Archive - Jun 2010 - Story

And there are those who wonder why the US has spent countless dollars and thousands of dead soldiers protecting a few desolate mountain passes in Afghanistan. And no, it turns out it is not just the opium trade. The NYT reports that "The United States has discovered nearly $1 trillion in untapped mineral deposits in Afghanistan, far beyond any previously known reserves and enough to fundamentally alter the Afghan economy and perhaps the Afghan war itself, according to senior American government officials." The article continues, "The previously unknown deposits — including huge veins of iron, copper, cobalt, gold and critical industrial metals like lithium — are so big and include so many minerals that are essential to modern industry that Afghanistan could eventually be transformed into one of the most important mining centers in the world, the United States officials believe." Ah yes - "previously unknown." Yet the punchline of the piece : "The vast scale of Afghanistan’s mineral wealth was discovered by a small team of Pentagon officials and American geologists." Because $1 trillion worth of minerals just lie there waiting to be discovered almost 10 years after the initial incursion. Next thing you know FCX already had an entire mining infrastructure in place just in case a contingency like this miraculously occurred. In the meantime, look for gold prices to plunge as the newly uncovered gold deposits are rumored to be "large" enough to once again refill Fort Knox and to push the supply curve three miles to the right.

Three days ago we brought attention to Soros' most recent outburst of negativity in a speech presented during a conference in Vienna, in which he said that "The collapse of the financial system as we know it is real, and the crisis is far from over. Indeed, we have just entered Act II of the drama." Below is the full text of Soros' speech. A teaser: "The first phase of the maneuver has been successfully accomplished – a collapse has been averted. In retrospect, the temporary breakdown of the financial system seems like a bad dream. There are people in the financial institutions that survived who would like nothing better than to forget it and carry on with business as usual. This was evident in their massive lobbying effort to protect their interests in the Financial Reform Act that just came out of Congress. But the collapse of the financial system as we know it is real and the crisis is far from over."

Another important piece of news that was lost in last week's "oilflow" in addition to the failed Chinese bill auction previously discussed on Zero Hedge, was the Hungarian 12-month bill auction on June 10th, which aimed to raise 50 billion Hungarian Forints ($214 million), of which the government only accepted HUF35 billion in offers. It is unclear if submitted bids actually topped 50 billion, yet the inability to find a mere $64 million at acceptable terms is very troubling. Fitch immediately stepped in to diffuse the situation, which is still very tense courtesy of the prior week's commentary out of Hungarian politicians that the country is in dire a situation as Greece: "Fitch Ratings has said on Friday that while Hungary’s Government Debt Management Agency (ÁKK) was able to sell less 12-month discount Treasury bills than it originally planned yesterday, the undersold debt auction means no threat to the country’s financing ability, but it does highlight its vulnerability that was exacerbated by "misjudged comments" by members of the new government" as portfolio.hu reports. The failed auction, does "highlight Hungary's ongoing vulnerability to global investor risk aversion, sharpened recently by misjudged comments by the new Hungarian government, and post-election uncertainty over the outlook for public finances in the context of an already high gross government debt burden."

In a stunning development, and what may be the biggest loss for the Federal Reserve's lobbying power in history, the FT reports that "Banks are likely to lose a key lobbying battle in the US over whether they will be forced to spin off their lucrative swaps desks, according to people familiar with financial reform negotiations in Congress. Defeat, which would be a further blow to Wall Street, has been made more likely by Paul Volcker, the influential former Federal Reserve chairman, softening his opposition to the provision." If this indeed happens, the fallout for the US financial system will be dramatic, as numerous Wall Street spin offs would have to occur immediately in order to preserve CDS trading, an event that would will also adversely impact valuation multiples. The biggest problem with the Blanche Lincoln proposal, however, is that it still appears nobody really knows just what its full implications are. And adding more fuel to the fire, is the latest whisper from Volcker, whom many thought had relented on toning down his Volcker proposal to prohibit prop trading by banks: "Some senators want to modify the Volcker Rule, which also prevents banks from owning or sponsoring hedge funds in the name of risk reduction, to allow banks to “organise” a hedge fund and make an investment in a small amount of capital alongside a customer. But Mr Volcker thought that would be the thin end of the wedge, adding “from my point of view, I’d like it pure”. Could Wall Street be finally losing its tentacular grip over Washington? We, for one, will not believe it until we see it: after all Chris Dodd and Barney Frank's unfettered access to lifelong indulgences from the Clearing House Association lies in the balance.

