Archive - Jan 17, 2011

One of the bigger semi-bubbles over the past several years has been the "solar" space: an industry that has long held promise as an alternative replacement to oil yet which continues to struggle with low efficiencies and, thus, needs ongoing government subsidies (a premise which will likely be re-evaluated should crude surge into the triple digit area). Unfortunately, in a time of global austerity, which is slowly spreading everywhere but the US, said subsidies for solar companies (and thus cash flow bleeding stocks) may soon be at an end. Dow Jones reports that Germany: one of the bigger subsidizers of a fledgling solar industry, is set to cut solar subsidies by up to 12%, 6 months ahead of schedule.

Two weeks after we presented Niall Ferguson's video lecture - "Empires On The Verge Of Chaos" to tremendous reader response and almost 30,000 views, we follow up with another must watch video presentation, this time highlighting the intellectual rigor of Ferguson, David Gergen and Mort Zuckerman. The topic once again is the Financial Crisis, and specifically how, why and whether it will lead to America's decline. Of particular note is Ferguson's spot on characterization of the primary deficiency in the so-called brains of economists, namely that they see patterns, equilibria and stable systems where there are absolutely none: i.e., in the complex (as in Lorenzian) world of economics: "Complex systems look like they are in equilibrium, but they are not: they are constantly adapting, highly decentralized, interdependent systems and this process of adaptation can continue for quite a long time. And you think to yourself when you look at it, that's in a wonderful equilibrium. That's how we think about the economy. That is how economists teach economics. They talk about it in terms of equilibrium. The bad news is that in fact we inhabit a complex system that has virtually nothing to do with the neoclassical model that you are taught in Econ 101. And that's why the economists failed to predict the financial crisis... For me American power if you generalize beyond the realm of finance through the geopolitical system is a perfect example of a highly complex system which looks like it is in equilibrium but like all the great empires of the past is quite close to the edge of chaos. And our nightmare scenario should be that something happens to us like happened to the Soviet Union... It suddenly just falls apart. And I think the trigger, the catalyst if you want to switch to chaos theory the butterfly in the tropical rainforest that flaps its wings and posits the distant thunderstorm is going to be the credibility of fiscal policy. That just seems to me like the obvious place where things can turn nasty, and they turn nasty with amazing speed."

Tim Staermose, one of our Asia partners, was in Hong Kong last week, and he conducted his normal rounds of the various banks in the Central business district that sell gold bullion coins over the counter to walk-in customers such as Hang Seng Bank, Bank of China, and Wing Lung Bank. At Hang Seng Bank, Canadian 1 Oz Maple Leaf coins -- in pure, 24 karat gold -- were available for cash purchase in Hong Kong dollars at just 0.5% above the prevailing spot price of gold. This is dirt-cheap... or as they say here in Chile, 'precio de huevos', and it certainly presents an interesting arbitrage opportunity. Depending on your objectives, however, there may be even better gold coin buys in Hong Kong at the moment. Over at the Bank of China, for example, the Chinese Panda coins were quoted at 4.9% above spot gold. Personally, I think the Panda is one of the most beautiful gold coins of all, and in North America they typically sell for much greater mark-ups above the spot price of gold than most other coins, often over 20%. In the UK it's even more.... This situation can be exploited to your advantage-- the difference between the buy price in Hong Kong and the sell price in North America is roughly $275 per 1-ounce coin.

Per the WSJ's Dennis Berman: "What a black eye for Lloyd & Co." Does this mean that not even Goldman is allowed to come up with innovative financial "schemes" any more? At least the SEC is spared the indignity of wristslapping its master. In other news first Apple, now Facebook... It is not too late for Sack-Frost to put up a provisional backstop POMO for tomorrow. The 45 minutes time slot starting at 1:15pm looks pretty vacant.

RANsquawk US Afternoon Briefing - Stocks, Bonds, FX etc. – 17/01/11

And so with a slight delay, one by one the bears come out of hibernation. Today, SocGen's Albert Edwards is the first to remind us that no matter how high the Fed pushes stocks (as per Bernanke's now own admissions of the Fed's "third mandate"), it means exactly nothing for the economy, and the actual cash flow drivers that in a non-bizarro world validate any bull market, not the straight line bear market rally that has continued to defy gravity and reality for two years now. The catalyst as per Edwards, is once again the recurring threat of a demographic crunch, phrased in a way that only the SocGen strategist can: "Our Ice Age thesis called for a long secular equity valuation bear
market, just like Japan. Most reject the comparison with Japan, especially with regard to the US having better demographics. Indeed I
felt that beyond the lost decade and secular bear market, the US outlook
was much more upbeat that Japan’s. But now, I am thinking I might have been too bullish....I haven’t really cracked this one but chatting this through with a number of people, I would suggest that although GDP growth may be more closely related to the absolute growth of the working population, asset price inflation may be more closely related to the proportion of workers in the general population. If that is the case, as the former baby-boomers start to retire this burgeoning cohort will tend to liquidate assets. This only exacerbates the secular bear market for property prices (which have already begun to decline again) as well as the equity market. This means that Bernanke for all his efforts may not be able to prevent the secular valuation bear market fully playing out until rock bottom valuations are reached." Oops.

