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October 16, 2011
Issue 169  -  Going Down?
The market has been rocketing up over the last couple of weeks with the general market up over 10% since October 3rd.  With the computers and hedge funds driving the market, things have gotten very volatile.  Of course 10% would be a good YEAR for the market so this has been a crazy couple of weeks.  Just why has the market been trending up though?  From Zerohedge:

The Biggest Market Headfake Ever: Is A Wholesale French Bank Liquidity Run The Sole Reason For The Euro, And S&P, Surge?

Over the past two weeks, there is one simple thing that has been bugging skeptical macro observers: namely the paradox of i) just how ugly the European funding and liquidity situations have gotten, on the one hand, confirmed by the blow out in French bond yields (the French-Bund 10 year spread just hit an all time record yesterday) as well as continuing deterioration in credit spreads across core European nations, yet, on the other, ii) the euro, especially in that critical pair the EURUSD, has seen one of its most explosive rises in recent history, which as Zero Hedge pointed out yesterday, has totally decorrelated with the French-Bund spread, to which it had been firmly 'pegged' previously. As a result of ii), equity markets have surged due to legacy correlation arbs, which see Euro strength, and hence dollar weakness, as an empirical signal of equity "cheapness", which in turn leads all algos to treat a rise in the EURUSD as a buying signal. So how is it that even with the interbank liquidity situation in Europe frozen and getting worse, further keeping in mind that European banks are now expected to (or have already commenced - see yesterday's move in PrimeX) engage in widespread asset liquidations, that broad market risk is perceived as cheap? Simple. As the following note by Deutsche Bank's Alan Ruskin explains, the sole reason for the EUR (and hence S&P and global 100% correlated equity risk) surge in the past 9 days is not driven by any latent "optimism" that Europe will fix itself, but simply due to the previously discussed wholesale asset liquidations (as none other than the FT already noted), which on the margin are explicitly EUR positive due to FX repatriation, courtesy of the post-sale conversion of USDs to EURs. Which means that the ever so gullible equity market has just experienced one of the biggest headfakes in history, and has misinterpreted a pervasive European, though mostly French, scramble to procure liquidity at any cost by dumping various USD-denominated assets, as a risk on signal!

In other words, an internal bank run has somehow been interpreted to be stock positive... And there is your explanation for not only the paradoxical surge in the EURUSD and S&P, but why the correlation between the EURUSD and the Bund-France spread has completely broken down. Expect all of this to promptly, and very violently, correct once the market understands what an idiot it has been in the past two weeks.

Hmmmm.....  that does sound a little like some "bulls" have been reading the wrong tea leaves.  In case you don't quite understand this, what it basically means is that the Euro has been rising in value against the dollar.  This has been interpreted by the market as the Euro having a "solution" in the works for its crisis.  Reality, according to this report, is that there has been a cashing in of assets to raise cash in Europe.  This cash has to be in Euros so dollar based assets that are being sold are being converted to Euros.  This drives the Euro up in value.  This could be a huge development in the markets.  If the market has been incorrect, the market could lose that 10% in a blink. 
This week is a big earnings week.  So far earnings have been weak except for Google and a few banks (which have used suspect accounting to show the good performance)  If the earnings are poor this week, look out below. 
Here is an example of this suspect accounting:
 Dave from Denver…

Tuesday, October 11, 2011

No Surprise Here For Me

It was revealed yesterday that the Austrian bank - Erste Group - had $5.2 billion in undisclosed Credit Default Swap (CDS) derivative losses sitting on - or rather "off" - its balance sheet.

Can you imagine how many banks, which often only have several billion dollars of equity, have such losses?  This is the elephant in the room which will soon become obvious to everyone.
On a sem-irelated note, it appears the Federal Reserve is breaking the law: (GATA)

The Atomic Bomb that is About to Explode at the Federal Reserve

I have consistently contended that Federal Reserve chairman Ben Bernanke is something akin to a mad scientist who, in his development of new "tools" to manage monetary policy, is probably unaware of all the nuances and ramifications of the new tools he is developing. Indeed, one problem with one of his new tools may be about to blow up in his face.

It turns out that Bernanke's decision to pay interest on reserves held at the Fed by member banks has some twists to it that make what he is doing likely illegal. The blog Uneasy Money
points this out in a post titled, Is the Federal Reserve Breaking the Law:

In a comment earlier today to this post, David Pearson shocked me by quoting the following passage from the Financial Services Regulatory Relief Act of 2006:
Balances maintained at a Federal Reserve bank by or on behalf of a depository institution may receive earnings to be paid by the Federal Reserve bank at least once each calendar quarter, at a rate or rates not to exceed the general level of short-term interest rates.

As I said to David Pearson in my reply to his comment, I am flabbergasted by this. The Fed is now paying 0.25% interest on reserve balances while and the interest rate on 3-month T-bills is now 0.01%. Yet the statute states in black letters that the rate that the Fed may pay on reserves is "not to exceed the general level of short-term interest rates." In fact, as can be easily seen on the Treasury’s Daily Yield Curve webpage, only on rare occasions was the 3-month T-bill rate as high as 0.25% in 2009 and it has been consistently less than 0.20% for most of 2009 and all of 2010 and 2011.

