Mitchell Securities

November 2,1998

Outrageous-Dealers are Looking for Another Bailout

It was reported in today's Wall Street Journal that the government-bond dealers are urging theFederal Reserve Bank of New York to buy government-sponsored enterprise debt ( i.e., GSEs such as Fannie Mae, Freddie Mac, FFCB and FHLB securities as part of its open market operations. Through the first nine months of 1998 these GSEs have issued about $4.5 trillion in debt. Banks, brokerage firms, and hedge funds have been huge underwriters and buyers of these securities. As I pointed out in earlier reports, banks, in particular, resumed their aggressive purchase of U.S. government securities ( primarily mortgage backs ) starting in the fall of 1997 ( see Charts 1, 2, and 3 ) . Since August of 1997, domestically chartered banks have added some $ 105 billion in securities to their investment portfolios of which $58 billion could be accounted for as mortgage-backed securities, including pass-throughs, CMOS, REMICs, etc. Currently such agency securities account for about a third of the average banks' investment security portfolio. However, as can be seen in Table 1, they can account for a significantly greater percentage of the larger banks' available-for-sale investment security portfolios. The problem that banks and underwriters of these securities now face is declining liquidity for these securities in the marketplace. This decline in liquidity is one of the side effects of the deleveraging of the system. Additionally, it is one of the reasons I remain bearish on the prospects for investment security gains in 1999, particularly for those organizations that have levered up on mortgage backed securities ( see Table 2 ) . Earlier this year, I wrote that the mortgage-backed securities market would be characterized by arbitrage losses first, absolute losses later. While market participants seem encouraged by the recent firming of spreads, they are missing the fact that absolute losses are starting to develop. In other words, spreads are firming, in part, because the yield curve is starting to back up with longer dated securities selling off more rapidly than intermediate securities. Thus, we have the real reason behind the Bond Market Association's request that the fed consider agencies in their secondary open-market operations. Dealers and banks now carry a considerable inventory of such securities, but face the problem of having eliminated one of the end receptacles for these securities. That end receptacle was the hedge fund Mafia. By pulling back on its funding to the hedge fund community, the banking industry has forced, in part, a deleveraging of the system. By association, the buyers for fixed income securities, particularly agencies, has shrunk. In short, the banking and dealer community is now faced with a need to off load its inventory of securities into a declining market at a time when a major buyer of such securities has had its wings clipped. Therefore, the dealer community needs to replace that original buyer with another. Why not the Fed! After all, they have always stepped up in times of crisis to bail out the excesses of the financial community. The problem here is that if the international community perceives that the Fed is monetizing the U.S. debt, the U.S. dollar could come under even greater pressure than it is under now. I continue to view the Fed as increasingly putting itself in a bind that will result in a disappointment with respect to interest sensitive sources of income. Agency securities and investment security gains are only one piece of the puzzle. The risk/rewards of owning bank stocks at this point of the cycle continues to emerge as a poor bet. My emphasis continues to focus of recommending the sale of regional banks into any strength.

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Do you have a way to document that someone is lying to us? Count railroad automobile car traffic? Some raw number that has not been 'massaged' by the 'powers that be'?

I suspect that it would be very tempting to keep the party going as long as possible -- at least till after the election we just had.

I think all at Kitco would be very grateful if you could identify something that would get to the bottom of this. Think of the newsscoop for Matt Drudge!

@Gold-bug children: I didn't say exactly what I meant to say earlier, of course Santa is real and comes every year, but he doesn't always bring me what I want. My girlfriend also brings me presents and they are predictable. Don't let anyone tell you that Mr. Nick isn't real, because he is, I have pictures and radar telemetry.

But -- we do have Kenneth Starr testifying soon -- Congressman Hyde has promised that the impeachment proceedings will end by December of this year. And -- the worst possible witness for the Dems is Kenneth Starr -- all Hyde needs to do is ask a question like -- do you know anything about WJC taking drugs in the Whitehouse -- etc. This is probably too extreme to happen, but the pandora's box could open. Kenneth Starr's two grand juries are still in business, and collecting testimony. Given the Republican's panic about impeachment, it is likely that the Judicial types who advise Kenneth Starr will tell him to release some more damaging evidence to Congress. A Hillary indictment on racketeering is possible -- who knows?

These next two months will be interesting, especially since the anti-WJC forces have been quiet so that they will not be accused of influencing the elections.

A big WJC fiasco would push gold up alot -- and the US dollar down, IMHO.

