Baltic Dry Index. 1474 +07
LIR Gold Target by 2019: $30,000. Revised due to QE.
There can be few fields of human endeavour in which history counts for so little as in the world of finance. Past experience, to the extent that it is part of memory at all, is dismissed as the primitive refuge of those who do not have the insight to appreciate the incredible wonders of the present.
J. K. Galbraith
It is the last day of May, the last day to implement the old stock market adage, “sell in May, go away, don’t return until after Labor Day”, (in the USA,) “after St Leger Day”, (in the UK, after the famous horse race that takes place in early September at Doncaster race course.) Today is the last opportunity to cash out stocks to the New York Fed’s intervention desk.
The big European news yesterday was yet another U-turn by Berlin. If Mrs. Thatcher was a lady not for turning, Frau Merkel is her exact opposite. She now U-turns so often, it’s getting impossible to know which way she’s facing on so many important issues. Berlin is now in danger of being ignored in the power halls of the EU. If the lady’s for turning at ease, will go the logic, we can ignore her views and turn her later at will. Yesterday’s U-turn was on the issue of yet another German bailout of those lovable tax and work shy Greeks. In another recent U-turn, Germany’s current policy is to close down all German nuclear power plants by 2022. Or make that 2023, some of them might be eligible for a one year extension. Only a few weeks ago, Berlin’s preferred policy was to see most of them getting an extended life out to 2035. I suspect that another Greek bailout will be one bailout too many for Germany’s long suffering, hard working, taxpayers. Poor Germany’s voters have in reality nowhere to turn, the main opposition socialist party is more pro bailout even so than Merkel. A distressing opportunity is opening up for the far right. Stay long precious metals. Nothing good ever comes from dithering in a crisis.
“It is difficult not to marvel at the imagination which was implicit in this gargantuan insanity. If there must be madness something may be said for having it on a heroic scale."
J. K. Galbraith. The Great Crash: The Euro, with apologies to 1929.
MAY 31, 2011
Berlin Considers a Shift on Greek Debt
Dropping Push for Early Rescheduling of Bonds Could Permit New Aid Loans
BERLIN—Germany is considering dropping its push for an early rescheduling of Greek bonds in order to facilitate a new package of aid loans for Greece, according to people familiar with the matter.
Berlin's concession that it must lend Greece more money, even without burden-sharing by bondholders in the short term, would help Europe overcome its impasse over Greece's funding needs before the indebted country runs out of cash in mid-July.
But some officials in Berlin hope that a short-term fix can be found that would allow a full deal including a bond rescheduling later this year.
----Officials from the ECB, the IMF and the European Commission are currently in Athens to find a way to generate additional cash—including for the Greek government to generate more money on its own. The so-called "troika" are expected to issue their conclusions by early next week, officials said.
Greece's government Monday stepped up preparations for billions of euros of new spending cuts, tax rises and privatizations that it plans to unveil in the next few days even as widespread public opposition to the measures continued to mount on the streets of Athens.
A decision on how the money is to be found is needed by late June. But that this would require Germany, the IMF or the ECB to back down. The new aid package, which officials from European finance ministries are due to discuss on Wednesday in Vienna, is likely to include new loans for Greece in return for greater Greek efforts to cut spending, improve tax collection and sell state assets under international supervision.
But officials from Germany, the Netherlands and Finland say it will be extremely difficult to win their parliaments' approval for additional Greek aid without some form of burden-sharing by Greece's private bondholders. The ECB has warned loudly that a debt restructuring, however mild, could cause a meltdown in Greece's banking system and financial panic around Europe's indebted periphery.
German officials have lost hope recently in the possibility of reaching an early agreement to extend the maturity of Greek bonds, Germany's preferred way of involving private investors. German Finance Minister Wolfgang Schäuble has said that a debt rescheduling can't be pushed through against the will of the ECB.
More.
They can try to ‘delay and pray’ but the euro is running out of time
As a doomsayer from the start, who has written several times on the subject, I have recently been reluctant to burden my readers with more jeremiads about the euro.
Roger Bootle 29 May 2011
But fasten your seatbelts. Here I go again. My excuse is that this crisis keeps surprising the unwary. There is so much to say that I will have to have several bites.
