Capital Gold Group Report: Gold Rises in N.Y., Heading for Quarterly Gain; Silver Declines

By Pham-Duy Nguyen

March 31 (Bloomberg) — Gold rose in New York, heading for a second straight quarterly gain, on speculation that a weaker dollar will boost the metal’s appeal as an alternative asset. Silver fell.

The U.S. Dollar Index, a six-currency gauge, fell as much as 0.9 percent, halting a three-session rally. Gold and the dollar are inversely correlated. . .

“For investors who are concerned about the long-term prospects of the U.S. dollar, gold may be attractive,” John Reade, a UBS AG metals strategist, said today in a report. “In an environment where the reserve currency of the world could become shunned, gold could do extraordinarily well.” Gold futures for June delivery rose $2.80, or 0.3 percent, to $920.50 an ounce at 11:27 a.m. on the New York Mercantile Exchange’s Comex division. The most-active contract is up 4 percent this quarter, which would be the biggest quarterly gain in a year.

Silver futures for May delivery fell 19.8 cents, or 1.5 percent, to $12.835 an ounce in New York. The price has jumped 14 percent this year, which would also be the biggest quarterly gain in a year.

Gold and the dollar usually move in the opposite direction. Gold has posted gains every year since 2001, and the dollar has only risen in three of those years.

Devalued Currencies

Investors may also purchase gold as central bank policies to ease borrowing costs devalue currencies, analysts said. Gold priced in euros and pounds reached records in February. Gold futures rose to an all-time high of $1,033.90 on March 17, 2008 and reached $1,007.70, the highest this year, on Feb. 20. . . .

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Capital Gold Group Report: Bankruptcy Leads Possible Plans for GM, Chrysler; Dow Falls 250 Points; GM falls 25%

MARCH 30, 2009, 4:52 P.M. ET

By JEFFREY MCCRACKEN, MONICA LANGLEY, and JOHN D. STOLL

WASHINGTON — The Obama’s administration’s leading plan to fix General Motors Corp. and Chrysler LLC would use bankruptcy filings to purge the ailing companies of their biggest problems, including bondholder debt and retiree health-care costs, according to people familiar with the matter.

The move would in essence split both companies into their “good” and “bad” components. The government would like to see the “good” GM to be a standalone company, according to an administration official. The “good” Chrysler would be sold to Fiat SpA, assuming that deal is completed, this person said.

GM and Chrysler have had bankruptcy attorneys devising plans for such a move in recent months.

President Barack Obama’s task force has told both companies that the administration prefers this route as a way to reorganize the two auto makers, rather than the prolonged out-of-court process that has thus far frustrated administration officials.

GM looks increasingly like it will be forced into filing for bankruptcy protection, sometime in mid-to-late May, in a plan where the automaker breaks into two companies, the surviving entity a “new GM” that maintains key brands such as Chevy and Cadillac and some international units, say several people familiar with the situation.

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Capital Gold Group Report: Gold Remains Resilient Despite Sell-Off in Commodities; Long-Term Trend is Higher

03/30/09 03:14 pm (EST)

(CEP News) – Growing negative sentiment is causing investors to move out of commodity markets, which is also helping to drag down gold prices.Gold prices are modestly weaker Monday afternoon, trading in the mid-$951 per ounce level. There was an increase in volatility early in the North American session. Prices dropped to session lows of $908.60 just ahead of the open.

Following the open, prices spiked higher to $932.50. However, the gains were short lived as risk aversion sentiment dragged prices into negative territory.

According to some commodity strategists, grim news from the U.S. auto sector is helping to weaken all commodity prices, including those for gold.

The Obama administration’s autos task force rejected the restructuring plans from GM and Chrysler. Chrysler has 30 days to close a deal with Fiat or could be forced into bankruptcy. Meanwhile, GM now has 60 days to restructure its plans. GM CEO Rick Wagoner stepped down at the request of the White House.

Despite Monday’s broad sell-off, Aaron Fennell, commodity futures broker at MF Global Canada, said gold prices are holding up reasonably well. He pointed out that oil prices are down over 7% on the day, while gold prices are down 0.4%.

“The news creates some risk that the recession could be worse than expected,” Fennell said. “Gold is a resilient commodity and we are seeing that today. We have seen the dramatic moves in the last few days.”

