more articles by

Jim Willie CB

Click to enlarge Click to enlarge


Optimistic Negative Correlations

By Jim Willie CB      Printer Friendly Version
Jul 26 2007 2:48PM

An unusual chart is presented, since the Broker Dealers sit at the nexus of the massive asset-backed bond ‘con game’ perpetrated upon the nation and the world. The extent of possible fraud will be sure to be unraveled. They sold acidic bonds, over-rated, misrepresented, opaque as a stone in their fundamentals and inner workings. REVENGE IS BEING DOLED OUT TO THIS DEEPLY CORRUPT GROUP, which boldly write in covenants to obstruct lawsuits by limiting legal liability. As the Broker Dealer XBD stock index suffers deep wounds, the USFed will be compelled to rescue them, since their components are INSIDERS on Wall Street. The chart is at a crucial juncture here and now, as support is badly strained at the 50-week moving average of support. The major Wall Street brokers, bankers, dealers, are the marquee principal Knights of the Round Table for the USGovt and US Financial core, complete with all the collusion and merged interests in almost every conceivable room among the power brokers, including regulators.

One might argue that an historically unprecedented pilferage of the middle class has been in progress ever since 1999, when the stock bubble attracted money. For five years, the bond bubble has set the stage for a much larger bust, perhaps 20x larger in scope. As this group of broker dealers comes under fire, they will urge the USFed to use public money to bail them out. They will have less money to orchestrate gold ambushes. They will have attention diverted, with focus on continued profit and survival. They must stem the bloodletting. Hedge fund client woes only worsen the strain on the group, since they serve widely as creditor to their insane over-leveraged practices. For each $1 million lost in a hedge fund lies $5 to $10 million in creditor loss. As this chart worsens, the prospects for a gold & silver rise improve.


The key revelation is that the XBD and the bankers BKX stock index have both shown important declines, at the same time as the revival in the precious metals has occurred. The HUI unhedged precious metal miner stock index is pushing the upside, in the process of breaking through a tough resistance. Oh yes, the energy stock indexes are soaring, which should provide a nice assist to the precious metals weaker brother, by means of ratio arbitrage by speculators. Central banks have managed to sell off huge gold bullion inventories this year, in desperation. Otherwise, gold would be well past 700 and probably above 740 right now. They are unable to sell crude oil, although the Bank of Baghdad scummy operations attempt to suppress the oil price using Iraqi revenues, managed by the JPMorgan henchmen.

The XBD stock index shows a bearish wedge pattern, with increasing volatility in recent months, and a breakdown in progress. Topping behavior with a rounded top seems extremely apparent, with a substantial decline in the offing. Be sure to know that the Plunge Protection Team is led by Goldman Sachs, whose ‘GS’ stock is a component to the XBD index. So the decline will be controlled by this quintessential manipulator. They operate above the law, above reproach, at the USGovt behest. Nevertheless, and possibly consequently, this stock index serves as a guide for the ultimate USFed bailout of Wall Street broker dealers. The implosion of mortgage bonds and their overloaded over-leveraged damaged Collateralized Debt Obligation (CDO) bonds is the bane of the broker dealers, if not the entire banking system. Still, 40% of all bank sector assets are linked either to mortgage portfolios or their mortgage bonds. The broker deals are up to their necks in fast falling asset-backed bonds.

Confirmation can be found in the banking stock index BKX, whose chart actually looks worse than the XBD. Regard the XBD as the ‘INSIDER’ bank stock index (with adjoined brokerage functions), and the BKX as the ‘BROAD’ bank stock index. The BKX has already broken down, and looks more dire. The BKX serves as lead indicator of financial distress systemically. My interpretation is that the banking stock index breakdown leads the process, and assures a much more painful decline in the XBD index. However, the XBD breakdown is what the gold community will exploit, since the insiders have so much influence, if not direct control, through immediate participation, with the USGovt and US Federal Reserve management.


