Yesterday, the equity markets sold off over 2% while the US$ and GOLD moved sharply higher. That’s right, you read correctly, Gold and the US$ moved up together. This action comes as no surprise to the partners of RCM. Over the last year or so, I have explained to anyone willing to listen that the real move higher in Gold prices will occur in spite of or along with an initial move higher in the US$.

One reason the US$ initially moves higher with Gold can be accredited to the carry trade unwind which artificially drives funds back into US$ investments. As an example simply look at the strength of US Treasuries yesterday. As risk is unwound money moves into the relative safely of US Treasuries. I write ‘relative safety’ because as currencies around the world continue to devalue owning US Treasuries will not protect buying power. The only true safe haven in a world intent on currency debasement will be the precious metal Gold and Silver.

I will allow Briefing.com to supply the summary of yesterday’s trading. As you will see they have done an exemplary job…

WRAPX End of Day Summary: Stocks Drop Sharply in High Volume Trade

A high-volume selling effort in response to downgrades on the sovereign debt of Greece and Portugal sent stocks to their worst percentage loss in more than two months, but drove the dollar to its best gain in four months… Early trade was rather lackluster as widespread weakness among overseas markets weighed on mood of morning participants… Data didn’t do anything to improve the mood either. The S&P/CaseShiller 20-City Composite made its first increase since 2006 with a 0.6% year-over-year increase, but that was still weaker than the 1.3% annual increase that had been expected… Consumer confidence climbed in April as the Conference Board’s Consumer Confidence Index came in at 57.9, which was not only higher than the 53.5 that had been expected, but was the best reading since August 2008…

Weakness quickly worsened when it was learned that credit analysts at Standard & Poor’s downgraded Greece’s debt to junk and cut Portugal’s debt two notches to A-. Subsequent selling pressure sent the Dow down roughly 150 points in just 30 minutes. It even pushed through its 20-day moving average for the first time since February. It was never able to recover and, as a result, finished near its session low…

The wave of selling sent volatility sharply higher. In fact, the Volatility Index made its way up more than 30% to its highest level since February…

Many market participants fled to the dollar for safety. That gave the greenback a 1.3% gain against a basket of foreign currencies. The euro was especially weak as it fell to 1.3179 against the buck. That puts it on par with its one-year low against the dollar…

Tags: Bookmark and Share Tags: case-shiller, equity markets, gold, Greece, Portugal, precious metals, silver, sovereign debt, US Treasury, US$

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Greek funding update: Deal complete, interest acceptable, funding crisis averted for now….

New Greek €5 Billion 10 Year Bond Prices At 300 Over Midswaps, 326 bps Over 2020 Bund, Comes With 6.25% Coupon 

        Greek debt chief says bids for 10-year bond at EUR14 bln – DJ

DJ reports the Greek government’s offering of 10-year bonds has attracted EUR14 billion in bids, and will close soon, the head of the country’s debt management agency said. In the wake of a new package of austerity measures announced Wednesday, the government earlier launched an offering of 10-year bonds through a group of lead managers that comprises Barclays Capital, HSBC Holdings, National Bank of Greece, Nomura and Piraeus Bank. “The bond offering is going very well, beyond expectations,” said Petros Christodoulou. The government aims to raise EUR5 billion through the offering, but it appears to be heavily oversubscribed. After launch, Greece cut price guidance on the EUR5 billion, 300 basis points over mid-swaps from 310 basis points… “The bidding so far shows that confidence has returned to the Greek bond market,” a senior government official said. “It is a very good development. Everyone is breathing easier now.”

Guest post from Bill H.. His take on the CDS market is dead on and thought provoking, enjoy…

Credit default swap lunacy!

Dubai, Greece and the rest of the PIIGS, now Britain and next the U.S.. Speculators are pushing currencies and sovereign bonds and yields higher and lower almost at will using the CDS (credit default swaps) market. These rocket scientists hedge and or speculate (even attack) currencies with these CDS products and go to sleep at night with a clear conscience. They sleep tight each night not caring what destruction they have caused real people and the real economy and take mistaken solace that if say Greece were to fail “they are hedged”.