Mike Glaser, futures broker at LaSalle Futures, said he is expecting gold to continue to bounce around a broader range of between $900 and $960.

“We are trading below the 50-day moving average [on Monday] and I think overall we will see some short-term weakness but, in the long term, prices will trend higher,” he said. “I am still looking at buying on dips.”

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Capital Gold Group Report: FEDS SEIZE CONTROL OF TWO TOP U.S. WHOLESALE CREDIT UNIONS

U.S. Seizes Key Cogs for Credit Unions

MARCH 21, 2009

By Mark Maremont

In the latest move by federal authorities to prop up the nation’s banking system, regulators late Friday seized control of the two largest wholesale credit unions in the U.S. after finding that their losses on mortgage-related securities were larger than previously thought.

U.S. Central Corporate Federal Credit Union in Lenexa, Kan., and Western Corporate Federal Credit Union in San Dimas, Calif., which have a total $57 billion in assets, were taken into conservatorship by federal regulators.

Michael E. Fryzel, chairman of the National Credit Union Administration, the industry’s federal regulator, said the seizure was necessary to maintain the integrity of the credit-union system and protect the insurance fund that backs up deposits in thousands of retail credit unions.

The affected institutions don’t serve the general public. They provide critical financing, check clearing and other tasks for the retail institutions. These wholesale credit unions, known in industry parlance as corporate credit unions, are owned by their retail credit-union members.

The vast majority of regular credit unions, the bank-like cooperatives familiar to millions of account holders nationwide, are considered financially sound. Credit unions have more than 90 million members nationwide.

U.S. Central and Western Corporate have been grappling for more than a year with large paper losses on a slew of assets, mostly mortgage related. In January, regulators moved to prop up U.S. Central with a $1 billion infusion after it took big write-downs on some of the securities.

Mr. Fryzel said regulators acted Friday after becoming convinced that the two institutions were underestimating the true scope of their losses. “With us in control we’d get honest numbers,” he said. Mr. Fryzel said regulators plan to replace top management at both institutions.

In total, the 28 wholesale credit unions in the U.S. were showing paper losses of about $18 billion as of Dec. 31. Mr. Fryzel said regulators aren’t concerned about the health of any other wholesale credit union besides the two brought into conservatorship.

Mr. Fryzel said NCUA’s latest estimate is that wholesale credit unions will eventually have to realize between $10 billion and $16 billion in losses on their holdings. The agency on Friday also raised its estimate for what these losses will cost its insurance fund, to $5.9 billion from the prior $4.7 billion estimate.

NCUA had said it would make up the expected losses in the insurance fund by dunning the nation’s thousands of retail credit unions. But after an outcry from the industry, Mr. Fryzel said the agency’s board now plans to ask Congress in the coming week for authority to borrow money from the Treasury. He said the industry isn’t looking for a bailout, and would repay all such borrowings.

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Capital Gold Group Report: CHINA CALLS FOR NEW GLOBAL CURRENCY

By JOE McDONALD, 03.24.09, 12:49 AM EDT
China is calling for a new global currency controlled by the International Monetary Fund, stepping up pressure ahead of a London summit of global leaders for changes to a financial system dominated by the U.S. dollar and Western governments.

The comments, in an essay by the Chinese central bank governor released late Monday, reflects Beijing’s growing assertiveness in economic affairs. China is expected to press for developing countries to have a bigger say in finance when leaders of the Group of 20 major economies meet April 2 in London to discuss the global crisis.

Gov. Zhou Xiaochuan’s essay did not mention the dollar by name but said the crisis showed the dangers of relying on one nation’s currency for international payments. In an unusual step, the essay was published in both Chinese and English, making clear it was meant for an international audience.

“The crisis called again for creative reform of the existing international monetary system towards an international reserve currency,” Zhou wrote.

A reserve currency is the unit in which a government holds its reserves. But Zhou said the proposed new currency also should be used for trade, investment, pricing commodities and corporate bookkeeping.

Beijing has long been uneasy about relying on the dollar for the bulk of its trade and to store foreign reserves. Premier Wen Jiabao publicly appealed to Washington this month to avoid any steps in response to the crisis that might erode the value of the dollar and Beijing’s estimated $1 trillion holdings in Treasuries and other U.S. government debt.

