Thursday, October 28, 2010

10/28/2010 - Run Turkey, Run

Run Turkey, Run
  • The Fed’s announcement of a renewed commitment to Quantitative Easing has been well telegraphed and the market’s reaction is likely to be subdued.
  • We are in a “liquidity trap,” where interest rates or trillions in asset purchases may not stimulate borrowing or lending because consumer demand is just not there.
  • The Fed’s announcement will likely signify the end of a great 30-year bull market in bonds and the necessity for bond managers and, yes, equity managers to adjust to a new environment.
They say a country gets the politicians it deserves or perhaps it deserves the politicians it gets. Whatever the order, America is next in line, and as we go to the polls in a few short days it’s incumbent upon a sleepy and befuddled electorate to at least ask ourselves, “What’s going on here?” Democrat or Republican, Elephant or Donkey, nothing much ever seems to change. Each party has shown it can add hundreds of billions of dollars to the national debt with little to show for it or move our military from one country to the next chasing phantoms instead of focusing on more serious problems back home. This isn’t a choice between chocolate and vanilla folks, it’s all rocky road: a few marshmallows to get you excited before the election, but with a lot of nuts to ruin the aftermath.


Each party’s campaign tactics remind me of airport terminals pre-9/11 when solicitors only yards apart would compete for the attention and dollars of travelers. “Save the Whales,” one would demand, while the other would pose as its evil twin – “Eat Whale Blubber,” the makeshift sign would read. It didn’t matter which slogan grabbedyou, the end of the day’s results always produced a pot of money for them and the whales were neither saved nor eaten. American politics resemble an airline terminal with a huckster’s bowl waiting to be filled every two years.


And the paramount problem is not that we contribute so willingly or even so cluelessly, but that there are only two bowls to choose from. Thomas Friedman, the respected author of The World Is Flat, and a weekly New York Times Op-Ed author, recently suggested “ripping open this two-party duopoly and having it challenged by a serious third party” unencumbered by special interest megabucks. “We basically have two bankrupt parties, bankrupting the country,” was the explicit sentiment of his article, and I couldn’t agree more – whales or no whales. Was it relevant in 2004 that John Kerry was or was not an admirable “swift boat” commander? Will the absence of a mosque within several hundred yards of Ground Zero solve our deficit crisis? Is Christine O’Donnell really a witch? Did Meg Whitman employ an illegal maid? Who cares! We are being conned, folks; Democrats and Republicans alike. What have you really heard from either party that addresses America’s future instead of its prurient overnight fascination with scandal? Shame on them and of course, shame on us. We’re getting what we deserve. Vote NO in November – no to both parties. Vote NO to a two-party system that trades promises for dollars and hope for power, and leaves the American people high and dry.


There’s another important day next week and it rather coincidentally occurs on Wednesday – the day after Election Day – when either the Donkeys or the Elephants will be celebrating a return to power and the continuation of partisan bickering no matter who is in charge. Wednesday is the day when the Fed will announce a renewed commitment to Quantitative Easing – a polite form disguise for “writing checks.” The market will be interested in the amount (perhaps as much as an initial $500 billion) as well as the targeted objective (perhaps a muddied version of “2% inflation or bust!”). The announcement, however, has been well telegraphed and the market’s reaction is likely to be subdued. More important will be the answer to the long-term question of “will it work?” and perhaps its associated twin “will it create a bond market bubble?”


Whatever the conclusion, not only investors, but the American people should recognize that Wednesday, even more than Tuesday, represents a critical inflection point in determining our future prosperity. Of course we’ve tried it before, most recently in the aftermath of the Lehman crisis, during which the Fed wrote $1.5 trillion or so in “checks” to purchase Agency mortgages and a smattering of Treasuries. It might seem a tad dramatic then, to label QEII as “critical,” sort of like those airport hucksters, I suppose, that sold whale blubber for a living. But two years ago, there was the implicit assumption that the U.S. and its associated G-7 economies needed just an espresso or perhaps an Adderall or two to get back to normal. Normal just hasn’t happened yet, and economic historians such as Kenneth Rogoff and Carmen Reinhart have since alerted us that countries in the throes of delevering can take many, not several, years to return to a steady state.


