David Rosenberg: "Despair Begets Hope"

Sunday, May 20th, 2012

Pre­sent­ing the best weekly self-contrarian seg­ment from everyone's favorite Gluskin Sheff–based skep­tic — David Rosenberg:

DESPAIR BEGETS HOPE

... Over half of the 2012 price advance has been reversed in barely over a month as the broad mar­ket drifts down to its low­est level since Feb­ru­ary 2nd. The Finan­cial Times makes the point that the 10-day rel­a­tive strength index at 29.2 is deeply into over­sold ter­ri­tory. The Cana­dian TSX index is offi­cially in bear mar­ket ter­rain, hav­ing declined 21% from its cycle high (posted in April last year) and is back to lev­els pre­vail­ing on Octo­ber 2011.

Fad­ing risk appetite is also under­scored in the credit mar­kets where BB-rated cor­po­rate spreads have widened to 450 basis points from the recent low of 420bps. Until we see some res­o­lu­tion to the lat­est round of euro area angst, one can rea­son­ably expect spreads to widen fur­ther, but we would look at this as a nice buy­ing oppor­tu­nity as the link between the prob­lems there and cor­po­rate default rates here is extremely loose. The fact that gold and other com­modi­ties are slip­ping while core gov­ern­ment bond mar­kets — gilts, bunds and Trea­suries — are ral­ly­ing strongly sug­gests that defla­tion risks are get­ting repriced into var­i­ous asset classes. Greek bonds are trad­ing at pen­nies right now and implicit prob­a­bil­i­ties in periph­eral bond mar­kets are highly dis­count­ing exits from the mon­e­tary union by year-end. Span­ish bond yields have blown through 6% (Italy get­ting closer too) and 10-year spreads off Ger­many have hit a new record high of 485bps.

This is where the LTRO has proven to have actu­ally been a dis­mal fail­ure. Domes­tic banks used the pro­gram as a carry trade to play the yield curve and are now chok­ing on losses on the sov­er­eign gov­ern­ment bonds they were enticed to buy. So thanks a lot, Mr. Draghi — ECB poli­cies are at least partly respon­si­ble for why it is that euro area bank shares have sunk all the way back to March 2009 lows. Non-domestic investors have been dump­ing the periph­eral gov­ern­ment bonds just as the Ital­ian and Span­ish banks have been load­ing up — these for­eign enti­ties, we see in the FT, have been net sell­ers of Ital­ian gov­ern­ment bonds to the tune of 200 bil­lion euros in the past nine months and 80 bil­lion of Span­ish debt over the same time frame. And guess what? They can unleash even more sup­ply dam­age because they still own roughly 800 bil­lion euros worth of com­bined bonds of both basket-case countries.

The most bizarre quote we have seen in quite a while came from a strate­gist in the FT. Get this:

We can take com­fort from the fact that while the Greek elec­torate are against aus­ter­ity, the sup­port for stay­ing within the euro­zone is even stronger".

I can replace that with this real-life comment:

We can take com­fort from the fact that while my three sons are against doing their home­work, the sup­port for get­ting a pass­ing grade is even stronger".

How utterly lame.

If the Greeks want to stay in the euro­zone, it's prob­a­bly because they know they can con­tinue to suck at the teat of the Troika. More bailouts please and on easy terms since "aus­ter­ity" is the new dirty nine-letter word globally.

The best lines actu­ally came from the FT Lex column:

"All balled-out euro­zone coun­tries will ulti­mately have to decide whether they can make the fis­cal adjust­ments and achieve eco­nomic growth more quickly in, or out­side, the euro. That is where Greece now finds itself."

Now that is a thought­ful comment.

There was another really good zinger in the Mar­kets and Invest­ing sec­tion. To wit:

"it's naïve in the extreme to think you can limit the knock-on effect. As soon as Greece leaves or defaults, con­ta­gion will pass like a can­non going off in Spain".

That was from an exec­u­tive at a U.K. bank.

Arvind Sub­ra­man­ian penned a truly bril­liant piece in the FT as well, titled Why Greece's Exit Could Become the Eurozone's Envy. In a nut­shell, Greece's chal­lenge is that it is woe­fully uncom­pet­i­tive and as such needs wages and prices to adjust sharply lower. You either do that organ­i­cally or you devalue the cur­rency — which then sharply boosts exports and fos­ters import sub­sti­tu­tion. Of course, the ini­tial impact is reces­sion­ary and defla­tion­ary, but only for one to two years, if his­tory is a guide, fol­lowed by a boom. This is exactly what hap­pened to Asia a decade ago. As Arvind con­cludes, "the ongo­ing Greek tragedy could yet turn out not too badly for the Greeks. But tragedy it might well be for the euro­zone and per­haps the Euro­pean project".

Indeed, the cost esti­mates I have seen pub­lished for the euro area would be in the neigh­bour­hood of 400 bil­lion euros — in terms of imme­di­ate direct finan­cial losses. Sec­ond round impacts are far more dif­fi­cult to assess, but would be enor­mous. While there are a myr­iad of legal com­plex­i­ties sur­round­ing a Greek depar­ture, it is not an impos­si­ble task. The big­ger issue would be how the ECB would man­age to ring-fence the banks in Por­tu­gal and Spain and pre­vent a contagion.

But let's talk about what we do know with some certainty.

The Greeks voted against the sta­tus quo. It isn't work­ing for them. An elec­tion is likely around mid-June, and the party in the lead is dead-set against the ini­tial bailout terms. The gov­ern­ment, mean­while, runs out of cash by early August when a bond pay­ment comes due and that could well be the trig­ger for default and exit. It is tough to see this process being orderly — con­fu­sion, tur­moil and volatil­ity all come to mind. But if we do get a cathar­tic event, we will be able to buy assets for our client base at excel­lent prices. There always is a sil­ver lin­ing. You just have to find it.

We also know that Angela Merkel this far is not being swayed by her party's recent elec­toral set­backs — at least that is the indi­ca­tion we are get­ting from her lat­est rhetoric.

Tags: Bond Yields, Broad Market, Bunds, Carry Trade, Credit Markets, David Rosenberg, Default Rates, Dismal Failure, Domestic Banks, Domestic Investors, Draghi, Financial Times, Gilts, Government Bond Markets, Government Bonds, Greek Bonds, Relative Strength Index, Risk Appetite, Sovereign Government, Yield Curve
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Gold: The World’s Friend for 5,000 Years

Saturday, May 19th, 2012

Gold: The World’s Friend for 5,000 Years

By Frank Holmes, CEO and Chief Invest­ment Offi­cer, U.S. Global Investors

Facebook’s highly antic­i­pated ini­tial pub­lic offer­ing today helped the com­pany raise $16 bil­lion, a record for tech IPOs. It’s refresh­ing to see investor excite­ment rally around the stock, as the U.S. needs inno­v­a­tive busi­nesses to thrive and attract cap­i­tal. How­ever, as behav­ioral finance warns, be cau­tious of a herd mentality.

Last Novem­ber, the IPO deal of the day was Groupon. On the first day of trad­ing, shares rose to a high of $31 from an ini­tial offer­ing price of $20.

By Thanks­giv­ing, the stock had fallen below the IPO price, and only a few months later, uncer­tainty popped up around the company’s account­ing meth­ods and finan­cial con­trols. The stock fell fur­ther, with the mar­ket devalu­ing Groupon by about 50 per­cent in only six months. How’s that for a group buy?

It’s inter­est­ing to note that the value of Groupon’s stock has lost more than $13 bil­lion since the peak on the first trad­ing day through April 30. For com­par­i­son, if you look at the total net assets in Lipper’s pre­cious met­als mutual fund peer cat­e­gory, assets fell $8.3 bil­lion over the same time­frame. Investors lost more than $5 bil­lion more in one tech stock alone than in all of the pre­cious met­als funds combined.

Gold—A Real­ity Check
Investors have “defriended” gold recently in favor of the dol­lar, as Greek and French vot­ers rejected aus­ter­ity mea­sures. Greeks have been respond­ing to their esca­lat­ing debt issues for a while by steadily pulling money from overnight deposits. I often say, money goes where it is best treated, and these deposits will need to find a safe haven.

It’s not only Greece the mar­ket is wor­ried about, says BCA Research. In a spe­cial report aptly named, “In Case of Emer­gency Grexit,” the firm says there’s extra pres­sure on Spain and Italy, “which immi­nently needs a large bailout of its bank­ing sys­tem.” The 10-year yields for each coun­try have reached 6 per­cent today, and while there are funds to suf­fi­ciently cover Spain, there aren’t enough funds for Italy, too, says BCA.

So if the Euro­pean Union (EU) stops the flow of bailout funds, Greece, unable to pay wages, would invoke social unrest, accord­ing to BCA.

More impor­tantly, with­out funds from the EU, Greece would default on its bonds. Look­ing at what the coun­try owes this year alone, $1 to $7.6 bil­lion is due each month, says BCA. The Euro­pean Cen­tral Bank would then most likely stop pro­vid­ing funds to Greek banks, caus­ing more indi­vid­u­als to pull money. “With deposit flight, and no injec­tions from the ECB, the banks would be bust and Greece would be hem­or­rhag­ing money,” says BCA.

It’s also impor­tant to look at the investors of Greek debt. Accord­ing to the Lon­don Evening Stan­dard ear­lier this year, French banks are the largest hold­ers of Greek gov­ern­ment bonds and private-sector debt in the euro­zone, with $47.9 bil­lion expo­sure to Greece.

In the end, I believe gov­ern­ments in Europe lack the courage to be fis­cally dis­ci­plined. Ear­lier this week, I told Aaron Task and Henry Blod­get on The Daily Ticker that when push comes to shove, Europe will likely con­tinue to print money. This should be pos­i­tive for gold.

At the Hard Assets Con­fer­ence ear­lier this week, Greg Wel­don com­pared the money print­ing sit­u­a­tion to a sink. In an inter­view he gave with The Gold Report, Greg said:

“It’s going to be very dif­fi­cult to see how economies in Europe, the U.S. and Japan can stand on their own two feet with­out the assis­tance of cen­tral banks debas­ing cur­rency through debt mon­e­ti­za­tion. I liken it to fill­ing the sink halfway up with water and pulling the plug out of the drain. Of course, the water level will recede unless you turn the faucet on and start more water pour­ing into the sink. The level of water rep­re­sents asset prices, the water flow­ing out of the faucet rep­re­sents liq­uid­ity pro­vided by global cen­tral banks and the drain rep­re­sents the real macro econ­omy, which has not been fixed.

“At the end of the sec­ond round of qual­i­ta­tive eas­ing, when the Fed shut off the faucet, the water level (asset prices) started to go down. But now the water is run­ning again—particularly with some of the mea­sures insti­tuted by the Euro­pean Cen­tral Bank, with its three-year loan pro­gram, the fed­eral liq­uid­ity swaps and the back-ended way that it's man­aged to involve the Inter­na­tional Mon­e­tary Fund.

“The prob­lem with all of this is it does noth­ing to fix the under­ly­ing prob­lem, which is too much debt. This is not sus­tain­able. Cen­tral banks turn­ing on the water faucet is good for asset prices. The real solu­tions of fis­cal aus­ter­ity, which are prob­a­bly not palat­able to most politi­cians in Europe, are the real strug­gle as we go for­ward. This prob­lem is not going to go away.”

So, dur­ing times like we’ve had recently, when the dol­lar is cho­sen over gold, I apply math. The chart below shows the 60-day per­cent­age change of the gold price and the U.S. dol­lar. Gold’s recent weak­ness has trig­gered a –2.2 sigma event in stan­dard devi­a­tion terms. Over the past 10 years, this has hap­pened less than 2 per­cent of the time. His­tor­i­cally, each time gold has touched the –2 sigma mark, the pre­cious metal has rallied.

This bounce is exactly what we saw on Thurs­day and Fri­day this week.

See more slides from my Hard Assets Invest­ment Conference.

While gold may not go up ver­ti­cally from here—as fre­quent read­ers know, the yel­low metal his­tor­i­cally has fallen in June and July—with the extra­or­di­nary events occur­ring in Europe, I believe investors will soon “friend” gold once more. As we wait for the cen­tral banks around the world to act, I encour­age investors to con­sider dollar-cost aver­ag­ing. It’s a way to stay invested, and more impor­tantly, to avoid mak­ing emo­tional invest­ment decisions.