The most recent iteration of the ES-EURJPY decoupling trade spotted on Friday was a little stubborn going into Friday's close. We were almost worried we may lose this guaranteed money maker for a second. Those worries are now gone: this is the 6th time the observed risk-FX docoupling trade has closed in 6 observations, and in 6 (and a half) trading sessions. With cumulative P&L over the past week starting to become material, on a standalone, unlevered and/or annualized basis, we are stunned that this trade continues to manifest itself with such regularity.

Risk assets now back in play with the Euro going vertical in Asia trade. Perhaps we can see Erin, Michelle C-Squared, Amanda, etc. celebrate tomorrow by loosening up a few buttons on those silk blouses....

LOL....

As promised, we bring you Goldman's response to our earlier query on whether any ethics waivers have been used in the prior five years by executive or non-executive employees of GS. It appears all of Goldman's workers have conducted themselves with the utmost ethical standards (at least from their perspective) and no waivers have been requested. To wit:

Tyler:

Thanks for your message. The ethics code, including waiver provision, was required under SarbOx. No waivers have been requested.

Regards / Lucas

This only leaves former GS CEO Hank Paulson as a prominent user of an ethical waiver, when employed by the FRBNY as we wrote previously, specifically in the context of bailing out Goldman Sachs.

Last week, with little fanfare, among the ever deteriorating oil spill crisis, the White House quietly noted the issuance of an executive order "Establishing the National Prevention, Health Promotion, and Public Health Council", in which the president, citing the “authority vested in me as President by the Constitution and the laws of the United States of America” is now actively engaging in "lifestyle behavior modification" for American citizens that do not exhibit "healthy behavior." At least initially, the 8 main verticals of focus will include: smoking cessation; proper nutrition; appropriate exercise; mental health; behavioral health; sedentary behavior; substance-use disorder; and domestic violence screenings. Eventually we fully anticipate that the program will also target such wholesome activities as screening for precious metal holdings, monthly minimum usage of available revolving credit (and a minimum threshold thereto) and the susceptibility of an individual to stay current on one's mortgage. Additionally, the president will establish yet another Advisory Group, composed of "experts" picked from the public health field, and one which tracks the successful uptake by the US population of the precepts for a better functioning society that the president deems important. Cosmo culture has just been adopted by the White House, where Big Brother is now in the business of counting calories, and soon, your bars of gold.

Now that the market has decisively entered into correction territory, two of the most bullish investment banks around, Goldman and Deutsche Bank, are long overdue for reports that describe just how this event was dully expected and in fact, priced in, and that investors should in now way draw and conclusions about a potential recession emerging from something as innocuous as a recession. Furthermore, the 10%+ pullback is "perfectly normal", and has no impact on either Goldman's 1,250 or DB's 1,375 end of year target for the S&P. And yet, there is a 'but' - both firms now sound far less confident than they did a few short months ago, and the hedging of year end targets has begun (more so at GS than DB). And while Goldman's report is more focused on the European context, and is thus appreciably more bearish, Goldman's tone is far more subdued than Deutsche's, which is understandable: with assets at two thirds of German GDP, and with a government dead set on minimizing bank bailouts for the foreseeable future, the German bank has far less margin for reality than the primary recipient of Hank Paulson's bailout generosity.

Chiswick's (and, of course, Goldman's) very own European permabull, Erik Nielsen, who just like his other N-11 permabullish colleague is sorely lamenting the Hand of Clod, is back to discuss the merits of flying transatlantic coach, the wonderfully sound economic edifice that is Europe, and the "overblown" concerns over the Swiss National Bank building up an FX reserve position that is approaching one half of Swiss GDP. As Erik observes: "now there is someone – appropriately – not worrying about their balance sheet!" - indeed, why worry. When the time to really worry comes, it will be far too late.