The currency should be based on shares in the IMF held by its 185 member nations, known as special drawing rights, or SDRs, the essay said. The Washington-based IMF advises governments on economic policy and lends money to help with balance-of-payments problems.

Independent economists have suggested creating a new reserve currency to reduce reliance on the dollar but acknowledge that would face obstacles. It would need acceptance from governments that have relied on the dollar for decades and hold huge stockpiles of U.S. currency.

China has pressed for changes to give developing countries more influence in the IMF, the World Bank and other finance bodies. G20 finance officials issued a statement at their last meeting calling for such changes but gave no details of how that might happen.

Russia also has called for such reforms and says it will press its case at the London summit.

Zhou said the new currency would let governments manage their economies more efficiently because its value would not be influenced by any one nation’s need to regulate its own finance and trade.

“A super-sovereign reserve currency managed by a global institution could be used to both create and control global liquidity,” Zhou wrote. “This will significantly reduce the risks of a future crisis and enhance crisis management capability.”

Zhou also called for changing how SDRs are valued. Currently, they are based on the value of four currencies – the dollar, euro, yen and British pound.

“The basket of currencies forming the basis for SDR valuation should be expanded to include currencies of all major economies,” Zhou wrote. “The allocation of the SDR can be shifted from a purely calculation-based system to one backed by real assets, such as a reserve pool, to further boost market confidence in its value.”

Copyright 2009 Associated Press.

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Capital Gold Group Report: Central Banks Sit on Their Bullion Reserves

Falling gold sales and loans provide price support; IMF has 400 tons to unload

By Moming Zhou, MarketWatch

Last update: 5:04 p.m. EDT March 24, 2009

NEW YORK (MarketWatch) — The world’s major central banks, which hold more than 15% of above-ground gold, are expected to reduce their sales or lending of their bullion reserves this year, potentially restricting supplies and putting a floor under gold prices.

Several precious metals consultancies and the industry’s main trade group anticipate total sales from major central banks such as France and Switzerland will decline again this year. One estimate projects sales could tumble to their lowest level in at least a decade.

Fewer sales mean gold supplies, which have been retreating in recent years as mining production has weakened, are likely to keep falling short of demand.

As long as investor appetite stays strong – and that’s a big question mark, of course – this trend should support prices over the long term.

“Falling central bank sales have been a part of the gradual improvement in the overall balance between demand and supply in the gold market,” said George Milling-Stanley, managing director of the official sector at the producer-funded World Gold Council.

“There are a whole bunch of reasons why the [gold] price has been going up, and I think that lower supply has been one of those reasons,” he added.

Jon Nadler, senior analyst at Kitco Bullion Dealers, said falling central bank sales “might put a floor of some kind under gold, near $500 or so.”

Analysts also anticipate official holders such as central banks will lend less of their reserves, keeping with a trend of recent years. Some analysts say central banks’ loans of their reserves to mining companies and private banks contributed to a slump in gold prices in the second half of last year.

Another important milestone for the supply of official gold this year is the International Monetary Fund. The organization has said it plans to sell more than 400 tons of gold to diversify its revenue and strengthen its balance sheet.

Some investors are worried that the IMF sales could pressure gold prices, although the fund has said it plans to coordinate closely with central banks to minimize the impact of this large gold sale.

The IMF’s plan could provide a boost in getting central banks to extend an agreement expiring in September to limit how much gold they will sell every year. That deal, called the Central Bank Gold Agreement, has helped restrain central bank gold supplies over the past decade.

In Tuesday’s trading, the London afternoon gold fixing, an important benchmark for gold prices, stood at $923.75 an ounce. That’s $88 lower than the record high above $1,000 hit about a year ago.

Bank of England’s shocker

Central banks sell gold to rebalance their reserves portfolio by reducing the portion of gold. By selling gold, a country can switch into assets with higher return and better liquidity.

For example, Switzerland, which had held the most gold reserves per capita in Europe in 1999, has sold more than 1,300 tons of its gold reserves. Other major sellers in the past 10 years included France, the Netherlands, and the U.K.

Countries like France, where monetary policy is now set by the European Central Bank, still maintains its own central bank. The U.S. hasn’t sold gold.

