Archive - Feb 19, 2010 - Story

The greatest mystery in finance is and always will be what the fair value of gold is. Unlike stocks, where fair valuations are usually based on some multiple of cash income, earnings, or dividends, gold has no inherent dividend, nor a positive carry, and thus value is confined the realm of the intangible. Some pundits have considered the fair value for gold a price which covers the currency in circulation in a given country on a dollar for dollar basis. Others attribute a floating valuation to gold such that is convertible to any asset at a specific ratio, to account for inflation over the ages. Yet others dismiss any valuation attempts outright as hogwash, claiming that gold has any value to it solely due to insane and deluded gold bugs manipulating the gold market ever higher, contrary to the earnest attempts of shorters such as a JP Morgan and Sempra who are merely trying to keep gold priced as fairly (i.e., closely to zero) as possible. Due to the various (and numerous) conflicting opinions, we read the following paper from University of Albany professors Faugère and Van Erlach "The price of gold: a global required yield theory" closely. In it the authors observe that gold is priced to yield a constant after-tax real return related to long-term productivity as defined by real long-term GDP/capita growth.

One aspect of the capital markets that has not seen a comparable pick up in risk and pricing levels as the broader market, has been trading for secondary hedge fund LP interests. Web site, Hedgebay, which is a primary and secondary hedge fund interest auction marketplace, and tracks the prevailing price of LP interest clearance, has released its January data set. After hitting an all time low in December at 79.78% of NAV, average trade prices have picked up substantially and hit 87.93% in January. Yet this is materially below the long-term average in the upper 90s. As Hedgebay says: "While some stability has returned to these markets, most believe the underlying fundamentals have not changed all that much and that the “concept” of credit is still quite fragile." Indeed, the smartest money is still very much tepid when purchasing pieces of one another other. Luckily, with robots, vacuum tubes, and retail momos still precluded from participating in this market, this could be one of the very few truly transparent price discovery mechanisms left. And with the top two strategies trade being the very liquid Relative Value, and Credit sectors, and over half a billion in open interest, it is not possible to make the argument that illiquidity is a major gating factor to getting transactions done.

After a record net speculative short euro (futures) build up in the prior week, with bearish bets hitting -57,152 for the week of February 9 (increasing by -13,411 from the prior week), there were expectations that some of the more timid elements would run for cover. So much for that. The CFTC just released its February 16 COT detail, which showed that net euro shorts climbed once again, hitting a new record "high" of-59,422. This is -30.30% of the open interest. The record net long exposure from May 15, 2007 of +119,538 is a distant memory. The increasing bearishness on the euro was countered with some profit taking on net long yen positions. Net speculative yen longs declined from +22,396 to+13,912 (11.6 of OI).

Yet another blowout day for Goldman Sachs. How much did they make this week? $150 million? $250 million? Puts were blown out 5 days in a row, and even the weak longs in the futures market were chased out with surprise rate hikes, PIIG disasters, and other assorted "convulsions" that sent the ES futures tanking.

Not too surprisingly, now that the old man is loose, he just refuses to keep his mouth shut about the true state of the economy. Also, unlike his interview with Maria Bartiromo, this time he doesn't just walk off the set. Some of the soundbites: "The mortgage market in the US is in trouble. It's totally dependent, heavily dependent on the government participation. It shouldn't be that way. That's going to have to be reconstructed." Another modest proposal from the former Fed chairman - raising the retirement age: "Social Security program should raise the retirement age by maybe a year or so." On the greatest blunder in the U.S. housing market: "Fannie Mae and Freddie Mac were not a good idea in the first place. This hybrid public/private thing sooner or later was going to get you in trouble and it sure got us in trouble big time! So I hope we don't go back to that model." And, lastly, on the most relevant issue at hand - the Volcker rule and defining commercial bank activities: ""The criteria in my mind is, are you meeting a customer demand or are you trading in your own interest? Or are you responding to your customer's demand to sell or buy?"

When Tiger's speech causes a more dramatic volume impact than the FOMC you know this market is all sorts of perfectly efficient. Bloomberg's chart of the day below shows the total NYSE volume change in-between when Tiger started his convoluted and meandering mea culpa, and when he ended. Curiously (or not at all once you realize that algos now have a low volume trigger for activating buying programs), in the period when there was no trading volume, the market jumped, only to see the new baseline level as of the end of his speech be today's resistance level.