On Friday we disclosed that major PM distributor, retailer and trading house BullionVault.com had run out of physical silver inventories in Germany (and possibly elsewhere) and was advising clients to seek the precious metal elsewhere. Today, we find that the UK joins Germany in what is now becoming the second round of the global silver shortage (the first one occuring in May 2010 when it was unclear just how the ECB would deal with insolvent PIIGS). Below is the warning by British BullionByPost notifying clients that the company currently has no silver bars in stock. Inventories are expected to be restocked later in February. In the meantime, as before, we urge customs agents to do a quick check of the cargo hold of all private jets (and time shares) registered to any banker making over $25 million. After all, surely the Tunisian president didn't come up with the idea to flee with 25% of Tunisia's gold entirely on his own.

And meanwhile the charade in Europe continues, after the ECB purchases a whopping €2,313 million in the week ended January 17, bringing total purchases under the SMP program (a/k/a toxic crap monetization) to €76.5 billion. This is roughly 20 times higher than the pathetic €113 million monetized in the week before, when deluded holders of PIIGS debt were not selling hand over fist on the inane assumption that Europe will actually survive the imminent implosion. Last week's total purchases were the second highest weekly amount since July 2010, only topped by the €2,667 million purchased in the week ending December 13 when Ireland went tits up, and peacefully and very gracefully presented the key to its sovereignty to ubercrat Olli Rehn.

Below we present the top 200 holders of AAPL stock. The holdings of the smallest one in the group amount to $133 million. We are confident they will all exit the theater in a calm, collected fashion. And oh yes: paging groupthink king Dr David Kostin...You are urgently needed in the burning theater.

AAPL Bid/Ask: EUR 233/249.85
Last EUR 239.5 down -20.7 (-7.96%)

And it was just yesterday that we ridiculed the Goldman brain trust for pushing everyone into the world's biggst hedge fund hotel, Apple, which is held by over 190 hedge funds. Don't look now but Nasdaq futures are about to get reacquainted with gravity.

Jobs also says that he will continue as CEO and be involved in major strategic decisions for the company. As a reminder Apple accounts for about 20% of the Nasdaq. As a further reminder, the last time it was even rumored the COO was leaving, the stock tumbled $20 in the span of a few milliseconds. German listed Apple shares fall 1.8% following the news.

There were many skeptics when I said that housing values would go so low that banks wouldn't even find it cost effective to foreclose. Many relatively bright people dismissed my statements as sensationalist or unrealistic. Well, I suggest some explain that to those folks in Chicago where banks are probably walking away from thousands of homes.

Philly Fed's Plosser once again releases a slam dunk speech which is the most vocal critique of Ben Bernanke's interpretation of the freedoms afforded to him by monetary policy to date. "How do you use monetary policy to burst a bubble in Las Vegas real estate, where house prices were appreciating at a 45 percent annual rate by the end of 2004, without damaging the Detroit market, where prices were increasing at less than a 3 percent annual rate? Because monetary policy is such a blunt instrument, asking monetary policy to do what it cannot do, such as seeking to deliberately influence the evolution of asset prices, risks creating more instability, not less. Moreover, the moral hazard created by the belief that the central bank would intervene if prices of a certain class of assets became “misaligned” might, in fact, cause more inefficient pricing and more instability, not less...monetary policy cannot reverse the sharp decline in house prices when the economy has significantly over-invested in housing" And more: "I have advocated the elimination of Section 13(3) of the
Federal Reserve Act, which allowed the Fed to lend directly to
“corporations, partnerships and individuals” under “unusual and exigent
circumstances.”" Plosser's conclusion is spot on, and means that Congress should immediately enact a limit on the Chairman's recently self-appointed 3rd mandate, which is to not only reflate the biggest asset bubble in history, but to get the Russell 2000 to 20,000: " I too am concerned that we are in the
process of assigning to monetary policy goals that it cannot hope to
achieve. Monetary policy is not going to be able to speed up the
adjustments in labor markets or prevent asset bubbles, and attempts to
do so may create more instability, not less. Nor should monetary policy
be asked to perform credit allocation in support of particular sectors
or firms. Expecting too much of monetary policy will undermine its
ability to achieve the one thing that it is well-designed to do:
ensuring long-term price stability."

The press conference with Julian Assange on Julius Baer whistleblower Rudolph Elmer who plans on releasing information on "over 2,000" high net worth tax evading individuals, which we discussed this weekend, has started. It can be watched below.