Tags: Accounting Methods, Austerity Measures, Bailout, Behavioral Finance, Chief Investment Officer, Deal Of The Day, Debt Issues, Extra Pressure, Frank Holmes, French Voters, Herd Mentality, Initial Offering, Initial Public Offering, Investor Excitement, Ipo Price, Lipper, Net Assets, Offering Price, Precious Metals Funds, U S Global Investors
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FaceBook: The Complete Forensic Post-Mortem

Saturday, May 19th, 2012

While much has already been writ­ten on the topic of peak val­u­a­tion, social bub­bles pop­ping, and the eth­i­cal social util­ity of yesterday's his­tor­i­cally over­hyped IPO, nobody has done an analy­sis of the actual stock trad­ing dynam­ics as in-depth as the fol­low­ing com­plete foren­sic post-mortem by Nanex. Because more than any­thing, those tense 30 min­utes between the sched­uled open and the actual one (which just hap­pened to coin­cide with the Euro­pean close), showed just how reliant any form of pub­lic cap­i­tal rais­ing is on tech­nol­ogy and elec­tronic trad­ing. And to think there was a time when an IPO sim­ply allowed a com­pany to raise cash: sadly it has devolved to the point where a pub­lic offer­ing is a pol­icy state­ment in sup­port of a bro­ken cap­i­tal mar­ket, which how­ever is fully in the hands of SkyNet, as yesterday's chain of events, so very humil­i­at­ing for the Nas­daq, showed.

From a delayed open­ing, to 2 hour trade con­fir­ma­tion delays, vir­tu­ally every­one was in the dark about what was really hap­pen­ing behind the scenes! As the analy­sis below shows, what hap­pened was at times sheer chaos, where every­thing was hang­ing by a thread, because if FB had got­ten the BATS treat­ment, it was lights out for the stock mar­ket. Well, the D-Day was avoided for now, but at what cost? And how much over the green­shoe Face­Book stock over­al­lot­ment did MS have to buy to pre­vent it from tum­bling below $30 because as Reuters reminds us, "had Mor­gan Stan­ley bought all of the shares traded around $38 in the final 20 min­utes of the day, it would have spent nearly $2 bil­lion." What about the first defense of $38?  In other words: in order to make some $67 mil­lion for its Invest­ment Bank­ing unit, was MS forced to eat a sev­eral hun­dred mil­lion loss in its sales and trad­ing divi­sion just to avoid look­ing like the world's worst under­writer ever? We won't know for a while, but in the mean­time, here is a visual sum­mary of the key events dur­ing yesterday's far less than his­toric IPO.

May 18 — The Face­book IPO

The first warn­ing sign, was the delay in trad­ing. Here's the sta­tus mes­sages from Nas­daq for that day.

The first 4 charts are 5 sec­ond inter­val charts of Face­book show­ing the first hour and 15 min­utes of quotes and trades.

Chart 1. NBBO (National Best Bid or Offer) Spread. Black: bid < ask (nor­mal), Yel­low: bid = ask (locked), Red: bid > ask (crossed)all bids and offers color coded by exchange.

Chart 2. Best bids and offers (NBBO) color coded by exchange.

Chart 3. All bids and offers color coded by exchange.

Chart 4. All trades color coded by exchange.

The next 4 images are tick charts show­ing quotes and trades. How to read these charts

Chart 5. The first sec­onds of trading.

Chart 6. The first sec­onds of trad­ing, continued.

Chart 7. Sud­denly, a vac­uum appears and pro­duces a record 12,285 trades in 1 second.

Chart 8. Same as above, show­ing just Nasdaq.

The next 2 charts (10 sec­ond inter­val) show how Nasdaq's quote stopped, but trades from Nas­daq did not (direct feeds must have been fine, but not the consolidated).

Chart 9. Nas­daq Bids and Offers along with NBBO.

Chart 10. Nas­daq Trades

The next 2 charts (20 mil­lisec­ond inter­val) show the effect when Nasdaq's quote returned. There were two sig­nif­i­cant gaps in quotes (for all exchanges) and 1 sig­nif­i­cant gap in trades.
Note how the gap in trades is not at the same time as the gaps in quotes.

Chart 11. All bids and offers color coded by exchange.

Chart 12. All trades color coded by exchange.

The next chart (5 mil­lisec­ond inter­val) shows the result of the blast in trades and quotes when Nasdaq's quote returned. Trades printed at least 900 mil­lisec­onds before quotes, an impos­si­bil­ity if orders are being routed accord­ing to reg­u­la­tions. We have jok­ingly referred to this anom­aly as fan­tasec­onds.

Chart 13. Nas­daq bids and offers (tri­an­gles), Nas­daq trades (cir­cles) and NBBO (gray/yellow/red shading).

The next 2 charts (500 mil­lisec­ond inter­val) detail the HFT Trac­tor Beam area where coin­ci­den­tally or not, Nas­daq quotes began "sput­ter­ing" right before stop­ping for about 2 hours.

Chart 14. NBBO Spread and quote rate from all exchanges.
Note the flat lines at the bot­tom. Also note how the quote rate (lower panel) surges when prices rise above the flat line, which is what we would expect. How­ever, on Nas­daq (next chart)..

Chart 15. NBBO Spread and quote rate from just Nas­daq.
When prices rise above the flat line, quotes from Nas­daq stop, exactly oppo­site of expected behav­ior and what we see from other exchanges at that time (see chart above).

And finally, Nanex on the fall­out:

Dur­ing the FaceBook's failed IPO open­ing period (11 — 11:30)  and shortly after the trad­ing began, bad prices (spikes) began appear­ing in other stocks, includ­ing sym­bols APPL, INTU, NFLX, PDCO, QCOM, QLD, UST and ZNGA. They also occurred in Face­book dur­ing the first 15 min­utes of trad­ing (see Chart 4 on this page). There are likely other stocks that were affected. In nearly all of these cases the price spikes were exe­cut­ing against quotes that were far out­side the NBBO. Most of these exe­cu­tions occurred on the CBOE, and a few on Chicago and AMEX. For­tu­nately, by chance, the prices were not wide enough to trig­ger cir­cuit break­ers in these stocks.

We think these bad price exe­cu­tions are related to what­ever issues Nas­daq was hav­ing in face­book and prob­a­bly are from errors in rout­ing soft­ware. A sim­i­lar thing hap­pened dur­ing BATS failed IPO in AAPL and other stocks.

Chart 1. AAPL

Chart 2. NFLX

Chart 3. QCOM

Chart 4. QLD

Chart 5. UST

Tags: Bats, Bubbles, D Day, Electronic Trading, Greenshoe, Hanging By A Thread, Hundred Million, Investment Banking, Ipo, Morgan Stanley, Nasdaq, Post Mortem, Public Offering, Reuters, S Chain, Skynet, Stock Market, Stock Trading, Trade Confirmation, Underwriter
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The Economy and Bond Market (May 21, 2012)

Saturday, May 19th, 2012

The Econ­omy and Bond Mar­ket (May 21, 2012)

Trea­suries ral­lied this week, send­ing long-term yields sharply lower. With head­lines tout­ing bank runs in Greece and Spain, the risk-off trade was in full swing this week as both gold and the U.S. dol­lar ral­lied along with Trea­suries. Ten-year Trea­sury yields hit the low­est level in 60 years this week and Ger­man 10-year bonds hit new record lows as part of the risk-off/fear trade.

Strengths

• The con­sumer price index for April was unchanged and the trend in infla­tion data is lower.
• Hous­ing starts rose 2.6 per­cent in April as the hous­ing mar­ket remains a bright spot.
• Cen­tral banks remain sup­port­ive as the Fed min­utes released from the April Fed­eral Open Mar­ket Com­mit­tee (FOMC) meet­ing hinted at more mon­e­tary eas­ing if the econ­omy slows. The Bank of Eng­land echoed sim­i­lar thoughts and the mar­ket sees higher chances of addi­tional quan­ti­ta­tive easing.

Weak­nesses

• The Con­fer­ence Board Lead­ing Eco­nomic Index fell 0.1 per­cent in April.
• Chi­nese power pro­duc­tion rose a mod­est 0.7 per­cent, the small­est gain since May 2009.
• Euro­zone indus­trial pro­duc­tion fell 0.3 per­cent in April; expec­ta­tions were for a gain of 0.4 percent.

Oppor­tu­nity

• Bonds con­tinue to grind higher and appear to be fore­cast­ing benign infla­tion and slow growth.
• The Fed­eral Reserve appears will­ing to increase mon­e­tary accom­mo­da­tion if nec­es­sary, which would be a boost to the bond market.

Threat

• China’s econ­omy is slow­ing faster than expected and gov­ern­ment pol­icy mak­ers appear com­fort­able with this dynamic.
• Europe remains a wild­card with aus­ter­ity pro­grams under pres­sure, cre­at­ing sig­nif­i­cant uncertainty.

Tags: 10 Year Bonds, Austerity Programs, Bank Of England, Bond Market, Central Banks, Chinese Power, Consumer Price Index, Economic Index, Eurozone, Federal Open Market Committee, Full Swing, Government Policy Makers, Housing Market, Housing Starts, Inflation Data, Open Market Committee, Record Lows, Term Yields, Treasuries, Treasury Yields
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Gold Market Radar (May 21, 2012)

Saturday, May 19th, 2012

Gold Mar­ket Radar (May 21, 2012)

For the week, spot gold closed at $1,592.40 up $13.59 per ounce, or 0.86 per­cent. Gold stocks, as mea­sured by the NYSE Arca Gold Min­ers Index, fell 1.87 per­cent. The U.S. Trade-Weighted Dol­lar Index gained 1.28 per­cent for the week.

Strengths

• Gold ETF hold­ings in India have reached close to the $2 bil­lion mark for the first time as of April 30. Accord­ing to data released by the Asso­ci­a­tion of Mutual Funds in India, assets under man­age­ments for gold ETFs have more than dou­bled from a year ago.
• Bil­lion­aire investor George Soros raised his stake in the SPDR gold trust, the biggest exchange-traded prod­uct backed by bul­lion, accord­ing to a fil­ing this week. Against a back­drop of record low inter­est rates and expec­ta­tions for fur­ther cen­tral bank gold buy­ing, which is run­ning at its fastest pace in five decades, there appar­ently are still buy­ers adding to gold at cur­rent lev­els. Using a 60-day rate of change, gold prices have fallen 2.2 stan­dard devi­a­tions now. Over the last 10 years, gold fell to 2.4 stan­dard devi­a­tions in Octo­ber 2006 and to an extreme of 3.4 in Octo­ber 2008. One year after those falls, the gold price was up 29 per­cent and 46 per­cent, respectively.
• The U.S. House Nat­ural Resources Com­mit­tee Wednes­day passed the National Strate­gic and Crit­i­cal Min­er­als Act, aimed at stream­lin­ing the per­mit­ting process for U.S. min­ing. The U.S. Depart­ment of Energy iden­ti­fied the 7–10 year period to obtain min­ing per­mits in the U.S. as com­pared to the aver­age 1–2 years in Aus­tralia as one of the prin­ci­ple bar­ri­ers to new U.S. min­ing ven­tures. Behre Dol­bear, an inter­na­tional con­sult­ing firm, has iden­ti­fied the U.S. as hav­ing one of the longest per­mit­ting processes in the world for min­ing projects. The bill now goes to a floor vote by the full House, but the bill is not with­out detrac­tors. Rep. Ed Mar­ket, D-Massachusetts, unsuc­cess­fully tried to amend the bill to require a roy­alty pay­ment for 12.5 per­cent of the value of the min­er­als pro­duced as a result of a fed­eral per­mit for min­eral explo­ration or min­ing on fed­eral lands.

Weak­nesses

• Com­modi­ties guru Jim Rogers said he is not buy­ing gold as he expects gold prices to fall fur­ther and believes they could tum­ble 40–50 per­cent off their top if India were to stop its gold imports or if Euro­peans were to sell their gold. Rogers notes those prob­a­bil­i­ties are pretty low but there has been some effort in India to cur­tail the pur­chase of gold, such as the intro­duc­tion of new or higher tax rates on gold pur­chases. This pro­posed tax, which was announced in March, was later aban­doned after wide­spread protest.
• Two min­ing CEOs called it quits this week. John Greenslade left Baja Min­ing after a drawn-out proxy fight with the company’s largest share­holder. Inter­na­tional Tower Hill Mines announced that the Board of Direc­tors has decided to under­take a review of the Liven­good Project in order to opti­mize avail­able devel­op­ment alter­na­tives and that it accepted the res­ig­na­tion of James Komad­ina as Pres­i­dent and Chief Exec­u­tive of the company.
• In an inter­view on Mineweb.net, Gold Fields CEO Nick Hol­land said that the gold indus­try needs a price above $1,500 per ounce oth­er­wise cur­tail­ment of projects, ratio­nal­iza­tion and pos­si­bly more con­sol­i­da­tion was in the cards. Nick pointed out that the all-in cost of the indus­try to pro­duce an ounce of gold is prob­a­bly around $1,400 per ounce and that doesn't leave a lot of mar­gin at $1,500. CIBC recently pegged $1,700 per ounce as the replace­ment cost for an ounce of gold and high­lighted that tax increases have been one of the fastest grow­ing com­po­nents of the cost creep.

Oppor­tu­ni­ties

• Low gold prices have been a weight on gold equi­ties. Gold min­ing ana­lyst Tanya Jakus­conek of Sco­tia Bank high­lighted that its group of North Amer­i­can senior gold min­ers is cur­rently trad­ing at 0.90 times the NAV com­pared to the lows of 0.79 achieved in 2008.

