Institutional Investors

It will come as no surprise to any reader that volumes in general are dismal. This leads inevitably to the question of just how liquid markets are in general. This may not be a critical question for mom-and-pop buying some IBM or CAT at the margin but for institutional investors it is critical to the decision to enter a position. Pairing off reward expectations with risk concerns tends to focus too much on volatility and too little on liquidity and by looking at daily market turnover and the bid-offer spread of each asset class, UBS finds taking liquidity into account can make a huge difference to performance (and risk-appetite). Unsurprisingly, the most liquid assets are large cap equities and US Treasuries. The least liquid assets include various fixed income securities, and in particular high yield credit. Perhaps this goes a long way to explaining why US Treasuries have maintained their strength and why large cap equities have been so strong relative to credit markets (a topic we have discussed at length) as money finds its 'easiest' hole to fill and thanks to liquidity concerns, high yield credit investors remain more pragmatic entrants to an ever-inflating bubble of liquidity (as exits will be small and crowded at the first sign of tightening). We suspect the increasing dispersion between the most and least liquid securities in each asset class will likely feed on itself as fewer funds are willing to 'earn' an 'illiquidity' premium given the bigger binary risks facing all markets.

Citigroup have said that they believe that gold will rise to $2,400/oz in 2012 and by $3,400/oz in “the coming years”. However, Citi’s Tom Fitzpatrick warned of price weakness in the short term and said there is a “real danger” that there may be a correction to $1,600/oz which would provide an even better buying opportunity. Citi are also cautious near term on oil and silver. Production of gold in Australia slid again last year, despite gold fetching higher nominal prices than ever before. According to gold experts, Surbiton Associates, 264 tonnes of gold were produced last year, two tonnes less than in 2010. The 264 tonnes equated to about 8.5 million ounces and ensures that Australia remains a major player in gold, with only China producing more last year. The United States was the world's third-biggest producer with 240 tonnes. Australia's gold production was well below the nation's production peak in the late 1990s.  This further suggests the possibility of peak gold production. Of the world’s four biggest gold producers (China, Australia, the U.S. and South Africa), only China has managed to increase gold production in recent years and this Chinese gold is used in China to meet the rapidly growing demand for gold jewellery and coins and bars as stores of value in China.

In the final installment of this interview, it's queried "Does GLD effectively print by selling shares in a Gold trust that does not have the Gold to back said investment?" or "Is this a form of fraud?"

With an economy of just $3.2Tn versus the United States $14.3Tn Germany is trying to prop up a Eurozone that is more than one trillion dollars bigger than America. They just do not have the resources for the task they are undertaking and I predict serious consequences, eventually, from their efforts. Germany is “best of class” and will be the last to go but they cannot evade the European recession in the end and I think it is only a matter of time and unfortunate decisions before the austerity demands made on so many will wind their way back home to those who made the demands. They used a timeline that was much too short for the job at hand and payment will eventually be forced upon them. They obviously get the joke where Eurobonds and other ploys of this nature average the economies of Europe and the standards of living over some period of time so that Germany, in the end, will suffer most as they have the furthest to fall. They have approached the G-20, China, the emerging market countries and all polite responses to the side; the results have been about zip. The Germans are running out of both time and money and Franz is squirming in the beer hall.

A few weeks ago, some of the more naive media elements reported that Greece has "all the cards" in its negotiations with private creditors, a topic we had the pleasure of deconstructing in its entirety to its constituent flaws? Well, a day ahead of the February 15 Eurozone meeting at which Greece's fate is finally supposed to be settled, things appear to be quite amiss. As a reminder, a critical part of the Greek debt deal is the private sector's agreement to roll over existing holdings into new bonds, which as we learned may now see the 15 cent per bond sweetener into new EFSF debt reduced. According to the Handelsblatt, that is now off the table. Dow Jones summarizes: "Some central bankers expect that Greece will fail to enlist enough private investors in a voluntary debt restructuring to avoid a technical default, a German newspaper reported Tuesday.  Greece is likely to make its case for a voluntary debt swap after a meeting of euro group finance ministers Wednesday, the Handelsblatt newspaper says. The Greek government is seeking to lower its burden by EUR100 billion. Handelsblatt cites unnamed central bank sources as saying the country will fail to achieve that goal, leaving the government little choice but to make the write-down mandatory for investors holding out. Requiring investors to take a loss would prompt credit rating agencies to declare a debt default for Greece, an event with unforeseeable consequences for financial markets. The report doesn't specify whether its sources are with the European Central Bank or with the German Bundesbank. Neither bank would comment early Tuesday." Which of course is not news: after all even the rating agencies have long warned a Greek default is now inevitable, and a CDS trigger will follow. The only thing that there is massive confusion over is whether and how this event will impact everyone else, and whether it will lead to an explusion of Greece from the Eurozone. Optimism is that it is all priced in. So was Lehman.

