Saturday 4 November 2017

Weekend Update 04/11/17 What’s Wrong With This?



“Under the gold standard, a free banking system stands as the protector of an economy's stability and balanced growth... The abandonment of the gold standard made it possible for the welfare statists to use the banking system as a means to an unlimited expansion of credit... In the absence of the gold standard, there is no way to protect savings from confiscation through inflation” 

Alan Greenspan

This weekend as President Trump goes globetrotting in Asia, “what’s wrong with this?”  If it seems too good to be true, it usually is. If something smells fishy, it’s usually rotting fish. Caveat emptor! Stocks take an escalator up, but an elevator down.

Up first, the too good to be true category.

"a company for carrying out an undertaking of great advantage, but nobody to know what it is".

The South Sea Bubble 1720

This tech-heavy stock-market index has never logged so many record closes in a single year

Published: Nov 3, 2017 5:05 p.m. ET
Nasdaq posts its 63rd record close of 2017
The Nasdaq Composite Index made history on Friday, as Apple Inc. helped to propel the technology sector to new heights.

The technology-stacked Nasdaq COMP, +0.74%  marked its 63rd record close of 2017, surpassing the previous record of 62 all-time closing highs in a calendar year rung up in 1980—a tally it matched on Oct. 31, according to WSJ Market Data Group. All three main benchmark equity indexes closed at records at the same time for the 25th time this year, tying a record for the calendar-year trifecta set in 1995.

And the year’s not close to being over.

On Friday, Apple’s surge AAPL, +2.61%  to its own record after hotter-than-expected quarterly results catapulted the Nasdaq and the broader equity market higher. The iPhone maker rallied nearly 3% and flirted with a valuation at $900 billion.

The stock is a component of the Dow Jones Industrial Average DJIA, +0.10% Apple’s size also makes it a powerful driver of moves in the S&P 500 index SPX, +0.31% which is weighted by market value.

The record-setting advance for the Nasdaq Composite—with year-to-date gains that are the best since the dot-com boom of the late 1990s—also comes amid better-than-expected quarterly results from other highflying tech giants, including at Amazon.com Inc. AMZN, +1.59% Microsoft Corp MSFT, +0.11% and Google-parent Alphabet Inc. GOOG, +0.67% GOOGL, +0.67%

So far this year, the Nasdaq has far outperformed the other main equity gauges. The index has risen nearly 26% so far in 2017, compared with a gain of nearly 16% for the S&P 500 index and 19% for the Dow over the same period.
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The Gap Is Growing Between the Stock Market's Winners and Losers

By Lu Wang
To the naked eye, it was just another up week for stocks. The S&P 500 Index rose 7 points, the eighth time in a row it’s been up. Beneath the surface a barrage of headlines on everything from earnings to the Federal Reserve and taxes were drawing brighter lines between winners and losers.

While benchmarks muddled along and broader volatility gauges plumbed to record lows, turbulence was rising within individual industries. Homebuilders and companies with shaky finances dropped as the House tax bill sought a limit on mortgage and interest expense deductions. Meanwhile, Apple joined other tech megacaps in beating estimates, solidifying the industry’s market leadership.

----Surface calm masked wide divergences in returns during a quarter in which investors have bought companies with the best earnings potential while staying away from those that may be hurt by competition or new policies. The Fed’s plan to raise interest rates has bolstered financial shares and at the same time made high-dividend stocks such as utilities and phone companies less attractive.

Another example: Amazon’s stock is rising along with its online presence while retailers such as J.C. Penney Co. nurse mounting losses. Despite concern over megacap valuations, tech shares have jumped the most this quarter among 11 main groups as the industry enjoyed the broadest profit beats.

While the S&P 500 climbed 2.7 percent since September, the gap between the best and worst performing industry widened to 19 percentage points. It’s the first time since the 2008 financial crisis that such a small move in the index was accompanied by such big industry divergence.

The S&P 500 was virtually flat on Thursday, when President Donald Trump nominated Jerome Powell to replace Janet Yellen as next Fed chair and the House announced its bill to lower the corporate tax rate to 20 percent from 35 percent. While Powell and the proposed rate were anticipated, investors still found groups to punish.
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November 3, 2017 / 12:06 PM

Commentary: Record low junk bond yields a warning sign for stocks

LONDON (Reuters) - Calling the top in world markets and getting the timing of it right seems like a lottery, but predicting the catalyst for the turnaround may be less random.

High-yield, or so-called “junk”, bonds are on a tear that puts even record-busting stock markets in the shade. Last week, the yield on the Merrill Lynch global high-yield bond index fell below 5 percent for the first time ever. The European index yields barely 2 percent.

To put that into context, European junk bonds yield less than 10-year U.S. Treasuries trading around 2.35 percent.

If there’s evidence of irrational exuberance anywhere in financial markets, this may be it. And if that’s the case, this will be where the first tremors of a broader market earthquake will likely be felt.

