Archive - Jun 2010

June 30th

Was AIG, In Addition To Being The Riskiest Company In The World, Also A Precious Metals Manipulator?

A little under two years ago, there was a big debate in the precious metals community, in which two groups of individuals were arguing for and against possible silver market manipulation, via arbing the COMEX and the OTC. On one hand you had such distinguished economists/bloggers as Mish (here and here) and Jon Nadler of Kitco (here) claiming there is no such thing as a COMEX-OTC arb because markets are ultimately efficient, and the second a trade is effected in one market, it implicitly affects all other markets, making spread arbing, and thus "manipulation" impossible. On the other hand, you had C.Loeb making precisely the opposite argument (here). After a brief flare up, the debate died down, with a partial win acceded to Nadler, who ended the debate with the following rhetorical statement: "Also, by the way, why not NAME the sinister manipulative banks in question? Why not ask them outright as to the motives behind their positions (or better yet, who their clients were) and whether or not they acted in a "willfully nefarious" manner? Conclusion: One can take any database and make it suit their conspiracy argument. That, however, does not make for proof of any kind." In other words, Mr. Nadler was asking for a bank to confirm it was arbing the COMEX-OTC spread, which in turn would unwind his defense argument, and lend credence to the claim that some players, due to their massive scale or otherwise, succeed in manipulating the silver (or gold) market by profitably spreading the legs of the trade in two completely different markets and arbing this spread. For the longest time people looked exclusively at JPMorgan for clues. Boy, were they wrong... and are they about to be surprised that in addition to almost blowing up the world, AIG FP has admitted that it itself, as the defacto risk mastodon and suicide bomber under Joe Cassano, with "$426 billion in total on and off balance sheet risk equivalent delta," was precisely just this spread manipulator. But don't take our word for it. Take AIG's.

Leo Kolivakis's picture

After maintaining a low-risk real estate strategy for decades, studies commissioned by Calpers show that it switched gears in 2002, embracing higher levels of risk even as the real estate market began to top out in 2005. By mid-2009, Calpers had a one-year loss of 48.8% in its real estate portfolio and was reporting among the lowest returns of any large pension fund in the country.

The CDS Wolfpack Is Now Coming After France... China

A month ago, Sarkozy was pissed that Merkel had dared to take the initiative over him and to ban naked CDS trading. Being a stubborn reactionary, this action only prolonged his inevitable decision to do the same (because politicians, being the wise Ph.D's they are, realize fully all the nuances of screwing around with the financial ecosystem). However, looking at this week's DTCC data, we have a feeling he may accelerate his decision to join the CDS-ban team. With a total of 456 million in net notional derisking, France was the top entity in which protection was sought in the past week. In a very quiet week, where the 5th most active name did not even make it past the $100 mm threshold, France was more than double the number two sovereign - Mexico (we are unclear if this is some sort of contrarian move to the Yuan reval, which Goldman was pitching as MXN positive, which means traders likely hedged by loading up on Mexican CDS). But what is probably most notable, is the sudden and dramatic appearance of China in the top 3rd position. Welcome China! And after tonight's surprise PMI miss and the resulting market drubbing, we are confident within a week or two, China will promptly become a mainstay of the top 3, and will quickly rise to the top position, where it rightfully belongs. We are also confident those perennial Eastern European underdogs, Romania and Bulgaria will shyly make an entrance in the top 10 next week.

Guest Post: Political Lessons from the Walang Kulit, Pt 1

This is the inaugural issue of The Phoenix World Views Digest. The purpose of this newsletter is to apply independent investigative analysis to the socio?political?economic structures of the world. The media, for the most part, has become corrupted by special interests, advertising dollars, and corporate relationships (see image below). Consequently, it is no longer a forum for independent commentary or insights. This centralization of media results in most outlets promoting the same “take” or views on a given story. And more often than not, the sources cited in the article come from the Federal Government or someone with close ties to it. The end result of this is that most media coverage ends up being a kind of grand distraction meant to draw the public’s attention from the real issues that determine the US’s economic/ political policies.
The goal of this newsletter is to avoid these distractions and detail the real relationships and socio?economic dynamics that define our reality. - Phoenix Capital Research

David Kostin's March 13 "S&P 1,300 By June 30" Call Is Only 30% Off

On March 13, David Kostin boldy went where A. Joseph Cohen has gone so many times before, by becoming the best contrarian indicator around. To wit: "Investors we met this week remain bullish in both outlook and
positioning, consistent with our view. We expect S&P 500 to
rise to 1300 by mid-year (+13%), before ending 2010 at 1250 (+9%).
" Kostin missed his target by 30% in 3 months. We are not sure if even his equally capable predecessor, AJ Cohen, was as skilled at so wholesomely raping and pillaging the P&L of the firm's few clients who still are terrified to utter a squeek of disapproval against the monopolist for fear of losing those oh so precious trading axes, formerly rightfully belonging to GS archrivals Lehman and Bear Stearns. Luckily, we have Christine Varney keeping an eye on such market monopolistic behavior.

