Exchange Traded Fund

By now, everyone has heard about the Kauffman report on ETFs, whose sole purposes is to bash exchange traded funds, which if nothing else, are aggressively stealing market share from mutual funds. The report also tangentially makes a claim that HFTs are in fact innocent, and had no role in the flash crash. While ETFs are certainly not without fault, to say the High Frequency Trading is irrelevant for market crash purposes is naive beyond measure. Yet a more salient question is where did the anti-ETF bias arise at Kauffman, and what is the point of this hit piece out of left field. We decided to dig a little deeper, and found the following conflicts of interest.

You can see that gold is mainly a negatively correlated trade against the dollar - it's there to protect your cash! You stocks are not cash, your TBills are not cash, your other commodities are not cash so don't make the mistake of over-protecting yourself because gold will crash with the markets - that's something a lot of people did not realize in our last crash as people panicked into the dollar and sent commodities right off a cliff along with equities.

One of the completely unmentioned side effects of the recent surge in gold prices, has been the fact that one of the biggest holders of gold, the GLD ETF (presumably physical, even though it is kept in the cellars of HSBC in London, one of the two banks recently charged with a RICO suit for precious metal price manipulation) which as of close today held 1,294 tonnes, has not really bought any gold in over 5 months. The issue is that GLD's gold actual holdings, which feed right into its NAV, have been flat since June, peaking at 1,320.44 tonnes on June 29, and flat-lining and even declining through today. Since then, however, gold spot has risen by 14%. As the chart below shows, GLD tends to reindex its NAV in spurts, buying up gold during specific periods when gold goes up, notably in March of 2009, and between May and June of 2010. As of today, the trust's NAV per GLD in gold is at an all time low of 97.67. The bottom line is that GLD is now long overdue to replenish its actual gold holdings, net of redemptions. Assuming that GLD will increase its holdings in line with prior accumulations, when gold price surged, the ETF may soon be due to buy about 200 tonnes of gold. Should that happen, GLD will further increase its distance to 6th sovereign holder of gold, China, which as of September 2010 held "just" 1,040 tonnes. As to what would happen to the price gold if it is made known that there is a buyer for 200 tonnes of gold, we leave to our readers' imagination.

QEII is truly lifting all boats, even the leaky ones, like the US stock market. The debasement of the dollar this policy assures will keep money pouring into virtually every tradable asset in the world, including stocks, bonds, currencies, commodities, precious metals, and yes, even real estate. The Fed knows it is creating a monster with the enormous amounts of money it is now creating, and that someday, it will have to drive a giant steak through its heart in the form of huge and cathartic interest rate rises.

The subcontinent is poised to overtake China’s white hot growth rate. India will grow by 8.5% this year. Growth could exceed that in the Middle Kingdom as early as 2013. Financing and construction of huge transportation, power generation, water, and pollution control projects are underway. India is also a huge winner on the demographic front, with one of the lowest ratios of social service demanding retirees in the world. Many hedge funds believe that India will be the top growing major emerging market for the next 25 years. (INP), (FXI).

The market rallied today as election booths underflowed with discontented voters, unemployed workers looking for a warm place to hang out during the day, and douchey hipsters who thought the lines were for the Apple store.

BNP shares 19 reasons why the real bubble is not in gold, it is in quantitative easing itself...

Now they promise they’ve sobered up and learned their lessons and are expecting the voters to welcome them back with open arms and Wall Street could not be happier to welcome the new boss, who is the same as the old boss that let them operate free of rules and restrictions and not only bailed them out when their gambling spree lost them $4Tn...

BNY's always informative and entertaining Nicholas Colas has a habit of seeing the silver lining, when others only see a putrid and radioactive mushroom cloud. And in this case, we do tend to agree with him... somewhat: when looking at the transformation currently gripping stock markets, instead of taking either extreme, Colas takes the Keith Richards path: adapt and survive (instead of fading away). And in surviving, the market may just return to that “old school” model of stock picking, and thus, fundamentally based stock trading, something which all investors and market participants lament and remember fondly as a bygone era before the Fed decided to take control of the entire capital market. However, where we are far less sanguine, is that for Colas' prediction to come true, it would necessarily (and sufficiently) require the removal of the Fed and its tentacular influence on stocks. And thus the question: can the existing stock market model survive an overhaul in which the underlying economic model reverts back from a central banking primed fiat system, to some "other" form of sound monetary decision making. That, we do not know.

