I caught the following quote from this Yahoo Article on yesterday's fall in crude oil prices:

“I don’t think there’s anything they [OPEC] can say at this point,” said analyst Stephen Schork, who doesn’t expect a sustained rally in oil prices during the first half of this year.

The SEC is in talks again about possible adjustments to the Mark to Market accounting standards that are held up by FASB (Financial Accounting Standards Board) Rule 157. Any suspension of FASB 157 would have dramatic implications on our economic recovery. Book value for many publicly traded companies would once again shoot through the roof. This would create a false sense of security and credit quality. What companies like Blackstone (BX), AIG (AIG) and even General Electric (GE) are looking for is a source of affordable credit so they can slowly spread out the eventual further writedowns they will likely need to take.

In case you missed it, the SEC has announced new accounting rules that will help companies value illiquid assets.

Taken from this article, Rethink of rules on value boosts banks

The speed at which the Great British Pound is falling against the US Dollar is staggering.

The U.S. is currently racking up a massive amount of new debt. Here is the current tally taken by Alex Patelis, an economist at Merrill Lynch:

Treasury buying mortgage-related assets: $700bn
Potential supplementary stimulus package favoured by Democrats: $100bn
Insuring money market funds: $50bn
Treasury fortifying the Fed’s balance sheet: $100bn
Expansion of temporary swap lines with central banks: $180bn
Loan to AIG: $85bn
Fed purchase of agency discount notes & ABCP: amount not specified
Fed loans through the Primary Dealer Credit Facility: $20bn through Sep 17
Fed’s discount window: $33bn balance
Treasury purchase of GSE MBS this month: $10bn
Potential cost of Fannie/Freddie bailout: $200-$300bn

This is a followup to my previous article, The Greatest Show on Earth.

In this post, I am going to expand on watching CDS (Credit Default Swaps) with banks. What CDS can tell you is how much money a person is willing to pay to insure the debt of a bank. The healthier a bank is, the lower the premium will be to insure its debt. If a banks financial situation sours, the higher the premium will be to insure its debt.

I would like to say “the circus” in reaction to the title of the post, but sadly today we are looking at the collapse of Lehman Brothers (LEH) and the worsening of the current credit crises.

Currently out of the top 5 investment banking firms in the U.S., (Goldman Sachs (GS), Morgan Stanley (MS), Merrill Lynch (MER), Lehman Brothers and Bear Stearns (BSC), only two will remain in business going into the fall of 2008. The source of all of this is of course the over-leveraged nature of investment banks. At the end of 2007, Lehman Brothers was leveraged 31:1. They turned $1 into $33 through the magic of leverage. On a mark to market basis, every bank with exposure to complex CDO (Collateralized Debt Obligations) and derivatives is prone to an amazing loss of value at staggering speeds.

The largest gripe that I’ve had with Wall Street Analysts is that they lack accountability. They flip-flop around their investment thesis and fundamental analysis of a situation. In my view, the individual investor has many reasons to completely tune out all the noise that they hear and draw their own conclusions from macro-economic events and their own due diligence of a companies released earnings.

Over the past 400+ articles, I’ve mostly posted my buys and sells, with exact prices. This is to establish accountability and to form a track record. I’ve always said, regardless of how a person finds their stock picks, all that matters is performance in B&W. It doesn’t matter if you employ throwing darts or advanced quant analysis. The best written article and in-depth analysis is worthless if it consistently loses you money in investing.

The largest gripe that I’ve had with Wall Street Analysts is that they lack accountability. They flip-flop around their investment thesis and fundamental analysis of a situation. In my regard, the individual investor has many reasons to completely tune out all the noise that they hear and draw their own conclusions from macro-economic events and their own due diligence of a companies released earnings.

Over the past 400+ articles, I’ve mostly posted my buys and sells, with exact prices. This is to establish accountability and to form a track record. I’ve always said, regardless of how a person finds their stock picks, all that matters is performance in B&W. It doesn’t matter if you employ throwing darts or advanced quant analysis. The best written article and in-depth analysis is worthless if it consistently loses you money in investing.

There are a number of startling factors for investors to consider when evaluating the possibility of a larger looming economic crisis. A few authors have guessed that the majority of writedowns are now done and that the worst may be past us. From the most recent news, I believe we may extend losses past the most recent credit crises fueled by collateralized debt. We may soon face a banking crisis larger than the Savings and Loan crises of the late 1980’s.

Here are a few factors to consider:

I started writing on the subject of hyperinflation almost 4 years ago. One definition of hyperinflation, offered by Wikipedia, is “a cumulative inflation rate over three years approaching 100%”. Investopedia defines hyperinflation as “Extremely rapid or out of control inflation.” Anyone who was expecting a recession in the U.S. should also be prepared to look at the process of recovery.

