Archive - May 2010 - Story

"Here’s the deal on gold. When we had the post-Lehman collapse, gold fell from $900 to $720 an ounce but it still managed to outperform other commodities and rise in many other currencies, outside the U.S. dollar. That post-Lehman collapse phase was a giant margin call where investors sold their winners, like precious metals, and on top that, there was insatiable appetite for dollars from the global banking system caught short of greenbacks.

What is happening today is truly fascinating. Gold has broken out to the upside even as the U.S. dollar has done likewise on the back of a renewed flight-to-safety bid. What this means, of course, is that gold has managed to hit new highs even as, (i) the U.S. dollar has risen, which means gold is breaking out against all major currencies; and, (ii) other industrial commodities, such as oil and copper, have slumped from their recent highs. So what this all means is that gold is no longer being considered as part of a resource complex that is outperforming the segment but is increasingly being viewed as a currency of its own." - David Rosenberg

"There are classic signs indeed that the recession in the U.S. ended last summer — output, sales, etc. But the depression is ongoing and the reason we say that is because real personal income, excluding handouts from the government, has barely budged. In fact, real organic personal income is nearly $500 billion lower now than it was at the peak 16 months ago and this has never occurred before coming out of any technical recession. It is a depression, as the chart below attests — that is the trendline for real household incomes, until the government comes in to top them off with handouts, subsidies and extended jobless benefits. The share of U.S. personal income being derived from Uncle Sam’s generosity has risen above 18% for the first time ever." - David Rosenberg

In an exclusive report Reuters' Matt Goldstein has uncovered the mystery seller of 75,000 E-Mini contracts during the market melt down. And no, it's not Nassim Taleb as previously reported: the culprit for soaking up ES liquidity (if indeed the selling of 75,000 50x S&P equivalents is enough to throw the market into a 10% tailspin): the "hedging" party is small Kansas-based advisor and asset manager Waddell & Reed (yeah, that was our reaction too). This information is based on an internal CME report which has yet to be disseminated to the general public. Yet the biggest question is not why Waddell trade what it did, when it did, but why did Barclays, which executed the trade for Waddell, stuff the massive order into the pipe, without breaking it up into a thousand child orders first. This is borderline criminal negligence, with Barclays basically begging for their "best executions" practices to be front run by every single algo in existence.

By Marla Singer and Geoffrey Batt

In September of 2008 the Reserve Primary Fund, loaded with exposure to Lehman Brothers debt, faced massive withdrawals and promptly "broke the buck."  (Slipped below $1.00/share NAV).  The result was a cascade of credit crunches for major corporations dependent on commercial paper for not just their near term financing, but their day to day operations.  Firms like Honeywell, General Electric, 3M, Boeing and WalMart were gripped in what might even be called a destructive co-dependent relationship with the short term cash available in the commercial paper market.  Particularly in an environment of low interest rates, money market funds desperate for yield are ravenous lenders to these large cap firms that divert their cash elsewhere and use the commercial paper market to make up the difference.  The constant "roll risk" means that any seizing up of the commercial paper market could deliver sudden and unexpected defaults by the country's largest and most respected firms.

Full profit taking in everything. Now even gold is plunging, but it is likely an LBMA "intervention." EURUSD just broke through 1.23 and has no further realistic supports for a long time. The money has no option but to go into gold or money markets. For now it is not going into gold, which means it is a relatively good buying opportunity. Liquidity in stocks is now gone as volume picks up. Two of the desk traders we have spoken to are all wearing fireman's hats, bracing for Flash Crash part 2. Look for much more action out of the ECB/FED/IMF/EU/X-Men/Ghostbusters before Asia opens this Sunday. In the meantime, everyone must sure be grateful that the SEC is contemplating instituting new and improved circuitbreakers some time in 2039.

We're not actually sure anymore.

The EURJPY has just broken all support. The next level for the battered pair, as the carry trade is no longer a source of funding, are the May 6 Dow 1000 point crash lows, somewhere south of 112.

The country that Zero Hedge has long claimed is the glossed over black sheep that will take down the core of the eurozone is about to be downgraded. At least that's the case according to the latest flurry of market rumors. EURUSD now moving 10 pips with each trading block... and not higher. Look for support somewhere in the mid 1.23s.

Just because this is what a fully normal market should look like. Imagine what would happen if 7% of the population, according to Zero Hedge's somewhat non-scientific poll, actually did not have faith in capital markets.

Angela Merkel = Captain Obvious; discuss

After the event(s) of last week, risk is off, at least as indicated by capital flows. We demonstrated earlier how domestic equity funds saw a massive outflow even before the May 6th crash. Now, courtesy of Lipper/AMG we discover that the panic gripping high beta assets, specifically High Yield bonds, since the crash was the third biggest in recorded history (going back to 1992). The $1.7 billion in HY mutual outflows is the biggest flight to safety (or in this case money markets) since May 2004.

For about a year, I’ve been sharing my realization that there are two main risks in the investment world: the risk of losing money and the risk of missing opportunity. You can completely avoid one or the other, or you can compromise between the two, but you can’t eliminate both. One of the prominent features of investor psychology is that few people are able to (a) always balance the two risks or (b) emphasize the right one at the right time. Rather, at the extremes they usually obsess about the wrong one . . . and in so doing make the other the one deserving attention. During bull markets, when asset prices are elevated, there’s great risk of losing money. And in bear markets, when everything’s at rock bottom, the real risk consists of missing opportunity. Everyone knows these things. But bull markets develop for the simple reason that most people are buying – ignoring the risk of loss in order to keep from missing opportunity – just when elevated prices imply losses later. Likewise, markets reach their lows because most people are selling, trying to avoid further losses and ignoring the bargains that are everywhere. - Howard Marks

If you were wondering why the market is spooked by rumors that Germany may be returning to the DM, here is actual fact that French President is on the verge of reinstating the franc. And with that, the euro is nothing more than a political toy for Merkel, Sarkozy and whoever the current non-indicted head of the Italian government is, to achieve their political goals. The currency is now dead. Parity coming within a few weeks.

The title pretty much sums it up...

One of the most delayed IPOs in the history of capital markets, that of Apollo's Noranda Aluminum, which first was allegedly coming to market in 2008, has finally priced. And it's a stunner: after preliminary expectations for raising as much as $266.7 million (16.66 million shares at $16/share), the company barely managed to attract interest for 30% of this amount, or a paltry $80 million. The 70% reduction in the price is a record for 2010 IPOs and shows that the IPO window in which the Goldman "Idiot Money" Rolodex is put to full use, is pretty much shut. Only this time it wasn't Goldman leading the underwriter brigade: GS was only fourth in the line up of managers. This IPO debacle is exclusively the work of lead manager Bank Of America, which more or less explains the fiasco. If you need a crap REIT upgraded you go with Merrill. Everything else will end in tears. And it also goes to show that if you need to find fools willing to part with their money, Goldman is and always will be the way to go. We are very much surprised Leon Black is not fully aware of this. As a result even pro forma for the IPO, Noranda is still leveraged 5x+, or more than three times its peer universe average. Dear latest money investors: our message to you is to prepare to lose your entire investment within a year.