The vast majority of professional investors are unable to contemplate truly dark times for the markets. After all, the two worst items most of them have witnessed (the Tech Bust and 2008) were both remedied within about 18 months and were followed by massive market rallies.Because of this, the idea that the financial system might fail or that we might see any number of major catastrophes (Germany leaving the EU, a US debt default, hyperinflation, etc.) is on par with Bigfoot or Unicorns for 99% of those whose jobs are to manage investors' money or advise investors on how to allocate their capital. 

Solyndra, Ener1, and now Kaufman Bros - The current economy may not be very good at creating jobs, even minority-focused ones, but its track record in inverse job creation is rapidly becoming second to none. Bloomberg reports that "Kaufman Bros. LP, the minority-owned investment bank that helped unwind U.S. stakes in bailed-out financial companies, ceased operations as of yesterday, according to a notice posted on its website. Chief Executive Officer Benny Lorenzo told employees that New York-based Kaufman was closing immediately in a meeting yesterday after trading closed, according to two people with knowledge of the matter, who declined to be identified because they weren’t authorized to speak publicly. Neither Lorenzo nor Chief Financial Officer Gerard Durkin returned messages left on their office and mobile phones yesterday and today." More amusing is the following description: "The company, which also has offices in San Francisco, said it was sought out by institutional investors, hedge funds and government agencies to help meet diversity goals." No comment. The closure notice can be found on the company's website. And so another bank bites the dust. Many more coming.

As retail investors continue to appear significantly pessimistic in their fund outflows ($7.1bn from US equity mutual funds in w/e January 4th - the largest since the meltdown in early August) or simply stuff their mattresses, David Santschi of TrimTabs asks the question, 'who is pumping up stock prices?' His answer is noteworthy as a large number of indicators suggest institutional investors are more optimistic than at any time since the 'waterfall' decline in the summer of 2011. Citing short interest declines, options-based gauges, hedge fund and global asset allocator sentiment surveys, and the huge variation between intraday 'cash' and overnight 'futures market' gains (the latter responsible for far more of the gains), the bespectacled Bay-Area believer strongly suggests the institutional bias is based on huge expectations that the Fed will announce another round of money printing (to stave off the panic possibilities in an election year). The ability to maintain the rampfest that risk assets in general have been on (and the cash-for-trash short squeeze that has been so evident) must be questioned given his concluding remarks.

While lately not much, if anything, has changed in our and the broader secular outlook on gold, which has been and continues to remain the only currency equivalent that isolates devaluation risk, and excludes counterparty risk while being an implicit bet on the stupidity of those in charge (the fact that various tenured "Ph.D. economists" hate what it represents for their tenure prospects of course only makes the bullish case far stronger). True, in the past month it has surged from $1520 to $1660 but only Ph.D. economists (indeed, that 200 DMA proved to be a complete non-event) could not have foreseen that year end liquidations in a desperate drive to shore up liquidity (as explained here) by institutions, always end, and the reversion to the above thesis sooner or later reappears. So while it won't say much new, below we present Nomura's just released Gold Sector Initiation, which is a must read for new entrants to the field of physical and paper representations of gold, as well as a timely reminder for everyone else that in the past 3 years nothing has changed with the fundamental thesis, and in fact recent actions have merely reinforced it (and if we indeed have a €1 or €10 trillion LTRO, then watch all resistance levels in the metal get blown off).

When back in August, Europe declared a short selling ban of any financials (here we are willing to channel Romney, and make a $10,000 bet with anyone that said ban will never be lifted), and which as we predicted has had no favorable impact on bank stocks which have since tumbled, we suggested that the next step will also be the final one: the passage of laws prohibiting sales of any kind. As usual we were partially joking. And as so often happens, we are about to be proven right again. As the FT reports in its headline article today, whose gist is simple enough, that Europe is on the verge, it is the tactically-placed final paragraph that is of particular curiosity. It says the following: "Speaking on the fringes of a start-of-year retreat of her Christian Union lawmakers in the city of Kiel, Ms Merkel said she would consider calls from her party colleagues for legislation to bar institutional investors such as insurance companies from selling bonds when ratings were downgraded, or fell below investment grade." Allow us to recopy and repaste the key part: "legislation to bar institutional investors such as insurance companies from selling bonds."

