Archive - May 2010

While Erik Nielsen is free to provide Goldman clients with a comfortably tabulated and bullish list of last week's events from the UK countryside, a realistic appraisal of the key events over the past 168 hours really boils down to one thing - central bank intervention. Whether it is definitive SNB intervention in the Swiss franc or questionable ECB involvement in the euro, the only catalyst that prevented an all out rout of European currencies was outright and blatant market participation by sovereigns and their printers. Yet something interesting happened on the way to the stick save - decoupling. As the chart below shows, once it became openly obvious that the SNB/ECB is intervening in the market, the traditionally very tight correlation between the euro and US stocks went up in a puff of ink cartridge smoke.

Happy Sunday,

For the first time this year I am writing to you from my backyard here in Chiswick; the weather is impeccable and I couldn’t think of a place I’d rather be right now. A good cup of Nespresso certainly contributes to my well-being this morning, but more on that later. Here’s my view of Europe right now. - Erik Nielsen, Goldman Sachs

The other perspective: "The US Senate has passed its version of financial regulatory reform that will include serious changes, some expected, some not, specific to the OTC derivatives market. The passage of this bill will lead to a compromise bill created jointly by the House and Senate and ultimately President Obama signing it into law before 4th of July barbeques are under way. Although its contents are questionable, getting the bill out of the Senate is a good thing as the Hill will finally be removed from the Street. But as we’ve learned during the entire, multi-year reform process, the devil is really in the details and unfortunately many of the details continue to be a bit hazy. At last check, there were 434 proposed amendments to the Senate bill. Most of these amendments will fall by the wayside now as the Senate was anxious to move the process along, but sorting out and knowing what’s in, what’s out and what replaces what may well require a gaggle of Congressional staffers. Even with the final text made clear, most of us at TABB Group are left trying to decipher the “spirit” of the law."

Here are some Trivial Pursuit questions for you:
1) What is the biggest market in the world for a physical commodity?
2) Is the gold market one of the smallest markets in the world for a physical commodity?
I would guess that you answered:
1) Crude oil.
2) Yes. Gold is one of the smallest commodity markets in the world.
If those were your answers, you are wrong. What everybody believes to be the "tiny gold market" is in fact the world's biggest physically traded commodity market. Let's have a look at some facts. The London Bullion Market Association (LBMA) "over-the-counter" (OTC) gold market trades approximately 90 percent of the world's physical gold trade.

Max Keiser at his best, deconstructing the global ponzi with Gerald Celente, another very much outspoken critic of the broken financial system. Most ZH regulars will be quite familiar with the overriding themes exposing the mass corruption perpetrated by the kleptocratic oligarchy, yet Max as always delivers the message with his patented iconoclastic panache that just draws you in.

A Wave 4 is described as a Profit-Taking Wave. It is not so much that the Bears are getting stronger as the Bulls are taking profits off the table as they see them eroding. The mini-crash on 6 May may not have been real in the eyes of many, but it did technical damage to the market. The emotions of traders are seen in the market as fear and greed have their way. That is also why I said in my post on 6May that the low of that day would be taken out, even though the massive rebound made many think it was just an anomaly. That low (1056) was broken Friday as ES dipped to 1051.25. I think we still have more to go, but I’ll take that new low for now. If that first leg down on 6May didn’t convince traders and investors that there was a significant correction beginning, then the more deliberate decline to the new low on Friday should have convinced them that there is trouble brewing with their new-Bull market. IMO, this is why technical analysis is so great. It is based on repeatable mass psychology, and it is driven by the emotions, fear and greed. Fear and greed are ever-present human emotions that form repeatable patterns in the market, whereas news and world events cannot be anticipated and measured by the lowly traders like myself.

