Tag: finance

When it comes to forecasts and outlooks for 2014 (or 2013, or 2012, or 2011, etc), there is no way one can’t be tired of the endless Keynesian drivel which the sellside bombards its gullible client base, which can be summarized as follows: “this is the year when the central bank strategies, which have failed to boost the global economy for the past 5 years, will finally work and the economy picks up – yes, this time will be different, we promise. Oh, and ‘if’ we are wrong (again), well just blame it on cold weather in the winter, or warm weather in the summer and if need be, delay the ‘recovery” to the following year, while blaming the lack of insufficient stimulus – because $1 trillion in balance sheet expansion per year is obviously not enough.” Rinse. Repeat. One would think spinning the same yarn year after year, they would get it right purely by luck at this point. Alas, they haven’t. So for everyone tired of listening to the same old broken record, here is a completely different “Austrian” perspective, one shared by Scotiabank’s Guy Haselmann.

His full report is attached below, but for those curious what an alternative take on 2014’s risk factors, here is the summary:

Market Factors and Risks in 2014:

• Market liquidity, especially during crisis periods, is the leading market attribute that all portfolio managers (PM’s) miscalculate.
• Central bank ‘put’ is weakened with tapering, so volatility will be higher.
• With the surge of equities (right-tail), the greater is the probability of a move down into the ‘left-tail’.
• Portfolios should increase the overall liquidity of their portfolios, as well as their ability to make tactical adjustments.
• With asset prices so elevated and distorted and with the initiation of the Fed ‘Taper’, preservation of capital must be a core investment strategy. (Long term wealth accumulation means not participating in the downside, because historically it takes approximately 10 years to return to your high-water mark.)
• Global capital markets will be more volatile due to capital flows triggered by changing central bank actions. Emerging market economies with current account deficits will have difficulty attracting foreign capital.
• Chinese growth is a key to the global economy. Chinese housing remains in a bubble. Non-performing loans are on the rise. Ecological challenges are growing. Policy pivot from export-led growth to one of domestic demand will have growing pains.
• Shale gas, leading to U.S. energy self-dependence, is a major positive for U.S. markets over the next 10 years and has positive implications for a revival of U.S. manufacturing.
• EU markets are too complacent but investors do not wish to fight the commitment of leaders who implement reactionary ad-hoc fixes to each new crisis.
• Abenomics will not yet achieve its 2% core inflation objective. There is a paradox: as inflation rises, the yield on the 10-year JGB will be unable to stay near 0.7%. (See strategy note from May 2013). Higher debt servicing will be a problem for a country that already spends 25% of revenues on debt servicing.
• Protectionism is a great potential risk to the global economy and must be monitored closely.
• Cyber-crime and cyber-terrorism are real and growing threats. Precautions must be taken where possible. A significant event that impacts markets is likely in
  2014.
• Other risks include: escalation of Middle East tensions, escalation of Asian tension over disputed islands, EU disunity, civil unrest, election(s) of extreme political parties, and extreme weather or electrical grid problems.

Full 2014 Outlook report (pdf)

via Zero Hedge http://ift.tt/1hiETRs Tyler Durden

Just when you thought bizarro world couldn’t get any, er, bizarrer, here comes – who else – Dennis Gartman, who is now long gold…. in crude oil terms.

Further, we shall recommend owning gold in terms of crude oil, buying the former and selling the latter in equal dollar sums. Further, to eliminate the impact fo the Brent/WTI spread from this trade, we’ll do half of the oil trade in WTI and half in Brent.

Uhm, #Ref!

The New idea…

 

as the old faithful has been ‘killing it’

via Zero Hedge http://ift.tt/19phgq6 Tyler Durden

Submitted by Charles Hugh-Smith of OfTwoMinds blog,

"Prosperity" based on serial asset bubbles and near-zero interest rates is neither real nor sustainable.

Longtime readers know I have been covering residential housing since mid-2005. In those 8+ years, housing has proceeded through a cycle of bubble-bust-echo-bubble: now the echo bubble is crumbling, for all the same reasons the 2006-7 bubble burst: a prosperity based on asset bubbles and low interest rates is a phantom prosperity that cannot last.

