President Obama told reporters at Camp David:
“Europe has taken significant steps to manage the crisis. And there’s now an
emerging consensus that more must be done to promote growth and job creation
right now in the context of these fiscal and structural reforms.”
This is code for, "we are gonna print a shit load of money."
Inflation will be spun and sold to the masses as "growth"...after all, the
US Government and the Fed have fooled Americans into believing that
Inflation = Growth for over 40 years now...why not the rest of the World?
INFLATION IS NOT GROWTH, this will end in global economic catastrophe.
“As expected, the G-8 led to little concrete measures on how to stimulate
growth, particularly in Europe,” said Thomas Costerg, an economist at
Standard Chartered Bank in London.
The whole thing was just another shameless effort to CON the public into
believing that the western governments can "solve the crisis"...another
feeble attempt to "boost confidence".
And what do the first three letters of the word confidence spell? CON!
The whole lot of them at the G-8 are at a loss for what to do...their desperation now
obvious.
Painfully, it must be pointed out that there is yet another summit tomorrow, this time where the European heads of state will sit down [by themselves] and also decide that, shockingly, they want Greece in Europe, and that increased growth and employment are imperative.
Posted: Monday , 21 May 2012
LONDON (Mineweb) -
In his keynote presentation to last week's New York Hard Assets Investment Conference, Eric Sprott, as usual as a precious metals believer, gave an upbeat presentation on the long term prospects for gold and silver.
He opened his address by pointing to a big change in the markets since he presented at the same event a year earlier when, as he pointed out, the silver price was around $49.50 "until they bombed it" and gold was shortly to see $1900 plus. But overall he pointed to the huge sea change in the precious metals markets over the past 12 years and that the 12 month correction we are currently seeing is a temporary phenomenon and that he reckons the physical market in gold and silver is actually still in great shape.
He sees markets in general being distorted by manipulation by governments - examples being homeowner tax credits, cash for clunkers, TARP, QE1, QE2, LTROs, unlimited swap lines, etc. A veritable litany of stimuli to prevent what should be happening from happening. He quoted a recent interview with Jim Grant - the highly respected economic commentator - who stated that "all markets are manipulated". Sprott pointed in particular to interest rates "which for sure are manipulated" and gave credit too to GATA who came out with the statement that markets were being manipulated long before the theme has been picked up by a number of commentators including Jim Grant. He very strongly concurs with this view pointing out that government stimuli have been designed to try and elicit some strength in stock markets and a degree of suppression in the precious metals markets which they do not want to go up as this indicates the relative weakness in fiat currencies.
Sprott touched on a number of facets affecting the markets at the moment - JP Morgan and its big derivatives losses, financial repression, Sovereign debt - describing the latter as being in a Minsky Moment who said "If you continue to expand your economy by increasing the amount of debt, there comes a time when the productive capacity cannot handle the debt". Greece is seen as a great example of this, He sees Spain as the next one on the list, although Portugal is probably in an even worse position. He sees this as the dominoes which are going to fall one after the other and, in his mind, there is no question that they will fall.
The potential effects on the banking system are drastic. He reminded the audience that at the peak of the 2008 financial collapse Treasury Secretary Paulson said that he was within hours of shutting the banking system down! "Please never forget those words" said Sprott. The system is vulnerable and has got close to this several times since.
For gold he feels that as people realise how vulnerable, flawed and over-levered and risky the banking system is they will want to withdraw their money and put it somewhere which they will see as keeping its value.
There are a number of other factors he sees as being particularly positive for the gold market. These include:
The zero interest rate policy
China's dramatic increase in gold imports
Chinese and Russian mined gold (two of the world's major producers) never gets to the free market
Central Bank buying seemingly increasing
This effectively means a large percentage of global gold supply is being taken off the market. "If these trends persist", said Sprott," the price of gold will not stay down".
The physical market supply thus has Sprott asking "Where is the gold coming from". The only source which he sees as likely is that Central Banks are selling gold surreptitiously, perhaps by leasing it so that any decline does not show on their books.
Silver: When it reached $49.50 there was suddenly 1 billion ounces of ‘paper' silver released onto the market. Sprott is convinced that certain people in the market with very big short positions manipulated the price down. "We see very strange things happening in the silver market" said Sprott.
He couldn't understand also why people in Europe were not buying gold given their financial system is collapsing around them.
Why does Sprott like silver so much? People buy 50 times more silver than gold and while paper silver may be ruling the market, the day of physical will come. "When currencies fail" said Sprott "gold will become a part of the official reserve currency and silver will have a very, very major role again."
Sprott concluded by saying while he loves gold, loves the data, that silver will still be the investment of the decade. "Stay the course" he said. Even though Central Banks et al may be working against you gold and silver will ultimately prevail as fiat currencies continue to decline in value.
Monday, May 21, 2012
CFTC - Managed Money Short Positioning High for Gold, Silver
Could be 100 Octane Rally Fuel for precious metals.
SOUTHEAST TEXAS – Taking a break from the grueling, demanding and intense quest for things with fins and scales for a half day* today, we thought we would share with everyone a couple of the more interesting charts which surfaced in the latest Commodity Futures Trading Commission (CFTC) commitments of traders report (COT). The report was released Friday, May 18, with data as of Tuesday, May 15.
According to the CFTC, as of Tuesday of last week, large traders the CFTC classes as Managed Money (“MMs,” hedge funds, commodity trading advisors and other funds that trade futures on behalf of others), increased their short positions in gold futures by 9,837 contracts to show 32,822 contracts short. That is the highest pure short position for the “funds” since September 16, 2008, during the height of the 2008 panic with gold then in the $770s. One week later, on September 23, gold closed at $891.90, about $122 higher as the MMs covered or offset more than 20,000 of those short positions (not a misprint).
Source for all graphs CFTC for COT data, Cash market for gold and silver.
Continued…
Very high pure short positions for the usually net long Managed Money traders very often correspond with important turning lows for gold. To confirm that notion simply look at the graph above and note that the spikes to the upside for the blue line (short positions) often correspond closely with bottoms in the pink price of gold.
The graph above is in part why we say that large MM short positions are “100-octane rally fuel” for the price of gold. The typically long side of the battlefield likely uses short positions to temporarily “hedge” existing long positions they do not wish to close. Their short positions are just like any other shorts, they have to be covered (bought back) at some point prior to expiry. Higher short positions are “buying pressure in a bottle” more or less.
