Archive for September, 2011
BY KATHRYN A DERBES CFA
Stay the Course: Lots of Physical Buying while Paper Sells Off:
We are witnessing significant financial crises unfold around the globe as the culmination of decades of financial mismanagement, miss-allocation of capital, over-indebtedness and the ultimate demise of fiat currencies begins their final reckoning. As events rapidly transpire, markets suffer huge volatility caused by confusion and questions about what is now happening and what is likely to happen in the near future.
While the road forward can take many turns, it should be clear that this final episode could spell the end of fiat currencies after a massive purging of global debt. Here we will try to distill a complex system of cause and effect and outline some potential paths. Ultimately, our quest is to understand the forces affecting both gold and silver, which we believe to be the ultimate currencies. To do that we need to look at what is happening with paper currencies around the world. This is our simplistic view, for what it’s worth. More importantly, we believe it is critical to watch fervently as events shake out in the coming days, weeks and months to gain clues as to where we are actually headed.
Short-Term Liquidity vs. Balance Sheet Problems:
The short-term liquidity issues that caused problems with large U.S. financial institutions in 2008 are now plaguing banks and insurance companies across the Euro Zone. The U.S. Federal Reserve’s response, as you may well know, was massive liquidity injections into the economy in the form of TARP, TALF, QE1, QE2, cash for clunkers, etc. and now “Operation Twist.” Because we have a printing press the Fed was able to “accomplish” their mission of recapitalizing the banks in the U.S, although these banks still have to deal with their own balance sheet issues which include declining real estate values. The individual European countries gave up their respective own printing presses when they joined the Euro, so now, faced with the same short-term liquidity problems, they must turn to the EU to bail them out.
The EU did just that last week in a massive coordinated effort with our Federal Reserve, the Swiss National Bank, the Bank of England and the Bank of Japan. All pledged to supply unlimited U.S. dollars to European banks in need of short-term funding through the end of this year (see our piece on the details here). That effort helped calm short-term fears of bank illiquidity, but it did not solve the real problem of insolvency. Insolvency is a balance sheet issue brought about by owning too much questionable sovereign debt (Greece, Portugal, Ireland, Italy) that cannot currently be repaid at anywhere near face value. Clearly, while there is a short-term liquidity issue (losing deposits through slow motion bank runs) in European banks, their balance sheet issues must also be addressed to restore health to the financial sector. Because valuable time was frittered away without a credible, cohesive “solution,” the issue now is whether the markets will give the central banks and finance ministers enough time to recapitalize their banking systems and address their debt issues before equity markets revolt in a global meltdown.
One thing we want to be clear about it is that the solution to excessive debt is not more debt. It may provide time to work toward a solution, but in and of itself money printing is not a solution. A reckoning of the debt will happen. Eventually, a sound money system must be implemented. A healthy economy depends on a credible currency to grow and prosper. Ultimately the same holds true for the equity markets.
Effect on Gold & Silver:
This brings us to gold and silver. The run up in both metals, starting with silver in the spring and gold in the summer, hinted that fiat currencies were at risk and confidence in central bankers was declining rapidly (and with good reason). Silver’s short-term overbought condition (late spring) and fear of a waning industrial demand due to slowing economic growth (recently) caused it to decline rapidly. Gold’s descent this past week (and silver’s too) was triggered by a fear of a less accommodative Fed and a potential meltdown in which everything is sold to raise cash. Both base commodities and equities have erased their gains for the calendar year to date, and anyone invested in them (individuals, pension funds, hedge funds etc.) is now experiencing losses. As deleveraging occurred in equities and commodities this past week, the need to raise cash to cover margin calls began. Gold, which is still positive for the year, became a source of funds while still booking a net gain for the calendar year.
While deleveraging in equity and commodity markets can continue and thus put more pressure on precious metals in the coming weeks and even months, the fundamental reason for owning them has actually become stronger, more pronounced and more critical. We believe a lot of the downside has already been experienced even though gold and silver could go lower in the wake of a worldwide equity meltdown (we are not predicting this, just pointing out the possibility).
What we want to be clear about is this: while the paper selling in gold and silver has been intense, so too has the physical buying. Lisa Sprott of Sprott Money announced Friday: “We have completely run out of physical silver, so we are temporarily out of stock.” At KDPM, all of our premiums on silver coins were raised Friday because the market is so tight (in short supply). We have access to silver, but demand is once again overwhelming supply in the short-term. We expect premiums to go up again on silver and gold due to intense buying and lower supplies.
Where Do We Go From Here?
The most important thing we can do is stay alert to what is actually happening, that way we can revise our short term thinking to match reality. Our long-term belief, as we tried to portray above, has not changed and has even grown stronger: we are eventually headed to a gold and/or silver standard, and if not, these metals will be the best means of preserving one’s wealth during chaotic times.
At this point here is what things looks like: the short-term deleveraging could continue, possibly precipitated by the recognition that Greece and possibly Portugal or Ireland have essentially defaulted. Or perhaps European banks lose deposits faster than they can effectively be re-liquified, causing a failure of one or more banks in Italy, France or elsewhere in Europe. That could cause gold to test its 200-day moving average (roughly $1525). Silver has already broken down below its 200 day moving average and could see one final swoon. At this point, it looks like this sharp decline in both metals could be short-lived due to the anticipated policy makers response of more money printing. Again, we are not predicting this to be the sequence of events, just trying to sort out some possibilities.
If the equity markets meltdown and thereby force their hand, the central bankers’ response to this crisis will be as it was before – to print more and more paper currencies. We have no reason to believe they will alter that path now, when faced with what is arguably the largest financial crisis in our history. Talk is cheap but behavior never lies. What central bankers have failed to realize is that they are the problem. Their interference in the free markets has caused unsustainable imbalances which must eventually be righted.
If a global central bank coordinated re-liquifying (money printing) effort materializes, the metals should eventually stabilize and continue their decade long bull run. While this decline may test your stomach, try not to let the volatility test your resolve. It is the health of the financial sector, not the stability of gold and silver, that is in question.
Read the entire article HERE.
by Michael Piromgraipakd
September 26, 2011
The fear in this gentleman’s voice below is genuine and he speaks the truth the “establishment” does not want you to know. This mornings drop in the price of precious metals is the sign of a strengthening dollar. With the crash of the Euro, big money is flowing into what ever safe haven is available and apparently that is the Dollar. But jumping from a sinking ship into another will only make you wet. Below is an article by ZeroHedge detailing what’s going on.