• Before gold ral­lied in the last two days of the week, all the price gains made this year were erased as the dol­lar had gone a record 13 days of con­sec­u­tive gains. What may have snapped gold back was the real­iza­tion that the run on the banks in Greece by its cit­i­zens with­draw­ing their money could be a wild­card that forces the Euro­pean Cen­tral Bank to act sooner than expected and/or lead to a pol­icy mis­take on how to address the country’s sol­vency crises. Gold­man expects gold prices to rise 25 per­cent to $1,940 an ounce in 12 months and Mor­gan Stan­ley fore­cast prices to rebound to an aver­age of $1,825 this year and $2,175 in 2013.
• As for gold equi­ties they are down but not out. How­ever, investors are adamant about one thing…SHOW ME THE MONEY! In his sem­i­nal research report “Stop ‘Growth At Any Price’ (GAAP) Build­ing,” George Top­ping of Stifel Nico­laus noted that ram­pant min­ing infla­tion has ben­e­fited those involved in mine-building to the detri­ment of share­hold­ers. George pointed out that if min­ing com­pa­nies deferred lower inter­nal rate of return (IRR) deposits this would allow man­age­ment to bet­ter focus on cost con­trol, send a mes­sage to consultants/contractors that fees have gone too far, and free up labor for the remain­ing projects. Projects should pass stress test lev­els of using a $1,200/oz long-term gold price and deliver a min­i­mum 10 per­cent IRR. The cur­rent dynamic in the sec­tor of esca­lat­ing cash cost and cap­i­tal expen­di­ture creep has made the high grade/high mar­gin deposits more accre­tive and with less down­side expo­sure on the gold price. These are the types of com­pa­nies our gold funds focus on for deliv­er­ing the best value cre­ation over time. Gold com­pany share­hold­ers are likely to be sup­port­ive if the capex sav­ings are paid out as div­i­dends which could be raised to lev­els that approach 5 per­cent. George points out that a change of strat­egy by the gold min­ing com­pa­nies is required to reverse the flow of funds out of the gold sector.

Threats

• HSBC Global Research lamented that at some point, the focus will come back to Amer­ica ver­sus Euroland and the U.S. dol­lar will come back under pres­sure. HSBC doc­u­ments the pend­ing fis­cal cliffhanger the U.S. faces with nine tax expi­ra­tions or spend­ing cuts that investors should worry about see­ing in the near future: 1. Expi­ra­tion of 2001/2003 Bush-era income tax cuts, 2. Bud­get Con­trol Act Sequester, 3. Alter­na­tive Min­i­mum Tax (AMT) increase, 4. Inter­ac­tion of AMT and income tax changes, 5. Pay­roll Tax Cut expi­ra­tion, 6. Expi­ra­tion of extended unem­ploy­ment ben­e­fits, 7. Reduc­tion in pay­ments for Medicare physi­cian ser­vices, 8. New Medicare Tax, and 9. Tax extenders.
• HSBC com­piled a worst-case sce­nario for these poten­tial pol­icy changes and a reality-check sce­nario that tries to esti­mate what may actu­ally hap­pen. In the worst-case sce­nario, the tax increases and spend­ing cuts could amount to $665 bil­lion or about 4.1 per­cent of GDP in 2013; in a reality-check sce­nario HSBC fore­cast 2013 GDP to come in at 1.8 percent.
• David Rosen­berg, of Gluskin Sheff Research, also reminded us this week the cur­rent lus­ter sur­round­ing the U.S. econ­omy may be in for some head­winds as the fall approaches. With arguably the most impor­tant pres­i­den­tial elec­tion since 1980, in terms of set­ting the eco­nomic and fis­cal path for the next decade, the U.S. gov­ern­ment is on track to again hit the debt ceil­ing by Octo­ber, just weeks ahead of the elec­tion, with Repub­li­cans plan­ning a new stand­off on debt lim­its to be front and cen­ter. Dave notes that “at that point in the fall, a lot of folks may have wished they were buy­ing the dip in gold dur­ing the win­ter and spring.”

Tags: 2 Standard Deviations, Bank Gold, Critical Minerals, Floor Vote, George Soros, Gold Etf, Gold Etfs, Gold Market, Gold Miners, Gold Price, Gold Prices, gold stocks, International Consulting Firm, Low Interest Rates, Market Radar, Mining Permits, Natural Resources Committee, Nyse Arca, Royalty Payment, Spot Gold
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Energy and Natural Resources Market Radar (May 21, 2012)

Saturday, May 19th, 2012

Energy and Nat­ural Resources Mar­ket Radar (May 21, 2012)

Strengths

• Accord­ing to the Shang­hai Futures Exchange, its cop­per inven­tory fell 9,178 met­ric tons to 187,449 met­ric tons.
• China’s steel prod­uct out­put rose 7.9 per­cent last month to 81.1 mil­lion met­ric tons from a year ago, accord­ing to the National Bureau of Statistics.
• China imported a record high 25.05 mil­lion met­ric tons of coal in April, up 90.1 per­cent year-on-year, Platts reported, cit­ing pre­lim­i­nary cus­toms fig­ures. Chi­nese year-to-date coal imports rose 69.6 per­cent year-on-year to 86.55 mil­lion met­ric tons of coal.

Weak­nesses

• Stocks and com­modi­ties fell this week as the like­li­hood of a Greek exit from the euro­zone has increased sig­nif­i­cantly dur­ing the past two weeks.
• Oil prices fell 4.8 per­cent this week. The cur­rent bout of con­cerns had arisen from the resur­gent fears about the Span­ish and Ital­ian bank­ing sys­tems and spec­u­la­tion that Greece may have to exit the euro. Since then, for oil in par­tic­u­lar, news reports sug­gest­ing that Pres­i­dent Obama is seek­ing G8 coöper­a­tion on an oil stock release have com­pounded the depress­ing effect.
• Reuters reported that Chi­nese steel mills defer iron ore ship­ments owing to slow­ness in the steel mar­ket. Some Chi­nese steel mills are said to have post­poned iron ore deliv­er­ies from sup­pli­ers such as Vale, given the slow steel mar­kets. Pro­duc­ers are also expect­ing a fur­ther drop in prices.

Oppor­tu­ni­ties

• Global infla­tion might have already pushed the costs of explor­ing and pro­duc­ing oil from new most expen­sive projects, known in the indus­try as the mar­ginal cost of pro­duc­tion, above $100 per bar­rel, accord­ing to JBC energy con­sul­tancy. That com­pares to $50-$75 prior to the 2008 finan­cial cri­sis. A decade ago, oil com­pa­nies such as BP were say­ing they would start a project if oil traded above $17-$20. Even the Inter­na­tional Energy Agency, which rep­re­sents con­sum­ing nations, says pro­duc­tion costs have gone up sharply. “There is not a sin­gle drop of oil in the world that can­not be pro­duced at a price of oil of $85-$90,” IEA’s chief econ­o­mist Fatih Birol told a summit.
• The Chi­nese gov­ern­ment announced a new batch of new sub­si­dies to pro­mote the con­sump­tion of energy-efficient home appli­ances and autos on Wednes­day. RMB6bn will be pro­vided to fuel-efficient vehi­cles with engines below 1.6L, and an RMB26.5bn finan­cial sub­sidy will be pro­vided for energy-efficient appli­ance prod­ucts, includ­ing all the major white goods prod­ucts. This appears to be a clear sig­nal of the government’s com­mit­ment to shift domes­tic demand toward more per­sonal con­sump­tion and away from fixed asset investment.
• Oil indus­try exec­u­tives and bankers are assum­ing oil prices will stay above $100 a bar­rel in the year ahead, despite mount­ing eco­nomic wor­ries, as any fall below that level would trig­ger a cut in Saudi Arabia’s out­put and force clo­sures at high-cost projects around the world. A Reuters straw poll of oil exec­u­tives, traders, bankers and fund man­agers showed seven respon­dents pre­dict­ing Brent crude trad­ing at $100-$120 a bar­rel in the next 12 months.
• Boart Longyear, the world’s biggest provider of min­eral drilling ser­vices, expects demand to remain strong as large min­ing com­pa­nies pro­ceed with projects. “We still see very strong demand, par­tic­u­larly from the majors,” Craig Kipp, CEO of the com­pany said. “We haven’t heard from a lot of the majors out­side of Aus­tralia that there’s a change in their plans or in their bud­gets. We haven’t seen any change in mar­ket dynam­ics — we’re oper­at­ing all over the world,” Kipp said. “We do see that juniors, the second-tiers, have had prob­lems get­ting financ­ing,” he added.

Threats

• In a Wall Street Jour­nal arti­cle last year at this time, Chief Exec­u­tive Mar­ius Klop­pers said BHP would invest $80 bil­lion by the end of 2015 to expand fur­ther. The euro­zone cri­sis, slower Chi­nese growth, and falling met­als prices are forc­ing BHP to now say it will be cut­ting those spend­ing plans. Falling com­mod­ity prices and ris­ing oper­at­ing costs put its cash inflows at risk and, by exten­sion, its com­mit­ment both to rais­ing its div­i­dend and keep­ing its single-A credit rat­ing. BHP's plans need to become clearer if it wants to reverse the 28 per­cent fall in its share price since a year ago.
• Agri­money reported that the Fed­eral Reserve has warned, “The surge in U.S. farm­land prices, which in parts of the Plains achieved their strongest run of growth on record, may be about to fade, sapped by the wors­ened out­look for agri­cul­tural prof­its.” Farm­land val­ues posted sharply higher gains in states around Kansas in the year to the start of last month, reflect­ing higher crop prices and an eas­ing in the drought which has plagued much of the area since 2010. “Strong farm incomes con­tin­ued to fuel demand for farm­land,” the Fed­eral Reserve System's Kansas City bank said, not­ing that val­ues had now risen by more than 20 per­cent for two con­sec­u­tive years for the first time since it began col­lect­ing data in the 1970s. Prices in Nebraska, which avoided drought, were par­tic­u­larly strong, with val­ues of irri­gated land soar­ing 41 percent.

Tags: Banking Systems, Bureau Of Statistics, Chinese Year, Coal Imports, Energy Consultancy, International Energy Agency, Marginal Cost, Market Radar, Million Metric Tons, National Bureau Of Statistics, National Bureau Of Statistics China, Oil Prices, Oil Stock, Platts, Shanghai Futures Exchange, Steel Market, Steel Markets, Steel Mills, Steel Product, Stocks And Commodities
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Emerging Markets Radar (May 21, 2012)

Saturday, May 19th, 2012

Emerg­ing Mar­kets Radar (May 21, 2012)

Strengths

• Despite the esca­lat­ing cri­sis in Greece and the wider euro­zone, Turk­ish retail equi­ties have ral­lied strongly since the start of 2012. In con­trast to most global equi­ties, the Istan­bul Stock Exchange Retail Index has already surged well beyond its 2008 peak and last month pushed through the high achieved in 2011.

• China’s cen­tral bank cut the reserve require­ment ratio (RRR) by 50 basis points over the week­end, which cre­ates liq­uid­ity for banks.
• China will allo­cate Rmb 26.5 bil­lion in sub­si­dies to pro­mote the use of energy-saving house­hold appli­ances and prod­ucts, which should be pos­i­tive to the sector.
• Korea’s unem­ploy­ment rate was 3.4 per­cent in April, as the num­ber of employed peo­ple jumped 1.9 per­cent in the month.

Weak­nesses

• For­eign direct invest­ment in China fell 0.7 per­cent from a year ear­lier to $8.4 bil­lion in April, a sixth monthly drop since Novem­ber last year, which will reduce the amount of pres­sure for the cen­tral bank to buy back for­eign currency.
• China’s power con­sump­tion, a barom­e­ter of eco­nomic activ­ity, increased 3.7 per­cent in April to 389 bil­lion kilowatt-hours, the slow­est in 16 months, data from the National Energy Admin­is­tra­tion showed on Mon­day. The growth rate was 3.3 per­cent­age points lower than the pre­vi­ous month, and 7.5 per­cent­age points slower than the same period last year. It was the slow­est rate since Jan­u­ary 2011.
• Renewed uncer­tainty over Greece's euro­zone mem­ber­ship and the poten­tial for severe cri­sis con­ta­gion upon a Greek depar­ture from the mon­e­tary union has weighed heav­ily on the bank­ing sec­tor over the recent week.

Oppor­tu­ni­ties

• For­eign cap­i­tal has con­tin­ued flow­ing into the Thai equity mar­ket this year, reach­ing $2.6 bil­lion year-to-date in May, accord­ing to Mor­gan Stan­ley. At the cur­rent speed, the total inflow of for­eign cap­i­tal can eas­ily sur­pass the recent peak of $2.9 bil­lion. Investors are attracted to Thai­land due to the expec­ta­tion of eco­nomic recov­ery from flood­ing last year.

Threats

• On top of slowed domes­tic invest­ment growth, both wors­ened euro­zone credit risk and con­sump­tion demand neg­a­tively affected Chi­nese eco­nomic growth. The Chi­nese gov­ern­ment soon may have to restart stalled infra­struc­ture projects to help eco­nomic growth while it is try­ing to trans­form the econ­omy by enhanc­ing value-added man­u­fac­tur­ing pro­duc­tiv­ity and consumption.

