When we put up a link to last week's CFTC hearing webcast little did we know that it would end up being the veritable (physical) gold mine (no pun intended) of information about what really transpires in the commodities market. First, we obtained direct evidence from Andrew Maguire (who may or may not have been the target of an attempt at "bodily harm" as reported yesterday) of extensive manipulation in the silver market. Today, Adrian Douglas, director of GATA, adds to the mountain of evidence that the commodities market, and the CFTC, stand behind what is potentially the biggest market manipulation scheme in the history of capital markets (we are assuming for the time being that all allegations of the Fed manipulating the broader equity and credit markets are completely baseless). Using the testimony of a clueless Jeffrey Christian, formerly a staffer at the Commodities Research Group in the Goldman Sachs Investment Research Department and now head and founder of the CPM Group, Douglas confirms that the "LBMA trades over 100 times the amount of gold it actually has to back the trades."
Christian, who describes himself as "one of the world’s foremost authorities on the markets for precious metals" yet, in the words of Gary Gensler, said "that the bullion banks had large shorts to hedge themselves selling elsewhere- how do you short something to cover a sale, I didn’t quite follow that?" and proves that current and former Goldman bankers are some of the most arrogant people alive, assuming that everyone else is an idiot and will buy whatever explanation is presented just because the CV says Goldman Sachs. Yet Christian confirms that the gold market is basically a ponzi: "in the “physical market” as the market uses that term, there is much more metal than that…there is a hundred times what there is." And there you have it: as Douglas eloquently summarizes: "the giant Ponzi trading of gold ledger entries can be sustained only if there is never a liquidity crisis in the REAL physical market. If someone asks for gold and there isn’t any the default would trigger the biggest “bank run” and default in history. This is, of course, why the Central Banks lease their gold or sell it outright to the bullion banks when they are squeezed by high demand for REAL physical gold that can not be met from their own stocks" and concludes "Almost every day we hear of a new financial fraud that has been exposed. The gold and silver market fraud is likely to be bigger than all of them. Investors in their droves, who have purchased gold in good faith in “unallocated accounts”, are going to demand delivery of their metal. They will then discover that there is only one ounce for every one hundred ounces claimed. They will find out they are “unsecured creditors”.
We are seeing some interesting developments in the markets so I want to jump right into it and save all the social and political commentary for the end. I would first like to focus on the US dollar since it is the hot topic of conversation in the media, and its price movement is subject to a lot of misinterpretation. The general line of thinking espouses a new bull market for the greenback given the fact that the US economy is on the mend. As you know by now I don’t believe the economy has bottomed and I certainly don’t buy into the idea of a new bull market for the greenback. Yes, we are experiencing a reaction and it’s one of the largest to date since the dollar topped in 2001, but that doesn’t mean it’s a new bull market. Whenever you want to see the big picture in a market, it helps to get away from the here and now, and the best way to do that is with historical weekly or monthly charts.
The latest development in Silvergate, in which whistleblower Andrew Maguire has exposed the manipulation details in the London commodity market, is straight out of a John Le Carre or Ian Flemming novel: an assassination attempt.
If there is one topic that has been beaten to death, reincarnated, then Friend-o'ed three more times by everyone in desperate need of a Google hit or a TV appearance, it is Greece and China (and also Manchester United if you live in the UK). This will not stop us from presenting this FT clip, in which Goldman's Jim O'Neill and Nouriel Roubini spar over the Greek bailout and the Chinese economy (and, you guess it, Man U). Guess who is the optimist and who is the pessimist. For the most part a bland recreation of each pundit's party line, although we do appreciate Roubini's reminder that the immediate catalyst responsible for the 20% Black Monday drop (at a time when the market was poised on a precipice much as it is today) was a topic near and dear to everyone: the announcement of a trade war.
"20 years ago we had a large trade deficit with Japan and Germany. The dollar was weakening but the Germans and Japanese were resisting, and the US got angry. And the US Secretary of the Treasury Baker got on TV on Sunday and said if you don't let if move we are going to retaliate. The next day the stock market crashed 20%."
Are the starts aligning for a repeat appearance of just such a crash, especially as the US has mere days left in which to brand China a currency manipulator?
