Archive - Apr 2013

We have closed our recommendation to short COMEX Gold, as prices moved above the stop at $1,400/toz. We have exited the trade significantly below our original target of $1,450/toz, for a potential gain of 10.4%. The move since initiation was surprisingly rapid, likely exacerbated by the break of well-flagged technical support levels. Our bias is to expect further declines in gold prices on the combination of continued ETF outflows as conviction in holding gold continues to wane as well as our economists’ forecast for a reacceleration in US growth later this year.

• China’s Recovery Falters as Manufacturing Growth Cools (BBG)
• Gloomy eurozone output points to rate cut (FT)
• Limit Austerity, EU appartchik Barroso Says (WSJ)
• Regulators Get Banks to Rein In Bonus Pay (WSJ)
• SEC looks to ease rules for launching ETFs (Reuters)
• Easy come, easy go: U.S. Seizes $21 Million From Electric Car Maker Fisker (WSJ)
• Japan nationalists near disputed isles (Reuters)
• OECD in fresh warning on Japan debt (FT)
• S&P says more than one-third chance of Japan downgrade, cites risks to Abenomics (Reuters)

If there was any debate about the global economic contraction, driven largely due to pundits confusing manipulated stock market levitation with this anachronistic thing called the "economy" and fundamentals for the fourth year in a row, all doubts were removed after this morning's manufacturing PMI data out of China, which as reported previously was a big disappointment (sending the Composite firmly into the red for the year down 2.57% to 2184.5) only to be followed by just as disappointing manufacturing and services PMI data out of Germany, which tumbled from 49 and 50.9 to 47.9 and 49.2, respectively, missing estimates of 49.and 51. The composite German PMI tumbled to a 6-month low of 48.8 as a result, meaning the European economic deterioration is just getting started, and at the worst possible time for Merkel several months ahead of her reelection campaign. The end result was a miss in the blended Eurozone Mfg PMI, which dropped from 46.8 to 46.5, even as the less relevant Services component eaked out a small gain from 46.4 to 46.6, on the back of a dead cat bounce in French economic indicators. Bottom line: a contraction in both European manufacturing and services for the 15th consecutive month. Some "recovery."

The parallels between games like chess and poker and trading are many-fold, but poker is probably a little closer to trading, as it involves things like incomplete information, bet sizing and 'reading opponents', none of which play a role in chess. The following infographic, from tradimo.com, lists a number of famous traders and poker players who are good at both activities as well as a number of characteristics applying to both trading and poker. What really caught our attention though was the statistic right at the end...

After a disastrous few days in early April, bitcoin is back over $100 and up on the month, the year and its short lifetime.  ConvergEx's Nick Colas is intrigued and continues to believe that this phenomenon is the most provocative economic experiment since the invention of the euro and well worth watching.  The next chapter of the story, he believes, will be the entry of a host of "Smart money" venture capitalists looking to build the currency's infrastructure.  Money and currency are exactly the kind of large, scalable and complex opportunity that gets VCs very, very excited.  Yes, it could all still end in tears, either by regulation or mismanagement.  But bitcoin isn’t dead just yet, and it remains one of the most potentially disruptive forces in modern finance. In summary, bitcoin is what he calls a "Beta currency." How it all shakes out, however, will be both instructive to watch and potentially profitable for those on the right side of this very novel trade.

As Boston and U.S. security agencies congratulate themselves over the apparent neutralization of a pair of Chechens that bombed the Boston Marathon, troubling questions are beginning to arise. First and foremost is, why a pair of Chechens, born in the former Soviet republic of Kyrgyzstan, apparently committed the attack? For possible answers, one must looks beyond the present and delve into Russia’s and the USSR’s past policies towards Chechnya, and since 1991, U.S. policy in the Caucasus, which since the 1991 implosion of the USSR had a single focus – the exploitation of the Caspian’s massive energy reserves. It is a history that makes for deeply uncomfortable reading, but one that may eventually provide some answers to seemingly intractable questions. The history below, virtually unknown in the US, is deeply known to the Chechens; and while nothing excuses the terrible actions, the US is hardly blameless about the carnage visited on the Tsarnaev's ancestral homeland.

Thanks to a drop into contractionary territory for both New Export Orders and Employment, HSBC's Flash China Manufacturing PMI missed expectations and dropped to its equal lowest 'expansionary' print in six months. Also struggling with pricing power, as the China industry minister notes the country is "clearly facing over-capacity problems," commodity currencies (and the Shanghai Composite) are getting monkey-hammered. As we noted earlier, China is somewhat hamstrung in its ability to save itself this time, and further to that, the China industry minister added, "companies have no strong desire to invest."

