Archive - Oct 2011

About a year ago, we speculated that as part of the ongoing currency warfare between Brazil and the "developed" world, its finance minister Guido Mantega would keep his trade surplus trump card until the moment of biggest impact. That moment has come, after the financial head (with the Playboy-posing daughter) just told Europe to take a hike. "I believe that European countries do not need funds from Brazil to buy bonds. Brazil is not considering it," Mantega told reporters in Brasilia. "They have to find solutions to the European problems within Europe." And with Brazil out, it is certain that China will not step up over fears of appearing weak and needing to provide vendor financing to its biggest export partner. Unfortunately for Europe this means that at least one component of the revised SPIV: that which foresees public investment from third parties into the EFSF (a new twist proposed only last week), can now be safely forgotten, bringing us back to page one and the entire 5x levered CDO structure which as has been explained numerous times, is Dead on Arrival. There is, however, one loophole. "Mantega said Brazil would be willing to provide financial help via the International Monetary Fund." Which is rather laughable considering that by IMF, one typically refers to, at least in polite society, Uncle Sam. Then again, with a French woman (and one who until recently was solely reponsible for the grave French financial condition) in charge, it is easy to lose sight and to be, there is that phrase again, baffled by irrelevant bullshit even as following the bailout money always lead to the same old source.

Is it safe to say that the Goldman love affair with the government is officially over? From Reuters: "Former Goldman Sachs director Rajat Gupta will surrender to the FBI on Wednesday to face criminal charges, a person familiar with the investigation said. Gupta was named as an unindicted co-conspirator in hedge fund founder Raj Rajaratnam's trial earlier this year. He has denied wrongdoing. Rajaratnam was sentenced to 11-years in prison this month. Gupta's attorney, Gary Naftalis, did not immediately respond to a call seeking comment." Perhaps it is also safe to say that the war between Obama and Wall Street is now official. Of course, we give Obama about 24 hours before the economy tanks, the stock market implodes, the great unwashed see their meager 201k's converted into 100.5k's, and decide to #OccupyTheWhiteHouse. In other words, our money is not on the administration on this one. In fact, when the smoke settles, we expect a few extra tentacles from 200 West to penetrate even deeper into the three farcical branches of government of this once non-banana republic.

On Friday the "haircuts" on Greece get serious. No more bogus high coupon principal protected notes - but real notional reductions of 50 per cent or more. I believe the ECB has a portfolio of 55 billion of Greek debt. If average price was 80 then that is a 16.5 billion actual loss. ECB, unlike our beloved FED, doesn't want to just print money so they make a capital call on their members. Yes, the same members that back the EFSF. How many of those members even remembered the ECB can call for additional capital (it's why they are so happy to employ the double down don't frown trading strategy). The terms of ECB capital calls are worse than EFSF because they are joint and several. If countries don't meet their obligations they don't go away, they get passed to another country. So as ECB loads up on PIIGS debt and losses or haircuts would be paid for by the non problem countries - in addition to their EFSF obligations. Germany maybe has learned not to overextend and is scared to pile this (previously ignored) liability on top of it's EFSF guarantees. At least EFSF is something they have control over. France I think was planning on loading up the ECB with so much debt they would just capitulate and print money.

So much to consider....

In this video excerpt from the Casey Summit When Money Dies, Rich Dad advisor Mike Maloney explains how currency is created, "fractional reserve banking," and why our banking system is a pyramid scam of epic proportions.

It was bound to happen: after hitting a two year high recently at (adjusted) 15.3 billion shares, total NYSE short interest, which failed to be satisfied with a violent market plunge and instead got caught in a vicious short squeeze, has dropped to the lowest level since mid-August, or 14.7 billion shares. Naturally, this, coupled with the massive bearish bias in the euro, discussed previously, where covering merely added to reinforce the squeeze dynamics, are sufficient to explain the weak hands covering following the unprecedented near 1000 point jump in the DJIA. The good news for bears: it appears the weak hands have been shaken off now. At this point, even if no incremental shorts are layered on, then certainly the autopilot melt up in equities will be next to impossible to be sustained, and some real, not rhetorical, pick up in the global economy will be needed. Alas, one is not coming.

