Archive - Nov 2010

As its memory of the unhappy market collapse of 1929 becomes blurred, it may lend at least one ear to the voices of The Street subtly pleading for a return ” to the good old times.” Forgotten, perhaps, by some are the shattering revelations of the Senate Committee’s investigations, forgotten the practices and ethics that The Street followed and defended when its own sway was undisputed in the good old days.

Kind of a drab hum drum day in the market yesterday as no new countries were close to defaulting, no new IPOs of shitty companies were being sold (and yeah Harrah's, Money McBags is looking at you), and no new news on whether Milla Jovovich will be joining her country's burgeoning Femen movement.

There once was a time when the "learned" believed the sun revolved around the earth, the world was flat, and government spending led to sustainable economic growth. This week's Investment Advisor Ideas focuses on another such misconceived idea, classifying stocks with growth and value designations. While the investment consultant community has firmly adopted the growth vs. value concept, at some point, hopefully in the near future, this classification will go the way of the buggy whip, leaching, and the above silly misconceptions. After all, the classification tends to imply a choice between owning a stock that can grow but doesn't offer much value, versus one that offers a compelling value but doesn't offer much growth. Such a choice is silly - every stock valuation implies a future stream of cash flows to justify its price. If today's price implies a smaller cash stream than a company is capable of generating, it is a value stock. If a stock's price implies greater cash stream than a company is capable of generating, it is a value trap, regardless of how sexy its products are or how strong its future revenue growth appears. It does not get much simpler than that.

Over a year ago, Zero Hedge published an expose in three parts (two of them in the form of direct letters to Andrew Cuomo) discussing the possibility that so-called "expert networks" are nothing less than legalized insider trading rings for the uber-wealthy, operating largely unsupervised, and leaking selective information to preferred clients. For those who may be new to this topic, we suggest catching up on Part 1, Part 2 and Part 3. Subsequently, we also suggested that expert networks would be implicated in the bust of Galleon Partners, the Goldman "Huddle", the collapse of FrontPoint Partners and, most recently, that expert networks may have been directly or indirectly involved in facilitating the record historical P&L of such hedge fund "titans" as SAC Capital. Today, via the Wall Street Journal, we realize that not only have the good folks at the SEC been diligently reading us for the past 13 months, but that we may have been right all along (once again). To wit: "Federal authorities, capping a three-year investigation, are preparing insider-trading charges that could ensnare consultants, investment bankers, hedge-fund and mutual-fund traders and analysts across the nation, according to people familiar with the matter. The criminal and civil probes, which authorities say could eclipse the impact on the financial industry of any previous such investigation, are examining whether multiple insider-trading rings reaped illegal profits totaling tens of millions of dollars, the people say. Some charges could be brought before year-end, they say." Good bye expert networks (and many, many hedge funds) - we hardly knew you. 

If you don't hate Ben yet, you will soon.

The Federal Reserve has decided to buy US Treasury bills for about US$ 600 billion in all, in monthly installments of about US$ 75 billion over eight months, until June 2011. However, this action will not achieve the desired goal of economic growth, nor will it change the US labour market, this according to most analysts and security traders surveyed by Bloomberg in its quarterly “Global Poll”. In fact, more than half of 1,030 experts who took part in the survey, expressed doubts about the Federal Reserve’s move. For more than 70 per cent of them, the Fed’s second round of quantitative easing (QE2) is largely an attempt to adjust the exchange rate of the US dollar against other currencies. Thus, according to such set of views, the Federal Reserve (de facto but not de jure the US central bank) wants to redress the trading disadvantage US manufacturers have accumulated over the last few decades and cut the US trade deficit.

The three biggest problems with QE 2 are:

1) The potential for a US Dollar break-down
2) Treasuries falling and pushing interest rates UP
3) China retaliating.

Of these, #3 is the most worrisome for the global financial markets. Let’s be clear here, China is extremely adept at making investing/ financial decisions. And while we do need to take its decision to cut Treasury exposure seriously, I cannot believe China would actually telegraph that it was dumping Treasuries when the dumping really starts.

"Take a position. Do the right thing. Pass Bill C-216. It is the right thing to do. By doing nothing, by leaving us hanging, in my opinion, they are effectively giving their blessing to the court judge and lawyers we are dealing with to bury us alive. I do not know why. I do not understand what I and 400 other sick people did wrong to be treated like this."

- Jackie Bodie, Nortel disabled employee

Retailers are counting on holiday sales this year but on the other hand they are rather pessimistic. It remains to be seen if holiday sales will improve substantially this year. Bling yes.

