Three weeks ago we first mused about the irrational endgame of it all when we asked: "When Hussein left Kuwait he set the oil wells on fire. Will Ghaddafi?" It now appears that this could well be the endgame, after Al Jazeera reports that "desperate Gaddafi might hit oil facilities in an attempt to fend off encroaching rebels, sparking a human catastrophe." And obviously in order to prevent this, the US will be "forced" to institute a no fly zone, thereby commencing a full blown invasion of the country, and eventually destabilizing the region completely.
RANsquawk European Morning Briefing - Stocks, Bonds, FX etc. – 09/03/11
Global pension assets are estimated to be – drum roll, please – $31.1 trillion. No, that is not a misprint. It is more than twice the size of last year’s GDP in the U.S. ($14.7 trillion). We know a few hedge fund managers have invested in gold, like John Paulson, David Einhorn, Jean-Marie Eveillard. There are close to twenty mutual funds devoted to gold and precious metals. Lots of gold and silver bugs have been buying. So, what about pension funds? According to estimates by Shayne McGuire in his new book, Hard Money; Taking Gold to a Higher Investment Level, the typical pension fund holds about 0.15% of its assets in gold. He estimates another 0.15% is devoted to gold mining stocks, giving us a total of 0.30% – that is, less than one third of one percent of assets committed to the gold sector. Now here’s the fun part. Let’s say fund managers as a group realize that bonds, equities, and real estate have become poor or risky investments and so decide to increase their allocation to the gold market. If they doubled their exposure to gold and gold stocks – which would still represent only 0.6% of their total assets – it would amount to $93.3 billion in new purchases. If these funds allocate just 5% of their assets to gold – which would amount to $1.5 trillion – it would overwhelm the system and rocket prices skyward.
There's a scenario that could play out between May and September in which commodities (including my beloved silver) and the stock and bond markets could all sell off between 20% and 40%. The trigger will be the cessation of QE II and a multi-month pause before QE III. This is a reversal in my thinking from the outright inflationary 'buy with both hands' bent that I have held for the past two years. Even though it's quite a speculative analysis at this early stage, it is a possibility that we must consider. Important note: This is a short-term scenario that stems from my trading days, so if you are a long-term holder of a core position in gold and silver, as am I, nothing has changed in my extended outlook for these metals. The fiscal and monetary path we are on has a very high likelihood of failure over the coming decade, and I see nothing that shakes that view. But over the next 3-6 months, I have a few specific concerns.
All those who believe (erroneously) that the Department of Truth is just a euphemism, guess again. Below we share some of the recent highlights that the Chinese central propaganda bureau is attempting to keep secret from the public. One can only weep at the "efficiency" of our own propaganda masters. Luckily, they are quickly learning from the best.
After yesterday TrimTabs Charles Biderman made it all too clear who runs the stock market, today the same firm exposes the system's dirty socialist core: "In a research note, TrimTabs highlights that government social benefits —including Social Security, Medicare, Medicaid, and unemployment insurance—were equal to 35% of all private and public wages and salaries in the 12 months ended January, up from 10% in 1960 and 21% in 2000. “We have no quibble with the view that the U.S. economy is expanding at a moderate pace,” says Madeline Schnapp, Director of Macroeconomic Research at TrimTabs. “But we believe Wall Street does not fully appreciate the degree to which growth depends on government support.” Schanpp's conclusion: QE3 is inevitable, leaving aside debt monetization concerns, as without it the US welfare state will collapse. DXY: meet 50, just in time for the NYSE Borse to extends its rollup with the Zimbaber stock exchange.
