Archive - Aug 29, 2012

The technical picture for Euro gold looks near perfect now. Gold has been trending higher since May. The long term charts show a series of higher lows and higher highs and even in the correction of recent months there have been a series of higher lows and gold gradually consolidated between €1,200 and €1,400/oz. Gold is now comfortably above the 50, 100 and 200 day moving averages. In the last four years, there have been 3 periods of correction and consolidation which have lasted 12 to 13 months (see boxes in first chart) and we appear to be coming to the end of another such period. Break outs from such consolidations often lead to sharp moves higher and thus new record highs above €1,359/oz and possibly over €1,600/oz should be seen before the end of 2012. The fundamental back drop of the unresolved Eurozone debt crisis , deep divisions in the ECB and a high degree of uncertainty regarding the euros long term future strongly suggest that the euro will continue to fall against gold in the coming months. Further confirmation of robust demand for gold is seen in figures showing that exchange-traded products backed by the gold expanded to a record. Smart money from Paulson to Soros to PIMCO continues to diversify into gold. Gold ETFs holdings have now surpassed Italy to become the world’s third-largest gold holdings when compared with national gold reserves.

Spain is hotting up again. Just a day after Catalonia's beggars-are-choosers moment, Valencia is making headlines with its rear-view mirror demands for a bailout:

• *VALENCIA NEEDS FUNDS TO COVER PAST YEARS' SPENDING: OFFICIAL
• *VALENCIA NEEDS OVER EU3.5BLN FROM SPAIN REGIONS FUND: OFFICIAL
• *VALENCIA TO NEGOTIATE AID AMOUNT WITHIN WEEKS, OFFICIAL SAYS

It would seem the sheer idiocy of yesterday's unconditional demands have been recognized as at least these come with comments that they had previously 'promised' to meet 1.5% deficit targets, but we wonder, given the bailout is to pay for past years' spending what that 'promise' is worth. With expectations that a liquidity fund will be produced within 10 days according to his statement, it appears they are all coming out with their begging bowls. The region of Murcia earlier today also demanded EUR700mm bailout.

We have long talked of the last/next desperate acts of a government in demise as being total repression and confiscation of assets - an ugly endgame indeed - and so today, as The Independent reports, UK's Nick Clegg is proposing a 'Super-Rich' one-off tax. In a very Buffeett-esque speech, Clegg admonished that "people of very considerable personal wealth have got to make a bit of an extra contribution" as the UK remains mired in a "longer economic war rather than a short economic battle." Interesting Churchillian word-choice. The action is designed to ensure that very high asset-wealth is reflected in the tax-system in a way it is not right now and as one would expect he is not making much progress with his more conservative coalition partners, though ever optimistic he adds he is trying to forget the past and aim for the 'sunny uplands' - which we assume will be lit brightly with the excess blubber of fat-cats if he gets his way.

After sliding from a stall speed-esque 2% in Q1 to sub stall speed 1.5% in the Q1 preliminary print, today's first revision was expected to be a solid bounce to the horrible preliminary economic data, with whisper numbers heard as high as 2.0% on the back of the recent plunge in the deficit (driven purely by a collapse in Chinese exports and a brief drop in crude prices in June, long since retraced). Instead the number came precisely in line with the consensus estimate of a 1.7% annualized growth, with the all important Personal Consumption Expenditures adding a modestly higher 1.20% (was 1.05% last). As expected, net exports shifted from a decline of -0.3% to an increase of 0.3%, which meant that the fudge factor was inventories, which also flip flopped, declining from the previously positive 0.32% to a negative -0.23%. In summary, the GDP number was the worst possible for a market in which good news, relative to an expectations benchmark, is good news, and bad news is great news. The only thing the algos don't know what to do is when numbers come "just right" - which is what just happened. And now- back to Congress doing nothing to resolve the Fiscal Cliff which would detract up to 4% from GDP in 2013 if nothing is done, which is assured as long as the S&P continues trading near 2012 highs.

With GDP not providing the kind of dismal print that assures NEW QE, market eyes rotate back to Europe and just in time as Merkel and Monti complete their meeting and mumble a few generic (yet entirely market moving) un-newsworthy headlines, via Bloomberg:

• *MERKEL SAYS EURO AREA NEEDS MORE COHERENCE (yes, thank you, water is wet)
• *MERKEL SAYS ESM OF PRIMORDIAL IMPORTANCE FOR EURO AREA (indeed - with all its conditionality)
• *MERKEL SAYS EURO AREA HAS AMBITIOUS AGENDA IN WEEKS AHEAD ('ambitious' is one word!)
• *MERKEL SAYS SHE, MONTI DISCUSSED GERMAN COURT CASE AGAINST ESM (ya think)

and sure enough S&P 500 futures jump 4 points to overnight highs and EURUSD pops 25 pips.