In the past, abrupt selling has sometimes depressed gold prices. The Bank of England’s announcement in early 1999 that it was selling part of its reserves helped gold prices slump to a 20-year low. Gold traded at just above $250 an ounce by the summer of that year.

But efforts to coordinate those sales have reduced those shocks. On Sept. 26, 1999, 15 European central banks, led by the ECB, signed the first CBGA to take concerted moves on gold sales.

The banks agreed that in a five-year period, they will cap their total gold sales at around 400 tons a year, with sales in five years not exceeding 2,000 tons. The CBGA was renewed in 2004 for another five-year period. The second CBGA raised annual ceiling to 500 tons and the five-year limit to 2,500 tons.

“There is a general consensus in the gold market that the two successive CBGAs have been a success for the whole market and for central banks in particular,” said WGC’s Milling-Stanley.

Sales slip, slip some more

In the past 10 years, almost all the official gold sales have been from signatories of the CBGA. Their sales have fallen in recent years and are likely to fall further this year, analysts say.

VM Group, a precious metals consultancy based in London, estimated that selling under the CBGA will fall to 150 tons in the year ended Sept. 26. If realized, this will be the lowest number since 1999, when the first CBGA was signed.

The World Gold Council and CPM Group, a New York-based precious metals consultancy, also anticipate official gold sales will fall this year.

Central bank gold sales declined to 279 tons in the 2008 calendar year, more than 200 tons, or 42%, lower than a year ago, according to data collected by GFMS, a London-based precious metals consultancy.

The fall in official sales is a major contributor to the decline in global gold supply in 2008, GFMS data showed. Meanwhile, the portion of official sales in total gold supply also fell to 8% in 2008 from 14% a year ago.

“Central banks that wanted to reduce their gold holdings have sold most of the gold they wanted to sell by the middle of this decade,” said Jeffrey Christian, managing director at CPM Group.

But further selling could come from countries that still hold a big portion of gold in their reserves, such as Germany and Italy, according to analysts at VM. Earlier this year, politicians in Germany were talking about selling gold to fund the country’s stimulus package.

Borrowing and hedging

Aside from selling gold, some central banks also lend the metal to miners, big banks and funds. Miners borrow gold to sell forward in order to lock in their future revenue. Funds and banks sometimes sell borrowed gold to invest the proceeds in other markets.

Gold borrowed for these two purposes used to have a dramatic impact on the market because it was immediately sold in spot markets, said WGC’s Milling-Stanley.

VM estimated that total outstanding balance of central bank gold lending was at 2,345 tons at the end of 2008. That’s more than the year’s total mining production, the major source of gold supply.

Nonetheless, this balance has shrunk consistently since the late 1990s, reducing its impact on the markets. The balance in 2008 fell almost 50% from 2004’s more than 4,300 tons, according to VM.

“Gold mining companies have largely stopped selling production as a hedge, and the hedge funds have largely abandoned the practice of selling gold forward as a speculation,” said Milling-Stanley.

Miners reduced forward sales by 1.54 million ounces in the fourth quarter, the smallest amount for the year, according to GFMS. Gold producers still had 15.52 million ounces left in hedging at the end of the year.

Still, in the short term, gold borrowing can make a shift in prices.

From last August, when the global credit crunch hit the financial industry, bullion banks borrowed “as much gold as was available and executed gold swaps to raise liquidity,” VM analysts led by Carl Firman pointed out in a yearly report released earlier this month.

The activity had an “immediate and very marked affect” on gold by holding prices back, even in the wake of strong retail demand for physical metal, Firman wrote in a report.

Gold prices slumped nearly 30% from July’s high to below $700 in November.

By lending gold, central banks can earn interest on it. Unless central banks can lend out their gold, it earns nothing, and the stockpile in fact is a cost in terms of storage and insurance, said VM’s Firman in a telephone interview.

Despite some wild speculations, all evidence indicates that the U.S., the biggest gold holder, is not lending gold, said CPM’s Christian.

“The people, the gold conspiracy theorists who claim evidence, twist the truth like Uri Gellar twists spoons,” said Christian.

More than half of the 8,133.5 tons of gold held by the U.S. is stored in Fort Knox, Ky., according to the Treasury Department. Gold is also stored in West Point, N.Y., and Denver, Colo.