ZeroHedge: In an interview on BBC News this morning that left the hosts gob-smacked (google it… it is the BBC after all), Alessio Rastani outlines in a mere three-and-a-half-minutes what we all know and most ignore. While the whole interview is worth watching, the money shot for us was “This economic crisis is like a cancer, if you just wait and wait hoping it is going to go away, just like a cancer it is going to grow and it will be too late!”. While he dreams of recessions, sees Goldman ruling the world, and urges people to prepare, it is hard to disagree with much (or actually anything) of what he says and obviously interventions and machinations means we will have days like this (in Silver for instance), there is only one endgame here and we hope there is less hopeful euphoria (and more preparedness) as we pull back the curtain further an further.
While we do not know who this trader is, one thing we can be 100% certain of is that he will never appear on CNBC.
Read the entire article HERE.
BY METAL AUGMENTOR
There is a new boiler room operation in town and it doesn’t involve slick-haired Wall Street scumbags with mafia connections but rather anonymous hedge fund managers and shady characters with no permanent homes or the guts to identify themselves.
And so these shorts without names or homes have found their latest target, Silvercorp Metals (NYSE/TSX: SVM). Unfortunately for them, this time their target doesn’t walk or smell anything like a duck. In fact, some of the anonymous allegations against Silvercorp are so stupid that they raise questions about all the past allegations the shorts have made against the long parade of Chinese companies listed on U.S. or Canadian exchanges. We all know them so let’s not get into names. What matters is that a “research” outfit by the lofty name of International Financial Analysis & Research Group (IFRA) has supposedly documented information on many of these companies by visiting corporate offices, production facilities and sales outlets along with conducting interviews with competitors, partners and customers. Given their work has now been confirmed as sloppy at best in the matter of Silvercorp, all of their prior work must now also be considered doubtful. We are actually quite shocked to learn of this — as recently as last week we still believed these “investigative” efforts were credible. It sucks to be naive but it’s much worse to remain that way.
At this point Silvercorp and several individuals (see here and here) along with the odd newsletter and broker have already provided a litany of rebuttals to the anonymous allegations. And yet they keep popping up with slight modifications and incessant repetition. Unlike the other rebuttals, we are not going to be nice here and give the shorts undeserved respect or benefit of doubt. We are going to call it instead exactly like we see it in true Metal Augmentor fashion.
First off, however, we don’t believe it is appropriate or productive to paint all short sellers with the same broad brush of manipulation and abuse. Shorts can serve a legitimate purpose in a stock market: to counteract pump and dump operations, to strengthen price discovery, to make sure valuation is reflective of market consensus (for good or bad), etc. Anybody should be able to form and share either a long thesis or a short thesis on a stock. One or the other thesis will eventually turn out to be correct and a free market is an efficient way to arrive at the right answer. The defamatory abuse that is taking place at this juncture, however, is not how a free market should work. Instead, it is exactly how a mob hands out justice: hang first and never ask questions later.
The false allegations that have been made are no different from a pump and dump except in reverse. Actually, there is a difference: a pump and dump is illegal only in securities trading whereas defamation is unlawful in virtually every human interaction. In most countries, you haven’t broken a law if you tell everybody what a great baseball player or poker player your loser nephew is … but if you wrongfully accuse him of being a rapist or a thief, then you are liable for damages arising from his lost reputation. It was only a matter of time before the shorts encountered a nephew who is actually not a loser or a rapist or a thief. Silvercorp be his name.
While it is important that shorts should be tolerated, abusive short-selling practices should be vigorously counter-balanced by seeking redress in court for civil damages as well as by bringing market regulators into the fold. Regulatory changes should restrict the abusive and manipulative aspects of short-sided speculation by, for example, requiring shorts who publish negative information to declare in regulatory filings their positions above a certain threshold level and by forcing these shorts to maintain their positions for a certain period of time so that the accused company has a chance to fully respond. In particular, we believe there are licensed investment professionals and registered investment advisors presently active in the United States who need to lose their credentials for their key roles in this gross abuse of the markets.
Look, we are no friends of companies run by reckless promoters who make selective disclosures, much less fraudsters. We have identified companies in the past that have subsequently gone under primarily as a result of undisclosed risks or negative factors. One company, Sterling Mining, even had a deposit that is geologically very similar to Silvercorp’s Ying property: the Sunshine Mine in the Silver Valley of the Coeur d’Alene Mining District in Shoshone County, Idaho. The problem there was that it was an old mine with most of the silver being left over mainly as side and crown pillars in old stopes while future production was burdened by a 7% NSR royalty. We suggested to management that they conduct exploration with an eye toward making a new discovery while negotiating a buyback of this royalty prior to announcing plans for production. They claimed the royalty would never have to be paid because of their arcane interpretation of the law. The rest was history.
We did all the original legwork to discover the facts in the Sterling Mining case including talking to former mine personnel, reviewing SEC and bankruptcy filings of the prior mine owner — the (also) defunct Sunshine Mining Company — and even pulling property records. Sure enough, those 7% royalty holders came looking for their NSR payments just as Sterling Mining was going into default. In fact that royalty is still pestering Thomas Kaplan’s new Sunshine Silver Mines (page 60).
We are aware of other companies that are still operating despite having some serious skeletons in the closet — and again we identified these problems by conducting original research. So we know how to properly do this stuff … while most of the short sellers are grasping at straws.
Here is a suggestion. The goofballs, hippies and know-it-alls who have piled on to attack Silvercorp should take a look at the historical production that came out of the aforementioned Coeur d’Alene camp (not to mention the current happenings at Hecla’s (NYSE: HL) Lucky Friday) before they pipe up again about the SGX mine in the Ying District having grades that are “too good to be true”. In fact, only a true mining ignoramus would compare a mesothermal vein deposit featuring massive sulfides and silver sulfosalts to a typical silver mine containing unremarkable epithermal veins or worse (from a comparative standpoint), a low grade disseminated silver deposit. These ignoramuses might wish to consult at least the Imiter Mine in Morocco for remarkable grade epithermal silver (about 30 ounces or 1kg/tonne) as well as Tahoe Resources’ (TSX: THO) Escobal and MAG Silver’s (TSX: MAG; AMEX: MVG) Juanicipio. These are among the few comparable vein deposits worldwide with overall silver grades at least as good as the SGX mine, which the shorts claim is misrepresented by the company as 845 g/t. The 845 g/t is actually the measured portion of the high grade resource at 300 g/t cutoff for the SGX mine from 2009. As such, it is basically irrelevant.
