Archive - Aug 25, 2011

Just like Interactive Brokers predicted the last CME margin hike with 100% precision, here it comes again. It is now all too clear that the CME risk managers have decided to do to gold what they did to silver: namely shake out the weak hands with as many as 5 or more margin hikes in a row. Since everyone else is all cash, the CME's attempt to manipulate the market is coming to an end.

Krieger is on fire today: "The interesting thing about today is that I had intended to write this piece on Warren Buffett all week. It was just really fortuitous timing that this Bank of America news came out today. Gosh where to start. First of all, this $5 billion preferred investment by Uncle Warren in preferred stock is extremely bearish for the market, the economy and the financial system. This is not an investment, it is political-economic strategy. It tell us so many things that we probably already suspected. It tells us that Bank of America did indeed need capital. Even worse they probably need so much that they went to Uncle Warren for five big ones so that people would just look the other way and gain “confidence.” This is how out to lunch these guys are. They don’t understand that the root of the lack of confidence is that the people see a country devolving into a Banana Republic led by greedy oligarchs and politicians stealing everything in sight as the ship sinks....This is 1789 France folks as I have said many times before. Second, the fact that TPTB are resorting to Uncle Warren for everything now may mean the Fed is out of the game. No one has confidence in the Fed to come save the day so they need the next thing. That next thing is Uncle Warren. Unfortunately it’s not working and it is not going to work. You can see it in the market today. People are waking up. They are starting to see through the matrix. Buffett is a fraud and a shill. If you follow him it will be right over a cliff."

There is a silver lining though: just as it has over the past 3 years, the world's Bernanke Put "Heads I win, Tails the world blows up" hub may survive simply courtesy of being in the eye of the Hurricane. Alas, this time around, the other side will arrive much faster: after all the Fed can not print windbreaks.

Translation for everyone other than science nerds: the sun is probably an important driver of the Earth's climate. This is at least somewhat relevant to business and economics, as carbon taxes and carbon credits affect business and the overall economy.

And so the Irene-induced state of emergency pronouncements start trickling in. First, New Jersey Governor Chris Christie signed a state of emergency order and urged people at the Jersey Shore to leave voluntarily by mid-day tomorrow as Hurricane Irene approaches the Northeast. The governor, in a briefing with reporters, said he was considering a mandatory evacuation of the Jersey Shore area. Following this news is the announcement by the US coast guard which issued a hurricane alert for Long Island sound. But the biggest losers? Insurance companies: both Chubb and Allstate CDS have spiked on expectations this hurricane could be a doozy in claim terms (although we urge readers to check their hurricane insurance: many times the deductible is far higher if the damage is caused by a Hurricane than a Tropical Storm: alas, this may be a saving grace for some insurance cos). What would be amusing is if the biggest loser out of today, now that BAC is threatening to close read for the day, is Berkshire's insurance empire.

Faber had a very clear message: that everyone should own *physical* gold… and what’s more, they should store it outside of the United States: “I prefer if investors hold physical gold in a safe deposit box, ideally outside the US, in various locations… Switzerland, Singapore, Hong Kong, Australia, Canada… I think it’s important in today’s very uncertain world to diversify, not only the various asset classes… but also the custody of your assets should be in different jurisdictions.” His hosts couldn’t believe it. -NOT- store in the United States, the bastion of freedom and security??!?! What lunacy! CNBC: “Uh, so do you thus not trust US banks or US custodians? Do you think they might fail or abscond with the gold?” Guffaws and incredulous snickers emerge from the hosts. Faber: “I don’t trust anyone.” Uncomfortable silence. CNBC: “Hmmm. Interesting.”

A snapshot of the US Afternoon Briefing covering Stocks, Bonds, FX, etc.

This is just hilarious: According to Bloomberg, Bank of America’s main hesitation was taking Warren Buffett’s money when bank had said it didn’t need capital, CNBC reports without saying where it obtained the information. It adds, the symbolic value of investment worth boost to confidence; "$5b not lot to raise" - also apparently "Terms better than public market." Here is our retort: Bank of America could have told Buffet: "No thank you" and leaked it. Instead it confirmed what Zero Hedge has been saying since October 2010 - that it is absolutely desperate for capital. Also, as to the saying that "terms were better than the public market" - why of course they are - the bank has absolutely no access to the public market. BAC IS LOCKED OUT! But at least we will soon see just how efficient Dodd-Frank's bank insolvency contingency is in real life. Because we have a feeling the brilliant legislation penned by Barney Frank and Countrywide's senator, may fall just a little short...

