Month: August 2011

Aug. 15 (Bloomberg) — Bloomberg’s Matthew G. Miller discusses billionaires who have kept low profiles as they created empires. Bloomberg Markets magazine reports on these tycoons in its September cover package, “Hidden Billionaires.” Miller speaks with Erik Schatzker on Bloomberg Television’s “InsideTrack.” (Source: Bloomberg)

The European Central Bank (ECB) spent 22 billion euros on bond purchases last week, as part of the expanded SMP (Securities Market Program), according to Reuters reports.  The purchases exceed the previous record of 16.5 billion euros that the ECB undertook when it began buying Greek government debt in May 2010.  The latest buying brings the total value of purchases under the program to 96 billion euros since the program began in May 2010.  It is understood that much of last week’s buying was concentrated on Spanish and Italian bonds, while Greek debt makes up the majority of the total purchases in the program to date (which also includes Irish and Portuguese bonds).

The ECB last increased its interest rates by 25 basis points at its July meeting; pausing in May and June, after raising the rate by 25 basis points to 1.25% in April this year.  The ECB held the rate unchanged when it met earlier in August, and also announced a resumption of its bond buying program; which initially had been focused on Greece, Portugal, and Ireland.  The initial absence of Spain and Italy from the resumed bond buying program contributed to the deteriorating financial market sentiment that saw significant volatility in asset markets last week.  Spanish and Italian yields rallied (fell) as much as 100 basis points over the past week in response to the ECB’s bond purchases.

Investors start off the trading session this Monday morning on a high note with US markets opening higher, but no doubt fretting about a week global economic situation and uncertainty in Europe. Good morning, I’m Kristin Bianco, with the Week Ahead Market Report for August 15, 2011.

The Central Bank of Kenya set its interest rate for discount window lending at 11.34% following the implementation of new interest rate calculation rules.  The Bank said in a note last week that the CBK discount window interest rate would be the CBR (Central Bank Rate) + previous day’s average interbank rate minus the CBR + a penalty 3 percentage points.  The Bank noted: “More recently, the foreign exchange market has once more been under severe pressure.  Consequently, the link between interest rates and exchange rates requires further elaboration in the Prudential Guidelines which govern liquidity for commercial banks”.

Recently the Bank increased, and subsequently decreased the discount window rate by 75 basis points to 6.25%, while holding the benchmark lending rate unchanged at 6.25% at its July meeting.  The Kenyan central bank last increased the benchmark lending rate by 25 basis points in May this year.  Kenya experienced inflation of 14.49% in June, up from 12.95% in May, compared to 12.05% in April and 9.19% in March, according to inflation data from the Kenya National Bureau of Statistics.  The Central Bank of Kenya has an inflation target of 5 percent.

Aug. 15 (Bloomberg) — Sony Kapoor, managing director of policy group Re-Define Europe, discusses the euro-zone sovereign debt crisis. He talks with Owen Thomas on Bloomberg Television’s “On the Move.”

Aug. 15 (Bloomberg) — Graham Neilson, chief investment strategist at Cairn Capital Ltd., talks about the outlook for credit markets and European Central Bank monetary policy. He speaks with Francine Lacqua on Bloomberg Television’s “The Pulse.” (Source: Bloomberg)

Forexpros – The U.S. dollar was broadly lower against most of its major counterparts on Monday, after disappointing U.S. data on manufacturing activity in the New York region and a report showing foreigners were net sellers of U.S. assets in June weighed on dollar sentiment.

During U.S. morning trade, the greenback was down against the euro, with EUR/USD jumping 1.44% to hit 1.4455.

The European Central Bank said earlier that it purchased EUR22 billion worth of Italian and Spanish government debt last week in an effort to prevent the euro zone’s debt crisis from spreading to the region’s third and fourth largest economies.

The greenback was also lower against the pound, with GBP/USD gaining 0.69% to hit 1.6395.

Bank of England policy maker David Miles said earlier that the U.K. economy is on a fragile recovery path, but added that further quantitative easing was not necessary at the moment.