Tags: Banking Sector, Basis Points, Contagion, Economic Recovery, Energy Administration, Foreign Currency, Foreign Direct Investment, Global Equities, Household Appliances, Inflow, Istanbul Stock Exchange, Kilowatt Hours, Monetary Union, Morgan Stanley, National Energy, Power Consumption, Retail Index, Rrr, S Central, Unemployment Rate
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Facebook IPO May Break the Market and Initiate a Free Fall Crash

Friday, May 18th, 2012

by Steven Vin­cent,  Bull Bear Trading

Let me start by clar­i­fy­ing some­thing.  I am not say­ing that the mar­ket could crash spec­tac­u­larly in the next few days and that in that event the Face­book IPO would be a major con­tribut­ing fac­tor.  I am not say­ing that.  The mar­ket is say­ing it.

Face­book boosts IPO size by 25 per­cent, could top $16 billion

NEW YORK/SAN FRANCISCO (Reuters) -
Face­book Inc increased the size of its ini­tial pub­lic offer­ing by almost 25 per­cent, and could raise as much as $16 bil­lion as strong investor demand for a share of the No.1 social net­work trumps debate about its long-term poten­tial to make money.
Facebook, founded eight years ago by
Mark Zucker­berg in a Har­vard dorm room, said on Wednes­day it will add about 84 mil­lion shares to its IPO, float­ing about 421 mil­lion shares in an offer­ing expected to be priced on Thurs­day.
http://finance.yahoo.com/news/facebook-expands-ipo-size-aims-011714...

This mam­moth dump­ing of shares onto the mar­ket is com­ing at the exact moment that global finan­cial mar­kets are tee­ter­ing on the brink of dis­as­ter.  Tech­ni­cally and psy­cho­log­i­cally this mar­ket is as weak and poorly posi­tioned to absorb a new float of this size as it could pos­si­bly be.  As every mar­ket across all asset classes breaks major bear­ish tech­ni­cal lev­els, as the fun­da­men­tal news flow accel­er­ates and wors­ens by the hour, Wall Street if fix­ated upon "the biggest IPO ever".  Few ask why Face­book own­ers are rush­ing for the exits now.  Few observe that the mar­kets began their cur­rent crash on the day of the Car­lyle IPO.  Even fewer won­der what the poten­tial effect will be of suck­ing the remain­ing air out of the room even as the mar­kets gasp for breath.

Bulls will presently argue that the mar­ket is very over­sold and posi­tioned to rally.  Under con­di­tions of a healthy bull mar­ket, they would be cor­rect.  Every indi­ca­tor you could think of is posi­tioned for a rally in the con­text of a real bull.  The trou­ble is that the last bull phase ended in Feb­ru­ary of 2011 and the mar­ket has been falling apart inter­nally for over a year.  In fact, tech­ni­cal dete­ri­o­ra­tion has run far ahead of price declines in much the same way in 2011.  The result then, as now, is that mar­ket price sprints to catch up to the tech­ni­cals and the result is a crash.

Here's just one exam­ple of many.  Prior to the 2011 crash, the ratio between Down Vol­ume and Up Vol­ume began to expand dra­mat­i­cally even as the mar­ket made new highs, cre­at­ing a diver­gence between mar­ket price and the indicator:


Take note that if this pat­tern repeats itself for a fourth time (and there are many com­pelling rea­sons to think it will as we will see later in this post­ing), then we are yet very early in the process.  This sug­gests that although we could be con­sid­ered "over­sold" at this time, a mar­ket crash is pend­ing.  And it is impor­tant to fur­ther note that seri­ous mar­ket crashes come from deeply over­sold, dete­ri­o­rated tech­ni­cal con­di­tions such as those pre­vail­ing right now.  When com­par­ing 2011 and 2012 lev­els, the indi­ca­tor also made a higher low while the mar­ket made a higher high which is a divergence.

The ratio between Advanc­ing and Declin­ing issues is set up very sim­i­larly and is also highly sug­ges­tive of a pend­ing crash with a break­out move just beginning:


This indi­ca­tor also cre­ated a diver­gence at the 2011 and 2012 price highs.  Keep in mind that both of these indi­ca­tors are just now begin­ning their big moves.

One of the hall­marks of a crash is a rapid expan­sion of New 52 Week Lows:

Note the huge diver­gence between 2011 and 2012 as more New Lows were being reg­is­tered at a higher price level in 2012.  Also notice the rapid expan­sion of New Lows as price breaks the neck­line of Head and Shoul­ders tops in both 2011 and 2012.

Many will argue that the price of the 30 Year Trea­sury Bond is "too high" and that the recent flight of cap­i­tal to the per­ceived safety of that mar­ket is "irra­tional" or even "stu­pid" and that it "must reverse".  Right now, the long bond is blast­ing through the upper resis­tance band that has con­tained it for sev­eral decades:

Note that this very long term break­out move is com­ing after a six month long con­sol­i­da­tion.  Also note that this is the first time ever that this mar­ket did not return to sup­port after vis­it­ing its upper resis­tance band.  Traders should respect the intel­li­gence of the mar­ket.  Clearly it is say­ing that there is a real need for safety and that the need is so urgent that a multi-decade tech­ni­cal level needs to be com­pletely taken out.  Also note that this break­out move is only just beginning.

The ratio of SPX to the 30 Year Trea­sury Bond has very recently plunged through its multi decade uptrend while simul­ta­ne­ously vio­lat­ing its 20, 50 and 200 month expo­nen­tial mov­ing averages:


Clearly this is a move that is only just begin­ning.  When such long term tech­ni­cal events occur is far more likely to mark the onset of some­thing rather than the end of some­thing.  The pres­ence of a clear Head and Shoul­ders for­ma­tion sug­gests an imme­di­ate crash to the neck­line and beyond.

The Dol­lar ETF, UUP, is rapidly approach­ing the neck­line of a clear reverse Head and Shoul­ders formation:

This is coin­ci­dent with a triple bull mov­ing aver­age cross.  The bull cross together with a break­out from the for­ma­tion neck­line would be the begin­ning of a very strong move.

Volatil­ity Index has bro­ken out from a six month long inverse Head and Shoul­ders pat­tern and has closed four con­sec­u­tive ses­sions above its 200 EMA:

This is the begin­ning of a very large move for VIX, which can only cor­re­late with a sig­nif­i­cant bear­ish event for stocks.

I could post many more charts which show that the mar­ket is far nearer to the begin­ning of a major event than to a sort of end.  Over­sold is likely to become much more over­sold as panic sell­ing takes hold.

While we could argue that RSI is now well below 30 and there­fore over­sold, his­tor­i­cal prece­dent shows that it can go much lower:
The inci­dents when RSI started at 70 and went below 20 led to an aver­age bot­tom for the indi­a­tor of 16.  My take is we will see that read­ing on this decline and it will reflect a seri­ous bear­ish mar­ket event.

In this con­text, Wall Street will be dump­ing an enor­mous new float of a new "dar­ling" stock into the mar­ket on Fri­day.  Mar­ket par­tic­i­pants still largely regard the recent price decline as a buy­ing oppor­tu­nity and the expec­ta­tion is that the FB shares will be "snapped up" by eager investors.  Recent dip buy­ing behav­ior has only served to expend what lit­tle avail­able cash there is in the mar­ket.  The Face­book IPO will suck the remain­ing air out of the room, leav­ing a vac­uum.  While the effect may not be imme­di­ate, it could take only a few ses­sions for the real sell­ing to begin.  The setup for a Black Mon­day is there.  And I do not mean that metaphorically.

I will leave you with the fol­low­ing chart study com­par­ing the period imme­di­ately prior to the Fri­day before Black Mon­day 1987 and the period lead­ing up to today, Fri­day, May 18, 2012:


Day by day, tick by tick, tech­ni­cal event by tech­ni­cal event, the two charts are nearly per­fect repli­cas.  Will the frac­tal echo com­plete on Fri­day and Monday?

Any long posi­tion under these cir­cum­stances is sheer folly.  And I'm not say­ing that.  The mar­ket is say­ing it.

There's an ele­phant in the room and no one wants to acknowl­edge it.

Copy­right © http://www.thebullbear.com

Tags: Asset Classes, Brink Of Disaster, Bull Bear, Bulls, Carlyle, Crash, Dorm Room, Exact Moment, Facebook, Finance Yahoo, Global Financial Markets, Harvard, Initial Public Offering, Investor Demand, Ipo, Mark Zuckerberg, Reuters, Steven Vincent, Trumps, Wall Street
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Sugar Makes You Dumb, and other Weekend Reads

Friday, May 18th, 2012

Here are this week's read­ing diver­sions for your per­sonal enlight­en­ment. Have a won­der­ful, long, Vic­to­ria Day weekend!

Pro­bi­otic Reme­dies: 6 Ways Live Active Bac­te­ria Can Boost Your Health

For most peo­ple, the men­tion of pro­bi­otics con­jures up images of yogurt. But don’t dis­miss the microbes as a mar­ket­ing gim­mick or food fad. The lat­est pro­bi­otic research sug­gests that live-active cul­tures of these friendly bac­te­ria can help to pre­vent and treat a wide vari­ety of ailments.

****

10 flu-fighting foods: Wild-caught salmon | MNN — Mother Nature Network

In a recent study, par­tic­i­pants with the low­est lev­els of vit­a­min D were about 40 per­cent more likely to report a recent res­pi­ra­tory infec­tion than those with higher lev­els of vit­a­min D. Increase your intake with salmon. A 3.5-ounce serv­ing pro­vides 360 IU, and some experts rec­om­mend as much as 800 to 1000 IU each day.

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What is Greek yogurt? | MNN — Mother Nature Network

As far as Greek yogurt’s nutri­tional ben­e­fits, there is more pro­tein because the yogurt is denser. When the lac­tose is strained, the yogurt loses some of its sugar and car­bo­hy­drates. (Does that mean this kind of yogurt is bet­ter for those who are lactose-intolerant, too?)

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Sugar Makes You Dumb, Sci­en­tists Warn

Eat­ing too much sugar can eat away at your brain power, accord­ing to US sci­en­tists who pub­lished a study show­ing how a steady diet of high-fructose corn syrup sapped lab rats' memories.

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Ann Brenoff: Is Look­ing Fool­ish A Boomer's Birth Right?

In a cul­ture where some­one live-tweets a birth and in the same week a 70-year-old announces to the world that she's tired of being a vir­gin and is look­ing for some­one to do some­thing about it, maybe it's time to have a national con­ver­sa­tion about what it means to "act appropriately."

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Cof­fee Drinkers Live Longer, Big Study Finds

The study of 400,000 peo­ple is the largest ever done on the issue, and the results should reas­sure any cof­fee lovers who think it's a guilty plea­sure that may do harm.

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Women's Health: Spe­cial­ists For Women To See By Decade (INFOGRAPHIC)

Women are more likely than men to go to the doc­tor, but that doesn't mean they're get­ting bet­ter care. In fact, doc­tors are still likely to miss heart attacks in women, because the typ­i­cal symp­toms are dif­fer­ent than those in men, and autoim­mune dis­or­ders, more com­mon in women than men, are noto­ri­ously hard to diagnose.

****

High Sugar Diet ‘Sab­o­tages Learn­ing, Mem­ory And Cog­ni­tive Skills'

If you can’t get through the day with­out a can of fizz, two sug­ars in your tea or a junk food binge, you are not only ruin­ing your waist­line — you could be dumb­ing down your brain, too.

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5 Foods That Can Trig­ger a Stroke | Caring.com

Whether your weak­ness is pas­trami, sausage, hot dogs, bacon, or a smoked turkey sand­wich, the word from the experts is: Watch out.

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Can aspirin really reduce the risk of can­cer? | Sci­ence | The Guardian

Beyond its painkilling effects, aspirin pre­vents blood platelets stick­ing together and so thins the blood. This reduces the risk of blood clots that can cause heart attacks and stroke.

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Aspirin tied to lower lung can­cer risk in women | Reuters

The find­ings, which link reg­u­larly tak­ing aspirin to a risk reduc­tion of 50 per­cent or more, do not prove that aspirin directly pro­tects against lung can­cer. There may be other expla­na­tions for the connection.

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The Avengers — Dr. Banner's Wis­dom About Bipo­lar | Psy­chol­ogy Today

Those who do not under­stand depres­sion and mania think that the only way to con­trol it is to make it go away. It works for a while, but, just like with anger for The Hulk, when mania or depres­sion returns they find them­selves back in cri­sis with no aware­ness or skills to do some­thing about it. When mania, depres­sion, rage, hal­lu­ci­na­tion, delu­sion, or any other man­i­fes­ta­tion return, chaos ensues just as anger trig­gered The Hulk in pre­vi­ous movies.