In reality, the actual high-grade reserves of the SGX mine in the current mine plan are less than half that number –410 g/t to be precise. Apparently our intrepid mining experts don’t understand the differences between how various resource categories are reported or the distinction between an estimated cutoff grade in a resource block and the actual cutoff grade used for ore reserves in the mine plan.
In the case of the SGX mine, the cutoff grade for measured and indicated resources is 300 g/t silver-equivalent, meaning that the reported resource tonnage is constrained to ore blocks that are at least that grade. There are no economic parameters applied to the 300 g/t cutoff number so it will tend to remain the same over time. By contrast, the economic cutoff grade for proven and probable reserves at SGX is about one-half the resource grade thanks to low mining costs and high silver prices. This is why the average mined grade at SGX doesn’t even look that remarkable for an underground deposit. We’re happy to explain all this to the shorts in a way that even a kindergartner can understand. Unlike the experts purportedly consulted by them, we’ll even try to avoid ridiculous claims like the one where 68 million ounces of “equivalent silver” is supposedly too low (“they should have more resources”) to support a company with even just a $100 million market cap. Our fees are reasonable.
Before moving on from the grades at the SGX mine, let’s look at the pile of rocks the fine folks at IFRA collected from the roadside between the Ying mine and mill.
Wow, what can we say! What an impressive pile of random rocks that probably did not fall off an ore truck! Many of them are clearly weathered with smooth edges or showing signs of air exposure (oxidation of iron sulfides) and as such they do not appear to be the product of very recent mining activity. Our guess would be these rocks are larger fragments from the fill material that was used to construct an all-weather road capable of supporting heavy truck traffic. The rocks could have come from the mine as well — perhaps barren or low grade development material — but they do not appear to be representative of high-grade veins (or even medium-grade ones).
Here is how ore might look like at various grades coming out of a silver-base metal vein (these are from my personal collection and also have some iron staining that would not appear as extensively discolored on freshly mined rock):
Notice a few things. One, the material tends to be angular since it was literally blasted out of whole rock by explosive force. Two, it doesn’t have rounded edges from weathering. Three, it has clear vein textures (bands of different colors) instead of typical rock composition. Four, there is some sparkly stuff representing sulfides (these rocks are high grade overall but there are also lower grade portions). Five, oxidation is in spots and bands confirming this to be vein material. All in all, we’d estimate that 75% or more of the rocks in the IFRA “sample” photograph did not “fall off a truck” that was transporting freshly-blasted ore from the SGX mine to the mill.
Now about those trucks. It is claimed they use 13 tonne “Hercules” models at Ying that cannot possibly carry 30 tonnes of ore … at least according to some random guy they spoke with. Oh brother! The shorts would realize their folly if they actually had any experience with trucks or even just bothered to spend 5 minutes conducting bona fide, unbiased research. Had they done that, they would have been able to recognize the clear difference between a light duty model and a heavy duty one. Things like box size and tire size easily give away the difference. Behind big boxes and big tires are big axles, big frames and big hydraulics. Only the cab remains the same size despite the 30 tonne truck sometimes having a larger engine.
The truck on the left is apparently the ironically-named light duty “Hercules” while the one on the right is an undeniable beast with muscular tires and a gigantic box in comparison. I wouldn’t quibble with the claim that the lightweight on the left would struggle to carry 30 tonnes — even though we are talking about just a few kilometers between mine and mill at relatively low speeds. The truck on the right, however, is a 30 tonne truck if there ever was one. Such a truck would no doubt be easily capable of transporting 40+ tonnes at slow speeds on dirt roads in its massive box (18 x 7.5 x 6 feet enclosing 20 cubic yards of rock by our estimate). The red trucks on the ferry (see full picture here) are equally massive and are also clearly 30 tonne beasts … obvious to anybody who isn’t blinded by the glitz of the fast and fabulous short-selling lifestyle.
Now let us discuss a slightly-uncomfortable truth. We now know that a 5% equity interest in Henan Found, the Chinese joint venture between Silvercorp and a state-owned enterprise (SEO) we’ll call Henan Non-Ferrous, was sold at an “auction” to an affiliate of the SEO. The “selling” price was approximately US$7 million and so the shorts would have us believe this is a good indicator of the fair value for all of Henan Found. In turn this would mean that the SGX mine might be worth no more than US$100 million. There is only one problem with this hypothesis. This was a very strange auction. There were 3 bidders. Each of these 3 bidders deposited 20 million RMB (almost half the opening bid) and also had to submit an “operating plan” for approval by Henan Non-Ferrous prior to being accepted as a bidder. After all this trouble, the bidders managed to bid up the price all the way to $45.5 million RMB between the three of them. The furious action must have left the 2 losing bidders gnashing their teeth — after all, you don’t often see an auction where the winning bid soars above the opening price by a massive 1%! In fact, we’re pretty sure nothing like this happens outside the competitive bidding process for privatizing state-owned assets in China. Of course China still doesn’t hold a candle to the competitive bidding that took place as the Soviet empire was dismantled in the early 1990?s. In sum total, the auction for 5% of Henan Found had an outcome that was as certain as the sun rising in the East.
There is much more that we could pick apart but we’ll look at just one other thing for now. It has been alleged that Silvercorp cannot possibly have completed the amount of exploration and development work that it claims in prior years given how little all of this work supposedly cost. This is an interesting allegation given that China works from an economic standpoint mainly because costs are so low there. To wit, in fiscal 2011 Silvercorp reported that it spent just US$11.3 million in exploration and development to accomplish the following according to page 8 of the MD&A:
The Ying Mine incurred $11.3 million exploration and development expenditures (FY2010 – $6.7 million). With that, 38,870 metres (FY2010 – 34,816 metres) of tunnel, 38,254 metres (FY2010 – 28,746 metres) of diamond drilling, and 935 metres (FY2010 – 1,387 metres) of shafts, declines and raises were completed. The mine development works completed will effectively sustain the Ying Mine’s production level.