If Greece fails to comply with all of the demands from the rest of the EU, and then experiences a genuine liquidity crisis in April and May, the most obvious next step for the region is to push Greece into the arms of the IMF. The IMF would then provide a program of financial support, with appropriate amounts of conditionality, to give Greece a couple of years to implement the appropriate fiscal adjustment. - JP Morgan

Just because one waves a magic wand and austerity measures appear automatically, with unicorns singing, leprechauns dancing and pissing gold coins, and rainbows shooting out of Joaquin Almunia's... assets. Or not. The much delayed budget cuts which are finally being instituted are causing transportation gridlock with taxicab drivers on strike, multi-hour long lines at gas stations, and as of recently, following the customs union workers' strike, an export plunge of 18%, putting the already frayed economy even more on edge.

If you live in Europe, the price of gold just hit another record earlier today. Gold denominated in euros just hit €828/oz, a record price since the introduction of the euro currency. The change from the lows of late 1999, when gold was trading in the mid €200's is now 251%, or an annualized return of 12.54%, better than about 99% of all hedge fund returns in the past decade. For all other intents and purposes, gold is likely still a very, very horrible investment... And by "all other intents and purposes" we, of course, envision JPM's massive gold shorts which we hope are at least USD- and not EUR-denominated.

Soc Gen's Albert Edwards, who has never been shy about his cautious stance on equities, has released another report taking his cautionary posture to the next degree. This ties in perfectly with earlier observations by David Rosenberg which unmask the market for the jittery, volatile, headline-driven knee-jerk automaton it has become. Also, Edwards provides a response to readers who are confused by the strategist's endorsement of Richard Koo's mantra of fiscal stimulus as pertains to both Japan and the US. Somewhat tying it all together is the argument that the euro has yet to experience a 25% drop from current levels. That expectation makes the Morgan Stanley euro target of $1.25 seem timid by comparison. Yet in a world of competitive devaluation, as Albert Edwards points out, "it is the nation that devalues last which suffers the deepest deflation." We are confident that Ben Bernanke is all too aware of this mantra.

And so the tragicomic becomes surreal. Yesterday's news about the departure of the head of the debt management agency, Spyros Papanicolaou, was somewhat of a yawner, until we realized that his replacement would be none other than Petros Christodoulou, who until today was head of Private Banking and Group Treasury at the National Bank of Greece (reporting directly to the CEO of the NBG Tamvakakis), as can be seen on the org chart below. Yet was is oddest, is that Mr. Christodoulou worked not only as head of derivatives at JP Morgan but also held comparable posts at Credit Suisse, and... wait for it, Goldman Sachs... Uh, say what?

Moody's has just placed $27 billion of AAA-rated bonds backed by Greek loans on review for possible downgrade due to increasing stress in the domestic economy. In essence thiscovers all Greek structured finance and covered bond transactions. Which is odd because Papandreou for the 1,485,384,495.4th time has just said that Greece is not looking for bailouts. Just this once, we will take Moody's word over someone else's.

As currency players have become more and more focused on bashing the Euro they are in danger of taking their eye off a potentially far bigger story i.e. how the FX market is as dangerously unbalanced as it was in 2008. Yet, after yesterday discount rate hike and resent FOMC comments we should be on notice that this precarious equilibrium is coming to an end and has the potential to turbo charge, as well as, significantly broaden the mild $ rally (the broad $ index is only 7% off the lows) we have seen to date. Even if you aren't a major player in the FX market this should concern you as a $ rally particularly a rapid one is potentially horribly corrosive for a whole swath of assets especially commodities that have a significant weak $ premiums already built into their price.

After some gyrations in both the 2s10s and the dollar, both are trading at the levels hit post the Fed announcement. The one outlier, of course, is stocks, which are trading oblivious of not only the Fed announcement, but everything that is happening in bonds and FX. Does it mean volume is horrendous and a few algos have again hijacked the market? Yes it does. Welcome to OpEx insanity.

This story gets more surreal by the day. First it was the Spanish CIA, and now Greek daily To Vima reports that the Greek National Intelligence Service, instead of focusing on such potentially more pressing issues as who may be bombing various offshore financial offices, or possible Cypriot unrest, is hot on the heels of those who were solely responsible for the Greek bond market collapse: four hedge funds who have had the temerity to buy and sell Credit Default Swaps (or, heaven forbid, GGBs). And they are not doing it alone: French and British intelligence agencies have also joined in the fray, actual people blowing themselves up all over the place be damned. Next up, after the obligatory sov CDS trading ban: selling of government bonds will only be legal during a full lunar eclipse, between the hours of 2:03 am and 2:04 am, when Mercury is in retrograde,and when Joaquin Almunia is not eating spam straight from the trough. In other words never.