Archive - Sep 13, 2009

A lot of speculation surrounds the recent announcement by Barrick Gold to raise $3.5 billion in equity to finance buy-backs of its gold hedges. While some lesser banks have taken this development as an immediate opportunity to upgrade the stock (not all that difficult into a rising market, even if common gets diluted by 94.8 million new shares), others have speculated that this is nowhere near enough to remove the full overhang of the existing hedges. A more relevant question is, why now, and what does this portend for the gold (and not just) market.

We're at a truly fascinating crossroads in modern economic times. Financial theory as we have come to know it will be changed forever based the recent actions of Ben Bernanke and global central bankers. Millions of textbooks will be rewritten in the coming 10 years and careers will either flourish or die on the back of the actions of these bankers. Those in favor of Bernanke's legendary helicopter drop are celebrating a 6 month rally in equities, but a vital piece of the recovery puzzle remains missing. While Bernanke and Co. fire up the printing presses, and the banks sell the recovery hook line and sinker to the investing public, we continue to see very weak consumer trends.

Natural gas price has spiked almost 60 % since Labor Day and prompted investors to believe a V-shape recovery might be near for the brutally battered U.S. natural gas market. However, don’t break out the champagne just yet until you learn more about two of the major factors driving this latest spike, Operation Flow Orders, and the trader's perspective.

As you have all read by now, Corus Bancshares went belly up on Friday adding yet another failed institution to the growing hall of shame. What makes Corus unique, however, is that they may have been the first failure with little to no delinquencies in their major loan portfolios.

I still think the best course of action is not to fight the tape, and of course, don't become fodder for the bulls.

The financial sector's oligopoly and consolidation through acquisitions and taxpayer guarantees is choking off regional banks and their stock internals and recent options activity suggest substantial downside risk.

In response to many inquiries about the process of UST purchases, and the simplification of the key actors, it is usually best to get the information straight from the horse's mouth. I present a paper from the New York Fed highlighting statistical data of Treasury purchases by purchaser, which also lays out the basics needed to understand what in theory happens when an auction occurs.

• Must read: The trade war is on: China looking at US auto, chicken dumping (Bloomberg) - time for our President to bring back Smoot Hawley
• Must read: Henry Paulson's longest night: an insider's look at Hank's tenure together with much embargoed information (Vanity Fair, h/t Deadhead)
• Must read: The deal of the century (Esquire)
• Must read: A story about the imminent decline of New York in four parts, from Der Spiegel
  • New York faces dramatic consequences of crisis (Part 1)
  • A bubble develops every ten years (Part 2)
  • Everyone around here was on welfare or drugs (Part 3)
  • We're at a watershed, everyone knows that (Part 4)

The main question here is whether the relative Tender points of focus are indicative of where treasury market participants expect key inflation inflection points. And, furthermore, the record Tender amounts in the 3, 5 and 7 more recent auctions, could also be explained as a wholesale fleeing from the tender loving care (no pun intended) of the equity market. Cumulatively, between all tenors, as of their last respective auctions, practically half a trillion ($496 billion) was tendered, of which just $185 billion was accepted. There is thus another $310 billion that will likely continue getting tendered in future Treasury auctions (absent a dramatic change in economic climate), and probably flee equities, at least in a non-bizarro world.