IMF has 400 tons to unload

The second CBGA is expiring in September. Milling-Stanley said he expected a new agreement will be signed. William Lelieveldt, an ECB spokesman, declined to comment on the potential renewal of the agreement.

One of the beneficiaries of a third CBGA will be the IMF, which is considering coordinating with central banks to sell 403 tons of gold.

The fund, which holds more than 3,200 tons of gold, ranking the third in the world after the U.S. and Germany, is facing a widening deficit. With the majority of its income coming from interest payment of the fund’s loans, the IMF has been looking for other revenue sources.

One of the plans is the creation of an endowment, with major financing for the endowment coming from the proceeds of gold sales.

The IMF acknowledged drawbacks of gold sales, but also said that the sales could “form part of a package approach” and should “subject to strong safeguards to limit their market impact,” according to the plan.

The sales “need to be coordinated with the existing and possible future central bank gold agreements,” the committee said in the report. By coordinating with the CBGA framework, IMF gold sales “should not add to the announced volume of sales from official sources.”

The WGC’s Milling-Stanley said the IMF is likely to help push through a third CBGA.

“The proposal was designed not just to plug the income gap, but also to put the IMF’s finances on a more diverse, sustainable and stable footing for the longer-term, and less subject to the ups and downs of the world economy,” wrote Matthew Turner, an analyst at VM, in a report.

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Capital Gold Group Report: FED MOVE COULD CREATE A DOMINO EFFECT OF WEAKENING CURRENCIES

REUTERS

HONG KONG, March 19 (Reuters) – The U.S. dollar steadied on Thursday after suffering its biggest daily plunge since 1985, while Asian government bonds rallied on a large-scale plan by the Federal Reserve to buy long-dated U.S. Treasuries, reviving a practice not used in decades.

Banks once again led Asian stocks higher on hopes for an improvement in the global financial sector and European equities opened higher after two sessions in a row of losses.

The Fed surprised investors on Wednesday by announcing it would buy $300 billion in U.S. Treasuries -- its first sizeable purchases of the debt since the early 1960s.

These efforts are part of Fed's intention to inject an additional $1 trillion into the ailing U.S. economy by also purchasing more U.S. mortgage and agency debt.
But analysts said the sharp expansion of the Fed's balance sheet could spew dollars into global markets and lead to an oversupply of the world's main reserve currency.

The actions also sparked concerns other central banks would follow suit, creating a domino effect of weakening currencies.

Central banks in Britain and Japan have already announced they would purchase their respective government debt, while the Swiss National Bank last week said outright it would sell francs to weaken its currency.

"Soon the entire G7 might have near-zero rates and have implemented quantitative easing in some shape or form, which makes it hard to pick a currency winner," RBS analysts said in a note to clients.

"Even so, the backlash against the U.S. dollar could last for some days and the downward pressure on the U.S. dollar will intensify if quantitative easing sustains the recovery in equities."

The announcement -- following a policy meeting that kept U.S. interest rates at nearly zero -- effectively seeks to print money to revive an economy in a practice known as quantitative easing.

The move to purchase longer-dated U.S. government debt, on top of regular purchases of short-term Treasury bills, is intended to feed into the U.S. economy via lower credit costs for consumers and businesses.

The dollar index, a gauge of its performance against a basket of major currencies, rose 0.2 percent to 84.324. But that came after a 3 percent slide on Wednesday that was its biggest one-day drop since 1985.

The euro initially extended its gains, hitting a two-month high of $1.3536 on trading platform EBS, after jumping 3.8 percent on Wednesday for its biggest one-day rise since its launch in 1999, according to Reuters data.

But the euro later trimmed its gains and was down 0.1 percent from late U.S. trading on Wednesday at $1.3462.

Analysts still expect the dollar to be hit, however.

"I think the dollar will continue to be sold across the board for the time being, over the next week or so," said Motonari Ogawa, a director at Barclays Bank in Tokyo.

In bond markets, U.S. Treasury yields remained sharply lower in Asia on Thursday, after plunging in the previous session by the most since the day after the U.S. stock market crash in 1987.

The yield on the benchmark 10-year note collapsed as far as 2.49 percent on Wednesday from just above 3.00 percent the day before, and was holding at 2.544 percent in Asian trade.