First, myth from Comcast's financial clown channel (the actual source is more than clear): "this is a turning point, Buffett's bailout marks the beginning of a massive multiday short-covering rally in the financials." And here's reality...

Kiss the free market goodbye. Spain's and France's regulator have both just announced that the short selling ban, which was supposed to expire tomorrow, has now been extended until the end of September 30, and November 11, respectively. Add to this Belgium and Greece whose regulators announced they will lift its own short selling ban "when conditions allow", or some time in October, in and we can pretty much be confident that the European market rout seen earlier is due to someone leaking the news that price discovery in Europe is now officially over.

One of the oddities that seemed out of whack in this morning's weekly Unemployment Claims update was the explanation for the spike in this week's receipents of government generosity: apparently it had to do with the BLS handing out weekly benefits checks to striking Verizon workers. We will repeat the key word from that sentence because it bears repeating: "striking." Now, we may be wrong here, but if one is striking, one is not u-n-e-m-p-l-o-y-e-d, and hence the US government should probably not be using taxpayer money to double pay such individuals who have singlehandedly decided to forgo pay in return for making a labor statement. Otherwise, it kinda kills the whole "sacrifice" thing. And, lo and behold, as it turns out, we are not wrong. From JP Morgan: "Striking workers are generally not eligible to receive unemployment insurance benefits, but it looks like about half of the total amount of striking workers filed claims over these two weeks to formally determine their eligibility." Generally... except when the administration is willing to hand out money to anything and everything with a pulse. After all, there is that massive $2.2 trillion Bank of America balance sheet that has to be funded. And with direct reserve funding already failed, as per QE1 and 2, the only other possible way is via deposit increases. Alas, by the time this money could possibly be saved, it has been spent 5 times, the other 4 hitting Bank of America's bad credit card receivables department.

Anyone living in New York may want to read this Bloomberg article as it is important stuff, unlike anything coming out of Jim Cramer, who told everyone an hour ago that "this is a turning point, Buffett's bailout marks the beginning of a massive multiday short-covering rally in the financials" - naturally the XLF is about to turn red.

And BAC retraces 50% from its pop. An 81 year old Buffett should really stick to washing himself while in the bathtub, flying in private jets with Becky Quick, and contemplating ways to have everyone in America pay more taxes, and maybe even consider retirement every now and then, than making "Long-Term" investment decisions.

While Buffett is forced to bailout America's most insolvent bank, which just confirmed our prediction that it will need to raise capital (although this capital raise was far lass than what will be finally needed), Europe has realized that it has no kindly-looking, ukulele-playing, no-income-tax-paying billionaire equivalent to bailout Intesa, SocGen, UniCredit, etc, etc, oh, and tomorrow, the short-selling bank is supposed to expire. End result: DAX flash crashes, and no rebound yet.

The Buffett bandaid move, coming 48 hours after Buffett's conversations with Obama, and which also comes oddly enough just 24 hours before Bernanke was expected to announce QE3, succeeds in temporarily sending the stock back to early August levels. It also succeeds in sending the financial sector higher, which as we explained yesterday is the main reason for why the 2s10s had to be steepened, so as a result Operation Twist now can go back to its original formulation of broad 2s30s flattening and result in purchases of bonds across the board. As for what to expect with this surprising move out of Omaha? Absolutely nothing. The $5 billion in cash, unlike Buffett's investment in Goldman, will be laughably insufficient, considering that the bank's mortgage exposure is in the tens of billions, while its litigation liability is another $20-30 billion. This does nothing to change our thesis that BAC will need to come to the market again and again to raise capital. However, as this "raise" confirmed, BAC only has access to private investments: we hope Buffett has very deep pockets to keep doubling down. The other news to come out of this - Paulson will be saved with another deus ex machina and will not need to sell his gold or GLD holdings, removing the liquidation overhang from spot gold. The only good news out of all of this: the taxpayer bailout of Bank of America, when it comes, will be $5 billion less.