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The Mir­ror Speaks in the Mother-Daughter Con­nec­tion | Psy­chol­ogy Today

If adult chil­dren of nar­cis­sis­tic par­ents dis­cuss their upbring­ing, they are usu­ally met with dis­dain. “Good girls or boys don’t hate their moth­ers!” “There must be some­thing wrong with you, if you are not con­nected with your mother.” “It must be your fault.” So, this pop­u­la­tion of peo­ple goes into hid­ing. They go back to what they were taught and prac­tice super­fi­cial pre­tend­ing which does not help their own recov­ery process. They are told once again to “put a smile on that pretty lit­tle face and pre­tend that every­thing is just fine with this family.”

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Tags: Birth Right, Brain Power, Coffee Drinkers, Coffee Lovers, Food Fad, Fructose Corn Syrup, High Fructose Corn, High Fructose Corn Syrup, Lab Rats, Lactose Intolerant, National Conversation, Nature Network, Personal Enlightenment, Probiotic Research, Probiotics, Respiratory Infection, Steady Diet, Study Participants, Victoria Day, Victoria Day Weekend
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Rethinking Risk With Corporate Emerging Market Bond ETFs

Friday, May 18th, 2012

Last month, iShares intro­duced CEMB, which gives investors expo­sure to emerg­ing mar­ket cor­po­rate debt. Since the fund’s launch we’ve fielded some ques­tions from clients won­der­ing why the yield on CEMB is close to the yield on another one of our funds — EMB, which pro­vides access to sov­er­eign emerg­ing mar­ket debt.

As of May 11, CEMB had an aver­age yield to matu­rity of 4.95%, while EMB’s yield was 4.99%. If I’m tak­ing on more risk with CEMB by invest­ing in cor­po­rate vs. sov­er­eign debt, clients have asked, why aren’t I receiv­ing a higher yield in return? The answer is because in this case, the risk asso­ci­ated with cor­po­rate emerg­ing mar­ket bonds might not be as ele­vated as many investors would think.

First, let’s look at the amount of dura­tion, or inter­est rate risk, of these two funds. As mea­sured by its dura­tion of 5.5 years, CEMB has less inter­est rate risk than EMB, which has a dura­tion of 7.42 years as of May 14.

Now, let’s look at the hold­ings of EMB and CEMB. EMB holds secu­ri­ties backed by emerg­ing mar­ket sov­er­eign gov­ern­ments, like Peru, Rus­sia and the Philippines.

CEMB mean­while gives investors access to the cor­po­rate debt of com­pa­nies domi­ciled in emerg­ing mar­ket coun­tries. It holds the debt of big com­pa­nies like Brazil­ian oil com­pany Petro­Bras Inter­na­tional and South African elec­tric­ity pro­ducer, Eskom Hold­ings. Although the issuers in CEMB are based in emerg­ing mar­kets, many have invest­ment grade credit rat­ings, includ­ing a fair num­ber with AA or A rat­ings. As the chart below illus­trates, the com­po­si­tion of CEMB is slightly higher on the credit rat­ing spec­trum than EMB:

Credit Rat­ing Breakdown:

Investors might assume that emerg­ing mar­ket cor­po­rate bond ETFs would con­sist of bonds that have lower credit rat­ings than those in emerg­ing mar­ket sov­er­eign ETFs, mak­ing them riskier hold­ings that pro­vide a higher yield. But this chart illus­trates that is not always the case, and it helps to explains why a fund like CEMB would have a yield sim­i­lar to that of EMB.

How could investors con­sider using CEMB in a portfolio?

1.) Diver­sify away from US cor­po­rate debt: For investors who own a fund like LQD, which holds invest­ment grade US cor­po­rate debt, CEMB offers an oppor­tu­nity to diver­sify away from US cor­po­rate debt while poten­tially pick­ing up addi­tional yield. LQD’s aver­age yield to matu­rity was 3.52% as of May 11. Addi­tion­ally, with low cor­re­la­tions to other fixed income sec­tors and equi­ties, emerg­ing mar­ket cor­po­rate bonds can add diver­si­fi­ca­tion to invest­ment port­fo­lios. Past per­for­mance is no guar­an­tee of future results.

2.) Access the emerg­ing mar­ket con­sumer: As Russ Koes­terich has noted, emerg­ing mar­ket growth con­tin­ues to cre­ate hun­dreds of mil­lions of new middle-class con­sumers. By 2025 China, India and Brazil are respec­tively expected to be the 2nd, 4th, and 9th largest con­sumer mar­kets in the world, accord­ing to McK­in­sey. The emerg­ing mar­ket cor­po­ra­tions whose bonds are held in CEMB are sell­ing their wares to this grow­ing con­sumer base.

3.) Gain access to emerg­ing mar­ket growth with less volatil­ity than emerg­ing mar­ket equi­ties. For the past 10 year, emerg­ing mar­ket cor­po­rate bonds have had total return volatil­ity of 12.5% as com­pared to 24.4% for emerg­ing mar­ket equi­ties, using data from Morn­ingstar and MSCI, as of April 30.

Matt Tucker, CFA is the iShares Head of Fixed Income Strat­egy and a reg­u­lar con­trib­u­tor to the iShares Blog. You can find more of his posts here.

Past per­for­mance is no guar­an­tee of future results. For the stan­dard­ized per­for­mance of these funds, please click here: CEMB, EMB, LQD.

The per­for­mance quoted rep­re­sents past per­for­mance and does not guar­an­tee future results. Invest­ment return and prin­ci­pal value of an invest­ment will fluc­tu­ate so that an investor’s shares, when sold or redeemed, may be worth more or less than the orig­i­nal cost. Cur­rent per­for­mance may be lower or higher than the per­for­mance quoted. Per­for­mance data cur­rent to the most recent month end may be obtained by call­ing toll-free 1–800-iShares (1–800-474‑2737) or by vis­it­ing www.iShares.com.

Hold­ings are sub­ject to change. To view the com­plete list of hold­ings for CEMB, please click here.

In addi­tion to the nor­mal risks asso­ci­ated with invest­ing, inter­na­tional invest­ments may involve risk of cap­i­tal loss from unfa­vor­able fluc­tu­a­tion in cur­rency val­ues, from dif­fer­ences in gen­er­ally accepted account­ing prin­ci­ples or from eco­nomic or polit­i­cal insta­bil­ity in other nations. Emerg­ing mar­kets involve height­ened risks related to the same fac­tors as well as increased volatil­ity and lower trad­ing vol­ume. Bonds and bond funds will decrease in value as inter­est rates rise. Diver­si­fi­ca­tion may not pro­tect against mar­ket risk.

Copy­right © iShares

Tags: Aa, Cemb, Composition, Corporate Bond, Corporate Bonds, Corporate Debt, Credit Rating, Duration, Electricity Producer, Emb, Emerging Market Bonds, Emerging Market Countries, Emerging Markets, Interest Rate Risk, Issuers, Oil Company, Sovereign Debt, Sovereign Governments, Spectrum, Yield To Maturity
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The Investing Implications of Price Creep (Koesterich)

Friday, May 18th, 2012

Tuesday’s April Con­sumer Price Index (CPI) report was gen­er­ally received as pro­vid­ing more evi­dence that infla­tion is under con­trol. What many mar­ket watch­ers missed, how­ever, was that core infla­tion, infla­tion exclud­ing volatile food and energy prices, is dis­play­ing a wor­ri­some trend for both con­sumers and investors — price creep, or a grad­ual and almost imper­cep­ti­ble increase in prices.

Here are just a few of the con­cern­ing core infla­tion data points:

1.)    At 2.31%, April’s core infla­tion fig­ure was the high­est since Sep­tem­ber 2008.

2.)    April was the sev­enth month in a row in which core infla­tion was above the Fed’s stated tar­get of 2%.

3.)    April’s core infla­tion read­ing was nom­i­nally above the 20-year average.

To be clear, this doesn’t sug­gest that alarmist pre­dic­tions for Weimar-style infla­tion are about to come true. As I’ve men­tioned before, it’s hard to argue that infla­tion in the United States is about to accel­er­ate in any mean­ing­ful way this year. Wage growth is slow, most of the US man­u­fac­tur­ing sec­tor is still strug­gling with excess capac­ity and up until late last year, the dearth of bank lend­ing pre­vented any accel­er­a­tion in the money supply.

That said, while double-digit infla­tion still looks fan­ci­ful, the rise in core infla­tion shows that prices are slowly creep­ing up and US con­sumers and investors are likely accept­ing, and becom­ing accus­tomed to, higher prices and higher val­u­a­tions with­out even notic­ing. In other words, US con­sumers and investors may be the prover­bial frog in the pot of slowly heat­ing cold water and this is only likely to continue.

High unem­ploy­ment will prob­a­bly pre­vent any mean­ing­ful accel­er­a­tion in wages, though the skills mis­match between employ­ees and poten­tial employ­ers may still result in some wage accel­er­a­tion. In addi­tion, mon­e­tary con­di­tions are no longer quite so innocu­ous when it comes to infla­tion. Bank lend­ing to busi­nesses – mea­sured by com­mer­cial and indus­trial loan demand – is now ris­ing 13% year over year and is close to a 3 ½-year high. Mean­while, M2 has been grow­ing at about 10% year over year since last sum­mer. Though it still takes time for growth in the money sup­ply to trans­late into infla­tion, the mon­e­tary envi­ron­ment is slowly turning.

For investors, there are a cou­ple of implications:

1.)    Rec­og­nize pur­chas­ing power ero­sion: Even if infla­tion sta­bi­lizes at cur­rent lev­els, over the long term 2.3% infla­tion would still cause prices to rise by 50% in less than two decades time. In other words, infla­tion of this mag­ni­tude would cause a one-third ero­sion in pur­chas­ing power over the next 18 years. This is an impor­tant con­sid­er­a­tion for investors with large cash posi­tions. And for bond investors – par­tic­u­larly those with large Trea­sury posi­tions – this is one more rea­son to ques­tion the wis­dom of accept­ing sub-2% yields for the next decade.

2.)    Con­sider equi­ties and com­modi­ties: While uncer­tainty over Europe and Chi­nese growth are likely to keep volatil­ity high this sum­mer, investors should con­sider using near-term mar­ket weak­ness to add to long-term equity and com­mod­ity posi­tions. To be sure, nei­ther asset class is likely to offer double-digit returns over the long term. How­ever, both may help investors keep their pur­chas­ing power from being slowly heated away.

Source: Bloomberg

Russ Koes­terich is the iShares Chief Invest­ment Strate­gist and a reg­u­lar con­trib­u­tor to the iShares Blog.  You can find more of his posts here.

Tags: 3 April, Acceleration, Cold Water, Consumer Price Index, Core Inflation, Cpi Report, Dearth, Energy Prices, Excess Capacity, Index Cpi, Inflation Data, Inflation Figure, Manufacturing Sector, Mismatch, Monetary Conditions, Money Supply, Target, Valuations, Volatile Food, Worrisome Trend
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Corporate Bond Chaos, ETF’s, and JPM’s “additional losses”

Friday, May 18th, 2012

by Peter Tchir, TF Mar­ket Advisors

Cor­po­rate bonds in the U.S. took a beat­ing in the past 48 hours. The high yield mar­ket, which had been spared much of the car­nage seen in the HY CDS mar­kets, finally succumbed.

This chart is key for a cou­ple of rea­sons. First it shows that the 3 point drop this week and the 2 point drop in the past two days for HYG is largely a catch up to moves that had already occurred in the CDS mar­ket. We still think of HYG as a “retail” prod­uct, but vol­umes have spiked in recent days as it has become a val­ued source of liq­uid­ity. Hedge Funds have been look­ing at the ETF ver­sus the HY CDS index. A trade we have liked, that as recent as 4 months ago was gen­er­ally met by polite grins from some of the HF’s we talk to. Now it is a strat­egy peo­ple like. More investors and mar­ket mak­ers are look­ing at the ETF’s as a bet­ter way to hedge them­selves than using the CDS index. The HY ETF’s have their own sets of prob­lems, but there is a grow­ing real­iza­tion, par­tic­u­larly in the high yield mar­ket, that at least they move with their bonds more than the CDS indices.

We are start­ing to see spikes to the down­side late in the day. It could be for any num­ber of rea­sons, but the real­ity is that I think it is mar­ket mak­ers more than any­one who are caus­ing that. To the extent you get hit on bonds in the morn­ing (you didn’t fade your bid fast enough, or the client was too impor­tant) you spent the whole day try­ing to move those bonds. With every­thing going on in Europe you don’t want (or aren’t allowed) to be long overnight. Your choices are hit­ting a down bid on the bonds – prob­a­bly a loss of at least 1%, short­ing HY18, which is already very cheap and the index guys get annoyed at any­thing less than $25 mil­lion, or, short­ing some HYG. It might cost you a ¼ point, but that is bet­ter than sell­ing the bond and it seems closer to the mar­ket than the CDS index which feels ripe for a squeeze. That flow is occurring.

The HY ETF’s are both trad­ing at a dis­count. That is encour­ag­ing the arb which means arb clients will be sell­ing bonds, buy­ing shares, and then using share redemp­tions to mon­e­tize the trade. Again, it seems like a “mar­ket neu­tral” strat­egy, but for some rea­son, the sell­ing of bonds seems to weigh more on the mar­ket than the pur­chase of the ETF’s. That adds to the down­side pres­sure, and there is cur­rently a big game going on of “which bond will the ETF’s sell”. That is adding to the volatil­ity in the cash market.

