We made every effort to keep the cheekiness of this missive, apart from very minor edits. By no means it is perfect, but it is definitely cheeky.
In 1919 the major London gold dealers decided to get together in the offices of N.M. Rothschild to “fix” the price of gold each day. While this was notionally to find the clearing price at which all buying interest and all selling interest balanced the possibility for market manipulation and self-dealing is inherently systemic in such a cozy arrangement. This quaint anti-competitive procedure continues to this day. In no other market in the world do the major players get together each day and decide on a price. Imagine if Intel, AMD and Samsung were to meet each day to “fix” the price of microchips, or if the major oil companies were to meet each day to “fix” the price of crude oil; wouldn’t there be a public outcry and a flurry of antitrust violation lawsuits? The “fix’ is not open to the public, there are no published transcripts of each fixing, and there is no way to know what the representatives of the bullion banks discuss between each other. The current London Gold Fix is conducted by the representatives of five bullion banks, namely HSBC, Deutsche Bank, Scotia Mocatta, Societe Generale, and Barclays. The “fix” is no longer conducted in an actual meeting but by conference call.
A few days ago, IRA's Chris Whalen had a good summary of why and how the next bubble is currently brewing in the Structured Notes space. For those unfamiliar with this particular product, we present a recent Bloomberg brief on the Structured Note market which has quietly grown from a side freakshow into the prime time spectacle. In brief - there has been $25.85 billion in YTD structured note issuance, and over $60 billion in global interest-linked note volumes. An amusing excerpt from the brief: "Sales of notes linked to wheat jumped this month after Russia’s worst drought in 50 years spurred a surge in the price of futures contracts on the grain. Banks including DZ Bank AG and Royal Bank of Scotland Group Plc, issued 82 wheat-linked warrants this month, compared with a total of 159 in the first seven months of the year, according to data compiled by Scoach, the structured products trading platform run by Deutsche Boerse AG and Switzerland’s SWX Group. The listed notes, called knock-out warrants, offer investors a leveraged way to bet on the price of wheat." For all those who thought Wall Street was dormant in the post-CDO implosion vacuum, this is a rough wake up call - it appears no matter what, idiots and their money are promptly parted, and the world's foremost financial innovators will always find a way (and a product) to guarantee that. And it is very refreshing to see that Germany's DZ Bank has almost learned from the CDO bubble: the questionably solvent German bank dominates the Structured Note market with $7.2 billion in issuance to date, followed closely by such stalwarts of financial stability as Barclays and Deutsche Bank.
The American public thinks they are rugged individualists, who come
to conclusions based upon sound reason and a rational thought process.
The truth is that the vast majority of Americans act like a herd of
cattle or a horde of lemmings. Throughout history there have been many
instances of mass delusion. They include the South Sea Company bubble,
Mississippi Company bubble, Dutch Tulip bubble, and Salem witch trials.
It appears that mass delusion has replaced baseball as the
national past-time in America. In the space of the last 15 years the
American public have fallen for the three whopper delusions:
- Buy stocks for the long run
- Homes are always a great investment
- Globalization will benefit all Americans
Now that QE Lite, or whatever one calls it, is here, the most appropriate market strategy reverts back to March of 2009, when life was very simple: "Buy what the Fed is buying." And with the benefit of QE1 in hindsight, namely the Fed's prior purchase of $700 billion in Treasurys in 2009, it is possible to determine precisely which bonds the Fed will focus on, and which are likely to be excluded, thus benefiting the least from the latest bout of monetization. Morgan Stanley has come up with a list of which bonds are likely to be targeted by the Fed in the upcoming 5 Open Market Operations beginning on August 17 and continuing through September 1. Those looking for a quick (and levered) return on investment will be wise to pick up the issues determined as most likely to be monetized, while potentially shorting those that are ineligible for buybacks.