The Fed’s second round of QE, therefore, more closely resembles an attempted hypodermic straight to the economy’s heart than its mood elevator counterpart of 2009. If QEII cannot reflate capital markets, if it can’t produce 2% inflation and an assumed reduction of unemployment rates back towards historical levels, then it will be a long, painful slog back to prosperity. Perhaps, as a vocal contingent suggests, our paper-based foundation of wealth deserves to be buried, making a fresh start from admittedly lower levels. The Fed, on Wednesday, however, will decide that it is better to keep the patient on life support with an adrenaline injection and a following morphine drip than to risk its demise and ultimate rebirth in another form.


We at PIMCO join with Ben Bernanke in this diagnosis, but we will tell you, as perhaps he cannot, that the outcome is by no means certain. We are, as even some Fed Governors now publically admit, in a “liquidity trap,” where interest rates or trillions in QEII asset purchases may not stimulate borrowing or lending because consumer demand is just not there. Escaping from a liquidity trap may be impossible, much like light trapped in a black hole. Just ask Japan. Ben Bernanke, however, will try – it is, to be honest, all he can do. He can’t raise or lower taxes, he can’t direct a fiscal thrust of infrastructure spending, he can’t change our educational system, he can’t force the Chinese to revalue their currency – it is all he can do, and as he proceeds, the dual questions of “will it work” and “will it create a bond market bubble” will be answered. We at PIMCO are not sure.


Still, while next Wednesday’s announcement will carry our qualified endorsement, I must admit it may be similar to a Turkey looking forward to a Thanksgiving Day celebration. Bondholders, while immediate beneficiaries, will likely eventually be delivered on a platter to more fortunate celebrants, be they financial asset classes more adaptable to inflation such as stocks or commodities, or perhaps the average American on Main Street who might benefit from a hoped-for rise in job growth or simply a boost in nominal wages, however deceptive the illusion.Check writing in the trillions is not a bondholder’s friend; it is in fact inflationary, and, if truth be told, somewhat of a Ponzi scheme. Public debt, actually, has always had a Ponzi-like characteristic. Granted, the U.S. has, at times, paid down its national debt, but there was always the assumption that as long as creditors could be found to roll over existing loans – and buy new ones – the game could keep going forever. Sovereign countries have always implicitly acknowledged that the existing debt would never be paid off because they would “grow” their way out of the apparent predicament, allowing future’s prosperity to continually pay for today’s finance.


Now, however, with growth in doubt, it seems that the Fed has taken Charles Ponzi one step further. Instead of simply paying for maturing debt with receipts from financial sector creditors – banks, insurance companies, surplus reserve nations and investment managers, to name the most significant – the Fed has joined the party itself. Rather than orchestrating the game from on high, it has jumped into the pond with the other swimmers. One and one-half trillion in checks were written in 2009, and trillions more lie ahead. The Fed, in effect, is telling the markets not to worry about our fiscal deficits, it will be the buyer of first and perhaps last resort. There is no need – as with Charles Ponzi – to find an increasing amount of future gullibles, they will just write the check themselves. I ask you: Has there ever been a Ponzi scheme so brazen? There has not. This one is so unique that it requires a new name. I call it a Sammy scheme, in honor of Uncle Sam and the politicians (as well as its citizens) who have brought us to this critical moment in time. It is not a Bernanke scheme, because this is his only alternative and he shares no responsibility for its origin. It is a Sammy scheme – you and I, and the politicians that we elect every two years – deserve all the blame.


Still, as I’ve indicated, a Sammy scheme is temporarily, but not ultimately, a bondholder’s friend. It raises bond prices to create the illusion of high annual returns, but ultimately it reaches a dead-end where those prices can no longer go up. Having arrived at its destination, the market then offers near 0% returns and a picking of the creditor’s pocket via inflation and negative real interest rates. A similar fate, by the way, awaits stockholders, although their ability to adjust somewhat to rising inflation prevents such a startling conclusion. Last month I outlined the case for low asset returns in almost all categories, in part due to the end of the 30-year bull market in interest rates, a trend accentuated by QEII in which 2- and 3-year Treasury yields approach the 0% bound. Anyone for 1.10% 5-year Treasuries? Well, the Fed will buy them, but then what, and how will PIMCO tell the 500 billion investor dollars in the Total Return strategy and our equally valued 750 billion dollars of other assets that the Thanksgiving Day axe has finally arrived?


