Archive - Apr 2011 - Story

One of the key news from the past week was that Chinese FX reserves passed a record $3 trillion for the first time, a surge of $200 billion in the first quarter alone. And with the bulk of that in dollar, it is not surprising that the recently collapse in the dollar has forced more posturing out of both the PBoC and SAFE (the State Administration of Foreign Exchange). In comments published Tuesday, Zhou Xiaochuan, governor of the People's Bank of China said that China's huge stockpile of foreign exchange
reserves have become excessive and the government
must diversify investments using the reserves. "Foreign exchange reserves have exceeded our
country's rational demand, and too much accumulation has caused
excessive liquidity in our markets, adding to the pressure of the
central bank's sterilization." That this is a not so subtle hint aimed at the dollar was confirmed earlier today by SAFE which said that the US government should take responsible measures
to protect the interests of investor. "U.S. Treasuries reflect the credit of the US government and are an important investment product for domestic and international institutional investors," the ministry said in a statement carried today on SAFE's website. "We hope the U.S. government takes responsible measures to protect investor interests." Alas, with the US administration solely focused on making confetti out of the US currency, we hope that China is not holding its breath too long. On the other hand, should the DXY take out its 2009 lows, all bets will surely be off and only another market collapse will be able to generate a potential flight to safety in the dollar. In the meantime, both gold and silver continue to benefit, and the only thing that appears to be able to drag down precious metals at this point is a wholesale margin call invoking cross asset liquidation.

RANsquawk European Morning Briefing - Stocks, Bonds, FX etc. – 20/04/11

• Obama Fights Back Against S&P Move (FT)
• China Speeds Yuan Push (WSJ)
• BOE Voted 6-3 to Hold Rate as Majority Noted ‘Downside.’ (Bloomberg)
• Apple to ship new iPhone in September (Reuters)
• Singapore Aims To Be Renminbi Hub (FT)
• GM Defying China Slowdown May Reclaim Sales Lead from Toyota (Bloomberg)... or not
• Cameron Dismisses Idea of Brown at IMF (FT)
• Banks Lag S&P as Slower Loan Growth Outweighs Higher Dividends (Bloomberg)
• Syria Government Approves Lifting State of Emergency (Reuters)
• USA: That ratings agency downgrade meeting (BBC)

Gold has breached the $1500 level and reached new record nominal highs at $1,505.65/oz. Since yesterday it has gradually risen in all currencies and is approaching record nominal highs in all major currencies. $2,400/oz is the inflation adjusted (CPI) high of 1980 and given the very uncertain macroeconomic climate of today and concerns about the dollar and all major currencies, arguably even more uncertain than the 1970’s, the real high remains a very viable target. It is important to remember that while gold has risen some 6 times in 11 years ($250 to $1500) it rose by 24 times in 9 years in the 1970’s – from 1971 to January 1980 ($35 to $850). This puts the recent reasonably gradual increase in gold prices in perspective and should give gold bears and top callers pause for thought.

Faced with a large capital funding need in advance of a substantial bond redemption next week, Spain had no choice but to hike rates on today's auction of €3.37 billion in 10 and 13 Year bonds.  Spain auctioned off €2.49 billion in April 2021 bonds at a yield 5.472% vs. Prev. 5.162% (5.5% interest) at a 2.1 bid/cover Prev. 1.81. it also sold €0.885 billion in 2024 bonds yielding a whopping 5.667% vs. 4.26% previously. The jump in yield caused the bid/cover to rise to 2.3 vs. 1.84 before. From Reuters: "Ten-year Spanish yields eased to 5.46 percent after the sale, having risen to around 5.55 percent since late last week -- just 20 basis points shy of the euro lifetime high. The surge in yields had sparked concern that Spain was being dragged back into the crosshairs of investors looking for the next candidate for an international bailout. The auction was seen as a test of whether Madrid was still seen as insulated from Portugal, Greece and Ireland, which have sought help. ""Spain's debt servicing costs have ratcheted higher and, while not yet providing any cause for alarm in terms of their outright levels, arguably have little in the way of headroom before such concerns might begin to take effect," said Rabobank strategist Richard McGuire. Traders said the 5.6 percent level in 10-year Spanish bonds was key, although yields have failed to break above that level on a sustained basis to date. "If that goes it could turn very nasty," one trader said." Elsewhere both Portuguese and Greek 10 Years hits fresh lifetime highs (low prices), printing 9.5% and 14.68%, even as an oblivious euro surged to a fresh 18 month high.

A series of earnings misses was yawned upon by the market. But a couple of earnings beats and the market goes insane. Or, more specifically, the dollar plummets. While anyone can plug whatever narrative they wish to what is happening in the market, here is Reuters' take: "The euro rose to a 15-month high versus the dollar in thin trade on Wednesday, buoyed by an improvement in risk appetite and expectations of further euro zone interest rate increases. A decent response to a Spanish bond auction also helped boost the euro which rose to $1.4548 on EBS, up 1.3 percent on the day and at its highest since January 2010. Traders said stop-losses were triggered through last week's high of $1.4521 and on the break of $1.4530." Whatever it is, the DXY just took out a multiyear low below 74.50 - the lowest since December 2010, the EURUSD is trading above 1.45 and after gold futures touched upon $1,500 yesterday, now it was spot's turn which cut through $1,500 like a hot knife through butter and never looked back. If the DXY drops below 74.25, watch out below (or above if you are gold). Looks like Jim Rogers' "confetti" scenario is playing out: after crossing $44 yesterday, silver is preparing to take out $45.

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.