Socialism is a dirty word in many parts of the US, but as the FT reports, the government has turned its mortgage market into a giant nationalised enterprise on a par with China’s Red Army with over 90% of mortgages subsidized by the state and aided by so-called "progressive" or "redistributive" policies. In the UK, the government have also become entwined with the housing market, albeit in different ways. Rates have also been slashed close to zero; tens of thousands are buying homes arm-in-arm with the state under 'shared equity schemes'; and one-third of all mortgages come from the two state-controlled banks (Lloyds and RBS); very reminiscent of supposedly communist China, where most banks are majority-owned by the state with small public floats. The question remains how can they avoid another crash if and when they withdraw support from the market? "It’s broadly accepted nowadays that China still lives under the banner of ‘communism’ despite capitalist markets playing an increasing role in society. In Britain and America – at least where the housing market is concerned – the reverse process seems to be taking place."

While the mainstream media, seemingly comprising of accounting 101 rejects and completely unaware that "profit" is merely an ephemeral, intangible accounting concept, and that for true business model viability one has to look at actual cash generated (or in this case lost), has been praising the Netflix "beat" ever since its announcement, the reality is uglier. On one hand, as reported, the incremental cost per subscriber on a true free cash flow basis is continuing to deteriorate, and while it is only a matter of time before the content providers decide to jack up content costs and crush the firm's margins. But far more disturbing is the ongoing attempt to push a massive amount of unfunded content liabilities and committments off the company's balance sheet. Because while NFLX discloses just $2.4 billion in total content liabilities (or 69% of total liabilities), it is the massive $3.3 billion in off-balance sheet liabilities, up half a billion in just one year, that is truly disturbing.  This means that cash flow-negative NetFlix has a liability amounting to 76% of its total assets, which is off-balance sheet, which gets zero auditor scrutiny, and which as so often happens, will blow up in everyone's face just when it is least expected. 

Pity the wise money manager these days. Our juiced-up financial markets, force-fed liquidity by the Fed the other major world central banks, are pushing asset prices far beyond what the fundamentals merit. If you see this reckless central planning behavior for what it is - a deluded attempt to avoid reality for as long as possible - your options are limited if you take your fiduciary duty to your clients seriously. Bill Fleckenstein of Fleckenstein Capital has a difficult time seeing other assets to own besides the precious metals. There are confidence bubbles in stocks, bonds and the fiat currencies that will break - not may, but will -  and when they do, he sees no safe harbor for investment capital save gold.

Chechen Brothers Did NOT Rob 7-11

Maybe not all, but certainly the vast majority of the most popular asset bubbles since before even the Tulip Mania of 1637 (including the Kipper and Wipper currency debasement of the German 30 years War, circa 1621, which is appropriately enough deja vu in contemporary retrospect, only the war is missing). While it may be worth noting that all the bubbles to the right of center have been central-bank induced (except for that amulet bubble of 2006, although even that is likely debatable), we will not note it as it is quite obvious even without us highlighting this simple fact. One can only imagine what would happen to asset prices - all of them - when the world's central banks, which are now collectively and voluntarily "all in" on reflating the biggest asset bubble of all time across all asset classes, decide to close the liquidity spigots (if ever).

If the FBI can track down two homicidal Chechen nobodies inside of forty-eight hours from their Boston bombing caper, you kind of wonder how come the Bureau can’t detect the odor of racketeering, insider trading, and wire fraud in this month’s orchestrated smackdown of the gold futures markets, including the parts played by the Federal reserve, one or more too-big-to-fail banks, self-interested big money players such as George Soros, slumbering regulators at the Commodities Futures Trading Commission, and tractable editors at The Wall Street Journal and The New York Times... Because the smackdown organizers pulled off their operation in a panic, they probably ignored the potential further negative consequences of their stratagem, namely a worsening loss of confidence in banks generally and in the trade of abstract financial instruments in particular

In what could to grow into a class action in US courts, a Chinese woman is suing the Federal Reserve after discovering that the real value of the USD250 she put in an account in 2006 had shrunk by 30%. She claims it was the result of the Fed issuing too much money, and as The South China Morning Post reports, her son Li Zhen, the lawyer, called the lawsuit "litigation for the public good". Alleging "abuse of monopoly in issuing currency," the People's Court of Kunming has yet to rule on the litigants' demand that the Fed cease-and-desist from its quantitative easing policy. While this may seem frivolous, there are some interesting points being made that bear watching, as Li notes, since "the Fed is private institution which enjoys monopoly over the issuing of currency, US Dollar holders can sue it for printing too much money."