Recently, Gold prices have been trading below $900/oz after trading over $1000/oz in late February. This weeks benign CPI and PPI data have shown that we are currently in a deflationary environment and that inflation will not be a concern in the near term.

For the last few trading sessions, gold prices had been in a trading range between $880/oz and
$900/oz. Currently, spot gold has broken through $880/oz and is trading around $874/oz. Gold looks much cheaper now, and we know inflation will eventually be a problem, should we buy?

The answer is no. The technical momentum is not positive for gold prices right now. We tested the 200 day moving average at $870/oz back on April 6-7, and we are headed back down in that direction, which isn’t a good sign. Lots of CTA’s (Commodity Trading Advisors) use the 200 day MA as their stop, and if we cross through we are likely to see accelerated selling pressures. In the near future, it doesn’t look like inflation will be a problem, so Gold won’t move up on that. If you think the stock market is likely to crap out again in the near future, that would give gold a “safe haven” boost, but you’re better off shorting stocks in that scenario.

Don’t get me wrong, I eventually think Gold prices are headed much higher, but its hard with the stock market showing strength and deflation rearing its ugly head for me to buy Gold right now. I’m going to wait this one out for now. If we bounce off the 200 day MA and the stock market takes a big nosedive, I may reconsider.

Uncategorized gold

Following this morning’s disappointing retail sales numbers, it was hard for one to be optimistic about the economy, but speeches by President Obama and Ben Bernanke changed all that.

President Obama delivered a 45-minute speech on the economy at Georgetown University today designed to update the American people on where we are, what we have to do going forward, and lay out the steps that the government is taking to transition us from recession to recovery. During his speech Obama said “There is no doubt that times are still tough. But by no means are we out of the woods just yet. But from where we stand, for the very first time, we are beginning to see glimmers of hope.” I consider those to be very encouraging words.

Similarly, at a speech today to faculty and students of Morehouse College, Federal Reserve Chairman Ben Bernanke was upbeat about the economy as well. Bernanke said that he sees “tentative signs” that the steep contraction in U.S. economic activity may be waning, and that he is confident in the economy’s long term prospects. Bernanke cited recent figures on housing, consumer spending and new vehicle sales as some of those signs that the recession is slowing.

The words now coming from government officials are only echoing what the markets have been telling us for the last month as they rebounded off the lows. In fact, as of late, market expectations for economic data have been too dire, and the actual data releases have been consistently surprising to the upside.

Bill Hester of the Hussman Funds provides us with the following chart and writes:

“The rebound in the stock market has been at least partially fueled by economic data that consistently came in better than expected last month. Some part of this rally is likely relying on the continuation of these “positive” surprises.

To track the trends in economic performance, we keep an ongoing tally of how data is announced relative to expectations – a method of analysis originally inspired by Bridgewater Advisors . Economic data that surpasses expectations gets added to a 3-month running total. Data that comes in weaker than expected gets subtracted. A rising line means that economic data is generally coming in above expectations, while a falling line means that the data has disappointed. A descending line could be the result of an economy that is not expanding as quickly as economists predict or – like in 2008 – it could be the result of an economy that is contracting at a faster rate than expected…

The red line in the graph above tracks the S&P 500 Index and it shows that stocks have recently closely tracked the trend in data surprises. The market fell along with the deteriorating surprise line last year, rallied slightly prior to improved news in December, and then rolled over again as the news weakened versus expectations in late January. In March the market rebounded along with a more pronounced persistence in favorable economic news versus expectations.”

Even other indicators of “flight-to-quality” and fear have declined significantly since March. Gold is off its highs and is currently testing its 200 day moving average.

I’m optimistic that the worst is behind us.

Uncategorized bernanke, economic data, gold, obama

The Somali Pirates are at it again, this time they have hijacked a U.S.-flagged cargo ship with some 20 Americans onboard in the the first pirate attack against Americans in 200 years. Luckily, the crew has been able to free themselves and the ship from pirate control, but the pirates still hold the ship’s captain as their only bargaining chip.

Are you kidding me? Aren’t pirates supposed to be the stuff of legend, those things that we get a good laugh at when we see them on the movie screen. They shouldn’t be endangering the lives of Americans who happened to be in the waters only to deliver food aid to Kenya.

The pirates have gone too far this time and I expect the reaction from the U.S. government to be swift and strong. The pirates are able to board these ships using small skiffs, grappling hooks, and small arms, while the U.S. military possesses laser guided bombs and stealth technology in its arsenal. We can’t allow this to happen any more, we need to send more warships to Somalian waters to make them safe.

