Month: January 2014

On December 31 we demonstrated the biggest operation in the history of the Fed’s temporary open market operations: a $198 billion reverse repo under its brand new fixed-rate scheme, which, at least according to the Fed, was supposed to be a mechanism designed to prepare the market for the “normalization” of the Fed’s balance sheet and allow seamless liquidity extraction. What the Fed did not announce was that it was also the biggest collateral window-dressing scheme ever conceived (that there was $200 billion in free liquidity sloshing around was a distant second highlight).

What we said then was that “We will leave it up to readers to decide what is more surreal: that the Fed is allowing banks to “window dress” to the tune of several times more than total Treasury holdings owned by the Primary Dealers as disclosed by the Fed, or that there is an unprecedented $200 billion in free liquidity floating out there.”

Well, if what happened in the last days of 2013 was indeed merely reverse repo-assisted window dressing, then we would expect the that first days of 2014 should see a comparable collapse in the magnitude of the Fed’s reverse repo operations. Sure enough, as the chart below shows, this is precisely what has happened following today’s far more modest $56.7 billion reverse repo operation conducted among 50 bidding counterparties and the Fed, of course.

In short: collateral window dressing on; collateral window dressing off, all with the blessing of the banks’ overarching regulator, the Federal Reserve. What is most disturbing is that both the world’s largest financial firms, and by implication the Fed, just admitted there is a massive collateral shortage currently if banks are forced to pad their books to the tune of nearly $200 billion in “high quality collateral” just to pass year-end auditor muster.

And a tangent: in the past two days, the Fed has first withdrawn and subsequently re-injected a record $140 billion in liquidity, or nearly two months’ worth of post-taper POMO. One may be tempted to wonder just where it is that these hundreds of billions in fungible electronic monetary equivalents have ended up…

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Sales of gold coins are booming even as the precious metal’s price is falling (and it’s not just central banks). Despite gold futures 28% drop in 2013 (its worst since 1981), the WSJ reports that demand for gold coins shot up 63% ti 241.6 metric tons in the first three quarters of 2013.

Because these investors intend to hold onto their gold for years or decades, many see the recent drop as an opportunity to buy more at a cheaper price, notes on strategist, “they’re not under any pressure to get a yield or a return in a year.”

Still, the importance of gold coins has been eclipsed in recent years by the rapid growth of exchange-traded funds, some analysts say, “hedge funds tend to overpower the impact of physical gold purchases… relatively little money gets them an awful lot of market power.” Unlike hedge funds, who may leave when prices fall, it is clear that coin buyers are in for the long haul.

 

 

Via WSJ,

Sales of gold coins are booming even as the metal’s price is falling, a testament to gold’s continued appeal for small investors and collectors despite its first bear market in more than a decade.

 

The heightened appetite for physical gold is a rare bright spot in a market that saw hedge funds and other large investors head for the exits last year. Gold futures prices tumbled 28% in 2013, their worst performance since 1981.

 

But at mints and coin shops around the world, gold continued flying off the shelves.

 

…

 

Sales of Gold Maple Leaf coins by the Royal Canadian Mint surged 82.5% to 876,000 ounces in the first three quarters of 2013 from the same period of 2012. The Perth Mint, Australia’s national coin and bar producer, saw sales rise 41% to 754,635 ounces last year, while the U.S. Mint sold 14% more American Eagle gold coins than it did in 2012, along with a record amount of silver coins.

 

…

 

Because these investors intend to hold onto their gold for years or decades, many see the recent drop as an opportunity to buy more at a cheaper price, he added. “They’re not under any pressure to get a yield or a return in a year,” Mr. Melek said.

 

…

 

Some think the continued strength of physical gold buying will prevent prices from falling much further, as it becomes clear that a core group of investors is sticking with the market,

 

…

 

“It’s obvious to me that at some point our dollar will see a downturn in its value,” said Mr. McClintock, who runs a contract post office. “Gold is just a good comfort, it’s a commodity that anybody in the world knows and you don’t need to be an expert to understand.”

 

…

 

Still, the importance of gold coins has been eclipsed in recent years by the rapid growth of exchange-traded funds, some analysts say.

 

…

 

“Folks like hedge funds tend to overpower the impact of physical gold purchases,” Mr. Melek said. “Relatively little money gets them an awful lot of market power.”

 

Unlike hedge funds, who may leave when prices fall, many coin buyers are in for the long haul.

 

…

 

“Most people who buy physical gold aren’t doing it for the same reason you’d purchase a stock,” said Mike Getlin, vice president with Merit Financial, a bullion and coin dealership in Santa Monica, Calif. “They tend to have a much longer investment horizon. They tend to hold onto them forever and pride of ownership is a huge factor in that.”

