August: the calm before the fierce storms created by FX moves

WHO WOULD HAVE THUNK IT?
The S&P in July rose over 7%. Leaving many a hedge fund dumbfounded. As Gary Kaminsky suggested, they will be hard pressed to cover the reminder of the year and beat the indices. Expect a few stock names to go stratospheric but most bets will be on commodity speculation.
We are of the view that Oil prices are being propped up by a concerted effort of producers to keep the futures prices up. Anyways, we have lost all faith in getting a real sense of prices and their value. After reading Patel's book "Value of nothing" you soon realize that prices are set nowhere near the costs of owning anything let alone the cost to society and the planet as a whole. Prices for goods are set by a totally archaic and  nonsensical basis of supply and demand. Through advertising, People are made to BUY BUY BUY while not really thinking about their actions and consequences.. In India a new car can cost less than $5K where you are hard pressed to find the same in Canada for less than $10K. Why?
Economic theory followed today was written when less than 1 Billion people lived on earth. With more than 6 billion it is totally inadequate to deal with the world's mounting problems.
Too bad the animals in the Gulf of Mexico don't get to vote on the price to charge for gasoline after the latest catastrophe.
According to some studies, some other 300 deep sea SHUT-IN or DISCONTINUED wells may also erupt due to corrosion... If it takes more than 100 days to fix a new well,  we wonder how long it takes to fix an old one!
Well enough scary talk for a day! Let's get back to supply and demand!

DEFLATION AND MASSIVE GVMT  DEBT SCENARIO is INTACT IN US

Next week the Fed meets. To prepare the terrain, US Treasury secretary Timothy F. Geithner (what does the F stand for? )wrote an Op ed yesterday in the New York Times vaunting his and Fed Chairman Bernanke calls in the past two years saying, the Administration's policies saved 8.5MM jobs vs. doing nothing. Interesting assumption... Bernanke is hinting that things in the near future will be done "à la Japonaise" i.e nothing. So if 2008, the FED was the BUYER of last resort, today the FED has delivered as they ARE, on our behalf,  the HOLDER of last resort. This is for many years to come or until some sweet deal is negotiated in the backrooms. Good luck with that boys! Freddie, Fannie and the other in-breds' portfolios will continue to be held close to taxpayers balance sheets. This is a typical case of Prozac induced deflation courtesy of inane government policy. We are also curious to see how the FED plans to go after all those MBS issuers claiming fraud.

So deflation will continue unabated in the US and for good measure the Fed will continue to hold Treasuries as it has no choice but to maintain appearances in an INCEPTION type state of disbelief while using QE  as the drug of choice. Expect 10yr Treasuries to trend towards an idiotic 2%. The pressure on that cauldron will be unimaginable when it blows, and blow it will, but we are not standing brave enough to face off both the stealthy Fed and the US Treasury. Best leave that to the young wolves and the old foxes!

According to Realty Trac , the top five  US cities for foreclosures were:

Top Foreclosure Cities

1. Las Vegas, NV
2. Miami, FL
3. Chicago, IL
4. Orlando, FL
5. Phoenix, AZ

That CHICAGO is third is both a surprise and a worry to us!

 As this chart shows all gains of the last 7 years were washed away. Would have been better to rent and spend the money on vacations, some collectibles and retraining...

Gold has proven a poor insurance policy as of late and we still think its prospects are limited.

In conclusion, the US government, as a dying republic, funds a $1.3Tb deficit with very little hope of getting out of the tomb dug by the voting public. Nice Job people!

So how is it out there in the rest of the world? EURO / USD CHART (last 120 days)

BOOM for those who WANT TO WORK... EURO has RECOVERED SOMEWHAT
Freight rates in Asia are up 50% over last October and the ships that comprise the Baltic Index are steaming ahead now showing a 2% idle  time vs. 12% last year.

Liner board prices have gone up and the UPSes of the world show nice numbers.

It has been our contention that Germany is enjoying a huge export boom and flooding the markets with its goods and machinery. Teutonic power at work. Our local dealer announces, with glee, further price decreases for 2011 Mercedes. BRING them on boys!  We all need more gas guzzling toys!

WHEAT
With The Ukraine and Russia disparaging each other over wheat crops estimates, fall prices have seen huge speculation to the upside. I would hate to be an industrial baker right now and having to decide the future of those prices. It's a bit like airlines locking jet fuels at $67 or $140. There are going to winners and whiners.
Best for the bakers to recite the Lord's prayer. It can't hurt!

In the Meantime, we continue to hold a firm amount of US bonds, a healthy portion of Euros and expect Spain to be center stage this fall with its very precarious economy.

CHEAP OLIVE OIL COMING!

Good trading to you

DCW

S&P 803 next target... short GOLD to below $800

We've seen a great rally since March 9th. "No doubt about it" would say Mr. Mark Haines.
If enough people want the market to go up... IT WILL. But once that initial move is done, momentum, above moving averages and RESISTANCE becomes counter forces to exuberance.