We will tell them this. Certain Turkeys receive a Thanksgiving pardon or they just run faster than others! We intend PIMCO to be one of the chosen gobblers. We haven’t been around for 35+ years and not figured out a way to avoid the November axe. We are a survivor and our clients are not going to be Turkeys on a platter. You may not be strutting around the barnyard as briskly as you used to – those near 10% annualized yields in stocks and bonds are a thing of the past – but you’re gonna be around next year, and then the next, and the next. Interest rates may be rock bottom, but there are other ways – what we call “safe spread” ways –to beat the axe without taking a lot of risk: developing/emerging market debt with higher yields and non-dollar denominations is one way; high quality global corporate bonds are another. Even U.S. Agency mortgages yielding 200 basis points more than those 1% Treasuries, qualify as “safe spreads.” While our “safe spread” terminology offers no guarantees, it is designed to let you sleep at night with less interest rate volatility. The Fed wants to buy, so come on, Ben Bernanke, show us your best and perhaps last moves on Wednesday next. You are doing what you have to do, and it may or may not work. But either way it will likely signify the end of a great 30-year bull market in bonds and the necessity for bond managers and, yes, equity managers to adjust to a new environment.


If a country gets the politicians it deserves, then the same can be said of an investor – you’re gonna get what you deserve. Vote No to Republican and Democratic turkeys on Tuesday and Yes to PIMCO on Wednesday. We hope to be your global investment authority for a new era of “SAFE spread” with lower interest rate duration and price risk, and still reasonably high potential returns. For us, and hopefully you, Turkey Day may have to be postponed indefinitely.


William H. Gross
Managing Director


http://www.pimco.com/Pages/RunTurkeyRun.aspx

10/28/2010 - Silver Subject to Price Manipulation, Chilton Says

Silver Subject to Price Manipulation, Chilton Says
By Asjylyn Loder and Pham-Duy Nguyen - Oct 26, 2010 1:17 PM ET



Silver Subject to Price Manipulation, Chilton Says
Commissioner on the Commodity Futures Trading Commission Bart Chilton. Photographer: Brendan Hoffman/Bloomberg


As an investigation of the silver market by the top U.S. commodity regulator entered a third year, a member of the Commodity Futures Trading Commission said today there have been “repeated attempts” to influence prices.
“There have been fraudulent efforts to persuade and deviously control that price,” said Commissioner Bart Chilton at a hearing today in Washington, alleging there have been violations of the Commodity Exchange Act. “Any such violation of the law in this regard should be prosecuted,” he said.
The five-member commission began investigating allegations of price manipulation in the silver futures market in September 2008. The CFTC said in a report that year that it had received “numerous letters, e-mails and phone calls” during the last 20 to 25 years alleging prices were being manipulated downward.
The CFTC proposed today new rules against manipulation and disruptive trading practices. Proving manipulation has challenged courts and lawmakers since the early attempts to regulate U.S. commodity markets in the 1920s.
“I don’t believe there is any long-term conspiracy to control prices,” said Leonard Kaplan, the president of Prospector Asset Management in Evanston, Illinois. “Manipulation can occur in small doses for very short periods of time. Adding regulation may not do the trick of correcting the problems simply because the players are smarter than the regulators and they’ll find another way to game the system.”
Silver’s Gain
Silver, used to create the first telegraph messages, has almost doubled gold’s gain this year, beating global equities, Treasuries and most industrial metals. Silver holdings through exchange-traded products surged this year. The metal is used in jewelry and industrial applications such as solar panels.
Assets held through four providers of ETPs climbed to 14,285 metric tons on Oct. 22, the most in at least eight months, according to data compiled by Bloomberg. That’s almost equal to Barclays Capital’s forecast for industrial and photographic demand this year.
Before today, silver gained 40 percent this year, touching $24.95 an ounce on Oct. 14, the highest level in 30 years.
Chilton said the commission should release more information on its investigation “in the very near future,” and that the law didn’t permit him to divulge traders’ names or information about their positions. He didn’t say whether prices had been manipulated up or down.
CFTC Hearing
Chilton spoke at a hearing in Washington on regulations to implement the Dodd-Frank financial overhaul, which became law in July and gave the commission a year to establish rules governing the $615 trillion over-the-counter derivatives market.
The financial revamp, named for its primary authors, Senate Banking Committee ChairmanChristopher Dodd, a Connecticut Democrat, and House Financial Services Chairman Barney Frank, a Massachusetts Democrat, mandates that most interest-rate, credit-default and other swaps be processed by clearinghouses after being traded on exchanges or swap-execution facilities.
The commission voted 5-0 to propose rules that will expand the agency’s ability to prohibit fraud and manipulation in commodity markets. The public has 60 days to comment. The proposed rules will expand the commission’s authority to the over-the-counter market and may make manipulation easier to prove.
Manipulation Cases
Under current law, manipulation cases hinge on a four-prong test that begins with proving that prices were “artificial,” or outside the bounds of normal supply and demand. Then the government must prove that the accused had the ability to cause an artificial price, took actions to cause it and intended it.
The agency spent five years investigating an attempt by the Hunt brothers to corner the silver market in 1979 and 1980. That effort drove futures prices up to a high of $50.35 per ounce in New York in 1980 before the commission forced the brothers to sell off their silver holdings and the price collapsed.
The CFTC proposal today adds a prohibition on fraud-based manipulation that would cover intentional and reckless conduct that deceives or defrauds market participants. Penalties include a $1 million fine or triple the monetary gain, whichever is greater, and restitution to customers.
The Dodd-Frank legislation also gives the commission until January to impose limits on the number of contracts a single trader can hold in markets for energy and metals. The commission has received dozens of letters in support of limits from people claiming silver prices have been manipulated. The proposed caps have not yet been announced.
“It is hard to know how important Chilton’s comments are with regard to the ongoing silver manipulation allegations,” said Mark O’Byrne, executive director of brokerage GoldCore Ltd. in Dublin, in an e-mail. “If the CFTC prosecutes those who may have manipulated gold and silver markets, as Chilton urged today, and violated commodities laws, then it could lead to further volatility and higher prices.”

