Archive - Apr 2013

Precious paper...

Another day, another muppet-slaying by the true master. Recall Goldman Sachs from April 10:

We recommend going short 10-year US Treasuries via June futures (TYM3) at the current level of 132-20 for an initial price target of 130-00 and stops on a close above 134-00. In yields space, the corresponding move is from the current 1.76% to around 2.10%, and stops on a close around 1.60% - corresponding to the lows from last November.

Fast forward to today where just out from Bloomberg we read...

• TY Poised for Highest Close Since Dec. 11

Sorry muppets, you just got slain. Again.

Some call it the “holy rail.” In Alberta Canada, an estimated 120,000 barrels of oil per day are shipped out by train to the U.S. east coast and Gulf coast region. By the end of the year - when several terminals are completed - that number could reach 200,000 barrels a day. Despite rail costs doubling pipeline tariffs, the logistics have often been worth the time for producers - those that have been able to get a better price railing it past the mid-continent refineries all the way to the US East Coast and Gulf Coast. But just as Canadian rail use is set to soar again, say analysts - rail may no longer be economic. In fact, rail could be a victim of its own success.

German finance minister Schaeuble just explained, in a seeming effort to assuage rising fears that the one core nation left in Europe will choose the game-theoretically optimal first-defection wins strategy, that "Germany benefits from the Euro more than others." Indeed it does; as German firms are buying up strong competitors, clients or suppliers at a time when those companies are struggling to stay afloat through years of recession in their home markets and as shaky banks restrict access to credit. It appears that the slow-and-steady bloodless invasion of Europe can be summed up by the following virtuous circle of Germany's hidden strategy. Of course, as Schaeuble explained later in his missive, "it is nonsense" that Germany wants a German Europe and that the Euro exchange rates is "Okay" for Germany.

The "Excel Spreadsheet Error" In Context

The controversial cybersecurity bill, known, ever so gently as, the Cyber Information Sharing and Protection Act (CISPA) - since it's for your own good - that passed the House last week looks set to be shelved in the Senate according to representatives. The bill would have allowed the federal government to share classified "cyber threat" information with companies, but it also provided provisions that would have allowed companies to share information about specific users with the government. Privacy advocates also worried, rightly so given previous experience, that the National Security Administration would have gotten involved. As US News reports, Sen. Jay Rockefeller, D-W.V., chairman of the committee, said the passage of CISPA was "important," but said the bill's "privacy protections are insufficient." One of CISPA's staunchest opponents, the ACLU, added, "CISPA is too controversial, it's too expansive, it's just not the same sort of program contemplated by the Senate last year." While this is a short-term victory for everyone who uses the web, the ACLU warns, "we need to be vigilant as the year moves on to make sure that whatever the next product is, it's not CISPA- lite."

Earlier in the week we discussed the dismal downward spiral that bank lending was implying for the euro-zone. Today, we get further confirmation that the credit creation business in Europe, the very life-blood of the pump-at-all-costs Keynesian economic world in which our super-inflated debt economies now live, is dead in the water. Not only did M3 come out well below expectations at 2.6% YoY (vs 3% Exp.) but loans to the private sector remain drastically in the red. The fragmentation across the individual nations is dramatic, indicating that even if Draghi were to cut rates next week it will be largely ineffective - given overnight rates are already close to zero and demand appears absolutely non-existent (due to balance sheet destruction). Of course, that is the entire point of the central bank, to lower the cost of funding to a point where it's impossible to refuse (force feed supply) but with the LTRO repayments an explicit tightening, banks delevering, and collateralizable assets in very short supply, Draghi will have to look long and hard to find an extraordinary measure to solve this vicious spiral.

Despite the many differences between China and the U.S., their basic problems are remarkably similiar: an economy that increasingly serves a tiny Elite, and a political/financial system that is incapable of meaningful reform. Setting aside the latest bird flu outbreak and sagging indicators of growth, China 2.0 is in trouble (with 1.0 being the Communist era of 1949 -1977 and 2.0 being the modernization/globalization era of 1978 - 2013), for it remains overly reliant on unsustainable growth dynamics. Add it all up and you get a clear picture of a government and economy that is incapable of making the kind of structural reforms that are needed to make growth sustainable.