I’m strug­gling to fig­ure out what is affect­ing U.S. high yield so much. Hedge funds don’t seem too lever­aged. Banks don’t have much inven­tory. Retail doesn’t seem spooked (the redemp­tions seem to have as much to do with arb activ­ity as retail out­flows). I think this is the oppor­tu­nity we have been wait­ing for to increase our allo­ca­tion in HY in our Fixed Income Allo­ca­tion.

I have to say some­thing about JPM here. The posi­tions at some level were long assets in an avail­able for sale account (which had over $7 bil­lion of untapped prof­its on a port­fo­lio of $200 bil­lion, accord­ing to the tran­script). From every­thing else I have pieced together they were short HY mar­ket via CDS and long IG via CDA – JPM details. You notice how HY CDS got tighter every day from the 21^st until the 30^th. That would likely have pro­duced a loss in the whale trade. Accord­ing to the WSJ, there was a meet­ing on the 30^th. Between then and the 10^th when the call occurred, HY moved in their direc­tion every day. That move has accel­er­ated. How much of this hedge did they keep? Did the funky nature of their hedge per­form the same as the on the run index? There is no way to know what hap­pened, but on the HY CDS leg, the mar­ket has done noth­ing but move in their direc­tion since that first emer­gency meet­ing. Their cash posi­tions in the AFS, which should be marked at the lower of cost and mar­ket value, had an aver­age gain of 3.5%. That port­fo­lio, using that form of account­ing won’t have had a loss (it prob­a­bly has less untapped gains, but no account­ing loss). Again, impos­si­ble to know what hap­pened there, but cer­tainly food for thought.

Invest­ment grade also was in real trou­ble yes­ter­day, though the CDS mar­ket has been indi­cat­ing that for days. LQD was down almost a point, and that is on a day where TLH was up over a point, ampli­fy­ing the spread widen­ing. While cash was that weak, IG18 only weak­ened into the close at it, some­what sur­pris­ingly spent most of the day near unchanged. While the sell­ing pres­sure in the cash mar­ket was real, and some­what scary, the rel­a­tive strength in CDS was encour­ag­ing as it has been the lead­ing indi­ca­tor in this entire sell-off that really started after the JPM announcement.

This graph shows the IG9 10 year index and the IG17 5yr since the start of the year. You can clearly see how fast the widen­ing has been, which started in early May and accel­er­ated after the JPM con­fer­ence call. There are a cou­ple of things worth think­ing about here. For every­one just look­ing at the per­for­mance of IG9 10 year and “guess­ing” what the addi­tional JPM loss is, it makes almost no sense. If it was that sim­ple, JPM would have had huge gains on this trade in the first quar­ter. Even in April the change wasn’t much. If it was all the “basis” and the dif­fer­ence between the indices that caused the prob­lem, you have the same issue, that it was fairly sta­ble though out the year. It has widened, which is likely bad, but again, doesn’t really explain the P&L. If IG9 was actu­ally tight­en­ing com­ing into April 30^th, why was JPM hav­ing losses? First, IG9 did seem to move slightly less than IG17 in those last few days of April. But if JPM was long the index, they should have some gains. The prob­lem, I believe, and am try­ing to con­firm, is the tranches didn’t move with the over­all index. A quick look at MBIA, which would be a dri­ver to the tranche price (the ones JPM had on, have a higher “delta” on the weak­est names) sup­ports that. MBIA CDS actu­ally widened from April 17^th when it was 884, to 970 by April 30^th. Radian had an even larger move wider, which again would have hit pric­ing on “mezz” and “equity” IG tranches. Doing more work, but it will have been a widen­ing in high beta names, dri­ving the tranches they owned wider that would explain the loss. The under­per­for­mance of IG9 vs IG18 in that period is largely because of the high beta names, the ones JPM had the most expo­sure too. The big ques­tion here, is did they just go very short IG17 or IG18 against the tranches in that first part of May when it was freely for sale, still trad­ing rich, and priced as low as 93 for IG18 which is cur­rently at 120? Again, impos­si­ble to know, but the sim­plis­tic IG9 10 year expla­na­tion that is out there has no real basis in fact.

Maybe the G8 will threaten Ger­many with becom­ing the Growth 7 and she will cozy up and change her tough stance? It is scary that the ECB and Ger­many seem obliv­i­ous to the risk of a Grexit, and I’m frankly scared at some of the sim­ple solu­tions the ECB seems to have for their losses – put them into the EFSF. But more peo­ple are com­ing out and point­ing out the dan­gers, and Europe if any­thing, has demon­strated great fear of deci­sion and kick­ing the can with a skill that even Messi envies.

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E-mail: tchir@tfmarketadvisors.com

Twit­ter: @TFMkts

Tags: 4 Months, Carnage, Chaos, Corporate Bond, Corporate Bonds, Downside, Extent, Hedge Funds, Hf, high yield, Hy, Hyg, Jpm, liquidity, Losses, Realization, Retail Product, Spikes, Squeeze, Tf
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So How Are JPM's Prop "Counterparties" Faring?

Friday, May 18th, 2012

We already know that JPM has lost bil­lions on its prop trade, and as sug­gested ear­lier (and as the FT picked up sub­se­quently), JPM's prop desk (not to men­tion its actual stand­alone hedge fund, $29 bil­lion High­bridge, which nobody has oddly enough dis­cussed in the main­stream press yet) is so large that unwind­ing the full trade, as well as all other posi­tions held by the CIO, would be unwieldy, allow­ing us to mock "the fun of neg­a­tive con­vex­ity - espe­cially when you ARE the mar­ket and there is no-one to unwind the actual tranches to." The FT then phrased it as fol­lows: "I can’t see how they could unwind these posi­tions because no one can replace them in terms of size. It’s a bit of the same prob­lem they face with the deriv­a­tives trade," said a credit trader at a rival bank. "They pretty much are the mar­ket." Which actu­ally is funny, because if the media were to actu­ally read a paper or two on how the mar­ket works, and puts two and two together, it just may fig­ure out that the biggest ben­e­fi­cial coun­ter­party for JPM is none other than the Fed, using the con­duits of the Tri-Party repo sys­tem. But that is for Long-Term Cap­i­tal Mor­gan^TM and its new CIO head Matt "LTCM" Zames to worry about. In the mean­time, a ques­tion nobody has asked is how have the pur­ported JPM coun­ter­par­ties, the most pub­lic of which are Blue­Moun­tain and Blue­Crest who leaked the trade to the press in the first place, and are allegedly on the other side of the IG9 blow up doing. Well, accord­ing to the lat­est HSBC hedge fund update look­ing at the week ended May 11, not that hot.

Now one thing we know is that when it comes to report­ing one's results to an aggre­ga­tor: when you have a profit you never under-represent it. And in this spe­cial case, since the funds are likely eager to recruit more like-minded hedge funds to their side of the trade, the best way to do it is by show­ing profits.

Which, for the early part of May, when the bulk of the JPM losses took place, are oddly miss­ing for the two biggest play­ers across from JPM...

So: where are the prof­its really going?

And is there much more here than the "access jour­nal­ism" press has been let on to know?

Tags: Aggregator, Billions, Blow Up, Bluecrest, Bluemountain, Conduits, Counterparty, Derivatives, Desk, Hedge Fund, Hedge Funds, Hsbc, Jpm, Long Term Capital, Losses, Ltcm, Mainstream Press, Negative Convexity, Profits, Tranches
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One Epic Chinese Bubble — The Concrete Scowl

Friday, May 18th, 2012

The best charts are those that need no expla­na­tion. Such as this one.

Source: Gold­man Sachs

Tags: Concrete, Epic, Goldman Sachs
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Gundlach On Debt Market and 'Monster Legs'

Thursday, May 17th, 2012

Jeff Gund­lach dis­cussed mort­gages, mod­els, math, and moronic delu­sion with Tom Keene on Bloomberg TV this morn­ing. Start­ing with why Europe mat­ters to US Trea­sury and mort­gage mar­kets, the Dou­ble­Line boss goes to address whether banks/hedge-funds have become too math-centric. "I don't believe in mod­els" is how Gund­lach begins his dia­tribe on the over-confidence in math and empir­i­cal rela­tion­ships, adding that they use 'sce­nar­ios' or 'space-relations' and build port­fo­lios as one would stack a dish­washer — piece by piece. He dis­cusses the model-implications of JPM (and other hedge funds) as they seemed to igno­rantly uti­lize and rely on cor­re­la­tions — which, unlike cer­tain talking-heads who in a know-nothing man­ner dis­cuss JPM's 'spread' trade incor­rectly — lead­ing to models-behaving-badly which are gen­er­ally at the heart of most unex­pected blow-ups.

Shift­ing gears to prac­ti­cal mat­ters, Jeff believes there is no rea­son to hold any invest­ment grade bonds that are inside of 3 years (and per­haps even 5 years) because they "just basi­cally have no yield" and fur­ther, it is non-sensical to think that short-term inter­est rates are going up in the US. Even if you are wor­ried about infla­tion — the Fed will still not allow inter­est rates to rise to implic­itly sup­press nom­i­nal GDP.

The new king of bonds also goes on to note that price action in bonds is almost every­thing nowa­days as the old-school coupon-reinvestment-growth mod­els no longer work since coupons are implic­itly lower and lower in this new ZIRP world. This in our view means that prices will become more volatile as the coupon rein­vest­ment flow becomes less of a smooth­ing effect — espe­cially when the Fed tight­ens its liq­uid­ity spigot a lit­tle as it is now. As Socrates said, Gund­lach echoes the fact that 'one should not try to know every­thing; but respect the things that one can­not know' — don't delude your­self — which seems like good advice for all those with such high con­vic­tions of sus­tained reality.

Towards the end he dis­cusses his already-infamous short-AAPL, Long-Nattie trade — adding that the trade has 'mon­ster legs' and the biggest mis­take investors make is exit­ing win­ners too early.

Tags: Aapl, Blow Ups, Correlations, Debt Market, Delusion, Diatribe, Empirical Relationships, Good Advice, Growth Models, Gundlach, Hedge Funds, Investment Grade Bonds, Monster Legs, Monster Models, Mortgage Markets, Nominal Gdp, Sensical, Shifting Gears, Spread Trade, Term Interest, Tom Keene, Ups
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Flight From Risk: Treasury Plummets To Record Low Yield As Gold Surges

Thursday, May 17th, 2012

Now its get­ting inter­est­ing. 30Y yields fell the most in 5 months today back to 5 month lows, 10Y yields crashed to all-time clos­ing lows, and Gold surged by its most in 4 months (and 2nd most in 7 months) as stocks started to accel­er­ate lower. Gold is unch on the week now as 30Y is –21bps and 10Y –14bps — incred­i­ble. Between the Philly Fed's con­fir­ma­tion of decel­er­a­tion in US macro data and Europe's increas­ingly crescendo-like implo­sion, is it any won­der that the decou­pling the­sis has given way to real­ity. S&P 500 e-mini futures repeated the early rally late fade pat­tern of the last 8 days but this time it was more aggres­sive as ES pushed towards 1300. CAT was a dog today account­ing for 25% of the Dow's losses and AAPL tum­bled fur­ther — head­ing towards a 20% retrace­ment off its highs. Finan­cials tum­bled fur­ther with Citi inch­ing very close to red YTD (and JPM falling rapidly). Credit mar­kets, which led the sell­off, con­tinue to slide but this time with equi­ties in sync. Equi­ties went out at their very lows of the day — at 3.5 month lows as VIX soared over 24% to close at its high­est in 5 months.

Is BTFD DOA?

30Y Trea­suries plunged but 10Y fell to record clos­ing low yields!!!

and Gold is back near unch of ther week as the PMs soared today...

Finan­cials are rapidly los­ing ground with Citi and JPM about to go red YTD...

Tags: 4 Months, 5 Months, 7 Months, Aapl, Confirmation, Credit Markets, Crescendo, Deceleration, Dow, Futures, Jpm, Losing Ground, Lows, Macro Data, Pms, Retracement, Selloff, Treasuries, Unch, Ytd
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Europe History Time Lapse Map Goes Viral

Thursday, May 17th, 2012

Always wanted to learn more about Euro­pean his­tory but could never find the time? Look no fur­ther than the time-lapse map in the video above, which has boiled down the continent's his­tory into just three-and-a-half minutes.

The map traces changes in Europe's bor­ders from 1000 AD until 2003, and was cre­ated using soft­ware from the Cen­ten­nia His­tor­i­cal Atlas.

Watch the Byzan­tine Empire fall apart, fol­low the vic­to­ries of the Mon­gols, and watch national bor­ders shift, all accom­pa­nied by a fit­tingly dra­matic sound­track by Hans Zim­mer from the Incep­tion score.

