Market Observations with Rob Kirby

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The Stars are Aligning – But For What?

by Rob Kirby, Kirby Analytics. September 8, 2008

Fannie and Freddie were finally nationalized on Sunday, September 7, 2008 – a date that may very well live in infamy. Shareholders of the mortgage behemoth mortgage giants have been effectively wiped out.

By Glenn Somerville and Mark Felsenthal

WASHINGTON (Reuters) - The U.S. government on Sunday seized control of mortgage finance companies Fannie Mae and Freddie Mac in an aggressive move to help the distressed U.S. housing market and economy.

Officials were concerned mounting losses at the two companies, which own or guarantee almost half of the country's $12 trillion in outstanding home mortgage debt, was sapping their vitality and threatening to undermine them at a time other sources of housing finance have largely run dry.

"Our economy and our markets will not recover until the bulk of this housing correction is behind us," Treasury Secretary Henry Paulson said at a news conference. "Fannie Mae and Freddie Mac are critical to turning the corner on housing.”

The decision to take control of the companies, which have $1.6 trillion in debt outstanding, and place them into a conservatorship under their regulator could amount to the largest financial bailout in U.S. history. The Treasury Department, which is taking an equity stake in the two firms, said there was no reason to expect that taxpayers would have to shoulder losses.

Folks should appreciate and understand that the Fannie / Freddie bailout are being conducted with the resources of the U.S. Treasury and not the Federal Reserve. The Federal Reserve’s balance sheet simply would not allow it.

Ladies and gentlemen, I would contend that the U.S. Treasury’s balance sheet cannot either.

The Back Drop For Context

In what many folks might disregard as an unimportant revelation, the Bank of Montreal’s Don Coxe provided in his weekly web-cast to the bank’s institutional and private banking clients, a telling descriptive [transcript available here] of recent market events where he lays out how the Federal Reserve and the U.S. Treasury in conjunction with the CFTC and SECRIGGED” the recent collapse in commodities complex and the accompanying bounce in financials to purposely destroy people who were making commodity bets and shorting financials.

Coxe’s presentation is titled,

“And Hank And Ben Looked At Their Handiwork And They Were Glad.”

He goes on to state,

“So, let’s talk about this, what they did, why they did it and how brilliantly they did it, because this is the most massive intervention of government into the capital markets or the financial system since Roosevelt closed the banks back in 1933, briefly.”

Coxe goes on to explain,

“So what they did – and this is why you want in a crisis like this, you want a Goldman Sachs ex-CEO at work. People sometimes sneer about the fact that Goldman seems to just get all these big appointments. But what it means is you’ve not only got somebody that really knows the markets, but somebody who’s access to information is terrific and who really understands how you can intervene in the markets successfully. Because if you’re going to do a strategy like this, it’s got to work.”

The unintended beauty [sic] of Cox’s words is that they “drip” with nuance illustrating the incestuous relationship between the Federal Reserve / Treasury and one of their favorite private sector agent / provocateurs – Goldman Sachs.

This space has extensively documented the role of both Goldman Sachs [primarily in the investment banking / commodities space] and J.P. Morgan Chase [primarily in the commercial banking / interest rate complex] and their use as “TOOLS” to implement Federal Reserve Monetary Policy via stealth, all the while trying to maintain the illusion of “free markets.”

If my read on these goings-on is only half correct, this grand stage illusion of a charade is about to come to an end.

Our capital markets have been grossly manipulated and rigged. Regulators have been complicit. For those of you who have no problem with this, I would now like you to consider existing U.S. anti-trust laws:

The Sherman Antitrust Act is a Federal law prohibiting any contract, trust, or conspiracy in restraint of interstate or foreign trade.

The Sherman Act also provides that no person shall monopolize, attempt to monopolize or conspire with another to monopolize interstate or foreign trade or commerce.

A felony, an individual violating these laws may be jailed for up to three years and fined up to $350,000 per violation. Corporations may be fined up to $10 million per violation.

The Clayton Act regulates general practices that potentially may be detrimental to fair competition. Some of these general practices regulated by the Clayton Act are: price discrimination; exclusive dealing contracts, tying agreements, or requirement contracts; mergers and acquisitions; and interlocking directorates.

To imagine: I was always taught, growing up, that America was a country where the rule of law meant something.

Connecting Dots

The factual picture I’m painting here is that something egregiously, horribly wrong is occurring right now, under our collective noses, in our financial markets. I’m left with a sinking feeling that things are coming to a head, so to speak, and all that’s been missing to this picture is the exact timing of the culmination.

The timing, however, I now believe is very closely tied to this; illustrated by the work of Adrian Douglas, GATA consultant and frequent contributor to

September 2 session on the TOCOM Goldman Sachs COVERED an absolutely stunning 1,612 short contracts AND ADDED 351 LONG CONTRACTS to bring their long position to 1,049 contracts (a 50% increase in one session!) and their net short position to 2,537 contracts (a 44% reduction in one session!). This is a NEW RECORD LOW for their net short position but beats the previous low by 1,963 contracts! This has absolutely astonishing implications for the gold market. GS is running for the hills. Clearly the gold market is headed MUCH higher.

The activities of Goldman Sachs “shorting gold” on TOCOM [Tokyo Commodities Exchange] was first brought to my attention by Adrian Douglas via Bill Murphy’s daily Midas commentary at on Jan. 10, 2006. Douglas has reported on Goldman’s daily TOCOM gold futures position changes for almost 3 years.

With Goldman Sachs representing a defacto surrogate of the Federal Reserve, it is clear that the Fed is moving from being “overextended short” to flat – or possibly going long gold.

I believe this transition is critically important, much like a fuse burning toward explosives.

When this position crosses over from short to long, as I expect it will sometime this month, I expect that some large deafening bells will be ringing – somewhere.

Those bells might possibly be ringing first at Fort Knox, Kentucky or West Point, N.Y., where much of the U.S. sovereign stock [8,150 metric tonnes] of gold is alleged to be stored, but has never been independently [third party] audited since the Eisenhower administration.

I hope everyone has secured their own personal cache of physical gold already.

Today’s Market

Overseas equity markets began the week with Japan’s Nikkei Index rocketing 412 points to 12,624. North American markets were mixed with the DOW ahead 289.80 to 11,510.70, the NASDAQ adding 13.88 to 2,269.76 and the S & P gaining 25.50 to 1,267.80. NYMEX crude oil futures were unchanged at 106.23 per barrel.

On foreign exchange markets – Ripleys Believe It Or Not – the U.S. Dollar Index gained .86 to 79.42.

In the interest rate complex, the benchmark 5 yr. bond finished the day at 2.96% while the 10 yr. note ended the day at 3.66%.

The precious metals complex was torched [arson, perhaps?] with COMEX gold futures down 1.30 to 803.00 per ounce while COMEX silver futures were singed for .14 to finish the day at 12.14 per ounce. The XAU Index dropped 5.35 to 124.29 and the HUI was mauled by 14.61 to 286.54.

On tap for tomorrow, at 10:00 a.m. July Pending Home Sales data are due – expected +2.0% vs. prior +5.3%. Also at 10:00 a.m. July Wholesale Inventories data are due – expected +.5% vs. prior + 1.1%.

Wishing you all a pleasant evening and a happy back to school season!

Rob Kirby

© 2008 Rob Kirby

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Rob Kirby | Proprietor, Kirby Analytics Newsletter - Proprietary Macroeconomic Research
Toronto, Ontario, Canada | Observations | FSU Editorials | E-mail

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