Meanwhile, the greenback eased up against the yen, with USD/JPY edging 0.03% higher to hit 76.72.

Preliminary data released earlier in the day showed that Japan’s gross domestic product shrank by 0.3% in the second quarter, or 1.3% on an annualized basis. Analysts had expected Japan’s economy to contract by 0.9% in the quarter, or 2.5% on an annualized basis.

The yen was also weighed after Finance Minister Yoshihiko Noda pledged to take “bold action” to curb gains in the yen.

The dollar was also higher against the Swiss franc, with USD/CHF gaining 0.21% to hit 0.7796.

The Swissie was down sharply earlier after Swiss newspaper SonntagsZeitung reported on Sunday that the Swiss National Bank and the Swiss government were in “intense talks” over a possible exchange rate target level to curb strong gains in the currency.

Elsewhere, the greenback was lower against its Australian and Canadian counterparts, but up against the New Zealand dollar, with AUD/USD rising 1.13% to hit 1.0473, USD/CAD shedding 0.33% to hit 0.9839, while NZD/USD dipped 0.25% to hit 0.8301.

The dollar index, which tracks the performance of the greenback versus a basket of six other major currencies, was down 1.01% to hit 73.95.

Earlier Monday, official data showed that an index of manufacturing conditions in New York State fell by 3.9 points to minus 7.7 in August from minus 3.8 in July.

Analysts had expected the index to improve to minus 0.4 in August.

A separate report showed that net foreign purchases of long-term U.S. securities totaled USD3.7 billion in June, significantly below expectations of USD30.1 billion.

When we think of market manipulators, names like Bernie Madoff and Mike Milken come to mind. Or perhaps it’s Michael Douglas’ character Gordon Gekko from the 1987 classic Wall Street.

These guys profited from exploiting investors, causing major losses in the process.

All three of these men went to jail for their crimes, even the fictional Gordon Gekko. But there is blatant market manipulation taking place right now that is sure to go unpunished. The worst part is that it is happening in plain sight.

What Is Market Manipulation?

Market manipulation can come in many forms.

Inside information, one of the more common forms, can be used to get an edge over investors and take advantage of their elation or panic once the information becomes public.

Insiders can be corporate executives, their close friends and family, or anyone who obtains non-public information before it’s available to the public.

An example would be an employee of the National Agricultural Statistics Service (NASS) who gains knowledge of a crop report for oranges that shows far fewer were harvested this past season. If there were fewer oranges produced, prices would be sure to rise. If that person buys thousands of OJ futures ahead of the report, he is almost sure to profit. This is a form of insider trading, punishable by law.

Another form of market manipulation is the exploitation of technology.

Take the Small Order Execution System, aka the SOES. Whenever investors use the SOES to exploit traders or manipulate prices, they may or may not be breaking the law. It is a fine line that has been walked for many years. The “SOES Bandits” gained popularity back in the late ’80s and ’90s when firms like Datek Securities allowed active traders to take advantage of a weakness in the SOES.

Some call High Frequency Trading (HFT) traders the SOES Bandits of the new millennium. While we can’t blame extreme volatility on all HFT traders, I know there are some who are taking advantage of the system and causing investors to get undesirable results in their trades.

No… the real manipulators are different animals entirely.

The Real Market Manipulators

Believe it or not, the HFT traders don’t worry me. In fact, those folks who use inside information to profit don’t bother me either (although they should be punished), but they generally don’t have the power to create massive swings in global stock markets.

The big concerns I have are coming from sources you wouldn’t expect and no one talks about… clearing houses, exchanges and even the very regulators that are supposed to protect us from manipulation, the SEC.

Clearing Houses

A clearing house is basically a financial institution that provides settlement and clearing services, and houses customer accounts and assets. This means that a clearing house matches and reconciles trades between two parties. So if you buy a stock and some other random person sells that stock to you, a clearing house ensures that the trade is properly allocated and the assets are placed in the proper account.

Firms like Goldman Sachs, JPMorgan, Pershing and Penson clear billions of dollars’ worth of transactions per day and handle billions of dollars of clients’ money.

