Gold-buy or sell?
The sharp moves in Gold over the past weeks has “renewed” the interest around the shiny metal. Let’s see if Soros will be proven right once again. From Bloomberg.
Billionaire George Soros bought more in the first quarter and hedge-fund manager John Paulson held on to the biggest stake in the SPDR Gold Trust, the largest exchange-traded product backed by bullion, Securities and Exchange Commission filings show. Some investors are refusing to capitulate even after failed elections in Greece drove the euro to a two-year low against the dollar and gold slumped as much as 21 percent in December from the record $1,923.70 set in September.
“The $2,000 target has moved further away, but it still holds,” said John Stephenson, who helps manage $2.7 billion at First Asset Investment Management Inc. in Toronto and predicted in November that prices would reach $2,500 in the next several months. “We will see some easing, and that will push gold higher, but the reality is that we are on hold until the outcome of the Greece elections.”
The euro and the global crises
Some thoughts on the Euro and crisis, via Voxeu.
It is a few years since the US-originated global crisis and the world economy now finds itself grappling with another crisis emanating from the OECD countries. The Eurozone sovereign debt crisis currently poses the single biggest downside risk to the global outlook. The crisis is rooted in the uneven growth performance of the different Eurozone countries, the unsustainably large public debts of some periphery countries, and the European banks’ exposure to these debts. These developments exposed the possible dynamic inconsistency of the euro project, dubbed by Pisani-Ferry (2012) as the ‘Euro Impossible Trinity’.1
The short history of the euro project has been remarkable and unprecedented. Earlier concerns about the stability of the transition from national currencies to the euro, and scepticism regarding the gains from forming the euro, were deemed overblown during the 2000s. However, the real test of a currency union happens at times of sizable asymmetric shocks, like recessions impacting some states in the union, while other states boom. The slowing down of the periphery at a time when Germany kept growing awakened the market in 2010 to the growing debt overhang of the Eurozone’s periphery, and the incompleteness of the euro project. The resultant Eurozone crisis is testing the viability of the single currency.
MF Global and creative planning
MF Global is almost a “forgotten” topic, at least for the ones that were not affected by the stupidity of the organization. We will most probably never hear about what actually happened. What seems to have happened though, is the fact MF Global were involved in creative planning when it comes to capital requirements. From NYT.
Under pressure from regulators last summer to increase its capital cushion, MF Global moved some of its risky European debt holdings to an unregulated entity in an effort to avoid having to raise extra money, according to a new report. The revelation raises new questions about MF Global’s actions in its last months — in particular, how it responded to regulators. The brokerage firm had previously disclosed that it had met the capital requirements, but never mentioned that it had transferred some bonds rather than raising additional money. The shift was detailed in a report by Louis J. Freeh, the trustee overseeing the bankruptcy of MF Global. The report is separate from the one issued Monday by James W. Giddens, the court-appointed trustee charged with recovering money for MF Global’s customers.
“This strategy allowed the MF Global Group to transfer the economic benefits and risks,” thus reducing the “regulatory capital requirements,” the report by Mr. Freeh said.
Draghi Day
All eyes on Draghi today. Let’s see if the ECB is up for some prevannouncements. From Bloomberg.
The Group of Seven nations yesterday agreed to coordinate their response to Europe’s turmoil, which has tipped at least eight of the 17 euro-area economies into recession and damped European demand for foreign goods. ECB President Mario Draghi, who said last week the monetary union is “unsustainable” in its current form, could choose to withhold further stimulus until governments do more to tackle the causes of the crisis.
“Despite the recent escalation, the ECB seems to insist on getting backing from governments before going ahead with additional measures,” said Juergen Michels, chief euro-area economist at Citigroup Inc. in London. Still, “the current combination of moderating inflation and falling sentiment data are paving the way for lower rates soon.”
“The ECB might want to wait for further corroborating data to conclude that its second-half-of-the-year recovery expectations are challenged,” said Silvio Peruzzo, an economist at Royal Bank of Scotland in London. “We push back our June rate cut to July, but we do not exclude the possibility that the ECB might pre-announce it this week, recognizing the increasing downside risk to the economy.” (Full article here.)
