Archive - Apr 13, 2011

GFMS, arguably the most respected precious metals consulting company, has just released its much anticipated 2011 Gold Survey. While the rather expensive 128 page report is not available for public consumption (yet), the gist is as follows: GFMS sees gold prices averaging $1,455 an ounce this year and sticking to a range of $1,319-1,620 an ounce, executive chairman Philip Klapwijk told delegates at the launch of its Gold Survey 2011. Klapwijk said the market had probably already seen the lows for this year, after prices slipped towards $1,300 an ounce in late January during a broad-based sell-off of commodities.Quoting Klapwijk: "Overall, we would not be surprised, therefore, to see gold break through $1,600 before the end of the year." Neither would Goldman, which needs to buy some more, thus expect a downgrade shortly.

The IMF has released its 2011 Global Financial Stability Report which summarizes the fund's view on the causes for ongoing market instability and proposes some solutions on how to continue. Not surprisingly, the IMF sees the key threat as follows: "The main task facing policymakers in advanced economies is to shift the balance of policies away from reliance on macroeconomic and liquidity support to more structural policies—less “leaning” and more “cleaning” of the financial system. This will entail reducing leverage and restoring market discipline, while avoiding financial or economic disruption during the transition. Thus, ongoing policy efforts to withdraw (implicit) public guarantees and ensure bondholder liability for future losses must build on more rapid progress toward stronger bank balance sheets, ensuring medium-term fiscal sustainability and addressing excessive debt burdens in the private sector."  The key issue here is that as the IMF correctly observes household leverage, still at unsustainable levels, continues to be a threat to the financial system (despite aggressive attempts to transfer leverage from the private to the public sector) and may further weaken banks (but not if one listens to JPM - it's all unicorns and rainbows there). Yet the scariest news: "Global banks face a wall of maturing debt, with $3.6 trillion due to mature over the next two years." But that's ok- these banks will focus on funding US Treasury issuance first, ergo no need for more QE...

Yesterday, Goldman Sachs decided to call the top in commodities. But the markets are telling us something different...

The FBI and the Secret Service showed their willingness today to utilize the expanded definitions of “counterfeit currency” and “domestic terrorism” brought about by the recent conviction of Bernard von NotHaus of the alternative currency outlet “Liberty Dollar” when the agencies initiated a surprise raid on an unsuspecting Chuck E. Cheese establishment in Des Moines, Iowa. “Haven’t you ever been at the laundry mat with a pocket of change thinking you have plenty of quarters, only to discover that most of them are Chuck E. Cheese tokens?!” railed Anne Tompkins, Department of Justice prosecutor in the Liberty Dollar case, as she read from a carefully prepared DHS script. “That is close enough to counterfeiting for me! It is a blatant destabilization of our democratic economy! What are you supposed to do, let your underpants wallow in filth while Chuck E. Cheese makes a profit? I say no to these financial terrorists!”

March retail sales which came at 0.4%, below expectations of 0.5%, and down from an upward revised 1.1% February, confirm that the economy in Q1 slowed down materially toward the end, and was certainly not as hot as had been predicted early in 2011. This was the lowest improvement since June 2010. The number was offset by the "ex autos and gas" number which came at 0.6%, better than expected, although with ever more capital being diverted to gas purchases this is cold comfort to those who have to use gas. The biggest weakness was in auto sales which dropped by a substantial 1.7%. Retail sales increased a modest 0.3% (and retail and food total up 0.4%). Gasoline stations saw another sizable increase of 2.6% sequentially and 16.7% from a year earlier. Food and beverage stores were among the weakest posting just a 0.1% increase in March.

• Obama Said to Call for Entitlement Cuts, Higher Taxes (Bloomberg)
• Banks Face Sovereign Debt Scrutiny in EU Stress Tests (Bloomberg)
• ECB: Ireland’s Taxpayers Must Share the Pain (FT)
• BRICS Push Resource-Hungry China to Buy Finished Goods (Bloomberg)
• China’s Nuclear Freeze to Last Until 2012 (FT)
• TEPCO still working on plan to end Japan nuclear crisis (Reuters)
• Schneider Says Currently No Talks With Tyco About Alliance (Bloomberg)
• Portugal's Leaders Bicker Over Bailout (WSJ)
• Chinese Companies Go on Global Bond Spree (FT)

Stocks are higher in Europe after gains in Asia despite losses on Wall Street yesterday. Gold and silver are showing tentative gains after 1% declines yesterday. With America set to have the largest budget deficit of any of the developed economies, a whopping budget deficit of 10.8pc of GDP this year alone, gold and silver’s medium term prospects remain positive. The IMF has warned that the U.S. lacks credibility regarding its debt and must implement stringent austerity measures. This is one of the primary factors which strongly suggests that, contrary to the consensus, a double dip recession looks increasingly likely in the U.S. This would be negative for the dollar and US treasuries and lead to higher gold and silver prices due to safe haven buying. Central banks are questioning the dollar and the euro as reserve currencies due to the massive liabilities and debt levels confronting the US and the Eurozone (see News below). This is set to lead to central banks continuing to be net buyers of gold for the foreseeable future

• Chinese cos go on global bond spree; Mainland groups have borrowed $12.2B this yr.
• Japan cuts its economic assessment as earthquake damage mounts.
• Obama said to call for cuts in entitlements, higher taxes.
• Oil hovers above $106 in Asia as investors eye crude demand amid 2-month rally.
• OPEC sees higher demand for its oil in 2011 at 29.9M barrels/day, up 400,000 bbls YoY.
• Swedish government expects public finance surplus in 2011, tax cuts in 2012.
• Taiwan halts plans to build atomic reactors after Japan crisis.
• US Import prices increased 2.7% in March on crude oil, food.
• US lacks credibility on debt, says IMF. Stringent austerity measures needed.

Busy day with quite a bit on the economic front: if Gallup is right March retail sales will be weaker than expected. Other key events include the JOLTS survey, business inventories, a Treasury auction and the inverse - POMO; and last Obama is presenting at noon his deficit reduction plan.

And so the loan loss reserve accounting game continues. JPM just reported earnings of a solid $1.28/share for Q1 2011, generated by net revenue of $25.8 billion (a decreased of $2.4 billion from a year ago). This would have been enough to push the stock substantially higher... if only $0.29 of this "beat" was not from a purely accounting benefit from reduced credit card loan loss reserves. Now the only question is how much of this credit card improvement is from credit card holders paying their credit card cards instead of their mortgage (and with a $50 billion annual squatters rent benefit this is not a trivial question). Considering that JPM announced a $650 million expense for estimated costs of foreclosure-related matters our guess is "a lot." Per Jamie Dimon: " "Retail Financial Services demonstrated good underlying performance, while we continued to invest in building branches and adding to our sales force. However, this performance was more than offset by the extraordinarily high losses we still are bearing on mortgage-related issues.(a) Unfortunately, these losses will continue for a while. Rest assured, we are fully engaged in fixing our problems and addressing our mistakes from the past, and we will strive to build the best mortgage business going forward.""

When evaluating a money manager, what's more important, process or performance? Are hedge funds that sell premium (short vol) better than ones that buy premium (long vol)?

RANsquawk European Morning Briefing - Stocks, Bonds, FX etc. – 13/04/11

The market traded down today as earnings season began not with a bang, or a whimper, but with a