Based on the above, it is claimed by the short sellers that drilling costs at Ying appear “under-reported by 3.9x”. We don’t know how it is possible to determine this about drilling since the shorts’ own surveys of local drilling contractors arrived at an assumed price of 225 RMB/meter (US$35/meter). The total for drilling 38,254 meters would therefore be about US$1.3 million out of the US$11.3 million. Similarly for shafts, declines and raises the shorts’ contractor surveys arrived at an assumed cost of 15,000 RMB/meter (US$2,300/meter) totaling US$2.2 million for the 935 meters.
That leaves 38,870 meters of tunneling or sometimes also known as “drifting”. For some strange reason the shorts use an assumed cost of 6,750 RMB/meter (US$1,053/meter) for this drifting and therefore they arrive at a total cost of US$41 million. But, there is only US$7.8 million left for drifting expenses after deducting drilling and shafting costs of US$1.3 million and US$2.2 million, respectively, from the total exploration and development for the year of US$11.3 million.
Of course once again it never occurs to these shorts that a simple explanation may exist to their big questions and red flags. Indeed, such a simple explanation means that their short thesis is that much weaker so they would rather prefer there isn’t an explanation at all. Let’s ruin their fun anyway, shall we? At under US$200 per meter (US$7.8 million divided by 38,870 meters), the drifting at Ying would indeed be some of the cheapest development work conducted since the old timers who got paid in whiskey and liked it that way. In fact, we don’t doubt that the contract rate for drifting can sometimes be as high as 12,000 to 15,000 RMB — about US$2,000 per meter — in China for a typical production scenario involving major drifts that require access by large mining vehicles.
Silvercorp’s Ying project, however, is anything but typical. Let’s start with the tunnels that are 2 meters by 2 meters. These tunnels are barely tall enough for the average Westerner with a hard hat and just wide enough for two of them to pass each other. One tonne “tricycle trucks” zip back and forth through these claustrophobia-inducing tunnels like ants in a colony. Meanwhile ceilings are only intermittently secured by rock bolts or timbers due to good ground conditions along with the minimal size of the headings themselves. A small crew of miners could advance such a tunnel at the pace of 2 meters a day. At the calculated cost per meter of drift (US$7.8 million divided by 38,870 meters), the combined wages of this crew would be on the order of US$200 per day after expenses, which breaks out to a significant individual amount for the hardest working crew members. Meanwhile the laid-back miners still prefer to be paid in whiskey, like always.
Let’s also consider that the pocket-like nature of the high grade ore shoots requires much of the drifting to be done on the vein itself: the famous refrain of drill for structure, drift for grade. This style of development can result in quite a bit of “development ore” being accumulated while production stopes are being accessed and prepared for mining. The next part is mere speculation but we’ve had personal experience with similar instances of it at other projects. To wit, such “development ore” might not meet the minimum cutoff grade (approximately 160 grams or 5 ounces per tonne silver-equivalent) per the mine plan … but that doesn’t mean it must necessarily go to waste. Indeed at $40 silver, a tonne of such rock contains metal worth about US$200, which as you’ll recall from above is about the same that the entire crew earns during a hard day of work!
Remember also that the miners use one tonne “tricycle trucks” to haul rocks around the mine, meaning that a single load could be worth up to US$200 in metals. And this is the stuff not going to the mill — in fact the mining crews are being paid to keep it out of the mill. Yet it would be safe to surmise that rock with such high value might be going somewhere other than the waste rock pile. For example possibly as a credit against the mining contract: a bonus, profit share or any of a wide range of possible arrangements that are not unique in the annals of mining history. Such netting can make a mining contract rate seem very low, which it is in Silvercorp’s case. In other words, nothing to see here kids, mosey along now.
Unfortunately our little short bashing must come to an end for today … but never fear because we continue to be on the case, correcting wrongs and championing truth wherever the dark forces of market abuse cast their evil gaze.
Read the entire article HERE.
by Bruce Krasting
For me, the most significant development from the Fed’s announcement is a change in policy where the Fed will re-invest proceeds of maturing MBS securities in new issues of Agency MBS paper. Prior to today, the Fed re-invested principal repayments in Treasury bonds.
I wrote about the possibility of a mega mortgage ReFi by Fannie and Freddie (here and here). I (and many readers) pointed to an obvious flaw in the ReFi story. If a Trillion or so of mortgages were rapidly prepaid, then who would buy all of the new (much lower coupon) mortgage paper?
Now we have the answer. The Fed will put the new MBS paper back on its Balance Sheet, $ for $. There will still be many bondholders outside of the Fed who will get prepaid much faster than they had assumed. Most of that is in pension/bond funds. No one cares about them.
I think that Treasury will announce the plans for a Mega Refi in the not too distant future. It could come this weekend or next week. Obama will wait just enough time after the complex Fed decision so that 99% of all people don’t connect these two dots.
In that 1% will be Republicans. They are going to be mad as hens tonight that Bernanke ignored their last minute plea not to play more monetary games. The authors of that letter, McConnell, Boehner, Kyle and Cantor are really going to be peeved. Not only did the Fed step further on the gas, they greased the skids for an Administration’s plan to ReFi mortgages.
It’s not at all clear that the Fed’s latest move are going to accomplish a thing. I’m not sure that the Big ReFi is going to be such a success either. But that doesn’t matter.
What’s important about this is that the Republicans will respond. They will not give Obama another leg up with his one-year stimulus program. Any chance of that went up in smoke with the Fed’s VERY political decision on MBS today. Can you say, “Collusion”?
This is a real circus now. In this one the bears aren’t dancing. They’re fighting. The claws are out and it’s going to get bloody.
Read the entire article HERE.
By Ben Berkowitz
Yahoo! News: Reuters
September 21, 2011
NEW YORK (Reuters) – The Federal Reserve’s latest move to stimulate credit for consumers and businesses, known as Operation Twist, is likely to threaten the earnings of some of the country’s largest insurers for years to come.
Wall Street in the past week has dimmed its view of MetLife, Prudential Financial and other big insurers, forecasting that they will have to cope with low rates and weak market returns through the end of 2011 and possibly well beyond.
