Archive - Nov 2010 - Story

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By now you have plenty of reason to congratulate yourself for having boarded the gold bandwagon. The early tickets are the cheap ones, and you’ve already had quite a ride. The best of the ride, I believe, is yet to come, and it should be very good indeed. It should be so much fun that your wallet may start to feel a bit giddy – which can be dangerous. So it would be wise to consider, now, how things will be and how they will feel when the current bull market in gold reaches its “end of days.” Because it will end. Buying at the right time is the key to building profits. Selling at the right time is the key to collecting them.

The man who made Goldman Sachs a household name (using some very helpful and lurid imagery), has found a new target: Bank of America, JP Morgan, Wells Fargo and Citi.... And the "Rocket Docket." Quote Taibbi: "The Rocket Docket exists to launder the crime and bury the evidence by speeding thousands of fraudulent and predatory loans to the ends of their life cycles, so that the houses attached to them can be sold again with clean paperwork. The judges, in fact, openly admit that their primary mission is not justice but speed." And here comes the trademark Taibbi visual: "the foreclosure crisis is Too Big for Fraud. Think of the Bernie Madoff scam, only replicated tens of thousands of times over, infecting every corner of the financial universe. The underlying crime is so pervasive, we simply can't admit to it — and so we are working feverishly to rubber-stamp the problem away, in sordid little backrooms in cities like Jacksonville, behind doors that shouldn't be, but often are, closed." Pure genius.

Prepare for another staple pricing readjustment courtesy of central clearing "risk management": minutes ago the ICE hiked its Clearing Member outright margin for Sugar (SB and SBC) from $2,150 to $3,550, a substantial 65% increase in margin requirements. Little by little more exchanges refuse to take on liquidity risk. In essence what the CME, the ICE, LCH and everyone else is doing by hiking margins (in addition to forcing a brief period of selling) is to offset liquidity risk, although not risk of more rounds of liquidity, but of the Fed's withdrawal of liquidity. If tomorrow Bernanke were to announce QE is over, all those who have so far enjoyed massive unbooked profits in their options accounts on margin, will see their NAV collapse and margin calls will provide the double whammy to a complete asset liquidation wipeout. Yet unlike in the case of silver, where the margin requirement was modest, here the jump is very material. That said, now that silver margins have been tightened, gold should follow shortly - surely, that is the prudent thing to do. On the other hand, ongoing delays in gold margin increase will make the whole recent margin readjustment somewhat odd - after all, what better way to keep another buying surge in check then not announcing how much gold margins will go up by. Once the news is out there, buyers will be able to process and adjust accordingly. As long as this information is merely anticipated, it will continue to be a far bigger brake to a parabolic move higher in gold than if it had been already disclosed and processed.

Today, Bank of America filed its first official response, and exposed how it plans on defending itself, to the recently launched RICO case by the Davis family (Southern Illinois, 10-01303), seeking monetary damages for what they now claim is a fraudulent eviction on the ground that the affidavit was signed by two Robosigners: one Keri Selman and one Melissa Viveros. In its Motion to Dismiss, defendant BofA notes "Plaintiffs assert that these affidavits were “necessarily perjured” because Ms. Selman and Ms. Viveros could not have read the allegations in the complaints, examined all of the documents or exhibits “and still read all of the accompanying documentation to all of the other affidavits [ ] signed the same day." The bulk of BofA's defense is centered around a technicality: it says Plaintiffs do not “seek to reopen or disturb the judgments in [the Foreclosure Action], and instead seek only monetary damages as a result of being prematurely evicted from their houses based on perjured affidavits." The Davises also have some choice words about MERS saying it is “widely reported” that MERS was “poorly conceived and sloppily run.” Having read the motion to dismiss, it does appear that BofA may be able to get off on a series of technicalities on this one, yet that will only enable subsequent RICO suits to emerge using the weaknesses of the Davis case. And the main thing BofA does not defend against is the underlying allegation that fraudulent affidavits were used to evict the Davis family, nor, more importantly, does it present a verifiable case that it does in fact own the underlying mortgage note. As such, once the technicalities are all resolved in the next RICO lawsuit, all the holes presented by BofA's attorneys will be filled, making a technicality-based defense that much more difficult, since if BofA/CFC indeed does not own the mortgage note, there is little it can do to defend itself against an onslaught of comparable legal claims.