Before we can find solutions, which I will discuss at a later date, first the causes. Why is the euro in crisis? Because it was fundamentally flawed at its inception. Only good luck, strong economic growth and enlightened economic management could keep it together. In fact, the eurozone has had to suffer the opposite of all three.
Giving up sovereign currencies is a serious challenge. Exchange rates act as a safety valve. When you remove them, the pressure either has to be reduced or it will find some other way out. In a fixed exchange rate system, such as the ERM, currency speculation could and did break the system. Advocates of the euro project drew comfort from the fact that, by contrast, a full monetary union is immune from such attacks.
It was recognised that economic and financial pressure might still find an outlet as countries which diverged from the core had to face higher bond yields. But this would be a good thing. The prospect of it should serve to restrain them. It wasn’t imagined, though, that strain in the bond markets could threaten the stability of the euro itself.
Four things went wrong. The first two were private sector failures. First, far from reacting to their newly shackled state, Spain and Ireland went on a private sector spending spree. (Meanwhile, in Greece the government led the bonanza.) Second, in all these cases, the bond markets were hopeless at foreseeing possible difficulties and imposed bond yields only marginally higher than on Germany. Accordingly, they provided no restraint at all.
More.
While everyone’s attention is focused on the EU PIIGS and their looming sovereign debt default, Europe’s retail sales seem to be signaling worse might be underway. Under the weight of multiple austerity measures, Europe may be about to lurch into a new recession. Stay long gold and silver. On a fiat monetary system already operating on zero interest rate policies, all that’s left is a great monetization.
European Retail Sales Contract to 7-Month Low, Markit Says
By Patrick Henry - May 30, 2011
European retail sales contracted in May to the lowest level since October 2010, driven by a “sharp drop” in Italy, Markit Economics said.
A gauge of euro-area retail sales fell to 48.8 from 52.2 in April, London-based Markit Economics said today in a statement. The index is based on a survey of more than 1,000 executives and a reading above 50 indicates month-on-month expansion.
Italian retail sales declined at the fastest pace in 11 months in May, while monthly increases in Germany and France, the euro area’s largest economies, were the weakest in seven and three months, respectively, Markit said.
Data for the first two months of the second quarter “suggest a steep slowdown in growth of consumer spending in the single-currency area,” Trevor Balchin, a senior Markit economist, said in today’s report. “As a result of elevated cost pressures and falling sales, retailers’ gross margins deteriorated to the greatest extent for a year,”
Below, a new warning from someone who ought to know of what he speaks. A new financial crisis lies ahead because no one has fixed anything in the broken system.
Mobius Says Fresh Financial Crisis Around Corner Amid Volatile Derivatives
By Kana Nishizawa - May 30, 2011 12:10 PM GMT+0100
Mark Mobius, executive chairman of Templeton Asset Management’s emerging markets group, said another financial crisis is inevitable because the causes of the previous one haven’t been resolved.
“There is definitely going to be another financial crisis around the corner because we haven’t solved any of the things that caused the previous crisis,” Mobius said at the Foreign Correspondents’ Club of Japan in Tokyo today in response to a question about price swings. “Are the derivatives regulated? No. Are you still getting growth in derivatives? Yes.”
The total value of derivatives in the world exceeds total global gross domestic product by a factor of 10, said Mobius, who oversees more than $50 billion. With that volume of bets in different directions, volatility and equity market crises will occur, he said.
The global financial crisis three years ago was caused in part by the proliferation of derivative products tied to U.S. home loans that ceased performing, triggering hundreds of billions of dollars in writedowns and leading to the collapse of Lehman Brothers Holdings Inc. in September 2008. The MSCI AC World Index of developed and emerging market stocks tumbled 46 percent between Lehman’s downfall and the market bottom on March 9, 2009.
----The largest U.S. banks have grown larger since the financial crisis, and the number of “too-big-to-fail” banks will increase by 40 percent over the next 15 years, according to data compiled by Bloomberg.
Separately, higher capital requirements and greater supervision should be imposed on institutions deemed “too important to fail” to reduce the chances of large-scale failures, staff at the International Monetary Fund warned in a report on May 27.