Apparently, most merchant crews are “unarmed” and are sitting ducks in these waters — a policy that needs to change. The CEO of Maersk Line, John F. Reinhart made the following statement:

“The company policy is that crew members can use fire hoses to try to repel pirates who are using grappling hooks to climb the ship’s sides. But once the pirates have boarded, the crews are told to retreat to “safe rooms” because they have no weapons.”

Fire hoses?, are we serious, people? The pirates are laughing at us.

Right now, piracy is the most lucrative profession in Somalia, making it imperative that there is an effort made by the international community to work with the Somalian government to combat these efforts. If these efforts are unsuccessful, I see no other alternative than to fight fire with fire, and we have the much bigger gun.

The Maersk Alabama container ship, formerly Maersk Alva, was hijacked by pirates operating off the Horn of Africa. (AFP/Getty Images)

Uncategorized pirates, somalia

Goldman CEO Lloyd Blankfein spoke before the Council of Institutional Investors addressing issues such as the causes of the financial crisis, wall street compensation policies, and a U.S. push towards protectionism. He admitted that compensation policies on wall street got “greedy”, but also offered specific guidelines on how employees should be compensated going forward.

• Compensation should include an annual salary plus deferred compensation, which is appropriately discretionary because it is based on performance over the entire year.

• The percentage of compensation awarded in equity should increase significantly as an employee’s total compensation increases.

• For senior people, most of the compensation should be in deferred equity. Only the firm’s junior people should receive the majority of their compensation in cash.

• An individual’s performance should be evaluated over time so as to avoid excessive risk taking and allow for a “clawback” effect. To ensure this, all equity awards should be subject to future delivery and/or deferred exercise over at least a three-year period.

• And, senior executive officers should be required to retain the bulk of the equity they receive until they retire. In addition, equity delivery schedules should continue to apply after the individual has left the firm.

The guidelines are designed to more closely align the interests of wall street employees with the interests of shareholders of their respective firms. Along with better risk management policies, the “clawback” provisions in employee compensation should discourage excessive risk taking and the frequent occurrence of “multiple standard deviation events” that we have seen during the financial crisis.

Blankfein’s speech would have not been complete without several interruptions by protesters with the organization Code Pink.

Image Courtesy of Fox Business

Uncategorized blankfein, bonuses, goldman

It’s been over a week since Treasury Secretary Tim Geithner announced his Public-Private Partnership Investment Program designed to help the banks dump their “toxic assets”. As of late, the plan has received some much deserved criticism. Upon closer review, It’s my opinion that the plan won’t work in its current form because it fails to address one major question.

“What if the banks colluded to create a market price for these assets that is much higher than their actual value?”

Let’s not forget that we still have some very smart people working at this nation’s banks and they are working around the clock to find out the best way to take advantage of these new government programs. Although banks wont be allowed to bid on their own assets as part of the auctions, what is going prevent banks from setting up special entities to bid for them in the auctions or paying a hedge fun a “management fee” to bid for them on their behalf?

Let’s say that through this partnership a bank is able to sell an asset at 60 cents instead of the 30 cents that they probably are worth. If the bank only put up 5 cents worth of equity, the taxpayers would be on the hook for the remaining 25 cents of losses. If we didn’t have the partnership, and the government made the mistake of purchasing the assets at 40 cents, the taxpayer would only lose 10 cents.

Potentially, by using the “market” to price these assets, the taxpayer could stand to lose alot more money as opposed to a plan where the government would be the sole purchaser of the assets at “its” price. Its clear that the banks are incentivized to game the system to create a fake market for these assets.

The Financial Times reported yesterday that many banks that have received government aid are planning to participate in the auctions of each other’s assets.

The Khan Academy, a ‘not-for-profit organization, has posted the following great ‘chalkboard’ commentary on YouTube describing how the banks might game the system.

The fact that the banks are trying to purchase each others “toxic assets” is not surprising. None of them is going to write these assets down to their “real market value” which is why there has been little to no trading in the secondary market. If the banks were to sell or mark down their toxic assets to the “real market level”, many would be insolvent. In that scenario, the common shareholder is wiped out and those banks would have to be nationalized to prevent a collapse of the financial system — an area our government does not want to go.

So we are left with the Geithner plan, a plan that looks good on the outside but could have disastrous implications for taxpayers if these loopholes aren’t fixed. Until the govt is prepared to wipe out shareholders and nationalize the banks, the taxpayer is going to be holding the bag. Unfortunately, I don’t see any way around it.

Uncategorized banks, geithner, toxic assets