The problem is that returns on insurers’ investment portfolios can’t keep pace with the obligations they have accumulated from torrid sales of annuities and life policies over the past few years.
“Ultimately I think it’s going to be a challenge to business models,” said Gregory Staples, co-head of U.S. fixed income portfolio management at Deutsche Insurance Asset Management, the world’s largest asset manager for insurers.
Insurers were demonstrating sound financial management in purchasing long-term bonds with the premiums they collected to balance their long-term obligations. But if the Fed’s Operation Twist is successfully executed it will push long-term rates lower and, according to some experts, force insurers to retrench on product sales.
No one is suggesting Twist will put insurers out of business, but it is exacerbating a problem that they have been contending with since the financial crisis of 2008.
Under Operation Twist, as announced Wednesday, the Federal Reserve sell shorter-term notes to buy longer-dates Treasuries. That will have the effect of keeping longer-term interest rates down, which the Fed hopes will spur consumers to borrow and spend.
“Folks have brought the low interest-rate environment up to No. 1 priority,” said Doug French, managing principal of the insurance and actuarial advisory practice at Ernst & Young. “We’re not going to get any relief from interest rates for the next two to three years.”
The accounting firm has modeled the investment return needs of the 25 largest life insurers over the next three years to determine what will happen if rates remain static or fall further.
“Their general account yields (in aggregate) are going to decrease by about 51 basis points over the next three years, and that’s a cumulative effect,” French said. “The life industry is under spread compression. It’s just going to continue, and, in fact, it’s going to get worse.
Annuities, a little understood but increasingly popular alternative for older Americans, are a paradoxical problem for insurers when rates plummet.
Limra, a marketing and research group for life insurers, estimates that 35 percent of U.S. retirees receive income from annuities. MetLife, the largest life insurer in the United States, reported that annuity sales rose 48 percent in this year’s second quarter.
Many of the products are sold with a guaranteed minimum benefit in return for an upfront payment. That means that regardless of the strength or weakness of the markets, the insurer has to write a check that doesn’t vary throughout the life of the product.
And that life is getting longer. Several insurers late last year warned that people were holding on to their annuities rather than cashing them out to invest in higher-return products. That creates a bigger nut for the insurers at a time when markets and the central bank aren’t cooperating.
“Once you get a little further out, there’s a very strong consensus that interest rates need to rise,” said JMP Securities analyst Matt Carletti. He and others said insurers are resigning themselves to anemic rates of return.
“Everybody expects a rise in interest rates but few expect it to happen any time soon,” Carletti said.
Rates on 10-year U.S. Treasuries prior to the Fed’s announcement were about 40 basis points below their previous 60-year low and almost two percentage points below their trailing five-year average, according to research from Oppenheimer.
Travelers Companies said earlier this month that 10 percent of its long-term fixed income investments mature annually through 2014 at an approximate yield of 5 percent. If Travelers reinvests that in Treasuries, the yield is likely to be two to three percentage points lower.
The prospect of anemic returns may be one reason why insurance shares have underperformed the broader market in six of the last seven months.
Shares were broadly lower after the Fed’s announcement.
Several insurers that were hoping for moderate interest-rate relief by now may consider higher-risk investment alternatives eventually, though not yet.
Deutsche IAM said some insurance clients have been seeking to invest in bank loans and other alternatives to traditional stocks and bonds if they could find yields higher than 3 percent, though their appetite has cooled.
“With the recent volatility in the marketplace and the recent sell-off and concern about risk there’s been a bit of a pullback in the interest in those asset classes,” Deutsche’s Staples said.
Most everyone agrees that insurers can sustain themselves during a prolonged period of low rates and meet their obligations through their cash flow rather than investment returns. But the question is what happens if rates do not rise in a few years.
“Let’s say, hypothetically, you’re in a low interest rate environment for the next five to 10 years, you’d have to say you’ve got to change your product mix, you’ve got to change what you’re selling,” Ernst & Young’s French said.
Read the entire article HERE.
by Michael Piromgraipakd
September 19, 2011
Now this is how you make love, during an all out riot. I’m sure none of those riot officers wanted to do anything, but watch the beauty unfold before their eyes. Brilliant! I came across this photo by Rich Lam of Getty and it just brought tears to my eyes, so I had to share with you. Can you imagine the chaos ensuing around them? Can you imagine being one of the rioters and breaking windows, doors and rolling cars over and in the midst of the craziness, turning and beholding this spectacle blooming as you dropped your splintered 2×4 on the ground and cry in happiness because you were lucky enough to vicariously experience sexual bliss through these creatively dirty love birds? Click the image for a LARGER view… WOW!
Original article below:
Jun 16, 2011 8:54 PM ET
Vancouver police Chief Jim Chu said more than 100 people were arrested during the riots in the city’s downtown core following the final game of the Stanley Cup on Wednesday night.
Residents of the city awoke Thursday to the aftermath of the city’s worst riot in decades, facing a massive cleanup and questions about how the mob fury came to be unleashed after the Canucks lost Game 7 of the Stanley Cup final to the Boston Bruins.
Chu defended the police preparations, but said in hindsight it would have been better to have more police deployed downtown initially.
Chu apologized to business owners who became the victims of rioters, but defended the police’s tactical decision to focus on public safety and suppress the riot by dispersing the crowd, rather than rushing to hotspots as crowds attacked stores.
He described the instigators as anarchists and criminals who appeared to be the same people involved in the pre-Olympic demonstrations and noted police saw many equipped with goggles, gasoline and other tools to create damage.
Chu said the crowd was three times as large as the crowd during the 1994 Stanley Cup final, but this time it took police half the time to quell the riot, a task which he said took three hours.
He praised the actions of police from Vancouver and all the regional municipal police forces and RCMP who responded to the violence. A total of nine officers were injured, none seriously, and two police cars were destroyed in the riot.
He also praised the efforts of ordinary citizens who stepped in to protect the injured and stop further property damage.
Chu said police gathered thousand of minutes of recordings of the rioters as evidence and were getting much more from witnesses who captured images on cellphones and cameras.
Police are asking anyone with video evidence, photographs, or witness accounts to contact them.