10/28/2010 - InPlay




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General Advice Disclosure: Please note that the advice contained herein is general advice and is for the purposes of education only. The risk of loss in trading futures contracts, commodity options, stocks, stock options and forex currencies can be substantial, and therefore investors should understand the risks involved in taking leveraged positions and must assume responsibility for the risks associated with such investments and for their results. You are reminded that past performance is no guarantee or reliable indication of future results. It has not been prepared taking into account your particular investment objectives, financial situation and particular needs.You should therefore assess whether the advice is appropriate to your individual investment objectives, financial situation and particular needs. You should do this before making an investment decision based on this general advice. You can either make the assessment yourself or seek the help of a professional adviser. This commentary is not a recommendation to buy or sell, but rather a guideline to interpreting the specified indicators. This information should only be used by investors who are aware of the risk inherent in securities trading. The Vulcan Report accepts no liability whatsoever for any loss arising from any use of this expert or its contents.liability whatsoever for any loss arising from any use of this expert or its contents.


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Wednesday, October 27, 2010

10/27/2010 - QE2 - Fed looks set for new round of monetary easing

Fed looks set for new round of monetary easing

C. Dudley, President and Chief Executive of the Federal Reserve Bank of New York, addresses the … By Pedro Nicolaci da Costa Pedro Nicolaci Da Costa – 41 mins ago
WASHINGTON (Reuters) – The Federal Reserve looks set to embark on a hotly debated second round of monetary easing next week, but much uncertainty surrounds the scope and pace of bondpurchases by the U.S. central bank.
Market expectations have centered around an initial commitment to buy at least $500 billion in Treasury debt over five months in an effort to spur lending and support an economic recovery that is too weak to tame high unemployment.
Further muddying the outlook, Fed officials have offered conflicting signals on their policy predilections in recent weeks, with some pushing for a very aggressive stimulus and others highly skeptical of any additional accommodation.
This makes it harder to gauge where the ultimate consensus will settle, though most analysts assume Fed Chairman Ben Bernanke's dovish leanings will carry the day.
Here are some ways in which next week's decision might play out:
$500 BILLION OVER FIVE MONTHS, HINTS OF MORE
This is the base-case scenario for financial markets -- investors may have already priced in even more, in fact. However, any disappointment at the headline figure would likely be more than offset by any nod to the possibility of further purchases if conditions warrant. That would be interpreted as an open-ended promise to do whatever it takes to ensure the recovery is on track and spark rallies in U.S. stocks and government bonds. The dollar, which has been gaining ground this month, would suffer.
$750 BILLION TO $1 TRILLION, HINTS OF MORE
The Bernanke Fed has shown a propensity for erring on the side of going big. This is based on the notion that policy acts with a lag, and that fighting inflation is easier than battling deflation. The Fed could choose to go beyond market expectations in order to build in an extra "announcement effect," in the same way that intermeeting rate cuts are believed to offer more bang for the buck. This would lead to a sharp rally in riskier assets like stocks and emerging market bonds. Commodities would also rise sharply as investors worry about the possibility of an unruly dollar decline.
OPEN ENDED, WITH NO UPFRONT COMMITMENT
Given opposition within the FOMC from hawks, it is not inconceivable that the Fed will find it hard to settle on a large upfront commitment. Instead, the Fed could announce purchases of about $100 billion a month, a figure that has already been cited by at least two top Fed officials, but hint at intentions to do more as economic conditions evolve. This approach might have the added benefit of helping to quell concerns from other countries that the United States was engaged in competitive devaluation of its currency. Market reaction to this outcome is harder to predict and would depend greatly on how the Fed characterizes the economy in its policy statement.