Is something rotten in the state of Spain?
Spain is falling further into the abyss. As we have been arguing for the past months, the bail out of Spain should be the point of focus for now, not Greece. In order to understand the Spanish economy, one must understand the Spanish mentality, and this can’t be derived from financial researcher and their excel sheets. The Spanish bubble has burst, but still the country lives in great denial. This is the single most important factor prolonging the crisis. Meanwhile, the corruption is reaching new dimension, where the “clean” corruption of stealing money has evolved into a situation where the law is twisted. One of the better pieces on the great denial of the imploding Spanish economy, by El Pais.
Four years into the ever-darkening tunnel of recession, growing numbers of Spaniards are losing whatever faith they may have had in their political parties and the country’s institutions. A new survey by pollsters Metroscopia shows that for 90 percent of people, the economic crisis is far and away their most pressing concern; the same percentage also believe that they have been abandoned by politicians of all stripes, accusing them of acting out of self-interest. In just seven months, since October 2011 to May, the number of people who believe that the current political system, with all its faults, is the best that the country has known has fallen from 72 percent to 56 percent.
Multi-billion-euro bailouts to the banks who caused the mess we’re in, along with myriad recent corruption cases and an ever-worsening unemployment rate, have robbed the country’s politicians of what little credibility they may have enjoyed until the crisis kicked in in 2008, since when unemployment has risen to one in four of the workforce, and millions of families have seen their living standards fall sharply, and tens of thousands more have been made homeless. According to the International Monetary Fund, Spain is living through a lost decade, and will not recover the GDP levels of 2008 until 2018. Who is to blame, if not our politicians?
Schadenfreude Is a German Word
Guest post by Peter Tchir of TF Market Advisors.
The market is relatively stable overnight and this morning. Yesterday traded in fits and starts with brief moments of concern that Friday’s sell-off would continue and brief moments of hope that Europe was going to do something to fix the situation in Europe. Trading was on light volume and liquidity seemed low as gaps of 5 pts on the S&P 500 seemed the norm.
With the U.K. shut for a second day due to the Queen’s diamond jubilee, there isn’t much of a read on credit markets in Europe. Spanish and Italian 10 year bond yields are better for the fifth day in a row in the case of Spain. 5 year yields are more mixed and CDS, without London, is effectively shut. Here in the U.S. with futures hovering around fair value the credit indices are stable with IG18 1 wider and nearing the 130 level, but HY18 finally outperforming and actually up an 1/8. HY managed to squeak out a small win yesterday in ETF land with HYG and JNK both up, and the EMBI index had some real strength. This is in spite of continued outflows from the funds, though with the ETF’s now trading at less than a 1% discount we may see any arb driven activity slow.
Is the German Pot Calling the PIIGS Kettle Black?
We seem to get the daily barrage of messages and soundbites out of Germany demanding that countries stick to existing plans and that “austerity” is the only way forward. Germany continues to love to point the finger at the other countries and accuse them of borrowing too much and that these countries need to suck it up and pay what they owe. For now we will ignore the fact that Germany itself was one of the first countries to break the Maastricht Treaty. What Germany seems to be forgetting is that they jeopardized their own credit quality. With bunds at record lows, this may not be obvious, but for the past 2 years, Germany has been throwing around guarantees and commitments like they meant nothing.
Gold-what now?
When it comes to gold and big moves, just like we had on Friday, it is wise checking what Jessie has to say about it. By Jessie.
After the spectacular rally of last Friday it is natural for gold to pause and consolidate here.
However, I wanted to make sure you could see the position of the gold price with regard to the intermediate trend.
This is the key resistance which I referred to last week, clearly visible in the chart below.
The hedge funds were leaning very hard on the short side as we had shown in some of the indicators, and as several others had shown in the market structure through the Commitments of Traders Reports. And the bears had ‘gotten smoked’ by the commercials who hit them with a stiff short squeeze last week. As Ted Butler remarked, ‘manipulation goes both ways.’ Yes it does, but not in this case, because Ted does not understand even yet it appears the basic underlying reality of the long term gold market, perhaps because he is so focused on silver.