The somber reality has to be brought back with anecdotal evidence:
- In March 50,000 houses in California went into default.
- Munis refinancing market is sold to an unsuspecting market (pension liabilities are unfunded). There is no pro-interest in the sector ( they know what is coming)
- Some New York commercial properties are changing hands for debt (or 30 cents on the dollar)
In the U.S. market, commercial real estate is worth about $6.5 trillion, and is financed by an estimated $3.1 trillion in debt.
And that debt is going bad at an escalating rate. In March, the delinquency rate on about $724 billion in securitized debt reached 1.8%. As percentages go, that’s a pretty small number. In fact, it’s less than a quarter of the housing market’s record-breaking mortgage-delinquency rate of 7.88% for the fourth quarter, according to the Mortgage Banker’s Association.
- IF Talbots 'latest quarterly report is any indication that retailers with a marginal offering are about to bite the dust, Mall owners will be breaking into negative cash flow soon enough...

If you think banks can make a living on a spread business, think again. Q1 numbers at GS are showing some profits in business lines that aren't likely to be repeated in following quarters. Their competitors missed a golden opportunity to use the March rally to come clean with portions of their books. Waiting or delaying consolidation reporting of mergers (WFC) is NOT going to work for very long.

With the lack of transparency from the FED's decision NOT to report results of the ongoing stress tests, we fear that investors will shy away from committing new funds to this market until another watershed occurs.

Putting this all together suggests our favorite TURBO number S&P 803 is going to be tested fueling a strong move to the down side after that.

NAZ? NO
While the NAZ had a nice rebound, INTC's numbers don't seem to justify the interest in Semis and the rest of the lot doesn't show margin expansion.

OIL? NO
Oil is bound range $44-$54 and nothing seems to offer any viable scenario to see this change any time soon. Production cuts are meeting demand shortfalls step for step. Intense pressure on margins will constrain Capex on all major players well into 2010.

GOLD? NO
While Mr. Bernanke can be congratulated for offering free money all along the yield curve and avoiding the latest attempt at a market implosion from succeeding, he has won BUT a reprieve. Price deflation abounds as all measures of inflation seem to be subdued: Housing affordability, food and energy costs seem well contained and with a supply of 5MM unsold cars on lots... inflation is not coming back for a while. Holding gold therefore is not a productive asset at this point. People are already getting no return on their CDs and their bonds. HELL if pensioners are just going to sit on physical gold to further reduce their monthly income! Best be short treasuries to gain same effect...

SHORT TERM TRADING? be ready for tiny profits
Market pros are playing this market on a day to day basis bagging small profits and with the looming GM bankruptcy, another period of intense angst is about to test supports levels.

SHORT TREASURIES: HOW MUCH?
Bernanke and Geithner riding the Obama wave of popularity. Why fight it? WE are using a measure of $10 of short treasuries ETFs (TBT & PST) for any $1 we commit to short term trading, so when Armageddon hits with the inevitable implosion of the current ludicrous bond yields on treasuries, we will be protected when the market really takes another hit.

INDIA ETF? NO
Unfortunately that country doesn't have the infrastructure or resources to grow its own economy. It still needs foreign investments to fuel job creation> we think it will be a number of years before investments returns in search of what was once a source of English speaking cheap labor.


COPPER? YES
For some odd reason that metal is trading over a five month rally.

BRAZIL? YES
Best bounce back, good currency, great exporter

SELL USD, BUY LOONIE? YES
This has proven a great trade and has another 10 cents in it


Conclusion:

SHORTS:
US MM banks
US Commercial lenders
US Treasuries (7yrs-20yrs)
NAZ
US Oil majors
INDIA ETF

LONGS:
Non-ferrous metal plays
Brazil ETF
Loonie


Good trading to you!

DCW

WHy Gold is looking better every day

Dear friends and readers,

My dear friend JP has offered a sensational piece which shows some insight on why you need all the gold you can get your hands on. A good friend said that Wal-MArt was running out of personal safes as Americans are hoarding the metal. I deplore the Chinese's thinking that they need to keep a couple of trillion fiat dollars to keep their economy going. BIG MISTAKE! So without any more gibberish on my part , please read on the dire predictions of our esteemed colleague JP. ( name witheld by request)