On Monday afternoon, the hedge fund that I co-manage received a scary notice from Penson Financial stating that they were increasing margin requirements on short options over 400%.

Here is their letter:

View Here

Unrealistic Margin Requirements

To put it simply, a trade that cost us $20,000 in margin, would now cost $80,000. If we didn’t have the money to cover it, they would force us to close the position, even at a loss! That’s scary… and barefaced manipulation!

Imagine how you would feel if you bought a house with $20,000 as your down payment, moved in, and then a month later your mortgage company sent a letter forcing you to come up with an additional $60,000 in a day or it was selling your home. This is exactly what was happening to tens of thousands of people this Monday.

And guess what… It drove volatility even higher!

Penson is the largest independent provider of clearing and settlement services around the world. It clears trades for many of the brokerage firms, ones that you might do business with. It may have had a hand in creating the volatility Monday and Tuesday: they forced tens of thousands of investors and hedge funds to trade violently to cover new margin requirements.

When you force that many people into panic, you create a lot of risk. Two days later Penson reduced their unreasonable request under pressure from customers…

Exchanges are doing this as well. The Chicago Mercantile Exchange (CME) recently hiked gold margins for the second time this year. They have increased silver margins seven times already in 2011, which may be another reason silver prices are lagging.

The SEC and Other Regulators

The worst manipulation of price in my mind is the short-sale ban. France, Belgium, Italy and Spain all have banned short selling on their exchanges today. Short selling is natural, it allows for markets to find their true value, and can be an important tool for traders trying to keep their heads above water in a bear market.

The most foolish thing a regulator can do is ban short selling. Abnormal pressures and overflows will happen when you stop the markets from flowing freely. Like water, traders find the path of least resistance and bust through with a force 10 times more powerful than first thought.

The more these guys try to manipulate and control the markets, the more violent those markets will become. The potential effects are magnified because the global markets are so connected to each other.

On Sept. 19, 2008, the SEC banned short selling on 800 financial stocks for two weeks. By Oct. 2, the S&P 500 plummeted 13%. As soon as the ban was lifted, stocks dropped another 24%. Did their plan really help?

There is no doubt that negative global issues alive and well. But I believe we should let the markets perform and quit trying to control and manipulate them. Not only would they be more efficient, but investors would have more confidence. It’s hard to play and trust the game when the rules are always changing.

The media wants you to believe that Madoff ruins the game, but he only breaks the rules. Perhaps we are looking for criminals in the wrong place.

Written by Jared Levy by Taipan Publishing Group. Additional valuable content can be syndicated via our News RSS feed. Check us out at www.facebook.com/TaipanGroup. Republish without charge. Required: Author attribution, links back to original content or www.taipanpublishinggroup.com.

Aug. 15 (Bloomberg) — Michael Widmer, head of metals research at Bank of America Merrill Lynch, talks about the outlook for gold. He speaks with Francine Lacqua on Bloomberg Television’s “The Pulse.”

By Kris Sayce

“This is going back to 1992, so that’s 20 years of this massive credit-induced dot-com bubble going into 2000.  We then had the recession going into 2002.  The start of the [first Iraq] War and the turnaround.  The housing boom.  We then had the crash from 2008/09.  And we’ve seen this free money induced Fed Reserve money-printing created rally over the last two years…”

That’s where we are now.

So what happens next?

Slipstream Trader, Murray Dawes says he knows exactly where the market is going next.

Call it bravado if you like.

He picked the market sell-off like a peach and now he’s placing bets on the next market move. Already he’s received comments from his trading members such as this:

“You Sir, are a genius. I took your… advice and moved my Super out of the stock market and into cash at the end of June.”

Murray posted his latest free weekly analysis last Wednesday. If you’d like to check out what he had to say and where he reckons the market is going next, click here.

And that’s the great thing about Murray’s analysis. You can use it to protect and grow your investment wealth, no matter which way the market’s moving. You can go long on the way up. Short on the way down. And get out when things look shaky.