I think that the downward pressure, or bearish manipulation if you will, was greatly exaggerated by the trading desks because of the key market dates including option expiration. The ferocity of the rally was due to that pressure being relieved and turned back. It perhaps then could be better described as ‘the end to the manipulation’ than an active manipulation itself.
Chart of the Week: SPX Andrews Pitchfork
Guest post by Vix and more.
With phrases like “inflection point” and “fiscal cliff” ricocheting around in their heads over the weekend, investors had quite a few extreme scenarios in mind for equities today, but for the most part, hovering around the unchanged line was not considered a likely outcome. Yet, 1 ½ hours into today’s session, stocks are essentially flat.
I mention all this because if one looks at a monthly Andrews Pitchfork chart for the last two decades, the moves in stocks over the last 2 ½ years or so look remarkably unremarkable, with stocks hugging the middle prong of the pitchfork, which currently points at a trend line “fair value” for the SPX of about 1265.
Part of the reason I am posting the chart below is that it shows a surprising degree of moderation and mean reversion in recent stock moves. The other reason I have attempted to shoehorn Andrews Pitchforks into the discussion is that the last two times I posted about these charts, I have received very strong reader feedback that suggests those who are seeing these charts for the first time are attracted to the visual simplicity and underlying logic of these charts. Going forward, this Andrews Pitchfork chart will provide some real value if it can help to define a channel and mean reversion target for stocks. With all the macroeconomic uncertainty out there, it would be nice if something in the technical toolbox can provide investors with some meaningful context that incorporates elements of both volatility and direction.
The Face of Corporatist Hypocrisy
Guest post by Azizonomics.
From Bloomberg:
“Retirement ages will have to move to 70, 80 years old,” former AIG CEO Robert Benmosche, who turned 68 last week, said during a weekend interview at his seaside villa in Dubrovnik, Croatia. “That would make pensions, medical services more affordable. They will keep people working longer and will take that burden off of the youth.”
Now, as a guy who is living in a taxpayer-funded villa after his bank-insurance-derivatives-hedge fund-ponzi company blew up, we know Benmosche is a hypocrite. In my view, management should be held personally liable a long time before taxpayers. That’s right, I believe in personal responsibility and that means no hiding behind limited liability and bailouts, no matter how “systemically important” you claim to be.
But let’s set aside disgust at government for first setting up this scenario via Gramm-Leach-Bliley, and then in 2008 throwing money at hypocritical grifters like Benmosche.
Is he wrong about social security and medical services?
Spending costs money. You can spend as much as you like so long as you have the revenues to do so. But the US government is failing to fund its current spending, let alone the $61.6 trillion (that’s a low-end estimate — the high end estimate is $127.5 trillion or 737% of GDP) of future liabilities for social security that the US government is mandated by law to spend.
Overvaluation Declines
With the equity markets sharply off over the past weeks, let’s review some of the “fundamental” of this market. Overvaluation has declined. By Doug Short.
Here is a summary of the four market valuation indicators I updated at the beginning of the month.
| ● The Crestmont Research P/E Ratio (more)
● The cyclical P/E ratio using the trailing ● The Q Ratio, which is the total price of the ● The relationship of the S&P Composite to |
To facilitate comparisons, I’ve adjusted the two P/E ratios and Q Ratio to their arithmetic means and the inflation-adjusted S&P Composite to its exponential regression. Thus the percentages on the vertical axis show the over/undervaluation as a percent above mean value, which I’m using as a surrogate for fair value. Based on the latest S&P 500 monthly data, the market is overvalued somewhere in the range of 23% to 43%, depending on the indicator. This is a reduction from the previous month’s 33% to 49% range.
I’ve plotted the S&P regression data as an area chart type rather than a line to make the comparisons a bit easier to read. It also reinforces the difference between the line charts — which are simple ratios — and the regression series, which measures the distance from an exponential regression on a log chart.
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