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XMFSinchiruna (26.58)

Capmark and CIT ... harbingers of persistent systemic risk



October 27, 2009 – Comments (11)

Please don't overlook the significance of these failed institutions. They are each a very big deal in their own way. Due to CIT, retailers and other consumer-focused business are scrambling to find alternate lines of credit within a still stagnant credit market. The banks would still rather sit on slightly leveraged free gov't capital than lend it out to Mom or Pop or anyone else for that matter.

Capmark was formed from the commercial real estate segment of GMAC, and its failure announces the falling of this long-anticipated domino within the much larger sequence of dominoes still at risk within the ongoing derivatives deleveraging event. At $360 billion in total debt serviced, this is no small blow to the credit markets.

“The Capmark bankruptcy reinforces that, in the case of institutions with large concentrations in commercial real estate, current disruptions to the market have the potential to impact their viability,” said Sam Chandan, president and chief economist of Real Estate Econometrics LLC, a commercial real estate consulting firm in Manhattan. 

And we still have round II of the residential real estate crisis looming!

If gold breaks below $1,033, it will mean that the crucial 0.76 pivot point on the USDX that I identified for Fools here and here has found support, and any second round of indiscriminate equities selling that may ensue could indeed drive interest in the dollar from those investors who don't know any better. The well-informed investor will be buying precious metals amid the selling, while the ill-informed will flock to Treasuries and thereby construct even greater bargains for the savvy. My discussion from this blog still applies as to expectations for the extent of any gold correction and dollar rally, but if we see another spate of major failures stemming from this CIT / Capmark one-two punch along with the mountng bank failures and everything else ... then those expectations could prove optimistic.

Here are those expectations delivered as a rebuttal to GV on October 12:

For the record, gold already has posted a major advance from $1,005 where you called a top on October 4, to $1,060 ... officially canceling the 18-month corrective range-bound phase between $700-$1,033. Whether that advance is extended or interrupted going forward hinges upon the key technical pivot point of 0.76 on the USDX ... which is presently the line in the sand that will determine the next near-term move within the broader multi-year bull market for precious metals.

It is entirely possible for gold and silver to take a breather here after an explosive run (again depending upon the action in the dollar). While a blip of near-term strength in the USDX is plausible if investors are spooked back into Treasuries by another precipetous decline in the broader indeces (which I agree is imminent), the dollar raly will be far smaller and shorter than the prior reversal as the fundamental environment has changed inalterably.

I think $1,000 now has a chance of holding as a floor beneath gold, but consider $980 as a far greater foundation of support. In the unlikely event that $980 breaks amid a truly miraculous and manipulated dollar rally [Oct 27 addition: or renewed round of panic-induced indiscriminate flight from equities], then $950 and $900 stand as bastions of reinforcements behind the gold price. The likelihood of a test of $900 is extremely slim IMO.


11 Comments – Post Your Own

#1) On October 27, 2009 at 10:57 AM, leohaas (30.12) wrote:

Systemic risk indeed still exists. The 'too-big-to-fail' companies have not been broken down yet into smaller, not-too-big-to-fail entities. Until that happens, the risk of another collapse remains. Yet I hear very few calls for regulation into that direction here on CAPS...

Gold (and silver) will take a breather at some point. All investments in a long-term bull cycle do that. You have correctly argued that the long-term bottom for gold is around $600 because that is how much it costs to harvest an ounce. That number will only go up unless the alchemists come up with a break through.

Just one question:

"The banks would still rather sit on slightly leveraged free gov't capital than lend it out to Mom or Pop or anyone else for that matter."

This one does not make sense to me. Banks make money by lending out money! That is the core of their business. I understand that they have become a lot more careful about whom they lend to (and for what purpose), but in the end if they want to make money (and what business doesn't), they have no choice but to lend out money.

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#2) On October 27, 2009 at 11:30 AM, rd80 (94.71) wrote:

Banks make money by lending out money!

But they are lending out money - they're loaning it to the gov't.  With Fed rates near zero, banks can borrow from the Fed and buy Treasuries a little ways out the yield curve.  Margins are thin, but they add a zero risk asset to their balance sheet.  The only risk for them is the Fed raising short term rates - very unlikely with unemployment near 10% and still climbing.

They get a better spread on commercial loans, but that adds a credit risk.  

It's a circle.  Treasury and the Fed provide money to banks via the discount window, TARP, etc.  The banks can turn around and loan the money to fund those programs right back to the gov't with little of the money finding its way to the commercial markets.

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#3) On October 27, 2009 at 11:36 AM, blake303 (28.47) wrote:

At $360 billion in total debt serviced, this is no small blow to the credit markets.

In itself this is not a big deal. The servicing business will continue under a different name. Capmark can exercise a put to sell servicing to a Berkshire & Leucadia partnership. The larger risk to credit markets will be the elimination of loan originations, which totaled $10B last year (and were likely larger in the past).

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#4) On October 27, 2009 at 11:40 AM, silverminer (30.03) wrote:


For the record, I have made no such argument with respect to $600 gold. What I did say to GV was that his expectation for $600 gold was entirely implausible on the basis of all-in production costs. There's a BIG distinction there. If anyone knows a dozen or so industry CEOs well enough to call them and ask them to share their (usually private) all-in cost estimates, I'm all for updating a current industry average.

Some 16 months ago, I offered the best available estimate of the all-in cost of production for the industry as $700, which turned out to be precisely the pivot point in the 18-month correction phase for gold.

