Gold and silver dip modestly from near all time highs and the momentum chasing brigade is screaming it's the end of the world and all ___bugs should take cover. At such a point it is useful to reanalyze the fundamentals that have brought the two key precious metals to such astronomic heights. Attached, we present a 40 pages special report from Reuters, summarizing all the recent developments in the area, for all those who still may be unsure about the alternatives provided by the metal to the traditional fiat-based monetary system.
There has been a lot of talk about the excessive loose monetary policy coming out of the Federal Reserve. However, most of the arguments concerning the implications take the form of generalizations as opposed to quantifiable relationships. Our objective here is to show, through the historical relationship between short-term interest rates and the economy, that the Fed has been overly generous. Moreover, we will see that the data call for much higher industrial commodity prices before this cycle runs its course. In retrospect, they will make today’s elevated levels look benign by comparison. There are two inescapable conclusions from this data. The first is that interest rates and commodities are headed much higher. The second is that the Libyan no fly zone needs to be extended to include Ben Bernanke’s helicopter.
A company with already razor thin margins comes out and while it beats revenues, reporting $9.86 billion in sales on expectations of $9.54 billion, it literally shits the bed on the bottom line, reporting $0.44 EPS on expectations of $0.61, proving that this mythical "margin collapse" thing is actually really real. And the icing on the cake: it provides an operating income guidance range for Q2 of $95 million to $245 million. Expectations? $369.5 million. Can you spell Timber? Market sure can.
Buy Stocks, Buy Bonds: Carry Orgy Leads To "Buy Everything" Binge Session, And Today's Compression OpportunitySubmitted by Tyler Durden on 04/26/2011 - 15:50
To think, just as stocks had started to demonstrate some semblance of normalcy we get... today. Whether it is due to some unfounded rumor that Bernanke will say something surprising tomorrow, or disclose something that he is unprepared to disclose, we are seeing another carry fueled binge resulting in a total divergence (or technically convergence) between the two traditionally inversely correlating asset classes: stocks and bonds. As the chart below demonstrates, while the two had been trending in perfect unison yesterday, today we are seeing a substantial decoupling between the 2s10s30s butterfly, which is also indicative of bidding interest focused on the 10 year, and thus is an indicator of a smoothing of the treasury curve: something traditionally associated with stock market weakness. But not today. Which is why at this point a compression trade seems warranted with an up to 40 ES equivalent point pick up.
There has been a LOT of talk recently on the rising price of gasoline at the pump, so much so, that Obama has now jumped in with both feet admonishing the "evil speculators" for causing such a burden upon the American public. Well, that and to promote a clean energy policy that is ill conceived, ineffective and grossly misunderstood...mostly by him. However, as in the famous words of Bill Clinton, "What is...IS" and what "is" right now is that gasoline is rapidly approaching, and has achieved in some states already, $4 a gallon. Therefore, that is what should be concerned with right now and when that additional drain on the discretionary income of the average American translates into the next economic recession.
Krag Gregory's derivative trading desk has had its share of success over the past several years which is why we present the latest compilation packet by the Goldman Derivative traders. While it is not surprising that this particular silo of Goldman is alligned with the prevalent theme at GS, which is S&P500 at 1,500 or bust, which obviously would imply ongoing declines in vol (with or without the assistance of the Fed), there are some obseravtions that deserve to be highlighted...
Since I’ve identified four major rationales for our impending doom, I’ve decided to write a four part series that can be read in small doses, rather than one enormous article. I don’t want anyone to miss tonight’s episode of Dancing With the Stars, get distracted from the Royal Wedding preparations, or skip the best reality TV show ever – Ben Bernanke’s press conference, while reading an 8,000 word article about the end of America. The four part series will have a Clint Eastwood theme. For a Few Dollars More will address the Baby Boomer impact on America’s decline. A Fistful of Dollars will examine how the creation of the Federal Reserve and the income tax in 1913 set us on a path to ruin. Outlaw Josey Wales will scrutinize the looting of America by a small group of powerful, connected, super rich men lurking in the shadows, but pulling the strings on our puppet politicians. Lastly, Unforgiven will detail the impending collapse of our economic system and the retribution that will be handed out to the guilty.
Today's very ironic $35 billion 2 Year Bond with a Cusip identifier QE3 (no joke, check it) just priced at a 0.673% high yield, slightly higher than last month's 0.669%. Yet the notable metric that caught everyone's attention was the Bid To Cover which came at a 3.06 compared to 3.41 previously and 3.2 average. Primary Dealers took down 49%, with 38% left for Indirects and 13% left for the Direct Bidders, a breakdown in line with expectation. What is important is that dealers expressed the lowest amount of bidding interest for this auction in 2 years: the $72.9 billion Primary Dealer bid was the lowest for a 2 Year auction since December 2008. This auction merely brings the total debt that much closer to the now largely irrelevant debt ceiling. And since there are another $64 billion in auctions over the next two days, it is about to get very tight in there. As a reminder, tomorrow's 5 year auction will close early at 11:30 am due to the Fed press conference.
While in the US speculators and speculators alone are blamed for surging oil prices, in China we get an example of precisely what happens when speculators get caught on the wrong side of the trade. "Farmers across China are suffering from unmarketable vegetables since the arrival of spring, hurt by an increase in output following speculation last year’s surge in demand would continue in 2011... Many farmers blamed oversupply as the main reason for the poor market. Due to climate factors, leaf vegetables from northern and southern China came onto the market almost at the same time, making the supply much higher than last year...Speculators also played a major role in the price collapse, as they dumped vegetables that they had been hoarding onto the market." That's a new one: so speculators are now to blame for a plunge in prices? Of course, the "speculators" themselves merely took their losses, some went out of business, and the PBoC did not rescue any of them. This way the more incompetent of them are now out of business. In the US, on the other hand, where we are now urgently holding our breath for an ES margin hike to hit the tape any second now from the Globex because the silver bubble has now moved back to the S&P ("where it belongs" - unnamed Fed official), all those who would have placed idiotic bets either way would be promptly bailed out by the Fed, especially if they were the prop trading operation of a TBTF toxic laden monstrosity (here's looking at you mother Merrill). Does one see an issue here?