A few days ago we pointed out that Seth Klarman is bracing for yet another lost decade, as the legendary Baupost investor anticipates nothing good out of government incursion in capital markets, and has come up with the best description for the fake, busted and heart attack inducing market yet, comparing it to a "hostess twinkie" (full must read article summarizing his speech at the CFA Institute here). Another must read piece, for those who may have missed it the first time around, is his summary of lessons learned and unlearned from the financial crisis, found here. Today, the WSJ's Jason Zweig has a follow up on Klarman, who, as we noted earlier "is more worried than ever" and concludes that "all we got out of this crisis was a Really Bad Couple of Weeks mentality. I am more worried about the world, more broadly, than I ever have been in my career." And they say Zero Hedge is bearish...

If you don't give us what we want, we'll shoot ourselves ...

Scam Du'Jour ...

The reform bill is a joke. It reforms nothing, it fixes nothing, and it will not prevent the next much bigger crash from happening (with or without Goldman's Supplemental Lack of Liquidity Provider assistance) - just two items that need to be pointed out: $6+ trillion in GSE debt - untouched, $400 trillion in IR swaps: untouched. This is reform? However, if you care enough to know what a bribed and corrupt Congress and Senate have "reformed" here is a useful cheat sheet courtesy of the New York Times.

The worst kept secret in New York politics is out: the Attorney General has officially announced he is running for governor. From nydailynews.com "After months of speculation of when he will make the formal announcement, Cuomo tossed his hat into the ring on his campaign website Saturday morning." Alas, any changes at the top will do nothing to cure the number one problem in both New York, as well as all other states: insolvency. Too bad New York is so bankrupt that pretty much nothing can help, least of all those tens of billions in NOL carryforwards at Wall Street's investment banks which will make sure New York State corporate tax receipt coffers are empty for years to come.

Jim Rickards, who some may say has gotten a little too much media exposure recently, is on King World News this morning, discussing the presentation he gave to the US Treasury (closed to the public) in which he lectured Tim Geithner on financial warfare, read China, and how flawed trade policies can impact this ever so critical and increasingly tenuous relationship. To be sure, it is better late than never that someone advised the UST on what the right path is. Unfortunately, righting the US(S) Titanic at this point is impossible as it would mean undoing 2 years of flawed actions and policies, and the cost would be unbearable. Another topic touched upon is the recent correction in gold. The price move over the past week should come as no surprise to anyone. On May 19th we noted Goldman's most recent move to a bullish stance in gold, and we concluded that "we may well be in for a gold retracement, at least from a purely
technical standpoint, as Goldman "distributes" its newfound gold
holdings" as Goldman moved to sell its gold to whatever few clients it has left. Sure enough, $70 dollars lower later, Goldman's ever-angrier clients who listened to this most recent horrendous tactical call, are only left with a receipt for a metric ton of KY. The gold move is nothing more than liquidation of real assets to cover margin calls in imaginary ones, such as LBO bonds which have moved from 10 cents on the dollar to par during the melt up, and are now seeing a bidless environment, a groupthink phenomenon of which a plunging FDC is the prime example. Those who have no reason to sell gold should obviously hold right - Rickards notes: "for every seller there is a buyer. The sellers are the daytraders, speculators and people in distress who need to raise cash, buyers could be foreign sovereigns, China, Russia, India, so we could be seeing a move from weak hands into strong hands. I see gold at $2,000 in the short-term, and $5,000 in the long-term." Also discussed is Germany's ban on naked shorting, which Rickards applauds, not so much as a policy move, but as a symbolic stand by European sovereigns against the bullying power of Wall Street, something we fully agree with is long overdue. "Merkel will definitely be supported by others. I know the French were a little but upset that she did it, but they are not upset because she did it, but that she did it first. Sarkozy will join in."

It's silly to compare today's markets to those of the 1930s or even 1990s. Erratic moves have become the norm, not the exception. What's driving these moves and what is the paradox which threatens the integrity of capital markets and might ultimately threaten the global economy?

Fresh off his "You own the Red Roof Inn" tour, Alan Grayson gives another svelte performance as he introduces the latest soon-to-be buried-in-committee bill with the help of his trusty easel.