----But it’s precisely this supercharged run that should be ringing the alarm bells for investors. A selloff in high yield could hit stock markets hard.

With stocks around the world higher than they’ve ever been, it’s easy to forget that there was a 20 percent drawdown from mid-2015 to early 2016, a correction that dovetailed with a collapse of the junk bond market.

Historically, the correlation between junk bonds and stocks is nearly always positive, but had shown signs of breaking down through 2014 and early 2015, just before junk bonds and stocks began to slide.

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Next, something smells fishy in Silly Con Valley, to this old dinosaur trader and market follower, at least.  Far from draining, the swamp seems to be getting bigger. Is who leaked what and when, the Silly Con Valley swamp scandal waiting its day in the sun?

"Increasingly, the wealth of the modern world has come to be represented by financial assets rather than real assets, and this to me is a very unhealthy situation, because financial assets are inherently unstable. Financial assets (currencies, bonds, mortgages, stocks, bank credit, etc.) can be quickly and violently reduced in value, or destroyed completely by either inflation or deflation."

Donald J. Hoppe.

Early Backer of Facebook Linked to Russia Bank, Kushner Platform

By David Kocieniewski, Tom Metcalf, and Caleb Melby
A prominent Silicon Valley investor who was an early backer of Facebook Inc. has since partnered in two investments with the Russian state-controlled bank VTB Bank PJSC, his spokesman confirmed Friday.

Yuri Milner, the Russian-born founder of DST Global, also invested $850,000 of his personal money last year in Cadre, a real estate investing platform, founded and partially owned by the family of Jared Kushner, President Donald Trump’s son-in-law and senior adviser. Milner’s spokesman said that VTB played no part in his Cadre investment.

VTB has been under U.S. sanctions since 2014, imposed after the Kremlin’s role in annexing Crimea. Milner has said that the sanctions “did not restrict” DST from partnering with the bank.

In 2011, Milner and VTB co-invested in Twitter Inc., when DST Global led a $400 million funding round for the social-media company, which was then valued at $7.6 billion. The firms co-invested the same year in JD.com Inc., a Chinese online mall. DST and VTB sold their stake in Twitter in 2014 before the sanctions came into effect and exited JD.com in 2015. Milner told Forbes in September that DST disposed of its Facebook stake in 2012-2013.

Jared Kushner has said he would divest his interest in Cadre, but as of the last financial disclosure still held an interest. A spokesman for Kushner declined to comment.

Representatives of Facebook, Twitter and VTB didn’t immediately respond to requests for comment.
At a time when the U.S. is investigating Russian efforts to meddle in the 2016 presidential election, the investor’s connection to a sanctioned bank may prompt additional questions about whether his native country tried to buy influence elsewhere in the U.S. VTB has been pressuring the U.S. to drop sanctions, but Milner has never discussed the issue with anyone from the Trump administration, his spokesman said Friday.

The spokesman said VTB bank funding totaled less than 5 percent of DST Global’s capital, and DST didn’t take investments from any other Russian government institutions.

Details about the relationship between Milner and VTB surfaced in the wake of a data hack that revealed confidential information from a major Bermuda law firm that handles offshore financial matters for corporations and high net worth individuals. Information from the firm, Appleby, has been leaked to the International Consortium of Investigative Journalists, and reporters are reviewing the millions of pages of documents that reveal strategies used to hide assets and avoid taxes.

----Milner, who co-founded the leading Russian-language internet company Mail.ru Group Ltd., rose to prominence in Silicon Valley after buying nearly 3 percent of Facebook in 2009, and held a 5.5 percent stake in the company before its IPO in 2012. DST Global has invested $7 billion in more than 30 internet companies, including tech darlings such as Spotify Ltd., Zynga Inc. and Groupon Inc.
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Up next, is the Royal Canadian Mint’s gold, gold? Just how big a problem is this likely to become?  How much dodgy gold is out there? Does Fort Knox even have any real gold anymore? China and Russia keep adding heavily to their gold reserves, what do they know that we don’t?

"There can be no other criterion, no other standard than gold. Yes, gold which never changes, which can be shaped into ingots, bars, coins, which has no nationality and which is eternally and universally accepted as the unalterable fiduciary value par excellence."

Charles De Gaulle

Royal Canadian Mint-stamped gold wafer appears to be fake

Mint investigating after piece purchased by Ottawa jeweller Oct. 18 at Royal Bank of Canada branch
By Stu Mills, CBC News Posted: Oct 30, 2017 5:00 AM ET Last Updated: Oct 30, 2017 8:05 AM ET
The Royal Canadian Mint is investigating how a sealed, "pure gold" wafer with proper mint stampings may in fact be a fake. 

The one-ounce gold piece, which was supposed to be 99.99 per cent pure, was purchased by an Ottawa jeweller on Oct. 18 at a Royal Bank of Canada branch. Yet tests of the bar show it may contain no gold at all.

When neither the mint nor RBC would take the bar back, jeweller Samuel Tang contacted CBC news.