A trend has been set since the Al Greenspan era to flood the U.S. economy with newly printed dollars and access to cheap money through low interest rates. It seems that Ben Bernanke is following the same trend of increasing the money supply and keeping interest rates low till we emerge from recent economic problems.

Some of my readers have asked me if I would be afraid if the market would continue falling to 50% or greater. I’m sure to their surprise, my response has been “I hope so”.

It is human psychology that leads us to believe that buying in a market where prices are up 300% is safer than buying when the market is down 80%. When markets are dramatically up, there is a sense of confidence in the air, when the markets are severely down the confidence is replaced with fear.

In a follow-up to my article, A True China Bear, I recommend investors to set their sights on China since there may be tremendous upside in the emerging economy. The Shanghai Composite Index (000001.SS) has fallen to 2868 from a high of 6124, a drop of over 50%. The drop below 2900 marks a new 52-week low.

For the long-term, I’ve written that China may follow and overtake the performance of the Hang Seng Index (HSI).

I've written previously about using financial stocks as a hedge against the falling price of gold and silver equities. Gold and silver stocks are currently rising over an unstable global financial climate, rising inflation and a falling dollar. As the financial environment attempts to stabilize, we have seen the recovery of many bank stocks and the fall of most precious metal stocks.

While financial stocks are a great way to hedge a portfolio of gold and silver stocks, I believe I have found another sector that can be used as a more efficient hedge. When we look at creating hedges, I believe looking at volatility is very important. When your hedge moves up 8%, you want your gold and silver positions to move down by a similar amount and vice versa.

I caught the chart below from ZealLLC.com. It clearly shows the dramatic increase in money supply from the Fed.

The chart above illustrates MZM, or money of zero maturity. MZM is essentially all of the money available for spending not in time deposits or money market funds. The chart is also linked to an interesting article discussing the subject of money inflation.

The USD Index looks like it may breach the 75 level. If this level is reached, I expect gold to trade under $800. A move by the USD Index nearing 80 levels would signal a major breakthrough for the USD. If we near 80 levels, I expect gold to trade between $600-$750.

A move by gold under $800 would likely mean seeing Yamana Gold (AUY: 12.90 +0.62%, vol: 14,116,012) shares under $10. Yamana is the primary gold stock I am watching at the moment. With the heavy volatility in gold equities, I’m going to set a limit order to purchase AUY at $10 good for the entire month of May. If the order executes, I plan to set additional orders at $1 increments with major purchasing if AUY drops to the $6-$7 range.

I found the image above at kitcocasey.com and it clearly illustrates the earlier gold to oil ratio that I wrote about.In the image, notice how when the red line representing oil crosses the yellow line representing gold the ratio is approximately 10:1. If oil prices remain strong, gold will have a long way to rebound to match the historical ratio.

With all the talk of a bear market in China, it pays to look at China in comparison to Hong Kong, its nearest cousin. I would consider a true bear market as one that drops 80% or more. In 1973, the Hang Seng Index dropped from 1100 to 153 in under a year. Today the Hang Seng Index is over 25,000. China may be a similar long-term opportunity as Hong Kong in 1973. In 30 years, a Shanghai Composite Index at 150,000 points or higher seems plausible if we look at the history of emerging economies that continued growing into developed economies. In the U.S. the Dow grew thousands of percent points as the economy grew between 1930 and 1960.

Since reaching an all time high in October, 2007, The Shanghai Composite Index has dropped nearly 40%. At the moment the best way to invest in China is through Morgan Stanley’s China A Share Fund (CAF: 45.5101 -0.09%, vol: 139,551). The fund is down from a high of $72.30 to $45.41, a drop of 37.19%. Last month, CAF dropped over 50% to a one year low of $33.51. If the fund were to drop to $20, it would represent a drop of 72%, close to a true bear market and I would enter heavily at that price as a long-term investment opportunity.

We now have a large number of disparities facing gold investors. Here are a few oddities I’ve noticed and I saved the biggest for last:

- We are now facing the $120 level for oil, yet gold is currently at $890.
- Rice, a staple food for half of the global population, has doubled in price over the past three months, yet gold is falling.
- Currently gold continues to drop when U.S. markets are open, yet overnight gold typically ends up in Asian markets.
- Mid-large cap U.S. gold equities, such as Yamana Gold (AUY: 13.44 +0.37%, vol: 4,800,957), Barrick Mining (ABX: 39.87 +0.50%, vol: 3,674,910) and Newmont Mining (NEM: 44.52 -0.47%, vol: 2,603,548) have roughly dropped 20-25% in the past two months. In Asian markets, many mid-large cap gold equities have dropped 50% or more.
-Many gold equities are trading at prices when physical gold was in the $700-$750 range.