Capital Gold Group Gold News: March 2008 Archives
Tue, Mar 18 2008, 18:22 GMT
The rate cut, which has been approved by 8 votes against 2, and it follows a 25 basis points surprise rate cut approved on Sunday.
This decision was widely expected by the analysts, although there were differences about the extent of the rate cut, as the Bank has taken a strong commitment to help the Banks to avoid a major scale liquidity crisis, as it has been seen earlier this week when the Bank supported financially the acquisition of the Bear Sterns Bank by JP Morgan Chase & Co.
The Central Bank has already cut interest rates from the 5.25% level in September to the actual 2.25% in order to mitigate the effects of a crisis in mortgages that has already turned into a great scale credit crisis, which has made the major figures of US economy swift their language from the “economic slowdown” speech to openly acknowledge that US economy is going through a serious recession.
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March 17 (Bloomberg) -- JPMorgan Chase & Co. agreed to buy Bear Stearns Cos. for about $240 million, less than a 10th of its value last week, after a run on the company ended 85 years of independence for Wall Street's fifth-largest securities firm.
Shareholders of New York-based Bear Stearns will get stock in JPMorgan equivalent to about $2 a share, compared with $30 at the close on March 14, the two companies said in a statement today. The U.S. Federal Reserve will provide financing for the transaction, including support for as much as $30 billion of Bear Stearns's ``less-liquid assets.''
JPMorgan Chief Executive Officer Jamie Dimon bought Bear Stearns, once the biggest underwriter of U.S. mortgage bonds, for less than the value of its real estate after clients, alarmed by rumors of a cash shortage, withdrew $17 billion in two days. Faced with the prospect of bankruptcy, Bear Stearns CEO Alan Schwartz was forced to accept the deal as part of an effort by the central bank to stave off a broader market panic.
``Bear Stearns shareholders are at the short end of the stick,'' said CreditSights Inc. analyst David Hendler. ``This was done in the market's best interests. They had to get this done or they would risk runs on other companies.''
Without a resolution this weekend, the company's situation would have continued to deteriorate when markets resumed trading, according to analysts and investors. Yet the value placed on Bear Stearns, which employs about 14,000 people, raised questions about share prices for the rest of Wall Street.
``This is a serious crisis,'' said David Goldman, portfolio strategist at Asteri Capital. ``For Bear's stock price to go to effectively zero, contrary to market expectations, even at the close on Friday, tells us that something is systemically very wrong and we're at a very dangerous moment.''
Eight-Month Slide
If a sale hadn't been announced, Bear Stearns probably couldn't open its doors for trading, Goldman said.
Founded in 1923, Bear Stearns survived the Great Depression and first sold shares to the public in 1985, under then-CEO Alan ``Ace'' Greenberg. Today's fire-sale to JPMorgan caps an eight- month slide in the company's fortunes that began last July with the collapse of two of its hedge funds, which invested in securities linked to subprime mortgages. Those failures caused investors to doubt the value of any asset linked to the mortgage market, the biggest business at Bear Stearns.
``The past week has been an incredibly difficult time,'' Schwartz, 58, said in the statement. ``This transaction represents the best outcome for all of our constituencies based upon the current circumstances.''
Schwartz, an executive with more than 30 years of experience at Bear Stearns, became CEO less than three months ago, as the hand-picked choice of his predecessor, James ``Jimmy'' Cayne, 74.
Reduced Fortunes
Cayne, who remains non-executive chairman, stepped down after reporting an $854 million fourth-quarter loss, the first in the company's history. He was at a bridge tournament in Detroit last week as speculation about the firm's cash position pummeled the stock.
Cayne ranked as Wall Street's richest CEO, with $1.3 billion of assets, according to Forbes magazine's 2007 billionaire survey. His stake in the firm approached $1 billion last year when the shares reached their peak price of $170. Under the terms of the JPMorgan acquisition, his holdings are now worth about $12 million.
Joseph Lewis, Bear Stearns's second-largest shareholder, has spent more than $1 billion on the firm's stock since September, paying as much as $150 a share. Lewis, a 71-year-old billionaire, wasn't planning to reduce his stake, a person close to him said March 11. He's now entitled to $22 million of JPMorgan shares.
Shareholders Wiped Out
``To see a situation involving a bailout lead to shareholders getting pretty much wiped out is a pretty significant event for the market,'' said Ben Wallace, who helps manage $800 million, including stock in JPMorgan, for Grimes & Co. in Westborough, Massachusetts. ``It's going to raise concerns'' about the value of financial stocks, he said.
JPMorgan will give investors 0.05473 shares of its common stock for every one share of Bear Stearns stock they own. Including shares in an employee-incentive plan, the purchase price would be as high as $270 million. JPMorgan may not be buying those shares.