$500 BILLION TO $750 BILLION, WITH NO HINT OF MORE
Perhaps the best way to win over skeptics is not to limit the initial amount of easing but rather to put a cap on its ultimate size. With Fed credit to the banking system already at $2.3 trillion, triple pre-crisis levels, some officials worry that an eventual exit from this ultra-easy stance will be made increasingly difficult with a larger balance sheet. However, it is difficult to imagine the Fed would embark in such an unorthodox policy without giving itself the flexibility to follow through on its efforts to spur a sustainable recovery.
A SMALL, FINITE COMMITMENT
This is the least likely outcome. Markets have not priced in a significant easing in a vacuum. Fed officials, including Bernanke, have been careful to telegraph the central bank's intentions. By disappointing these expectations so severely, the Fed would risk undoing the lowered yields garnered by jawboning alone, potentially jeopardizing an already fragile recovery. The dollar would benefit, but at the expense of bonds, stocks and emerging market securities.

10/27/2010 - InPlay



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General Advice Disclosure: Please note that the advice contained herein is general advice and is for the purposes of education only. The risk of loss in trading futures contracts, commodity options, stocks, stock options and forex currencies can be substantial, and therefore investors should understand the risks involved in taking leveraged positions and must assume responsibility for the risks associated with such investments and for their results. You are reminded that past performance is no guarantee or reliable indication of future results. It has not been prepared taking into account your particular investment objectives, financial situation and particular needs.You should therefore assess whether the advice is appropriate to your individual investment objectives, financial situation and particular needs. You should do this before making an investment decision based on this general advice. You can either make the assessment yourself or seek the help of a professional adviser. This commentary is not a recommendation to buy or sell, but rather a guideline to interpreting the specified indicators. This information should only be used by investors who are aware of the risk inherent in securities trading. The Vulcan Report accepts no liability whatsoever for any loss arising from any use of this expert or its contents.liability whatsoever for any loss arising from any use of this expert or its contents.


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Tuesday, October 26, 2010

10/26/2010 - InPlay



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Risk Disclosure


General Advice Disclosure: Please note that the advice contained herein is general advice and is for the purposes of education only. The risk of loss in trading futures contracts, commodity options, stocks, stock options and forex currencies can be substantial, and therefore investors should understand the risks involved in taking leveraged positions and must assume responsibility for the risks associated with such investments and for their results. You are reminded that past performance is no guarantee or reliable indication of future results. It has not been prepared taking into account your particular investment objectives, financial situation and particular needs.You should therefore assess whether the advice is appropriate to your individual investment objectives, financial situation and particular needs. You should do this before making an investment decision based on this general advice. You can either make the assessment yourself or seek the help of a professional adviser. This commentary is not a recommendation to buy or sell, but rather a guideline to interpreting the specified indicators. This information should only be used by investors who are aware of the risk inherent in securities trading. The Vulcan Report accepts no liability whatsoever for any loss arising from any use of this expert or its contents.liability whatsoever for any loss arising from any use of this expert or its contents.


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