“Are the banks bigger than they were before? They’re bigger,” Mobius said. “Too big to fail.”
More.
We end for today with yet another growing stock scandal on the NYSE. This one holds the promise of much more yet to come. Sell in May, never looked better. More on “God’s work” on Wall Street.
The Audacity of Chinese Frauds
By FLOYD NORRIS Published: May 26, 2011
To pull off a fraud that humiliates the cream of the global financial elite, you need to have some friends. And where better to have them than at the local bank?
The fraud at Longtop Financial Technologies, a Chinese financial software company, was exposed this week in an amazing letter from its auditors, Deloitte Touche Tohmatsu. It appears to be a tale of corrupt bankers and their threats to auditors who had learned of the lies.
Deloitte, which had given clean audit opinions to Longtop for six consecutive years, apparently was well on its way to providing a seventh, for the fiscal year that ended March 31. But for some reason — Deloitte did not say why —the auditor went back to Longtop’s banks last week to again seek confirmation of cash balances.
It appears Deloitte sought confirmations from bank headquarters, rather than the local branches that had previously verified that Longtop’s cash really was on deposit. And that set off panic at the software firm.
“Within hours” of beginning the new round of confirmations on May 17, the confirmation process was stopped, Deloitte stated in its letter of resignation, the result of “intervention by the company’s officials including the chief operating officer, the confirmation process was stopped.”
The company told banks that Deloitte was not really the auditor. It seized documents, Deloitte wrote, and made “threats to stop our staff leaving the company premises unless they allowed the company to retain our audit files.”
Despite the company’s efforts, Deloitte learned Longtop did not have the cash it claimed and that there were “significant bank borrowings” not reflected in the company’s books.
A few days later, Deloitte said, Longtop’s chairman, Jia Xiao Gong, told a Deloitte partner that there was “fake cash recorded on the books” because there had been “fake revenue in the past.”
The stock has not traded since that confrontation. The final trade on the New York Stock Exchange was for $18.93, a price that valued the company at $1.1 billion. At its peak in November, it had a market capitalization of $2.4 billion.
It now seems likely that the stock is worthless. It is a real company, but its revenue and profits probably were a small fraction of the amounts reported. The existence of the “significant” debt means that whatever assets are left are likely to be owned by the banks, not the investors.
Deloitte may have decided to check the numbers again because it knew a growing group of bears on the stock had been challenging the Longtop story as too good to be true, questioning both its financial statements and the claims it made for its software. A month earlier, Deloitte resigned as the auditor of another Chinese company, China MediaExpress, in part because of questions about bank confirmations.
It is never good for an auditor to have certified a fraud, but Deloitte seems to have acted properly. It got bank confirmations, and it got them directly from the banks rather than relying on the company to provide them, as PricewaterhouseCoopers had done when it failed to notice a huge fraud at Satyam, an Indian technology company.
But the confirmations were lies.
“This means the Chinese banks were in on the fraud, at least at branch level,” says John Hempton, the chief investment officer of Bronte Capital, an Australian hedge fund. He was one of the bears who questioned Longtop’s claims and now stands to profit from the stock’s collapse.
“This is no longer a story about Longtop, and it is not a story about Deloitte,” he added. “Given the centrality of Chinese banks to the global economy, it’s a story much bigger than Deloitte or Longtop.”
The Securities and Exchange Commission has started an investigation, and no doubt more details will emerge, including the names of the banks involved. Just what, if anything, Chinese officials choose to do could provide an indication about whether defrauding foreign investors is deemed to be a serious crime in China.
Fraud in Chinese stocks is not new. But it had seemed that the worst problems were in small companies without Wall Street pedigrees. Many of the fraudulent companies went public in the United States by the reverse-merger shell route, a course long favored by shady stock promoters. That route allowed companies to start trading without going through a formal underwriting process or having its prospectus reviewed by the S.E.C. And many used tiny audit firms based in the United States that seemingly did little if any work.
More.
http://www.nytimes.com/2011/05/27/business/27norris.html?_r=1&pagewanted=1&_r
Why did I take up stealing? To live better, to own things I couldn't afford, to acquire this good taste that you now enjoy and which I should be very reluctant to give up.