Millions of robots are jarred out of their somnolent churn as Disney not only reports earnings half an hour early (was supposed to be after the close), but misses on both top and the bottom line. This is yet another demonstration that in a market priced to perfection, the smallest deviation from the equilibrium can bust everything. DIS now down 5%, and has sent the entire market lower. At this point the market is really testing the POMO resolve over the next 20 days. After all there is only so much garbage the Fed-Citadel complex can buy.

One of Zero Hedge's all time favorite charts is the following, which demonstrates the full breadth of Wall Street "complexity" ingenuity, and highlights the incremental layering upon layering of hollow synthetic securities in the form of "leverage" that allowed the housing boom to explode to unprecedented levels, and to create artificial money flooding the shadow banking system which among other things was used to pad ridiculous banker bonuses over the past decade. Today, Citi's Matt King has taken a humorous approach on this topic, and has concluded that in order for investors in a CDO2 to have a complete understanding of all the nuances in their investment (based on filed information), they would need to read precisely 1,125,000,300 pages worth of information for every CDO2 purchased to be aware of everything that was being acquired. And this even ignores the fact that recent robosigning revelations may have rendered the entire reading process moot as the entire RMBS foundation may have been built upon a complete sham.

Zero Hedge friends Chris Martenson writes in: "For a very long time I have been calling for, expecting and otherwise anticipating the day that the Federal Reserve would begin openly monetizing government debt. I knew the day would come intellectually, but in my heart I hoped it wouldn't. But with the Fed's recent decision to directly monetize the next 8 months of federal deficit spending, that day has finally arrived. I have to confess, while my prediction has proven accurate, I’m still stunned the Fed actually did it. In this report I examine the risks that this new path presents, what match(es) may finally ignite the decades-old pile of dry fuel, what the outcomes are likely to be, and what we can and should be doing in preparation."

If there is one reason why the market has not sold off far more broadly today, it is that traders are currently gearing up in anticipation for the upcoming brand new POMO regime, which will start in earnest tomorrow and will continue for the next 6 months. And for those who would like to see just how much greater of an impact the next 20 trading days' POMO will have compared to the old QE Lite POMO regime, John Lohman has prepared the following two charts. To wit: the median size of any given POMO will be $7 billion, nearly three times as large as the old median of $2.5 billion. As for frequency: in the next 20 days we will see 19 POMOs, virtually one a day (and in some cases two per day), compared to the old POMO incidence which was roughly one every two days. In other words, it certainly appears that the Fed will not allow the GM IPO to be subject to any "market conditions."

CLSA's Chris Wood latest Greed and Fear is out, and in his latest discusses virtually all the critical issues that are at the forefront of investor minds, namely QE3, the next collapse in the GSEs courtesy of the current housing bubble, any signs of releveraging in the private sector, a potential rise of capex in corporate America (not sure where he is seeing this), insolvent states, Japan, which he thinks may be an reflationary alternative to gold (as Dylan Grice has claimed in the past) and last but not least, his disagreement with Goldman's take on China, which he believes is still an attractive investment opportunity.

