Archive - May 2011

Is the disaster creating a buying opportunity? China has far and away the world’s most ambitious nuclear program, with 100 plants on order over the next decade. Any cut back in the nuclear program would have to be met with stepped supplies from other sources, which are unavailable. The place to go when “RISK OFF” is over? (NLR), (CCJ).

Something interesting appeared in today's Release of David Kostin's Hedge Fund Trend Monitor. Actually make that shocking: as of the end of Q1, Apple is no longer the most hedge fund-held stock in the world. After 195 hedge funds held AAPL at the end of 2010, the most of any stock, with Citigroup and JPM in 2nd and 3rd position, over the next 3 months 22 fund or over 10% of the HF holder base have dumped their entire stake. And with a YTD return of just 4% who can blame them... for jumping out of the frying pan and into the "value investor" fire: as of Q1 the most widely held Hedge Fund stock is now Microsoft with 181 holders, up from 161 in the previous quarter. Which unfortunately means that 181 hedge funds have generated a -11% return on this holding. And with few if any funds left who have yet to enter, the only way for MSFT from here on out is down. Not surprisingly, both Citi and Bank of America saw their fans depart, with 12 fund closing out their C positions, and 9 doing the same for BAC.

Several BoomBustBloggers inquired as to my opinion of what apparently was an overpriced acquisition of Skype by Microsoft. At first blush, it appears as if the management of Microsoft has lost their mind. A second look reveals a more interesting perspective. To make a long story short, Microsoft is trying to replicate Google’s cloud services.

As if Spain did not have enough to worry about with now daily protests gripping the main cities (the live webcam for the daily festivities in Madrid can be found here), next according to Goldman's John Noyce not only are Spanish bonds on the verge of a technical breakdown (and yields about to breakout), but due to the very high correlation between the Bund-Spain spread and the inverse EUR, it likely means that should the market start pricing in the Spanish domino, then the EUR, already lagging the move, is about to take out 1.40 rapidly. And with Spanish spreads flying as is over concerns what the Spanish elections on Sunday could mean for the country and the region, we can see something snap in advance of the weekend any minute.

• Netanyahu: U.S. "does not understand reality" (Reuters)
• Bank of Japan Refrains From Adding Stimulus (Bloomberg)
• Tepco Credit-Default Swaps Surge Above Levels BP Hit After Gulf Oil Spill (Bloomberg)
• IEA: More Oil Needed Urgently (WSJ)
• Obama Speech Elicits Conflicting Reactions (WSJ)
• Two top Fed officials say easy money still needed (Reuters)
• ECB Threatens Greek Funding (WSJ)
• Meredith Whitney Trips Over Her Muni Default Tale (Bloomberg)
• Watch out for tail risks hanging over Treasuries (FT)
• Spain Vote Threatens to Uncover Debt (WSJ)
• As we warned starting in December: Profit Margin Squeeze Continues to Grip the Economy (dshort)
• Capitalists Who Fear Free Markets (NYT)
• Drifting back to gold standard (The Hindu)

Gold and silver are higher again today with the debt laden dollar, euro and yen all being sold. News that China has become the world’s largest buyer of gold bullion and has seen investment demand double continues to reverberate in the markets and may have contributed to this morning’s strength. China becoming the world’s largest gold buying nation is very important. While informed analysts have been saying that this would inevitably happen much of the commentary and most of the public remain completely unaware of the huge implications that Chinese gold demand has for the gold market. Chinese investors bought 93.5 tonnes of gold coins and bars in the first quarter. China produced 340 metric tons of gold last year and consumption was about 700 tonnes, leaving a gap of nearly 360 tonnes. Demand is forecast to increase due to the growing wealth of the Chinese middle class and deepening inflation in China. What is most important and rarely covered is the fact that gold ownership by the Chinese public remains minuscule. Especially when compared to other Asian countries such as Vietnam and India.

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A snapshot of the European Morning Briefing covering Stocks, Bonds, FX, etc.
Market Recaps to help improve your Trading and Global knowledge

The GC-IOER collapse is far more significant than many people realize. The dynamics of the repo market are not always easy to understand, but somehow I don’t think that is the reason it has received zero attention outside of ZeroHedge. ZeroHedge’s coverage has rightly focused on the liquidity implications for Wall Street institutions and the overall repo market. There is also the push to get money funds out of repo and in to the regulated banking system through deposits. While these are certainly significant issues in and of themselves, I think there is an arguably more substantial aspect that has not yet been uncovered.

In yet another confirmation that Goldman's multi-million dollar push to advertise its humanitarian image on various websites has been a colossal failure, the WSJ has just broken news that the firm will shortly be the proud recipient of yet another barrage of legal inquiry in the form of subpoenas relating to its mortgage-related business, only this time not from the SEC but from criminal prosecutors. This stems from Carl Levin's massive 639 page report which referred the firm to the justice department  (and whose findings were summarized best by Matt Taibbi), an escalation which could rekindle not only a civil case against the squid, but also potentially force the new District Attorney to finally lob a couple of criminal indictments here and there, thus guaranteeing that GS stock is about to be pulverized (and cementing those plans to finally MBO the company, as the Fed's balance sheet has largely served its purpose). The WSJ clarifies: "Subpoenas don't necessarily mean criminal charges against Goldman or individuals at the firm are inevitable or even likely. The company turned over hundreds of millions of pages of documents to the Federal Crisis Inquiry Commission, a 10-member panel that examined the causes of the financial crisis. Goldman also gave tens of millions of documents to the Senate Permanent Subcommittee on Investigations." Yeah, but... ""Any step in the direction of criminal charges would be bad news for Goldman's stock price," said Jeff Harte, an analyst at Sandler O'Neill + Partners LP." And now that Rolling Stone has peeled off the scab once more and made it all too clear that the villain is and has always been GS, Lloyd may find himself on the wrong side of the Q&A session all over again.