After having contracted notably to only -93,325 net short speculative contracts, it appeared that speculators could be loosening their death grip on the EURUSD. The most recent numbers from the CFTC commitments of traders report, however, indicates that after last week, EUR shorts once again piled back in, after the second largest adverse move in EUR sentiment in 2010. -18,620 contracts were added to short positions, the second largest such move in 2010, following only the -28,576 from March 23, resulting in a speculative Euro FX exposure of -111,945 net short contracts: just a fraction higher than the all time low ever seen of -113,890 on May 11. As this data is for the week ended June 8, the late week shakeout in which the EURUSD climbed all the way back to $1.21 is therefore just a case of all the new weak hands getting shaken out, after ambitions of a quick profit did not materialize. We now expect the net short number to once again drop below the -100,000 mark, and for the EURUSD speculative onslaught to continue.

Another sign of the imminent return of the Deutsche Mark comes this weekend courtesy of BoersenNEWS.de, one of the largest German stock market portals. Due to popular demand, the portal has reintroduced quotations in DEM, alongside those in EUR: "Due to the ongoing Euro crisis many investors expect the return of the Deutsche Mark. A recent survey, showed that 39% of 1,364 börsennews.de users, would like the good old Deutsche Mark reintroduced. Börsennews.de has responded and will immediately display share prices in Euro and Deutsche Mark." The commentary on this symbolic switch is enough to indicate just how the majority of Germany feels about this issue: "With the symbolic reinstatement of the Deutsche Mark Börsennews.de is not supporting to the abolition of the Euro, however the desire of many citizens for economic security. One thing is clear, the German Mark represented the economically strong and healthy Germany. The Euro represents a cracked economic system, not only throughout the world, in Europe, but above all in Germany." We couldn't have said it better ourselves. Suddenly, Jim Rickards' observation that Germany and Russia could be very well considering a new gold- and oil-backed currency, does not seem all that very ludicrous to us.In fact, should the two countries indeed be in such deliberations (and for their literal recent proximity , look no further than the seating chart in this year's Mayday parade in Moscow), the end of fiat could be approaching much faster than previously expected.

With daily geopolitical, natural resource and sovereign liquidity crises suddenly becoming the norm, it is easy to get sidetracked from other very important issues, in which, at least until recently, moderate progress had been achieved. Primary among these is the seeming disconnect (at least when compared to other banks such as Bear Stearns and Lehman Brothers) in the preferential treatment of Goldman Sachs. Now that Goldman is a household name, courtesy of a variety of litigation overtures, both in the civil and criminal arena, demonstrated by Goldman's popularity among the broader population, the firm has been kind enough to publicize its "Code of Business Conduct and Ethics" in an attempt to placate the concerned populace, and demonstrate that Goldman has a whopping 4 pages dedicated to promoting legal behavior amongst its nearly 30,000 employees. What confuses us is the placement at the very end of this document of the following section, Waivers of This Code, in which one reads: "From time to time, the firm may waive certain provisions of this Code." In other words, Goldman's activities comply fully with legality until such time that Goldman decides it is in the name of the greater good to "waive" this compliance. We are confused that in light of this glaring loophole, not one question has been asked of Mr. Blankfein as to what specific circumstances have necessitated the invocation of the "ethics waiver", by either executive and non-executive employees: something which none other than former Goldman CEO Hank Paulson recently used in order to pursue the full taxpayer-funded rescue of precisely this firm. Which is why, in the absence of others doing so, we have decided to ask this question directly of Goldman head of PR Lucas van Praag.

A quick look at the "math" behind the spectacle that will consume over 25 billion people for the next thirty days.

Ever wonder who may have been buying up every share of BP stock earlier this week, especially when it plunged to 14 year lows on June 9 amid media frenzy based on a Fortune story in which Simmons & Co.'s CEO Matt Simmons was quoted as saying that BP "has about a month before they declare Chapter 11. " Why, Simmons & Co. itself, of course. In a note released to clients on Friday, Simmons & Co, upgraded BP from Neutral to Overweight, in which Mr. Simmons amusingly notes, "the kitchen sink of headlines have been thrown at BP shares over the past 2 weeks, thereby partially desensitizing the shares to the news." With his dire warnings of an imminent bankruptcy just two days prior to the upgrade, Mr. Simmons surely did his fair share to contribute to kitchen sink. It is only fair that after creating a near-panic in the name, that the firm would now suddenly be stuck in a Schrodinger's Cat world, in which BP is seen as both bankrupt, and having a $52 price target at the same time.