Archive - Jun 2010 - Story

Gold At $6,000? That was so May 2010. The next target, according to deflationist David Rosenberg, may be $10,000.

It appears that tensions are escalating between Gaza and Isreal. The Jerusalem Post reports that 3 members of an Islamic militant group had been killed after launching two rockets into southern Israel, which "landed in open areas and caused no injuries." This was allegedly immediately followed by an airborne retaliation: "The IDF confirmed it had carried out an airstrike Tuesday, and Gaza's chief medical examiner said there were three deaths." Doesn't end there: the Israeli media reports that "two Palestinian terrorists were identified infiltrating into Israel from the southern Gaza Strip earlier this morning. The soldiers on the scene exchanged fire with the terrorists, killing them both." We are still awaiting for the other perspective on these escalations, although so far have been unable to attain an impartial view on events. In other news Al Jazeera quotes Mossad Chief Meir Dagan as saying on Tuesday that Israel is progressively becoming a burden on the United States. "Israel is gradually turning from an asset to the United States to a burden," said Dagan, speaking before the Knesset's Foreign Affairs and Defense Committee.

The decade of the 1960s stood orthodoxy on its head. It was a time when alternative everything got a hearing. Expertise came into doubt; the phrase “some decisions are too important to be left to the experts” was heard everywhere. The seer of the day was Ralph Nader. Government was only trusted as a regulator. So it regulated: the environment, the schools, the workplace, the airline industry, the communications industry, and new industries like nuclear power. Anything that had escaped regulation in the 1930s got swept up in new regulations. And those 1930s regulations for banks and utilities were applauded. Well, this decade is beginning to emulate the anti-establishment passion of 50 years ago. In particular, a despised government is being asked to regulate.

With all the grace of a drunk Keynesian at an Austrian economists meeting, the Central Banks once again kill the EUR shorts and intervene to prop it up, for a ridiculous 250 pips intraday move. And thanks to Germany's Economics Minister Rainer Bruderle, we now know that the Fed is actively manipulating the FX pairs. Thank you Ben Bernanke for making sure that Atari has some confidence left in the manipulated market, as no humans are left any more.

Earlier we reported that Caja Madrid was put on downgrade review by S&P, following Friday's puke fest on all things Spanish by Fitch. The rating agencies may have gotten it right for once: MarketWatch reports that according to a report, Caja Madrid "will tap the government for €3 billion in rescue funds." That CajaSur "New Century" domino, as we predicted, is starting to really set in.

The IMF has announced its gold reserves declined to 2,966.4 in April from 2,981.5 tonnes in March, a 15.1 ton decline. And while the IMF sold well over half a billion worth of gold in April, Russia was once again taking advantage of what some are calling firesale prices, bulking up its gold holdings by 5 tonnes, which increased from 663.7 to 668.7. Russia has now been adding gold every month since February. As has long been known, in 2009 the IMF announced it would sell 403.3 tonnes of gold, of which 212 was purchased in prearranged deals by India, Mauritius and Sri Lanka. This means the IMF, after accounting for all disclosed sales, has 152.1 tonnes of gold left to sell from its original quota. Bloomberg discloses who has been doing the most buying recently: "Central banks and governments added 425.4 tons last year to 30,116.9 tons, the most since 1964 and the first expansion since 1988, data from the World Gold Council show. Official reserves may expand by another 192 to 289 tons this year, according to CPM Group, a research and asset-management company in New York." Keep your eyes on Russia: "Russia’s central bank bought 142.9 tons of gold last year, raising its holdings of the metal by 29%, RIA Novosti reported last month, citing Bank Rossii’s annual report submitted to parliament."

It is no secret that Robert Precther has long predicted a massive crash in the stock market. While we see no need to recap the events of the past two years culminating once again with the economic, financial and geopolitical crises of the past month, is the Elliott Wave Theorist finally about to be vindicated? Prechter's concern is that just as the record swing in the market on the way up caused a sense of false security, and, well, overall giddiness for lack of a better word, the crash will be accompanied by a variety of important adverse socio-behavioral demonstrations. While these can likely easily be anticipated by most, as they summarize pretty much what the first few days of the apocalypse would look like, here is a complete list of what Prechter expects on the way down, pulled from an October 2003 issue of the Elliott Wave Theorist.

The napkins as previously noted, saw the 1096/1097 in the S&P as a rather critical test area. That looked like the level of the ten month moving average (MMA) on the monthly chart. Some friends who use computers instead of napkins say the 10 MMA was at 1095. Adding to the confusion, Dennis Slothower, who follows the indicator avidly maintains that we closed May dead on the 10 MMA.The reason that is important is that a break of the S&P 10 MMA has traditionally been an effective trading signal. A break below – sell. A move above – buy. So, while we may not have seen an outright sell, we certainly got a warning signal. Somewhat perversely, Friday’s late swoon came on slightly lower selling pressure. Nevertheless, the selling pressure/demand power ratio remains in a “correction” mode. Today’s targets look interesting. Thursday’s S&P stopped dead at the 200 DMA (circa 1104/1105). If we sell off this morning, as seems likely, first resistance on any rally attempt should be 1088/1092 and then the critical 1104/1105. Support looks like 1072/1075. Then we revert to last Wednesday’s lows 1064/1067. Below that the “do or die line” is at last week’s low 1040. Despite Thursday’s rally, market is still oversold so bulls could try an afternoon salvage operation. - Art Cashin