Remember that the positioning above was on Tuesday with gold then trading in the $1,540s. Gold has indeed advanced since then and is currently trading in the $1,590 region as we write on Monday, May 21, 2012.
That high short position is in part why the Managed Money no-spread net position shows the lowest net long positioning (80,098 contracts) since December 16 of 2008 (73,332 contracts net long then with $858 gold). On Tuesday Managed Money traders were the least net long gold futures since the global panic of 2008 in other words.
So, to conclude this brief look at the Managed Money gold futures positioning, it’s pretty clear that “the funds” decided to “hedge” their long trades by adding shorts up to last Tuesday. With gold moving back to the upside, we can expect with little doubt, that the MM’s pure short positioning will be considerably lower and their net long positioning will therefore be higher in the next COT report. The only question is by how much. That is, of course, unless gold does something weird by the close tomorrow, Tuesday, the cutoff for the next COT report.
Similar Story for Silver
Turning to an interesting graph for silver futures, take a close look at the graph below and, given what we just shared about gold futures, answer the question: What does this high pure short positioning by the usually net long “funds” mean?
Well, what it usually means is that silver is getting close to a bottom if history is any guide. To quantify the chart above, Managed Money reported an increase of about 3,700 new contracts short over the past two reporting weeks, to show a relatively high 12,518 lots short, with 3,334 contracts of that increase coming in the May 8 reporting week with silver then closing at $29.43.
That is actually the highest pure short positioning for the “funds” since the September 16, 2008 report (arrow), when they showed 13,171 short contracts with silver then at $10.48. One week later, on September 23 silver closed at $13.26, but the funds only covered 1,538 of those short contracts. That was an ill omen that the funds did not cover more of that short position then and indeed silver was not yet done with its waterfall panic, rush to liquidity plunge. By late October silver was back under $10 and did not forge a sure-enough bottom until the beginning of December, 2008. Interestingly, by the time silver did indeed make its seminal turning low in December, the MMs had pared their pure short positions down to just 5,384 lots on December 9. )
The high short position for Managed Money traders is in part the reason that their collective net long futures positioning was so low in this May 15 report. As shown in the chart below traders the CFTC classes as Managed Money reported holding a combined net long position of just 5,703 lots – not very much higher than the 4,752 contacts net long they reported at the end of 2011 in the December 27 COT report with silver then at $28.67.
As should be clear from the chart above, when the combined net long position for Managed Money traders (blue line) reaches the lower limits of the chart it often corresponds with lows in the price of silver.
Sure enough, since Tuesday silver briefly tested a $26 handle before catching a bit of a bounce. Silver is currently trading in the $28.30s as we write (a little above the May 15 cutoff of $27.69) and it will be extremely interesting to see if the “funds” have seen fit to begin covering some of those “temporary hedges,” and if so, how many of them.
Silver is testing “The Green” or the area we have been looking for support to show. We strongly suspect the MMs are covering some of their shorts, opportunistically, but we, like everyone else, will have to wait until the Friday release of the COT for confirmation of that notion.
Meanwhile, in a contrary sense, the COT data suggests that gold and silver are very close to a bottom, if one has not already been put in last week. In part because of the data shown above, yes, but also because of the positioning of the usual Big Hedgers, but that story will have to wait for another time. We have run out of “break time” and have to get back to our grueling, demanding and intense quest for things with fins and scales…
As we send this off to be posted we note that the AMEX Gold Bugs Index or HUI is up about 2.5% to the 405 level, and there has been little in the way of meaningful retreat for the precious metals on an up day for the Big Markets.
That just might be some continued short covering underway – into dips. If so, it ought to be visible in the next COT report and would be an unmistakable signal to traders and speculators who follow the COT data consistently.
Hold down the fort, help is on the way…
*We are between fishing events, but on relatively “low power” personally.
Submitted by Tyler Durden on
05/20/2012 21:36 -0400
By the time Operation Twist (1) ends in just over 40 days time, on June 30, Fed Chairman Ben Bernanke, according to his previously announced "loose" target, will hope to have extended the average maturity of all bonds in the System Open Market Account (SOMA) to a record of roughly 100 months from 75 month at the onset of the program in October 2011. After all the sole purpose of Twist was to load up the Fed's portfolio with duration, forcing the rest of the market to shift its investing curve even further into risky assets, as the Fed will have effectively onboarded the bulk of securities in the 3-4% return interval. Now as we showed back in early April, hopes that the Fed will simply continue with Operation Twist 2 after the end of "season" 1, as suggested by some clueless "access journalists" who merely relay what they are told by higher powers, are completely misguided as the Fed simply does not have enough short-term securities (1-3 years) to sell, and would have at most 2 months of inventory for a continued sterilized operation. Which however, does not mean that the Fed can not be quietly ramping up its operations in the ongoing Twisting episode. Because as Stone McCarthy demonstrates, as of the past week, the Fed has already surpassed its 100 month maturity target of 100 months, and is at 102.82 months as of May 16. And this is with 6 more weeks of Twist to go: at the current rate of SOMA purchases, the Fed will have a total portfolio average maturity of just shy of 110 months by June 30! Which means that contrary to market expectations of what the Fed's own stated goal may have been, Bernanke will have gobbled up nearly 40% more long-dated Flow relative to estimates! In other words, Ben does not need to do a full blown Operation Twist 2 episode: by the time Twist 1 is over, he will have attained nearly 40% of the goals of the next potential sterilized operation.
Why is this important? Well, recall that over a month ago Goldman Sachs itself admitted what we have been saying for over 3 years: it is not stock that matters... it is flow. Recall the Goldman punchline:
...we have found some evidence that at the very long end of the yield curve, where Operation Twist is concentrated, it may be not just the stock of securities held by the Fed but also the ongoing flow of purchases that matters for yields...
And there you have it.
What the finding above means is that the Fed has been ramping risk assets, read the S&P even more than where it should have been, based on simple flow models, and that contrary to market expectations, the S&P500 should have been about 40% lower compared to where it will be on June 30 if the Fed has pursued its stated goal, and targeted solely a 100 month average maturity.
