Addison Wiggin – October 27, 2011
- Markets rally… why the “eurozone rescue plan” won’t have a lasting impact…
- Meanwhile, Humpty Dumpty takes over the credit markets: when a default isn’t really a default… who’s getting hosed this time
- General strike next Wednesday? The shooting that could take the OWS protests to a whole new level…
- Frank Holmes finds some super values among gold stocks… while the Perth Mint unveils a monster Kangaroo…
- Stolen church bell recovered… more replies to Project X… and the hours tick down on your discount to one of our most-expensive services
Markets worldwide are rallying on confirmation of the news traders have been waiting for all week:
Renowned monetary policy authority Lindsay Lohan will, indeed, pose for Playboy.
C’mon.
You have to admit it makes about as much sense as the reason they say they are rallying: a “fix” for the euro crisis.
European leaders really mean it this time. Cross your heart, hope to die.
The highlights…
- Holders of Greek government bonds will see the bonds’ value cut by 50%
- The eurozone bailout fund, heretofore totaling €440 billion, will be leveraged to €1.4 trillion
- European banks will be required to raise their “Tier 1 capital ratio” — a measure of their core capital relative to their “assets” — to 9%. The banks will need to scrounge €106 billion from somewhere to make this happen
It’s either that… or this:
We can confidently predict the bump in stocks today will prove at least as ephemeral as the bump in Playboy newsstand sales — for reasons we’ll get to momentarily. But without any further ado, the numbers…
- Major U.S. stock indexes are up 2-2.5%. At 1,273 as we write, the S&P 500 is back to a level last seen before Standard & Poor’s downgraded U.S. sovereign debt on Aug. 5
- Volatility as measured by the VIX has tumbled to 26 — likewise a level last seen in early August
- European indexes also rallied to near three-month highs. Germany’s DAX jumped 5%, while France’s CAC 40 leaped more than 6%
- At 75.4, the dollar index is back to a level seen right after Labor Day. The euro has crested $1.40, also a level last seen in early September
- Crude oil rallied hard to $93.47 a barrel. (Don’t look now, but oil has moved up more than $7 since Col. Gaddafi met his unseemly end a week ago today. So much for the notion of Libya’s production coming back on the market quickly.)
- The sell-off you might expect in precious metals hasn’t materialized. At $1,720, gold is right where it was 24 hours ago. Silver’s up to $33.86.
“The announcement in Brussels poses more questions than answers, so it’s puzzling to see stocks soaring on this announcement,” says Strategic Short Report’s Dan Amoss, studiously avoiding any analogies to Ms. Lohan’s photo shoot.
“For one thing, the 50% haircut on Greek debt is closer to 30%, because it excludes debt held by the European Central Bank and the loans the EFSF (the eurozone bailout fund) has made to Greece since early 2010.”
“This cut in Greece’s debt is obviously not enough to put its economy on a sustainable footing. It will not stop the riots and strikes, and it will lead to another round of funding stress sooner than expected.”
Then there’s the Humpty Dumpty nature of the announcement — which is extremely relevant to the health of U.S. banks.
“When I use a word,” said Humpty Dumpty in Lewis Carroll’s Through the Looking Glass, “it means just what I choose it to mean — neither more nor less.”
In the case of the news from Brussels, a 50% haircut on Greek government bonds is not — repeat, not — a “default.” Thus it does not trigger the credit default swaps that U.S. banks wrote on the European banks that loaded up on all those Greek bonds (and which said U.S. banks don’t have nearly enough resources to pay).
“This means,” Dan Amoss explains, “we could see some turmoil at big bank trading desks. Those parties who held both Greek debt and CDS will find that their insurance is not as valuable as they thought.”
“So EU bureaucrats, in their haste to ‘stick it to speculators and short sellers,’ may actually bring about a collapse in demand for the debt of other PIIGS countries, as CDS is no longer a reliable hedge.”
“If so, the need to refinance Italian debt would quickly burn through the €1.4 trillion ‘leveraged’ bailout fund.”
One more problem: The aforementioned €106 billion the European banks need to shore up their balance sheets? “Most credible sources place the capital shortfall at more than five times this amount,” says Mr. Amoss.
“Plus, it’s unclear how banks are supposed to raise this capital, since most of their stocks are trading far below book value. They can’t raise this much in the private markets, so some form of ‘Euro-TARP’ or bank nationalization still looks inevitable.”
“Ultimately, the PIIGS crisis won’t be close to resolved until we see the ECB overtly or covertly monetize a lot more PIIGS debt. Such action would worsen the slow-growth, rising-inflation conditions facing the global economy.”
“In hindsight,” Dan concludes, “today’s rally will likely be seen as a knee-jerk reaction to an inadequate plan to deal with PIIGS insolvency. Like the initial rally in the wake of the late July EFSF announcement, today’s rally will probably fail quickly.”
Sorry to burst your bubble. But you still have the January issue of Playboy to look forward to.
The Commerce Department took its first guess at third-quarter GDP this morning, and guessed an annualized 2.5%.
Not exactly “robust,” but better than the previous quarter’s 1.3%… and the 0.4% in the quarter before that.
But under the hood of this rumbling engine lie some nasty smoke and fumes:
- Real disposable personal incomes: Down 1.7%
- Consumer spending: Up 4.9%
- Savings rate: Down from 5.1% in the second quarter to 4.1% in the third
So incomes are down and consumers are once again drawing on their meager savings to keep up with the Joneses. Yeah, looks like a sustainable recovery to us.
We have a feeling the Occupy Wall Street movement just got some new wind in its sails, thanks once again to police overreaction…
This happened Tuesday night as Oakland cops tried to break up the occupation there.