Tags: Byzantine Empire, Continent, Europe History, Europe Map, European History, Hans Zimmer, Inception, Mongols, National Borders, Score, Time Lapse, Using Software
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The Vision Thing II (Smead)

Thursday, May 17th, 2012

by Bill Smead, Smead Cap­i­tal

In May of 2010 we wrote about how impor­tant it was for the com­pa­nies which meet our eight cri­te­ria to have a strong vision and clear agenda for their busi­ness. When Pres­i­dent George Her­bert Walker Bush ran for re-election in 1992, he was crit­i­cized for not cast­ing a vision for our coun­try. In the after­math, he called it “the vision thing”. We at Smead Cap­i­tal Man­age­ment (SCM) believe that every five to ten years those who man­age money need to “cast a vision” of where they want to take investors and then back­track from there to put a port­fo­lio together to best take advan­tage of the vision cast. We believe there are three main road­blocks to the cast­ing of a vision for the exe­cu­tion of a port­fo­lio plan. In the absence of more attrac­tive titles, we will call these road­blocks fog, bog and smog.

Vision is all about see­ing clearly and fog inhibits the abil­ity of folks to see any­thing other than what is right in front of them. The time frames used by today’s indi­vid­ual and insti­tu­tional investors are cre­at­ing fog. For exam­ple, War­ren Buf­fett was uncom­fort­able with any six to twelve month pro­jec­tions about Berk­shire Hath­away shares at the annual meet­ing last Sat­ur­day in Omaha. He was very con­fi­dent about where they might be in five to ten years! Short-term pre­dic­tions have a ten­dency to be foggy and long-term vision can be much clearer, in our opin­ion. To cast a vision for invest­ing you need longer time frames.

Many in money man­age­ment might have the vision for five to ten years, but they are stuck in a bog. They might have real­ized wisely in the early 2000′s that US com­mon stocks were going to per­form rel­a­tively poorly, so they moved to a posi­tion of wide asset allo­ca­tion. The the­ory was that by spread­ing your nets widely you would always be catch­ing some fish some­where. This was a good idea early on, but now that it is being prac­ticed by vir­tu­ally every major finan­cial orga­ni­za­tion and insti­tu­tion in the US, there is a great deal of net being used and very few asset classes catch­ing fish. Worse yet, the five-year out­look for some of the nor­mal fish­ing holes (think bonds, com­modi­ties, etc.) is down­right dis­mal and dis­heart­en­ing. How­ever, so much mar­ket­ing, pos­tur­ing and so many com­puter mod­els have been put in place that the embar­rass­ment of cast­ing a new vision makes a money man­age­ment pro­fes­sional feel like their legs are three-feet deep in mud.

The third road­block is smog. Another descrip­tion is pol­lu­tion. Clients are scared from look­ing in the invest­ment rearview mir­ror and they are allow­ing their atti­tudes to get pol­luted. They are attempt­ing to limit the vision of their money man­ager by giv­ing severe push back when vision enters the con­ver­sa­tion. There is a cot­tage indus­try which exists today to pol­lute the minds of money man­agers and their clients. Go online, on TV or lis­ten to the radio and you will hear a steady diet of neg­a­tive smog and pol­lu­tion. Most of it is con­cerned with the same one-year time frames that the vision caster must avoid. In many cases, these smog pro­duc­ers are part of one’s own research team or are a man­ager of a fund that you nor­mally use to exe­cute your long-term vision. We won’t name names, but in most cases these neg­a­tive nabobs are becom­ing wealthy from other people’s mis­ery. If that were the worst part things would be okay. Unfor­tu­nately, they have pol­luted the lungs and minds of finan­cial pro­fes­sion­als and their clients and shoved their legs deeper into the bog.

Our vision is that the best per­form­ing asset class of the next ten years will be large-cap US stocks. And we believe that domestically-oriented com­pa­nies will sig­nif­i­cantly out­per­form those which depend more heav­ily on for­eign rev­enue and prof­its. Lastly, we believe that most money man­agers are blocked from join­ing us because of fog, bog and smog. We’d like you to get elected and re-elected. Don’t for­get “the vision thing”.

Best Wishes,

William Smead

The infor­ma­tion con­tained in this mis­sive rep­re­sents SCM’s opin­ions, and should not be con­strued as per­son­al­ized or indi­vid­u­al­ized invest­ment advice. Past per­for­mance is no guar­an­tee of future results. All of the secu­ri­ties iden­ti­fied and described in this mis­sive are a sam­ple of issuers being cur­rently rec­om­mended for suit­able clients as of the date stated in this mis­sive and do not rep­re­sent all of the secu­ri­ties pur­chased or rec­om­mended for our clients. It should not be assumed that invest­ing in these secu­ri­ties was or will be prof­itable. A list of all rec­om­men­da­tions made by Smead Cap­i­tal Man­age­ment within the past twelve month period is avail­able upon request.

Copy­right © Smead Cap­i­tal

Tags: Asset Allocation, Backtrack, Berkshire Hathaway, Capital Management, Common Stocks, George Herbert, George Herbert Walker, George Herbert Walker Bush, Herbert Walker Bush, Institutional Investors, Long Term Vision, Money Management, Portfolio Plan, President George Herbert Walker Bush, Roadblocks, Smead, Term Predictions, Time Frames, Vision Thing, Warren Buffett
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Keep Your Portfolio Rolling Along With Canadian National Railway

Thursday, May 17th, 2012

by F.A.S.T. Graphs

Cana­dian National Rail­way Co (CNI) is a com­pany whose stock price has his­tor­i­cally cor­re­lated very closely to earn­ings. Wher­ever earn­ings have gone, Cana­dian National Rail­way Co's stock price has fol­lowed. Cur­rently CNI's stock price is pre­cisely track­ing its earn­ings jus­ti­fied val­u­a­tion. There­fore, we believe the com­pany is trad­ing at a sound val­u­a­tion offer­ing the pru­dent div­i­dend growth investor the oppor­tu­nity for cap­i­tal appre­ci­a­tion and div­i­dend growth at a rea­son­able level of risk.

Div­i­dend Con­tender: Cana­dian National Rail­way Co.

This arti­cle looks at Cana­dian National Rail­way Co, a Div­i­dend Con­tender, through the lens of the F.A.S.T. Graphs™ Fun­da­men­tals Ana­lyzer Soft­ware Tool. Since a pic­ture is worth a thou­sand words, the reader will be pro­vided the "essen­tial fun­da­men­tals at a glance" expressed vividly in pic­tures. In order to pro­vide you the oppor­tu­nity to research this com­pany deeper and faster we are pro­vid­ing a link to a live, fully func­tion­ing earn­ings and price cor­re­lated set of graphs Found Here. (Tip: Run your mouse over the var­i­ous lines and watch the graphs come to life).

A Div­i­dend Con­tender is defined as a com­pany that has increased its div­i­dend for a min­i­mum of 10 — 24 straight years. Cana­dian National Rail­way Co is a Div­i­dend Con­tender that has raised its div­i­dend every year for 16 con­sec­u­tive years. The com­plete Div­i­dend Con­tenders list is com­piled cour­tesy of David Fish. (Open as an excel spread­sheet and look at the tabs on the bot­tom to find the Div­i­dend Con­tender list).

About Cana­dian National Rail­way Co: from their website

"Cana­dian National Rail­way Com­pany and its oper­at­ing rail­way sub­sidiaries — spans Canada and mid-America, from the Atlantic and Pacific oceans to the Gulf of Mex­ico, serv­ing the ports of Van­cou­ver, Prince Rupert, B.C., Mon­tréal, Hal­i­fax, New Orleans, and Mobile, Ala., and the key met­ro­pol­i­tan areas of Toronto, Buf­falo, Chicago, Detroit, Duluth, Minn./Superior, Wis., Green Bay, Wis., Minneapolis/St. Paul, Mem­phis, St. Louis, and Jack­son, Miss., with con­nec­tions to all points in North America."

Cana­dian National Rail­way Co: A Div­i­dend Con­tender with 16 Con­sec­u­tive Years of Div­i­dend Increases

Learn­ing from the Past — Look­ing at Earn­ings Only

Since div­i­dends are paid out of earn­ings, a clear per­spec­tive of a company's his­tor­i­cal earn­ings growth record is a vital com­po­nent of a div­i­dend investor's pru­dent due dili­gence process. The fol­low­ing graph plots Cana­dian National Rail­way Co's earn­ings per share since 1998. A quick glance to the right of the graph shows that Cana­dian National Rail­way Co has increased earn­ings at a com­pounded rate of 17.5% (see pur­ple cir­cle on graph) per annum.

(click to enlarge)

Earn­ings Deter­mine Mar­ket Price and Div­i­dend Income: The fol­low­ing earn­ings and price cor­re­lated F.A.S.T. Graphs™ clearly illus­trates the impor­tance of earn­ings to both price move­ment and div­i­dend income. The earn­ings growth rate line or True Worth ™ line (orange line with white tri­an­gles) is cor­re­lated with the his­tor­i­cal stock price line. On graph after graph the lines will move in tan­dem. If the stock price strays away from the earn­ings line (over or under), inevitably it will come back to earnings.

Since div­i­dends are paid out of earn­ings, and there­fore rep­re­sent addi­tional return on top of what the mar­ket cap­i­tal­izes earn­ings at, they are depicted by the light blue shaded area and stacked on top of the earn­ings line. There­fore, a quick visual of these two impor­tant com­po­nents is simul­ta­ne­ously revealed:

1. The addi­tional return that div­i­dend pay­ing stocks provide.

2. The per­cent­age of earn­ings paid to share­hold­ers as div­i­dends (pay­out ratio).

The value in this arti­cle is through care­fully ana­lyz­ing the earn­ings and price cor­re­lated fun­da­men­tally based graphs. Notice that one glance tells you how well the com­pany has per­formed on an oper­at­ing basis his­tor­i­cally and how the mar­ket val­ued that his­tor­i­cal per­for­mance. There­fore, the reader is free to dis­cover whether or not cur­rent val­u­a­tions make sense based on his­tor­i­cal norms cou­pled with fun­da­men­tal val­ues. Instead of opin­ion, this arti­cle is designed to pro­duce facts that can be ana­lyzed to the read­ers invest­ing benefit.

(click to enlarge)

Per­for­mance Table: Cap­i­tal Appre­ci­a­tion and Div­i­dend Income Cana­dian National Rail­way Co

The asso­ci­ated per­for­mance results with the earn­ings and price cor­re­lated graph, val­i­dates the above dis­cus­sion regard­ing the two com­po­nents of total return: Cap­i­tal appre­ci­a­tion and div­i­dend income. Div­i­dends are included in the total return cal­cu­la­tion and are assumed paid, but not reinvested.

When pre­sented sep­a­rately like this, the addi­tional rate of return a div­i­dend pay­ing stock pro­duces for share­hold­ers becomes unde­ni­ably evi­dent. In addi­tion to the 17.6% cap­i­tal appre­ci­a­tion (Clos­ing Annu­al­ized ROR), long-term share­hold­ers of Cana­dian National Rail­way Co would have received an addi­tional $91,374.80 in div­i­dends that increased their total return from 17.6% to 18.3% per annum.

(Note: Since this is a Div­i­dend Con­tender it has raised its div­i­dend every year for at least 10–24 years, there­fore, neg­a­tive div­i­dend growth rates shown, if any, will be attrib­uted to spe­cial addi­tional div­i­dends paid in excess of the company's reg­u­larly reported div­i­dend rate)

(click to enlarge)

The fol­low­ing graph plots the his­tor­i­cally nor­mal PE ratio (the dark blue line) cor­re­lated with 10-year Trea­sury note inter­est. Notice that the cur­rent price earn­ings ratio on this qual­ity com­pany is as nor­mal as it has been since 1998.

(click to enlarge)

A fur­ther indi­ca­tion of val­u­a­tion can be seen by exam­in­ing a company's cur­rent price to sales ratio rel­a­tive to its his­tor­i­cal price to sales ratio. The cur­rent price to sales ratio for Cana­dian National Rail­way Co is 3.91, which is his­tor­i­cally high.

(click to enlarge)

Look­ing to the Future

Exten­sive research has pro­vided a pre­pon­der­ance of con­clu­sive evi­dence that future long-term returns, and the div­i­dend and its growth rate are a func­tion of two crit­i­cal determinants:

1. The rate of change (growth rate) of the company's earnings

2. The price or val­u­a­tion you pay to buy those earnings

There­fore, fore­cast­ing future earn­ings growth, bought at sound val­u­a­tions, is the key to safe, sound, and prof­itable performance.

There­fore, it log­i­cally fol­lows that mea­sur­ing per­for­mance with­out simul­ta­ne­ously mea­sur­ing val­u­a­tion is a job half done. At its cur­rent price, which is attrac­tively aligned with its True Worth™ val­u­a­tion, Cana­dian National Rail­way Co rep­re­sents a poten­tial oppor­tu­nity to invest in a Div­i­dend Con­tender at a rea­son­able price. The impor­tant fac­tor is that Cana­dian National Rail­way Co has real assets and cash flow under­pin­ning its stock price. This solid eco­nomic foun­da­tion offers share­hold­ers the poten­tial for both a strong mar­gin of safety and an oppor­tu­nity for an increas­ing div­i­dend income stream and poten­tially attrac­tive future returns.