Which has a rather scary implication for the stock market: if and when Ben announces that Twist ends on June 30 with no successor program, stocks will immediately react, and realize that the Fed's SOMA account holds well more than the expected long-end, and that without further "flow" forcing more 30 year paper into the gaping maw of Bernanke, stocks will have no reason at all to maintain their prior epic surge (all else equal, whcih it won't be).
It also means that unless Bernanke is willing to see the stock market plunge ahead of the Obama re-election, which he isn't, or at least the President most certainly isn't, that the June Fed statement will be quite interesting, as not only will Bernanke have to maintain a program which is now uncovered to have been monetizing the long-end at a rate 40% higher than estimated, but will still have just two more months of capacity left for any potential future sterilized market propping experiments.
Which only leaves the Fed with one option: that of making Bill Gross, and all those others who are loading up on duration-sensitive securities which will benefit from an LSAP based episode, very, very happy. Of course, the list of such assets most definitely includes gold.
DJ Fed's Lockhart: Sustained Monetary Accommodation Warranted
Mon May 21 05:15:00 2012 EDT
NEW YORK(Dow Jones)--Given the modest economic progress in the U.S., the Federal Reserve should continue with its policy of monetary accommodation, said a top central banker on Monday.
"Circumstances today in the United States call for continued measured efforts to quicken the pace of recovery and shrink unemployment, while keeping inflation controlled and close to the [Federal Open Market Committee's] official target of 2%," said Federal Reserve Bank of Atlanta President Dennis Lockhart.
Lockhart's comments came from the text of an address prepared for delivery before the Institute of Regulation and Risk, North Asia, in Tokyo. Lockhart is a voting member of the Fed's monetary policy-setting FOMC, which kept the current course of monetary policy unchanged at its latest meeting.
The Fed continues to expect short-term interest rates will be kept near 0% until late 2014, while continuing forward with an effort to move out the average maturity of the central bank's $2.9 trillion balance sheet.
"Current economic data continue to be a mix of positives and negatives," Lockhart said. "Consumer activity is continuing to grow, and manufacturing is expanding. At the same time, we've seen a recent slowdown in business investment, and the pace of job creation has weakened."
Lockhart said his economic outlook calls for "only modest growth over the next few years."
Such a recovery and meager job growth is keeping wage growth "subdued and inflation expectations reasonably well-anchored," he said, noting his outlook for inflation remains steady at around 2% over the forecast horizon.
Among the biggest risks for the U.S. economy are the spillover effects from Europe, Lockhart said. This is why, he said, the risks to the U.S. outlook are "tilted modestly to the downside."
The challenge policymakers face is judging the appropriateness of a tool for particular circumstances, Lockhart said. He reiterated that he doesn't see the need right now for the Fed to embark on balance-sheet-expanding bond purchases most in the market refer to as a stimulus policy called QE3.
Still, the option can't be taken off the table, he said.
While another round of quantitative easing would work under the right circumstances, "I don't believe such circumstances prevail at this time," Lockhart said.
It doesn’t happen often, but sometimes God smiles on us. Last week, he smiled on investigative reporters everywhere, when the lawyers for Goldman, Sachs slipped on one whopper of a legal banana peel, inadvertently delivering some of the bank’s darker secrets into the hands of the public.
The lawyers for Goldman and Bank of America/Merrill Lynch have been involved in a legal battle for some time – primarily with the retail giant Overstock.com, but also with Rolling Stone, the Economist, Bloomberg, and the New York Times. The banks have been fighting us to keep sealed certain documents that surfaced in the discovery process of an ultimately unsuccessful lawsuit filed by Overstock against the banks.
Last week, in response to an Overstock.com motion to unseal certain documents, the banks’ lawyers, apparently accidentally, filed an unredacted version of Overstock’s motion as an exhibit in their declaration of opposition to that motion. In doing so, they inadvertently entered into the public record a sort of greatest-hits selection of the very material they’ve been fighting for years to keep sealed.
I contacted Morgan Lewis, the firm that represents Goldman in this matter, earlier today, but they haven’t commented as of yet. I wonder if the poor lawyer who FUBARred this thing has already had his organs harvested; his panic is almost palpable in the air. It is both terrible and hilarious to contemplate. The bank has spent a fortune in legal fees trying to keep this material out of the public eye, and here one of their own lawyers goes and dumps it out on the street.
The lawsuit between Overstock and the banks concerned a phenomenon called naked short-selling, a kind of high-finance counterfeiting that, especially prior to the introduction of new regulations in 2008, short-sellers could use to artificially depress the value of the stocks they’ve bet against. The subject of naked short-selling is a) highly technical, and b) very controversial on Wall Street, with many pundits in the financial press for years treating the phenomenon as the stuff of myths and conspiracy theories.
Now, however, through the magic of this unredacted document, the public will be able to see for itself what the banks’ attitudes are not just toward the "mythical" practice of naked short selling (hint: they volubly confess to the activity, in writing), but toward regulations and laws in general.
"Fuck the compliance area – procedures, schmecedures," chirps Peter Melz, former president of Merrill Lynch Professional Clearing Corp. (a.k.a. Merrill Pro), when a subordinate worries about the company failing to comply with the rules governing short sales.
We also find out here how Wall Street professionals manipulated public opinion by buying off and/or intimidating experts in their respective fields. In one email made public in this document, a lobbyist for SIFMA, the Securities Industry and Financial Markets Association, tells a Goldman executive how to engage an expert who otherwise would go work for “our more powerful enemies,” i.e. would work with Overstock on the company’s lawsuit.
"He should be someone we can work with, especially if he sees that cooperation results in resources, both data and funding," the lobbyist writes, "while resistance results in isolation."
There are even more troubling passages, some of which should raise a few eyebrows, in light of former Goldman executive Greg Smith's recent public resignation, in which he complained that the firm routinely screwed its own clients and denigrated them (by calling them "Muppets," among other things).
Here, the plaintiff’s motion refers to an "exhibit 96,” which refers to “an email from [Goldman executive] John Masterson that sends nonpublic data concerning customer short positions in Overstock and four other hard-to-borrow stocks to Maverick Capital, a large hedge fund that sells stocks short.”
Was Goldman really disclosing “nonpublic data concerning customer short positions” to its big hedge fund clients? That would be something its smaller, “Muppet” customers would probably want to hear about.