So far, 101 arrests were reported, with 85 charged with breach of the peace, eight charged with public intoxication and eight charged with Criminal Code offences including theft, mischief, assault with a weapon and breaking and entering.
Read the entire article HERE.
by Eric King
September 17, 2011
King World News
With continued volatility in the gold market and identities of individuals being named in the JP Morgan silver manipulation lawsuit, today King World News interviewed Michael Pento, President of Pento Portfolio Strategies. Pento started off discussing the economy and ended with his thoughts on the JP Morgan silver situation. Let’s begin with Pento’s comments on the economy, “The stagflation condition that maligns the U.S. is worsening on a daily basis. Last week we saw an increase in initial jobless claims and an increase in the YOY rate of Consumer Price Inflation. Jobless claims increased by 11k to a level of 428k and the CPI jumped to 3.8% over the last 12 months.”
Michael Pento continues:
“Remarkable, instead of taking steps to address our inflation problem, the Federal Reserve has locked in their dollar-killing zero percent interest rate for another two years, and Chicago Fed President Charles Evans is on record saying the target rate of inflation needs to be raised!
Our debt and deficits continue to pile up and has caused John B. Chambers, Chairman of Standard & Poor’s Sovereign Debt Rating Committee, to warn last Thursday that there is a one in three chance of another U.S. debt downgrade. That’s because the single-celled organisms in both parties that run our government have hatched a scheme to cut just about $20 billion in spending, but want to add $450 billion.
The bottom line is that the U.S. will have added $1.3 trillion in debt during fiscal 2011 alone. China is watching and waiting to pounce on European and U.S. assets to pick up those pieces after the collapse of our dollar and bond market occurs.
“To top off everything, last week the follicle challenged Donald Trump accepted gold as a lease deposit worth about $200,000 from Michael Haynes, chief executive of precious metals dealer APMEX. But Trump has the payment method for this transaction 100% correct.
The faith in the purchasing power of the U.S. dollar is falling about as fast as our crumbling GDP. We must, as a country, defend the middle class by promoting savings and investment. We can only do this by balancing our budget and fighting inflation. Unfortunately, we are doing everything to kill whatever value is left in our currency and our economy.
As a side note, if the allegations that JP Morgan has engaged in silver manipulation are proven correct, as discussed in the King World News piece, the conspiracy theorists will have been exonerated. This will vindicate those who believed for so many years that prices in the silver market were being artificially depressed. Chalk one up for the hard money advocates as this is a big blow to the wire houses who have been hopelessly defending their silver short positions.”
Read the entire article HERE.
by Eric King
September 16, 2011
King World News
Identities of people involved in the alleged JP Morgan conspiracy to manipulate the price of silver have been exposed, along with the mechanisms of the manipulation of silver. King World News was contacted two days ago by key people familiar with this situation. This was described by an individual out of London who is very familiar with the lawsuit as, “The biggest news in a long time because these are actual people who are coming out and naming names of individuals who were involved in this alleged conspiracy with JP Morgan to actively manipulate the price of silver. People may go to jail over this. JP Morgan has all barrels pointing at them as traders are named in this suit, including senior traders at JP Morgan.”
Robert Gottlieb, who is currently a Managing Director/Trader at JP Morgan and an alleged participant in the manipulation is brought up in the lawsuit. What is interesting about Mr. Gottlieb is that in February of 2008 he made the following statement, “If you take just 1-2% of hard asset pension fund money earmarked for commodities and put that into gold, you can project much higher prices in the future than even where we are today.” The timing of the statement is so interesting because at the time Bear Stearns was massively short silver and the firm collapsed within weeks of his comments.
Guess who inherited that massive silver short position? You got it, JP Morgan. Not only did they pick up the massive silver short position, but they also picked up Mr. Gottlieb in the deal as you can see.
Stay tuned as we will have more interviews and comments from key people regarding the JP Morgan lawsuit.
Below are some critical portions from the lawsuit against JP Morgan that King World News was able to obtain. This is a 104 page document, so we just wanted to highlight key points from the suit:
1. Unlawful conduct. “Defendants combined, conspired and agreed to restrain trade in, fix, and manipulate prices of silver futures and options contracts traded in this District on the Commodity Exchange Inc. (“COMEX”) division of the New York Mercantile Exchange (“NYMEX”). Defendants thereby have violated Section 1 of the Sherman Act.
Also during the Class Period, certain of the Defendants, including JP Morgan, have intentionally acted to manipulate prices of COMEX silver futures and options contracts.
2. Purpose and Means. Defendants have effected their foregoing restraint of trade and manipulations in order to profit themselves. Defendants have caused declines in the price of COMEX silver, and COMEX options, and also stabilized such prices through diverse means. These means include (a) a dominant and manipulative short positions and market power manipulation; (b) repeated manipulative and uneconomic trades and trade manipulation; (c) false trades made to facilitate a trade manipulation; and (d) other acts.
3. Market Power Manipulation. (a) JP Morgan, gradually acquired control, between March 17, 2008 and August 2008, of an enormously large ounce short position in COMEX silver futures and silver that previously was held by Bear Stearns. This short position and JP Morgan’s existing COMEX short silver positions gave JP Morgan substantial market power in COMEX silver futures contracts.
4.Manipulative and Uneconomic Trades (a) During the Class Period, JP Morgan also made large manipulative trades that repeatedly caused sudden, unreasonable and artificial fluctuations in COMEX silver prices which profited JP Morgan. (b) One of these episodes occurred on August 14 and 15, 2008. JP Morgan’s trades caused a very large decline of almost $1.41 per ounce, or approximately 12%, in COMEX silver futures. This represented an approximately $220,000,000 increase in the value of JP Morgan’s COMEX silver short positions.
