Archive - Aug 2011 - Story

UBS have raised their 3 month forecast for silver sharply from $30/oz to $50/oz. They suggest that investors are too nervous to short gold and may be preferring to buy silver instead. Silver remains more than 16% below the record nominal high seen in late April 2011 and in January 1980. While gold at $1,888 is now 120% above its nominal 1980 high of $850/oz. The inflation adjusted high for silver is over $130/oz and those who understand the fundamentals of the silver market are positioning themselves for the possibility of a move to these levels in the coming months. Speculative fever in the silver futures market remains muted with COT data showing net longs well below the records seen in April. Silver is volatile but in the current climate what isn’t? Recently, there has been huge volatility in currency and bond markets and entire equity indices have been as volatile as silver. While silver is volatile, what makes silver valuable is the fact that like gold it has no counterparty liability or risk (with silver coins, bars or allocated storage) and therefore cannot go bankrupt unlike banks and sovereign governments. Media coverage of silver remains minimal with big brother gold getting some of the limelight recently.

Two economic data points today - New home sales and the Richmond Fed index. Since LaVorgna just hiked his Richmond Fed estimate, leading the consensus to rise from -7 to -5, we would be particularly concerned about this number missing by a mile. Also, Treasury issues $95 billion in new 4 week, 52 week and 2 year debt, for net new cash of $46 billion.

• Bernanke to aid recovery with gradual boost in dosage (Reuters)
• China factory output cools in August: HSBC (Reuters)
• German court to rule on Sept 7 on euro, Greek bailouts (Reuters)
• European Banks Must Pay Up to Borrow $100B (Bloomberg)
• A ‘no-growth’ boom will follow 2012 global crash (Market Watch)
• Merkel and Sarkozy Relationship Betrays Europe Crisis (Bloomberg)
• White House to Scale Back Regulations on Businesses (WSJ)

Just like yesterday we have the makings of a perfectly schizophrenic day. While stock futures are rapidly higher to begin with, as on Monday, on news of a slightly better than expected PMI out of China, we are very concerned whether this algo induced ramp can be sustained. The reason is that earlier today we got an absolutely abysmal German ZEW investor confidence number which dropped to -37.6 from -26, a doubling of the previous -15.1, and the lowest since December 2008. This epic collapse can only be compared with the stunner out of the Philly Fed last week. The biggest component of the ZEW, the current situation, imploded from 90.6 to 53.5, trouncing (to the downside) expectations of 85.0. Additionally, the eurozone economic sentiment dropped to -40 from -7.0. So what is the immediate impact? Well, as we said equity futures are completely ignoring that Europe's growth dynamo is now confirmed to be in a double dip recession. However, not debt: as Bloomberg reports, "the cost of insuring European bank debt against default rose to a record as German investor confidence fell to the lowest 2 1/2 yrs+ on concern the region’s debt crisis will curb growth." Specifically, iTraxx Fin soared to record 255 bps, +5 overnight, while SovX (the sovereign CDS index) was 5 bps wider to 302, just off the record 206 form July 18. We give stocks, which are once again soaring on renewed expectations of a QE3, a few hours before they realize that the news is actually i) very bad and ii) as has been said countless times, stocks have to drop far more, before LSAP resumes for the third time.

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

About a month ago we penned an article titled (and asking) "Is Brian Lin The Next Incarnation Of Joe Cassano?" in which we sought to demonstrate just on what flimsy ground Bank of America has based its litigation reserve assumptions: a topic that since then has become the biggest sticking point in the BAC bull thesis. Considering that since then, Bank of America default risk has exploded by over 150% and the stock price has plummeted by half, at least some have grasped the severity of a situation when incremental flawed assumptions are magnified level after level, until we finally get what, as Manal Mehta terms it, is a Bank of America "Subprime CDO." Since this issue is extremely important to the future of the financial system (a bankruptcy of Bank of America would be hundreds of times more severe than Lehman's), below we present in visual, and thus easy to comprehend, format what we previously explaining in a narrative and which once again brings us to our question: will the man behind the BAC litigation reserve fraud be responsible for the next iteration of an AIG-type implosion?

The latest update in this news-heavy night is that Japan's unpopular Prime Minister is out, after tellng his cabinet ministers that they have about one more week before packing up and looking  for new jobs. As Reuters reports "The ruling Democratic Party of Japan is planning to pick a new leader on Aug. 29, setting the stage for parliamentary confirmation of a new premier and the selection of a new cabinet." We hope for the sake of the G7 that there is no massive crisis in the next 10 days, as a leaderless Japan will hardly provide confidence that any crisis can be circumvented. As for the Yen, it is hardly troubled and at last check was trading at 76.75 to the dollar. Not an all time record... but pretty close.

