Archive - Jul 2011 - Story

The U.K.’s Royal Mint said that first-half silver production in 2011 doubled, while gold production climbed 8.9% over 2010 levels. The Royal Mint, established in the 13th century, used 36,219 ounces of gold compared with 33,266 ounces the previous year, according to data obtained by Bloomberg News under a Freedom of Information Act request. Silver use more than doubled to 324,421 ounces in the period. The Royal Mint makes Britannia silver bullion coins and other collector silver coins. 324,421 ounces of silver at today’s prices ($36/oz) would be worth less than $12 million dollars. Mere chump change to many wealth investors and savers concerned about their investments and savings.

We get two non-core employment indicators today, with both the ADP and the Initial Claims numbers coming out in an hour. Last month ADP for the first time in a while predicted the NFP release with a high degree of confidence, although with the bulk of layoff now concentrated at the government level it will likely not disclose the full picture.

The cooling system at Fukushima's Daiichi sister plant was closed earlier today after Tepco announced that "sparks were detected". According to TEPCO this is no cause for alarm and the situation will be restored back to normal shortly. According to yet other news, after 4 months of lies, TEPCO has started telling the truth. From Reuters: "The operator of Japan's Fukushima Daini nuclear power plant, located near the tsunami-crippled Daiichi plant, on Thursday halted the cooling system at one of its reactors after electrical sparks were detected, Kyodo news agency reported. Tokyo Electric Power , the plant's operator, expects to be able to restore the cooling system at the Daini plant's No.1 reactor before the end of Thursday, Kyodo said." Fair enough. We will be sure to check in later today to validate this latest "fact."

Both completely in line with expectations. And since the BOE is anything but the PBOC which is actively tightening, the GBP barely budged on the priced in news. The minutes of the meeting will be published on July 20 and 9.30 am. And now everyone shifts their attention east to the ECB where in a 45 minutes Trichet is expected to hike rates by 25 bps or else China will have a full day on its hands buying the EUR dumpathon.

Today, the ECB will probably raise the benchmark rate to 1.5 percent, while the Bank of England will leave rates and its bond purchase program unchanged, according to economists. Per Reuters, "concern about the pace of economic recovery looks set to persuade the Bank of England to keep interest rates at rock-bottom not just this week but for months to come. UK interest rates have stood at 0.5 percent since March 2009, when a deep recession and the threat of deflation prompted central banks around the world to slash rates to record lows. Since then, inflation in Britain has returned as a force to be reckoned with. Consumer prices are rising more than twice as fast as the BoE would like, but it has been reluctant to tighten monetary policy when the government's massive fiscal tightening is already crimping growth. "The Bank can do nothing about inflation over the next six months, and will not try to," said Paul Mortimer-Lee, chief global economist at BNP Paribas. While the European Central Bank looks set to raise rates this month -- its second move since April -- all 70 economists polled by Reuters last week predicted that the BoE's key rate would stay at 0.5 percent." So with inflation at 4.5%, double the target rate, there is speculation the BOE may even commence another round of QE: "Minutes to the meeting observed that "the current weakness of demand growth was likely to persist for longer than previously thought". And several policymakers -- not just arch-dove Adam Posen -- considered that more quantitative easing could be warranted in the future if growth remained weak. Most economists, however, believe printing more money is unlikely short of a disorderly Greek debt default or similar financial crisis. "Many investors remain wary about QE and the monetary policy committee might find it difficult to sell the idea to markets with the current rate of inflation so far above target," said Philip Shaw at Investec." There is no such fear at the ECB yet: after all that particular bank's monetizations occure via separate CDOs and SPVs. Yet if Trichet does not do the expected 0.25% hike, look for the EURUSD to tumble at least 150 pips.