Cary Grant. To Catch A Thief.
At the Comex silver depositories Friday, final figures were: Registered 31.10 Moz, Eligible 70.32 Moz, Total 101.42 Moz.
+++++
Crooks and Scoundrels Corner.
The bent, the seriously bent, and the totally doubled over.
Next, more on “God’s work” at Goldie. Being a Goldmanite requires real sacrifices and a high degree of skill. It’s not easy to get a 98% track record. Even a stopped clock is right twice a day. It’s tough work, but someone’s got to do it. Without Goldie, where would Greece be today? Libya? Not to worry, no Goldmanites were inconvenienced, let alone suffered financial hurt in the making of this WSJ epic.
"God, no, we don't club baby seals. We club babies."
Goldmanite, quoted in The Times of London. November 8 2009.
MAY 31, 2011
Libya's Goldman Dalliance Ends in Losses, Acrimony
In early 2008, Libya's sovereign-wealth fund controlled by Col. Moammar Gadhafi gave $1.3 billion to Goldman Sachs Group to sink into a currency bet and other complicated trades. The investments lost 98% of their value, internal Goldman documents show.
What happened next may be one of the most peculiar footnotes to the global financial crisis. In an effort to make up for the losses, Goldman offered Libya the chance to become one of its biggest shareholders, according to documents and people familiar with the matter.
Negotiations between Goldman and the Libyan Investment Authority stretched on for months during the summer of 2009. Eventually, the talks fell apart, and nothing more was done about the lost money.
An examination of the strange episode casts light on a period of several years when Goldman and other Western banks scrambled to do business with the oil-rich nation, now an international pariah because of its attacks on civilians during its current conflict. This account of Goldman's dealings with Libya is based on interviews with close to a dozen people who were involved in the matter, and on Libyan Investment Authority and Goldman documents.
Libya was furious at Goldman over the nearly total loss of the $1.3 billion it invested in nine equity trades and one currency transaction, people involved in the matter say. A confrontation in Tripoli between a top fund executive and two Goldman officials left the bankers so rattled that they made a panicked phone call to their bosses, these people say. Goldman arranged for a security guard to protect them before they left Libya the next day, they say.
Discussions inside Goldman about how to salvage the fractured relationship included Lloyd C. Blankfein, the company's chairman and chief executive, David A. Viniar, its finance chief, and Michael Sherwood, Goldman's top executive in Europe, according to documents reviewed by The Wall Street Journal and people involved in the negotiations. All three executives declined to comment.
Goldman offered the fund an opportunity to invest $3.7 billion in the securities firm. Between May and July of 2009, Goldman executives made three proposals that would have given Libya preferred shares or unsecured debt in Goldman, according to documents prepared by Goldman for the fund. Each proposal promised a stream of payments that would eventually offset the losses.
At the time, U.S. banks were under pressure from the U.S. government about their capital levels, among other things. In September 2008, Warren Buffett's Berkshire Hathaway Inc. had made a deal to invest $5 billion in Goldman, giving Berkshire a stream of cash and potential ownership of roughly 10% of Goldman. By May 2009, the Federal Reserve had told Goldman it had passed its "stress test," meaning that the firm wouldn't be required to raise additional capital. Goldman repaid Berkshire this April.
Longtop did not go public through a reverse merger. Its initial public offering, in 2007, was underwritten by Goldman Sachs and Deutsche Bank. Morgan Stanley was a lead manager in a 2009 offering of more shares.
More.
“It's morally wrong to allow a sucker to keep his money.”
W. C. Fields.
The monthly Coppock Indicators finished April:
DJIA: +182 Up. NASDAQ: +236 Up. SP500: +185 Up.
The Dow and SP 500 and NASDAQ have all reversed from down to up. The Fed’s rigging of the indicators seems to have worked. Note: like all indicators, they were devised for normal markets not markets where the central bank is flooding the economy with new cash. In current conditions where risk is suspended by too big to fail, I doubt any indicators are showing more that where the Fed’s new cash is flowing in our world of casino capitalism.