A fundamental knowledge of Theta is imperative in order to understand the mechanics and construction of option strategies. In many cases, Theta is either the profit engine or the means by which experienced option traders reduce the cost of opening a new position. Theta can even take an ETF that pays no dividend and create a monthly income stream utilizing a technique known as a covered call write. The most exciting thing about options is their versatility. You can trade them in so many different ways. A trader can define a positions’ risk with unbelievable precision. When traded properly utilizing hard stops, options offer traders opportunities that stocks and futures simply cannot provide. Theta allows option traders to write spreads which generally offer nice returns with very limited risk.
Keynesian stimulus can’t be blamed for all our problems, but it would have been nice if our politicians hadn’t relied on it so blindly. Debt is debt is debt, after all. It doesn’t matter if it’s owed by governments or individuals. It weighs on the institutions that issue too much of it, and the ensuing consequences of paying off the interest costs severely hinders governments’ ability to function properly. It suffices to say that we need a new economic plan – a plan that doesn’t invite governments to print their way out of economic turmoil. Keynesian theory enjoyed a tremendous run, but is now for all intents and purposes dead… and now it’s time to pay for it. Literally. - Eric Sprott
Some days ago, Business Week pointed out that "Warren Buffett shortened the duration of bonds held by his Berkshire Hathaway Inc. after warning that deficit spending could force inflation higher." As the article further pointed out, twenty-one percent of holdings including Treasuries, municipal debt,
foreign-government securities and corporate bonds were due in one year
or less as of June 30, Omaha, Nebraska-based Berkshire said in a filing
Aug. 6. That compares with 18 percent on March 31, and 16 percent at the
end of last year’s second quarter. The conclusion: "It may be a sign that Buffett expects interest rates to start rising, maybe sooner than the conventional wisdom." Yet very curiously, as we pointed out, another capital markets titan, Bill Gross with his trillion+ in fixed income securities courtesy of Pimco's numerous asset managers, has done precisely the opposite. As the chart below demonstrates, Gross' flagship Total Return Fund has been doing the inverse of Buffett, and has been actively increasing the duration of his bonds over the past two years, with the current blended maturity profile being the most long-end weighted in years: in fact the percentage of bonds maturing in 3 years or less is now the lowest it has been since October 2008. Using the above logic, it would signify that, unlike Buffett, Gross is now more primed for deflation than ever. In the great inflation-deflation debate, this will be the primetime heavyweight cagematch to watch. Between Buffett's empire and Pimco's FI monopoly, one of the two will have to lose. Our question of the weekend is who will it be?
After a brief hiatus, Jim O'Neill is back, and this time is taking it easy on taunting the bears. In his weekly letter he has some rather lucid questions, the first one of them being the observation of the paradox of the surging Chinese trade deficit in light of the weakening renminbi. O'Neill states: "the GS trade weighted CNY has actually weakened by around 1.75pct since
they “ de-pegged”, by “undershooting” the rise of the Euro, Yen et al." Don't anyone tell Schumer that China's whole revaluation bluff was nothing but (and in fact a smokescreen for further devaluation) or there will be more theatrical demands for blood. O'Neill also looks at recent Chinese regulatory developments and notes that the push "to bring any off balance sheet vehicles for disguised lending, back on
the balance sheet, and to be prepared to raise fresh capital" is sensible but hopes that "if this is going to be implemented, if necessary, offsetting stimulatory measures would be introduced." Sure enough, China also has to pay for the Keynesian funeral for a long, long time. Not surprisingly, O'Neill looks at the one-time record pick up in the German economy courtesy of a massive EUR devaluation and extrapolates far into the millennia: "there seems to be a belief that Germany is on the verge of a jobs “ miracle” , and there is more and more talk of a period of stronger domestic demand." Sorry no. It is nothing like that and is purely a function of the ever more volatile seesawing in key FX crosses, on a trendline to global deleveraging contraction. Germany merely borrowed from the future courtesy of a plunge in EURUSD. It is already paying for this now and this quarter's data will be a major disappointment.
