Archive - Jun 2010 - Story

Don Coxe of Coxe Advisors is out with his latest monthly newsletter, a must read report on why the Loonie may be a better investment than both the CNY and the USD combined, why investors should beware of Greeks baring facts, the BP disaster, and, most importantly, quotes Browning, in an extensive analysis of gold: "Leave the fire ashes. What survives is gold."

Somebody forgot to give the PBoC the memo about that whole "PBoC eliminating the dollar peg" thing. According to the just released fixing by the Chinese Central bank, the USDCNY today was at 6.8275, the exact same as Monday. And adding just a little insult to injury, the PBoC devalued the CNY against the EUR by juar under 300 pips: from 8.4538 to 8.4825. That's ok though, the HFT brigade already has its wax on, er, risk on, no volume marching orders.

We continue to hear pundits describe gold as a bubble. Certainly it will turn into a bubble before this is all over but we are hardly in the bubble stage yet. In order for a bubble to form you need the public to come into an asset class. The public is pretty dim and it can take 15-20 years before they "catch on". It took 18 before they noticed the tech bubble. Once they do start to "get it" we will have about a year to a year and a half as gold enters the parabolic stage before the bubble pops. See the Nasdaq chart below from late 98 to March of 2000. At gold's top, half of your neighbors will be buying gold (not selling like they are doing now). At the top there will be lines outside the the local coin dealer waiting for the next shipment of gold to come in. At the top 7 of 10 billboards you see driving down the highway will have something to do with precious metals. At the top the guy standing next to you in the grocery store will tell you how many thousands of dollars he made last month off his gold coins. At the top everyone will have become convinced the dollar is toilet paper and will only continue to decline until it has become worthless.

The Euro is gapping up in Asia tonight, no doubt celebrating the de-pegging of the Yuan. Looks like "Risk On" is possible on Monday.

There are some, like Pimco and Whitney Tilson's T2, who enjoy talking their book, and demonstrating they just love to live dangerously by buying the stock of a company which has an Upside/Downside ratio of 1 (or 100% on both sides, with the government dead set on pushing the "equation" solidly to the D side). Then, there are those, who would rather go to Vegas, breathe in deeply some beta radiation courtesy of the Us DoD and DoE, play some serious blackjack, get the presidential suite and all the Grey Goose comped, and have the very same wining odds as a BP investment, even as the house is gamed to win in the long run (thank you HFT).For those in the first camp, below, courtesy of My Investing Notebook, is Whitney Tilson's case on why BP's stock price belongs tens of dollars higher. For the sake of Blackrock and every pensioner in the UK, we hope Tilson is correct. For now, he has a ways to get above hist cost basis.

An internal BP document released by the chairman of the Energy and Environment Subcommittee in the House Energy and Commerce Committee, Ed Markey, discloses what the vast majority already know - that a "worst case" gusher scenario could be as high as 100,000 barrels of oil per day. According to an exhibit discussing flow rate probabilities, BP says that "If BOP and wellhead are removed and if we have incorrectly modeled the
restrictions – the rate could be as high as ~ 100,000 barrels per day
up the casing or 55,000 barrels per day up the annulus (low probability
worst cases)." This is getting very close to the estimate presented previously by Matt Simmons that the flow rate could be as high as 120,000 bpd. As Markey notes, "This number is in sharp contrast to BP’s initial claim that the leak
was just 1,000 barrels a day. At the time this document was made
available to Congress, BP claimed the leak was 5,000 barrels a day, and
told Members of the House Energy and Commerce Committee that the worst
case scenario was be 60,000 barrels a day. This document tells a
different story." It is stunning to discover that a major multi-national corporation could be so daring as to lie to shareholders, Congress and taxpayers. The next question that Congress may want to look into is why the Obama administration swallowed BP's lies hook line and collapsing GoM floor bed, without using an independent 3rd party verification, and what the liability to the firm would be if the official flow rate is revised to be twice higher than the current worse case scenario. We are confident that as more of the structural integrity of the seabed collapses, that even Simmons' estimate will prove to be conservative.

All you need to know about how the world looks through the eyes of everyone's favorite Chiswick resident: "I am sorry to sound like a broken record here in my opening paragraph, but – alas – we are through yet another week of pretty good real-economy data in Europe, further positive signs on the policy front, and stabilising markets." (and yes, that's Erik Nielsen from GS). The decoupling from reality is now complete: what is it about "decoupled" London tap water? First O'Neill and now Nielsen...

Who needs a wartime nuclear exchange when you have peaceful countries nuking the gamma rays out of their own sovereign territories - now that the environmental theme is rather popular, the following video by Isao Hashimoto shows all the nuclear "tests" conducted by the world in the period between 1945 and 1998. Based on public data, the world's peaceful countries have already nuked themselves at least 2,054 times, with the US nuking the state of Nevada and its immediate neighbors about one thousand times. And keep in mind - the fallout does not just miraculously "disappear." Feel free to consider that next time you look at bargain properties on the strip. Anyway, as Idealist.ws asks, "How would your life be different if you were taught in school a small nuclear war already took place?" One thing is certain - Congress would be stunned and appalled, and the disgraced CEO of Nukes R Us, Inc., who previously gave trillions in campaign contributions to every Congressional critter, would be facing a very unpleasant day.

Update: It appears the Aircraft Carrier crossing the Suez is the USS Harry Truman, under the control of Herman "Herm" Shelanski, who is quoted by aish.com as saying "I understood that the strength of the United States is directly proportional to the safety of Israel."