When I contacted Goldman and asked if it was true that Masterson had shared nonpublic customer information with a big hedge fund client, their spokesperson Michael Duvally offered this explanation:
Among other services it provides, Securities Lending at Goldman provides market color information to clients regarding various activity in the securities lending marketplace on a security specific or sector specific basis. In accordance with the group's guidelines concerning the provision of market color, Mr. Masterson provided a client with certain aggregate information regarding short balances in certain securities. The information did not contain reference to any particular clients' short positions.
You can draw your own conclusions from that answer, but it's safe to say we'd like to hear more about these practices.
Anyway, the document is full of other interesting disclosures. Among the more compelling is the specter of executives from numerous companies admitting openly to engaging in naked short selling, a practice that, again, was often dismissed as mythical or unimportant.
A quick primer on what naked short selling is. First of all, short selling, which is a completely legal and often beneficial activity, is when an investor bets that the value of a stock will decline. You do this by first borrowing and then selling the stock at its current price; then, after the price drops, you go out, buy the same number of shares at the reduced price, and return the shares to your original lender. You then earn a profit on the difference between the original price and the new, lower price.
What matters here is the technical issue of how you borrow the stock. Typically, if you’re a hedge fund and you want to short a company, you go to some big-shot investment bank like Goldman or Morgan Stanley and place the order. They then go out into the world, find the shares of the stock you want to short, borrow them for you, then physically settle the trade later.
But sometimes it’s not easy to find those shares to borrow. Sometimes the shares are controlled by investors who might have no interest in lending them out. Sometimes there’s such scarcity of borrowable shares that banks/brokers like Goldman have to pay a fee just to borrow the stock.
These hard-to-borrow stocks, stocks that cost money to borrow, are called negative rebate stocks. In some cases, these negative rebate stocks cost so much just to borrow that a short-seller would need to see a real price drop of 35 percent in the stock just to break even. So how do you short a stock when you can’t find shares to borrow? Well, one solution is, you don’t even bother to borrow them. And then, when the trade is done, you don’t bother to deliver them. You just do the trade anyway without physically locating the stock.
Thus in this document we have another former Merrill Pro president, Thomas Tranfaglia, saying in a 2005 email: “We are NOT borrowing negatives… I have made that clear from the beginning. Why would we want to borrow them? We want to fail them.”
Trafaglia, in other words, didn’t want to bother paying the high cost of borrowing “negative rebate” stocks. Instead, he preferred to just sell stock he didn’t actually possess. That is what is meant by, “We want to fail them.” Trafaglia was talking about creating “fails” or “failed trades,” which is what happens when you don’t actually locate and borrow the stock within the time the law allows for trades to be settled.
If this sounds complicated, just focus on this: naked short selling, in essence, is selling stock you do not have. If you don’t have to actually locate and borrow stock before you short it, you’re creating an artificial supply of stock shares.
In this case, that resulted in absurdities like the following disclosure in this document, in which a Goldman executive admits in a 2006 email that just a little bit too much trading in Overstock was going on: “Two months ago 107% of the floating was short!”
In other words, 107% of all Overstock shares available for trade were short – a physical impossibility, unless someone was somehow creating artificial supply in the stock.
Goldman clearly knew there was a discrepancy between what it was telling regulators, and what it was actually doing. “We have to be careful not to link locates to fails [because] we have told the regulators we can’t,” one executive is quoted as saying, in the document.
One of the companies Goldman used to facilitate these trades was called SBA Trading, whose chief, Scott Arenstein, was fined $3.6 million in 2007 by the former American Stock Exchange for naked short selling.
The process of how banks circumvented federal clearing regulations is highly technical and incredibly difficult to follow. These companies were using obscure loopholes in regulations that allowed them to short companies by trading in shadows, or echoes, of real shares in their stock. They manipulated rules to avoid having to disclose these “failed” trades to regulators.
The import of this is that it made it cheaper and easier to bet down the value of a stock, while simultaneously devaluing the same stock by adding fake supply. This makes it easier to make money by destroying value, and is another example of how the over-financialization of the economy makes real, job-creating growth more difficult.
In any case, this document all by itself shows numerous executives from companies like Goldman Sachs Execution and Clearing (GSEC) and Merrill Pro talking about a conscious strategy of “failing” trades – in other words, not bothering to locate, borrow, and deliver stock within the time alotted for legal settlement. For instance, in one email, GSEC tells a client, Wolverine Trading, “We will let you fail.”
More damning is an email from a Goldman, Sachs hedge fund client, who remarked that when wanting to “short an impossible name and fully expecting not to receive it” he would then be “shocked to learn that [Goldman’s representative] could get it for us.”
Meaning: when an experienced hedge funder wanted to trade a very hard-to-find stock, he was continually surprised to find that Goldman, magically, could locate the stock. Obviously, it is not hard to locate a stock if you’re just saying you located it, without really doing it.
As a hilarious side-note: when I contacted Goldman about this story, they couldn't resist using their usual P.R. playbook. In this case, Goldman hastened to point out that Overstock lost this lawsuit (it was dismissed because of a jurisdictional issue), and then had this to say about Overstock:
Overstock pursued the lawsuit as part of its longstanding self-described "Jihad" designed to distract attention from its own failure to meet its projected growth and profitability goals and the resulting sharp drop in its stock price during the 2005-2006 period.
Good old Goldman -- they can't answer any criticism without describing their critics as losers, conspiracy theorists, or, most frequently, both. Incidentally, Overstock rebounded from the 2005-2006 short attack to become a profitable company again, during the same period when Goldman was needing hundreds of billions of dollars in emergency Fed lending and federal bailouts to stave off extinction.
Anyway, this galactic screwup by usually-slick banker lawyers gives us a rare peek into the internal mindset of these companies, and their attitude toward regulations, the markets, even their own clients. The fact that they wanted to keep all of this information sealed is not surprising, since it’s incredibly embarrassing stuff, if you understand the context.
More to come: until then, here’s the motion, and pay particular attention to pages 14-19.
UPDATE: Well, I guess I shouldn't feel too badly for the lawyer who stepped on this land mine. For Morgan Lewis counsel Joe Floren, karma, it seems, really is a bitch.
“Europe has taken significant steps to manage the crisis. And there’s now an
emerging consensus that more must be done to promote growth and job creation
right now in the context of these fiscal and structural reforms.”