``JPMorgan Chase stands behind Bear Stearns,'' Dimon, 52, said in the statement. ``Bear Stearns's clients and counterparties should feel secure that JPMorgan is guaranteeing Bear Stearns's counterparty risk. We welcome their clients, counterparties and employees to our firm, and we are glad to be their partner.''
Crisis of Confidence
The Fed's attempt to rescue Bear Stearns last week with a cash infusion failed to avert a crisis of confidence among the company's customers and shareholders, who drove the stock down a record 47 percent on March 14, when the emergency funding was announced.
Bear Stearns's profit exceeded $2 billion in 2006, yet the price JPMorgan is paying is about one quarter the value of the securities firm's headquarters building in midtown Manhattan. The 1.2 million-square-foot, 45-story structure built in 2001 is worth about $1.2 billion, based on the average $1,000 per- square-foot that comparable office space in the city is currently fetching.
JPMorgan Chief Financial Officer Mike Cavanagh said on a conference call after the sale was announced that the bank was comfortable with the values Bear Stearns had assigned to the mortgage-related assets on its books. Asked to explain why JPMorgan was paying about $2 a share for a company with a book value of $84 a share, Cavanagh said the price reflected the risk the firm was taking.
It ``gives us the flexibility and margin of error that's appropriate given the speed at which the transaction came together,'' he said. JPMorgan said it was confident Bear Stearns shareholders would approve the sale.
Counterparty Risk
``If you're buying equity for free and the liabilities are pretty well capped, it sounds like it's good for JPMorgan shareholders,'' Wallace at Grimes & Co. said. ``The thing that everybody's been worried about has been the counterparty risk and if this gives people more confidence, that will be good for the markets.''
Minutes after the deal was announced, the Fed, in an emergency move, cut the rate on direct loans to commercial banks by a quarter percentage point.
Bear Stearns's prime brokerage unit, which provides loans and processes trades for hedge funds, generated $1.2 billion in revenue last year. That business is probably the only piece left of the company with value after the mortgage market collapsed last year, analysts said.
`A Lot of Value'
The prime brokerage was the third-largest behind Goldman Sachs Group Inc. and Morgan Stanley as of April 2007, according to Sanford C. Bernstein & Co. About a sixth of the firm's income came from packaging and trading mortgage bonds, a market that has been almost completely frozen since July.
``As bad as things are at Bear Stearns, this is still a franchise with a lot of value, particularly the prime brokerage business, which is what JPMorgan is after,'' said William Fitzpatrick, who helps manage $1.6 billion at Optique Capital Management, including JPMorgan shares. ``That's the crown jewel, and that would fit into JPMorgan's business extremely well.''
Dimon's New York-based company has suffered fewer losses than rivals during the credit-market contraction, which has prompted $195 billion of writedowns and losses by Wall Street's biggest banks and securities firms.
JPMorgan, the third-largest U.S. bank by assets, has posted $3.7 billion in writedowns, a fraction of the $22.4 billion reported by New York-based Citigroup Inc., the biggest U.S. bank.
Paulson Involved
Treasury Secretary Henry Paulson defended the Fed's bailout today, saying policy makers will do whatever is needed to prevent disruptions in financial markets from hurting the economy. Paulson said he was involved with the discussions on Bear Stearns's future this weekend, without elaborating.
``There's always a decision to be made to say what's best for the stability of the marketplace, the orderliness of the marketplace,'' Paulson said. ``I think we made the right decision.''
When Bear Stearns invited potential buyers for detailed presentations by department chiefs yesterday, only JPMorgan and private equity firm J.C. Flowers & Co. showed up, according to people familiar with the talks.
Other potential buyers, such as Royal Bank of Scotland Group Plc and HSBC Holdings Plc, which had expressed interest in the past, didn't send representatives. Hundreds of Bear Stearns employees went to work yesterday to help with the sale process and the presentations.
Bear Stearns has offices in cities including London, Tokyo, Hong Kong, Beijing, Shanghai, Singapore, Milan and Sao Paulo, according to its Web site.
JPMorgan's participation in the bailout follows a long tradition at the bank of stepping in to rescue financial markets from crisis, according to Charles Geisst, the author of ``100 Years on Wall Street.''
The bank has also profited from its intervention. JPMorgan got at least $725 million of revenue for taking on half the energy trades from collapsed hedge fund Amaranth Advisors LLC in 2006.
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SAO PAULO, Brazil - Antique store owners in lower Manhattan, ticket vendors at India's Taj Mahal and Brazilian business executives heading to China all have one thing in common these days: They don't want U.S. dollars.
Hit by a free fall with no end in sight, the once mighty U.S. dollar is no longer just crashing on currency markets and making life more expensive for American tourists and business people abroad; its clout is evaporating worldwide as foreign businesses and individuals turn to other currencies.