The HUI unhedged precious metals HUI stock index has shown the OPPOSITE pattern to the distressed bankers. This negative correlation has not been seen since 2002 and 2003 in my recollection. Shown here is the XAU, which usually is shunned in my analysis, but deserves attention now. Why? Because the XAU is the index traded with higher volume among the bigger players and bigger institutions. Because the XAU has tradable options tied to the index. The XAU receives much more broad attention, visible to the larger arenas where market control mechanisms are deployed. The XAU has broken above its traded range dated back to June 2006. That is critically important. The stage is set for a rather powerful autumn runup, sure to easily overwhelm the previous highs set in 2006. Although gold has been a laggard among the commodities, it should make up some ground in the coming months. Scrap cardboard, cement, and water have outperformed gold, but a breakout in gold in coming months will capture world attention. As the year passes, Euro Central Bank ability to sell gold bullion will wane, as they run low on supply and willingness to sell.

The same picture is seen with the HUI chart, but not quite as pronounced. This is a great signal, since the large marketcap stocks will most likely lead the smaller cap stocks. The recent flirt with the 80 level by the USDollar DX index has raised the alarm level, pushed the central banks into intervention mode, generated nonsensical propaganda about the benefits of a lower US$ exchange rate, and magnified the worst possible attention. The fires are raging. An overnight rescue bounce in Europe did take place, as the euro rose by 100 basis points, the British sterling rose by a similar amount, but the Canadian Dollar barely moved down. Some like Antal Fekete warn that the DX=80 could form a bear trap, with strong chances of repeated bounces and firmer support than is widely expected. My view is that the DX=80 critical support will continue to falter and give way on a repeated basis. This will shape up as the monetary story for the next year and longer, chronic weakening and silly repeated movement of the perceived line in the sand downward, so it does not break. Levels will be seen with some distance below 80, in a series of breaks and relief recoveries. Low 70 levels are assured, in time.

Calls come for official USGovt action to support its currency. Treasury Secy Paulson found it urgent to make an appearance on a CNBC interview this week. His words were hollow. He repeated the parrot stance that a strong USDollar is in our best national interest. He also claimed strength in the USEconomy, when it is actually eroding under its flimsy foundation of rising housing asset prices and backward dependence upon consumption. Paulson, if truth be known, is pushing for China to give an upward revaluation in their yen currency. Doing so will weaken the greenback further, AND lift long-term interest rates. The duplicity and failing integrity of the US Treasury are being discovered, at a time when the incompetence and marginalized irrelevance of the US Federal Reserve are being more widely recognized. The effect on the gold price will be direct. Expect silver as usual to outperform gold.

Some feedback came to me from various corners, friends, subscribers, fellow analysts. They were wondering if the wedge displayed in the USDollar DX chart was actually bullish. My view is that in this case the downtrend is the dominant theme, still bearish. The chart pattern was more like a dreadful downtrend, with some ugly sloppy traits. The fundamentals behind the USEconomy continue weak, with future prospects even weaker. Dependence upon housing for financials and consumption for economic structure will reap horrendously bitter fruit in the coming two years. The USDollar is stuck in a downtrend of uncertain outcome, possibly even a political solution, like a new domestic currency itself (AMERO). The international revolt against the USDollar is broad and ongoing, probably worsening from both the Asian side and the Persian Gulf region. The mortgage bond debacle is the albatross around the neck of the wrecked buck. The price movement in the DX index since early July seems to confirm the chart as bearish still, with the breakdown below the 81.5 level. Talk among the pundits and powerful houses seems to focus on what the next crucial support levels are, certainly not a bullish development.