I Took the $7.7 trillion of bailouts. donations or guarantees and with the help of my trusted abacus, calculated that the US currency was backed with Gold sitting at Fort Knox and West Point (if there actually is any) but only if gold traded at $35,000 an ounce.
--
At current prices concensus seems to be China's Gold hoard is worth approximately $3billion. In total reserves of $1.9 trillion at last official count. It would seem China is seriously - if not imprudently - underweight Gold.
---
The only reason the USD isn't trading at new lows it is because China and Japan still continue to hold on to it. According to IMF (http://www.imf.org/external/np/sta/ir/802P816.pdf)
----
Obama - with Geitner appointment - does not seem to understand that he needs to deal with the CDS (Credit Default Swap) ponzi scheme and exterminate it. An honest solution would be to allow companies to go into bancruptcy, payoff the CDS at face value and outlaw speculators and be made thankful they are getting out alive. Obama appointing the likes of Geithner is a signal of more of the same. President-elect Obama has choice:

a) adopt financial sanity, safety and soundness by deflating the remaining (and biggest) speculative bubble by letting free-market bancruptcy mechanism do its function.

b) elongate and deepen the economic stagnation (à la Japan method) wading pool for the next 5-10 years by continuing the Paulson / Geithner method of hiding true value of assets and nationalize the banking system and allow the CDS to persist waiting for the inevitable day of reckoning.
-----
US Code
§ 3910. Audit authority of Government Accountability Office
http://www2.law.cornell.edu/uscode/12/usc_sec_12_00003910----000-.html

is forbidden from:

(3) Audits of the Federal Reserve Board and Federal Reserve banks may not include—

(A) transactions for, or with, a foreign central bank, government of a foreign country, or nonprivate international financing organization;

(B) deliberations, decisions, or actions on monetary policy matters, including discount window operations, reserves of member banks, securities credit, interest on deposits, or open market operations;

(C) transactions made under the direction of the Federal Open Market Committee; or

(D) a part of a discussion or communication among or between members of the Board of Governors of the Federal Reserve System and officers and employees of the Federal Reserve System related to subparagraphs (A) through (C) of this paragraph.

JP

I bought Physical gold today

I keep reading all these articles about governments printing billions of fiat currencies in the hope of preventing a depression. $700BB, Tarp, $600BB China, ECD , France, Britain. The list includes all the usual lemmings. I believe that all this printing will create a horrible inflation spiral in 2009. It's simply because governments are reading terrible accounts of previous economic cycles.
Just as doctors killed many more patients a hundred years ago because of lack of good diagnostic equipment, today's economic advisers are giving the press and government officials, a terrible diagnosis of what is ailing global economies and subsequent terrible economic stimulus.

FIRST of all STOP calling it ALARMING, AILING, DIRE!

We are simply deleveraging investment banks and hedge fund madness. THAT's a good thing!
Printing money and giving it right back to these people. THAT's a bad thing!

DE LEVERAGING CONTINUES
Banks balance sheets have to clean up and because they can't leverage 30:1 , it's pretty normal that their ROE will fall by an order of magnitude. Citicorp loses $100BB YTD in market cap. That's normal. They grew by dumb acquisitions, bad management and bad oversight from a purely incompetent Board of directors. Let the chips fall... Citicorp fires 53,000 employees and the stock still goes down. Poor Pandit, he has one heck of a mess on his hands. Stock going to 5 and hopefully no lower...
Goldman Sachs, now a federally regulated bank cuts 10% STAFF and bonuses to guys who racked in over $500MM a year ago in bonus...

Printing Money is NOT a long term solution
Printing money will not convince baby boomers to either save, invest or spend. So why are governments hell bent on repeating the mistakes of Germany of the late 1920s?
If you read history, the Germans had to pay exorbitant war reparations bills after they lsot WWI and after 10 years of crippling payments they just got fed up doing it for real so they started printing money. By 1933, you needed a barrel full of Deutsche marks to buy a loaf of bread. You know what happened next.


I bought my first ten ounces of a planned 400 ounces buy as a goal today. The local dealer was out of 10oz bars so I had to pay more for 1 ounce coins. For $60, the stuff gets delivered to the house. Don't get any ideas. Stuff is going straight to my bank safety deposit box. ( That gives me an idea... if banks are not to be trusted, should a non deposit business be started to offer vault services?) My local gold Dealer, http://www.kitco.com , says that since gold fell $300 , his business had the best month EVER in 20 years! It seems smart people have been converting their USD into bullion? They are not leasing or buying into pooled funds. Leasing gold from institutions that will never deliver is not wise. Pooled funds can always have a run and default so your are at risk. The only safe way is to hold the metal in YOUR hands. SO THEY ARE TAKING PHYSICAL DELIVERY.
With all the mining companies hard pressed to get their 2009 financing in place, I can safely say the coast is clear to 2010.
The recent pullback in gold is a tremendous buying opportunity. Remember I told you this less than a month ago. Hedge funds redeem their foreign holdings BACK to USD. That explains the drop in the British Pound, the Euro and countless currencies. The USD is a currency of last resort. Not much longer folks!

Even though, I also predicted a bad 2009 for the Euro, my call is for selling that gold at a significant profit in late 2009-2010 which will allow for nice purchase of real estate in EUROPE in 2011.

Stay tuned

DCW









Green tech is dying yet again after a two year sucker's bet.