Notes From Underground

If it is Thursday it must be another major Euro summit in Brussels. There is so much chatter about the outcomes and German capitulation that is impossible to conjecture the result. Will George Soros’s apocalyptic prognosis bear fruit or will the European policymakers provide enough initial capital to help stem the financial cliff for another three months and allow the EURO ELITE to enjoy the beaches of Spain and Greece? So before we return to the SUMMIT let’s examine a few other financial thoughts.

***ARE THE SWISS GOING TO COMMIT FINANCIAL SUICIDE? HYPOTHESIS: The Swiss National Bank has resigned itself to defend the 1.20 EUR/CHF crossrate and in so doing has committed to buy EUROS at that level. The question the SNB needs to ask is what happens if the GERMANS were to abandon the EURO and leave the PIIGS at trough and create a DEUTSCHE MARK ZONE? The Swiss would be the bagholders for a huge amount of depreciating EUROS while the most valuable part of the EURO project was denominated in D-MARKS.

There is speculation that it is the SWISS who are pushing German SCHATZ to record lows as the SNB is buying two-year German paper with the EUROS they buy to maintain the cross. I have no certainty to this but if I ran the SNB that is certainly one way I would hedge my exposure. If the SNB is not buying German DEBT, then the answer to the question is that they stand to commit FINANCIAL SUICIDE. This possibility is just another variable in the game of disruption caused by the credit crisis in Europe.

***An interesting story yesterday was that the long-awaited merger between XSTRATA and GLENCORE looked to be falling apart. Some large shareholders in Xstrata were pressing the BOARD to ask for an increased price and thus were threatening to block the merger. RUMORS AROSE THAT GLENCORE WOULD WALK AWAY FROM THE DEAL BECAUSE OF ALL THE ACRIMONY. This merger has been the biggest commodity story of the year and if the two parties were going to cancel the deal  it would seem that GLENCORE FELT IT WAS PAYING TOO MUCH FOR XSTRATA IN AN ENVIRONMENT OF SOFTENING COMMODITY PRICES (except grains).

There have been several stories about the Chinese economy slowing and the impact the slowdown is having on raw material prices. Rumors abound about bulk cargo ships sitting off Chinese ports and nobody desiring to take delivery of pre-arranged shipment for lack of funds. If global commodity prices are headed lower, GLENCORE may believe that it could make a better deal in the future for XSTRATA. It seems that XSTRATA’s newfound greed is giving GLENCORE the excuse to walk on the deal. IF GLENCORE ALLOWS THE DEAL TO COLLAPSE BY NOT MEETING XSTRATA’s INCREASED DEMANDS,IT MAY BE A PRECURSOR TO FALLING COMMODITY PRICES.

IF THIS IS CORRECT, A TRADE THAT WOULD COME TO MIND IS LONG GOLD AND SHORT COPPER. COMMODITY PRICES REFLECTING INTERNATIONAL SLACK WILL SIGNAL THE WORLD’S CENTRAL BANKS THROWING ALL CAUTION TO THE WIND ON THE NEXT ROUND OF QE. This is something to pay close attention to as the rumors of a Chinese slowdown begin to gain traction. Looking at the world right now I would advise XSTRATA TO TAKE THE MONEY AND RUN.