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Wolf Richter   www.testosteronepit.com   www.amazon.com/author/wolfrichter

Nothing could have been a more pungent metaphor for the current investment climate than the headline, “Macau gambling revenue hits record $45 bn in 2013.”

Revenues jumped 18.6%, after rising “just” 13.5% in 2012 – which had caused a lot of handwringing, since they’d soared 42% in 2011. Post-financial-crisis Macau – like its bigger sister, high finance – fizzes with optimism. Last year, it extracted $45 billion from the pockets of people who gambled there; this year, it’s going to set another record.

Or maybe there was an even more pungent metaphor: Stephen Cohen’s pad in Manhattan. He personifies the smart money; his hedge fund, SAC Capital Advisors, pleaded guilty to insider trading and agreed to pay a fine of $1.2 billion and wind itself out of existence. So he is trying to sell his 9,000-square-foot duplex on the 51st and 52nd floors of Bloomberg Tower. The metaphor isn’t that he dropped his asking price by $17 million, from $115 million down to a measly $98 million, but what he’d paid for the two units in 2005, namely $25.9 million, plus whatever it took to combine and remodel them. That he thinks he can get nearly four times the amount he’d paid for it less than nine years ago – that’s the metaphor for our crazy investment climate.

Hedge funds raked in the moolah in 2013, with assets under management rising by $228.8 billion to an all-time record of $2.01 trillion – not counting the hedge funds that our TBTF banks have become. But returns paled compared to the miracles the Fed performed with the stock market. Hedge funds specializing in distressed debt outperformed all other strategies with a 16.8% gain, ahead of long/short equities hedge funds, up 14.3%, and event-driven hedge funds, up 11.3%. Compared to 29% for the S&P 500.

But hey, what matters is that the all-important metric of assets under management gets pushed to new highs. Hedge funds get paid 2% on it, come hell or high water, so about $40 billion in 2013. And they get paid another 20% on any gains, so roughly $55 billion in 2013, for a total fee intake of $95 billion or so. Hopes are riding high for a killer 2014.

Corporate deal-making also bloomed in the US in 2013: mergers rose 11% to over $1 trillion, the highest since the financial crisis. Reshuffling the corporate deck is good for everyone: CEOs, investment banks, hedge funds with insider knowledge, and workers who are going to get laid off as the post-merger synergies are being implemented….

“This era of low interest rates has encouraged companies to consolidate and clean up some structural inefficiencies,” is how Michael Carr, head of Goldman’s Americas M&A, explained the workers-getting-laid-off phenomenon. Goldman pocketed $1.5 billion in fees for its M&A advisory work.

The accelerating pace of the mergers during the last two quarters is goosing extrapolations of what an insanely good year 2014 is going to be – helped along by a “stronger economy,” some sort of “stability at the Fed,” and an inexplicable absence “of near-term economic bumps,” according to Scott Barshay, head of the Corporate Department at Wall Street law firm Cravath, Swaine & Moore. In reality, to get a bumper crop of mergers, you must have a gravity-defying stock market and a continued flood of freshly printed money made available to large corporations at near-zero cost.

Companies are motivated. Stock valuations have moved into the stratosphere. Financial engineering, such as share buybacks, has been covering up, more or less elegantly, the ugly reality of stalling growth in revenues and earnings. But there will be a moment of truth.

“The pressure is building for companies to justify their trading multiples,” warned Chris Ventresca, co-head of Global M&A at JPMorgan, which pocketed $1.3 billion in fees for its M&A advisory work. “It will be hard to deliver that organically, so you have to look for inorganic growth.”

You can practically hear the fizzing optimism for IPOs. In 2013, there were 229 IPOs, raising $61.3 billion, the highest amount since 2007, and up 58% from 2012 [read my take on this and other extraordinary accomplishments in 2013….. Financial Engineering Wildest Since The 2007 Bubble]. Now even Chinese IPOs are coming back. Everything that isn’t nailed down will get shoved out the door, viable or not, at dizzying valuations. And somebody is going to end up holding the bag.

“The longer this window stays open, the more the quality of the deals falls, the more you get the piggyback deals,” explained Tony Ursillo, a tech analyst at Loomis Sayles & Co., which has $193.5 billion under management. “I feel like we’ve cleaned out a number of the first-tier companies, from a quality standpoint.”

The casino mentality that has set in, and the billions it extracts from the real economy, is dependent on the most addictive drugs of all: a flood of nearly free money. It sets off a chain reaction, including ecstatic stock markets, where IPOs without earnings can soar and where even the most convoluted mergers that will haunt stockholders for years to come seem to make divine sense – and our favorite Wall Street engineers are out making hay while they still can.

Central banks rule! They’ve accomplished the impossible: separating stock markets from the economies they’re based on. But in 2014, the US and China are trying to unwind these crazy policies – without taking down the entire global economy. Read… So This Isn’t Exactly A Rosy Outlook For 2014, Or Something

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