending credence to Gov’t backing.)

Had his insightful plan to create a true separation been successful, we may not be in the mess with our financial institutions that we are now. As it worked out, the situation was far too entrenched to turn around.

2008 Sep 15 06:54 AM