Tech darling FNSR is plummeting after hours, down by $14, or 35%, to $26 after the company released in line Q3 numbers, but an outlook that has left the investor base, not to mention its sellside lemming brigade, stunned. While the current sellside Q4 consensus is of 48 cents a share on revenue of $257.9 million, the company announced that "revenues for the fourth quarter to be in the range of
$235 to $250 million" and "earnings per diluted share is expected to
be in the range of approximately $0.31 to $0.35." The result: a stock that is down 33% after hours. Perhaps it is time form Miller Tabak's Alex Henderson, who has been ranked #1 11 times in the Institutional Investor "All Star" poll, to reduce his $60/Buy Price Target. Yet what is worst is that perpetual tech dynamo, China, is now growing dim: from the mea culpa: "the Company will be
impacted by...a slowdown in business in China
overall." Is this the beginning of the end for the tech bubble?
Paul Farrell is out with another rather dismal outlook on the financial system (better known in the vernacular as the feloneous Ponzi scheme), and how while the immediate causes of the crash, and its disastrous aftermath, which benefits only the upper class at the expense of everyone else, are certainly a function of the current and previous administration, one has to look further back to see the flawed foundations on which everything is built. As far back as Reagan, in fact, and his eponymous Reaganomic doctrine according to Farrell. "Was their Reaganomics ideology so rigid, so blinding, they couldn’t (and still cannot) admit they were wrong? Forcing them to lie to America? Cover up the lies? The evidence is clear. Today, a harsh lesson from history, facts and a warning. Listen closely America. It’s already happening again. The collective Reaganomics Brain has gone from crash to cover-up to comeback kid to capitalism-for-the-super-rich in three short years. Now with absolute power over America." Sure enough, Farrell sees the events of 2008/9 as only the first step in the unwind of Reaganomics. Step two is coming, and it will be the final end of not only the Great Moderation experiment started in the early 80s, but, luckily, of that organization at the heart of it all: the Federal Reserve.
RANsquawk Market Wrap Up - Stocks, Bonds, FX etc. – 08/03/11
Reuters is now quoting witnesses as saying that 50 protesters have been hurt in Yemen, three of them seriously. Earlier on Tuesday, thousands of inmates rioted at the central prison in Sanaa, taking a dozen guards hostage and calling for President Saleh to resign, according to the Associated Press. At least one prisoner was killed and 80 people were wounded, police said. And elsewhere, gunfire erupted in Abidjan, Ivory Coast, where Gbagbo forces killed 4. These are just the latest pieces of news from Reuters in a day in which nothing at all from the tape mattered, as a rumor circulates that the wildcat well drilled in the 1 billion barrel strategic petroleum reserve in Bernanke's back yard has now started producing.
The conflict in North Africa was a predictable outcome of the US Monetary Policy of Quantitative Easing. It is not plausible that the US Federal Reserve, as the manager of the world's Reserve Currency, did not fully recognize the global ramifications of such monetary inflation actions well in advance. Quantitative Easing like the Intercontinental Ballistic Missiles (ICBM) of the cold war era has had the same devastating pre-emptive impact on Libya. There can also be little doubt that the bi-monthly meetings of the Bank of International Settlements (BIS) board of directors, which specifically meet to discuss coordinated monetary policy outcomes, did not consider this eventuality. The board of directors of this global power center includes all G7 Central Banks chiefs, with the conspicuous absence of a single member of the Arab League not receiving US military financial aid. Our Process of Abstraction research methodology (shown below) has been signaling looming political conflict and social tensions for eighteen months. Our Tipping Points have proven once again to be surprisingly accurate predictors. Though Tunisia as an initial flash point was somewhat of a surprise, we knew it was going to soon emerge somewhere due to serious inflationary pressures injected into the global macro. As we will discuss, it is a direct result of the US policy of Quantitative Easing (QE) igniting global inflation in food and basic resources of survival. The social unrest this triggers is still in the early stages of what we call the "Age of Rage".