A snapshot of the European Morning Briefing covering Stocks, Bonds, FX, etc.
Market Recaps to help improve your Trading and Global knowledge

At this point we refuse to even recall whether Goldman is long or short oil. Probably so does Goldman, whose Brent recos have become the same laughing stock as Tom Stolper's EURUSD "strategic" price targets in 2010. Yet Jeffrey Currie has found a new way of dealing with appearing idiosyncratically idiotic. Instead of focusing on any one product, the firm has just upgraded (or rather, maintained its buy) the entire commodity space wholesale: "Progress in dealing with the Greek budget crisis and better economic data have improved sentiment around cyclical assets in recent days. We continue to expect further increases in commodity returns later this year and into 2012. We maintain our overweight recommendation for commodities on a 3-, 6- and 12-month horizon and our 20% 12-month commodity returns forecast." Um, yeah, this comes less than two weeks since the last flip flopping on the matter: "The International Energy Agency announced today that its member countries have agreed to release 60 million barrels of oil from their emergency stocks over a period of 30 days. The IEA has coordinated this release, only the third in its history, in response to the ongoing loss of Libyan light sweet crude oil production and the impact that the resulting higher crude oil prices are having on the world economy. We estimate that a 60 million barrel release by the end of July has the potential to reduce our 3-month Brent crude oil price target by $10-12/bbl, to $105-107/bbl. 125/bbl." Way to preserve street cred there Jeffrey. Of course, the aforementioned flipflopping does not prevent Goldman from mocking the IEA's ridiculous SPR release decision, as well as reiterating its upside expectation in the metals space, with an emphasis on gold, copper and zinc. As a reminder, if Jeffrey says "buy", run, Forest, run.

SocGen has published a fantastic, must read big picture report, which compares the world in the 1980/1985-2000/2005 time period and juxtaposes it to what the author, Veronique Riches-Flores predicts will happen over the next two decades years, the period from 2005/2010 to 2025/2030. Unlike other very narrow and short-sighted projections, this one is based not on trivial and grossly simplified assumptions such as perpetual growth rates, but on a holistic demographic approach to perceiving the world. At its core, SocGen compares the period that just ended, one in which world growth was driven by an expansion in supply, to one that will be shaped by an explosion of demand. And, unfortunately, the transformation from the Supply-driven to the Demand-driven world will not be pretty. Summarizing this outlook: "Over the last three decades strong growth in the working-aged population across Asia and the opening-up of world trade have led to considerable expansion in global production capacities. These factors created a highly competitive and disinflationary environment of plentiful supply, which was characterised by low interest rates, a credit boom and, in the financial markets, exuberant appetite for risky assets. As the demographic cycle progresses, we are seeing the emergence of an aging population, which is less favourable to productive investment. Meanwhile the rise in living standards among the emerging population heralds an unprecedented level of growth in demand. The world supply/demand balance is dramatically changing against a backdrop of resource shortages which are likely to favour shorter cycles, increased government intervention in economic affairs and inflation." In other words, contrary to what you may have read elsewhere, the future is about to get ugly. And topping it all off is a Kondratieff cycle chart: what's not to like. Read on.

If there was ever a setting where you would think risk is properly appreciated it would be in European banks. Look at total return on senior-sub financial European financials since 2004. On a total return basis, European senior bank debt has outperformed subordinate debt. As a matter of fact, you’ve lost money if you own a portfolio that replicates the BarCap sub debt index going back to late 2004. Question: Why is sub such a persistent loser in times of crisis, precisely when people should be demanding compensating return for the risk?

As was previously disclosed, as part of the SPR's auctioning off of 30 million barrels of light sweet crude, bids for a total of 30.64 million barrels of oil at an average bid of $107.20/barrell were submitted by various parties. The only thing unknown was the identity of the parties, which however has now been all cleared up following the release of the complete bid list from the DOE. Probably the most notable (if not completely expected) discovery is that JPM, that FDIC-insured depositor bank, has requested 1.5 million barrels at a price of $105.33 for a total of $158 million. We wonder just what JPM plans on doing with this crude, which as predicted, will be transported by vessel, and offloaded at such time as JPM sees fit, probably well after the product is trading at a substantial premium to the purchase price. Other potential buyers include Valero, Vitol, Shell, Conoco, Plains and various other E&P companies. Ironically, JPM wants more crude than Sunoco and Tesoro: so next time one tries to gas up their car, we suggest looking for the JP Morgan gas station. But by far the most important news is that 80% of the bid are based on a vessel-based distribution, meaning it will be weeks if not months before the SPR disposed crude finally makes it into circulation, if at all, and has an actual supply-side benefit. Complete bid list is attached.

