Archive - Apr 19, 2011 - Story

While the University of Texas made headlines over the weekend for disclosing it had taken delivery of $1 billion in gold (albeit in a Comex warehouse in New York), another Texas fund is making waves today however for all the wrong reasons. As Bloomberg announces, "The Teacher Retirement System of Texas needs an annual return of 21 percent in the year ending Aug. 31 to maintain an 80 percent funded ratio, the level actuaries consider adequate to cover liabilities, said its deputy director." Needless to say, as Brian Guthrie, the fund's executive director admitted, “We’d have to have remarkable investment returns for the rest of the year to reach 80 percent.” Considering that the fund’s investment return was 14.7% in 2010, the best among large public pension funds, it is more than obvious that a major portion of the fund's 109 billion in assets as of April 1 is already in stocks. Which is why should the market swoon following the end of QE1, the best performing fund of 2010 may well be the worst performing fund of 2011. And even if by some miracle stocks surge enough to fill the performance void for the rest of the year, it is still not guaranteed that the fund will make up for the performance shortfall, even as pensioners' capital is likely tied in with such bloated, overvalued garbage as 4x+ beta, triple digit forward earning multiple stocks (full list of key equity holdings below).

In a filing released as part of the company's lawsuit against Samsung for design copycatting, Apple disclosed sales numbers through March 2011 for its three key marginal product lines: the iPad, iPhone and iPod touch. Since these numbers come out one day ahead of AAPL's earnings release (after close tomorrow), they promise to have quite an impact on Apple's stock. In summary: the company appears to be running short of Wall Street's estimate for iPad sales, while being ahead of consensus in iPhone sales. Apple also disclosed its iPod touch sales. It is unclear whether these are sales as of the beginning or the end of March (or some point inbetween), although with the filing hitting the docket on April 15, it may well have been a full Q2 number.

Jim Rogers commented on the recent move by the University of Texas to take delivery of $1 billion in gold, saying the decision is long overdue, and has only occurred because everyone else is now buying thereby taking metal out of circulation. He adds: "But where were these guys five, ten years ago? That’s when they should have been doing all of this." Indeed the momentum chasers never show up until it's too late. Then Rogers had some words of caution for silver bulls: "If silver continues to go up like it has been over the past 2 or 3 weeks, yes, then it would get to triple digits this year. And then we’ll have to worry. It’s not parabolic yet. I hope something stops it going up in the foreseeable future and we have a correction. " There is one caveat: "maybe the US dollar is going to become confetti in 2011, and if that’s the case and silver goes to $150, then obviously I wouldn’t sell my silver. It would be the US dollar which is collapsing. But if silver goes up the way you’re talking about without currency collapse, I would be very worried." So as usual, those long Precious Metals should not hate the Chairsatan but to urge him on to continue doing what he is doing so well: converting that once valuable combination of 75% cotton and 25% linen into "confetti."

For anyone who is still confused by what the S&P warning of a debt downgrade means, here comes the NMA TV signature animation explanation which cuts right to the chase. And as some may be out of Aderall to comprehend even this 1 minute cartoon version, we are confident that the bears will show up and put the topic to rest. And if that fails, there are always sock puppets and claymation dollar bill printers missing an OFF switch.

The purpose of this series is to help the reader better understand the risks and pitfalls of trading options and having a position at expiration. We will try to describe exactly what happens at expiration. The concepts here apply to all options markets, but we chose to focus on Silver because an interesting expiration is setting up presently. The upcoming expiry gives us an opportunity to discuss all the pieces of the option puzzle: the Greeks, market manipulation, Pin risk, and other factors.

Max Keiser concludes his report about the Irish debt "carpetbombing" (perhaps carbombing would have been a more appropriate verb?) in the second part of this documentary on the Irish eco-hell presented below.

RANsquawk Market Wrap Up - Stocks, Bonds, FX etc. – 19/04/11

The purpose of this paper is to illuminate the real purpose of the obscene size of derivatives books amongst the world’s largest financial institutions. Derivatives in strategic markets are controlled by governments through proxy banks and agencies using these instruments. By sheer volume, the trading in paper “tails” wag the physical “dogs”. When market volatility negatively impacts these large institutions they are given a pass by regulators and accounting protocols in the interest of national security and preservation of the status quo. Moreover, this ensures the perpetuation of U.S. Dollar hegemonic power. The following accounts outline how these instruments are used to project this power.

