Archive - May 2010

Sometimes the apple does fall very, very far from the tree. A must read essay by Howard Buffett, father of the "legendary" investor who initially was so very much against derivatives then promptly changed his tune, discusses fiat money and gold, and concludes that "human freedom rests on gold redeemable money." In this stunningly simple, straightforward, and flawless analysis, Buffett's father stresses the relation between money and freedom and contends that without a redeemable currency, an individual's freedom and one's access to property is dependent on goodwill of politicians. Buffett also says that paper money systems generally collapse and result in economic chaos. He goes on to observe that a gold standard would restrict government spending and give people greater power over the public purse. Lastly, back in 1948, Howard Buffett, said this the "present" is the right time to restore the gold standard. Alas, 60 years later, his advice has still been largely ignored, and as a result we have a global economy that stands on the precipice of global default with runaway budget deficits across the entire developed world. Key quotes: "Is there a connection between Human Freedom and A Gold Redeemable Money? At first glance it would seem that money belongs to the world of economics and human freedom to the political sphere. But when you recall that one of the first moves by Lenin, Mussolini and Hitler was to outlaw individual ownership of gold, you begin to sense that there may be some connection between money, redeemable in gold, and the rare prize known as human liberty. Also, when you find that Lenin declared and demonstrated that a sure way to overturn the existing social order and bring about communism was by printing press paper money, then again you are impressed with the possibility of a relationship between a gold-backed money and human freedom. His conclusion is eerily prophetic with what is happening with US society currently: "I warn you that politicians of both parties will oppose the restoration of gold, although they may outwardly seemingly favor it. Unless you are willing to surrender your children and your country to galloping inflation, war and slavery, then this cause demands your support. For if human liberty is to survive in America, we must win the battle to restore honest money.""

It is well-known by now that the IMF and EU have no credibility left. What, however, was not known, is that even bankrupt little Greece is now in on this secret. In the latest attempt by the veryrecipient of US and European taxpayer generosity to muscle around the bailout providers, Reuters reports that Greece is now actively trying to renegotiate the terms of its pension reform. The initial focus item: "officials said they wanted the EU and IMF to agree full pensions should be payable after 37 years of contributions instead of 40, as set out in the deal, and allow the reform to be implemented later than foreseen." Of course, should the IMF relent and give in to this, Greece will immediately demand that all Austerity requirements are null and void as they tend to lead to such unfortunate events as stormings of parliament and possible future civil war. Furthermore, with austerity now a pan-European phenomenon, look for increasing back and forth negotiations to begin all across the PIIGS and the core, as, surprisingly, nobody in Europe is all that eager to keep working the second they hit 50 years of age. Look for a plunge in the EUR if the IMF even considers engaging in terrorist negotiations. Which of course is the plan all along.

• $40 Billion in 5 Year Bonds close at 2.13% High Yield (15.05% allotted at high), compared to 2.54% previously, 2.46% average in last year, 2 bp tail from 2.11% WI at 1:00 PM
• Bid To Cover comes at 2.71, 2.75 previously, 2.58 average
• Direct bidders take down at new record of 15.0%, compared to 14.3% previously, 8.1% average
• Indirect bidders take down 40.6%, comapred to 48.9% previously, 48.6% average
• Primary Dealer Hit Ratio of 24.3%, compared to 20.3% previously, 24.6% average

• Finra fines Citigroup Inc over cemeteries
• Finra says Citigroup pays $1.5 million for failures related to scheme to misappropriate millions in trust funds belonging to cemeteries
• Finra says Citigroup pays $750,000 fine, $750,000 disgorged commissions
• Finra says Citigroup does not admit wrongdoing in agreeing to settle

In reading Buffett's nearly 30 year old letter, we can't help but be stunned by the hypocrisy in the statement made by the man whose multi-billion derivative bet on perpetual ponzi expansion almost caused a liquidity crunch at none other than Berkshire Hathaway in early 2009: "We do not need more people gambling in non-essential instruments identified with the stock market in this country, nor brokers who encourage them to do so. What we need are investors and advisors who look at the long-term prospects for an enterprise and invest accordingly. We need the intelligent commitment of investment capital, not leveraged market wagers. The propensity to operate in the intelligent, pro-social sector of capital markets is deterred, not enhanced, by an active and exciting casino operating in somewhat the same arena, utilizing somewhat similar language and serviced by the same work force. In addition, low-margined activity in stock-equivalents is inconsistent with expressed public policy as embodied in margin requirements. Although index futures have slight benefits to the investment professionals wishing to "hedge out" the market, the net effect of high-volume futures markets in stock indices is likely to be overwhelmingly detrimental to the security-buying public and, therefore, in the long run to capital markets generally." We also find it ironic that everything that Buffett warned against happening as a worst-case scenario, is precisely where the US capital markets find themselves right now.  In the meantime, a month ago the NYSE introduced liquidity rebates for the 15 most actively traded contracts.

