November 14, 2007 by david.pennington.

Dear Readers 

First, some comments regarding today’s big drop in gold and silver. I’m amused at the media’s explanation that gold went down due to investor’s “risk aversion” and desire to flee commodities. Yea right, and money poured into the big banks looking for somewhere safe? 

This is a joke. Monday’s stock market is just another one of many manipulated by the Plunge Protection Team to keep investor’s calm about an economy where all the news is bad. Precious Metals will be very volatile but the long term trend is up and we will soon see higher records for both gold and silver prices. 

Judging from the reaction to my plea to protect your financial assets, many of you have started to take some action. Regarding my concern over Internet Stock companies, this article recently appeared about  E-Trade: 

http://securities.law360.com/Members/ViewArticlePortion.aspx?Id=39442&ReturnUrl=..%2fsecure%2fViewArticle.aspx%3fId%3d39442 

Sub-prime bank Losses is closer to $400 Billion 

http://www.bloomberg.com/apps/news?pid=20601087&sid=a3fCFxLIgT2s&refer=worldwide 

A nuclear accounting bomb set to go off on November 15 

According to the following article, being forced to tell the truth is a world class regulatory blunder. My god what has this place become when truth is a blunder rather than a virtue? 

This is a nuclear bomb being dropped on the Big Shot Establishment Financial Liars who will scream, jump up and down, and lie some more. 

Why FAS 157 strikes dread into bankers. 

 Just when we hoped the worst was over… by William Rees-Mogg 

We have heard about sub-prime mortgages; we have heard about collateralized debt obligations (CDOs); we have heard about banks writing down their assets; we have heard about global bankers resigning; we have heard about Northern Rock and the first run on a British bank in 140 years.  

The risk of a worldwide banking crisis – one that is particularly damaging to mortgages, private equity, hedge funds and the banks themselves – is higher than it was a month ago, and the storm is rising.  

This is still an emerging story. It was not until last Wednesday that The Financial Times led on the legal provision that CDOs can be liquidated by the senior holders when they go into default. That could lead to a fire sale of CDOs and still larger defaults.  

Yet this, as important as it could be, is not the biggest threat. Few non-bankers have heard of FAS 157 and 159, yet these are the regulations that will set the terms on which the banks will value their assets. The trouble with FAS 157 and 159 is that they are perfectly reasonable regulations in themselves which could have disastrous, though unintended, consequences.  

What are FAS 157 and 159? They are the new United States (Federal) accounting standards that have been introduced to regulate the valuation of bank assets. These valuations are of crucial importance because they are the basis of all bank lending: no assets, no lending; no lending, no bank. According to an informative article in The Financial Times, the new standards will apply fully from Thursday. Many US banks have adopted them already. All US quoted banks will have to publish asset figures in conformity with FAS 157 by next spring.  

The new rules divide bank assets into three “levels”, according to the freedom with which they can be bought or sold. Level-one assets, which are easy to value or trade, have to have quoted prices in active markets such as US government bonds or gold bullion. Level two is an intermediate stage; these assets are not as fully marketable as level one, but still sufficiently trade able to have a definite value.  

Level-three assets – usually artificial financial instruments – are the problem. They do not have quoted prices in active markets. They have to be valued by reference to the bank’s own models. According to the analyst Martin Hutchinson, who had analyzed some of the US banks, the holdings of level-three assets are substantial. Lehman has $22 billion; Bear Stearns $20 billion; JP Morgan Chase $60 billion. Even these figures may be understated, since the banks have themselves decided whether assets belong to level three or the more acceptable level two, and they have an interest in placing as little in level three and as much in level two as they reasonably can.  

Martin Hutchinson has also analyzed the assets of Goldman Sachs. The bank has disclosed $72 billion of level-three assets, out of total assets of $900 billion. That seems reasonable enough, but it compares with Goldman Sachs’s capital of $36 billion. Any substantial write off of level-three assets would impact on Goldman Sachs net asset value.  

One cannot say that FAS 157 is only an American regulation and the banks of other countries would not therefore be affected. Most global banks already have a listing in the United States that would therefore be subject to US accounting standards. Those that do not will be judged by FAS 157 as the international standard. From now on all major banks will have to declare their assets in the FAS 157 form with its division into different levels by marketability.  

No doubt this is the reform that should have been introduced years ago; that would have saved a great deal of agony and some abuse. But FAS 157 is coming into effect at a most inconvenient time. The sub-prime mortgage defaults have already undermined confidence in mortgage backed securities. These form a significant part – perhaps about a quarter – of all level-three assets. Level three also includes higher-quality mortgages and leveraged bridged loans for buyouts.  

The global banking system now faces the risk of a general flight towards cash and liquid level one asset on a scale that has not been seen since the early 1930s. Already British banks are showing signs of near panic. I hear of London banks going back on recently agreed loans to parties of good credit, presumably on orders from head office.  

There have also been cancellations of offers of credit cards that had already been approved. One need have little sympathy for the US investment banks; they found it profitable to make speculative loans, and now they are paying the price.  

Even if ordinary mortgages do continue to be offered – and they are bound to be restricted – sub-prime mortgages will no longer be available for first-time buyers. Yet the housing market depends on people being able to sell their first houses when they trade up to their second. If all banks are anxious to protect their cash reserves, and to reduce their level-three assets, that will make ordinary borrowing difficult and level-three borrowing impossible. Probably the downturn will spread into stock markets, even though it did not originate in stock market speculation.  

It is far too late to cancel FAS 157 and 159, even if that were desirable. The concept of different levels for bank assets has been introduced to the banking system and the defaults on sub-prime mortgages have lowered the acceptability of all level-three assets.No one knows what they are worth and hardly anyone wants them.  