Got that? The Fed, as I have pointed out a number of times, is paying interest to bankers many times what is available in the marketplace and this turns out to be illegal.

Now that's nice isn't it?  The Federal Reserve is breaking the law.  Paying more interest than allowed to keep the banks afloat.  Don't you wish you had that deal?
But then again, the game is rigged against anything that is antiestablishment, i.e. gold/silver:

CME reduces(!) margin in the XAF

What does GCZ, SIZ, and XAF have in common? According to the CME all 3 need one side of the trade fiercely protected. In the case of gold and silver it's the shorts that get protection, while with financials it's the longs that get the insider's help. In an irrational and "counterintuitive" decision the CME, at the height of extreme volatility in the financial sector, actually LOWERED margin requirements yesterday on the XAF by 33%. That's right, in the case of the financial index the CME is encouraging MORE volatility. There now can now be no doubt the CME manipulates trading through leverage and margin. After punishing silver and gold longs with well-timed and orchestrated margin hikes the CME is now intent on routing any financial shorts in the same manner. The XAF margin decrease announcement was once again perfectly timed, seeing how the Dow had just staged its 400 point "miracle" comeback. CME members should be long gasoline futures because they sure the hell have provided a lot of it lately scorching their opponents. Maybe the CME will next mimic Fed policy and end up with zero margin requirement for equities and TBTF banks.

CME margin for 1 silver contract: $24,975
CME margin for 1 gold contract $11,475
CME margin for 1 basket of insolvent too big to fail banks: $ 3,500

Facilitating manipulation for cartel traders: PRICELESS

Do you see how the game gets rigged?  Push people into bank stocks while discouraging people from gold and silver.  This, while China does the exact opposite:
Chinese Removing All Barriers That Inhibit Gold Investing As National Sport

The gold mavens of the west have nothing on China, 1.3 billion strong. China’s politically influenced banking system takes every measure to facilitate ordinary Chinese– not only the Chinese imitating hedge fund king John Paulson– to either buy gold straight from their savings accounts in giant state- controlled banks like ICBC or the Agriculture Bank(way larger than BAC or JPM) or to acquire gold jewelry from huge nationwide chains of jewelry shops– a phenomenon unknown in the US, or for that matter, anywhere in the west.

Gold jewelry is a growth industry in China. We have our fast food joints and discount mall stores like Costco. China has jewelry chains with a least 1000 outlets or more across China, according to the World Gold Council. I’ll bet you a million yuan you’ve never heard of Chow Tai Fook, or Luk Fook, or China Gold or Laofengxiang or Laomao. But, they are as well known as Kentucky Fried Chicken and Macdonalds.

I’m perplexed because this is a culture foreign to us. It has cultural roots, but it also is a measure of national economic policy to promote gold as a savings device. Are the Chinese signaling not to expect the protection of artificially elevated levels in the renmimbi to last forever? Is it a way to jump start a larger middle class out of poverty? This phenomenon bears more intense scrutiny. It’s certainly good for the western investor in gold bullion.

So what effect has that had?  Americans are told time and time again that gold and silver are in bubbles while the Chinese think differently:
Chinese Investors Prefer Gold To Stocks And Real Estate Lenzner Forbes Staff

The crowds surge shoulder to shoulder inside Beijing’s Cai Bai store to buy 5 to 10 gram slivers of gold and jewelery of every size and shape. It’s one dramatic example of the gold craze in China, which is officially and unofficially promoted by the Communist government. It is a sight equivalent to teenager mobbing Abercrombie & Fitch in a pushing mob to get the newest tee shirt. And it is an integral part of the pro-gold preference by the Chinese public and its government. Imagine a pure gold store on Fifth Avenue. A unique cultural preference.

Some Chinese gold officials believe some 5000 tons more of gold will be amassed in China over the next 5 years. That compares with the Us government’s hoard of 8133 tons and the 1200 tons worth $65-70 billion in GLD, the Spyder ETF that’s the vehicle most utilized by American gold investors.

Ever since 2002 when the price of gold began to move from its $200-$250 an ounce base, China has facilitated the purchase of gold as an investment., It was then the PBOC, the People’s Bank of China, established the Shanghai Gold Exchange that became the action arena for 1.5 million accounts of the ICBC Industrial Bank of China which automatically began to execute orders as small as $10-$20 a day or week. Prior to 2002 all gold orders went through the PBOC.

Nobody really knows how much gold is held by China because producers and importers do not typically report their purchases. Then, too, the PBOC reports purchases infrequently over the years. In fact, China makes it a practice of camoflaging its gold purchases by not reporting them so as not to affect prices in the market, according to William Purpura, chairman of the Comex Governing Committee and proprietor of a gold trading operation in New York and Asia.