As noted yesterday, due to massive demand for physically backed gold ETF (or just one as the case may be), and due to the massive spread between NAV and FV of his gold trust, Eric Sprott announced a follow-on offering of 18 million trust units, with a 2.7 million overallottment. The offering has now priced less than 24 hours after the offering announcement; we doubt lead manager Morgan Stanley had any problems finding investors for this particular offering. Total money raised from the offering was $243 million, and could be as much as $279 million when the green-shoe is exercised.

A review of the 1st Quarter 2010 FDIC bank data reveals an ever increasing amount of nonperforming loans for 1-4 Family First Liens. Banks are sitting on $185 Billion in loans that are either 90+ Days Past Due or on Nonaccrual.

RANsquawk US Afternoon Briefing - Stocks, Bonds, FX etc. – 26/05/10

Just Reuters headlines for now, but rather self-explanatory. Time for the IMF to raise PIIGS GDP forecasts again: after all the less people work, the greater the GDP, according to recent GAAP-endorsed changes to the GDP definition.

Paul Farrell's latest perspective: "Last March I wrote "6 reasons I'm calling a bottom and a new bull." Today it's time for a new call. We've had a good year. Net gains over 50% in 2009. But now: "Game over, head for the exits." Bears beating bulls. Dow sinking below 6,470...The clock's flashing. Huge point spread. Think bear, think crash, think end of capitalism, think Great Depression II ... This is no buying opportunity, this game's in the refrigerator, call it." So much for Paul's chances of ever getting invited on CNBC.

After some marked uncertainty in FX for most of the morning, the carry unwind trade has resumed once again: the EURJPY is preparing to take out 110 support, even as stocks continue to push to the upside, however with increasingly lower conviction. The Aussie is also seeing some renewed weakness: after news surfaced about the government's backtracking on new tax lead to a push in the AUD, the temporary bullishness in the currency has evaporated. Should carry unwind continue, look for a dramatic reversal in the ES, which was on the verge of taking out 1,090 earlier.

Once again massive corporate behemoths show those bankrupt sovereigns who is in charge. Case in point China's great resource subsidiary-cum-housing bubble known as Australia. The Australian reports that a mere three weeks after the Rudd unveiled its new resource super tax, the government will back track on this proposal, and will "lift the threshold definition of a super profit from 6 per cent to 11 or 12 per cent following a ferocious campaign by the mining companies." Not to look completely toothless, the government will still keep some vestige of the tax, although now that corporations know they have the upper hand, look for this tax proposal to be soon eliminated completely. In fact, mining companies have already declared the changes do nothing to stop the risk to investment in Australia. Quite possibly one of the main reasons for this capitulation has been the huge drop in the AUD over the past several weeks, as investors have unwound long AUD trades with gusto. In the meantime, the slow, concerted creep by corporations to take over the world continues. Next step: the IBM Stellar Sphere, the Microsoft Galaxy, Planet Starbucks.

We had more respect for Jim Caron: the man who has traditionally been very objective in his estimation of market risk comes out with this particular measure of "notable risk improvement" - "3M LIBOR set a mere 0.2bp higher than it did yesterday – this morning at 0.53781%." Seriously? He also proceeds to give some other dead cat bounce indicators which are supposed to demonstrate that all is well in the world again. Obviously when confidence in the global Ponzi is dangerously low, the voices of any naysayers must immediately be silenced. We are just confused why hedge funds continue to exist in this "alpha is now extinct" environment: we have gotten to a point where one buys if other buys, Risk On, and vice versa, Risk Off. Why pay someone 2 and 20 to do this is beyond us.

The lucky country has become accident prone. Shooting itself in the foot with a 40% special tax on the profits of mining companies. Start scaling back into the Ausie dollar and the Ausie/euro cross. Australian stocks should be at the top of your list too. (FXA), (EWA).

Goldman's Jan Hatzius is now seeing a revised Q1 GDP, which will be announced this Friday, up from 3.2% (Goldman's estimate is 3.4%) to 3.7%. However, far from a good sign, this merely means that the imminent slow down is coming, and any gain in Q1 GDP over and above estimates, will result in a commensurate drop in Q2 and onward economic growth: As Hatzius points out: "Inventories are beginning to pile up at a rapid pace in the durable goods sector. These inventories rose 0.7% in April following increases of 0.6% and 0.7% in March and February, respectively. This is much faster than most companies will see as sustainable; hence some slowing in production is likely if recent - highly tentative - signs of abatement in orders (in the New York and Philadelphia Fed surveys) are at all indicative." Surely, this is nothing that a few extra trillion in QE or new fiscal stimulus can't fix, courtesy of the Central Committee.