Inverting Cause And Effect: Do Asset Prices (And Stock Market Bubbles) DetermineThe Economy And Monetary Policy?Submitted by Tyler Durden on 03/27/2010 - 18:23
Earlier Alan Greenspan shared some Fed insight, explaining the diagonal rise of the stock market, which can be summarized as follows - "stock prices determine the economy, not the other way round." In one simple sentence, Greenspan demonstrates that the Fed is not only chock full of people who can't read economic textbooks good (sic) but is populated by a subset of people suffering from cause-and-effect inversion disorder (it is also chock(er) full of new and improved stock traders and algos populating Liberty 33, doing all they can to make sure that in 13 up days, there is just one down). Yet in a market which has broken all laws of rationality, is the Fed's flawed self-fulfilling prophecy gaming the only thing that the amazing American's recovery is based on? To be sure, the main reason why economic skeptics such as Rosenberg, Edwards, Janjuah, and (ever decreasing) others retain their pessimism is that while the marker has now priced in one of the most ebullient, V-shaped economic recoveries in the history of the world, the underlying economy has stagnated and even downshifted into a double dip along numerous metrics, even despite ongoing fiscal stimulus and monetary pumpatude. So what is going on? Simple - the Fed, and by implication the administration, believe that once confidence and the market reach a given level, Joe Consumer will forget that the mortgage bill has not been paid in 12 months, the credit card in 3, that all neighbors lost their jobs a year ago and still can't find a new ones, and instead will merely look at the Dow (not the S&P - for some reason government/Fed workers still don't realize that nobody follows the DJIA, but whatever) and the UMich consumer confidence, for a barometer of economic health. The fallacy of this proposition is of course beyond preposterous, but these and such are the thoughts of the Federal Reserve.
Appropriately, Goldman's Sven Jari Stehn has just published an analysis looking at whether there is a two-way relationship between asset prices and the economy (merely the latest in a long line of such queries), and most relevantly: monetary policy.
Alan Greenspan Discusses The Fed's Inability To See Bubbles, Is Confident There Is A "Bubble Waiting To Burst In China"Submitted by Tyler Durden on 03/27/2010 - 14:12
The maestro managed to run away from the old folks' bent on monetary destruction home just long enough to carry this amusing interview with Bloomberg TV's Al Hunt. Tomes (will) have been written about Greenspan's dementia, just as books will be available on the Kindle one day analyzing his successor's massive mistakes which are slowly but surely leading to an American day of reckoning, so we won't comment much, suffice to point out some of the key highlights in Greenspan's presentation. Most amusingly, note the escalating battle between Greenie and the Fed's new vice-chairman Janet Yellen, who blatantly contradicted Greenspan's that higher interest rates would have prevented a housing bubble. For all it's worth, Alan's response is actually quite interesting: "We tried to do that in 2004. We ran into a conundrum. For decades, every time the Fed raised its short-term rates, the 10-year note, which is really the proxy for mortgage rates, the yield went up with it. This time, it did not. And the reason it did not, is you cannot have the 10-year note determined both by arbitraged global finance and individual central banks. As a consequence of that…starting in the period where the sensitivity of the early stages of the bubble were building up, it was very clear that what was determining the rise in prices was movements in long-term mortgage rates going down, not the federal funds rate." In English, this is quite intriguing: China, which at about this time started running up massive trade balances, essentially became indifferent about US monetary policy, as it gobbled up everything east of 5 Years, with a preference on the 10 Year. The reason for this is the US consumer became the one driving force behind the massive Chinese economic expansion. With the consumer out, and with China set to report its first trade deficit in 6 years, and the Fed pulling out its support of mortgages, and the Chinese National Bank pulling liquidity, the move in 10 Year over the next few weeks is now more critical than ever, which is why the 10 Year - 30 Year MBS spread is paradoxically pressured at an all time tight spread, as all the early MBS shorts are covered, forcing pundits to say MBS are cheap as fighting momentum in this market is professional suicide. To be sure, this technical push down will soon end. And when this last coiled spring blows out, watch out below, first in housing, then in rates, in corporates, and last, in equities.
Sometimes insights from really grim times show how the most loved assets can unravel and how the crappiest suddenly become the finest. Data from the dark days of the credit crunch indicate just what assets held the financial architecture together, and the crap that got flushed.
- The extent of haircuts is a good measure of the extent of systemic financial collapse.
- Primary counterparties and hedge funds took only minuscule haircuts on G-7 sovereign debt throughout the credit crisis.
- Post-crash, structured credit wasn’t accepted as collateral. This implies pre-crash valuations were way off.
- Collateral haircut rates were different for primary dealers and hedge funds.
Crude oil prices still found stubborn resistance above the $80-a-barrel level amid concerns about demand while natural gas continued its decline, to below $4 per million British thermal units, as burgeoning supply from unconventional sources depressed prices. The natural gas Henry Hub benchmark futures settled Friday at a nearly six-month low of $3.87, down 31% so far this year from above $6 in January. Natural gas demand experiences a lull at this time of the year as warmer weather reduces heating use but the need for more electricity from gas-fired plants to power air conditioners is still weeks away.
