Friday, August 20, 2010

The Midnight Massacre Revisited

Ben Davies of Hinde Capital released a report this week titled, "Silver Velocity - The Coming Bullet."  It is a fantastic piece that gives a clear overview of the market today as well as where we go from here.

In the report he describes the event that took place in July 2008, which I like to call the Midnight Massacre.

Overnight the short position by four commercial banks increased from 9% of the COMEX net short to over 60%!  Five months later they had increased the short position to 99%!  (Shorting a commodity means you sell the commodity today and if it falls in price you buy it back in the future and profit the difference.  The COMEX is the exchange where silver is traded, such as the New York Stock Exchange for stocks)

The following graph shows the massacre beautifully.  The red lines show the % short position and the black line shows the price of silver.  You can see when the red lines exploded downward on July 2008, and peaked during December 2008 at 99% of short position.

As you can see the commercial banks have held their short positions extremely high since the night of the massacre.  You can also see the price of silver has risen steadily (black line) in the face of this extreme paper market manipulation.  The reason for this is because astute investors that understand that the paper price is being artificially held down at the COMEX have been purchasing physical metal at the artificially low prices.

Here is the best part: If the price continues to rise the banks are going to find themselves trapped because at some point in the future they are going to have to buy back the paper silver that they have shorted.  (This is called covering your short)

In addition to this "problem" the COMEX now holds less physical silver than has been lent short in the market.  They work on a "fractional" reserve basis that most experts agree is around 12:1.  There will be a scramble for physical metal at a time when there is none available.

Can the banks bring the price lower in the short term by increasing their artificial short position?

Of course they can, but this just provides a better opportunity to buy more.

The best play is to accumulate physical metal every month and continue to hope that they hold the prices down.  Focus on the number of ounces you own, not the paper price for those ounces.

Thursday, August 19, 2010

The Next Flash Crash

ICI reports today that we have hit the 15th week in a row with mutual funds and IRA's as net sellers out of the stock market.


$48 billion in net stock sales this year from the retail investor.  (The public no longer believes)

Foreign countries were net sellers last month of stocks and corporate bonds.

Nothing holding stocks up right now but hot air. (Commercial bank's high frequency trading)

Ironically the public is paying for this reckless commercial trading as any losses will be paid for with a tax payer bail out (2008) and any gains will kept at the banks in the form of huge bonuses. (2009)

Let's all pray that they do not decide to become sellers because there will be no buyers available on the other side of the trade.

The next flash crash could come any moment.

Unemployment Claims Skyrocket

We received the weekly unemployment claims today which come out every Thursday morning.  As the name implies, it measures the number of new people showing up to the unemployment office to collect a government check.  Hopes were high heading into the number on improvements over last weeks horrible 488,000. 

No such chance, the number came in at a frightening 500,000, the highest since November 2009.

The economy is in full disintegration across the board as all artificial stimulus and inventory boosts are fading fast.  All economic data continues to fall off a cliff.

Not included in the number is the 300,000 Americans showing up for emergency unemployment claims, which were recently reinstated by the government.  This provides help for those unemployed for so long that their State and Federal help has ended.

There is now once again no need to look for a job, not that there is one available anyway.

The Fed's new printing program announced a few weeks ago may keep the markets in good spirits for a while, but ultimately gold will provide the truth on what is really happening under the surface.

Wednesday, August 18, 2010

Large Money Position

Last week, the Malaysian government of Kelantan "said it was introducing a new monetary system featuring standardised gold and silver coins based on the traditional dinar and dirham coins once used by the Ottoman Empire."

This marks the first country to move toward a gold standard.  In addition to watching the monetary moves by individual countries, it is important to watch the actions of the largest hedge funds as they can be more powerful than some of the smaller countries.

Two hedge fund behemoths run by John Paulson and David Einhorn, who both made their names and fortunes by betting against subprime mortgages and financial stocks, now both have the same asset as their largest portfolio position:


This morning we received the updated portfolio for the man considered the greatest hedge fund manager of all time; George Soros. 

His largest position?


The Golden Bull, January 2000 to Present Day:

Applications Rise, Purchases Fall

Applications for refinancing mortgages rocketed up 17.1 percent last week to the highest level since May 15, 2009. (When the Fed announced $1.25 trillion in mortgage purchases and rates fell precipitously)

Homeowners that cannot sell their homes at least have the opportunity of taking advantage of the government (tax payer) subsidized low mortgage rates.

Unfortunately the low rates have not helped actual sales which fell 3.4 percent on the week back to 1997 levels.  The following chart shows home purchases. 

Let's hope Obama has another trick up his sleeve to get this housing market back to bubble prices.

Kyle Bass Interview

Incredible interview with the man who became an international sensation after his bet against the subprime mortgage market back in 2005 and 2006. He was one of the stars of the CNBC special "House of Cards."

Tuesday, August 17, 2010

July Housing Starts

Housing starts for July came in abysmal again this morning at 546,000.  Last month's tragic June number was revised down to 537,000.  The following chart shows where these numbers stand going back to 1968. 

The government is meeting today to discuss the future of Fannie and Freddie.  The government (tax payers) currently purchase or guarantee 95% of all new mortgage loans being created.

Any reduction to this will be catastrophic to home prices.  I am fully expecting the government to go the opposite direction and announce more help.

Maybe they can move up from 95% to purchase 100% of the mortgages AND make the mortgage payments. 

God bless the U.S.S.R.

China Debt Dumping Continues

Yesterday the banner headline was that China has just surpassed Japan as the second largest economy in the world in terms of GDP. 

The subsequent discussion from this news was how long it would be before China overtakes the United States.  With an annual GDP around $5 trillion, most estimates show at least another 20 years before China catches America's current $15 trillion.

What I found interesting in most estimates I read through was that they did not show the possibility of the US shrinking in size, they only focused on how rapidly China would grow.

America's growth is based on our ability to borrow money.  At some point our foreign lenders will slow down in their willingness to lend.  The important question there is - when?

Yesterday we also received the Treasury International Capital data.  (Also known as TIC flows)  This shows exactly who is purchasing our debt and how much they are buying.  The most recent data was for the month of June and it was surprising to show that China was a net seller of our debt for the second month in a row.

Their holdings fell by $24 billion in June and $32.5 billion in May.  They now own $96.2 billion less of our government debt than they did last July.

Over the years our third largest debt buyer (after China and Japan) has been the oil exporting nations.  They sold off $12 billion in US debt.

Japan was a strong buyer for the month, but without the other big two it raises concerns for our "unlimited" credit card.

Perhaps some of the economic estimates should review this information in before providing 2030 as the year China will surpass the United States.  They need to consider the notion of our GDP shrinking.

The big buyers to fill China's absence were the large commercial banks who have purchased $83 billion in debt since the end of June.  To understand where they got the money, please see United States Debt Default.

Monday, August 16, 2010

The Colossus of Clout

There is a large group of financial analysts, technicians, and economists that I read and study on a daily basis..  What I have found after reading their work every day is that there are a few analysts, technicians, and economists that they study daily and look up to.

The name I come across most often is David Rosenberg.  He is the Michael Jordan of economics, a true powerhouse in the financial realm.

His daily work titled "Breakfast with Dave" is mandatory reading for financial professionals.

He recently sat down with the Wall Street Journal to discuss his outlook on the economy.  The video is presented below:

Video Link Here

FDIC Losses