Daily Oil Market Summary: June 30

Alex was upgraded to a hurricane on Wednesday, and it was close to making landfall near the Texas-Mexico border. As a precautionary measure, an estimated 26% of oil production and 14% of natural gas production in the US Gulf were shut down. After picking up wind-speed over the warm waters of the western Gulf, Alex became the first Atlantic hurricane in 15 years to occur in June. Still, Alex was not the driving story. This week’s DOE report showed a decline of 265,000 bpd in the four-week average for all products supplied. A week ago, the same figure was 1.261 million bpd (6.89%) higher than a year ago; this week it was 873,000 bpd day (4.73%) higher than a year ago. There was a larger-than-expected build in distillate stocks, and there was a build in gasoline stocks. Crude oil stocks fell by more than had been expected, and refinery utilization was lower rather than higher. Gasoline demand came in at 9.462 million bpd, which was less than SpendingPulse’s 9.498 million bpd and substantially less than the implied gasoline demand figure of 9.706 million bpd reported by the API. - Cameron Hanover

Explaining Derivatives, And Goldman's Dominance Thereof, In Four Simple Charts

Attached are several charts used to explain to confused politicians all they need to know about the biggest ponzi scheme market ever created (synthetic derivatives), how these derivatives are created, how the leverage attributed to just one asset can result in infinite amplification of risk, and how Goldman is in the very middle of a web which encompasses tens if not hundreds of trillions in derivative counterparty exposure with virtually every single other financial company in the world.

The CBO Issues Most Dire Warning On US Budget Yet, Warns US Debt Will "Swiftly Be Pushed To Unsustainable Levels"

In its just released Long-Term Budget Outlook, the CBO has come out with the most dire warnings on the US projected debt  to date. In summary, the healthcare spending and the Social
Security will consume an increasing portion of the budget and will push the national debt up sharply unless lawmakers act,
CBO Director Douglas Elmendorf warned. "CBO projects, the aging of the population and the rising cost of health care will cause spending on the major mandatory health care programs and Social Security to grow from roughly 10 percent of GDP today to about 16 percent of GDP 25 years from now if current laws are not changed." While this does not sound too dramatic, the way it is attained is with the following ludicrous assumptions (which Paul Krugman would certainly call perfectly normal): "government spending on everything other than the major mandatory health care programs, Social Security, and interest on federal debt—activities such as national defense and a wide variety of domestic programs—would decline to the lowest percentage of GDP since before World War II." Good luck with that. In the more realistic, alternative fiscal scenario, the CBO observes, that "with significantly lower revenues and higher outlays, debt would reach 87 percent of GDP by 2020, CBO projects. After that, the growing imbalance between revenues and noninterest spending, combined with spiraling interest payments, would swiftly push debt to unsustainable levels. Debt as a share of GDP would exceed its historical peak of 109 percent by 2025 and would reach 185 percent in 2035." The CBO's conclusion is a nightmare to each and every hard-core Keynesian fundamentalist (you know who you are): "the sooner that long-term changes to spending and revenues are agreed on, and the sooner they are carried out once the economic weakness ends, the smaller will be the damage to the economy from growing federal debt. Earlier action would require more sacrifices by earlier generations to benefit future generations, but it would also permit smaller or more gradual changes and would give people more time to adjust to them."

Relentless Equity Fund Outflows: ICI Reports Another $1.2 Billion Redeemed, 8th Straight Week Of Outflows

Crunchtime for mutual funds has arrived. On one hand they are getting slammed with the S&P now almost -8% YTD causing a collapse in the funds' own equity values. On the other hand, investors have now withdrawn $30 billion in cash, forcing a feedback loop where selling begets selling, and even more redemptions. Ah, the beauty of a Keynesian system falling apart. And let's not forget that fund cash levels are at all near record lows to begin with. If the market slide can not be contained, and if consumers who already have zero faith in the market retrench even more, it could be the beginning of the end for the fund industry. More relevantly, ICI has just reported $1,248 million in outflows from domestic equity mutual funds: this is the eighth sequential week of outflows since the Flash Crash, and a period during which $32 billion has been redeemed.

PPT Stuck In Line To Purchase iTimberrrrr App For iPhone 4

The sudden and dramatic absence of the Liberty 33 folks can only be explained by their realization that there's an app for market crashes. Alas, they have to wait in line like every other Steve Jobs fanatic. That's the only explanation one can come up with to explain why the market is plunging. Nothing else that makes sense: the economy is flourishing, Europe is hella strong, China is growing like a weed, the Baltic Dry is going to the moon, there are 5 jobs for every American, US debt is negative, one month T Bills are not negative. In other news, 1,040 taken out. 865 next stop.

Market Now Just 15% Above 666 Lows, 22% Off 2010 Highs, When Priced In Gold

It may come as a surprise to some that when the market's performance is expressed in the opposite of infinitely dilutable paper, we are currently just barely 15% higher than the generational S&P low of 666. As the chart below demonstrates, the S&P expressed in gold is plunging, and has dropped 22% from its 2010 highs, down 18% from the beginning of the year, and just 15% higher than March 5, 2009. As Russia and GLD have been demonstrating so aptly over the past 5 months, gold is not dilutable, and can not be contaminated with various Greek sovereign bond holdings. It is, in summary, pure, and is immune from that strain of 100% lethal, and printerborne, Central Banking syphilis where one's paper rots off. Which is why the Dow may easily pass 36,000. The issue is that at or about that time, the Dow to Gold ratio will be 1. Note also, the downward channel in the SPX/Gold index: each day this channel is not broken, is another day that Bernanke pops a few extra Ambien.

Berkshire May Be Required To Post Up To $8 Billion In Collateral

Some bad news for Uncle Warren. In a note by Barclays' Jay Gelb, the insurance analyst evaluates the impact of FinReg on that "other" company and concludes that as a result of Berkshire having $62 billion in notional derivative exposure, the additional collateral requirement contemplated in the current version of Financial Reform (don't worry, the corrupt idiots in Congress will strip it before all is said and done), which amounts to 10% of notional, or 100% of option proceeds, would result in $6-8 billion in collateral posting requirements imposed on "America's Company." Even for Buffett, this is not purely chump change.