Recall that the original protest in New York last month didn’t catch fire for more than a week… until a cop walked up out of nowhere and pepper sprayed a group of young women standing around peaceably.
This time the weapon was more serious — either a rubber bullet or a “flash-bang” grenade — and the target was a Marine veteran who did two tours in Iraq. He’s in critical condition with a head wound.
Occupy Oakland is now calling for a general strike next Wednesday, Nov. 2
A general strike is an event no American under the age of 70 has any recollection of, unless, of course, you happen to have lived part of your life in Europe. According to organizers, Oakland was the scene of the last general strike in the U.S., back in 1946. The most recent strikes prior to that noted on Wikipedia took place in San Francisco and Minneapolis in 1934.
Hey, maybe this really will go down as a Greater Depression. Gee whiz.
At Occupy Baltimore, a few blocks from our HQ, the protesters gathered in McKeldin Square are now in “formal violation” of dictates set by the Parks and Recreation department but police haven’t beaten them with sticks… yet.
Gold mining stocks are up modestly this morning, the GDX ETF recovering to a one-month high. Ditto for the “junior” explorers and developers as represented by GDXJ.
Still, juniors are on sale, says U.S. Global Investors chief and Vancouver favorite Frank Holmes.
“Investors have the opportunity to purchase explorers and developers at about half of the company’s net asset value (NAV),” says Frank. “In simplest terms, the NAV means assets minus liabilities.”
“In fact, you can see from the chart that the current price-to-NAV level for E&D equities is sitting near record-low levels…levels not seen since the financial crisis of 2008.”
Gold stocks in general have been unable to keep pace with bullion, but juniors “have been hit the hardest,” according to TD Securities Equity Research. Over the last six months, juniors followed by TD have declined 21%, while small and mid-cap producers have declined 6% and the majors 5%.
“Looking over the next year or so,” says Frank, “we believe the smaller gold miners are especially poised to outperform this time.” Or as TD stated the case, “on a rebound, we expect the best-performing equities to be among the ranks of the explorers and developers.”
If gold bullion is more your speed, the Perth Mint in Australia has something special…
That’s $54 million in gold… in a single coin weighing one metric ton. It’s now on display at Perth Mint headquarters.
“Creating a coin this large is a worldwide first and initially it was dubbed impossible,” reports The West Australian, but with 18 months and the efforts of 35 people, you see the final result… now on display at Perth Mint headquarters.
“The Australian Kangaroo gold coin is very well-known throughout the world,” says the Perth Mint’s Ed Harbuz, “but we want to promote it some more.”
Yeah, that ought to work.
Heh, the church bell stolen from St. Mary’s Cathedral in San Francisco has turned up across the bay in West Oakland.
Police say a homeless man found it abandoned in a field near the port, covered with tarps, sitting on two wooden planks.
Evidently, a 2.7-ton church bell isn’t something you can readily sell for scrap. At least the thieves figured out the goods were too hot to handle, which is more than you can say for the poor dopes accused of dismantling a steel bridge in Pennsylvania.
We were, however, tripped up a bit by this line in the San Francisco Chronicle’s account: “A police tow truck drove across the bridge from San Francisco and will haul the bell to an undisclosed, secure location.”
What… for questioning? We didn’t realize inanimate objects could get the Dick Cheney treatment.
“I agree wholeheartedly,” says a reader who caught Michael Pento’s comment yesterday that without a manufacturing base, the nation is stuck with low-paying service sector jobs.
“Except for Internet services startup,” the reader continues, “I don’t think America is really creating a lot of new businesses with new ideas, as it was in the past. Our manufacturing sector is doomed. Doomed are the diversified pool of jobs that construction can no longer absorb.”
“How can we innovate when education and skills knowledge transfer is no more a real priority for our government? When innovation ends in bureaucrats’ hands at the patent office, when it take more than three years to get covered at three times the cost of last decade?”
“Asian countries are copying us faster than we can invent new things.”
“America’s government has taken on a life of its own,” writes a reader, this one among the thousands who’ve taken the time to answer our short two questions for “Project X.”
“The government now justifies its own existence and pillages the serfs to fund its ever growing appetite. My concern is how do you avoid the poorhouse in this situation? How can I make enough money to save, actually save it, and then build upon it effectively without the tax man robbing me blind?”
“Can a man of 61 years,” writes another, “even think about retirement by the time he is 67? Will the simple necessities of life be affordable with U.S. dollars? Will the American people step up to the challenge of keeping America the greatest nation, with the most promise?”
“Waking people up to the fact,” writes a third, “they should do the best job with the most pride they can. Whether they are self-employed or working for someone else! We need the words ‘MADE IN AMERICA’ to mean something again!”
As part of the project, we ran the myriad of responses through the word cloud generator popularized here in The 5 by our own Abe Cofnas. As depicted below, the words that appear largest in the graph were mentioned most:
Clearly, you’re worried about the government… and about your retirement. And, no doubt, how the former is mucking up the latter.
“I am afraid,” writes another, “that America will turn into another Greece or Egypt or any other country that finally got sick and tired of the corrupt politicians or government in general and begin to riot and start rebelling so much that it turns into almost another revolution right here at home.”
At this stage, that’s not an unreasonable worry. It’s a trend we first saw taking shape when we wrote Empire of Debt… the book that proved the genesis for Project X.
If you want to be in the loop once we’re ready to reveal the details, there’s only one way, and that’s to sign up here. You won’t have to answer the survey questions, unless you want to… and there’s absolutely no obligation that comes with signing up. So let us know… at this link.
Regards,
Addison Wiggin
The 5 Min. Forecast
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