Commercial banking, with its large customer base, is in better shape than investment banking, but will also be affected. FAS 157 may prove an historic regulatory blunder.

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November 10, 2007 by david.pennington.

1. DOLLAR FALLS TO NEW LOWhttp://www.bloomberg.com/apps/news?pid=20601087&sid=aOoJCF.XMFsY&refer=worldwide 2. OIL SETS NEW ALL TIME HIGH - ALMOST $100http://www.bloomberg.com/apps/news?pid=20601087&sid=aOhoSjcKJhcY&refer=worldwide 

3. GM REPORTS RECORD $39 BILLION 3RD QTR LOSShttp://biz.yahoo.com/ap/071107/earns_gm.html?.v=6 4. IRAN DEFIANT REACHES 3,000 NUCLEAR CENTRIFUGEShttp://www.jpost.com/servlet/Satellite?cid=1192380756670&pagename=JPost%2FJPArticle%2FShowFull 

5. CHINA SAYS IT MAY SELL DOLLAR RESERVEShttp://www.marketwatch.com/news/story/dollar-slumps-top-china-official/story.aspx?guid=%7B49785919%2D0D1E%2D4E6A%2DBF51%2DD1DD1D2A874E%7D&siteid=moren 6. SUPERMODEL GISELE JOINS BILLIONAIRES WARREN BUFFETTAND WILLIAM GROSS AS BEARISH ON THE DOLLAR 

7.  PAKISTAN CRACKDOWN CAN EXPLODE INTO CIVIL WAR ATANY MOMENT 8.  FORECLOSURES AT A TWENTY YEAR HIGH AND SEE NOLETUP IN 2008 AND 2009 

9. US BANKS TO WRITE-OFF MORE THAN $40 BILLION IN NEWDERIVATIVE LOSSES IN 4TH QTR 

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November 9, 2007 by david.pennington.

By: Michael Pennington 

This weekend I couldn’t help but think of the several callers I had over the past 90 days that thought about buying gold/silver but for whatever reason decided not to. First of all, the most obvious reason is that they missed out on some spectacular gains during this time, especially those who bought either gold or platinum. Price of gold is up 18% or $144 in the last 60 days. Not a bad return for sure. While its true hindsight is always 20/20 the same fundamentals driving the precious metals market higher still exists today – only more so. The emergency status of our country’s financial affairs will eventually be disastrous to us all. So the sooner you begin to protect your wealth the better off you’ll be. Another way of saying all this is that those of you who purchased gold and silver recently have not only seen a good rate of return but your purchasing power has been maintained. In contrast, those who retained their wealth in cash, fiat dollars or Federal Reserve Notes, have seen a considerable decline in their purchasing power regardless of their rate of return. Inflation and the declining dollar have taken a significant bite out of their assets – at least 10% in 2007.

I’m begging all of you now to please begin converting more of your assets held in dollars to precious metals.

I realize inertia is a powerful force to overcome. I also realize we have never faced such tumultuous times before, but I ask you to weigh the risk reward of not doing something.

The sub-prime problems and size of the derivative problems just coming to light could have global economic crisis written all over it. What is happening today at Citigroup, what happened last week at Merrill Lynch and Washington Mutual is only the beginning.

DO NOT IGNORE THE WARNING SIGNS. GOLD and SILVER WILL PROTECT YOU BUT YOU HAVE TO START NOW WITHOUT FURTHER DELAY.

There is no hiding place as this is a product of the greed and avarice of the new geek kids on the block who have killed themselves, their industry and hurt everyone everywhere. I am sure that in years to come derivative traders will be seen as pariahs and criminals deserving of prison - not as the multi-millionaires they are today.

Be diligent, start to protect yourself to the degree it can be accomplished by removing people and institutions between you and your assets. This is the real thing. This is what was discussed in the 1970s but did not happen. It was discussed by many back in 2000, but it is happening here and now. There is no functional tool to stop a derivative meltdown. It will burn through many financial institutions like a fierce forest fire and start a domino effect that I do not want you to be caught up in.

I want you to be safe. What can it cost you to take precautions? I believe that the cost to you is nothing. I am telling you to take less risk, not more. I know the central bankers will burn and crash the dollar before all this happens. What concerns me is that all this could easily get out of hand before you’ve had a chance to take all needed precautions.

But first here is some practical advice for all to consider:

·         Buy bullion gold and silver approximately the same amount each month as long as you can. This dollar cost averaging method is an excellent way to enter the precious metal market over a volatile time period.

·         What you cannot withdraw and is in cash put into short term treasury instruments. For those able, I prefer Swiss and Canadian dollar Federal T bills.

·         I suggest selling all equities. It is simply too risky. This includes mutual funds, except Precious Metals Funds. If you must hold stocks request the stock certificate from your broker.

·         Reduce personal debt for peace of mind.

·         If you own coins, but have them stored by a dealer, take delivery of them and request prompt service.

·         If you have accounts at Internet financial entities close them and transfer the accounts to a smaller firm that can confirm in writing that they have no over the counter derivative exposure. Be sure to ask for certificates for your share investments and take delivery of them.

·         Reduce - if not eliminate - your margined position even if that means selling down to rid yourself of debt on your securities or gold assets. The swings in gold now are going to become so violent that most people will not be able to tolerate it when debt is attached to their positions.

This is a time to be conservative, not adventurous. Gold and Silver are going to range trade more violently in the future, but the fundamentals indicate more than ever that we will see gold at $1,500 by the end of next year and silver will soar to $30.00 over the same time.

CALL ME IF YOU WISH TO DISCUSS YOUR OWN PRIVATE SITUATION. 

mpennington14@yahoo.com
P) 425.503.8425 or 425.868.4966

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