Archive - Feb 2011 - Story

The paper-driven sell off in the gold market seen in January has been trumped by continuing robust physical demand in January and February. This has resulted in gold rising nearly 6% in February and silver’s strong industrial and investment demand leading to a 19% rise to new nominal 30-year highs. Political, and more importantly socioeconomic, revolutions in the Middle East and North Africa are leading to a degree of geopolitical instability and risk not seen in many years. This is leading to concerns about oil supplies from the region and hence the 14% jump in US crude oil just last week and deepening inflation concerns. With all eyes on the Middle East and North Africa, there has been less focus on the continuing European sovereign debt crisis. However, the crisis continues and recent days and weeks have seen government bonds in Greece and Ireland again come under pressure. The majority of Irish people are seeking that the massive debts of the Irish and European banking systems, incurred against them, be restructured or defaulted. Therefore, the new government will be under pressure to negotiate a fairer, more equitable settlement with the European Commission and the ECB with possible ramifications for the many European banks who lent irresponsibly to Irish banks...Mooted proposals by the Vietnamese Central Bank to ban “gold bullion trading” (see news below) are somewhat bizarre. If true this would be a very important development as the Vietnamese are some of the largest buyers of gold bullion in the world.

Markets mixed this morning. This week will see the release of a slew of economic figures, starting today with personal income estimated to rise 0.4%E v 0.4% prior and personal spending estimated to be 0.4%E v 0.7% prior. Market expectations for spending will likely be less robust than in January because of the recent rise in food and energy prices. The PCE data due out today is a reminder that we face commodity and input inflation, not wage inflation. This issue of divergent inflations will begin to rear its ugly head in the quarters to come as incomes are squeezed and the resulting impacts on spending are felt. In areas of the world where food/commodities/inputs are a significant portion of incomes, policy responses in EM and DM will be key to watch. Inflation hawks will push for rate hikes and there is concern those hikes would have little impact on the inflation at hand. Geopolitics do not help. Are we smoking at the gas station? Is our biggest worry actually not inflation, but global growth disappointment? Given a potentially disappointing consumer, tighter fiscal policies, geopolitical risks on the rise, and potentially tightening monetary policies it would appear so.

Saudi Arabia continues being on an excess capacity roll. After totally butchering the concepts of apples and oranges, specifically as pertains to light sweet and heavy sour, with the market apparently stupid enough not to know the difference, and somehow promising it can make up for lost Libyan output last week when in reality it is in desperate need to export more oil to balance its budget, the increasingly troubled country now is seen as the natural backstop to Oman disruptions. Reuters reports: "Oil prices turned lower on Monday as reassurances from Saudi Arabia that extra supply needs had been met soothed market fears over the spread of protests to oil-producer Oman. Violent uprisings in OPEC member Libya dramatically reduced exports from North Africa, but Saudi Aramco CEO Khalid al-Falih told reporters on Monday the shortfall had been made up. Falih refused to give exact figures, but an industry source on Friday said the top exporter's output had risen to more than 9 million barrels per day (bpd). This compared with roughly 8.3 million bpd in January, according to a Reuters survey." Of course, whether or not there is any actual hike in production in a country long rumored to be vastly exaggerating its spare capacity, we will only know months from now. In the meantime, Saudi will gladly take the few days of stability sub-$100 WTI grants the world, while it decides how to handle increasingly more beligerent neighbors Yemen, Oman and Bahrain.

RANsquawk European Morning Briefing - Stocks, Bonds, FX etc. – 28/02/11

After two deaths resulted from protests spreading to that other Yemen (and Saudi) neighbor over the weekend, the situation has deteriorated once again, as Reuters reports the death tool has hit 6, and now "Omani protesters
demanding political reforms blocked roads leading to a main export port
and refinery on Monday as the death toll from Sunday clashes with police
in the Gulf Arab sultanate rose to six.  About 1,000 protesters were standing in the road to block the entrance to the industrial area of the coastal town of Sohar, which includes a port, refinery and aluminium factory. Hundreds more were protesting at a main roundabout, angry after police opened fire on Sunday at stone-throwing protesters demanding political reforms, jobs and better pay. Protesters later burned the town's police station and two state offices." Apparently not even Oman's attempt to follow through in Saudi's footsteps and paradrop money is having much of an impact: "The government, under pressure over its response to the Sohar protests,
pledged on Sunday to create 50,000 more government jobs and hand out
unemployment benefits of $390 a month to job seekers." In the meantime, according to Merrill there is little hope of a return to normalcy in Libya for a long time: "With Libya apparently at risk of a civil war, there are reasons to believe that oil supplies in that country could be off for months," it said in a note to clients, received by Reuters on Monday. So now that Saudi Arabia is the only gulf country not to be rioting, maybe someone can update us on what is happening in suddenly very quiet and even more peaceful Algeria.

