Archive - Oct 2010

A question that has become very prevalent recently is whether in a world denominated in fiat ponzi equivalents, in which central banker intervention is hell-bent on devaluing this very system, whether gold (with a recent Sharpe ratio most portfolio managers can only dream of) is not currently the best hedge against tail risks. Conveniently, the World Gold Council has just released a paper, and, for those with a shorter attention span, a video clip, which provides an affirmative answer to that question. From the WGC: "In the analysis the WGC shows that during the period between October 2007 and March 2009—the height of the global financial meltdown—an investor with a portfolio of US$10 million experienced an additional US$500,000 financial loss simply by not maintaining a position in gold. The study used a composition similar to a benchmark portfolio, which included an 8.5% allocation to gold, to show that total losses incurred during the period reduced by 5% relative to an equivalent portfolio without gold." But before we get into the WGC paper's findings, we would like to point out a special report by Reuters which confirms what all the "goldbugs" have known all along: "The world's
wealthiest people have responded to economic worries by buying bars of
gold, sometimes by the ton, and moving assets out of the financial
system, bankers catering to the very rich said on Monday... A banker said, "We had a clear example of a couple buying over a ton of gold ... and carrying it to another place."" Guess why JPMorgan is doing all it can to preserve as much physical gold within its system before it all runs out, and all those demands for physical delivery skyrocket (even more).

RANsquawk US Afternoon Briefing - Stocks, Bonds, FX etc. – 04/10/10

After dropping to a modest €134 million last week, ECB purchases of sovereign debt exploded tenfold in the last ended week to €1.384 billion, confirming that the ECB continues to bid up all Portuguese and Irish bonds available for sale, so the market does not crash. As Reuters notes, this is the highest weekly amount purchase since early July. Once again it is up to the European Fed-equivalent to be the buyer of only resort. And Europe's continued central bank facilitated life support comes on the heels of the latest joke in recession timing: per Dow Jones, the Center for Economic Policy Research Monday said its Euro Area Business Cycle Dating Committee had determined that the currency area's recession began in January 2008 and ended in April 2009, lasting a total of 15 months and reducing gross domestic product by 5.5%. Some recovery there, when half the PIIGS have no access to capital markets, have their Prime Ministers mocked during conference calls, and are fighting with an exchange rate last seen long before Greece, Portugal, Spain and Ireland had to be rescued. We wonder what the CEPR's timing on the end of the European depression will end up being?

Realtor.org has released the August pending home sales, which increased from a SAAR of 78.9 (of course, downwardly revised from the previous reading), to 82.3 in August, a 4.3% rise on expectations of 2.1%, mostly on a jump in South and West transactions, which increased by 6.7% and 6.4% respectively. And add this to the plethora of data series which consistently see prior numbers revised adversely: July data was revised from a 5.2% increase to 4.5%. NAR chief economist, Larry Yun, once again tried to put some lipstick on the bottom-bouncing pig: “Attractive affordability conditions from very low mortgage interest rates appear to be bringing buyers back to the market. However, the pace of a home sales recovery still depends more on job creation and an accompanying rise in consumer confidence.” And yes, throw one more party praying eagerly each night for QE2.

Ever heard of the oxides of Lanthanum, Cerium, Neodymium, Praseodymium and/or Samarium? With price surges between 250% and 600% in one quarter, you may wish you have. The recent pissing contest between Japan and China, which culminated with a temporary export ban in rare earth metals such as those named above, translated in ridiculous price jumps in some compounds most have never even heard of, let alone traded, yet which would have made not only the year, but the decade for hedge funds invested in them. And with China producing more than 90% of the world's supply of rare earth minerals, coupled with increasing probability of escalating global (and regional) trade wars, it is distinctly possible that the gains recorded recently in gold will be dwarfed by the imminent Samarium Oxide bubble, which 3 months ago was trading at $4/kg and is now over $30.

An aid for visualizing the full ponzinomic spectrum.

This month we want to address canaries, coal mines, and the whole issue of yet another round of Fed quantitative easing. As you may remember, when the Fed stopped its last official QE effort, our comment at the time was that there was absolutely no way this was the grand finale of money printing for the current cycle. Not a chance. Our thoughts were that QE would resume either later this year or early next at the very latest due specifically to continued lack of meaningful money growth. At the time, we did not have a whole lot of company with this line of thinking as very few other folks were calling for this, especially in the mainstream. As of now, it has become consensus thinking as we survey the landscape. In fact broker after broker have been putting out research pieces over the last few months handicapping just when and why QE will begin anew. A few comments and then maybe some curveball thinking, as we at least need to consider the next round of QE being sparked by a source the Street is not looking for and has not discussed at all up to this point as far as we can tell. Question being, would QE sparked by a left field source elicit the positive response most anticipate as per consensus thinking of the moment?