And it was shaping up like your typical boring, noonish "gold-smackdown-so-JPM-can-refill-its-vault" Friday. Trust the White House to come out, guns blazing, false flags waving, and make those selling hard assets into the weekend think twice:

• US PURSUING "DEFINITIVE" EVIDENCE ON SYRIAN CHEMICAL WEAPONS
• WHITE HOUSE SAYS OPTIONS FOR DEALING WITH SYRIA USE OF CHEMICAL WEAPONS INCLUDE, BUT ARE NOT EXCLUSIVE TO, MILITARY FORCE

Well, you know what they say: seek and ye shall find. Just ask Bush. As for what the White House failed to mention is that the other options are, well, military force.

Gold and silver prices are plunging after the European equity markets closed. It seems someone got the tap on the shoulder and needed to fund some liquidity. Given the 'unusual' strength in high-beta European assets this week, it would suggest someone (or many someones) were short and squeezed to cover in a hurry and perhaps this post-close dump in gold and silver reflects the final end-of-week realization of losses that need to be funded.

Gold has surged 4.9% in dollar terms so far this week and is headed for its biggest weekly gain in one-and-a-half years. Gold has recovered in all currencies and is up by 4.8% in euro terms and 3.7% in sterling terms. 

Therefore, gold has recovered nearly half of its recent sharp decline and is now just 7% below its price ($1,560/oz) prior to the futures induced sell off on April 12th and 15th.

It all makes so much sense. Broad European stocks have just completed their best week in 5 months. Even though today saw some of the exuberance wear off a little, the market is up 3.6% broadly (with Spain and Italy up around 5%) as everyone anticipates something magical from Draghi next week. Macro data is a disaster. Micro (earnings) data is far worse then expected. Italy remains government-less. The money (Merkel) faces problems at home. The Buba is strongly critical of the ECB and OMT/ESM plans. But apart from that, stocks ended near multi-year highs. The EUR closed down modestly on the week. European sovereign bonds are perhaps the canary in the coalmine here - as they have been smashed to near record low yields, the last 3 days have seen spreads leaking back wider (even as stocks continue to surge).

Last week it was Rwanda issuing USD-denominated debt at 7% (lower than Spain yields less than a year ago) just as bond yields of 90% of global sovereign bonds are at or near all time lows. And now, moments ago, we just learned that Ghana (nominal 2013 GDP: $42.8 billion) has just upsized its dollar-denominated $750MM bond issue to $1 billion.

When it comes to true demand for the "unfondleable" barbaric relic, one can look at spot prices (or listen to CNBC, at least when gold is correcting when it is being commented on every 5 minutes; when it has soared by $150 in 10 days, one hardly hears a peep), or one can continue looking at the absolute frenzy in the physical markets, now all over the world, where those who refuse to take their eyes off the ball, or the G-7 printers as the case may be, understand very well how this story ends. They also understand that the recent gold correction has simply been a buying opportunity, and the further the price fell, the more gold was bought until finally mints, refineries, and brokerages have run out of physical in inventory.  Bloomberg reports on the ground from India, the world's biggest importer of gold, where gold consumers "thronged jewelry stores across the country for a second week on speculation that bullion may extend a rally after the biggest plunge in three decades." “Demand has been extraordinary in the past 15 days and sales this April have been much better than last year,” Kamal Gupta, chairman of P.P. Jewellers Ltd., said by phone from Delhi. “We waited for sometime to see if prices will fall more but when we saw them moving up again, we decided it’s time,” said Sripal Jain, a 77-year-old silver dealer who came with his younger brother, daughter and daughter-in-law to buy gold necklaces at Mumbai’s Zaveri Bazaar. “We don’t have any wedding or occasion coming up. The rates fell, so we decided to buy"