Why are the Chinese doing this?  I don't think it's because their stupid.  They know that the end game is gold and silver.  Eventually the Americans will come around.  As our "recovery" plays out, it will be more and more apparent that things aren't going back to the good ole days for a long, long time:

U.S. Incomes Seen Stagnant Through 2021

  • Americans' incomes have dropped since 2000 and they aren't expected to make up the lost ground before 2021, according to economists in the latest Wall Street Journal forecasting survey.

    From 2000 to 2010, median income in the U.S. declined 7% after adjusting for inflation, according to Census data. That marks the worst 10-year performance in records going back to 1967. On average, the economists expect inflation-adjusted incomes to rise over the next decade, but the 5% projected gain isn't enough to reach prerecession levels.

    "Standards of living in the U.S. will continue to decline as we deleverage and emerging markets take over as the growth engine of the global economy," says Julia Coronado of BNP Paribas.

    Though the majority of the 50 economists surveyed-not all of whom answer every question-say the current generation of college graduates will have a higher standard of living than their parents, a third of respondents think it will be lower. College graduates have generally fared better in the U.S., and they currently have a 4.2% unemployment rate compared to 9.1% for the entire work force. But a college degree hasn't been enough to ensure wage gains from 2000 through 2010. According to Census Bureau data, only advanced degree holders managed to record increases in earnings over that period.

    The current generation of college graduates will only see a higher standard of living if "they get graduate degrees and are willing to give up a lot of free time," says Diane Swonk of Mesirow Financial. She says that while falling incomes may make up lost ground, the issue will be the distribution of those gains.

    This is just devastating to those hoping for a return to the gravy train.  Not going to happen.  We spent too much, for too long, with money we didn't have and now the bill is coming due.  More evidence:
    U.S. Incomes Declined More During Recovery Than In Recession: Study

    The Huffington Post Jillian Berman Updated: 10/10/11 10:40 AM

    The U.S. economy may technically be in a recovery, but it likely doesn’t feel that way for many Americans when grabbing for their wallets.

    Median annual household income has fallen more during the recovery than it did during the recession, according to a new study from former Census Bureau officials Gordon Green and John Code. Between December 2007 and June 2009, when the U.S. economy was in recession, incomes declined 3.2 percent. While during the recovery between June 2009 and June 2011 incomes fell 6.7 percent, the study found.

    The lack of income growth may explain why for most Americans the recovery still feels like a recession. Eight in 10 Americans believe the recession is an ongoing problem, according to a recent Gallup poll. And workers don't anticipate things will pick up any time soon. Nine out of 10 Americans said they don't expect to get a raise that will be enough to compensate for the rising costs of essentials like food a fuel, according an American Pulse survey released in June.

    Slow job growth is likely also exacerbating the feelings of recession and weighing on household incomes. U.S. employers added 103,000 jobs in September, too few jobs drive the unemployment rate below 9.1 percent and barely enough to keep pace with population growth, the Department of Labor reported last week. Those Americans that are employed are continuing to get squeezed by their employers. Profits per employee went up for the second year in a row in 2010, according to financial analysis company Sageworks.

    If the U.S. continues its sluggish jobs growth pace it could drive incomes even lower. Americans who are jobless for more than 99 weeks lose any unemployment benefits driving their incomes to zero and weighing on the national average, according to 24/7 Wall Street.

    The recession’s and the recovery’s drag on income growth has put some Americans in a worse position than they were decades ago. The median income for U.S. males was worse in 2010 than in 1968 on an inflation-adjust basis.

    In some states the recession and the recovery only exacerbated a decline in incomes that’s been taking place for longer. The median household income in Wisconsin plunged 14.5 percent between 1999 and 2010, The Milwaukee Wisconsin Journal Sentinel reported.

    If union membership continues to decline in states like Wisconsin, incomes may keep falling. A boost in union membership would increase middle-class incomes by more than $1,000, a bump that would be more than if the unemployment rate fell by four percent, according to the Center for American Progress.

    Still, even if Americans are forced to continue to watch their incomes dwindle the U.S. economy won’t necessarily get pushed back into a recession. Recent data including last week’s jobs report indicates that the economy is growing slowly, not contracting, Bloomberg reported.

    In the coming weeks I see the stock market (and possibly gold/silver stocks) falling due to some "event."  I've reduced my leverage and am waiting to see how it plays out.  
    GORO  (closed $20.84, up $2.32, average price paid $6) 
    Mexus Gold  (closed $.14, unchanged, average price paid, $.22) 
    Alexco Resource Corporation -  AXU  (closed $7.39, up $0.55, recommended at $7.90)  
    Stocks    (Current status, short, short initiated October 15)
    If this plays out right, I'll be reentering the market this month.
    Physical Gold  (Closed $1679, up $25,  average price paid $395)
    Physical Silver  (Closed $32.16,  up $.36,  average price paid $5.31
    I'll close this week with a video of the 2nd largest aquarium in the world.  This is in Japan.  (the largest is in Atlanta)  Have a great week!