Even if you don’t want to short-sell stocks (perhaps you don’t like the risk, you’re not familiar with it, or you’ve got a moral objection to short-selling) wouldn’t it be useful to know when the market is set to tank?

So, like the reader above – and many of Murray’s readers – you can sell your stocks when he says the market is set to take a hit. You can move to cash and sit tight for the next buying opportunity.

Because odds are, volatility is here to stay. And that means, if you missed out on this rally, another is sure to follow.

We’ve had two decades of boom and bust. What are the odds on that ending anytime soon?

Already, since the market bottomed last Tuesday, the benchmark S&P/ASX 200 has gained 12.6%.

A rally like none before

To understand the scale of the bounce, consider this…

After the Fukushima crash and recovery the market moved no more than a few percentage points in a week.

After the March 2009 low, the market only gained 4.2% over the following week. It took more than two weeks for it to pile on 12%… and that’s when stocks really were super-cheap.

And if we go further back, after the 13 March 2003 low, it took until 30 April 2003 for the main Aussie index to gain 12%.

So to us, the current quick rally spells danger.

As we wrote early last week, that was time to buy cheap stocks. Trouble is, we can’t say the same thing with the same conviction today.

To get a 12% bounce in a week is almost unheard of. And it takes stocks from cheap to… well, not so cheap.

That’s what makes this market tough for fundamental investors… but fun for technical investors.

The issue is how much buying strength the market has left. You’ll always see a big bounce after a sell-off. But it’s hard for the market to maintain that momentum.

So what you have to figure out is which way the momentum will swing next. To answer that we have to ask, is all the risk gone from the market? Or are things just as bad today as they were a week ago?

In all honesty, it’s hard to fathom what’s changed.

The Europeans still want Germany to bail out the rest of Europe. And the U.S. debt clock continues to tick higher – USD$14.6 trillion as we write. That’s USD$300 billion more since the debt ceiling was raised two weeks ago!

And in Australia, in a sign of economic strength (not), ANZ Bank [ASX: ANZ] joined Commonwealth Bank [ASX: CBA] and Westpac Bank (or should that be WestPascoe Bank?) [ASX: WBC] in cutting fixed-rate mortgages.

But it’s not just mortgage rates they’ve cut. As Dow Jones Newswires reported last week:

“ANZ Banking Group Ltd… cut term deposit rates for savers by up to 20 basis points [0.2%]… Rates on 12-month deposits have been cut to 5.80% from 6%, on five-month deposits rates are now 5.8% and three-month savings rates are now 5.5%, down from 5.6%.”

In other words, Australia joins the global trend of cutting interest rates to stimulate risk-taking.

Granted, we’re not talking the same extent as the U.S., where savers in government bonds get just a 0.19% yield on their investments… a negative yield when you factor in inflation.

But even so, the real return for Aussie investors isn’t much better. If you assume the inflation rate is much higher than the official 3.6% quoted by the Australian Bureau of Statistics (ABS), then conservative Aussie investors are likely getting close to a negative return on savings too.

Especially for those who can’t afford to squirrel away cash in a term deposit.

Yet despite the warnings, investors have gone all smug again. Our early warning signals show that. Fear is a thing of the past… apparently.

Fear is so ‘last week’

The Aussie dollar has taken off against the Swiss Franc – although that’s mainly due to rumours of the Swiss National Bank (SNB) planning to “peg” it against the terminally ill Euro:

A bizarre course of action. A bit like S.S. Titanic survivors choosing to “peg” themselves to the anchor rather than a life vest!

It’s also rallied against the U.S. dollar. And gold and silver have dropped.

Meanwhile, the U.S. S&P 500 Volatility Index (VIX) dropped 7% on Friday night as the underlying stock index bounced.

So, is this still a buyers’ market? Or is it a wait-and-see market?

Who knows?

What we do know is it’s still a super risky market.

If you plan on having a flutter with stocks make sure you remember that nothing has changed over the past week. With one exception, today stocks are more expensive today than they were then…

And that means when investors remember how bad things are, stocks will have much further to fall.

Cheers.

Kris Sayce
Money Morning Australia

Source: Two Decades of Boom and Bust