Arabic newspaper Al-Quds al-Arabi reports that 12 American warships, among which one aircraft carrier, as well as one Israeli corvette, and possibly a submarine, have crossed the Suez Canal on their way to the Red Sea. Concurrently, thousands of Egyptian soldiers were deployed along the canal to protect the ships. The passage disrupted traffic into the manmade canal for the "longest time in years." The immediate destination of the fleet is unknown. According to Global Security, two other carriers are already deployed in the region, with the CVN-73 Washington in the western Pacific as of May 26, and the CVN-69 Eisenhower supporting operation Enduring Freedom as of May 22. It is unclear at first read what the third carrier group may be, but if this news, which was also confirmed by the Jerusalem Post and Haaretz, is correct, then the Debka report about a surge in aircraft activity in the Persian Gulf is well on its way to being confirmed. There has been no update on the three Israeli nuclear-armed subs that are believed to be operating off the coast of Iran currently.

Goldman's macroeconomists led by Jan Hatzius have launched a new tool, the US-MAP, also known as a Macro-data Assessment Platform, whose purposes will be to track up/downside macroeconomic "surprises" relative to expectations. As lately we have had nothing but downside surprises, yet the market keeps ploughing higher for some computerized reason, this would be a useful tool to keep track of just how overoptimistic the economic consensus is. Yet as usual, Goldman introduces a fudge factor in the way it grades the importance of specific economic data: for example according to Goldman's relevance matrix, such lagging and manipulated data as the Conference Board Confidence Index is given the same weight as the ISM Services and the ADP report, and greater weight than Initial Claims, New, Existing and Pending Home Sales, the Empire Index, Industrial Production, Core PPI , the Trade Balance, Housing Starts and, stunningly, actual Consumer Spending. How this makes any sense, we don't know - then again we did not win the Wall Street All Star Economic Prize last year, so address your queries to Jan. Yet even with all this doctoring, Hatzius is forced to admit: "A visual check of US-MAP readings for the data released thus far in June confirms the predominance of downside surprises." In other words, it is about time economists start factoring in a double dip instead of continuing to live in the land of unicorns, endless stimulus and pixie dust. The game of "the data beat expectations" is now over. Now what?

This past Monday, June 14, 2010, the Unites States Supreme Court let stand without comment or dissent the Second Circuit Appeals Court decision to dismiss Maher Arar's suit against the U.S. Government. Mr. Arar was illegally detained by U.S. officials while in transit back to his home in Canada, and then handed over to Syrian Intelligence officials using “extraordinary rendition”. The Syrians kept Arar for ten months, interrogating him using torture, and finally releasing him when they concluded that Mr. Arar was neither a terrorist, nor in possession of any relevant intelligence. Once free, Mr. Arar sued both the Canadian government (which peripherally assisted in his kidnapping and torture) and the U.S. government. The Canadian government issued him an unequivocal apology, and $10 million Canadian in compensation. Mr. Arar did not get any similar justice from the U.S. government, though. The Second Circuit Appeals Court quashed his suit by stating that Congress had not authorized such suits as Mr. Arar’s. By letting stand the Appeals Court decision to quash the suit Mr. Arar brought against the U.S. Government, the Supreme Court effectively ruled that the Government cannot be held accountable by private citizens for its actions. The Government can do as it pleases to any individual—including assassinating one of its own citizens—and there is no legal remedy. Now let's compare how the U.S. Government dealt with BP, regarding the oil spill disaster in the Gulf of Mexico.

Moody's Investors Service downgraded Anadarko Petroleum Corporation's and its guaranteed subsidiaries' (Anadarko) long-term debt rating to Ba1 from Baa3 and placed the long-term ratings under review for further possible downgrade. Moody's also assigned a Ba1 Corporate Family Rating. Moody's anticipates Anadarko, as BP's partner in the well, will meet its responsibilities through some allocation of some portion of the liability from the accident. Moody's believes the ongoing uncontrolled flow from the well will result in higher containment and clean-up costs than initially expected, as well as potential further increases in litigation costs and fines in view of the widespread damage caused to the economies of the coastal regions affected by the oil spill.

Even as recently 'demoted' BP CEO Tony Hayward is out and about, enjoying a fine yacht race-filled Saturday (cost of InTrade contract that the CEO leaves by year end, now at 74.9), the GoM gusher continues spewing up to 120,000 barrels of toxic sludge daily. Below is an informative interactive map from USA Today, disclosing all you need to know about the spill, and why both Texas and the entire Eastern seaboard are likely next to be picking tarballs out of their coastline. In the meantime, BP execs are glued to the Weather Channel, dreading any formation that could even remotely resemble a hurricane-in-waiting (InTrade odds of first Hurricane strike). Should one approach anywhere near the Horizon, all those investors who will buy the Company's unsecured bonds, or even a secured Term Loan of BP, will be wiped out.

In a statement posted on the PBOC's website late last night, the Chinese central bank has announced it will seek a flexible yuan, ending a two-year peg to the dollar. The news comes a week before the G-20 meeting at which the CNY exchange rate was set to be a key issue of debate. On the other hand, as the PBoC noted, With the BOP account moving closer to equilibrium, the basis for large-scale appreciation of the RMB exchange rate does not exist." As such, a large initial move is unlikely to occur, and the bulk of the volatility will likely strike at traded CNY forwards. Either way, this is sure to play major havoc with already extremely volatile EUR, CHF, GBP and JPY pairs.

David Kostin continues his attempt to reconcile the apparent incongruity between very bearish macro and just slighly bullish micro investors. In a recent trip to London, David Kostin conducts a detailed investigation on this divergence: "Through a combination of 1x1s and group breakfasts, lunches and dinners we exchanged views with a large cross section of macro equity, fixed income, and FX hedge funds, classic long/short equity hedge funds, and growth, value and global long-only mutual funds." The take home is that really pretty much everyone (at least in Europe) has a bearish tilt. We wonder when Goldman will readjust its EPS expectations appropriately.