Archive - Jul 17, 2010 - Story

To spin or not to spin– that is the question:

Whether 'tis nobler in the mind to suffer
The slings and arrows of outrageous measures,
Or to take arms against a sea of Top 40
And, by opposing, end them. To scratch, to filter
No more – and by a filter to say we end
This track and the thousand natural beats
That dance is heir to – ‘tis a consummation
Devoutly to be wished. To dance, to fall
To roll, perchance to peak. Ay, there's the rub,
For in that roll of bliss what dreams may come,
When we have shuffled off this trance interlude,
Must give us pause. There's the respect
That makes calamity of so long song.

In the most surprising news of the weekend (so far), the IMF and the EU effectively suspended Hungary's access to the remaining funds in a $25 billion rescue loan package created in 2008 to prevent a financial meltdown of the country. The timing of this development is most extraordinary, as only a month ago Hungary served as ground zero for yet another scare that pushed European sovereign bond spreads to new records. The reason given for this dramatic, and very destabilizing action is that the nation must "take tough action to meet targets for cutting its budget deficit." Ostensibly Greece continuing to lie about its own economic deterioration is a necessary and sufficient condition for escalating IMF lauding. Yet, with Europe set to announce results of its Stress Test kabuki next week, the last thing the continent needs is a real liquidity crisis (or the threat thereof) to counteract the smooth talking bureaucrats dead set into hypnotizing the union into "all is well" submission ("and when I snap my fingers, the debt-to-GDP ratio will be back to 10%"). To quote Portfolio.hu: "Brace yourself for Monday, folks!"

Zero Hedge recently posted several insightful pieces from Hinde Capital, among which the fund's presentation on the ECB's role as the European Commission's whore, and more recently, its presentation on Gold as the "currency of first resort" (recreated below). Last week, fund manager Ben Davies, who previously ran trading for RBS Greenwich Capital in London where he managed a macro portfolio, gave a must hear interview to King World News, in which Ben covers various in depth topics on the gold market and shares his views on "unimaginable price possibilities for the final culmination of the gold bull." Among the things covered are the Andrew Maguire whitsleblower case, David Einhorn's transition from paper to physical gold storage (he notes the storage and indemnification risk), on whether the US government actually owns the hold it represents to holding (noting the demonstrative busting of the very unimpressive Russian spy ring), Russian gold reserve accumulation, where he detours into noting that while gold was 25% of Russian reserve holdings in 2000, it has since plunged to just 5% even as the country has been hoarding gold indicative of the massive currency creation across the world - as currency reserves have grown globally by $7.5 trillion. Ben touches upon the recently popularized concept by Jim Rickards, about an alternative currency basket (aka a new China-Russia-Germany axis) backed by actual physical resources (a modified version of the much dreaded gold standard): "there will be a standardization, a basket of currencies somewhere in the world, that will then become a competing reserve currency very quickly overnight." Most relevantly, Davies answers what he thinks the fair price of gold is: "between $10,000 and $15,000."

It appears that a Phibro/Buffett-inspired attempt to corner a commodity market is in progress. Amusingly (or not so much for chocolate mousse cake makers), it is occurring in the relatively compact and illiquid cocoa market, where the WSJ reports ten brokers (mainly BNP Paribas) took possession of more than 240,000 tons of cocoa, valued at as much as
$1 billion, leaving just 6,710 tons available for purchase. The Telegraph adds some further color: "The cocoa beans, which are sitting in warehouses either in The
Netherlands,
Hamburg, or closer to home in London, Liverpool or Humberside is
equivalent
to the entire supply of the commodity in Europe, and would fill more
than
five Titanics. They are worth £658 million." This is nothing less than an attempt to squeeze existing shorts, with an emphasis of the on the run, July contract. Indeed, the backwardation between July and September has surged to 11%, even as the settlement price on the continuous front-month, closing at $3,165, approaches all time highs: "Thursday, cocoa for July delivery settled at £2,732 ($4,221) a metric
ton. Friday, the new front-month contract, for September delivery, rose
1% to £2,445 a metric ton." And that's not all: "Already, cocoa for September delivery is trading at a big premium to
December cocoa, sparking talk that another run on inventories may occur
when the September contract expires." In other words, with half of America beckoning diabetes with open arms, a rather sharp bout of inflation is about to be felt for all those whose daily calorie intake is over 2,000. Incidentally, this is precisely the kind of action that would happen if and when someone had the urge to pull a Buffett and send the price of gold and silver through the roof (and destroy JPM and the LBMA in a matter of hours).

David AJ Cohen replacement, DK, continues to be shocked, shocked, by the market's behavior: "Arguably the S&P 500’s recent 7% rise heading  into earnings season largely discounted much of the earnings upside. But it is not a positive sign when firms such as the  Industrial firm W.W. Grainger (GWW) posts strong results with June US organic sales up 12% year/year and July tracking in-line with June so far and the shares close essentially flat on the week." He explains this "inconsistency" as follows: "As noted, investors are intensely focused on the profit outlook for 2011. Investors are currently worried about the trajectory of US economic growth in 2H 2010 and the possibility of a double dip recession in 2011.  Scrutiny is being directed to how various economic scenarios will affect 2011 EPS." At the end of the day Kostin tries to remain cool, calm and collected, and throws out the zinger that he sees nearly $100 EPS in 2011 in a time when even Goldman admits GDP growth getting us there would be 1.5% in H2 2010 and 2.5% in 2011. Good luck. Also included are the usual plethora of pretty charts.