DEPRESSION: Economic condition characterized by falling prices, reduced purchasing power, an excess of supply over demand, rising unemployment, accumulating inventories, deflation, plant contraction, public fear and caution, and a general decrease in business activity. The Great Depression of the 1930s, centered in the United States and Europe, had worldwide repercussions.

Source: Barron's Finance & Investment Handbook Fourth Edition ISBN 0-8120-6465-8

So -- we know what will happen -- eventually. It is just a replay of Russia and the IMF. Human nature -- how predictable -- the only part we don't know is when it will all come crashing down.

And -- if I am wrong -- there is the small matter of the 60 billion US that Mexico still has not paid off since 1995.

Cherokee -- You and I are thinking alike! Saddam ( Sadmad? ) is playing us as much as we are playing him -- he at least is consistent. I agree with you -- all we need is to goad Saddam with some fireworks to impress the 'average American' who is supposedly infavor of punishing Saddam because the polls say so. Stupid move.

If we give Saddam enough rope with these ineffective fireworks, he will lob something nasty into Israel, and Israel will respond like a hornets nest. There is no way that WJC has enough clout in the MiddleEast this time to stop Israel from retaliating. And -- the Arabs will defend Saddam -- if he moves cautiously.

We can only hope that the WJC impeachment process moves forward fast enough to keep him from doing something rash, or that the armed forces refuse to cooperate. Unfortunately I am not optimistic, as there are two many bureaucratic 'yes men' that do what WJC wants.

Cherokee -- any idea what this 100 million plus barrel oil surplus is about? Smokescreen? A secret hoard by someone who knows what is about to happen? The US government? Hard to tell the truth from fiction these days.

What a unfortunate time for the Republicans to be in disarray, when they should be on the offensive!

http://search.washingtonpost.com/wp-srv/WAPO/19981109/V000638-110998-idx.html

So we do not have to worry about FEMA taking over control of the US economy, do we? Our own Social Security is far more enlightened then they are about y2k.

And even the IRS may be catching on -- an emergency flat tax -- just in case. Easier for enforce if the system breaks. But wait a minute -- what about those mortgage deductions?

I find it amusing that our goverment seem to think they can step in and take over all economic functions if we have a meltdown due to y2k. I think they will be in for a big surprise, since it seems that the federal government is the worst prepared of all. My guess is that the state governments will fair better handling the y2k crisis. It will be easier for them to seek local support from the people who make this economy run.

Y2k is likely to go a long way in making it clear to everyone that the Federal Government is ossified. Just the opposite of what you might think. After we have y2k we may find our respective governments less centralized -- not more. Remember what is happening to Japan -- most of it due to their centralized, planned economy. Our chaotic one works much better.

I find it interesting that we are told how good automobile sales are in the US -- but in Brazil they are off 40%. How can GM,Ford, Chrysler etc. have it so good when so much of their income comes from South America?

Any thoughts about the IMF and the Brazil bailout? And what is Mexico going to do with the 60 billion they owe that they supposedly paid back in 1995?

Also, we hear about how much Mainland China's foreign trade surplus is, and how asutute their leaders are. I do not worry about the private Chinese businessmen, because they are some of the best businesspeople in the world. But -- when the Chinese government gives out loans without any review of risk to the lender ( foreign money I guess ) -- I worry. Am I getting paranoid if I imagine warehouses of goods in mainland China yet to be sold -- products made far in excess of what the actual world demand is -- to be sold to the tune of 10 cents on the dollar?

My guess is that there will be a time when mainland China's trade surplus no longer is there to cover their inefficiencies, and foreign investors suddenly find themselves holding nothing. Hard to tell how long it will take before China defaults on their foreign loans.

My intuitive guess is the AG will keep interest rates constant, now that the markets have recovered a bit. Perhaps he will wait for european rates to drop some more before acting again. I do not know what to think about the negative effective interest rates in Japan -- when the Japanese have to pay people to take Japanese Yen, that is certainly not a good sign -- it does not look like the Japanese banks have reached bottom yet. There is a mountain of distrust they have to overcome before Japan can rise out of their depression.

Short/intermediate term Gold stock trend:

I cannot decide whether we are inching toward the brink yet again -- or we are about to rally once more. What I fear is another financial meltdown, site of origin unknown. My guess is that the short/intermediate term in gold stocks is up -- but I have no intention of getting caught in yet another gold Tsunami surfer wipeout.

Comments, anyone?

3090971__RANDGOLD & EXPL CO GDXXX1 FOR 3 REVERSE SPLIT

Just a thought -- the Arab oil producers are sitting on their supplies -- all they have to do is cut production to hoard it some more. Could be that some non - producer types are doing the hoarding.

Just imagine what would happen to the price of oil if the missing oil turns up! Big profits for someone either way.