For those of us who are awake, and for those who are on the verge of understanding, certain rules come into play that strengthen our stance and shield us from folly. Liberty is not a self perpetuating social condition. It requires guidelines, and effort, and sacrifice. Liberty will not survive without our willingness to maintain it. If you are not ready and willing to fight for your own independence, then you are not truly free. Let’s examine some of the inherent laws and guidelines of free will and free action that will allow us to not only win back our self determination, but to keep it for generations to come. You want liberty? This is what it takes…

LPS, which together with MERS, has long been at the heart of the fraudclosure scandal courtesy of loan appraisals which even the FDIC claims were/are fraudulent, just fired a big red warning sign about its continued existence as a going concern after the CEO, Jeffrey Carbiener, just announced he is resigning "due to health concerns." Well, everyone knows what that means. From Reuters: "Lender Processing Services Inc (LPS.N) said its Chief Executive Jeffrey Carbiener resigned due to medical reasons and would be replaced in the interim by Lee Kennedy, its executive chairman. The mortgage processing services provider said its board had established a committee to search for a replacement. Kennedy, who was the executive chairman and CEO of LPS's former parent Fidelity National Information Services, will remain the executive chairman, the company said in a statement." Somehow we doubt the market will be too happy with this development, which could well be the beginning of the end for the $1.7 billion company.

Don't sell those corn futures just yet. Despite last week's surprising announcement by the USDA that there has been much more expansive planting of corn, and other crops, than expected, which in turn set the price of corn tumbling by the most in years, one thing the USDA did not specify is whether said plantings are currently underwater. And if not now, how about in a week or two. Because according to the National Oceanic and Atmospheric Administration (NOAA) the floods America has experienced so far are nothing compared to what may be coming. "Many rivers in the upper Midwest and northern Plains remain above flood stage, and the threat for more flooding will continue through the summer, forecasters at NOAA’s National Weather Service said today. With rivers running high and soils completely saturated, just a small amount of rain could trigger more flooding, including areas that have already seen major to record flooding. NOAA’s Climate Prediction Center is forecasting above-normal rain in most of these vulnerable areas in the next two weeks, and above-normal rainfall in much of the region in the one- and three-month outlooks. Adding to the flood threat will be the rising temperatures over the Rockies, which will release the water from the remaining snowpack. “The sponge is fully saturated – there is nowhere for any additional water to go,” said Jack Hayes, Ph.D., director of NOAA’s National Weather Service. “While unusual for this time of year, all signs point to the flood threat continuing through summer. Forecasters say this season could rival the Great Flood of 1993, when the upper Midwest endured persistent, record-breaking floods from April through August, impacting nine states and causing more than $25 billion in damages (adjusted for inflation)." If indeed this occurs, look for corn, and other softs, to surge to few all time highs, just in time for the much anticipated collapse in food prices to never happen.

RANsquawk Market Wrap Up - Stocks, Bonds, FX etc. – 06/07/11

Industrial commodity bulls may be advised to steer clear of the latest quarterly commodities update by Global Tactical Asset Allocation's Damien Cleusix whose conclusion is that "Most commodities remain deeply overvalued." Specifically, "As with other assets it does not really matter in the short-term (as long as the trend is positive) but it is paramount for longer-term projections. We have little doubts that commodity long-only who buy to hold are going to experience a > 50% drawdown (from current levels) on their industrial metals, crude oil and agricultural positions sometimes in the next 12-18 months." The catalyst: China. "Demand has been artificially boosted by China strategic reserve building, infrastructure intensive fiscal stimulus, booming demand from the rest of emerging economies and, as the trend persisted, by trend followers and money managers new attraction to the sector (you know it is not correlated so you should buy them to diversify your portfolio... sorry it WAS not correlated...). The introduction of physically-based ETFs is not helping in this matter as it represents a big short-term increase in marginal demand especially when the Fed was still busy implementing QE2." Agree or not, the cases for both the up and downside are compelling and well researched, with lots of supporting facts. Much more in the full presentation.