Archive - Jan 2011 - Story

Zero Hedge is happy to announce a new collaboration with the precious metals experts at Gold Core. We look forward to posting periodic industry updates, notes, analysis and commentary in conjunction with GC on all matters of topical significance in the PM space. As an introduction, we would like to present GoldCore's review of 2010 and Outlook for 2011. A sample from the analysis: "Should the dollar and other debt laden currencies and government bonds fall sharply in value due to a panic and wholesale liquidation we could experience hyperinflation. In this scenario paper assets will be shunned and people will protect themselves by buying hard assets such as real estate, commodities and gold and silver bullion. In such a scenario, gold and silver surge would quickly reach their inflation adjusted 1980 high of $2,300/oz and $130/oz before overshooting to much higher levels as was seen in Weimar Germany and more recently in Zimbabwe."

In the eyes of this volatility trader the current paradigm of monetary and fiscal stimulus may best be understood as the greatest leveraged volatility short in economic history. The current stimulus is analogous to continuously rolling "naked" put options on the global economy, backed by margin provided by the US taxpayer, generating short-term growth at the expense of long-term systematic risk. The reinvestment of the premium into risk assets by the investor class ensures the Fed's naked put is never exercised. In theory the Federal Reserve is now the largest volatility trader in the world...You've most likely heard the old adage about the danger of picking up pennies in front of a steamroller. The great volatility short is no different in principal as our government collects trillions of pennies from the treads of a debt steamroller repatriating them to the driver in exchange for a promise to slow the machine. We must hope the operator is able to find a better job before he becomes dependent on those pennies for his survival. At 9.4% unemployment it will be challenging. In a recent letter to senior members of Congress Treasury Secretary warned there will be "catastrophic economic consequences" if the government's $14.29 trillion debt ceiling is not increased immediately. What should be apparent by now is that one day the greatest volatility short in history will face a margin call the US taxpayer will be unwilling or unable to meet. While the markets remain in a state of euphoria it may be the right time to opportunistically position yourself on other side of the Fed's volatility trade by going long tail risk.

After insiders closed off 2010 with just 19x more selling than buying, they have greeted 2011 with a ratio of selling to buying of 114x, a decent pick up in dumping. Specifically there were 4 purchases in the first week of 2011 in S&P 500 names, for a total of $2.5 million in notional. This was offset by $290 million in sales, in 86 transactions. The only notable purchase in the last week was in ATI, which has continued to see insider buying for the past month. The selling side is far more interesting, and here we can see ongoing dumping of Google, MCK, Qualcomm, Ford, HP, Carnival, CSX, and so forth. Luckily for the PDs and the Fed, the retail hot grenade lemmings are finally stepping in, because it was unclear how much longer the HFTs could keep the market from crashing again.

RANsquawk Market Wrap Up - Stocks, Bonds, FX etc. – 11/01/11

A week ago we noted that the first Fed 'excess liquidity' inspired violence of the year broke out in Algeria, where following the recent release of FAO data confirming food prices have just hit an all time high, rioting broke out "over rising food prices and chronic unemployment... with youths torching government buildings and shouting "Bring us Sugar!" To be expected, this event received no coverage in the US. In the meantime, the violence has escalated and spread to neighboring Tunisia, where weeks of clashes have left 14 dead. The reason for the lethal violence- "high unemployment and the surging cost of living." One would think that excess economic slack from pervasive unemployment would bring about a plunge in the cost of living... Unfortunately, that is not the case in a centrally planned world.

From Dow Jones

• Illinois House Committee Passes Tax Bill To Cut Deficit
• Illinois Income Tax Would Jump To 5% From 3%
• Illinois Corporate Tax Would Jump To 7% From 4.8%
• Illinois Bill Now Goes To Full House

Whoever said CNBC does not have good content: the biased station's European division actually has some very informed and interesting guests. Of particular note is yesterday's interview with Cazenove's technical strategist Robin Griffiths. And while the chartist tends to not be too happy with the recent stock market action (who is), the most notable item on the docket was Griffiths discussion of gold. And it was quite memorable: "I
think not owning gold is a form of insanity, it may even show unhealthy
masochistic tendencies, which might need medical attention. Real assets hedge paper money being printed into oblivion, so you've got
to own gold and you've got to own other commodity-related investments
still. Gold is far from being an overowned trade at the moment, far, far from it. Although it's been a top performer for each of the last ten years, it's
still in a linear trend. Eventually it will go exponential and make more
in the last little bit than the whole of the ten year trend." That pretty much covers it.