"Who is going to make sure those [gold wafers] are real?" asked Tang. "I am worried there are more of those [gold wafers] out there, and no one knows."

RBC has now picked up the bar and and returned it to the mint for testing, refunding Tang the $1,680 purchase price. 

The Royal Canadian Mint said in a statement to CBC it is in process of testing the bar, "although the appearance of the wafer and its packaging already suggests that it is not a genuine Royal Canadian Mint product." 

William Rentz, a professor at the University of Ottawa's Telfer School of Management and an expert on investments and equity, says it is troubling.

"A currency counterfeiter doesn't make just one fake $50 bill," he said. "They make a whole lot of them. So I would suspect this might just be the tip of the iceberg."

RCMP said they are aware of the incident, but no formal complaint has yet been made.

Figuring out gold was fake

The mystery began on Oct. 18, when Tang purchased what he thought was a 99.99 per cent pure gold wafer from an RBC branch just across the road from his Glebe-area boutique, Joy Creations.

He carried the business-card-sized bar, still sealed in its Royal Canadian Mint blister-pack, back to his shop.

His goldsmith, Dennis Barnard, said he cut open the plastic mint packing and placed the one-ounce wafer in a hand-cranked jeweller's tableting mill.

"I thought my age was catching up with me — because it was so hard to roll," said Barnard.

He also tried bending the wafer. Pure gold is usually pliable and can be bent easily. Instead, Barnard says, the wafer snapped, leaving a jagged line.

"That's when I started realizing something is amiss," said Barnard.

Barnard then tested the gold himself, using an acid testing kit.

In an acid test, the jeweller rubs a streak of the metal across an abrasive test stone. Then, a drop of pre-mixed acid is added to the center of the streak.

If the metal streak changes colour or disappears, then the metal is less than the karat of the test acid.
Gold of 99 per cent purity is considered to be equal to 24-karat gold.

'The bar that came from that package is a piece of junk. - Ernest Marbar, gold buyer

But the bar from RBC failed a test that gold of 18-karat or higher purity would pass.

That's when his boss contacted RBC.

"This could be huge. There could be quite a few people out there who've been rolled over," said Barnard.

CBC News took the same bar to Ernest Marbar, owner of the Gold Lobby, an Ottawa buyer of precious metals.

Marbar also found the bar failed an acid test for 14-karat gold.

----At Joy Creations, goldsmith Barnard said his concern wasn't with goldsmiths being duped.

Both he and Tang worry the bogus gold could be widely distributed and difficult to find, since most buyers are investors and leave the metal in the mint's blister-packed cases.

"Who's going to run around and open their packages, which are sealed by the mint?" asked Barnard.
It's a concern echoed by Rentz: "It's a serious problem. If the trust disappears, it could be seize up the market, at least temporarily." 
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The World Is Running out of Gold Mines—Here’s How Investors Can Play It

October 30, 2017
My good friend Pierre Lassonde, cofounder and chairman of Franco-Nevada, doesn’t know how we’ll replace the massive gold deposits of the past 130 years or so. Speaking with the German financial newspaper Finanz und Wirtschaft this month, Pierre says we’re seeing a significant slowdown in the number of large deposits being discovered. Legendary goldfields such as South Africa’s Witwatersrand Basin, Nevada’s Carlin Trend and Australia’s Super Pit—all nearing the end of their lifecycles—could very well be a thing of the past.

Over the medium and long-term, this could lead to a supply-demand imbalance and ultimately put strong upward pressure on the price of gold.

According to Pierre:

If you look back to the 70s, 80s and 90s, in every one of those decades, the industry found at least one 50+ million ounce gold deposit, at least ten 30+ million ounce deposits and countless 5 to 10 million ounce deposits. But if you look at the last 15 years, we found no 50 million ounce deposit, no 30 million ounce deposit and only very few 15 million ounce deposits. 

So few new large mines are being discovered today, Pierre says, mostly because companies have had to slash exploration budgets in response to lower gold prices. Earlier this year, S&P Global Market Intelligence reported that total exploration budgets for companies involved in mining nonferrous metals fell for the fourth straight year in 2016. Budgets dropped to $6.9 billion, the lowest point in 11 years. Although we’ve seen an increase in spending so far this year, it still dramatically trails the 2012 heyday.

And because it takes seven years on average for a new mine to begin producing—thanks to feasibility studies, project approvals and other impediments—output could recede even more rapidly in the years to come.

“It doesn’t really matter what the gold price will do in the next few years,” Pierre says. “Production is coming off, and that means the upward pressure on the gold price could be very intense.”
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“If we went back on the gold standard and we adhered to the actual structure of the gold standard as it existed prior to 1913, we’d be fine. Remember that the period 1870 to 1913 was one of the most aggressive periods economically that we’ve had in the United States, and that was a golden period of the gold standard. I’m known as a gold bug and everyone laughs at me, but why do central banks own gold now?” 

Alan Greenspan. June 28, 2016.

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