Friday, February 18, 2011

Silver Margin Requirements

Back on November 9th the CME surprised the markets by announcing they were going to increase margin requirements for silver.  Silver prices fell over $3 in just a few hours on the news, which I wrote about in What Happened To Silver?

Today the CME announced another surprise margin requirement, increasing it by another 50% from the current level.

Silver's reaction to the news? 

It not only completely disregarded the news, it rocketed upward to a new 30 year high.

The Financial Times interviewed David Madge this morning who is head of bullion sales at the Royal Canadian Mint.  His comments:

"We have sold everything we can produce in silver and have demand for at least twice that volume.

Silver coin sales at the US Mint and the Austrian Mint also hit record levels in January.

Gallup Unemployment

Another economic indicator released this week to send stock market shares higher was the Gallup poll.  It shows unemployment crossing back over the 10% threshold.

Part time workers who want full time work increased to 9.6%.

And the combination of the two, which shows total underemployment (part time plus unemployed) rose to 19.6%. 

Bad economic news = additional money printing = higher stock prices

Until the system snaps.  Then things will get interesting.

Thursday, February 17, 2011

Portugal Death Watch

The following chart shows the interest rate for a 10 year government bond in Portugal.

The interest rate today hit a new all time record high at 7.41%.  Interest rates rise when investors demand a premium due to risk of default.

Reuters reports today:

"European Union member states are increasingly concerned about Portugal's ability to fund itself in financial markets and believe Lisbon will have to seek a bailout by April, a euro zone source said on Thursday. The EU has a rescue plan ready for Portugal, but it is dependent on Lisbon asking for the aid and making that request to both the EU and the International Monetary Fund. Portugal remains adamantly opposed to asking for assistance. "Portugal is drowning. It's not going to be able to hold on beyond the end of March," the euro zone source said.

As interest rates rise it becomes tougher to finance and roll over new debt.  It is like a self-perpetuating death spiral.

Greece, Ireland, Portugal, Spain, Italy, Japan, UK, United States.

Place your bets and watch the dominoes fall.

Silver has launched to new record highs today as it watches and waits for the next bail out provided by a blizzard of printed paper bills.

$31.24 Silver Broken

Silver has made a new 30 year high.  During the 1980's silver spiked from $20 to $50 in just a few days when the Hunt Brothers cornered the market.  It then quickly returned back below the $20 level when the COMEX rules were changed.

Silver today is still in phase 1 of its secular bull market.  It will have violent up and down moves until it crosses $50 and it reaches phase 2.

Gold reached phase 2 of its secular bull market when it crossed $1,000.

Phase 2 is when fund managers and mainstream investors first begin to look at the investment and begin to accumulate, which has certainly not begun for silver. 

When silver reaches its mania stage, stage 3, there will most likely be no physical above ground silver available to purchase.

You will see a spike in price that market historians will discuss for centuries.

Keep accumulating physical metal; hope for prices to fall.  When we reach stage 3 all that will matter is the number of ounces you own.

For additional silver fundamental analysis see Silver Perspective, or listen to an excellent interview with billionaire Eric Sprott on Financial Sense Radio.

Homes, Jobs, And Stocks

Single family housing starts fell 1% month over month from 417,000 in December down to 413,000 in January.  The housing market continues to remain in a depression.

Weekly unemployment claims rose this week to 410,000 from 385,000 the week before.  American unemployment continues to remain at depression levels.

The consumer price index rose .4% for the month due to rents, food, and energy rising across the board.

With news that no jobs are being created (income) and the cost of living rising rapidly (expenses) the stock market continues to surge higher toward the stratosphere.

The 10 day daily sentiment index for the stock market has pushed to 89.1%.  This is the highest level of optimism since May 2007.

Market Vane's bullish consensus has risen to 68% bulls.  This is the highest degree of optimism since the October 2007 high in the stock market. (69% bulls)

Look out below when reality sets in for this market.  It will be a terrifying rush to the exits.

Wednesday, February 16, 2011

Kyle Bass Interview And Letter

This afternoon Kyle Bass, Hayman Capital's managing partner, spent some time with CNBC on their Strategy Session show.

Bass became a household name when he bet huge against subprime bonds in 2007.