Weekly Chartology; Goldman Introduces Its Own Version Of Rosenberg's SIRP For A Low GDP Growth EnvironmentSubmitted by Tyler Durden on 08/14/2010 11:04 -0400
In a surprising act of lucidity, David Kostin recently reduced his 2010 S&P target from 1,250 to 1,200. Now, the Goldman strategist has penned his own version of David Rosenberg's SIRP (Safety and Income at A Reasonable Price), by introducing two strategies for a low GDP environment: Low Operating Leverage And Dividend Growth (LOL-DG - yes, we prefer Rosenberg's acronym).Hopefully, this means that the GARP abortion is finally dead and buried.
Gregory Simmons, the energetic force behind Scopelabs, is an unorthodox money manager whose legacy exposure, and subsequent disenchantment, with Wall Street forced him into self-enforced exile (Hawaii is sufficiently far from Wall and Broadway), where he now runs an iconoclast trading operation combining elements of quantitative, technical, fundamental and every other possible analysis. Simmons has been striving to expose the core truths, or flaws depending on perspective, about trading (first and foremost that there is no such thing, especially since the vast majority of market participants end up losing to a few select winners, as a sure thing) which many daytraders simply refuse to accept in their pursuit of gambling nirvana, all the while failing to recognize that perceived skill (especially in our current marketplace) has very little if anything to do with profit. The below video is a suitable introduction for Zero Hedge readers who may not be familiar with Scopelabs: appropriately titled "Buzzkill", in it Simmons debunks several of the key doctrines that dominate the numerous streams of Stocktwits momentum chasers, "theory fitters" and other Koolaid drinkers, all of whom, we have long claimed, have far better odds at success in a rigged casino (and not to mention the downside protection of at least getting comped expenses) than trading in the stock market, absent the "information arbitrage" capabilities of those who, to bastardize Sun Tzu, have made the profit before the initiating trade was ever printed.
Media coverage of the oil spill’s effect on the Gulf focusing on tourist income lost by the waterfront towns – with footage of empty beaches, restaurants and T-shirt shops – dominates the news. Interviews with devastated business owners are heart rending. But they always end with references to somehow hanging on until “things get back to normal.” Trouble is, things are not going to “normalize.” Not for the Panhandle of Florida, and probably not for the rest of the state, either. Projections suggest that Florida can expect oil all along its west coast, and possibly throughout the Keys and up the east coast as well. Yet even before BP’s well began spewing crude, pressures within the state’s economy were building. It was an explosive situation awaiting a match. Oily beaches and dying wildlife are likely that match.
Several weeks ago, a spoof xtranormal cartoon went viral, in which the purchasing sequence of an iPhone (as compared to an HTC Evo) was hyperbolized, and which ruthlessly mocked the brainwashing practices of the Apple Borg collective. It was only a matter of time, before the brain trust behind the lampoon decided to focus its attention on the next group that has been ridiculed since time immemorial: the long-suffering gold bugs. Sure enough, the sequel is now out, and the process of purchasing an iPhone is now downright boring compared to the purported thought process behind buying gold. Of course, the cartoon is quite hilarious, but for all the wrong reasons, as in trying to mock those who believe that on a short/medium enough timeline, the survival rate for paper drops to zero, the video, which is sure to go just as viral, in fact proves all the concerns not just of the faceless "goldbug" collective, but of all those others who believe gold is headed much, much higher, which also includes the richest and most prominent money managers, financiers, and politicians in the world.
Goldman's John Noyce (part of the firm's trading desk) has released his most recent barrage of technical analysis and charts, confirming our running expectation that a drop in stocks is now widely anticipated by the charts. In addition to extended commentary on FX, Bonds, Curves, and the VIX, Noyce notes the following on the S&P: "as discussed in recent client meetings, while the timing is difficult, we remain concerned that a larger topping structure is still being formed on the S&P – which will eventually lead to another meaningful decline." Has everyone, Goldman included, now gone from bullish to bearish in the span of two weeks?