Talk has not even begun of the inevitable USFed bailout for the mortgage bond market generally and the Wall Street bankers in particular. My loose estimate is that the eventual bailout will be in the trillions of US$, not $1 trillion, but multiples higher. The big Wall Street banker broker dealers will receive the lion’s share. The 2000 stock bust was a major loss for the public, loss for pension funds, but a boon to Wall Street, whose established brokerage houses broadly shorted the tech stocks. This bond bust will be a major loss for pension funds again, but a gigantic loss for Wall Street insiders as well as the wealthy who took big gambles in nutty hedge funds. The Ruling Elite banker broker firms will beseech the USFed to bail them out, saving their hides, for the greater good and benefit and integrity of the system. Recall that members of the Fed banking system are aligned with the group of losers lined up for slaughter. The general non-voting public will want a bailout themselves, BUT WILL RECEIVE ONLY CRUMBS. ‘Helicopter Ben’ is all talk in spreading cash to households. For every dollar doled to the households nationally in aggregate relief, expect $1000 to be doled out to the elite Wall Street firms, 1000-to-1. When all this occurs, the bailout occurs, the USDollar will plummet. Integrity of the world reserve currency will become the concern, then an unfixable problem. Confidence in the custodians of the world reserve currency will become the concern, then a recognized failure.

Failed auctions for damaged mortgage bonds attract a tremendous amount of attention, since they are a market event refusing to endorse and ratify a given price structure! Lawsuits will add to the bad attention, a process which has begun. As home prices fall, so will CDO bonds directly but with time delay, under the added weight of the debt ratings agency downgrades, another process just begun. These agencies will act so as to avoid lawsuit themselves. The reality is that funds are being forced to sell into a falling market as they liquidate mortgage bond positions in order to meet margin calls, having lost their valuable investment grade. The ultimate rescue package by the US Federal Reserve will be an order of magnitude larger than the 1989 Savings & Loan bailout. This time, a resolution trust will have great difficulty in selling mortgage bonds and their concentrated acid vials of asset-backed CDO bonds.

The distress in the mortgage bond arena was brought to more public attention last week after the ABX bond indexes registered declines. The ‘AAA’ rated bonds fell by 5%, the ‘A’ rated bonds fell by 10%, which are seen below in the chart. The ‘BBB’ subprime fell again to below 50% of original par value. The contagion is being recognized as having threatened the high quality bonds. WITH BROADER CONTAGION COMES BAILOUTS. When collateral falls further in home prices, look for ‘AAA’ to suffer surprising further losses. Broader contagion is assured to commercial mortgages, since they employed the same lunatic lending practices, namely no documentation loans, low loan/value ratios, and exaggerated income statements from rents collected. Further contagion is assured also to the corporate bonds, which are packaged in the same potpourri of fecal matter in CDO bonds. Bear in mind that the key objective of the USFed, as expressed by Chairman Bernanke, is for any spread of the contagion to PRIME MORTGAGES. Give Bernanke credit at least for admitting the problem is worse than first thought. If only he could lose the mental shackles of incessant blabber on ‘inflation expectations’ then he would gain more respect. Such talk is the mental pretzel of fools. By the way, more distortion came today. The June existing housing sales were down 3.8%, but they claim inventory levels fell by 4.2% at the same time to 8.8 months. Lower sales mean rising supply of unsold homes. The May inventories were 8.9 months supply, but the answer to the riddle is homes pulled off the market, from seller discouragement. More corrupted statistics.

In England, US-based mortgage bonds have widely been priced via auctions at 50% of original par value. They were successful in that they fetched bids to complete the sales. They were disastrous in that they exposed the subprime mortgage bonds as having lost half their value. In the US, no such courage was evident, as market mechanisms have been avoided and evaded. Resentment is spreading globally, like to England, to France, to Asia. Incredibly, the USGovt has beseeched the Chinese to continue purchasing crippled US mortgage bonds. This sounds like a charity drive by a mafia in the neighborhood after a con game run by the same thugs was exposed. The image of the USDollar has suffered irreparable harm, only to worsen by as the coercion game continues by USGovt henchmen. Their tactics resemble those of a crime syndicate, whose abused power is doubly cursed by ineptitude.