Following years of pandering to client demands, and assigning trillions of dollars in fixed income securities with whatever rating money bought (among other things, a factor to the credit bubble and its subsequent implosion) S&P finally tried to do the right thing and tell the truth. However in this case it picked if not the worst, then certainly the most hypocriticial credit in the world to expose - the US itself. Sure enough two weeks after the downgrade, someone made the phone call and the CEO Deven Sharma is no more. As for the kick square in the gonads: Sherma will be replaced with the COO of...you know it... the bank which demanded tens of billions in secret Fed bailout loans itself, Citibank. The only question left in this entire farce is how long before S&P issues the following upgrade of the US: "Great service, AAA+++ rating, immediate payment, would do business again!!!"

When we said yesterday, while presenting live video of the "alleged" Libyan revolution, that "Since everyone is blatantly lying, on both sides of the conflict, we leave it to readers to decide what is actually happening." Which is why we can understand why some may have gotten the impression that Gadaffi's son Saif al Isam was arrested, after the Libyan rebel movement first reported this, and the ICC subsequently confirmed. Because it turns out he is anything but. According to Reuters, "Saif al Islam, the son of Libya leader Muammar Gaddafi who rebels and the International Criminal Court had been arrested, arrived in the early hours of Tuesday at the Tripoli hotel where foreign reporters have been staying." The following live blog from SkyNews merely confirms what we said yesterday: namely that Libyans on both sides of the divided have taken to doing what the developed (and for now, far less revolutionary) world does so well on a daily basis - lie to everyone about everything.

We may have been pessimistic with our assumption that gold would reach $2000 in under a week. At the rate it is going, it may get there tonight: upon reopening, gold immediately soared from just south of $1900, to a new all time higher of $1912 as pent up buying interest took out every offer in the market. This time around silver is not far behind and after many were staunchly pushing shorts around the $44 price, the metal also snapped above the $44 barrier. The only question we have is whether the CME will hike margins before or after gold touches $2000. Since the stop loss orders there are likely quite aggressive, we hope our Comex friends would push gold a little lower before it takes off for its next target 5-digit target. Incidentally, those who are long spam and short gold may want to consider unwinding that trade at this point.

It’s ironic that the government often relies on an insipidly weak logic when it erodes the privacy of its citizens. If you don’t like how USA PATRIOT Act provisions allow then to tap your telephone or check out your rental history, they say, “Hey, if you have nothing to hide, you have nothing to fear! Obviously the same reasoning doesn’t apply to them… and it’s another example of the tragic farce that is modern government.

RANsquawk Market Wrap Up - Stocks, Bonds, FX etc. – 22/08/1

For a perfect ending to a schizophrenic day we go to Reuters which has just reported that Goldman's CEO has hired high profile defense attorney Reid Weingarten. The market is not waiting to find out the details, and GS stock is tumbling. What has alos happened is that gold futures punched through $1900 for the first time ever. $2000 is the next target, and will likely be taken out within the week.

Perhaps the most defining features of an asset bubble is a marked and persistent deviation from the underlying metrics that once determined fundamental value.  We know how real estate in Canada stacks up when compared to GDP, personal disposable income (cities and provinces), rents (cities and provinces), and inflation.  It's not pretty.  As with any real estate bubble, the overvaluation is most extreme in a handful of cities.  The regional data can be seen in the highlighted links.  Certainly not all areas of the country have experienced a massive divergence from underlying fundamentals, but it is extensive enough to concern us.

Last week we had Citigroup warning that the market bottom is about to fall out, as the Fed is more than likely to disappoint already very lofty expectations (according to various estimates from both Goldman and the second Tier banks, i.e., all of them, the market has priced in roughly $500 billion in QE3 already). Today, Bank of America, which may or may not be with us much longer, has taken this desperate alarmism several notches further, and is warning that due to the gridlock in both the fiscal ("fiscal authorities have bombarded the markets with a quadraphonic message of hopelessness") and monetary ("the Fed is out of bullets anyway") stimulative pathways, the likely outcome of anything from DC will be nothig short of a disaster. To wit: "rather than a repeat of 2010, when the Fed saved the day with QE2, we think we are moving closer to a repeat of 2008, when major policy errors devastated the economy." For once we actually agree with Bank of America: "In our view, the pressure to “do something” is now far more likely to result in more desperate or radical measures, even if it is bad policy." Does this mean that we are looking at a TARP "vote down" market reaction this Friday if indeed the chairman disappoints? We will know for sure in about 100 hours, which just may be the longest 100 hours for bulls since the start of the artificial and solely QE inspired bear market levitation in March of 2009.