7. CFTC Commissioner Comment (a) Such depressions of the prices of COMEX silver futures through large uneconomic trades created benefitted JP Morgan’s extraordinarily large COMEX short position. (c) Also, these types of trades were reported to the CFTC by other persons. Plaintiffs further specifically allege that Commissioner Bart Chilton made public statements, including on October 26, 2010, to the effect that he believed there had been manipulation or related unlawful conduct in the COMEX silver futures market. “I believe that there have been repeated attempts to influence prices in the silver markets. There have been fraudulent efforts to persuade and deviously control that price. Based on what I have been told by member of the public, and reviewed in publicly available documents, I believe violations to the Commodity Exchange Act (CEA) have taken place in silver markets and that any such violation of the law in this regard should be prosecuted.” Bart Chilton
58. JP Morgan executed its trades on this day through, at least, a futures floor broker named Marcus Elias. Marcus Elias was a former classmate and wrestling teammate of Chris Jordan, a senior silver trader at JP Morgan. After the close of floor trading on June 26, 2007, Marcus Elias acknowledged that he had executed purchase trades for JP Morgan at or near the lows of the market. Marcus Elias also executed sell orders on behalf of JP Morgan in the morning, which contributed to the price declines, and then purchased futures on behalf of JP Morgan subsequently as the market bottomed.
65. Through its trading conduct on this day, JP Morgan intended to force traders who were short out of the money puts to cover their positions. As options on July futures approached expiration, JP Morgan had no fundamental reason to believe there would be a price move downward. Yet JP Morgan maintained its put positions until the last available day to trade these options – an economically unjustifiable action because at expiration the options would expire out of the money and worthless. However, by virtue of this large put options position, JP Morgan knew that a large and less capitalized segment of the market was conversely short options. So, rather than simply liquidate its out of the money positions at a loss, JP Morgan sold futures into the market and placed “spoof” orders to generate widespread panic. This selling forced panicked traders to systematically sell silver futures. As discussed below, this conduct was repeated again in August 2008.
The suit also names Robert Gottlieb who came to JP Morgan from Bear Stearns along with a massive silver short position which JP Morgan inherited from Bear Stearns:
c. JP Morgan’s Communications with HSBC
88. Between 1996 and 2000, Robert Gottlieb, Christopher Jordan and Michael Connolly worked together at the Precious Metals Trading Desk of HSBC and at Republic National Bank of New York, prior to its acquisition by HSBC. 89. In 2006, Jordan began his employment at JP Morgan where, until 2010, he was one of JP Morgan’s principal COMEX silver futures and options traders. 90. After a brief stint at Bank of America as a commodities trader, Mike Connolly returned to HSBC in 2007, where he served as Senior Vice President of HSBC’s Precious Metals Desk. 91. In March 2008, Robert Gottlieb began his employment at JP Morgan Chase where he presently serves as a Managing Director/Trader. 92. Prior to JP Morgan’s acquisition of Bear Stearns in 2008, Mr. Gottlieb had worked for Bear Stearns from January 2006 forward. 93. Bear Stearns, through Robert Gottlieb and others, had developed the previously alleged large Bear Stearns short position in COMEX silver futures prior to March 17, 2008. 94. Contrary to standard antitrust compliance manuals, Mr. Gottlieb regularly spoke to, and communicated and met with HSBC silver trader Mike Connolly from the time that Mr. Gottlieb joined JP Morgan until at least October 2010.
d. JP Morgan’s Motive and Financial Incentive to Cause Lower COMEX Silver Futures Prices From The Second Quarter Of 2008 Forward.
95. By the second quarter of 2008 and continuing thereafter through the end of the Class Period, JP Morgan possessed a large financial incentive to cause lower COMEX silver futures prices. Lower COMEX silver prices caused the mark to market value of JP Morgan’s short COMEX silver positions to increase. The amount of the increase in the value of JP Morgan’s short COMEX silver short positions was at least $100,000,000 and was as much in excess of $150,000,000 for each $1 decline in COMEX silver prices.
116. According to other witnesses as well, on or before August 15, 2008, brokers who often executed trades for JP Morgan accumulated a significant number of September puts that were well out of the money. 117. As prices decreased, these September puts became much closer to being in the money. Accordingly, those who had been selling these puts had to close out their positions by buying back the September puts on August 15, 2008. 118. Chris Jordan at JP Morgan was selling back large amounts of September puts on August 15 at an enormous profit.
124. In his communications with the CFTC, the whistleblower described how JP Morgan signaled its co-conspirators in advance of the manipulation, so that JP Morgan along with its co-conspirators, could reap enormous profits by artificially and unlawfully suppressing and manipulating the price of COMEX silver futures and options contracts.
Read the entire article HERE.
by Tyler Durden
09/16/2011 14:51 -0400
As we have been pointing out since the beginning of the week, the one defining feature of the past 5 days has been a relentless short covering rally. And while the mechanics were obvious, one thing was missing: the reason. Well, courtesy of David Rosenberg’s latest, we may now know what it is. Bottom line: for all who think that Bernanke is about to serve just Operation Twist next week… you ain’t seen nothing yet. “The consensus view that the Fed is going to stop at ‘Operation Twist’ may be in for a surprise. It may end up doing much, much more.” Rosie continues: “Look, we are talking about the same man who, on October 2, 2003, delivered a speech titled Monetary Policy and the Stock Market: Some Empirical Results. I kid you not. This is someone who clearly sees the stock market as a transmission mechanism from Fed policy to the rest of the economy. In other words, if Bernanke wants to juice the stock market, then he must do something to surprise the market. ‘Operation Twist’ is already baked in, which means he has to do that and a lot more to generate the positive surprise he clearly desires (this is exactly what he did on August 9th with the mid-2013 on- hold commitment). It seems that Bernanke, if he wants the market to rally, is going to have to come out with a surprise next Wednesday.” In other words, stocks are now pricing in not just OT 2, and a reduction in the IOER, but also an LSAP of a few hundred billion. There is, however, naturally a flipside, to Bernanke’s priced in announcement: “If he doesn’t, then expect a big selloff.” In everything, mind you, stocks, bonds, and certainly precious metals. And, of course, vice versa.
Full note from Today’s Breakfast with Dave:
The consensus view that the Fed is going to stop at ‘Operation Twist’ may be in for a surprise. It may end up doing much, much more. And this may be one of the reasons why the stock market is starting to rally (a classic 50%+ retracement, which always occur after the first 20% down-leg in a cyclical bear market would imply a test of 1,250 on the S&P 500 at the very least). Hedge funds do not want to be short ahead of next week’s FOMC meeting, and who can blame them?
Here are 10 reasons why:
1) Just go back to August 9th. The Fed was supposed to make a more emphatic comment in the press statement about “extended period” as it pertained to the length of time the Fed would stay ultra-accommodative on the rates front. Bernanke went much further than anyone thought with his pledge to keep the funds rate at the floor at least to mid-2013.