Silver's rise (in US$ terms, at least) over the past several weeks has been nothing short of phenomenal. The chart has effectively "gone parabolic," and people I've never met have started to e-mail me (in my capacity as a registered investment advisor) for advice on silver. It doesn't matter whether it's silver, tech stocks, emerging markets currencies, or pork belly futures... any time these two events coincide (a parabolic chart pattern, and strangers asking me for advice), it sets off ALARM BELLS in my head. I'm going to go out on a limb and say that right now, the fundamentals for silver DON'T matter. Many of the latest crop of silver "investors" have no clue about the fundamentals.
How much gold would an individual investor need as a hedge against the total depreciation of fiat currencies? Here is a back-of-the-envelope calculation...There are about 5.3 billion ounces of gold "above ground," roughly 160,000 tons. At the current price of $1,500 an ounce, all the available gold is worth about $8 trillion. About half is in jewelry, 10% in industrial uses and 40% as central bank reserves and investment. If gold took the place of fiat currencies as "money," the available gold would have rise to about $140 trillion in value. In today's dollars, that's about 18 times its current price. So $1,500 X 18 = $27,000 an ounce...To hedge $250,000 in paper financial wealth (recall that productive real estate, windmills, factories, etc. would still retain their productive utility value after currency depreciation), you would need 10 ounces of gold, or $15,000 worth at today's prices.
Today's dose of Mutual Assured Destruction brought to you by Reuters:
- Chairman of US Treasury borrowing advisory committee tells Geithner in letter there is an "urgent need" to raise debt limit
- TBAC says any delay in Treasury on making interest, principal payments could trigger "another catastrophic financial crisis"
Apparently, we now have at most 3 weeks before America, if the TBAC is correct, launches a suicidal nuclear attack on itself. Because as you recall the world ended when the Fed released its uber top secret classified docs.
Yesterday it was the Dallas Fed confirming our assumption that the US economy in Q2 has hit stalled speed. Today, it is the Richmond Fed which plunged compared to expectations and the March print of 20, instead dropping to 10, and indicative of a major slowdown in the manufacturing sector. From the index: "In April, the seasonally adjusted composite index of manufacturing activity – our broadest measure of manufacturing – fell ten points to 10 from March’s reading of 20. Among the index’s components, shipments decreased seventeen points to 6, new orders dropped ten points to finish at 10, and the jobs index eased two points to 14....All broad indicators – including shipments, new orders and employment – continued to grow but at a rate below March’s pace. Other indicators were mixed. Fifth District contacts reported that capacity utilization continued to grow more slowly, while backlogs turned slightly negative. Vendor delivery times edged higher and raw materials inventories grew at a somewhat higher rate." Now "Below March's pace" means trending Q2 GDP is now at or below 2%. But that's fine: somehow the economy will really hockeystick in Q3. And if not, there is QE3, 4 and 5. And the kicker, as usual, Prices Paid jumped as Prices Received plunged: which is always bullish for (collapsing) margins. Elsewhere the CON board called 7 Wall Street CEOs w
Pimco's Observations As The US "Reaches The Keynesian Endpoint" - The QE2 Ponzi Scheme Is "Nothing But A Profit Illusion"Submitted by Tyler Durden on 04/26/2011 - 09:39
Once again, it is the world's biggest bond manager which either is really tempting fate by telling the truth in an increasingly more aggressive manner day after day, or is engaging in the most acute case of reverse psychology ever seen, coming out with the most critical opinion of the Fed's actions on the verge of the Fed's historic first press conference. And this one is truly a stunner, far more real than anything even Bill Gross has said in the past: "Just as Charles Ponzi needed donuts to turn back a suspicious crowd
of investors, the Fed needs “donuts” in order to fill the bellies of
the literally millions of investors worldwide who worry about the
alarmingly large U.S. budget deficit and the impact that the U.S. debt
dilemma could have on their Treasury holdings...Their
collective buying has created what we believe to be a profit illusion
with many investors mistakenly believing they can continuously reap
profits from perpetually falling bond yields and rising bond prices,
just as they have had opportunity to do over the past 30 years, amid the
great secular bull market for Treasuries and the bond market more
generally...For many reasons, this “duration tailwind” for Treasuries can’t
last, particularly because the United States has reached the Keynesian
Endpoint, where the last balance sheet has been tapped." Must read.
Another day, another worthless Chinese company - Gulf Resources: (and no kidding - this time the price target on GFRE is a rather bold $0.00). This time the report comes from Glaucus Research which promises to create another massive shorting opportunity for those who can find the borrow in this alleged Nasdaq Fraud. From the report: "we present evidence that GFRE engaged in an inappropriate self-dealing transaction, the details of which GFRE intentionally concealed from the SEC and investors, that GFRE’s largest customer is privately owned by GFRE’s chairman, that GFRE engaged in dubious capital expenditures that may have been a smokescreen for transfers of cash to insiders, and that GFRE is exaggerating the size of the company’s operations. We also present evidence that the company’s CEO has a close relationship with a notorious puppet master of Chinese small cap scams."