The most recent short interest report by stock indicates that the most hated name on the NYSE by a large margin continues to be Citigroup, whose 404 million shares short as of October 15 were an 0.8% increase from two weeks earlier. Not surprisingly, two of the top five names in the top 5 are ETFs, which are broadly used by hedge funds for nothing else but to hedge long book positions. The SPY and the IWM were at the 2nd and 4th position, respectively, although both saw a decline in their short interest which was to be expected in a time when the overall market was continuing to surge (it is of course unclear whether the offsetting single names that made up the hedge were sold off as well, and what the delta on the trade would have been, and, most importantly, how profitable it may have been). Ford and Qwest round out the top 5 names. Other notable names in the top 25 include XLF at 6th, Paulson darlings BAC and MGM at 7 and 9 (both of which saw their short interest collapse by 19.5% and 11.9%, respectively, even as maintaining a BAC short would have paid off more than handsomely into the EOM). The two names which saw the biggest increase in short interest were Alcoa and the VXX. And while some have made an issue over XRT's SI being more than 5 times its shares outstanding and float, check out the KRE Regiona Banking ETF: it has a short interest of 50 million which happens to be over 15 times its daily volume, and about 7 times it outstanding stock. Gotta love the logic of ETF share creation.

Far too many people equate the pursuit of advanced educational degrees with intelligence and an increased likelihood of success. I know this is conventional thinking, but I highly disagree with this theorem. As an entrepreneur, it is my sincere belief that the much safer route for young adults to seek during the next decade will be realized through the entrepreneurial pathway versus the traditional pathway of “climbing the corporate ladder”. This means skipping the traditional business academic process may become in vogue in future years.

Following the recent strategic move by China to minimize rare earth mineral exports, the speculative investing crowd has suddenly found a new momentum darling: the REMs. And the growing chorus of voices that has emerged calling for a bubble in the rare earth space may certainly be on to something: to be sure many of the companies will not be profitable for years with quite a few likely not to even generate revenues for a decent amount of time, implying valuations are once again based on "stories" and hype. Today's launch of a rare earth ETF is surely a validation of the bubble theory. Amidst the bubble talk, the question of how long constricted supply demand conditions is certainly key. However, are there diamonds in the rough among the chaff? In other words, are there stocks that could be good pair trade or long hedge candidates to a short basket? Today we take a closer look at Lynas Corp, which was highlighted in the latest 13D.com (a newsletter we can not praise enough) report as "its favorite in the field."

In an interesting piece released last night, Goldman's Joshua Crumb, part of the same team which so far top-ticked gold to the millisecond, with its October 11 recommendation to buy gold at 1,364.2/oz, a call we suggested should be faded, looks at the role of suddenly popular physical metal-backed ETFs on actual price formation.

Now is the time to own gold stocks. Most gold companies will report their Q3 earnings at the end of October. Due to a higher year-over-year average spot gold price (which has increased 27.8% to $1,228/oz in Q3 2010 vs. $961/oz in Q3 2009), virtually every precious metal company is forecast to exhibit substantial net income growth. These fantastic net income results will be augmented by higher by-product prices (average silver, copper, and zinc prices were up 28.7%, 24.2%, and 14.8% year-over-year), which should set the stage for banner year-over-year earnings increases. One of the best axioms for investing is painfully obvious, but so often forgotten by seasoned investors: it’s all about earnings. Earnings are what drive stock prices over the long term. Investors seek out earnings growth wherever they can find it, and we can’t think of a single equity sector that exhibits better year-over-year earnings growth potential than the gold producers. We expect that to change over the next two quarters as investors realize how much stronger gold producers’ earnings will be at $1,350 gold. As countries decide to burn their currencies in the devaluation race, gold has responded, and now it’s the producers turn to perform. We’ll gladly take the earnings. - Eric Sprott

Is Indonesia the next China? Despite the triple digit return, it could still be early days for the world’s largest Muslim country. Since the rumblings about a global, synchronized QEII began in September, $2 billion a day has been flooding into emerging markets, and Indonesia has been at the top of the list. A rupiah that has been steadily appreciating against the dollar has added a nice double leveraged effect to the upside. (IDX), (EIDO)