A Hat Trick Letter subscriber passed this message onto me, from a friend of his. “I have just visited Countrywide Bank to close my account. The employee who is leaving to another institution next week and was helping to close my account said, ‘Now subprime supported CDOs, many troubled mortgage-backed home loans, and other toxic wastes are secretly being bought by Fannie Mae and Freddie Mae, eventually to dump the losses to taxpayers.’ I don't know how much of these are true.” That makes sense. Fannie Mae will be the official mechanism for facilitating one aspect of the mortgage bailout, the hidden bailout. They must control the credit derivative meltdown, whose ‘war room’ might indeed be Fannie Mae. In my view, the credit derivative events began with Fat Freddie Mac and Fatter Fannie Mae three years ago, and rage recently. This pair of pigs hold the absolute worst quality of all mortgages and related bonds. In fact, typically the worst quality loan portfolios are packaged into bonds by lending institutions. Lending institutions match this offload of garbage by recycling portfolios to Fannie & Freddie, of the lowest quality loans. Wall Street broker dealers own the same acidic low quality asset-backed bonds. Fannie & Freddie operate in the government agency bowels, but Wall Street operates in the financial nerve center. Whatever strain is at work with Wall Street, amplify that strain with Fannie & Freddie, since the fecal acid is so concentrated, unaided by profitable business segments.

An insidious catalyst can be identified here, pointing out the PREDATORY nature of Wall Street firms. They act as brokered counter-parties to their hedge fund (HF) clients. They act as creditor to these fund clients also. Just like Goldman Sachs torpedoed their own Amaranth client over natural gas contracts, resulting in huge profits for GSax, other Wall Street firms will accelerate sales of their own asset-backed bond holdings, ahead of their hedge fund clients, thus forcing HF liquidations en masse. WS firms will attempt to limit their bond losses, but kill off client funds. Clearly the coal mine canaries are the hedge funds, in a string of collapses destined to increase in number and pace. With the rising HF death toll, the USFed bailout moves closer, and the GOLD JUMP IS NEAR. Shenanigans are well-known, like with Goldman Sachs and the predatory gains they inflicted on their own client Amaranth in the natural gas futures arena. But the CDO and mortgage bond debacle differs markedly. Those brutal violent games were played in the futures contract arena, a zero-sum game. For each winner is a loser, with volumes of losses equal to volumes of gains. The mortgage bond market is not a zero-sum game, but rather a loser’s monopoly. As the housing market sheds most of its $10 trillion in gains since 2002, ill-gotten by Greenspan, look for mortgage bonds to lose a similar but smaller slice of value.

A bailout might have many motives, like some in 1998 not revealed. Gold is joined by crude oil, 10-yr Treasury Notes, along with the euro and yen currencies, as being at risk of massive collateral damage. If each has lost price control, gold will shoot up in price past $750 quickly, crude oil will move past $80, long-term TNote yields will rise above 5.5%, the euro will fly past 140 easily, and the yen decline will reverse. THESE CANNOT BE PERMITTED, since they signal the USDollar falling into the precipice, entering a monetary crisis. That crisis would be BOTH on the financial front and the economic front. The USEconomy is held hostage. A lower USDollar means higher import costs for everything under the sun in the structurally broken USEconomy. The most visible cost item is gasoline. Higher interest rates and energy prices would assure a USEconomic recession, even after doctored statistics distort the picture. The USDollar crisis unfolding guarantees a GOLD EVENT, but also a scrap cardboard event, a cement event, and a water event.



Jim Willie CB
Editor of the “HAT TRICK LETTER”
Hat Trick Letter




Jim Willie CB is a statistical analyst in marketing research and retail forecasting.  He holds a PhD in Statistics. His career has stretched over 24 years. He aspires to thrive in the financial editor world, unencumbered by the limitations of economic credentials. Visit his free website to find articles from topflight authors at . For personal questions about subscriptions, contact him at