"Today, we look at the world through rose-coloured glasses and this is what we see:
1. Everything is fine on the inflation front because no one needs things like food and energy.
2. Everything is fine regarding the US Trade Deficit because it did not grow as much as expected.
3. Everything is fine at Refco because it cannot be allowed to fail but in all probability will end up a name only with other entities taking over their business.
4. Consumer Confidence is at the lowest level in 13 years but that's OK because it is all weather related.
5. The oil price is off and talking heads now see that as a permanent feature so everything is OK in the energy sector.
6. Retail sales, although down, were just dandy - if you exclude autos. Sure, why not exclude autos, then clothes, then groceries and of course don't forget to exclude appliances.
The Dow closed 70 points higher today and the financial TV commentators were simply giddy because all is fine in La-La land."
A great comment by Jim Sinclair from his MineSet website. This was also worth reading:
"Dear Jim:
Another observation on the disconnect between the major financial markets this week and the reality that you pointed out in your piece earlier this afternoon.
One phrase can be used to describe exactly what the monetary authorities must achieve at all cost: “Avoid any loss of confidence.”
When you really sit down and think about it, our entire system runs on “confidence,” something so elusive and so fickle that it is difficult to describe exactly what its true nature actually is but very easy to detect once it is gone. Its absence speaks like a clap of thunder, a case in point being Refco.
When you consider the scale of Refco’s business and the amount of money that was involved in setting off the chain of events that transpired this week, it is quite shocking to realize just how quickly things unraveled.
Here are some facts about Refco courtesy of Reuters:
MAIN FACTS:
Employees - 3,000 in 14 countries
Futures accounts worldwide - 250,000
Assets - over $20 billion
Client equity - over $4 billion
Shares outstanding - 127.5 million
OPERATIONS:
Refco Inc: Holding company for Refco's operations.
Refco Capital Markets: Brokerage services for execution, clearing, securities financing and lending, custody and trade processing, primarily in U.S. Treasuries and foreign exchange.
Refco Global Futures: Allows customers to trade in interest rate and equity index swaps, energy agriculture, foreign exchange and metals contracts across all derivatives markets.
Revenues : $1.3 billion in fiscal 2005, a compound annual growth rate of 23.6 percent since 2000.
Operating Profit: $150.6 million in fiscal 2005, a compound annual growth rate of 19.8 percent since 2000.
Of course the news that precipitated this debacle involved a $430 million uncollectible debt owed the company which was hidden by a series of sophisticated accounting gimmicks. While that is indeed a huge sum of money for an entity the size of Refco with $20 billion worth of assets, it is not in itself, in my opinion, enough to take down the company nor does it explain the sheer speed at which things went from bad to worse, especially considering the fact that Refco claims the entire sum, plus interest, was repaid.
On Monday of this week the news broke and by Friday - a mere 4 days later - the largest FCM in the futures industry is now the subject of bankruptcy speculation.
How could this have happened with such stunning rapidity? The answer is simple and yet terrifying in its implications: loss of confidence. Once the company’s financial position was called into question vis-à-vis the validity of its books, its stock price began to drop as nervous investors do what they always do when confronted with fear or doubt – they sell first and ask questions later. The selling turned into an all out rout as the selling fed on itself, eventually causing trading in the stock to be halted. The stock closed at $28.50 last Friday and had fallen to $7.90 on Thursday of this week. Refco’s market cap is simple gone, vanished, vaporized.
Refco's debt collapsed as well as terrified bond holders panicked and unloaded the debt, hoping to be the first in line to get rid of such a hot potato. At one time in intraday trading today, Refco’s 2012 notes, which bear a coupon of 9 percent, traded as low as .16 on the dollar before they finally settled at .305 on the dollar. That is an astounding yield of over 38%! Talk about a risk premium.
The summary of all this is that one unexpected incident set a series of events into motion which more than likely will see a financial powerhouse bankrupt within the course of one week. Think about what we just witnessed.
Now consider the mountain of sewage called unregulated derivatives that are lurking out there and how easily and how quickly an event out of nowhere could arise which results in an exact repeat of the above scenario. Consider the shockwaves that it would send through the system. I can tell you that FEAR was running rampant in the futures industry this week as a result of this one company’s troubles.
With today’s computerized trading systems and the ease in which money can be moved electronically, one single event could see billions of dollars - if not trillions - disappear into the nether world in a day’s time as questionable derivative transactions come to light and computerized models fall apart like a house of cards when crunch time arrives.
Now do you see why you need to maintain a core holding in gold and why the “trade-everything-all-the-time” nitwits will one day trade themselves into oblivion? Do you also see why the “top pickers” in gold are playing with fire and will one day fly too close to the flames, setting themselves and their unthinking disciples ablaze in the process?"