This is code for, "we are gonna print a shit load of money."
Inflation will be spun and sold to the masses as "growth"...after all, the
US Government and the Fed have fooled Americans into believing that
Inflation = Growth for over 40 years now...why not the rest of the World?
INFLATION IS NOT GROWTH, this will end in global economic catastrophe.
“As expected, the G-8 led to little concrete measures on how to stimulate
growth, particularly in Europe,” said Thomas Costerg, an economist at
Standard Chartered Bank in London.
The whole thing was just another shameless effort to CON the public into
believing that the western governments can "solve the crisis"...another
feeble attempt to "boost confidence".
And what do the first three letters of the word confidence spell? CON!
The whole lot of them at the G-8 are at a loss for what to do...their desperation now
obvious.
Painfully, it must be pointed out that there is yet another summit tomorrow, this time where the European heads of state will sit down [by themselves] and also decide that, shockingly, they want Greece in Europe, and that increased growth and employment are imperative.
A reminder of Europe's summit mentality courtesy of David Einhorn circa last
year:
Sprott sees great things for gold and silver
An expectedly upbeat presentation on gold and silver in New York from Eric Sprott pointed to a large number of factors supporting his premise that gold, and silver even more so, will revert back to their rising paths.
Author: Lawrence WilliamsPosted: Monday , 21 May 2012
In his keynote presentation to last week's New York Hard Assets Investment Conference, Eric Sprott, as usual as a precious metals believer, gave an upbeat presentation on the long term prospects for gold and silver.
He opened his address by pointing to a big change in the markets since he presented at the same event a year earlier when, as he pointed out, the silver price was around $49.50 "until they bombed it" and gold was shortly to see $1900 plus. But overall he pointed to the huge sea change in the precious metals markets over the past 12 years and that the 12 month correction we are currently seeing is a temporary phenomenon and that he reckons the physical market in gold and silver is actually still in great shape.
He sees markets in general being distorted by manipulation by governments - examples being homeowner tax credits, cash for clunkers, TARP, QE1, QE2, LTROs, unlimited swap lines, etc. A veritable litany of stimuli to prevent what should be happening from happening. He quoted a recent interview with Jim Grant - the highly respected economic commentator - who stated that "all markets are manipulated". Sprott pointed in particular to interest rates "which for sure are manipulated" and gave credit too to GATA who came out with the statement that markets were being manipulated long before the theme has been picked up by a number of commentators including Jim Grant. He very strongly concurs with this view pointing out that government stimuli have been designed to try and elicit some strength in stock markets and a degree of suppression in the precious metals markets which they do not want to go up as this indicates the relative weakness in fiat currencies.
Sprott touched on a number of facets affecting the markets at the moment - JP Morgan and its big derivatives losses, financial repression, Sovereign debt - describing the latter as being in a Minsky Moment who said "If you continue to expand your economy by increasing the amount of debt, there comes a time when the productive capacity cannot handle the debt". Greece is seen as a great example of this, He sees Spain as the next one on the list, although Portugal is probably in an even worse position. He sees this as the dominoes which are going to fall one after the other and, in his mind, there is no question that they will fall.
The potential effects on the banking system are drastic. He reminded the audience that at the peak of the 2008 financial collapse Treasury Secretary Paulson said that he was within hours of shutting the banking system down! "Please never forget those words" said Sprott. The system is vulnerable and has got close to this several times since.
For gold he feels that as people realise how vulnerable, flawed and over-levered and risky the banking system is they will want to withdraw their money and put it somewhere which they will see as keeping its value.
There are a number of other factors he sees as being particularly positive for the gold market. These include:
The zero interest rate policy
China's dramatic increase in gold imports
Chinese and Russian mined gold (two of the world's major producers) never gets to the free market
Central Bank buying seemingly increasing
This effectively means a large percentage of global gold supply is being taken off the market. "If these trends persist", said Sprott," the price of gold will not stay down".
The physical market supply thus has Sprott asking "Where is the gold coming from". The only source which he sees as likely is that Central Banks are selling gold surreptitiously, perhaps by leasing it so that any decline does not show on their books.
Silver: When it reached $49.50 there was suddenly 1 billion ounces of ‘paper' silver released onto the market. Sprott is convinced that certain people in the market with very big short positions manipulated the price down. "We see very strange things happening in the silver market" said Sprott.
He couldn't understand also why people in Europe were not buying gold given their financial system is collapsing around them.
Why does Sprott like silver so much? People buy 50 times more silver than gold and while paper silver may be ruling the market, the day of physical will come. "When currencies fail" said Sprott "gold will become a part of the official reserve currency and silver will have a very, very major role again."
Sprott concluded by saying while he loves gold, loves the data, that silver will still be the investment of the decade. "Stay the course" he said. Even though Central Banks et al may be working against you gold and silver will ultimately prevail as fiat currencies continue to decline in value.
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Gene Arensberg: Trading data indicates bottom for monetary metals
Monday, May 21, 2012
CFTC - Managed Money Short Positioning High for Gold, Silver
Could be 100 Octane Rally Fuel for precious metals.
SOUTHEAST TEXAS – Taking a break from the grueling, demanding and intense quest for things with fins and scales for a half day* today, we thought we would share with everyone a couple of the more interesting charts which surfaced in the latest Commodity Futures Trading Commission (CFTC) commitments of traders report (COT). The report was released Friday, May 18, with data as of Tuesday, May 15.
According to the CFTC, as of Tuesday of last week, large traders the CFTC classes as Managed Money (“MMs,” hedge funds, commodity trading advisors and other funds that trade futures on behalf of others), increased their short positions in gold futures by 9,837 contracts to show 32,822 contracts short. That is the highest pure short position for the “funds” since September 16, 2008, during the height of the 2008 panic with gold then in the $770s. One week later, on September 23, gold closed at $891.90, about $122 higher as the MMs covered or offset more than 20,000 of those short positions (not a misprint).
Source for all graphs CFTC for COT data, Cash market for gold and silver.
Continued…
Very high pure short positions for the usually net long Managed Money traders very often correspond with important turning lows for gold. To confirm that notion simply look at the graph above and note that the spikes to the upside for the blue line (short positions) often correspond closely with bottoms in the pink price of gold.