In Japan, government bonds also gained, pushing yields down across most of the curve. The country's central bank had said on Wednesday it would increase its buying of government bonds by nearly a third to help cushion the economy.
June futures jumped 0.72 point on the day to 139.57, while the benchmark 10-year yield fell 4.5 basis points to a three-week low of 1.255 percent.

Asia-Pacific stocks rallied, led by banks such as Woori Finance Holdings and Commonwealth Bank of Australia amid hopes of an improvement in the global financial system and the prospects that an improved U.S. economy would bolster global trade.

The MSCI Asia-Pacific stocks outside Japan climbed 1.7 percent after earlier hitting their highest level since mid-February, though the Nikkei average lost 0.3 percent.

Gold was trading at $931.95 per ounce, succumbing to profit-taking from New York's notional close of $940.00 on Wednesday.

Prices for the yellow metal had surged in the previous session on concerns about the potential inflationary effects from the Fed's efforts.

Oil reversed earlier losses, to gain 81 cents to $48.95 a barrel.

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Capital Gold Group Report: Gold Jumps 6% as Dollar Weakens

FINANCIAL POST

by Paul Lauener and Jan Harvey, Reuters

Published: Thursday, March 19, 2009

LONDON — Gold rose on Thursday as the dollar resumed its decline, boosting bullion’s appeal as a currency hedge, after the Federal Reserve unveiled plans to spend US$300-billion on long-dated Treasuries.

The move announced on Wednesday means the Fed will effectively print money, and has damaged the dollar’s reputation as a safe store of value and stoked fears of inflation, sending investors to gold.

Spot gold jumped US$62.50, or 6.5%, to US$951.60 an ounce at 9:30 a.m. ET Thursday.

Mitsubishi precious metals strategist Tom Kendall said the metal was continuing its climb in response to the Federal Reserve statement. “The dollar sold off and that’s continued again in London this morning,” he said.

The dollar resumed its downward trajectory on Thursday, hitting a two-month low against a basket of currencies, after suffering its biggest daily plunge since 1985 in the previous session.

Gold traditionally moves in the opposite direction to the dollar, as it is often bought as an alternative investment to the U.S. currency.

A weaker dollar also makes gold cheaper and therefore more attractive for holders of other currencies.

Richcomm Global Services said in a research note there are concerns the Fed move may prompt other central banks to follow suit, creating a domino effect of weakening currencies and sending investors to safer investments such as gold.

Central banks in Britain and Japan have already announced they would purchase their respective government debt, while the Swiss National Bank last week said outright it would sell francs to weaken its currency.

A rise in gold-backed exchange-traded funds and investment in gold production also suggested support for gold.

Holdings of the world’s largest gold-backed exchange-traded fund, the SPDR Gold Trust, rose to a record 1,084.33 tonnes by March 18, up 15.28 tonnes or 1.4% from the previous day, the latest figures showed.

Inflows into ETFs are offsetting weakness in jewellery demand. Data showed exports of gold jewellery from Italy, Europe’s top manufacturer, fell 8.3% last year to 4.38 billion euros.

India gold demand also ebbed on Thursday as traders said prices were too high. Demand should pick up in mid-April to May as the wedding season begins. Among other precious metals, spot silver climbed to US$13.13/13.20 an ounce from US$12.88. Holdings of the world’s biggest silver-backed ETF, the iShares Silver Trust, rose 1.3% or 101.18 tonnes on Wednesday.

Platinum rose to US$1,081.50/1,091.50 an ounce from US$1,057, while palladium firmed to US$199/204 an ounce from US$197.

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Capital Gold Group Report: Wall Street Journal – Dow 5000? There’s a Case for It

Dow 5000? There’s a Case for It

Strategists Still See Rally, but Earnings Point to 1995 Levels for Stocks

By Annelena Lobb

Just how low can stocks go?

Despite Friday’s small gain, the Dow Jones Industrial Average marked its fourth consecutive week of losses as it tumbled through the 7000-point mark and spiraled to new 12-year lows. The Standard & Poor’s 500-stock index is trading below 700 for the first time since 1996.

As earnings estimates are ratcheted down and hopes for a quick economic fix fade, the once-inconceivable notion of returning to Dow 5000 or S&P 500 at 500 looks a little less far-fetched.