A few weeks ago, Hinde Capital's Ben Davies delivered a terrific speech to the The Committee for Monetary Research & Education in which the asset manager presented his insight on not only the futility of linear forecasting, on the flawed assumptions of economists, and on the very errors in the current monetary system, but went on to suggest several "Variant Themes" which put him at odds with the consensus, chief among them being of course his views on the monetary system and gold (both discussed repeatedly before on Zero Hedge), but also on specific socio-political and economic catalysts when looking at the future. Among these are : 1) "Japanese stocks are the most unloved in the world. Small-cap stocks in Japan will skyrocket in years to come, but then they would, as I see hyperinflation there in the next five years", 2) "The Swiss Franc as a bastion of safety is a fallacy. They too are debasing their currency", 3) "Turkey: the Ottoman Empire will return. Great enduring demographics and entrepreneurial spirit", and 4) "Mongolia will surpass Japan in GDP on a PPP basis." Aside from his recommendations, which may well be right or wrong, the epistemological basis of Davies view is a must read for any participant in what is becoming an increasingly chaotic, full of noise and reflexive market, in order to get a grasp of what may truly be relevant for creating, and influencing, correct opinions.

An interesting development for the biggest market event of the year for US capital markets, the GM IPO, which is supposed to start trading next Thursday (why else would Brian Sach have a POMO every day next week) is the news out of Dow Jones that Goldman Sachs will close its books for GM share allocation on Friday at noon. Dow Jones takes this as an indication of massive demand. Perhaps, although with Goldman third row in the bracket, below MS, JPM, BofA, Citi, Barclays, Credit Suisse and Deutsche, they hardly had a big allocation to fill. More likely, this is merely a way to snub the government and demonstrate that unlike the other banks (none of whom are closing books early) it has done its job the fastest and the most efficient. That said, should Brian Sack not be able to contain the suddenly very jittery market, we would not be too surprised to see someone pulling the "market conditions" cop out card over the next week.

After last night's completely unsurprising "beat" of Chinese annualized inflation of 4.4%, Goldman today has come out with a note which, however, is very surprising: Goldman's Robin Brooks and Dominic Wilson have decided to close out their "long China" recommendation, which was one of the firm's Top 2010 Trades presented previously on Zero Hedge. And while the profit on the trade of 11.3% is appealing, the reason for the unwind makes little sense. As everyone had been fully aware (see our note here) in advance, the inflation number would come out at 4.4% (and so it did). To use this as an argument for tightening expectations seems a little disingenuous. Which begs the question: why is Goldman truly no longer bullish on China? And does this mean that the firm no longer buys Jim O'Neill latest decoupling thesis? Lastly, as China has been a key dynamo for world growth, if there is little equity upside to be had in the one last capitalist country, what can we say about the less than capitalist America? This is further compounded by Jan Hatzius' suddenly rosy again outlook on the US economy (coupled with Goldman's ongoing demands for up to $2 trillion in QE, which with every passing day is becoming increasingly more improbable)...

As readers recall all too vividly, CSCO has traditionally been the one stock whose drop has precipitated at least one major tech market correction in the past. Will it do so this time? For now it is unclear: never before was the Fed the open buyer of every resort and thus risk used to exist, now not so much. Nonetheless, here is a look at the intraday losses for the top holders in the stock. A quick look at the top 50 holders indicates that today alone has generated over $10 billion in intraday losses. Will this lead to margin calls for already massively cash strapped funds, and thus waterfalling liquidations, remains unclear but should be carefully monitored.

The Fed are the ultimate swindlers. They say one thing and turn around and do another. More important to me however is why did Ben Bernanke just do what he did even though it was a truly desperate act. My answer is that the failure of the economy to have even a fake boom recovery with job growth risked further exposing all of the acts of financial terrorism committed by the Federal Reserve and the TBTF (too big to fail) banks. Worse, they continue to rob and pillage and therefore the Fed will do “whatever it takes” to cover it up. If that means flooding the world with dollars and destroying its value so be it. Anything so that the perpetrators of the greatest financial crime in world history do not get caught and brought to justice. But as I wrote recently, the tipping point has been breached, the Rubicon crossed, the zeitgeist of America changed and justice will be done though the heavens fall. This will really accelerate into 2011. Potential whistleblowers should start thinking about coming clean and protecting themselves now while they can. - Mike Krieger