I am going to tell you that NO ONE with any CDS product is hedged against anything! First you must understand that if sovereigns begin to default, there will be no end until the last, biggest and most egregious financial entity falls (the U.S. Treasury). These CDS products look good on the books but who can afford to lose and make the winners whole? What currency do you get paid in if you win? My point here is the “counter party risk”. The only way a CDS product could be secure and iron clad is if it were written by a Gold depository and payable in Gold which has been authenticated, assayed and audited as to purity and it actually being there for payment.

We hear that CDS spreads widen for this country or that one. We have even heard this about the U.S. from time to time. But think about how stupid it would be to “insure” against a U.S. default with ANY paper product issued by ANY issuer. When the U.S. finally goes whether it be through default or hyperinflation, the Dollar will ultimately “go away”. So what if you were right? Are you getting paid in Dollars that became worthless? Isn’t this what you were insuring against in the first place? So you win but you receive bazillions of pieces of the very same paper you were insuring against and thus YOU LOSE?

Oh I see…you insured against a U.S. default and will get paid in Euros. This makes all kinds of sense since a U.S. default certainly won’t submarine Europe. This logic works forwards, backwards or in either direction! What I am saying here is that once ANY sovereign default occurs, IT”S OVER! EVERYTHING paper goes boom and in a puff of smoke so does ALL the “supposed” value. EVERYTHING paper blows away and ONLY assets that you can touch, feel and actually USE (manufacturing, farmland, mining) will have or retain value!

THE only true hedge against ANY sovereign default is either Gold or Silver, period. Gold and Silver are real money and will accrue ALL of the “printed” monies’ value over the years. This is a difficult concept to understand but all the fiats that have ever been printed in the past and present really had no value other than “confidence” value. Each Dollar, Pound, Yen, Euro etc. that has come into existence will “spill” its value into the metals upon its demise. I can’t believe that no one has yet (other than Jim Sinclair) publicly explained the stupidity employed in the “CDS protection” scheme.

Credit default swaps are not protection, they are nuclear land mines scattered across the land that will go off in succession after the first one is tripped. OR as Mr. Sinclair says, they will print to oblivion and wipe out all paper values through hyperinflation. Either way if you have wealth tied up in metal or mining shares, you will win in the end. Have you ever wondered why there is no such animal as a credit default swap on physical Gold? Could this be because Gold cannot default? Taking a leap forward, when everything else is defaulting (including and especially CDS products), doesn’t it make sense that fear capital will seek that that cannot default? Now that’s simple logic! Regards, Bill H.

Tags: CDS, credit default swap, eur, gold, Greece, greek, PIIGS, sovereign debt, US Treasury

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The following story represents perhaps the largest obstacle facing equity market integrity today.  The previous statement is not hyperbole. The collapse of equity prices in 2008 was presaged by a python-like constriction of credit. If the private sector cannot access credit then business grinds to a halt and as we saw in 2008 economic cataclysm ensues… 

Credit markets flash hottest warning signal since crisis

European credit markets are flashing the most serious warnings signs in a year as the yields on risker bonds rise sharply and a string of companies cancel share flotations, raising fears that the recovery may falter in coming months.

The Markit iTraxx Crossover index measuring yields on lower-grade debt has jumped by almost 130 basis points since mid-January to 514, while the main index of investment grade bonds has jumped by a third to 93. “This is the biggest move since the financial crisis in early 2009, said Gavan Nolan, Markit’s credit analyst.

The rating agency Moody’s said market ructions have led to a “material” rise in borrowing costs over the last month, prompting the cancellation of debt issues by the Dutch energy group New World Resources, Italy’s Snai betting group, and the UK’s Travelport. Sixteen companies wordwide have pulled debt issues worth a $7.3bn (£4.66bn) since mid-January, including Canada’s Bombardier.

Read More…

…Will the Sovereign debt issues of Europe migrate across the pond?  The following story suggests the answer may be yes. The lack of foreign demand for US debt will have the effect of increasing rates. However, since an increase in rates would be the death knell of our supposed economic recovery we would expect the Fed to attempt to fill any gap foreigners create. These actions would be, of course, US$ bearish. So while the talk of an end to Q.E. intensifies reality of the situation suggests otherwise….  

