Markets continue correction

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Today was the sixth day of a rally try for the market. A big up day in higher volume than the previous session would count as a follow-through, confirming the attempted rally.




Gold/XAU Ratio 4.84


It's not over until it's over. "Mortgage loans (including the sub prime as well as other consumer debt) were packaged up and sold to the largest investors world wide, including investment banks along with private equity and hedge funds. Many of these obscure financial instruments frequently called derivatives were financed by borrowing Japanese Yen at very low interest rates. The motivation was greed… high yielding investments financed with low interest rates. As the news surfaced about the lack of quality of these investments, fear began to grip the markets causing a rush of redemptions as many investors rushed to the exits.

Many of these investments were highly leveraged and acquired with low cost borrowed funds, frequently using low interest Japanese Yen. The sudden stampede to sell these investments uncovered yet another hidden reality beyond the liquidity of the respective funds. Not only did these investment products have no ready buyers, they had inflated book prices attached entirely unrelated to market valuations.

The resulting effect was that as the big investors sought cash to repay their loans, they were basically selling anything of value including gold, silver, precious metals and blue chip shares. Thus you may have heard the reference to the unwinding of the Yen carry trade? Those borrowed funds were being repaid thus forcing the Yen higher vis a vis the US dollar and other currencies. We have seen some articles suggesting there is over $1 Trillion involved with the packaged mortgages and the Yen carry trade. Have we seen the last of the unwinding? We think not. While the sub prime mortgages seem to be getting the current attention, as more and more of the variable rate interest rate mortgages are readjusted during the coming nine months, we are sure to experience many more problems of write downs and liquidity concerns."
Dudley Baker