2) Ben Bernanke has shown repeatedly that he is willing to take risks and be very aggressive.
3) Everyone knows that the Dow finished the August 9th session with a huge 430 point gain after the FOMC press statement was fully digested. Not only that, but when Bernanke held his two-day meeting in mid-December of 2008 and unveiled QE1, the Dow soared 360 points. And last November, the day after that two-day meeting when Bernanke made it clear in his Washington Post op-ed article how key it was to ignite the stock market, the Dow jumped 220 points. It may all be just for a near-term trade, but in an industry where every basis point counts, who wants to be short knowing all that?
4) At that August meeting, we know both from the statement and minutes that additional rounds of unconventional easing were discussed. And Mr. Bernanke made it very clear at Jackson Hole that they would be on the table again at the coming meeting
5) The Fed would like to be out of the picture during the election campaign (especially if Richard Perry ends up winning the GOP nomination).
6) The Fed has cut its GDP forecasts at each of the past three meetings.
7) The stock market is actually little changed from where it was at the last meeting and we know based on that Washington Post op-ed, that it is equity valuation (specifically the Russell 2000) that Ben wants to see rally. Sanctioning lower bond yields is just a means to that end.
8) There is no fiscal stimulus to bolster the economy, with the odds very high that the Obama jobs plan — some in his own party object to the package as per yesterday’s New York Times — will be dead-on-arrival on the House floor. The Fed is the only game in town.
9) Financial conditions have tightened nearly 100 basis points since the spring and deserve a policy response.
10) Bernanke announced at Jackson Hole that this coming meeting was going to be a two-day affair, not one day. The last time he did this was back in December 2008 and that was when he invoked QE1. There has to be a reason why it is two days, and it must be because he wants to build the case for three dissenters. The Board is being sequestered for a reason!
Look, we are talking about the same man who, on October 2, 2003, delivered a speech titled Monetary Policy and the Stock Market: Some Empirical Results. I kid you not. This is someone who clearly sees the stock market as a transmission mechanism from Fed policy to the rest of the economy. Here is a key excerpt from that sermon:
“Normally, the FOMC, the monetary policymaking arm of the Federal Reserve, announces its interest rate decisions at around 2:15 p.m. following each of its eight regularly scheduled meetings each year. An air of expectation reigns in financial markets in the few minutes before to the announcement. If you happen to have access to a monitor that tracks key market indexes, at 2:15 p.m. on an announcement day you can watch those indexes quiver as if trying to digest the information in the rate decision and the FOMC’s accompanying statement of explanation. Then the black line representing each market index moves quickly up or down, and the markets have priced the FOMC action into the aggregate values of U.S. equities, bonds, and other assets.
Even the casual observer can have no doubt, then, that FOMC decisions move asset prices, including equity prices. Estimating the size and duration of these effects, however, is not so straightforward. Because traders in equity markets, as in most other financial markets, are generally highly informed and sophisticated. any policy decision that is largely anticipated will already be factored into stock prices and will elicit little reaction when announced. To measure the effects of monetary policy changes on the stock market, then, we need to have a measure of the portion of a given change in monetary policy that the market had not already anticipated before the FOMC’s formal announcement [emphasis added].”
In other words, if Bernanke wants to juice the stock market, then he must do something to surprise the market. ‘Operation Twist’ is already baked in, which means he has to do that and a lot more to generate the positive surprise he clearly desires (this is exactly what he did on August 9th with the mid-2013 on- hold commitment). It seems that Bernanke, if he wants the market to rally, is going to have to come out with a surprise next Wednesday. If he doesn’t, then expect a big selloff.
What he is likely to do is another story, but here are some options:
1) Expand the balance sheet further and simply buy more bonds (at the longer end of the curve).
2) Eliminate the interest paid to commercial banks on excess reserves (to try to spur lending).
3) Announce an explicit ceiling on the 10-year note yield (say 1.5%), which the Fed has done in the distant past. Based on Bernanke’s prior rhetoric, this would seem to be a preferred strategy (though the Fed relinquishes control of the balance sheet).
4) Buy foreign securities (bail out Europe and weaken the U.S. dollar — talk about killing two birds with one policy stone).
5) Announce an explicit higher inflation target or perhaps a lower unemployment rate target (i.e. reinforce the DUAL mandate).
6) As Mr. Bernanke stated for the record in November 2002, the Fed does have broad powers to lend to the private sector indirectly via banks, through the discount window. It could offer fixed-term loans to banks at low or zero interest, with a wide range of private assets (including, among others, corporate bonds, commercial paper, bank loans, and mortgages) deemed eligible as collateral. For example, the Fed might make 90-day or 180-day zero-interest loans to banks, taking corporate commercial paper of the same maturity as collateral. Such a program could significantly reduce liquidity and term premiums on the assets used as collateral. Reductions in these premiums would lower the cost of capital both to banks and the nonbank private sector.
Read the entire article HERE.
By Henry Blodget
September 9, 2011
Bank of America is doomed, says bank analyst Chris Whalen, the founder and managing director of Institutional Risk Analytics. (See video below)
Importantly, this dour outlook has nothing to do with the company’s operating businesses, which Whalen thinks are fine. In fact, says Whalen, there’s no need for the bank to be restructuring them and firing thousands of employees (40,000 is the latest estimate) to improve its bottom line.
The part of Bank of America that’s not fine, in Whalen’s view, is the ongoing liability from the mortgage underwriting that Bank of America’s subsidiaries did during the housing bubble. The litigation exposure from this could be so humongous, Whalen argues, that it will bankrupt the company, forcing regulators to step in and restructure it.
And Whalen doesn’t think the country should wait for that day.
Instead, Whalen says, the government should just seize Bank of America and restructure its debt, equity, and legal obligations now. The company’s operating businesses—branches, commercial lending, wealth management, and so forth—should continue operating, and the company could then be refloated with a new ownership structure.
This would leave Bank of America clean, lean, and competitive—just like the strengthened GM after the forced auto-company bankruptcy.
But in the meantime, none of this is under discussion. Instead, says Whalen, Bank of America is rearranging chairs on the deck of the Titanic. And firing thousands of people who don’t need to be fired.
Read the entire article HERE.