Over a year ago we attempted to deconstruct Goldman's prop trading activity using scraps of data from the tax returns of the Goldman Sachs Foundation. The reason we did that, is that up until today, the firm had never disclosed the non-client aspect of its trading, instead dumping all related revenues and profits in the umbrella "Trading and Principal Investments." That is no longer the case, as starting today the firm will break down its client facing and prop ("Investing and Lending") revenue and profit streams. The reason for our long-term fascination with Goldman prop trading, which is nothing less than a glorified hedge fund, and has no client flow focus whatsoever (presuambly), is that we had always claimed it accounts for a substantial portion of the firm's if not top, then certainly bottom line. After all it was Lucan van Praag who told us directly, that prop trading contributions to Goldman were really de minimis, a response which we took extremely skeptically as the margins associated with a modest revenue amount may well be huge and thus result in a substantial pre tax net income benefit to the firm. Today Goldman also published an 8-K that did a pro forma breakdown of its earnings. To our great surprise, we were correct in assuming that Goldman prop has been the dynamo behind the firm's profitability in 2010.

Someone forgot to change Johnny 5's fuses. The result: no mas liquidez.

That's ok guys. In this ponzi scheme of a banana republic, we too are having problems figuring out who is doing the buying, when the seller is the buyer is the seller ad inf.

We are hearing that the recent market downdraft and volume upswing occurred as a major block of just about $6 billion in E-Minis hit the bid. What is odd is that such a big order would go as a block and not be split. Either this was a fat finger or someone is making a statement. In the meantime the NYSE cume TICK hit -1,313, indicating just how much of everything trades as one, and the second there is any selling for whatever reason, the house of cards is once again in jeopardy.

The creep ever higher in the short-end of the belly continues, with the first 1%+ 3 Year auction pricing since July, specifically today's $32 billion in 3 Year printed at a 1.027% high yield, a 19% jump in one month. The increase in yield to 6 month highs resulted in an increased in demand as well, with the Bid To Cover coming at 3.057, still lower than the trailing 12 month average of 3.121. As can be seen on the chart below, after Indirects virtually withdrew from bidding in October just as the Fed attempted to make it clear that the short end was going to zero, they have been coming back since, and took down 39.4%, with Primary Dealers being allocated 44.5% and Directs 16.2%. Of the PD bids, we expect that much of the auction will be syphoned right back to the Fed in the next 3-4 months, with all the interest on the auction eventually being remitted back to the Treasury in the latest confirmation that all of US public finance is now a ponzi fraud.

Keynes' key insight was the role central banks and governments could assume to ameliorate specific kinds of financial depressions via borrowing and fiscal stimulus. But politicians found that keeping the spigot open all the time increased their power and longevity in office, and so what was to be used sparingly and infrequently became the default policy. We are now witnessing the exhaustion of permanent Keynesian stimulus. We shall soon see its repudiation as a systemic "solution." Which brings us to everyone's favorite campfire debate, inflation vs. deflation. What this really boils down to is whether the financial world will expire from fire (hyper-inflation) or ice (deflationary death spiral). My own position is that hyper-inflation is first and foremost a political phenomenon--it is necessarily the result of specific political policies and choices.

Much has been said about the parallels and differences between the Japanese and US experience. Today David Rosenberg chimes in in an original fashion, and instead of providing the latest rambling discussion, shares ten simple pictures. Quote Rosie: "Consider the charts below the equivalent of 10,000 words explaining why the U.S. post-bubble economic and financial backdrop is looking more and more like the Japanese experience of the past two-decades."

The backlog of alleged Chinese "scam" stocks is starting to trouble us: not even we suspected when we commenced our little crusade against Sino-fraud, and domestic stock exchange complacency to host said fraud on what are increasingly becoming discredited exchanges, that it would lead to such an explosion in content, confirming time after time, that a material number of Chinese companies, most notably of the reverse merger variety, are nothing short of pure-bred frauds. Today, we present a comprehensive analysis by The Forensic Factor of the most recent Chinese company: Telestone Technologies (Nasdaq:TSTC), that may end up trading 2011 at a far lower price than today. We quote TFF: "While TFF is not calling Telestone a fraud (that is for regulators and class action lawyers to determine), we do believe that Telestone's recent capital raise was completed under the auspices of misleading information, as well as a blatant lack of disclosure replete with forensic discrepancies. As investors undoubtedly learned from RINO, which was halted for three weeks and declined nearly 85%, in the land of Chinese reverse mergers, appearances are not always what they seem." Indeed, a cursory review of the analysis below confirms that there may be quite a few cockroaches hidden and just waiting to have some light shone on them. As always, we only hope to bring attention of those who may have (foolishly) invested their capital in yet another company which may be not all it represents itself to be, and thus prevent up to a complete loss of capital. For that we thank The Forensic Factor and their thorough analysis of the name.