Payback sure is a bitch. After being demonized for everything from the tiniest tick down in the EURUSD, to blowing out spreads in CDS, to plunging stocks across the insolvent continent, hedge funds, long falsely prosecuted for everything, even stuff they patently did not do, are about to have their day in the sun, precisely in the manner we predicted back in June of last year when we posted: "Greek Bailout #2 Is Dead On Arrival: A Few Good Hedge Funds May Have Called The ECB's Bluff, And Hold The Future Of The EUR Hostage." Back then we wrote: "we may suddenly find ourselves in the biggest "activist" investor drama, in which voluntary restructuring "hold out" hedge funds will settle for Cheapest to Delivery or else demand a trillion pounds of flesh from the ECB in order to keep the eurozone afloat. In other words, the drama is about to get very, very real. And, most ironically, a tiny David is about to flip the scales on the mammoth Goliath of the ECB and hold the entire European experiment hostage..." Sure enough, we were right yet again. Ekathimerini writes: "Hedge funds are taking on the powerful International Monetary Fund over its plan to slash Greece's towering debt burden as time runs out on the talks that could sway the future of Europe's single currency. The funds have built up such a powerful positions in Greek bonds that they could derail Europe's tactic of getting banks and other bondholders to share the burden of reducing the country's debt on a voluntary basis." Oh no, they will let it happen, but first Europe will pay, with real interest, for every single incident of hedge fund bashing and abuse over the past 2 years. We estimate the final tally, to US taxpayer mind you, will be about $20 billion, to remove the "nuisance factor" of hold out hedge funds. Congratulations Europe - you have proven to be a continent full of idiot "leaders" once again.

In spite of some short-term fixes, there remains no real resolution to the sovereign debt issues in many European countries. We're certainly not spending less money in the US, and now we're bailing out Europe via currency swaps with the European Central Bank. Shouldn't gold be rising? Yes, but nothing happens in a vacuum. There are some simple explanations as to why gold remains in a funk.

1. The MF Global bankruptcy, the seventh-largest in US history, forced a high degree of liquidation of commodities futures contracts, including gold. Many institutional investors had to sell whether they wanted to or not. This is similar to why big declines in the stock market can force funds and other large investors to sell some gold to raise cash for margin calls or meet redemption requests.
2. The dollar has been rising. Money fleeing the Eurozone has to go somewhere, and some of it is heading into US bonds, which means first converting the foreign currency into dollars.
3. It's tax-loss selling season, something that's also impacting gold stocks. Funds and individual investors are selling underwater positions for tax purposes. Funds also sell their big winners to lock in gains for the year and dress up quarterly reports.

These forces have all acted to depress the gold price.

Wondering why the future for housing as an asset is so bleak, why median housing prices continue to tumble and recently saw their biggest three month drop ever, and why there is no bottom in sight? Simple: the American public appears to have woken up to the reality that homes are no longer a flippable asset, and in fact continue to drop in price, an observation that is obvious to virtually all now. So what happens next? Why renting of course. Here is Morgan Stanley explaining (granted in a pitchbook for REITs but the underlying data is quite useful) why the Housing 2.0 paradigm is all about renting.

The following presentation from November 2009 highlights the top 15 institutional investors that matter more than anyone to Morgan Stanley: essentially the execution and head PM guys who throw MS orders of $100 million and above (all the way to $1 billion and higher). Among the companies listed are BlackRock, Capital Group, Fidelity, Gartmore, GIC, Norges Bank, Wellington, Eton Park, Jabre Capital, James Caird, Meditor, Moore, Och Ziff, and, of course, Paulson. As for the trader envy (as in my G-V is bigger than your Dassault), here are some names to remember Greg Bennett, Nigel Bolton, Philippe Jabre, John Paulson (duh), Greg Coffey and Julian Rifat. Oh wait, did we say Julian Rifat, the same guy that just got busted in the biggest UK insider trading scandal? Hmm: looks like Morgan Stanley sure has an eye for talent. We can't wait to see the metal detectors at Morgan Stanley's Christmas party, as clients demand a bug-free environment. Also, if you didn't make the list - don't despair. Just make sure you front run about $10 billion worth of orders in 2010 and you are golden.

After recently pulling a $2 billion bond issue due to an internal Snafu (and, as the rumor goes, due to a material lack of institutional demand), California has been advertising (and, ironically, using Google contextual ads on Zero Hedge for just that purpose, possibly running on this very page) the very same bond issue, direct to retail investors, and making it seems like retail is getting a great deal by getting on the same (deserted) floor as institutions, and even frontrunning the major institutional investors (which incidentally would not touch these bonds with a 12 foot pole). While we sympathize with Bill Lockyer's problem of being the Treasurer of a default state, we are not very sure that going direct to retail is the best option (or, all that legal either). If anything, it underscores just how horrendous the fiscal situation in California is, and how anyone buying into this bond issue should be prepared that the next round just may not find enough greater fools to extend the perpetual refi Ponzi (forget about repayment at maturity).