Foreign demand falls for Treasuries – Financial Times 

Financial Times reports foreign demand for US Treasury securities fell by a record amount in December as China purged some of its holdings of government debt, the US Treasury department said on Tuesday. China sold $34.2 bln in US Treasury securities during the month, the US Treasury said on Tuesday, leaving Japan as the biggest holder of US government debt with $768.8 bln. China overtook Japan as the largest holder in September 2008. The shift in demand comes as countries retreat from the “flight to safety” strategy they embarked on upon during the worst of the global economic crisis and could mean the US will have to pay more to service its debt interest. For China, the shedding of US debt marks a reversal that it signalled last year when it said it would begin to reduce some of its holdings.

“Credit is a system whereby a person
who cannot pay gets another person
who cannot pay to guarantee that he can pay …”
Charles Dickens (1812-1870)

Tags: China, Credit, credit markets, equity markets, Q.E., sovereign debt, US Treasury, US$

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Turn off the TV and forget about the newspaper. If you want to understand the equity market gyrations of the last couple of weeks simply log on to an internet service like Briefing.com and watch for updates to the sovereign debt crisis.   Today’s trading is a perfect example of this new paradigm.  The Greek tragedy has turned into a farce as constant rumors have succeeded in whipping the markets into a frenzy.

Markets opened today’s trading on a firmer note because…

Greek bailout speculation lifts euro – Reuters

Reuters reports euro rose on Tuesday on speculation that European Union nations could bail out errant member Greece, while global stocks were flat and emerging market shares climbed. Expectations about a rescue for Greece followed news that European Central Bank President Jean-Claude Trichet was leaving a meeting of central bankers in Sydney early to attend a European Union leaders’ summit. EU leaders will hold a special summit on the economy on Thursday in Brussels amid increasing worries that Greece and other so-called peripheral euro zone economies cannot handle their debts and deficits. Spreads between German 10-year bonds and Portuguese and Spanish equivalents tightened. The spread with Greek debt was steady, but wide at 365 basis points.

…Then things went into high gear when this story hit the wire:

Germany Preparing Aid Package To Greece, FTD Says — Bloomberg

…The above news hit at 11:48, but wait, at 12:41 the following news splashed the wire and markets swooned:

German govt spokesman says reports about decision on aid for Greece are “unfounded” – Reuters

…But cooler heads prevailed and by 2:43 the market regained its footing as…

Germany considering loan guarantees for Greece, other troubled Euro partners, source says – WSJ

My purpose for the play by play of today’s equity action is to illustrate the lunacy of attempting to build an investment strategy based on short-term market swings.

After a couple of weeks of a strong US$ brought on by the Greek situation, I am inundated with comments from would-be experts that the rally in Gold is over.  These same experts, who are convinced they can spot the top in Gold prices, have been unable to spot the best bull market of the last decade. They have not owned Gold during its nearly 300% increase over the last 10 years, but somehow, through a haze of delusional arrogance, they are sure prices have peaked.  

When will Gold prices peak? Don’t know for sure. Trying to pick a price is a fool’s errand.  But I will tell you this: When Gold is, say, $3000/oz and I’m inundated with comments that prices are headed for $6000/oz I’ll be selling.

The following comments exemplify the actual long term trends we believe require scrutiny during the building of an investment strategy.  Yes, sovereign debt woes are a problem, but so are the debt woes of US states.  Running from the Euro into the US$ appears short-sighted and, to us, resembles the hapless effort of running from the deck into the galley of the Titanic. The only real safety (in a world where governments are playing the dangerous game of competitive devaluation and stimulus leapfrog) is the safety of Gold. Please hold onto the bar….    

In a nutshell, toxic assets have basically been swept under the rug in the hopes that we will outgrow the problem. Leverage ratios across every level of society are still reaching unprecedented levels as the public sector sacrifices the sanctity of its balance sheet in its quest to stabilize the dubious financial position of the household and banking sectors in many parts of the world.