While not directly under the purview of finacial matters, a topic that has received much attention recently are the now two consecutive censures of MSNBC hosts: first Keith Olbermann, and now Joe Scarborough for political donations. The reason given by MSNBC (NBCsubsidiary) president Phil Griffin is that "since [Scarborough] did not seek or receive prior approval for these contributions, Joe understands that I will be suspending him for violating our policy." As for Olbermann: "Days before the November 2 congressional elections, Olbermann gave contributions of $2,400 each to Jack Conway, the Democratic candidate for U.S. Senate in Kentucky, and to two members of the House of Representatives from Arizona, Raul Grijalva and Gabrielle Giffords." Presumably the decision to censure the two arose out of NBC News, MSNBC's broadcast partner, which attempts to protect the news organization's image as unbiased. Zero Hedge is all for unbiased reporting, even at such purportedly extremely far from the center stations as MSNBC and Fox News. After all, both of these are watched purely for entertainment purposes, and serve to merely create an echo chamber environment. Yet one station, which is also under the control of NBC, and which should pursue neutrality more than anything due to the sensitive nature of its coverage, is financial station CNBC. Which is why we were very surprised to discover that none other than Larry Kudlow recently donated $1,000 to former Connecticut Congressman Chris Shays. We wonder whether this means we actually may a day or two without supply-side general extraordinaire Larry Kudlow at the CNBC helm since obviously NBC will strive to enforce objectivity at all of its broadcast partners?

Chris Martenson who recently launched a fascinating series of interviews and podcasts with a variety of the most interesting pundits in the world, chats with Ted Butler, discussing such germane items as why silver has such a compelling value story, the coming silver supply crunch, the argument behind the allegations of silver price manipulation, drivers behind the recent price action in silver, why price volatility will increase and the expected outcome of the CFTC’s investigation and why Ted thinks it will be "a bombshell for the silver market."

Looking at the CFTC Commitment of Traders data for the past week confirms that the momentum unwind continues. In Treasury's net spec positions in both the 2 and 5 Year tumbled (from -11,125 to -35,142, and from 152,782 to 102,885 respectively) even as bets that prices on the 10 Year would jump almost doubled (from 58,661 to 97,346). After chasing curve steepening, specs are now going all in on a major 2-10 flattening. The same thing is evident in commodities, where spec bets on five key categories all declined week over week. Lastly, the unwind in dollar shorts, and everything else longs is accelerating: dollar net spec increase from 6,315 to 10,827 as all other FX (except the GBP) saw spec bullish interest decline.

RANsquawk Market Wrap Up - Stocks, Bonds, FX etc. – 19/11/10

Is Max Keiser's attempt to put JP Morgan out of business working following the mother of all silver physical squeezes? The price of silver has been stable in the past few days, but if the US official precious metal seller is to be trusted, this will not last long. According to the US Mint, sales of 1-ounce American Eagle silver coins are headed for the strongest month since at least May, Bloomberg reports. More details: about 3,175,000 of the coins have been sold this month, compared with 3,633,500 in May, according to data on the Mint website. Silver futures in New York touched a 30-year high of $29.34 an ounce on Nov. 9. American Eagle coins also are available in gold and platinum. The Mint said 62,500 ounces of gold Eagles have been sold in November. What is interesting is that sales of the coins continue at an astronomic pace despite the nearly 10% premium one has to pay over spot. What is more interesting, is that the Mint has not run out yet. Yet the refreshing thing, is that instead of buying paper certficates promising that one's presumed purchases of gold is held by the DTCC, Americans are once again going straight into physical. Here is hoping Keiser's plan ultimately unravels whatever the RICO suit against JPM and HSBC leaves untouched.

Now that RINO is on its deathbed following the Muddy Waters report that started it all, it is time to give the specialized research shop some kudos...And move on to their next (or technically previous) target - Orient Paper. With RINO likely to open just north of 0 if at all (and will do so on the Pink Sheets), investors are curious which other name brought to you courtesy of the NYSE overeagerness to float any garbage, is just minutes away from becoming the next Chinese fraud export du jour. We present ONP, or Orient Paper, which Muddy Waters has been even more bearish on (since late June), and has a target price of $<1.00 (in essence, barely a liquidation recovery). The research report begins boldly enough: "We are confident that ONP is a fraud. Its purpose is to raise and misappropriate tens of millions of dollars" and then goes on to prove its allegations. The stock was last trading at $5.88. The only question is how much lower can it go.