Associated Press

Specialist Gerard Petti works his post on the trading floor of the New York Stock Exchange March 6.

A decline to 500 on the S&P is 183.38 points and 27% away. The index already has lost 881.77 points, or 56%, since its peak in October 2007. The index, which lost 7% last week, hasn’t been below 500 since 1995, when the tech-stock bubble was just beginning. After dropping 6.2% last week, the Dow is 1626.94 points and 25% above 5000, a level it also hasn’t seen since 1995.

Analysts and investors looking at valuations, history and stock-price trends are mostly predicting the indexes will avoid plumbing those lows, although all concede that, in this market, anything is possible.

Even Wall Street strategists are crunching the numbers, while sticking to forecasts of a second-half rally.

Goldman Sachs’s David Kostin in late February presented three scenarios for the S&P, including a “bear case” that put the index at 400 to 500. Although Mr. Kostin says he doesn’t anticipate the index will fall that low, “these are the cases that different types of investors are making,” he says.

Even though the Dow appears oversold and could rally back to around 7,400, investors should consider limiting their exposure to equities, according to Stockmarket Cycles’ Peter Eliades. Stacey Delo reports.

Looking solely at valuations, namely price relative to earnings estimates, the S&P at 500 isn’t necessarily a wild stretch.

The current 2009 earnings estimate for S&P companies is about $64 a share, down from about $113 last April, according to S&P. Goldman is now predicting $40, having cut its forecast from $53 in late February. Bank of America Merrill Lynch estimates $46 a share, and Citigroup is predicting $51.

At $64, the S&P is trading at about 11 times earnings. At $40, the index is at about 17 times.

According to Goldman’s data, the bottom of the 1974 bear market had a forward P/E of 11.3. At the trough in 1982, it was 8.5. Put a multiple of 10 with estimates of $40 to $50 a share and the S&P comes out at 400 and 500.

Mr. Kostin himself offered his own prognosis, in which the S&P stays between 650 and 750 and possibly rises to 940 at year end. Goldman’s earnings prediction includes write-downs and provisions, Mr. Kostin adds. But as financial companies recognize a significant amount of remaining losses in the next couple of quarters, investors, he says, could shift their focus to 2010 and what 2009 earnings might look like before write-downs and provisions — a figure he puts at $63.

Whether stocks continue to fall “boils down to confidence,” says Chris Guinther, president and chief investment officer of Silvant Capital Management. Mr. Guinther argues that without clear signs that the government stimulus and rescue packages are working, investors have little incentive to buy.

While Silvant sees the S&P staying in a range of 650 to 750, a decline to 500 is “definitely possible,” Mr. Guinther says.

A level of 500 on the S&P is “possible, but I wouldn’t put it in the realm of probable,” says Thomas Lee, chief U.S. equity strategist at J.P. Morgan. Mr. Lee on March 2 removed a tentative “buy” recommendation he had placed on the S&P in February.

For Mr. Lee, the S&P at 500 “would imply that we are now in a period similar to April 1932 — the final stages of a bear market.”

Between April 8, 1932, and July 8, 1932, stocks fell 34% — a little more than what it would take to get the S&P to 500.

A level of 500 would take declines for the S&P to 68% since its October 2007 high, compared with the peak-to-trough depression-era slump of almost 90%.

Still, Mr. Lee sees a tentative bottom for stocks in mid-2009, together with a trough in the economy. From there, he is still “really comfortable” with the prospect of the S&P heading toward 1100 by year end.

This time, the barrage of government policy prescriptions make a decline of Depression-era magnitude very unlikely, says Richard Sylla, a financial historian and economics professor at New York University’s Stern School of Business.

“People say [government policy] hasn’t worked yet, and there have been slips in the execution, but I would say things could be much worse. It will put a bit of a floor under the declines,” Mr. Sylla says. That said, he thinks stocks aren’t at their lows yet, and guesses the Dow will bottom near 6000.

There are those of course, who think the whole decline is overdone.

“Analysts are just slashing numbers and people are trying to extrapolate that earnings plunge into Dante’s Inferno,” Citigroup’s chief U.S. equity strategist, Tobias Levkovich, says. Mr. Levkovich is keeping a year-end target of 1000 on the S&P.

