Archive - Aug 25, 2011 - Story

• Analysts warn China facing pressure from US, EU debts (China Daily)
• U.S. May Back Refinance Plan for Mortgages (NYT)
• US budget watchdog cuts debt forecast (FT)
• ECB ‘Stands Ready’ to EaseDollar-Market Tensions, Dombret Says (Bloomberg)
• Merkel Rejects Seeking Collateral in European Bailouts as Splits Emerge (Bloomberg)
• Europe Banks Lean More on Emergency Funding (WSJ)
• Apple’s Steve Jobs Resigns as CEO, Will Be Succeeded by Tim Cook (Bloomberg)
• Bernanke Signaling No QE Backed by Higher Data (Bloomberg)

So what to do now? We maintain the forecast we made in 2002 that gold will rise to >$3,000 (and we believe it could be by a wide margin as it is expected to become (it is not yet) a bubble). For the short-medium-term, B. Bernanke speech tomorrow could (we insist on could as we would not be surprised if it is a non-event) be strongly bullish for gold but on the other hand with Paulson funds loosing almost 40% Ytd in some of his funds and the future exchanges around the world hiking margin on gold and silver, we could see further liquidation in the near-term. Liquidation risk is also restraining us from recommending to buy all the gold producers stocks you can at the present time (but we will do it probably this autumn as our gold stock models are on strong buy modes with historic >100% 6 months return).

What would we do? We would sell part of the implied volatility hedge in place (at least 50%) and then we would (using GLD as the basis) risk buy September 160 puts and sell September 150 puts. We would also sell September 180 calls and buy September 192 calls.

Calm before the storm today, with just weekly initial jobless claims (20 out of 20 400K+ weeks with one or two very small exceptions) on the economic docket, ahead of the last bond auction of the week, which should send total US debt on the verge of breaching the provision ceiling of $14.695 trillion.

If we crossed through some spacetime vortex that brought us back in time just two short months ago, to July of this year, today's confirmation that the second Greek bailout has now failed, following the Finnish finance minister's comments that the country will defy Germany and will not give in to demands to abandon its deal for Greek collateral, which in turn has sent the Greek 2 year bond bidless, its yield up 227 bps to an all time record 46.38%, would have been enough to send the futures and the EURUSD plunging. Not today. Instead, the EURUSD soared to a high of 1.4475 overnight, on two things that indicate no marginal improvement in the situation, but no deterioration either, namely: that the ECB continued to buy Italian and Spanish bonds, pushing their spreads to Bunds tighter on the day, and since tighter is the opposite of wider, the market can safely stick its head under the sand. A just as big factor was that borrowing under the ECB's overnight lending facility plunged to a one week low of €42 million after hitting a recent high of €2,822 million yesterday as noted. And with the WSJ noticing this development just a little late (as last week), the contraction, nevermind that another surge in borrowing is coming shortly, has been the big risk on sign for European markets, which in turn have pushed US futures higher, even as the market is getting increasingly nervous that Bernanke could very well disappoint significantly tomorrow. As usual, keep an eye on Libor, OIS spreads, and all other liquidity metrics, which indicate that despite the contraction in the overnight borrowing with the ECB, Europe's liquidity is far from normal.

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