The graph above is in part why we say that large MM short positions are “100-octane rally fuel” for the price of gold. The typically long side of the battlefield likely uses short positions to temporarily “hedge” existing long positions they do not wish to close. Their short positions are just like any other shorts, they have to be covered (bought back) at some point prior to expiry. Higher short positions are “buying pressure in a bottle” more or less.
Remember that the positioning above was on Tuesday with gold then trading in the $1,540s. Gold has indeed advanced since then and is currently trading in the $1,590 region as we write on Monday, May 21, 2012.
That high short position is in part why the Managed Money no-spread net position shows the lowest net long positioning (80,098 contracts) since December 16 of 2008 (73,332 contracts net long then with $858 gold). On Tuesday Managed Money traders were the least net long gold futures since the global panic of 2008 in other words.
So, to conclude this brief look at the Managed Money gold futures positioning, it’s pretty clear that “the funds” decided to “hedge” their long trades by adding shorts up to last Tuesday. With gold moving back to the upside, we can expect with little doubt, that the MM’s pure short positioning will be considerably lower and their net long positioning will therefore be higher in the next COT report. The only question is by how much. That is, of course, unless gold does something weird by the close tomorrow, Tuesday, the cutoff for the next COT report.
Similar Story for Silver
Turning to an interesting graph for silver futures, take a close look at the graph below and, given what we just shared about gold futures, answer the question: What does this high pure short positioning by the usually net long “funds” mean?
Well, what it usually means is that silver is getting close to a bottom if history is any guide. To quantify the chart above, Managed Money reported an increase of about 3,700 new contracts short over the past two reporting weeks, to show a relatively high 12,518 lots short, with 3,334 contracts of that increase coming in the May 8 reporting week with silver then closing at $29.43.
That is actually the highest pure short positioning for the “funds” since the September 16, 2008 report (arrow), when they showed 13,171 short contracts with silver then at $10.48. One week later, on September 23 silver closed at $13.26, but the funds only covered 1,538 of those short contracts. That was an ill omen that the funds did not cover more of that short position then and indeed silver was not yet done with its waterfall panic, rush to liquidity plunge. By late October silver was back under $10 and did not forge a sure-enough bottom until the beginning of December, 2008. Interestingly, by the time silver did indeed make its seminal turning low in December, the MMs had pared their pure short positions down to just 5,384 lots on December 9. )
The high short position for Managed Money traders is in part the reason that their collective net long futures positioning was so low in this May 15 report. As shown in the chart below traders the CFTC classes as Managed Money reported holding a combined net long position of just 5,703 lots – not very much higher than the 4,752 contacts net long they reported at the end of 2011 in the December 27 COT report with silver then at $28.67.
As should be clear from the chart above, when the combined net long position for Managed Money traders (blue line) reaches the lower limits of the chart it often corresponds with lows in the price of silver.
Sure enough, since Tuesday silver briefly tested a $26 handle before catching a bit of a bounce. Silver is currently trading in the $28.30s as we write (a little above the May 15 cutoff of $27.69) and it will be extremely interesting to see if the “funds” have seen fit to begin covering some of those “temporary hedges,” and if so, how many of them.
Silver is testing “The Green” or the area we have been looking for support to show. We strongly suspect the MMs are covering some of their shorts, opportunistically, but we, like everyone else, will have to wait until the Friday release of the COT for confirmation of that notion.
Meanwhile, in a contrary sense, the COT data suggests that gold and silver are very close to a bottom, if one has not already been put in last week. In part because of the data shown above, yes, but also because of the positioning of the usual Big Hedgers, but that story will have to wait for another time. We have run out of “break time” and have to get back to our grueling, demanding and intense quest for things with fins and scales…
As we send this off to be posted we note that the AMEX Gold Bugs Index or HUI is up about 2.5% to the 405 level, and there has been little in the way of meaningful retreat for the precious metals on an up day for the Big Markets.
That just might be some continued short covering underway – into dips. If so, it ought to be visible in the next COT report and would be an unmistakable signal to traders and speculators who follow the COT data consistently.
Hold down the fort, help is on the way…
*We are between fishing events, but on relatively “low power” personally.
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By The Time Operation Twist 1 Is Over, The Fed Will Have Quietly Completed 40% Of Operation Twist 2 As Well
By the time Operation Twist (1) ends in just over 40 days time, on June 30, Fed Chairman Ben Bernanke, according to his previously announced "loose" target, will hope to have extended the average maturity of all bonds in the System Open Market Account (SOMA) to a record of roughly 100 months from 75 month at the onset of the program in October 2011. After all the sole purpose of Twist was to load up the Fed's portfolio with duration, forcing the rest of the market to shift its investing curve even further into risky assets, as the Fed will have effectively onboarded the bulk of securities in the 3-4% return interval. Now as we showed back in early April, hopes that the Fed will simply continue with Operation Twist 2 after the end of "season" 1, as suggested by some clueless "access journalists" who merely relay what they are told by higher powers, are completely misguided as the Fed simply does not have enough short-term securities (1-3 years) to sell, and would have at most 2 months of inventory for a continued sterilized operation. Which however, does not mean that the Fed can not be quietly ramping up its operations in the ongoing Twisting episode. Because as Stone McCarthy demonstrates, as of the past week, the Fed has already surpassed its 100 month maturity target of 100 months, and is at 102.82 months as of May 16. And this is with 6 more weeks of Twist to go: at the current rate of SOMA purchases, the Fed will have a total portfolio average maturity of just shy of 110 months by June 30! Which means that contrary to market expectations of what the Fed's own stated goal may have been, Bernanke will have gobbled up nearly 40% more long-dated Flow relative to estimates! In other words, Ben does not need to do a full blown Operation Twist 2 episode: by the time Twist 1 is over, he will have attained nearly 40% of the goals of the next potential sterilized operation.
Why is this important? Well, recall that over a month ago Goldman Sachs itself admitted what we have been saying for over 3 years: it is not stock that matters... it is flow. Recall the Goldman punchline:
...we have found some evidence that at the very long end of the yield curve, where Operation Twist is concentrated, it may be not just the stock of securities held by the Fed but also the ongoing flow of purchases that matters for yields...
And there you have it.