The interview is essentially a summary of his latest letter The Cognitive Dissonance Of It All, which explains his outlook on Japan, Europe, Muni-Bonds, and Stocks.

What I particularly enjoyed was his discussion on when the debt crisis would occur and how investors could tell it was close.

My view has been that the Eurozone sovereign debt crisis would move next toward Japan or the UK, and would finish with the United States.  Bass describes why he feels Japan will topple first:

And more from Bass on muni-bonds, Fed policy, and stocks:

Should I Purchase A CD?

Investors around the world today are looking for a place to park money.  They know that the stock market is dangerous.  They know that the real estate market is dangerous, and they know that gold is in a bubble because they heard it on CNBC.

So maybe they will take their mother's advice growing up and put it in the bank.  Savings.

They stroll down to the local bank and discuss a savings option that will give them a strong but safe return on their investment.  They decide on a 5 year CD, and they take a look at some of the rates they can earn with a bank today:

Citibank: 5 year CD:  1.5%

NorthernTrust: 5 year CD:  1.35%
Chase Bank: 5 year CD: 1.25%
Bank of America. 5 year CD: .95%

Gee golly this is swell.  They hand over their cash and tell the bank they will be back in 5 years to collect their earnings.  (Unless they want it earlier, which means they will have to pay a penalty to remove the funds)

Now what does the bank do with the money?

The first option is to call the federal government and tell them they want a 5 year government bond.  What is the going rate on a 5 year government bond?


So the bank pays out 1.5% per year to the customer, and they collect 2.35% per year from the government.  They pocket the difference, or the spread. 

Why would the investor not just buy a 5 year government bond instead of a 5 year CD?  Very, very, good question.  The government bond is risk free.  Remember, it is the government who back stops the banks. 

However, the banks can do other things with this money to earn a higher return.  They can lend directly to state and local governments for around 4%.  They can lend to home buyers for around 5%.  These loans are typically 20 to 30 years in length.

Doesn't borrowing for longer than 5 years create a problem if interest rates were to rise?

Yes.  The problem is so large it is almost impossible to quantify.  The banks know that if and when interest rates do rise it will wipe out the reserve base for all the Too Big To Fails across the board.

The government will once again have to step in with a bail out.  In the mean time the focus is to generate the largest returns this quarter before the crisis comes.  This insures massive bonuses for the banking managers who will just step away when it comes time for the tax payer to foot the bill.

Rinse, wash, repeat.

h/t Mish

Tuesday, February 15, 2011

2011 Budget Spending Cuts

Fantastic visual aid to help show the "Draconian" cuts Obama is proposing for this year's budget.  His courage is truly remarkable.

CMBS Delinquency January

Commercial Mortgage Backed Securities (CMBC) delinquency rate rose to 9.01% in January.

These are commercial mortgages that are bundled together and sold as packages.

This is one of the major sources of financing for both commercial real estate (office, retail, industrial) and apartments, as I discussed in The Future For Apartments.

This number should continue to rise in the face of the market's euphoria.

Monday, February 14, 2011

2011 Budget Released

This morning the White House released the 2011 budget as well as budget projections through 2015.

My confusion comes from the revenue projections as the White House has the decency to not even pretend they will try to cut spending.

Question:  Mr. Obama, how do you plan to raise revenue from $2.174 trillion in 2011 to $3.003 trillion in two years in the face of a collapsing economy with no tax increases?

Answer:  Next question please.

2011 projected revenue: $2.174 Trillion
2011 projected spending: ($3.819 Trillion)
2011 projected deficit: ($1.645 Trillion)

2012 projected revenue: $2.627 Trillion
2012 projected spending: ($3.729 Trillion)
2012 projected deficit: ($1.101 Trillion)

2013 projected revenue: $3.003 Trillion
2013 projected spending: ($3.771 Trillion)
2013 projected deficit: ($768 Billion)

2014 projected revenue: $3.333 Trillion
2014 projected spending ($3.977 Trillion)
2014 projected deficit: ($645 Billion)

2015 projected revenue: $3.583 Trillion
2015 projected spending: ($4.190 Trillion)
2015 projected deficit: ($607 Billion)

American Life Summary