After last week we saw the Euronext, the Italian and the London Stock Exchanges crashing and burning, it is now Australia's turn. According to the ASX, the exchange is "currently experiencing technical difficulties regarding trade dissemination on Partition 3 Securities" which in non-binary means the prices on the ASX are not updating. Must be all that pent-up buying pressure over the continuing Libyan revolution... Of course, those who only trade the futures, such as the big banks and the quant desks are immune as futures are still trading without a glitch. How long before the threat of a racist, unpatriotic down print takes down the Nikkei, the Shanghai Composite, and finally the Deutsche NYSE? Luckily, the Nasdaq where only C-grade vacuum tubes trade any longer, will be spared.

With violent protests springing up like mushrooms, following recent appearances in North Korea and Vietnam, and following last weekend's failed attempt at a Jasmine Revolution, China's authoritarian regime is about to be put to the supreme test. Bloomberg reports that "Chinese Premier Wen Jiabao pledged to punish abuse of power by officials and narrow the growing wealth gap as police blanketed Beijing and Shanghai to head off planned protests inspired by revolts in the Middle East." In other words, beatings (and disappearances) will continue until morale finally improves. As for the beatings, Bloomberg's Stephen Engle managed to experience one up close and personal: "Security officers also detained several foreign journalists, including
Stephen Engle, a reporter for Bloomberg Television. The Wall Street
Journal saw Mr. Engle being grabbed by several security officers, pushed
to the ground, dragged along by his leg, punched in the head and beaten
with a broom handle by a man dressed as street sweeper." Yes, China may be the most repressive regime when push comes to shove, but should 1+ billion angry and hungry Chinese decide there is nothing all that unique about China compared to Tunisia, Algeria, Egypt, Libya, Bahrain, Oman, Saudi Arabia, Ivory Coast, Vietnam, North Korea, Djibouti and countless more to come, not even the most convincing "blanketing" by police forces will do much of anything to prevent the only revolution that matters.

Uprisings in Africa and the Middle East last week trumpeted any and all global investment themes. The hearts and minds of peoples against regimes played out on a global scale. Crude ended the week up 9.1%. CBOE Volatility Index, VIX, rose 15%. Global equity bourses retreated a few percent with the U.S. outperforming by a marginal percent on QUALITY flight. In some ways there is a marriage of both global and domestic themes alike as the peoples yearn for representation and the embodiment of what government REPRESENTS for people. Or doesn’t represent. Played out on a minor scale, one eye this week was on Wisconsin, Indiana, Ohio, New Jersey and the battles of the hearts and minds of public and private employees alike or better quantified as the high profile and human debate of the efficient allocation of private tax dollars and the consequent rate of return of public service. To oversimplify, it seems like the relevant and searching question everywhere in nation(s) is, how effective does government allocate public and private resources and consequently represent its peoples? This is the looming topic in the United States this week as both sides of the Congressional isle try to avert a government shutdown as lawmakers have funded our domestic "obligations?" only through this Friday. I guess obligation is a relative term. Federal agencies are scrambling to figure out how to handle a shutdown of government. Hey, mail would continue but Federal Parks would be closed. There are many other obvious fiscal and market iterations to be learned as to any auxiliary impacts of how a shutdown or our budgetary largess will shut us down from our creditors.

When analyzing the Federal Reserve monetary expansions, pundits only assess economic issues like inflation, balance sheets, bubbles or public debt. Significant as they are, it will be very useful that all this smart people were added to the camp of those who want to “save the planet”. Let me to try pin down it.

The FT reports some disturbing news for lovers of free information everywhere: JP Morgan's Digital Growth Fund is rumored to be in talks to acquire 10% of Twitter for $450 million, or a $4.5 billion valuation (for a service which we have yet to get confirmation is generating any more than token revenue whatsoever). "It is not clear if the JPMorgan fund will make a direct investment or buy out existing investors and shareholders with Twitter’s approval. But the fund does not intend to buy shares on the secondary market, the people said. The deal has not closed." For those unfamiliar with the DGF, it is merely JPM's way to copycat Goldman into "allowing" its high net worth clients to put their money into the latest tech bubble frenzy. "JPMorgan’s Digital Growth Fund was established this month to give rich clients exposure to fast-growing private tech companies, and follows a similar effort by Goldman Sachs to invest in Facebook. The fund has raised $1.22bn to date, according to a filing with the Securities and Exchange Commission. But it plans to raise $1.3bn in total, and will have a maximum of 480 investors, say the people. JPMorgan expects to earn commission of at least $13m from the fund." And since none of these company are quite public, and all of them supposedly trade on a shadow secondary market, the frenzy for which bank can open up the tech bubble market to most high net worth investors, a race for now headed by Goldman with its Facebook investment, has certainly marked the tech top. One thing that is certain is that those who mostly enjoy using twitter as a free information conduit will now aggressively seek to find a replacement that is not backed, and thus at the mercy, of the Fed's favorite bank.