This past Friday was the last day to submit hedge fund redemption requests for Q2, and we have heard of bloodbaths at several of the more prominent asset managers that have underperformed the S&P. Which ones these are, we will let people decide courtesy of the most recent HF performance update from HSBC. As indicated, it is not pretty, with many of the recent high-fliers now becoming fast-plungers. As expected, many of the underperformers have stopped reporting recent activity with the last documented performance date still stuck in April. If FASB 157 can be suspended for corporates, why should hedge funds be forced to report all of their red ink?

On Monday, the ECB made a statement that was not shocking to us, but apparently was relevant to the 3 or so people left with long positions in the Euro and the E-zone banks. Reuters reported, "The European Central Bank warned on Monday that euro zone banks faced up to 195 billion Euros in a "second wave" of potential loan losses over the next 18 months due to the financial crisis, and said it had increased purchases of euro zone government bonds." The result of that statement and it implications left the Euro down 1.3 % as of this writing, with equities down across the board, and the barbaric relic Gold up 10 dollars.

• Asian stocks fall on Japan political concern, China growth.
• China's manufacturing expands at slower pace as economic growth moderates.
• China supercomputer named second-fastest in global list.
• ECB expects additional $239.26B in write-downs by European banks.
• ECB states rating firms aggravates crisis.
• Euro-zone unemployment tops 10% in April.
• Euro moved lower against USD, Yen, on German Pres. Köhler's unexpected resignation.

As we reported yesterday, the ECB completed a €35 billion one-week liquidity absorbing Term Deposit tender: the amount was set to match the volume of govvie bonds purchased in the prior week, and is the third sequential and growing liquidity reduction exercise by the ECB (following €16.5 billion and €26.5 billion). Digging into the numbers however reveals a troubling trend. While the 68 total bidders in the latest tender round submitted a safe number of bids to take down the entire offered amount, or €73.6 billion, the bid to cover was only 2.1x, a far cry from 3.25x in prior week's tender, and the 10x Bid To Cover in the first liquidity withdrawing exercise. It appears European banks are rapidly losing their interest to trade off liquidity in exchange for a one week Fixed-Term loan. The marginal allotment rate for today's operation ended up at 0.28%, with a max set at 1.00%. As the ECB is likely buying increasing amounts of government debt, we anticipate next week's Fixed-Term tender to be in the €40+ range, and the bid to cover to have a 1 handle, if it is covered at all. Once again the ECB shoots itself in the foot by telegraphing on the liquidity absorbing side, that things within European banks are going from bad to worse. And the fact that the FTDs can be used as collateral in ECB refi operations apparently is not going to help one bit.

Things were so much simpler when contagion was "contained" to just Greece..."The CreditWatch placement reflects the possibility that we could downgrade Caja Madrid, based on our view that its financial profile will likely continue to weaken in 2010 and 2011. Depending on the degree of deterioration, Caja Madrid's creditworthiness could cease to be consistent with our 'A/A-1' ratings on the savings bank. In particular, we believe that Caja Madrid's operating profitability will likely come under heavy strain during the remainder of this year and 2011. This is because the repricing of the full loan book to the prevailing low interest rates will reduce Caja Madrid's earnings substantially, while at the same time, in our view, its loan loss provisions will remain elevated. In our view, the modest net operating profits that Caja Madrid will likely report might leave it with little room to maneuver if unexpected events arise. Furthermore, we think that by the end of 2011 Caja Madrid will probably have exhausted all its existing loan loss reserve cushions to cover the credit losses in its loan book. Spain's fourth-largest banking group, Caja Madrid had total assets of €191 billion on March 30, 2010." Standard and Poors

The latest example of selling not being actually "selling" comes courtesy of a Deutsche Bank oven mitt. Bloomberg reports that "Deutsche Bank AG sent a spate of erroneous sell orders for Japan’s Nikkei 225 Stock Average futures contracts because of a system malfunction. The erroneous orders sent stocks on the Nikkei 225 into a brief plunge seconds after the market opened at 9 a.m. The average sank as much as 1.1 percent to 9,658.44 before rebounding to about 9,743. The gauge was at 9,691.08 as of 1:54 p.m. in Tokyo." We are trying to remember when the last time that a "fat finger" was responsible for panic buying. But when every single HFT algo is programmed to only buy on no volume, the possibility of that happening is slim to none.

MarkIt reports Italian CDS has exploded by 50bps, from 200 on Monday to 250bps, a new record. The weakness is spreading globally now. A slightly delayed CMA report indicates that the biggest CDS movers are all sovereigns, and led by Korea and other Asian names. In the meantime eurodollar futures are pushing ever higher, even as Libor is still testing the temporary breaks at 0.53%. All fine and dandy, until you look at Euribor, where things are getting surreal. We will discuss this shortly.