It looks like the market will never – ever – learn a lesson. When there is easy money to be had, the market loses its mind, just like the Nasdaq did in 1999 and 2000. Prince wrote the song 1999, where he says “gonna party like its 1999.” That’s exactly what’s happening today. Like the Nasdaq in 1999 & 2000, when there were plenty of warning signs about the economy and WILDLY overvalued IPOs, Fraud Street partied on as if it would never end. One lyric from the 1999 song that most in the market forgot, however, was “party over, oops, out of time.” Most of the folks who believed in the moronic valuations that Fraud Street sold them ran out of time indeed; they bought the top and lost 90% or more of their speculation, err, pardon, “investments.” But the market didn’t learn a lesson in 1999/2000 because EZ-Al Greenspan flooded the market with “liquidity” and near-zero interest rates. His reason was, and this was admitted by Al “Bubbles” Greenspan in many interviews, to INTENTIONALLY BLOW A HOUSING BUBBLE so that the bankster pickpockets wouldn’t lose money on those horrible IPO speculations, err, pardon, “investments.” When Greenspan finally started raising interest rates, it was too late. The baton was handed to Ben “Helicopter” Bernanke who was now in charge of lying to Congress, as well as you and me, about the state of the economy. He said that the rapidly escalating economic problems, especially in Greenspan’s housing bubble, were “largely contained.” He forgot to tell us that he meant on Mars.

The QE 3 debate has been raging ever since the Fed announced QE 2 in November 2010. However, this debate is moot. The reason is because the Fed HAS to perform QE 3 in some form or another.

According to an update in gold demand trends released by the World Gold Council earlier, Q1 saw a divergence in purchasing intentions in the gold market as investors focused on physical and shunned paper instruments such as ETFs. Per the WGC: "Global gold demand in the first quarter of 2011 totalled 981.3 tonnes, up 11% year-on-year from 881.0 tonnes in the first quarter of 2010. In value terms, this translated to US$43.7bn, compared with US$31.4bn in the first quarter of 2010, an increase of almost 40%. This was largely attributable to a widespread rise in demand for bars and coins, supported by an improvement in jewellery demand in key markets. On the other hand, ETFs and similar products witnessed net outflows of 56 tonnes ($2.5bn). Redemptions were concentrated in January. Despite the outflows, the collective volume of gold held by global ETFs by the end of the quarter was in excess of 2,100 tonnes equating to more than $95bn. It is useful to realize that ever more investors see gold as not so much a speculative product, and merely as an intermediary between a fiat start and endpoint, but as a wholesale alternative to the fiat system. Obviously the best way to express this view is to focus on the physical market instead of the paper one (which as some investors in SLV have learned the hard way). And speaking of silver, a quick glance at today's Comex holdings update indicates that while total silver continues to flirt with the 100 million ounce total on the downside (hitting a record low yesterday at 100.5 million ounces), following yet another reclassification from Registered to Eligible silver at the Comex vault for a total of 496k ounces (or 6.3% of the vault total), true physical in the Comex just dropped to a new all time low of just 32.2 million ounces.

The Canada Pension Plan (CPP) Fund ended its fiscal year on March 31, 2011 with net assets of $148.2 billion, a gain of 12% in FY 2011. The Fund's private markets led the charge as they more than tripled their investment in Skype and made other successful strategic investments...

Back in November, we posted a piece by Knight Research titled "The Game Is Over" in which the firm's strategist Mark Lapolla presented his thesis why he believes that "the structural and cyclical terms of global trade have finally reached their tipping point. This will catalyze a wholesale change in sentiment and a historic repositioning of risk assets. The emerging market global growth story is over." And while the article came out just as the barrage of $750 billion in daily POMOs courtesy of QE2 was starting and hence masked the true state of reality, now that QE2 is finishing, it is only appropriate to bring Mark back up front, as the imminent and very violent convergence of the rosy myth that is the stock market, and of the underlying miserable reality, is about to wake up all those who have been dozing under the Pied Printer of Eccleslin's soothing tune, and Lapolla's thesis is about to see its first validation. In essence, while we have heard much from those who claim that the end game will come as a result of hyperinflation, Lapolla is convinced in the opposite: namely that the end will be not a bang but a hyperdeflationary whimper. In order to refresh readers with his thoughts, recently Lapolla conducted an interview with the master questioner Kate Welling in which the Knight strategist laid out his uber-bearish case in more gruesome detail than most can stomach. Below we present the key points from his interview, as well as the full thing subsequently.