What the finding above means is that the Fed has been ramping risk assets, read the S&P even more than where it should have been, based on simple flow models, and that contrary to market expectations, the S&P500 should have been about 40% lower compared to where it will be on June 30 if the Fed has pursued its stated goal, and targeted solely a 100 month average maturity.
Which has a rather scary implication for the stock market: if and when Ben announces that Twist ends on June 30 with no successor program, stocks will immediately react, and realize that the Fed's SOMA account holds well more than the expected long-end, and that without further "flow" forcing more 30 year paper into the gaping maw of Bernanke, stocks will have no reason at all to maintain their prior epic surge (all else equal, whcih it won't be).
It also means that unless Bernanke is willing to see the stock market plunge ahead of the Obama re-election, which he isn't, or at least the President most certainly isn't, that the June Fed statement will be quite interesting, as not only will Bernanke have to maintain a program which is now uncovered to have been monetizing the long-end at a rate 40% higher than estimated, but will still have just two more months of capacity left for any potential future sterilized market propping experiments.
Which only leaves the Fed with one option: that of making Bill Gross, and all those others who are loading up on duration-sensitive securities which will benefit from an LSAP based episode, very, very happy. Of course, the list of such assets most definitely includes gold.
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Mon May 21 05:15:00 2012 EDT
NEW YORK(Dow Jones)--Given the modest economic progress in the U.S., the Federal Reserve should continue with its policy of monetary accommodation, said a top central banker on Monday.
"Circumstances today in the United States call for continued measured efforts to quicken the pace of recovery and shrink unemployment, while keeping inflation controlled and close to the [Federal Open Market Committee's] official target of 2%," said Federal Reserve Bank of Atlanta President Dennis Lockhart.
Lockhart's comments came from the text of an address prepared for delivery before the Institute of Regulation and Risk, North Asia, in Tokyo. Lockhart is a voting member of the Fed's monetary policy-setting FOMC, which kept the current course of monetary policy unchanged at its latest meeting.
The Fed continues to expect short-term interest rates will be kept near 0% until late 2014, while continuing forward with an effort to move out the average maturity of the central bank's $2.9 trillion balance sheet.
"Current economic data continue to be a mix of positives and negatives," Lockhart said. "Consumer activity is continuing to grow, and manufacturing is expanding. At the same time, we've seen a recent slowdown in business investment, and the pace of job creation has weakened."
Lockhart said his economic outlook calls for "only modest growth over the next few years."
Such a recovery and meager job growth is keeping wage growth "subdued and inflation expectations reasonably well-anchored," he said, noting his outlook for inflation remains steady at around 2% over the forecast horizon.
Among the biggest risks for the U.S. economy are the spillover effects from Europe, Lockhart said. This is why, he said, the risks to the U.S. outlook are "tilted modestly to the downside."
The challenge policymakers face is judging the appropriateness of a tool for particular circumstances, Lockhart said. He reiterated that he doesn't see the need right now for the Fed to embark on balance-sheet-expanding bond purchases most in the market refer to as a stimulus policy called QE3.
Still, the option can't be taken off the table, he said.
While another round of quantitative easing would work under the right circumstances, "I don't believe such circumstances prevail at this time," Lockhart said.
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By Matt Taibbi
POSTED: May 15, 5:39 PM ET
The lawyers for Goldman and Bank of America/Merrill Lynch have been involved in a legal battle for some time – primarily with the retail giant Overstock.com, but also with Rolling Stone, the Economist, Bloomberg, and the New York Times. The banks have been fighting us to keep sealed certain documents that surfaced in the discovery process of an ultimately unsuccessful lawsuit filed by Overstock against the banks.
Last week, in response to an Overstock.com motion to unseal certain documents, the banks’ lawyers, apparently accidentally, filed an unredacted version of Overstock’s motion as an exhibit in their declaration of opposition to that motion. In doing so, they inadvertently entered into the public record a sort of greatest-hits selection of the very material they’ve been fighting for years to keep sealed.
I contacted Morgan Lewis, the firm that represents Goldman in this matter, earlier today, but they haven’t commented as of yet. I wonder if the poor lawyer who FUBARred this thing has already had his organs harvested; his panic is almost palpable in the air. It is both terrible and hilarious to contemplate. The bank has spent a fortune in legal fees trying to keep this material out of the public eye, and here one of their own lawyers goes and dumps it out on the street.
The lawsuit between Overstock and the banks concerned a phenomenon called naked short-selling, a kind of high-finance counterfeiting that, especially prior to the introduction of new regulations in 2008, short-sellers could use to artificially depress the value of the stocks they’ve bet against. The subject of naked short-selling is a) highly technical, and b) very controversial on Wall Street, with many pundits in the financial press for years treating the phenomenon as the stuff of myths and conspiracy theories.
Now, however, through the magic of this unredacted document, the public will be able to see for itself what the banks’ attitudes are not just toward the "mythical" practice of naked short selling (hint: they volubly confess to the activity, in writing), but toward regulations and laws in general.
"Fuck the compliance area – procedures, schmecedures," chirps Peter Melz, former president of Merrill Lynch Professional Clearing Corp. (a.k.a. Merrill Pro), when a subordinate worries about the company failing to comply with the rules governing short sales.
We also find out here how Wall Street professionals manipulated public opinion by buying off and/or intimidating experts in their respective fields. In one email made public in this document, a lobbyist for SIFMA, the Securities Industry and Financial Markets Association, tells a Goldman executive how to engage an expert who otherwise would go work for “our more powerful enemies,” i.e. would work with Overstock on the company’s lawsuit.
"He should be someone we can work with, especially if he sees that cooperation results in resources, both data and funding," the lobbyist writes, "while resistance results in isolation."
There are even more troubling passages, some of which should raise a few eyebrows, in light of former Goldman executive Greg Smith's recent public resignation, in which he complained that the firm routinely screwed its own clients and denigrated them (by calling them "Muppets," among other things).
Here, the plaintiff’s motion refers to an "exhibit 96,” which refers to “an email from [Goldman executive] John Masterson that sends nonpublic data concerning customer short positions in Overstock and four other hard-to-borrow stocks to Maverick Capital, a large hedge fund that sells stocks short.”
Was Goldman really disclosing “nonpublic data concerning customer short positions” to its big hedge fund clients? That would be something its smaller, “Muppet” customers would probably want to hear about.