Almost a year ago, Zero Hedge looked at the trend in US tax refunds, and we found that last year the government was doing everything in its power to accelerate the remittance of refunds to taxpayers. Back then we said that "one of the primary reasons why consumers may have exhibited an abnormal propensity to spend in January and most of February (at least according to government, if not Gallup, data), is the much greater individual tax refunding conducted by the Treasury/IRS this year compared to the prior year." But if accelerated tax refunds was the story in 2010, in 2011, at least so far in the year, it is precisely the opposite. In fact, to date the IRS has refunded nearly $20 billion less compared to 2010, and about $14 billion less than in 2009. With consumers suddenly having far less cash, does this mean that February and March are set to be major disappointments from a retail sales perspective, and any other vertical having to do with consumer "strength"?

The three events to watch this week are the global PMI’s, US payrolls and events in the Middle East. Goldman expects the China February PMI to be largely unchanged from January’s level. Regional factory surveys point to a strong ISM index for February. Nonfarm payrolls in February probably grew at their fastest rate since last April. Consensus is looking for a 190k NFP number, and a 9.1% unemployment rate. The dramatic events in the Middle East over the last few weeks will likely continue to impact global financial markets.

All who enjoy hearing a meaty Marc Faber fire and brimstone sermon, that cuts through the bullshit, will be happy to know that the Gloom, Boom and Doom author conducted a 40 minute interview with the McAlvany Financial Group, which covers all the usual suspects: gold, silver, precious and industrial metals, the "crack up boom", the future of the Ponzi and capital markets in general and much more. Of course, it wouldn't be a Faber interview without the requisite soundbite: "I think we are all doomed. I think what will happen is that we are in the midst of a kind of a
crack-up boom that is not sustainable, that eventually the economy will
deteriorate, that there will be more money-printing, and then you have
inflation, and a poor economy, an extreme form of stagflation, and,
eventually, in that situation, countries go to war, and, as a whole,
derivatives, the market, and everything will collapse, and like a
computer when it crashes, you will have to reboot it." Of course, on a long enough timeline...

Looks like speculation that the Egyptian Central Bank's gold stash may have been just modestly plundered is starting to play out. According to Reuters. "Egypt has issued a ministerial decree
immediately banning the export of gold in all its forms, including
jewellery and ornaments, until June 30, the official news agency MENA
said on Sunday. "This decision, which comes in light of the
exceptional circumstances the country is passing through ..., is to
preserve the country's wealth until the situation stabilises," MENA
said. Egypt's currency has come under pressure after some of the
country's main sources of foreign currency, including tourism and
foreign investment, collapsed after the protests that ousted President
Hosni Mubarak erupted on Jan. 25." Obviously, this "emergency" step would not be required if the E(gyptian)CB was still in full possession of its purported stash of the inedible metal. Whether the decline is due to alleged Mubarak sequestering of the shiny metal, or by other members of the former ruling regime is unclear, but one thing is certain: the WGC is long overdue in adjusting the Egyptian gold holdings from 75.6 tonnes to their real current value... far lower. As for Egyptian fiat: that is as freely exportable now as ever. If only anyone wanted it. But yes, somehow emerging markets are manipulating their currencies lower than fair value, the conventional wisdom claims.

A week ago we highlighted the major inversion in the non-commercial spec bets between the GBP and the JPY, after the two had been trending with very close correlation for almost a year. This week, after GBP spec bets had hit the highest in over a year, on expectations that the BOE would commence a tightening regime (which we believe are unfounded and largely premature considering the worsening stagflation the UK finds itself in), GBP bets dropped by a the second largest amount in over a year, or by 16,563 contracts (only the 18,788 decline in February of 2010 was greater), to 36,009. And as we suggested last week, when we told readers to "note the surge in GBP bullish bets, and the plunge in JPY. Those willing to bet that the spec crowd is always one step behind the curve may be well advised to take the other side of the trade" this is indeed what is starting to happen: the drop in Yen specs was roughly half the GBP decline, at 9,198 to a total of -27,746. In other words the GBP-JPY convergence is starting to play out. Nonetheless with Yen specs at the lowest they have been since May of 2010, this is a level of concern.