• Diluted EPS:
  • GAAP: $2.31, up 17 percent;
  • Operating (non-GAAP): $2.41, up 21 percent; Consensus of $2.30
• Revenue: $24.6 billion, up 8 percent, up 5 percent adjusting for
  currency; Consensus of $24.0 billion
• Gross profit margin:
  • GAAP: 44.1 percent, up 0.5 points; Below consensus of 44.6%
  • Operating (non-GAAP): 44.5 percent, up 0.8 points;
• Cloud revenue 5 times first-quarter 2010 revenue;
• Full-year 2011 Operating (non-GAAP) EPS expectations raised to at
  least $13.15 from at least $13.00.

Yesterday, in collaboration with Capital Context, upon observing the dramatic divergence between most assets and the 10 Year in the S&P warning aftermath, we noted the following "For those so inclined, an appropriate convergence trade would be a
2s10s30s neutral: essentially locking out for parallel curve shifts to
moves in the ES, while trading the 10 Year spot for a compression trade
with the ES, but keeping the wings of the butterfly constant as both the
ES and the 10 Year is bought." Less than 24 hours later, the divergence has now collapsed for a 6.5 pts pick up ES, while the 10 Year leg also went in the expected direction by 3 bps. Trade now unwound.

The real beauty about waging a two front war (keeping gold from hitting the barrage of $1,500 limit spot orders; and silver from passing a dollar a day) means that Comex cartel has to pick its fights. Today gold loses for now, as the $1,500 spot (but not futures) price is safely defended. The same can not be said for silver. $44 was just taken out. And those who actually wish to buy American Eagles can do so at the low, low price of $47.32 on Monex.

Max Keiser, in his typical engaging and florid style, has released the first part of a documentary focusing on economic collapse hotspots offshore. And while Charles Ferguson already did a good synopsis of what transpired in Iceland in his iconic Oscar winner "Inside Job", nobody has yet done a comparable overview of Ireland. Until now, with Keiser's no holds barred reporting out of Dublin. Must watch for anyone who hates the sugarcoating of reality by the mainstream media.

Once again retail is getting duped into believing that all is well in the market by daily blasts of just how low the VIX has plunged. And it has: it is down to levels not seen in years. But as everyone who has done even a little work in option vol, the only index that matters these days, at least for equities now that precious metals and certain currencies (CHF) are the true flight to safety, is the SKEW. As we have disclosed many times in the past, SKEW is how the pros play vol, while VIX is what is left for the peasantry and CNBC. Basically, VIX shows riskiness as implied by ATM options, while SKEW demonstrates the difference between ATM and OTM options. And as the chart below shows, there is a rather dramatic difference when looking between the VIX and SKEW indices. In essence what is happening is that everyone is selling ATM short-dated vol and buying mid-term Out of the Money vol as expressed by the SKEW, in a confirmation that the protection cost in the wings is actually much higher than one would assume.

Despite attempts by virtually everyone to bury the Sokol alleged frontrunning scandal due to the ongoing embarrassment it presents to some of the most revered "institutions" within America's crony capitalist system, it just refuses to do so. The latest development comes from Delaware Chancery Court, where we find that Mason Kirby, a shareholder of Berkshire has just sued Berkshire Hathaway and Warren Buffett, David Sokol among other BRK directors, over the purported frontrunning Lubrizol frontrunning by David Sokol. As summarized in the pleading, the complaint is no surprise: "David L Sokol (“Sokol”), a former Berkshire employee and key lieutenant to Warren E. Buffett (“Buffett”), Berkshire CEO, used his position of influence to profit for himself at the expense of Berkshire. As a result of Sokol’s unethical behavior Berkshire suffered significant reputational losses and other damages....Buffett and Sokol, working in concert, breached their duties to Berkshire and its shareholders through these actions and put the Company at risk for a potential adverse SEC action and negative credit rating – events which would be detrimental to the Company. Once the Sokol trades were disclosed, and Sokol resigned from Berkshire, Berkshire’s stock price fell. This immediate stock drop evidences the reputational impairment that Berkshire took as a result of this conduct." As a result of this alleged breach, the plaintiff is suing the Berkshire Board who "violated and breached their fiduciary duties of care, loyalty, reasonable inquiry, oversight, and supervision." Kirby also "seeks restitution from Sokol, and seeks an order of this Court directing disgorgment of all profits, benefits and other compensation obtained by Sokol from Berkshire, including any profit he made or will make in relation to his Lurizol holdings, based on his wrongful conduct and fiduciary breaches."

Things are certainly speeding up, and it is my conclusion that we are not more than a year away from the next major financial and economic disruption. Alas, predictions are tricky, especially about the future (credit: Yogi Berra), but here's why I am convinced that the next big break is drawing near. In order for the financial system to operate, it needs continual debt expansion and servicing. Both are important. If either is missing, then catastrophe can strike at any time. And by 'catastrophe' I mean big institutions and countries transiting from a state of insolvency into outright bankruptcy.