When I contacted Goldman and asked if it was true that Masterson had shared nonpublic customer information with a big hedge fund client, their spokesperson Michael Duvally offered this explanation:
Among other services it provides, Securities Lending at Goldman provides market color information to clients regarding various activity in the securities lending marketplace on a security specific or sector specific basis. In accordance with the group's guidelines concerning the provision of market color, Mr. Masterson provided a client with certain aggregate information regarding short balances in certain securities. The information did not contain reference to any particular clients' short positions.
You can draw your own conclusions from that answer, but it's safe to say we'd like to hear more about these practices.
Anyway, the document is full of other interesting disclosures. Among the more compelling is the specter of executives from numerous companies admitting openly to engaging in naked short selling, a practice that, again, was often dismissed as mythical or unimportant.
A quick primer on what naked short selling is. First of all, short selling, which is a completely legal and often beneficial activity, is when an investor bets that the value of a stock will decline. You do this by first borrowing and then selling the stock at its current price; then, after the price drops, you go out, buy the same number of shares at the reduced price, and return the shares to your original lender. You then earn a profit on the difference between the original price and the new, lower price.
What matters here is the technical issue of how you borrow the stock. Typically, if you’re a hedge fund and you want to short a company, you go to some big-shot investment bank like Goldman or Morgan Stanley and place the order. They then go out into the world, find the shares of the stock you want to short, borrow them for you, then physically settle the trade later.
But sometimes it’s not easy to find those shares to borrow. Sometimes the shares are controlled by investors who might have no interest in lending them out. Sometimes there’s such scarcity of borrowable shares that banks/brokers like Goldman have to pay a fee just to borrow the stock.
These hard-to-borrow stocks, stocks that cost money to borrow, are called negative rebate stocks. In some cases, these negative rebate stocks cost so much just to borrow that a short-seller would need to see a real price drop of 35 percent in the stock just to break even. So how do you short a stock when you can’t find shares to borrow? Well, one solution is, you don’t even bother to borrow them. And then, when the trade is done, you don’t bother to deliver them. You just do the trade anyway without physically locating the stock.
Thus in this document we have another former Merrill Pro president, Thomas Tranfaglia, saying in a 2005 email: “We are NOT borrowing negatives… I have made that clear from the beginning. Why would we want to borrow them? We want to fail them.”
Trafaglia, in other words, didn’t want to bother paying the high cost of borrowing “negative rebate” stocks. Instead, he preferred to just sell stock he didn’t actually possess. That is what is meant by, “We want to fail them.” Trafaglia was talking about creating “fails” or “failed trades,” which is what happens when you don’t actually locate and borrow the stock within the time the law allows for trades to be settled.
If this sounds complicated, just focus on this: naked short selling, in essence, is selling stock you do not have. If you don’t have to actually locate and borrow stock before you short it, you’re creating an artificial supply of stock shares.
In this case, that resulted in absurdities like the following disclosure in this document, in which a Goldman executive admits in a 2006 email that just a little bit too much trading in Overstock was going on: “Two months ago 107% of the floating was short!”
In other words, 107% of all Overstock shares available for trade were short – a physical impossibility, unless someone was somehow creating artificial supply in the stock.
Goldman clearly knew there was a discrepancy between what it was telling regulators, and what it was actually doing. “We have to be careful not to link locates to fails [because] we have told the regulators we can’t,” one executive is quoted as saying, in the document.
One of the companies Goldman used to facilitate these trades was called SBA Trading, whose chief, Scott Arenstein, was fined $3.6 million in 2007 by the former American Stock Exchange for naked short selling.
The process of how banks circumvented federal clearing regulations is highly technical and incredibly difficult to follow. These companies were using obscure loopholes in regulations that allowed them to short companies by trading in shadows, or echoes, of real shares in their stock. They manipulated rules to avoid having to disclose these “failed” trades to regulators.
The import of this is that it made it cheaper and easier to bet down the value of a stock, while simultaneously devaluing the same stock by adding fake supply. This makes it easier to make money by destroying value, and is another example of how the over-financialization of the economy makes real, job-creating growth more difficult.
In any case, this document all by itself shows numerous executives from companies like Goldman Sachs Execution and Clearing (GSEC) and Merrill Pro talking about a conscious strategy of “failing” trades – in other words, not bothering to locate, borrow, and deliver stock within the time alotted for legal settlement. For instance, in one email, GSEC tells a client, Wolverine Trading, “We will let you fail.”
More damning is an email from a Goldman, Sachs hedge fund client, who remarked that when wanting to “short an impossible name and fully expecting not to receive it” he would then be “shocked to learn that [Goldman’s representative] could get it for us.”
Meaning: when an experienced hedge funder wanted to trade a very hard-to-find stock, he was continually surprised to find that Goldman, magically, could locate the stock. Obviously, it is not hard to locate a stock if you’re just saying you located it, without really doing it.
As a hilarious side-note: when I contacted Goldman about this story, they couldn't resist using their usual P.R. playbook. In this case, Goldman hastened to point out that Overstock lost this lawsuit (it was dismissed because of a jurisdictional issue), and then had this to say about Overstock:
Overstock pursued the lawsuit as part of its longstanding self-described "Jihad" designed to distract attention from its own failure to meet its projected growth and profitability goals and the resulting sharp drop in its stock price during the 2005-2006 period.
Good old Goldman -- they can't answer any criticism without describing their critics as losers, conspiracy theorists, or, most frequently, both. Incidentally, Overstock rebounded from the 2005-2006 short attack to become a profitable company again, during the same period when Goldman was needing hundreds of billions of dollars in emergency Fed lending and federal bailouts to stave off extinction.
Anyway, this galactic screwup by usually-slick banker lawyers gives us a rare peek into the internal mindset of these companies, and their attitude toward regulations, the markets, even their own clients. The fact that they wanted to keep all of this information sealed is not surprising, since it’s incredibly embarrassing stuff, if you understand the context.
More to come: until then, here’s the motion, and pay particular attention to pages 14-19.
UPDATE: Well, I guess I shouldn't feel too badly for the lawyer who stepped on this land mine. For Morgan Lewis counsel Joe Floren, karma, it seems, really is a bitch.
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Got Gold You Can Hold?
Got Silver You Can Squeeze?
IT'S NOT TOO LATE TO ACCUMULATE!!!
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