Whatever bad assets have been resolved have almost entirely been placed on the books of governments and central banks, which now have their own particular set of risks, as we have witnessed very recently in places like Dubai, Mexico, and Greece, not to mention at the state and local government level in the United States. We simply have not seen a reduction in the percentage of properties with mortgages that are “under water”, hence the FDIC has identified 7% of banking sector assets ($850 billion) that are in “trouble”, so how can it possibly be that the financial system is anywhere close to some stable equilibrium? – David Rosenberg

Tags: EU, euro, FDIC, gold, Greece, investment strategy, sovereign debt, US$

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The equity and commodity markets get rocked as Sovereign debt woes resurface.

The burning question: Will the dramatic widening of credit spreads in Sovereign debt, beginning to resemble the CDS collapse of 2008 in the private sector, lead to a revisit of a 2008 type credit crisis and all the fallout associated with it?…

Greece, Portugal woes intensify – WSJ The Wall Street Journal reports the cost of insuring the debt of euro-zone members with large budget deficits against default rose Thursday, dashing hopes that the European Commission’s qualified endorsement of Greece’s budget plan would calm investor fears. Greece, Portugal and Spain were in focus, with their five-year sovereign credit default spreads moving sharply wider. Greece’s five-year sovereign credit default swap spreads were recently at 4.14%, compared with Wednesday’s closing level of 3.97%, according to to CMA DataVision. Portugal’s five-year sovereign CDS spreads were at 2.09 basis points—their widest level ever—after closing Wednesday at 1.96%. Spain’s sovereign CDS spreads widened to 0.12 percentage point to 1.64%. The moves followed news Wednesday that the European Commission had put Greece under more pressure to cut its deficit; that the Portuguese government sold only EUR 300 million of treasury bills at an auction, compared with an indicative offer of EUR 500 millon; and that the Spanish government had raised its budget deficit forecasts for 2010 through 2012. Spanish and Portuguese stock markets fell sharply for the second consecutive day, with banks leading decliners on sovereign debt worries.

…The jury is still out on the above question but market participants are voting today.  As usual, voting like this is detrimental to long term investment decision making.  I would suggest all take a step back relax and reassess after the smoke of today’s battlefield clears. In the meantime, tomorrow’s employment report may shed some light on the absurdity or validity of  today’s flight into the US$. I stress the word, may, because government released employment numbers are notoriously manipulated.  For those who wish to debate this manipulation issue and wish to cast aspersions about conspiracy theorists please view the following story…

Explaining The Government’s 1.8 Million Job Overestimation In Pictures

Last October the BLS announced it would revise historical payrolls lower by 824,000 on February 5 (this Friday’s NFP release). While this number will not impact the actual January NFP report (a loss of nearly one million jobs in a month would probably even take out the persistent SPY algo that has been hugging the bid for the past 10 months), it will be prorated across all months in the 2008-2009 reporting period. The reason for this adjustment has to do with a huge glitch in the birth-death model, which is exactly the same problem that the rating agencies faced when housing prices plummeted: the birth/death model assumes, in the long-run, jobs are created, not destroyed. Any period of excess volatility in the stock market therefore translates into major prior downward revisions to already disclosed payrolls. And while we know what the current revision will be, the scarier prospect is that the next historical adjustment, due out in early 2011, will be even larger, at least 990,000. This means that the government has overrepresented running payroll data by over 1.8 million jobs over the past 20 months. Read More…

Today, world equity markets suffer, the “risk” trade is reduced and scared investors run into treasuries and the US$.  Meanwhile, the underlying fundamentals of the US$ continue to deteriorate….

Zerohedge: It’s Official: Congress Passes Debt Ceiling 231-195; All Republicans, 20 Democrats Vote Against Raise.  Congress Democrats have just signed off on the US hitting 100% debt/GDP.  About 140% if one adds GSE liabilities which also should be on the budget.

Initial Claims 480K vs 455K consensus, prior revised to 472K from 470K

Continuing Claims rise to 4.602 mln from 4.600 mln

NY Fed’s Dudley says “nothing is on automatic pilot” when asked about ending MBS purchases in March, according to AP – Reuters (The expected end of Q.E. in March has been a major factor in the strong US$ theory since Dec.. Now we see, at the 1st sign of trouble, S&P500 down 3%+ today, the Fed begins to backtrack – surprise, surprise.)

Tags: CDS, commodities, credit markets, credit spreads, employment report, equity markets, Fed, Greece, initial jobless claims, sovereign debt

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