He says a high single-digit P/E ratio isn’t necessarily a valid assumption. In other periods when stocks were similarly valued, inflation, interest rates and risk premiums all were higher, he says.

Some analysts who look at stock price trends see the indexes heading much lower.

“There’s a good chance the market could keep going lower,” says Bill Strazzullo, chief market strategist at Bell Curve Trading.

His firm’s targets are 500 on the S&P and 5500 on the Dow, using charts of buying and selling trends. A small bounce may come around 650 for the S&P as short sellers take profits around that level, Mr. Strazzullo says. Long-term buyers have also been “active” at about those levels and may help push prices higher temporarily, he says.

“Some people may say that is the bottom, but I think there is another leg to go on this,” Mr. Strazzullo says. “That last leg will probably be the general public throwing in the towel.”

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Capital Gold Group Report: FDIC CHAIRMAN SAYS FUND COULD BE INSOLVENT THIS YEAR

By Alison Vekshin

March 4 (Bloomberg) — Federal Deposit Insurance Corp. Chairman Sheila Bair said the fund it uses to protect customer deposits at U.S. banks could dry up amid a surge in bank failures, as she responded to an industry outcry against new fees approved by the agency.

“Without these assessments, the deposit insurance fund could become insolvent this year,” Bair wrote in a March 2 letter to the industry. U.S. community banks plan to flood the FDIC with about 5,000 letters in protest of the fees, according to a trade group.

“A large number” of bank failures may occur through 2010 because of “rapidly deteriorating economic conditions,” Bair said in the letter. “Without substantial amounts of additional assessment revenue in the near future, current projections indicate that the fund balance will approach zero or even become negative.”

The FDIC last week approved a one-time “emergency” fee and other assessment increases on the industry to rebuild a fund to repay customers for deposits of as much as $250,000 when a bank fails. The fees, opposed by the industry, may generate $27 billion this year after the fund fell to $18.9 billion in the fourth quarter from $34.6 billion in the previous period, the FDIC said.

The fund, which lost $33.5 billion in 2008, was drained by 25 bank failures last year. Sixteen banks have failed so far this year, further straining the fund.

Angry Bankers

Smaller banks are outraged over the one-time fee, which could wipe out 50 percent to 100 percent of a bank’s 2009 earnings, Camden Fine, president of the Independent Community Bankers of America, said yesterday in a telephone interview.

“I’ve never seen emotions like this,” said Fine, adding that he’s received more than 1,000 e-mails and telephone messages from angry bankers.

“The FDIC realizes that these assessments are a significant expense, particularly during a financial crisis and recession when bank earnings are under pressure,” Bair wrote. “We did not want to impose large assessments when the industry and economy are struggling. We searched for alternatives but found none better.”

The agency, which has released the change for 30 days of public comment, could modify the assessment to shift the burden to the large banks “that caused this train wreck,” Fine said. “Community bankers are feeling like they are paying for the incompetence and greed of Wall Street,” he said.

Legal Constraints

Bair dismissed that suggestion.

“For risk-based assessments, our statute restricts us from discriminating against an institution because of size,” Bair wrote.

The deposit insurance fund won’t dry up because the government can get funds from the industry and congressional appropriations, and borrow from the Treasury, Chip MacDonald, a partner specializing in financial services at law firm Jones Day, said today in a telephone interview.

“As a depositor, I am not worried in the least,” MacDonald said. “No one is going to let the FDIC go without any money.”

Consumers should watch this issue closely, said Edmund Mierzwinski, consumer program director at U.S. PIRG, a Boston- based consumer-watchdog group.

“I wouldn’t take their money out of the bank yet,” Mierzwinski said. “If the FDIC is saying that there is this serious problem, then we should all be concerned. I think there is a chance the FDIC is going to have to ask taxpayers for money in the future.”

No Taxpayer Funds

Bair rejected arguments that the agency should use government aid to rebuild the fund. The FDIC has authority to tap a $30 billion line of credit at the Treasury Department and legislation pending in Congress would boost the amount to $100 billion.

“Banks, not taxpayers, are expected to fund the system,” Bair said. Asking for taxpayer support “could paint all banks with the ‘bailout’ brush.”

The FDIC “will revise the interim rule, if appropriate, in light of the comments received,” the agency said in a Federal Register notice.

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