Experts say the bleak U.S. economic forecast means it will take years for the greenback to recover its value and prestige.
Negative dollar sentiment is growing in nations where the dollar was historically accepted as equal or better than local currency — and dollar aversion is even extending to some quarters in the United States.
At the Taj Mahal, dollars were always legal tender, alongside rupees, for entry into the palace. But because of the falling value of the dollar, the government implemented a rupees-only policy a month ago. Indian merchants catering to tourists have also turned bearish on the dollar.
"Gone are the days when we used to run after dollars, holding onto them for rainy days," said Vijay Narain, a tour operator in the city of Agra where the Taj Mahal is located. "Now we prefer the euro. It gives us more riches."
In Bolivia, billboards feature George Washington's image on a $1 bill alongside a bright pink 500 euro note, encouraging savers to turn to the euro to tuck away money earned abroad or sent home in remittances.
"If the dollar's going down ... save it in Euros!!!" say the signs popping up around La Paz for Bolivia's Banco Bisa.
And in neighboring Brazil, the Confidence Cambio money-changing service was the first to start offering yuan so travelers to China no longer have to change the money into dollars first. The service is already a hit because Brazil does big business with China, and lots of Brazilians are heading to the Olympics this summer.
"Now we tell people not to take dollars when they go abroad, it's better to change it directly to the local currency," said Fabio Agostinho, one of the firm's managing partners. "If people leave here with dollars and go abroad, they lose when they exchange them. It's the same thing whether they're heading to China, Europe or even Argentina."
In Manhattan's Bowery district, Billy LeRoy, the owner of Billy's Antiques & Props, prefers payment in euros so he can stockpile the currency for his annual antique buying trip to Paris.
"Whip out dollars at the French flea market now, and they'll shoo you away," he said at his store near apartment buildings where Europeans are snapping up units because they've become dirt cheap. "Before it was like the second coming of Christ, but now they don't want it or if they do take dollars, they're going to take their pound of flesh."
The dollar has steadily eroded in value against the euro and other currencies since 2002 as U.S. budget and trade deficits ballooned, but fears of an American recession and credit crisis have sent the dollar to stunning lows amid predictions the slump will continue for a long time.
The euro traded for a record $1.5625 before declining to $1.5586 Thursday while the dollar dropped below 100 Japanese yen for the first time since November 1995. It traded as low as 99.75 yen before recovering some ground to 101.68 yen. The dollar also recently hit a 10-year low against the Chilean peso, and fell to its lowest level against Brazil's real since the nation floated its currency in 1999.
While low dollar cycles have come and gone for decades, experts caution that it's now much more difficult to predict when this one will end because the euro didn't exist as competition for the dollar before.
During previous U.S. economic downturns, big foreign funds typically snapped up U.S. treasuries, helping to shore up the dollar to a certain degree. But the euro and currencies from other nations are now seen as legitimate options, and interest rates are higher outside the United States — meaning the funds can get better returns on investments elsewhere.
"You have the U.S. still holding this trade deficit, but now you have the possibility of a U.S. led recession, and you have a weakening currency. So it's a very dark outlook for the dollar," said Gareth Sylvester, senior currency strategist with the British firm HIFX Inc., which executed $40 billion in currency trades last year.
Nations that were once seen as incredibly risky for investments — such as Brazil — are now seen as good long-term bets. And countries such as China and Russia, with burgeoning coffers of money to invest abroad, are thought to be shifting some of their reserves or diversifying fresh income to destinations and currencies outside the United States.
It used to be important for most countries "to accumulate dollars as a precautionary element against rainy days, but the accumulation of reserves has become so large in most emerging market countries that the balance is way beyond what's needed for precautionary reasons," said Eliot Kalter, a fellow at Tufts University's Fletcher School of Law and Diplomacy and a former International Monetary Fund official.
While most experts believe the dollar will eventually regain strength, no one is willing to predict when that will happen.
"I think the factors that are affecting the weakness of the dollar will be reversed, but no time soon," Kalter said.
The problem right now, is that "people just don't want to be holding U.S dollars and U.S.-based equities," Sylvester added. "If you are an investor with a million dollars to invest, you look for the highest yield — you're looking at South Africa, Australia, New Zealand."
And it's not only the big time investors that are looking for other options.
In Peru, where savings in U.S. dollars were long a popular hedge against inflation, many citizens are closing dollar accounts in favor of Peruvian soles.
At the same time, businesses like supermarkets, movie theaters and cable TV companies that used to accept dollars are now demanding soles.
Edwin Figueroa, a 29-year-old systems engineer, switched his checking account from dollars to soles seven months ago as the dollar's decline started worrying him. He doesn't think he'll be going back anytime soon.
The Peruvian sol "is stable now," he said. "And maybe in a year, the dollar will even go lower."