Just what does all this easily accessible and now pervasive student debt fund? The chart below, courtesy of Bloomberg, provides the answer: in the past 3 decades there has been no other cost that comes even remotely close to matching the near hyperinflationary surge in college tuition and costs.

• Hurricane Isaac Whips Storm Surge on Path to New Orleans (Bloomberg)
• Republicans Vow to Transform Obama’s U.S. With Low Tax, Freedom (Bloomberg)
• Little-known Ryan to take center-stage at Republican convention (Reuters)
• An $800 billion stimulus tempest in a teapot: China State Researcher: Local Govt Investment Plans Largely Symbolic (WSJ)
• China Says Payment Delays, Defaults May Worsen (Dow Jones)
• G-7 Countries Call for Increased Oil Output to Meet Demand (Bloomberg)
• Creeping Socialism: Clegg calls for emergency tax on rich (FT)
• United Airlines computer problem delays 200 flights (Chicago Sun Times)
• Paulson, Investors Avoid Fireworks Despite Brutal Run (Bloomberg)
• Occupy Sets Wall Street Tie-Up as Protesters Face Burnout (Bloomberg)
• The nostalgic grass is always greener: Serbia Joblessness Swells as Milosevic-Era Leaders Return (Bloomberg)

Just under a year ago, in early November 2011, the ECB specifically made it a very clear prerogative that it would not buy Italian bonds under the SMP program, or in any other way seek to lower Italian bond yields, which promptly soared to all time highs, as long as the intransigent Silbio Berlusconi, then career PM, remained in his position as head of Italy. A few days after Italian bonds soared, Silvio quietly and reluctantly stepped down, paving the way for that other Goldmanite - unelected technocrat Mario Monti to take over the reins. We are now just over two months until the one year anniversary of the historic Berlusconi ouster by a central bank (whose head amusingly wrote an Op-ed in a leftist German publication that his organization is apolitical; just as the Fed is apolitical until Wall Street darling Chuck Schumer tells Bernanke to "get to work Mr. Chairman"), and suddenly Silvio is back in the picture. As Italian daily Repubblica notes, the former PM "fears the repercussions of a conviction in the Ruby process before the vote" currently scheduled for 2013, and as a result Berlusconi would agree to sign off on a plan to reform the electoral law in the next few days on the condition that early elections will be held in November. Whether or not this means that Silvio is seeking to retain his PM throne, or merely to regain prosecutorial immunity from engaging in various questionable activities (mostly of a sexual nature) is unknown, but the fact that the Italian political theater may regain its old tragicomic luster has us smiling at the prospect of what the end of 2012 has to offer, especially since America's own presidential election will culminate at about the same time.

When jawboning is stuck on max, and mere talking and exortations to just "believe" lead to no incremental benefit for PIIGS bonds and the leve of the Dax, what is a central planner to do? Why start, er, fingerboning, and write extended missive on the future of one doomed utopian vision or another. Sure enough, the former Goldmanite has just released the following Op-ed in German Zeit, titled, "The future of the euro: stability through change", which contains this piece of sheer brilliance: "The ECB is not a political institution. But it is committed to its responsibilities as an institution of the European Union." The European Union which is first and foremost a... political institution.

In what is shaping up to be another listless trading day, where attention is glued to Hurricane Issac making not one but two landfalls, and the implication for US refining capacity or the lack thereof, here is what has happened so far, via BBG and Deutsche. The overnight session is mixed with Chinese equities under-performing again. The Nikkei and the KOSPI are both around two-tenths of a percent higher. The Shanghai Composite (-0.4%) is lower as the economic slowdown is adding negative pressure on cyclical sector earnings, closing at fresh 3 year lows. Iron ore prices continued to fall amid the weaker growth backdrop in China. Spot iron ore prices were down nearly 5% overnight to their lowest since November 2009. Rio Tinto's 5yr CDS has widened by about 25bp in a week. Rio's share price is down by about 6.6% over the same period. European markets fall, led by the commodity-heavy FTSE 100, with Swedish, Swiss markets rising. The euro rebounds against the dollar. Crude oil falls, metal prices decline. Spanish, Italian bond yields rise slightly, German, U.K., Irish bond yields fall. U.S. futures little changed and 2Q GDP figures are released later today. The state of Italy has sold EUR9 billion in 6 month bills at a 1.69 BTC, yielding 1.585%, the lowest since March, on prayers that Draghi, who was last heard defending the ECB as a non-political institution (whose sole product is the political construct known as the Euro - go figure), will finally step up and act instead of just continuing to talk and make empty promises.