I would GUESS that the industry-wide all-in cost currently hovers around $800.

However, it will not come down to a test of the all-in cost in this particular pause for gold. Investors need to realize that we've only just emerged from a massive 18-month correction ... it's WAY too soon to be expecting another major dip. I truly think $1,000 will hold, and if not $980 below it. This is nothing but a blip. Of course, I seem to recall saying that the March 2008 reversal would be nothing but a blip when it first presented ... :) These markets are anything but predictable, and only the fundamental developments within the broader landscape for the dollar will determine the near-term trajectories within an immutable long-term trend.


As for this question:

This one does not make sense to me. Banks make money by lending out money!

Leohaas ... where have you been my friend? Banks making money by lending money is SO passe! :) In the new reality, banks make money by borrowing money virtually for free from the federal government and leveraging it up to wheel and deal the capital in all sorts of ways. Didn't you hear? ... Goldman Sachs is now a bank holding company. :) I'm sure you can imagine the range of activities these institutions are engaging in to manufacture profits in ways that circumvent their historical reliance upon lending.

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#5) On October 27, 2009 at 1:40 PM, peachberrytea (26.50) wrote:

this is from a previous blog post, but i'm trying to understand the case you make that china has decoupled from the US... are there some statistics, etc. that indicate china has the domestic demand to decouple, for example?


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#6) On October 27, 2009 at 2:15 PM, silverminer (30.03) wrote:


The evidence is all laid out in my "Tale of Two Recoveries" post.

The decoupling has already occured, as China is already advancing a robust recovery built upon a targeted focus on its industrial base that continues to thrive even amid horrendous export demand from traditional sources in Europe and North America. China leveraged its stimulus package in all the right places, while ours has been yet another exercise in mismanaged futility. It is moving aggressively to trade in alternate currencues with key emerging market partners, and will eventually find a broadening geographical scope of export demand from those emerging economies that are able to find relative strength as fiscal conditions in the U.S. and Europe continue to deteriorate in a currency and derivatives crisis of massive proportions.

You want statistics? How about China importing 10 times the volume of met coal and 5 times the volume of thermal coal YTD in 2009 versus the same period in 2008? That one statistic screams volumes, as the scale of the difference is far greater than can be accounted for merely by the mammoth efforts to shore up strategic stockpiles.

How about nearby Korean bellwether POSCO operating at 92% of capacity while Nucor indicates the U.S. steel industry improved to just 69%.Looking to comparative outlooks, POSCO expects to return to peak 2008 production levels in 2010, while Nucor has called the domestic challenges the "grandaddy of all jobless recoveries".

Coal and steel are two of the most crucial bellwether sectors to illustrate relative industrial strength, and since the American consumer will continue to find household finances monstrously impaired for the better part of a decade, it is principally relative performance in the industrial base along with relative lack of exposure to the currency meltdown that will shape tomorrow's balance of economic power.

Decoupling is all about relative strength. It doesn't mean that China's growth trajectory will not lack significant challenges of its own. It just means that over the long haul China lacks those fundamental obstacles to sustainable recovery that the U.S. and Europe face (principally the lion's share of the derivatives crisis and thecurrency-related implications of misguided reflationary fiscal policy).

Fool on! :)


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#7) On October 27, 2009 at 4:53 PM, peachberrytea (26.50) wrote:

i see, thanks sinch

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#8) On October 27, 2009 at 10:35 PM, Tastylunch (28.54) wrote:

You dn't have to tell me about what the failure of CIT means. :(

They bankrupted one of my wholesalers when they called in their loans and line of credit  in desperation.

An 80 year old company doing  250 million in revenue annually gone like that.

I agree dollar relief rallies look to be good gold buying opportunities dadly now. The debate looks to be over.

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#9) On October 29, 2009 at 3:45 PM, puccini3005 (30.11) wrote:

Sinch, Sorry to be off-topic here...  I'm wondering if you're going to cover the AEM Q3 results.  I know that's one you follow closely, so I'd like to hear your thoughts on it.  Thanks!

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#10) On October 29, 2009 at 4:57 PM, silverminer (30.03) wrote:


I will indeed ... will be out tomorrow. In short, it's no skin off the back of a long-term investor like me. :) If I weren't restricted from buying shares within a certain number of days to either side of writing an article, I'd be scooping up shares here in a big way.

The market always overreacts to these mine commissioning hiccup stories because the market is always short-term focused.

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#11) On November 06, 2009 at 2:58 AM, puccini3005 (30.11) wrote:

Sinch, Thanks!  I did read (and rec, as always) the article.  Sorry I didn't make it back here till now to comment.  I was looking for that "...$23 million non-cash hit from the weakening U.S. dollar..."  This continues to bug me - investors (in gold mining stocks) take hits when the dollar rallies, and then again when earnings come out BECAUSE OF a weakened dollar!  I know you addressed this issue in greater depth w/ Yamana, and I'm guessing you consider these items small potatoes next to the potential of some of these stocks (as you also indicate in your article) with where you see gold going.  I'm with you on Gold, but I must confess I'm fighting some disenchantment with the miner stocks...

BTW - I checked out your KGC and Yamana articles today, nice work.  I guess I could respond on your articles, instead of coming back to unrelated blogs, but it seems you almost always respond to comments on your blogs, but seldom in your articles... is this policy?  Sorry about some of my Faulknerian-like runons here...

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