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And yet there still looks to be plenty of room to run.
At least, that’s what we can take away from the most recent strategy revealed by the leaders of Barrick Gold Corp.
Barrick, the world’s largest gold producer, won’t hedge its production - even with the big run-up in prices, Chief Executive Officer Gregory C. Wilkins said last week during an interview on CNBC-TV.
"The fundamentals are in place for a good sustained rally in gold prices," Wilkins said during the interview.
He added that there’s still a lot of room for gold prices to run, Reuters reported.
This is one of those rare company announcements that that’s worth looking at closely, since it actually has some significance for investors.
The price of gold - like the price of most commodities - can be incredibly volatile. So gold producers such as Barrick will often take steps to "hedge" - moves that will allow them to lock in a minimum price for the gold that they sell, or even to guarantee minimum sales and profit figures.
To do that, a company such as Barrick will sell its output forward, buy options or invest in other financial hedges to lock in a minimum price for its gold. By locking in the price, the company can be reasonably certain of the sales and profit figures it will report, something the certainty-seeking analysts on Wall Street are usually thrilled to see.
Assume, for instance, that gold prices are on the rise, but that
Barrick’s executives expect that a price-eroding glut will occur later
in the year. One alternative is to purchase hedges that would rise in
value if the price of gold falls.
But because it creates an extra expense, companies only hedge during uncertain periods. Barrick would have to pay a fee, known as a "premium," for the options, futures or other financial instruments it uses to hedge. Those premiums add to the company’s costs, thus eating into potential profits. But during an uncertain stretch, company executives are typically only too glad to make those outlays in return for having predictable sales and profits during an unpredictable market.
But if the price increase is expected to continue, Barrick executives would have no wish to limit the company’s profits - and would suspend its hedging strategy.
Gold has gained about 20% this year and funds managers, speculators and investors continue to pour cash into precious metals, expecting that a weak dollar, rising inflation, additional U.S. interest-rate cuts and record energy prices will continue to push gold and other commodities to even higher levels.
When Barrick’s Wilkins made his comments late last week, gold was
hovering around the $990 an ounce level. Silver was trading at $21 and
platinum was at $2,225 an ounce.
With platinum prices so high, it’s
possible automakers could switch to the lower-priced gold for inclusion
as a key element in automobile catalytic converters - providing yet
another catalyst for higher gold prices, Wilkins told CNBC.
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Silver was near a 27-year high hit on Wednesday, platinum below an historical high, New York's COMEX futures dipped after touching a record around $995 an ounce and Tokyo's platinum futures hit a new peak.
Spot gold dipped to $984,50/985,30 an ounce from $985,70/986,50 late in New York, when it hit a record $991,80.
It dipped from an intraday high of $989,50 on Thursday as a lack of follow-through buying triggered profit taking.
"There is psychological resistance at $1 000, but it's a matter of time to see gold break through that level," said Shuji Sugata, manager Mitsubishi Corp Futures and Securities Ltd.
Gold has gained as much as 19 percent in 2008 as funds, speculators and investors pour money into precious metals on expectations of further interest rate cuts in the United States and record high oil, which lift its safe-haven appeal.
"It's difficult to say at this juncture if we will touch the $1 000 mark. I guess it really depends on how long oil prices remain above $100," said Darren Heathcote of Investec Australia.
Crude oil extended gains to approach $105 a barrel on Thursday, aided by OPEC's decision to keep output levels unchanged and US government data showing a surprise decline in crude inventories.
Gold futures for April delivery on the COMEX division of the New York Mercantile Exchange fell $1,1 an ounce to $987,4 an ounce - off its record high of $995,20 hit on Wednesday.
The dollar hovered near a record low against the euro as data showing a fall in US private sector employment and a contraction in the service sector reinforced worries of a US recession.
Silver edged up to $20,73/20,78 an ounce from $20,61/20,66 an ounce, holding near Wednesday's 27-year high at $20,82 an ounce.
Spot platinum rose to $2 255/2 262 an ounce from $2 240/2 247 an ounce. Spot palladium fell to $542,50/547,50 an ounce from $552/556 an ounce.
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Thomas Jefferson and Andrew Jackson understood "The Monster". But to most Americans today, Federal Reserve is just a name on the dollar bill. They have no idea of what the central bank does to the economy, or to their own economic lives; of how and why it was founded and operates; or of the sound money and banking that could end the statism, inflation, and business cycles that the Fed generates.
Dedicated to Murray N. Rothbard, steeped in American history and Austrian economics, and featuring Ron Paul, Joseph Salerno, Hans Hoppe, and Lew Rockwell, this extraordinary new film is the clearest, most compelling explanation ever offered of the Fed, and why curbing it must be our first priority.
http://www.youtube.com/watch?v=iYZM58dulPE
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