Terrestrial solar storms tend to be maximal in the second half of the sunspot cycle, and numbers/intensity correlate roughly with the numbers/intensity of the sunspots. This is based on the fact that two sunspots make up the base of what consists of a 'solar flare' --an arch consisting of piece of solar plasma that got away from the sun -- with magnetic fielld lines locked inside --

The definition of a terrestrial solar flare ( or more accurately a solar storm ) consists of the effects of these loops of plasma with sunspots on each end. Especially big ones can break off or otherwise spill electromagnetic energy and elementary particles into the solar wind, causing a terrestrial solar storm when they reach the earth.

We could very well have some big terrestrial solar storms around y2k extending into 2002 or later, given the phase of the current sunspot cycle we are in. Unfortunately one cannot predict the occurrence of a big solar storm theoretically ( except that they occur during periods of high sunspot activity ) . So -- all one can do is watch the sun -- because it will take a day or so for the elementary particles of a solar storm to sweep over the earth.

A big solar storm is likely to have a major impact on our satellites, and power grids -- as they have in the past. My intuitive guess is that the solar storms from this current sunspot cycle are very likely to have a serious disruptive effect on the 500 or so satellites currently in orbit -- much more serious than the effect of the Leonid shower.

As you know, I have also noted that rising sunspot activity tends to correlate with rising US markets for reasons unknown. Some connection with human activity I guess. I do not look forward to what may happen to the markets/economy when sunspot activity starts to peak -- about the time the solar storms start to pick up.

Sharefin, the geek concerns are just too geeky ;- ) I would be worried much more about our inability to test all interfaces instead of lack of windowing standards. It's impossible to get agreement and synchronize interface testing between all external entities.

Lack of windowing standards will not cause the problem in a short time. Typical window is if less than 50 year is 20xx else year is 19xx. Sure, you can see windows 1930 through 2029, 1933 through 2032, etc. The point is that most dates in EDI interfaces have a short span, e.g., orders with delivery due date month ahead, financial results for the last year, etc. Windows without standards will work just fine until you start reaching window boundaries. Most of dates in interfaces where this may be a case ( e.g. date-of-birth ) are already handled as 4 digit years ( at least in systems I went through ) . Think about it this way, if we dealt with dates spanning the century and passing them as two digit years, systems would already be failing on massive scale. So far they don't.

Pragmatism is what will get us through this mess. A lot of worries coming from technical geeks ( mind you - NOT ALL OF THEM ) are based on scenarios which may never play. On the other hand, many geeks due to a narrow point of view doesn't think about real dangers hidden in complexity of modern society which so much depend on computers.

http://www.nypostonline.com/business/7250.htm

There is nothing new about the PPT. Apparently something like this happened over 100 years ago in the US. Looks like a good idea on the surface -- smooth out all the twitches so that the markets don't swoon. Only problem is -- if the PPT gets carried away then the markets get even more out of equilibrium from reality. And -- what if the PPT gets confused one day -- and pushes when it should have pulled? Or even worse -- runs out of money and forgets to tell anyone until it is too late? What if some of the biggest hedge funds are part of the PPT, and they fail to tell the FED they have a liquidity crisis?

Talk about insider trades -- is it fair for the insiders that work with the FED to know about the PPT and when they prop up the markets? I doubt you will ever hear about the SEC investigating the PPT.

http://quote.yahoo.com/a3?u

http://www3.techstocks.com/~wsapi/investor/reply-6339546

Off to buy a downtrodden Y2K tech stock....

Why Rubin?!

Oil Analysts Can't Account For Some 300 Million Barrels

By STEVE LIESMAN Staff Reporter of THE WALL STREET JOURNAL

Oil analyst Michael Rothman was crunching the global crude-oil data in April, when he came across a big problem: His trusty numbers didn't add up. A 14-year veteran of the oil statistics, Mr. Rothman of Merrill Lynch & Co. usually found a way to explain these things with a little massaging of the spreadsheet. But this time, the answer wasn't in the computer.

What Mr. Rothman and a host of other oil-industry analysts and experts had uncovered was that a veritable tidal wave of oil was missing -- almost 300 million barrels of it.

No one knows where the oil is. Some think it could be floating at sea or stashed away in shadowy storage facilities. Others think the barrels are a statistical aberration, merely a large spreadsheet error. Regardless, just about everyone in the world oil industry is desperate to solve the case. Washington politicians, Saudi oil sheiks and New York traders are in on the hunt, trying either to prove the oil doesn't exist or find the missing barrels before they come crashing down on world markets.

