Financial Update

· TSX -487.88pts plunging more than 3%, weighed down by falling commodity prices and closing in on January's 2008 low. Since last Tuesday, the index has fallen more than 11 %.
· Dow -280.01pts In New York, stocks slumped also as worries about the ability of U.S. investment bank Lehman Brothers to raise capital, fueled concern about the broader banking sector, sending the Dow Jones industrial average down 2.42%
· Dollar -.51c to $93.92US.
· Oil -$3.08 to $103.26US per barrel Oil prices tumbled on expectations OPEC would leave output targets unchanged and as the hurricane threat to U.S oil operations in the Gulf of Mexico eased.
· Gold -$10.40 to $787.10US per ounce
Many people have “conspiracy theories” regarding the government and the economy. Below is an editorial with an interesting perspective on the recent market fluctuations.


The real reason commodities are tumbling

JOHN HEINZL Globe and Mail

To hear Donald Coxe tell it, the commodity selloff ripping through Canada's stock market is no accident. It is the result of a deliberate, brilliantly executed plan hatched at the highest levels of the U.S. Federal Reserve and Treasury.

Mr. Coxe is no paranoid conspiracy theorist. As the chairman and chief strategist of Harris Investment Management in Chicago, he is one of the most respected investment authorities in North America. He also happens to have lost about 10 per cent of his personal wealth in the commodity rout, which came at the worst possible time for his Coxe Commodity Strategy Fund that started trading in June.

“This has done more damage to my personal wealth than anything in the last 20 years,” he said in an interview yesterday. But he has too much respect for how the U.S. authorities engineered the collapse in commodities – a move he said was necessary to shore up the global financial system – to be bitter.

“My attitude is, goddamn it, they're good … it was brilliant.”

To understand why commodities are plunging now – the S&P/TSX plummeted another 488 points yesterday – you have to go back to mid-July, when the U.S. Federal Reserve and Treasury first announced steps to support mortgage giants Fannie Mae and Freddie Mac.

The move, which ultimately led to the Treasury taking control of Fannie and Freddie this week, touched off a chain-reaction of market events that culminated with the wrenching decline in commodities.

According to Mr. Coxe, the Fed's ultimate goal was to trigger a rally in financial stocks, which would, in theory, help banks hammered by the credit crisis raise fresh capital and repair their balance sheets. To accomplish this, the decision to support Fannie and Freddie was deliberately announced on a Sunday, which had the effect of maximizing the reaction from thinly traded financial stocks on overseas markets.

Because many hedge funds were using massive leverage to short financials and go long on commodities, when North American markets opened and banks initially rallied, the funds were forced to cover their short positions.

At the same time, the U.S. dollar was rallying because the risk of holding Fannie and Freddie paper had diminished. The rising dollar, in turn, made commodities less attractive, giving funds that were already scrambling to cover their financial shorts another reason to dump oil, grains and other commodities.

The losses were swift and dramatic. On the Friday before the July 11 announcement, crude oil closed at $145.18 a barrel. Over the following five days, it plunged 11 per cent. “Leverage was being unwound dramatically,” Mr. Coxe said on a conference call last week. “We had a true panic.”

As oil and other commodities were tumbling, fears about the slowing global economy were mounting, giving resources another push downhill. This was also in keeping with the Fed's wishes, because lower commodity prices would help quell fears about inflation.

Mr. Coxe has no proof that the Fed and Treasury acted in concert to boost financials and sink commodities. He is basing his assertions on conversations with hedge fund managers and on years of watching financial markets. “There's no doubt whatever in my mind” about what happened, he says.

The future is less certain, however. Now that Freddie and Fannie have been nationalized, the credit crisis is still very much alive and financial stocks are looking as shaky as ever. As for commodities, once the current storm passes, Mr. Coxe is confident they will recover.