James Montier, formerly at SocGen, and now at GMO, has released his latest white paper which shares his seven "immutable" laws of investing which are as follows: 1. Always insist on a margin of safety; 2. This time is never different; 3. Be patient and wait for the fat pitch; 4. Be contrarian; 5. Risk is the permanent loss of capital, never a number; 6. Be leery of leverage; 7. Never invest in something you don’t understand. Of course, these are nothing new to anyone who trades on anything besides simple momentum (a strategy which always inevitably leads in massive capital loss). Yet the one observation we are delighted to read in Montier's letter is his relentless bashing of all pundits who claims that when bonds are unattractive one should buy stocks (that would be everyone on CNBC among others). His explanation "One of the “arguments” for owning equities that we regularly encounter is the idea that one should hold equities because bonds are so unattractive. I’ve described this as the ugly stepsisters’ problem because it is akin to being presented with two ugly stepsisters and being forced to date one of them. Not a choice many would relish. Personally, I’d rather wait for Cinderella to come along. Of course, the argument to buy stocks because bonds are appalling is really just a version of the so-called Fed Model. This approach is fl awed at just about every turn. It fails at the level of theoretical soundness as it compares real assets with nominal assets. It fails empirically as it simply doesn’t work when attempting to predict long-run returns (never an appealing trait in a model). Moreover, proponents of the Fed Model often fail to remember that a relative valuation approach is a spread position. That is to say that if the Model says equities are cheap relative to bonds, it doesn’t imply that one should buy equities outright, but rather that one should short bonds and go long equities. So the Model could well be saying that bonds are expensive rather than that equities are cheap! The Fed Model doesn’t work and should remain on the ash heap." Alas, with "career risk" the one and only factor that matters, nobody will likely read let alone take these rules seriously until it is once again too late.
With the enactment of a no-fly zone over Libya now a matter of days, despite all the rhetoric otherwise, the question becomes what the implications of such an escalation in military activity would be. Stratfor provides one perspective on this development: unlike conventional wisdom that this would lead to brisk and clinical institution of supremacy, Stratfor believes it could actually backfire: "The idea that this would be a quick, surgical and short-term invasion is certainly one scenario, but it is neither certain nor even the most likely scenario. In the same sense, the casualties caused by the no-fly zone would be unknown. The difference is that while a no-fly zone could be terminated easily, it is unlikely that it would have any impact on ground operations. An invasion would certainly have a substantial impact but would not be terminable. Stopping a civil war is viable if it can be done without increasing casualties beyond what they might be if the war ran its course. The no-fly zone likely does that, without ending the civil war. If properly resourced, the invasion option could end the civil war, but it opens the door to extended low-intensity conflict." Either way, the military outcome is by now likely predetermined, and is a function only of ongoing actions by the now supremely irrational Gaddafi. All we can do is sit back and watch.
As the Russell 2000 index, better known to the Chairsatan as the US economy, surges on no news, except of course for the huge, massive 0.5% drop in the WTI, demonstrations in Iran are once again front and center, except in the US media, which deems it irrelevant to report on what is happening away from the NYSE Borse. From JPost: "Heavy police presence reported in Tehran; dozens of women rounded up, beaten in Khartoum while attempting to stage anti-rape protest." Being that it is international women's day, one can see why even Iranian women believe that something like rape may be a little anachronistic. Alas, the Tehran police did not take too kindly to these ridiculous demands for equal treatment, as the clip below shows.
Today's $32 billion 3 Year auction closed at a 1.298% high yield: a slight decline from last month's 1.349%, which coupled with the pick up in the Bid To Cover from 3.013 to 3.219, explains why the auction prices inside of the WI at around 1.305%. Overall, Primary Dealers and Directs once again were responsible for two thirds of the auction, with just 34.4% going to Indirects, which nonetheless was an improvement from February's 27.6% which was the lowest since 2006. It seems foreigners are willing to purchase a little more bonds than recently, although this was still well off the LTM average of 34.4%. Following in the model of last month's 7 Year auction, we expect Primary Dealers to flip at least 50% of today's take down within 3 weeks back to Fed, as the check kiting game continues with absolutely no supervision from the Fed (which explains the low hit rate of 22.9% for the PD bid).