Last week, an analyst in London using an old map said he may even have discovered the treasure scattered around the globe. The missing oil is all too real, says Leo Drollas of the Centre for Global Energy Studies, either moving toward consumers or in floating storage. Anyway you measure it, 300 million barrels is a lot of oil to lose. It would fill about 135 tankers. Trouble is, nobody has actually seen the stuff nor has anybody reported it missing. The official numbers just don't add up, and the discrepancy is bigger than anybody can ever remember.

Here's why: Month after month amid the current oil glut, world oil supply has been outstripping demand. That's why prices have been going down. Usually, the extra oil shows up in official inventory figures. This time, inventories didn't swell near enough to soak up the extra crude.

What makes the missing barrels so important is sheer size, more than double the officially counted surplus. If the oil is found, markets could

be in for a rough downhill run at a time when oil prices, in real terms, are already cheaper than they've been in more than a decade. Oil producing countries, from Saudi Arabia to Venezuela to Russia, are reeling from the lost revenues. Companies are cutting back on exploration and writing down property values.

If this oil is sloshing around the world somewhere, crude-oil prices could remain low for several years. That is, unless the Organization of

Petroleum Exporting Countries, scheduled to meet later this month,decides to cut back production far more drastically than it has done already. By way of example, the Saudis, the world's largest producers, would have to stop pumping oil entirely for 37 days to rid the world of the missing barrels.

On the other hand, if the oil isn't there and the data are bad, prices could climb fairly quickly. In fact, OPEC might actually have overdone its cutbacks and shortages could occur. It means there is less oil available world-wide than the consensus thought, says George Yates,

chairman of the Independent Petroleum Association of America, an industry group that argues the missing oil is just a statistical anomaly.

The IPAA has focused its anger on the International Energy Association, the world's leading authority on petroleum statistics. Formed in response to the 1973 oil embargo to give consuming nations a better picture of supply and demand, the IEA has come under fire for consistently overstating supply. In response to outcries from small oil producers in his state, Sen. Pete Domenici, a Republican from New Mexico, recently asked the U.S. General Accounting Office to examine how the IEA collects and processes its data. The situation is troubling, Mr. Domenici wrote to the GAO. But the IEA, which will release its latest figures Monday, and several petroleum analysts defend the numbers. While admitting theirs is an inexact science, and acknowledging possible revisions, the IEA says the missing oil is out there and just remains to be found. We can't find too many places where the numbers could be wrong, says David Knapp, editor of the IEA's monthly oil reports. With Asian economies in the doldrums, Mr. Knapp says it isn't likely that the demand numbers are the errant inputs. This is a very surprising difference, he says. But these are very different times.

Mr. Drollas of the Centre for Global Energy Studies in London thinks he knows where it could be. One day recently, an associate of his remembered that they had a map of the world's petroleum storage facilities. Rummaging around the library, they found the old wall-sized chart buried in the clutter and spent several hours scanning it into the computer. After several more hours, they put the map's information into a spreadsheet. To their surprise, they found 612 million barrels of independent storage capacity around the globe that doesn't belong to oil companies or governments but is out there for hire. We were staggered to find there was that much storage around, Mr. Drollas says.

To be sure, a lot of the storage is in Europe and the U.S. and is orobably counted by the IEA. Yet 20% of it is in Africa, the Middle East, Asia, China and Latin America, outside the domain of the data collectors.

Mr. Drollas's report doesn't prove the missing oil exists. But it does answer critics who say the oil isn't there because there isn't any place it could be.

Mr. Drollas next looked at the tankers. What he found was that a lot more oil has been loaded onto ships than has been recorded coming off. Either the tankers are being held at sea, used as floating storage, or they are unloading in places where the flow can't be counted.

As proof of his theories, Mr. Drollas notes that shipping costs remain high, suggesting heavy tanker demand. His conclusion: The majority of

the missing barrels are out there, hanging over the market and exerting downward pressure on oil prices.

Mr. Drollas's final evidence is the price of oil. He says the wayward oil probably has been responsible for cutting short every oil rally this year, despite the OPEC cuts. Each time the price rises, he contends, some of this oil comes flooding onto the market.

What everyone agrees is that, given the significance of oil in the world economy, the data should be at least as good as that for, say, orange-juice concentrate. But many countries guard their crude production as a state secret. Most oil companies refuse to reveal how much they have in storage. The result is a perennial boom and bust cycle.

Meanwhile, Mr. Rothman keeps working over the data. He leans toward the camp that thinks the oil doesn't exist. But it remains a mystery. I still have not reconciled these numbers, he says.

PS..answer you ICQ!!!