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Stretch That TARP Some More

By Jon Nadler       Printer Friendly Version
Dec 12 2008 4:32PM

Good Afternoon,

This week's attempt at a breakout in commodities turned into a breakdown by Friday, after the US Senate's decision that failure is definitely one option for the beleaguered American auto industry. At this point, bankruptcy attorneys were sharpening their expensive pencils while rating agencies were cutting Big Three ratings to 'sell' swirled around newsrooms.

Republican Senators demanded that unions agree to significant autoworker pay cuts in order to bring them in line with what foreign automakers pay US workers at car plants domiciled in the US. Democrats just want the industry to live to see another day, although they too want several strings attached to a handout of money. Class warfare is not a pretty thing. Neither is the economic picture that would shape up following the demise of these firms, which President-elect Obama sees as the 'backbone' of American industry.

At this point, following a fresh Paulson about-face, the Treasury looks like it is next on the hook for putting TARP money into the auto sector's pockets. How much time will this buy? Who knows? Why, if GMAC cannot secure $30 billion and pulls the plug on dealer inventory financing, GM will have  no outlets to sell its future production through. Never mind that output itself is slated for a quarter-million unit slash. Now. This recession or whatever you wish to call it, has a long way to go. Like probably through next year.

Treasuries rallied on the news of the impasse, while oil lost more than $1.50 per barrel. Platinum group metals headed south due to similar concerns. Gold and silver came under selling fire and brought the maintenance of the $800 and $10 levels into question this morning. Gold closed the week's session with a more or less neutral stance, quoted unchanged at $820. Silver dropped 9 cents to $10.22 per ounce. Platinum suffered a $17 loss falling to $819 an ounce while palladium shed $8 to end at $170 per ounce.

One of the many year-end tallies to come shows the commodities complex surging at its best pace in 35 years up to July. And then, the wheels came off. As the US, Europe and Japan fell into a simultaneous contraction of their economies, the so-called 'super cycle' fell apart along with evaporating demand for every kind of 'stuff.' Copper and oil have cratered by between 60 and 70 percent in the wake of the July downturn. The Baltic Dry Index sank into the Marianas Trench, and commodity indices will finish the second half of the year with another record; that of having fallen the most since...ever. If there is any good news in this drama, it could be the fact that producers could face output shortfalls due to their current difficulties, when and if the global economy recovers. Either way, we can kiss super-cycle theorists a long goodbye.

About the only thing keeping gold aloft in early going today was the collateral automotive news damage sustained by the greenback (down 0.18 to 83.61 on the index). The dollar was also held back by noises from the ECB regarding its unwillingness to keep cutting rates any further at this point. Gold continues to be a dollar and oil story at the moment, although some safe-haven allocation should still be expected in the wake of this ugly home stretch to the year that was. There appears to be no industry left in the US (save healthcare and food) that is immune from the ravages of this unfolding crisis.

Meanwhile, it's business as 'usual' (of late) in the financial sector, where Bank of America will shed 35,000 jobs over the next 36 months. Falling axes everywhere. Also falling, US producer prices (for the second month in a row) and retail sales (by 1.8% - a fifth straight drop) - although one has to take plunging gasoline prices into account when tallying that number. One way or another, the conclusion that the world may be going through the worst recession since WWII appears to be gaining a lot of traction.

And that, is a wrap for this Friday. The Kitco celebration beckons and the staff is ready for a well-deserved break.

Happy Weekend!

Jon Nadler
Senior Analyst
Kitco Bullion Dealers Montreal



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