Paulson's largest Advantage fund, which managed $16.6 billion as of the end of Q2, and which was down 11% as of the end of August, has managed to ride the beta wave, which we expected in the beginning of September would miraculously come and rescue thousands of underwater hedge funds, and prevent tens of billions in redemption requests. As a result, Advantage pulled off a 12.5% return in September, outperforming the broader market 8.8% bounce over the same time period. Yet even with a gain of over $1 billion, the billionaire investor is just about breakeven for the year (in dollar-denominated terms), which taking high water marks and all that, likely means bonuses for all those analysts on the 50th floor of 1251 Ave of the Americas will be certainly subpar unless somehow the beta wave continues into the end of the year even as additional tens of billions in capital is pulled out by retail investors.

This sure sounds like a perfect set up for a reversal to me. On that note, I expect this week we’ll probably see a final impulse high on stocks, but that stocks will end the week down, creating a reversal week. This in turn I believe will be the beginning of a larger, VIOLENT collapse that will take stocks back to 1,040 on the S&P 500 in a matter of weeks. And ultimately, I believe we're heading to 875 by year-end.

• As predicted 2 months ago: S&P 500 profits cut for first time in year in analyst forecasts (Bloomberg)
• Irish Central Bank revises down recovery forecasts (Irish Independent)
• Wall Street Sees World Economy Decoupling From U.S. (Bloomberg)
• IMF admits to near-depression (Telegraph)
• Swiss to impose tougher standards on banks (FT)
• Fed Bond Buying's Unintended Consequences May Push Up Rates (Bloomberg)
• Was TARP Worth It? (Forbes)
• Morgensen: Count on Sequels to TARP (NYT)
• Decepticon Tradebots (Reformed Broker)
• Why some housing bubbles remain (FT)
• Jobs Report Could Spoil QE Party (WSJ)

Monday is not shaping up to be a pretty day for owners of the company that was once the modern-day equivalent of Apple, Amazon and Netflix. Oddly enough, that leveraged dividend appears not to be doing it for the "value" investors. Stock is red after Goldman, of all banks, decides to tell the truth: "We are downgrading Microsoft to Neutral and lowering our EPS estimates by 4%, 3% and 4% in FY2011, FY2012 and FY2013, and therefore our price target to $28 from $32, which suggests more upside in other Buy-rated names in our coverage. We believe the intrinsic value of shares cannot be unlocked if the status quo remains, and we have increased caution near term on a more elongated PC refresh cycle, combined with the newer threat of notebook cannibalization from tablets, where Windows does not yet have a presence." Here Goldman appears to have grown a little sense of humor: "Since added to the Americas Buy list on 8/12/08, MSFT shares have returned -13%, compared to -11% for the S&P 500."

• Asian stock mostly higher on Monday with investors inspired by US gains on Friday.
• China: Will continue to buy Greek govt debt when the country reintroduces open sale.
• Dubai's Cityscape realty exhibition to start Monday amid oversupply fears.
• Europe put on terror raid alert; US & UK issue warnings to public and travellers.
• Greece's 2011 budget seeks reduction in deficit, return to bond markets.
• Silver advances to $22.21, highest level since 1980, on investor demand.
• Wen says China to boost local demand, maintain holdings of European bonds.

Earlier today, Thomas Jordan of the Swiss National Bank stated that banks may need to triple their current common equity level, essentially undoing all the carefully prepared propaganda of Basel III, and validating just how undercapitalized banks throughout the world truly are. And while the regulators will likely completely ignore his message, the market appears to have noticed: the USDCHF fell to a fresh 2.5 year low of 0.9702, which is making Swiss exporters very, very unhappy. Additionally, the dollar weakness of recent days has reversed this morning especially on continuing Irish sovereign fears (especially after the whole Irish PM Citi conference circus), even as the Dollar-Yen continues to attack that critical 83 level which was the barrier for the BOJ's last intervention on September 15. It seems all the Chinese posturing of bailing out Europe is now completely priced in - oddly enough nobody seems to care that China is willing to provide vendor financing to broke European countries.All of this has driven the 2 Year UST to a fresh all time low yield of 0.3987%, as the Fed's finger salute to the saving middle class becomes ever more distinct.

We start with pending home sales and factory orders, then hear from the Fed, including twice from Chairman Bernanke, as well as Open Market Committee Portfolio Manager and Dark Pool master Brian Sack.

European Morning Briefing - Stocks, Bonds, FX – 04/10/10