The NY Fed's Trading Desk Head Laments The End Of Stupid Leverage And Wants His Derivatives Back (Or Why We Are Stuck With ZIRP For A Long, Long...Submitted by Tyler Durden on 03/27/2010 - 11:12
In a video conference before the ACI 2010 World Congress in Sydney, Australia, the head of the FRBNY's trading desk, aka, the busiest daytrader over the past year, Brian Sack, demonstrated once again that Fed members are either completely clueless about ongoing market dynamics or are so good at octuple re-reverse psychology, that they make the squid pale in shame and squirt ink in envy.
Goldman's S&P forecast summary:
Our top-down EPS forecasts of $76 and $90 for 2010 and 2011 reflect +33% and +20% growth, respectively. Our pre-provision and write-down EPS forecasts are $81 for 2010 and $91 for 2011. Bottom-up consensus forecasts a 38% increase in 2010 to $79, and a 20% increase in 2011 to $95.
This ain't nothing. Later we will show how squid now anticipates an S&P of 2,000 courtesy of the madman's printers.
How The CIA Will Manipulate Public Opinion In Germany And France To Support Continued War In AfghanistanSubmitted by Tyler Durden on 03/26/2010 - 20:10
The latest stunner from the CIA and the Obama administration via Wikileaks. To wit: "This classified CIA analysis from March, outlines possible PR-strategies to shore up public support in Germany and France for a continued war in Afghanistan. After the Dutch government fell on the issue of dutch troops in Afghanistan last month, the CIA became worried that similar events could happen in the countries that post the third and fourth largest troop contingents to the ISAF-mission. The proposed PR strategies focus on pressure points that have been identified within these countries. For France it is the sympathy of the public for Afghan refugees and women. For Germany it is the fear of the consequences of defeat (drugs, more refugees, terrorism) as well as for Germany’s standing in the NATO. The memo is a recipe for the targeted manipulation of public opinion in two NATO ally countries, written by the CIA. It is classified as Confidential / No Foreign Nationals."
The CFTC's latest weekly Commitment of Traders report shows that after a brief respite, potentially dictated by Goldman's very temporary euro bullishness, the euro is back to having a record number of non-commercial futures-only positions at -74,917. This is a more than 50% increase from last week's -46,341. As a reminder the prior euro net short record was -74,551 two weeks ago. Curiously, even as traders went bearish on the euro, this was not coupled by a carry offset with the JPY: net long spec yen positions dropped from 15,197 to 10,161. Another currency that saw an increase in bearish interest was the cable, which saw a 7,637 contract decrease to -71,624. On the bullish side, the AUD was the preferred contra-carry currency, as contracts increased by 10,161 to 74,339. In other commodities, both oil and gold saw speculative positions declines by -12,224 and -16,474, respectively, to 111,919 and 183,872. The number is relevant for gold as this represents 37% of the open interest.
With each day bringing new and more ridiculous M&A, and now LBO rumors, we thought it would be a good idea to highlight the public companies that have at least a fighting chance of going private. Using a simplistic template from UBS, we present the thirty companies which would generate the highest stock return should they get acquired, assuming a 4.5x Debt/EBITDA pro forma leverage (as much as TPG would like, 10x leverage is not coming back...Unless Joe Cassano is hired to run Chrysler's take private group), and also assuming a 40% equity portion in the transaction. In other words, these are the companies that at least on paper have the highest equity expansion potential in a 7.5x EV/EBITDA. While this analysis ignores whether or not any of these companies actually generate substantial cash flow to cover pro forma interest, or are a logical fit for any financial acquiror, any company not on this list is likely already equity heavy and as a result even if acquired will not result in material upside. As the chart below shows, the maximum stock upside ranges between over 200% in the case of R, to just over 22% in the case of BBY. This below list by no means suggests that any of these companies on it will be LBOed: it should merely be used a benchmark for modeling purposes.
- Recommendation: underweight energy
- Time horizon: 3-6 months
- Oil contango trade unwind
- USD strength
- General market headwinds
- Underlying theme: a substantial portion of recent energy demand originates from speculative and/or indirect sources, rather than organic, sustainable drivers, and the inflection point for the former to unwind has finally arrived
Following our focus yesterday on key supports in Fixed income, we feel that the risk is that on a rally here the curve could flatten. Indeed 2Y yields even though they rose recently, remain very low, and we feel that if the next leg is up in fixed income then the long end should outperform. We have attached a chart of 2/10 for US treasuries, as can be seen we just retested the 50-dma. - Nic Lenoir