The latest Momo implosion as predicted:

• AMAZON.COM 3Q EPS 14C, EST. 24C                       
  
• AMAZON.COM 3Q REVENUE $10.88 BILLION VS EST. $10.95
  
• AMAZON.COM SEES 4Q SALES $16.45B-$18.65B, EST. $18.16B
  
• AMAZON.COM 3Q OPERATING MARGIN 0.7%
• AMAZON.COM sees 4Q operating income (loss) between $(200) million and $250 million, or between 142% decline and 47% decline compared with fourth quarter 2010

No, Paulson & Co. is not long.

Very simply, the facts of the current environment in Europe don’t equal the conclusion that a coordinated effort will restore confidence.  The fact of the matter is that European Sovereigns are massively indebted and European banks are massively under-capitalized.  The proposed solution of raising capital and issuing fresh debt to solve this issue is a joke.  If I walk away from a home I owe $200k on and its fair market value is $100k (a 50% haircut), does a loan to my bank for $100K from the institution overseeing it change the impairment?  No.  You’re shuffling the cards.  Instead of taking a $100k loss, they now have an asset worth $100k and a new liability of $100k.  The asset is still worth $100k. Even though their little maneuver technically gives them an asset of $100k and cash of $100k, my bank now has $100K less to lend against.  Thus, their leverage increases.  This analogy applies to European banks holding sovereign paper... and for that matter the countries themselves (ie Italy voting on whether Italy's debt should be purchased by the ECB/IMF/EFSF, etc).  At this point, any 'plans' are only slightly more creative than card shuffling tricks from a clown at an 8 year old's birthday party. 

If you are long, or want to get long here your stop losses will be wide and volatility based. Here are some tips on managing the positions:

• Silver Stop Loss should be $32.45. You can pick a tighter stop if you like, but this is the proscribed level for pullbacks to go to and the bull move to remain intact. Losses can be managed by adjusting volumes rather than tightening stops.
• Gold Stop Loss Should be $1680.00. This may seem less risky than silver, but that often means worse reward potential.
• Tomorrow morning trail stops higher as profits occur, use previous lows, highs on the hourly level or the top Bollinger Band line on the Daily chart previous session.
• Get ready to take profits aggressively: when these hit, 80% of the projected volatility based move is in the first 72 hours
• Get out if you are not in the money in 48 hours, even if your stop isn’t triggered. Momentum fades fast if you don’t get follow through from the immediate push.

And just as we were thinking of buying some deep OTM calls...

While Citi's Stephen Englander does not go as far as concluding that a collapse of Europe would be sufficient (but certainly necessary) to "ruin" the world, he does have a very relevant conclusion in a piece just released to clients: namely that central banks everywhere, but in Europe, are using the recessionary slow down in the insolvent continent, which nobody seems to believe any more will be able to avoid a recession (an event which S&P stated in no uncertain terms would lead to a downgrade in France and other core countries), as the perfect political smokescreen to push the turbo print button on their respective money printers. To wit: "Eurozone weakness has also generated indications that policy will be eased elsewhere (even if not in Europe). Policymakers in the US, UK and elsewhere [ZH: and Japan as of 2 hours ago] are using the euro crisis as cover to ease policy. For example, the FRBNY's Dudley yesterday characterized even the improved US numbers as disappointing and pointed to further measures if growth did not improve. Chinese growth targets and policy maker comments imply that measures might be taken if there is any sign of slowing. The BoE has already expanded it QE program. At a minimum the comments are suggesting that the policymakers are willing to take aggressive action to offset any weakness. Overall the bias towards stimulus appears to remain in place outside Europe." What is supremely paradoxical is that with the ECB stuck, any incremental QEasing by the world will merely result in an ever stronger euro, until exports by Germany become almost as impossible as those of Switzerland pr peg. As a result, organic European growth at whatever remaining centers of productivity and commerce will be truncated until it is gone completely, even as the EURUSD approaches 2.00, as the Fed embarks on what will be by then something between QE5 and QE10. And there are those who wonder why gold makes sense not only here, not only at $1570 a month ago, but at $1900 under two months ago...

If you know what's good for you, you will pour your coffee into the sink before you look at this.

In the aftermath of the wipe outs in former momo-stars Netflix and First Solar, for some inexplicable reason, we have been flooded with demands to present an updated portfolio of one JAT Capital Management. Always willing to oblige, here are the top 25 holdings.

Phil is interviewed on the Business News Network.