Archive - Aug 2013

This is one of those stories about the gold market that almost seems too wild to be true since the numbers are so extraordinary. According to a Reuters article from earlier today, Australian bank Macquarie has reported that gold is flooding out of London and into Switzerland at a mind-boggling rate. Specifically, 240 tons were exported in May alone and 797 tons during the first half of 2013. That means gold is being exported at a annualized run rate of 17x the 92 tons exported for all of 2012. That’s insane. Moreover, it seems a lot of that gold is being sent to Switzerland so that the 400oz bars can be melted down into different sizes that are more amenable to Asian sensibilities.

As part of the SEC's consent order with Harbinger's Phil Falcone, we learned that in addition to the previously well-known stuff Falcone was engaging in (using the fund as his taxpaying piggybank, giving preferential gating terms to "friends and family", etc), perhaps what really scuttled the once legendary hedge fund manager is what ended up being an outright war with Goldman, when back in 2006 Harbinger tried to not only take the other side of a short bet put on by Goldman, but literally squeezed Goldman and its clients into absolutely misery with the result millions in profit to Falcone and unknown losses to Goldie. And as one knows, you never fight Goldman and win, without ultimately losing everything.

When a sophisticated hedge fund manager takes a position in the most senior segment of a failing retail form's capital structure, it is not a bet on recovery: it's a bet on being long the fulcrum security in an upcoming chapter 11, or at worst, on having collateral coverage to cover your exposure in a liquidation Chapter 7... And for anyone who spent more than 2 minutes deciphering this morning's JCP results will know, the cash burn is immense and outweighs any glib PR-strewn headlines that support a positive future. In fact, even the CFO noted he did not see any major trend change in the short-term (i.e. more of the same downtrend?) Of course, that didn't stop CNBC's Jim Cramer from talking it up pre-market (to a 8.9% gain before the bell) as he exclaims in the clip below "this is an amazing quarter... I am positive, the stock will go higher." Well, 60 minutes after retail got their first chance to buy, JCP is down 9% from its open, in the red for the day, and reflecting more closely the dismal reality that credit markets remain convinced of.

So much for the European growth meme (see CAT's bellwether sales to the region) or the cleanest dirty shirt moving across the pond. Even as the EUR soars (breaking above 1.3450), European bond and stock markets (most notably the peripherals that have soared recently on nothing but air and rotating momo liquidity), are collapsing. Spain and Italy are down 4.2% on the week, Greek stocks have dumped 6.8% and even the core are down almost 3%. Peripheral bonds (which actually outperformed in the rally) are sliding fast with Spanish and Italian bond spreads snapping 15bps wider. Europe's VIX has surged to its highest in a month (near 20%) and credit spreads for financials and corporates continued to blow wider, with stocks catching down. This is the biggest 2-day drop in 2 months for most assets.

Gross: Today I feel less "GUARDED" than yesterday. Is the free press still free?

— PIMCO (@PIMCO) August 20, 2013

There was some hope two months ago when CAT global retail sales posted a modest uptick between February and May, rising from a recent low of -13% Y/Y to "only" declining -7%. Alas, it turned out to be nothing but a dead CAT bounce, as a month ago hopes the global recovery would continue were dashed after the -7% global dealer retail sales dipped once again to -8%. Moments ago, the downward trend continued its acceleration, when the company reported global retail sales at -9%. And while it was not all bad news, with the US retail sales drop slowing and in July posting an almost flat print at -1%, it was the key market of Asia/Pacific (read China) that plunged by 28% from past year, far worse than the 21% drop in June, and the ugliest Y/Y comp since November 2009. Any day now, though, the third cat bounce will take place.

A stunning 57% of undergraduates used federal student aid to help pay for college in 2012; dramatically higher than the 47% in the pre-crisis 2007 year. As the WSJ reports, an average of $8,200 per recipient is paid out by the government coinciding with climbing tuition costs (credit fuels growth?). The report, via the Education Department, noted that "even students from households we would consider middle-income are increasingly eligible and are increasingly taking advantage of Pell grants," as the number of full-time students who received Pell grants in families with incomes between $60,000 to $80,000 shot up to 18% in 2011-12 from 2% in 2007-08. Just another wealth transfer scheme or moar better bargains for the middle class.

Liquidated ETF gold holdings are being shipped from the U.K to Switzerland for refining into smaller one kilogramme gold bars, Australian bank Macquarie wrote in a note yesterday. These were then sent to Asia and bought by Asian investors. The note  confirmed, what has been known anecdotally for some weeks.

In the biggest non-news of the day, Germany's Finance Minister Wolfy Schaeuble finally admitted, officially for the first time, what everyone knows: Greece will need a third bailout. His exact words, as cited by Reuters, "There will have to be another programme in Greece," Wolfgang Schaeuble told a campaign audience in northern Germany, in comments that raised prospect of a step that could be deeply unpopular domestically just five weeks before national elections.

Just as Japan's department store sales hit overnight (plunging at their fastest level in 13 months), gold and silver prices were shellacked lower almost instantaneously (admittedly in thin markets). We haven't seen this kind of morning smack-down in a little while but this time was different... the dip was bought aggressively and has now been retraced.

One can look at the just reported JCPenney Q2 results and compare them to expectations, which as "expected" missed across the board, with Revenues coming at $2.66bn below expectations of $2.78bn, EPS missing consensus of $1.07, printing at $2.16 per share, comparable store sales sliding 11.9%, a profit margin of 29.6% lower than last quarter's 30.8%, and 33.2% a year ago, and so on, but that would be ignoring the forest for the tress. The only data point that summarizes the epic, no recovery catastrophe at the company is the cash burn. As the following tell all chart shows, the company burned a ridiculous (and record) $1.146 billion in free cash flow (Cash from Ops less CapEx) in just one quarter, Q2, and when adding the $948 billion in cash burn in Q1, JCP burned a monstrous $2.1 billion in the first six months of 2013. At this point the only question is when the bankruptcy filing comes.

• So no great rotation into EM? Capital Flows Back to U.S. as Markets Slump Across Asia (BBG)
• Muslim Brotherhood leader arrested in Egypt (Reuters)
• Allies Thwart America in Egypt: Israel, Saudis and U.A.E. Support Military Moves (WSJ)
• Dear Bloomberg: when you buy the loans of a distressed retailer, you are not betting on a rebound, you are betting on being the fulcrum security in a bankruptcy: Kyle Bass Said to Bet on J.C. Penney Comeback With Loan Purchase (BBG)
• Bubbles Bloom Anew in Desert as Buyers Wager on Las Vegas (BBG)
• Britain rejects Spanish request for Gibraltar talks (Reuters)
• U.K. Mortgage Lending Rises to Highest Since Lehman Collapse (BBG)
• Pension Funds Dispute Math in Detroit Bankruptcy (WSJ)
• Christie Says Gayness Inborn as He Signs Therapy Measure (BBG)