The Esti­mated Earn­ings and Return Cal­cu­la­tor Tool is a sim­ple yet pow­er­ful resource that empow­ers the user to cal­cu­late and run var­i­ous invest­ing sce­nar­ios that gen­er­ate pre­cise rate of return poten­tial­i­ties. Think­ing the invest­ment through to its log­i­cal con­clu­sion is an impor­tant com­po­nent towards mak­ing sound and pru­dent com­mon­sense invest­ing decisions.

The con­sen­sus of 17 lead­ing ana­lysts report­ing to Zacks fore­cast Cana­dian National Rail­way Co long-term earn­ings growth at 11.5%. Cana­dian National Rail­way Co has medium long-term debt at 38% of cap­i­tal. Cana­dian National Rail­way Co is cur­rently trad­ing at a P/E of 14.5, which is inside the value cor­ri­dor (defined by the five orange lines) of a max­i­mum P/E of 18. If the earn­ings mate­ri­al­ize as fore­cast, Cana­dian National Rail­way Co's True Worth val­u­a­tion would be $154.49 at the end of 2017, which would be a 13.7% annual rate of return from the cur­rent price, includ­ing assumed dividends.

(click to enlarge)

Earn­ings Yield Estimates

Dis­counted Future Cash Flows: All com­pa­nies derive their value from the future cash flows (earn­ings) they are capa­ble of gen­er­at­ing for their stake­hold­ers over time. There­fore, because Earn­ings Deter­mine Mar­ket Price and div­i­dend income in the long run, we expect the future earn­ings of a com­pany to jus­tify the price we pay.

Since all invest­ments poten­tially com­pete with all other invest­ments, it is use­ful to com­pare invest­ing in any prospec­tive com­pany to that of a com­pa­ra­ble invest­ment in low risk Trea­sury bonds. Com­par­ing an invest­ment in Cana­dian National Rail­way Co to an equal invest­ment in 10-year Trea­sury bonds illus­trates that Cana­dian National Rail­way Co's expected earn­ings would be 7.3 times that of the 10-Year T-Bond Inter­est. (See EYE chart below). This is the essence of the impor­tance of proper val­u­a­tion as a crit­i­cal invest­ing component.

(click to enlarge)

This report presents essen­tial "fun­da­men­tals at a glance" on Div­i­dend Con­tenders Cana­dian National Rail­way Co, illus­trat­ing the past and present val­u­a­tion based on earn­ings achieve­ments as reported. Future fore­casts for earn­ings growth are based on the con­sen­sus of lead­ing ana­lysts. Although with just a quick glance you can know a lot about the com­pany, it's imper­a­tive that the reader con­duct his or her own due dili­gence in order to val­i­date whether the con­sen­sus esti­mates seem rea­son­able or not. Fol­low the link we pro­vided at the begin­ning of this arti­cle to a fully func­tion­ing F.A.S.T. Graphs™ on Cana­dian National Rail­way Co.

Sum­mary & Conclusions

We believe at its cur­rent quo­ta­tion CNI offers div­i­dend growth investors an above-average total return at below lev­els of risk. Although the com­pany only offers a mar­ket aver­age div­i­dend rate, we would expect its div­i­dend to grow com­men­su­rate with its above-average expected earn­ings growth. We con­sider this a high qual­ity div­i­dend growth stock that is ide­ally suited for the long-term buy and hold con­ser­v­a­tive investor. As always, we rec­om­mend you con­duct your own thor­ough due diligence.

Dis­clo­sure: No posi­tion at the time of writing.

Dis­claimer: The opin­ions in this doc­u­ment are for infor­ma­tional and edu­ca­tional pur­poses only and should not be con­strued as a rec­om­men­da­tion to buy or sell the stocks men­tioned or to solicit trans­ac­tions or clients. Past per­for­mance of the com­pa­nies dis­cussed may not con­tinue and the com­pa­nies may not achieve the earn­ings growth as pre­dicted. The infor­ma­tion in this doc­u­ment is believed to be accu­rate, but under no cir­cum­stances should a per­son act upon the infor­ma­tion con­tained within. We do not rec­om­mend that any­one act upon any invest­ment infor­ma­tion with­out first con­sult­ing an invest­ment advi­sor as to the suit­abil­ity of such invest­ments for his spe­cific sit­u­a­tion. A com­pre­hen­sive due dili­gence effort is recommended.

Copy­right © F.A.S.T. Graphs

Tags: Canadian National Railway, Canadian National Railway Co, Canadian National Railway Company, Canadian Railway, Capital Appreciation, Cni, Contender, Contenders, David Fish, Dividend Growth, Duluth, Excel Spreadsheet, Gulf Of Mexico, Metropolitan Areas, Mid America, National Railway Company, Pacific Oceans, Prince Rupert, Software Tool, Stock Price
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The Facebook IPO: A Note to Mark Zuckerberg; or, With “Friends” Like Morgan Stanley, Who Needs Enemies?

Thursday, May 17th, 2012

by Dan Ariely, Behav­ioural Sci­en­tist, and author of Pre­dictably Irra­tional, and The Hon­est Truth About Dishonesty

I just received this let­ter from a friend in the bank­ing indus­try. He prefers to remain anony­mous (you’ll see why soon enough).

Dear Mark,

There’s been a lot of bal­ly­hoo recently about your IPO and your choice of invest­ment bankers. Indeed, a war was fought by the banks to win your “deal of the decade.”  As reported in the press, the com­pe­ti­tion was so intense banks slashed their fees in order to win your busi­ness. Face­book is “only” pay­ing a 1% “com­mis­sion” for its IPO rather than the 3% typ­i­cally charged by the banks.

Con­grat­u­la­tions, Mr. Zucker­berg! On the sur­face it appears your pals in invest­ment bank­ing have given you a quite a deal!… Or have they?

Let’s take a closer look and see what you’re get­ting for your money.

To start, your bankers have the task of sell­ing 388 mil­lion Face­book shares to the pub­lic. In return, these banks will receive $150 mil­lion for their efforts.  Mor­gan Stan­ley will get the largest share of that amount—approximately $45 mil­lion. But is $45 mil­lion all that Mor­gan Stan­ley makes off your deal?

Before we answer this ques­tion, let’s first dis­sect the sales pitch that Mor­gan Stan­ley prob­a­bly gave you to jus­tify “only” the $150 mil­lion fee. We’ll look at what they told you, and then what that actu­ally means.

1) We will raise the opti­mal amount of money for the com­pany, for our 1% fee. (Trans­la­tion: How great is it that Zucker­berg believes he got a great deal by get­ting us down to a 1% fee! We can’t believe he got hood­winked into agree­ing to any level of what are actu­ally vari­able com­mis­sion fees.)

2) The def­i­n­i­tion of a suc­cess­ful deal is hav­ing a good price “pop” on the first day of trad­ing. This will make all par­ties happy and you, Mark, look like a rock star. (Trans­la­tion: No one ben­e­fits more than us if Facebook’s share price rises sig­nif­i­cantly on day one. That first day price “pop” will take money directly out of your pocket and puts it in ours and those of our “best friends”—not yours or the pub­lic stock­hold­ers. We will, at almost all costs, make this happen.)

3) This is a very com­pli­cated process, espe­cially for such a large com­pany, but we are here to suc­cess­fully guide you through it. (Trans­la­tion: It actu­ally takes the same amount of work to do a large IPO as a small one. Thus for approx­i­mately the same amount of work we’re doing for Face­book, we some­times get only $10 million—$140 mil­lion less than we’re mak­ing on Zuckerberg’s IPO.)

4) We will per­form due dili­gence on your com­pany to make sure the busi­ness and its finances are as they seem. (Trans­la­tion: While it cer­tainly does take some time and effort to per­form rea­son­able due dili­gence, Face­book is a very large and well-known com­pany, and we have done this same pro­ce­dure hun­dreds of times.)

5) We will write a prospec­tus that out­lines Facebook’s strat­egy, busi­ness plan, finan­cials, and risks, and we will get it approved by the SEC. (Trans­la­tion: Per the reg­u­la­tory guide­lines, a prospec­tus is largely a boil­er­plate doc­u­ment; for the most part, it’s just a lot of cut­ting and pasting.)

6) Once this prospec­tus is com­pleted and with input from the Face­book team, we will come up with “the range” or the approx­i­mate price we think your IPO shares should be sold at to the fund man­agers. (Trans­la­tion: The price of your IPO will be deter­mined by where and how we can best opti­mize our (secret) prof­its on the deal.)

7) We believe the best share­hold­ers are large fund man­agers, as they will become long-term hold­ers of Face­book stock.  How­ever, at your request, we will allo­cate 25% of the IPO shares to sell to indi­vid­ual investors. (Trans­la­tion: There are 835 mil­lion Face­book users world­wide. One could argue that what is best for Face­book would be to let all of Facebook’s legally eli­gi­ble cus­tomers enter orders to buy Face­book stock. Then through the bro­ker of their choos­ing, they could enter the quan­tity of shares they want to buy and the price they want to pay, just like the fund man­agers do—or are sup­posed to do. More on this sce­nario below.)

8) Our 10-day sales process will begin. For this impor­tant “road show,” you will be intro­duced to our large fund man­ager clients. These fund man­agers will receive our pitch for why they should buy your stock, and we will assess their inter­est and at what price. (Trans­la­tion: Far from being long-term hold­ers, many of our large fund man­ager “best friends” will, as soon as Face­book shares start trad­ing, sell (or “flip”) for a wind­fall profit on all the under­priced shares we’ve given them. We’ll enable this by cre­at­ing a per­ceived “feed­ing frenzy” for the stock by putting out an arti­fi­cially low ini­tial esti­mate ($28 to $35 per share) for where we think the IPO will be priced.  We will then raise that esti­mate dur­ing the road show. Rumors about this begin to cir­cu­late over the next day or so.)

9) At the end of the road show on the night before the IPO, we will review the over­all sup­ply and demand for the stock and then “price” the shares. This is the price at which the large fund man­agers will receive their “win­ning” Face­book shares. (Trans­la­tion: The price of the stock is already known. For the past few years, Face­book shares have been actively trad­ing on such venues as Sec­ond­Mar­ket and SharePost.)

10) And finally, we will put a mech­a­nism, called a Green­shoe, in place that “sup­ports” your share price after the IPO. (Trans­la­tion: Thank God Zucker­berg doesn’t under­stand one of the great­est invest­ment bank­ing profit enhanc­ing cre­ations of all time—“The Green­shoe.” The Green­shoe will likely be our most prof­itable part of this deal.  It’s a secret wind­fall, and although we mar­ket it to Face­book as a method to sta­bi­lize its share price, it’s really just another way for us, with lit­tle effort, to make huge amounts of money.)

We’re not done yet, Mark. Now, I’d like to dig a bit deeper into what’s going to hap­pen and show you all the addi­tional ways your banker friends and their large fund man­ager clients are going to make oodles of money off your deal.

1) Mor­gan Stan­ley only gives Face­book shares (“golden tick­ets”) to their best client “friends.”  In other words, it’s no coin­ci­dence that Mor­gan Stanley’s biggest fund man­ager clients get the bulk of the shares offered in this kind of deal.

2) How do you become best friends with Mor­gan Stan­ley?  There are lots of ways, such as trad­ing tens of mil­lions of shares with them or using the firm as your prime broker.

3) I’m sure there are a lot of con­ver­sa­tions going on right now between Mor­gan Stanley’s sales­peo­ple and their clients. These con­ver­sa­tions are prob­a­bly along the lines of (wink-wink) “before we allo­cate our Face­book shares, we’d like to ask first if you plan to do more trad­ing with us over the next week to six months….”

4) Let’s assume that 50 of Mor­gan Stanley’s “best friends” trade an extra 2 mil­lion shares so they can get access to more shares of the Face­book IPO. Let’s also assume that the aver­age com­mis­sion these clients pay to Mor­gan Stan­ley is 2 cents per share. Well, those extra trades will dump an addi­tional $2 mil­lion dol­lars into Morgan’s coffers.

5) Now comes the part where Mor­gan Stan­ley actu­ally gives free money to its friends. If the Face­book IPO is like the major­ity of other recent Inter­net offer­ings, here’s what Mor­gan Stan­ley will likely do.  They know Face­book will be a “hot” deal. Espe­cially, with all of the “5% orders” com­ing in, there will be huge demand for Face­book shares.  My pre­dic­tion is that Mor­gan Stan­ley will “price” Face­book at approx­i­mately $40 per share.  This is the price at which Mor­gan Stanley’s “best friends will be able to buy the bulk of the 388 mil­lion shares offered.

6) Now let’s now assume that Face­book shares open for trad­ing at $50—a lower per­cent­age pre­mium than Groupon’s open­ing share-price “pop.”

7) Let’s assume that one of Mor­gan Stanley’s “best friends” decides to sell 3 mil­lion shares right after the open­ing at $50 per share. That “best friend” will instan­ta­neously make a $30 mil­lion profit.  That’s right, a $30 mil­lion profit.

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