Correspondent Mark G. has written a three-part series on the current state of the residential and commercial real estate (CRE) markets. Part 1 addresses residential real estate.

The broad context of this analysis is straightforward: an economy based on ever-rising consumption falters when real household incomes stagnate or decline. Real income for the bottom 90% has been stagnant for forty years, and has declined since 1999.

The only way to keep consumption rising when incomes are stagnant is to boost the borrowing power (i.e. collateral and creditworthiness) of households by inflating asset bubbles that create temporary (i.e. phantom) collateral and by lowering interest rates so the stagnant income can support more debt.

This is why the Federal Reserve and the other agencies of the Central State have been reduced to blowing serial assets bubbles: there is no other way to keep a consumption-based economy from imploding.

But "prosperity" based on serial asset bubbles and near-zero interest rates is neither real nor sustainable: real prosperity is based on rising real incomes, not debt leveraged on phantom collateral.

Here is Part 1 of Mark's series on U.S. real estate.

 

PCE = Personal Consumption Expenditures. GDP = Gross Domestic Product. The ratio of these numbers times 100 produces the percentage figure.

PCE includes food, entertainment, residential housing, automobiles, clothes and iPads. The consumer broadly has two ways to obtain the money needed to support this spending. The first method is to earn it and the second method is to borrow it.

Since 1999 average real household income in the USA has declined by 10%. This real decline was only temporarily reversed during the peak bubble years. From 2000 to 2008 the full effects of this decline were masked by a vast expansion of household debts of all kinds, a collapse in mortgage and consumer lending standards and a concurrent decline in household net worth.

Exactly which 90% of the population is bearing the brunt of this collapse, and why it is occurring, is beyond the scope of this overview.

This trend culminated in the financial crisis of 2007 – 2009. This began in the subprime mortgage sector, spread to the entire residential real estate market and progressively engulfed commercial real estate, banking, the stock markets, commodity markets and finally all of international trade.

In response the Federal Reserve multiplied its balance sheet five times from $800 billion to $4 trillion dollars. And the US Government concurrently ran peak fiscal deficits up to $1.8 trillion. The US Government also extended many trillions more in direct guarantees of minimum prices of financial assets of all kinds.

US Residential Real Estate

The observed result of all this monetary and fiscal stimulus, combined with the lowest mortgage interest rates in the post World War II era, was to only slow the rate of decline of median US household income. In the combined residential US real estate market this set of policies had the following results:

Existing Home Sales

The rate of existing home sales has yet to recover to the levels of the mid-1990s. Since the most recent decline in sales rate is paralleling the upward spike in mortgage rates it is reasonable to believe they probably will not recover.

The average sales price of existing homes has recovered to approximately 2003 levels.

(Note: Whether increasing average home prices for a population still experiencing declining real average household incomes is an intelligent public policy goal is a second question. This question deserves far more critical discussion than it currently receives.)

New Home Sales: (This time it really is different)

Those interested in detailed numbers for single and multifamily housing construction can find them here:

New Privately Owned Housing Units Authorized by Building Permits in Permit-Issuing Places(Census Bureau)

New-Home Production Tops 1 Million in November (NAHB)

The National Association of Homebuilders (NAHB) announced in mid-December 2013 that new starts in single and multi-family housing had finally exceeded an annualized rate of 1 million units. In other words, the actual 2013 new construction number will be approximately 935k.

Prior to 2008 these sub 1 million total new build numbers were only seen in the six years of 1991,1981, 1980, 1975, 1966 and 1960. They have subsequently occurred six straight years in a row from 2008-2013. It will not be known for another year whether new builds will finally exceed 1 million in 2014.

Note that US population has been continuously increasing over the entire time period. Therefore the present era represents the lowest per capita rate of new construction on record for six decades.

Near Term Prospects

There are two primary reasons that residential real estate has not recovered more that it has. These are very straightforward:

1. Real US household incomes continue to decline.

2. Residential mortgage lending standards have been significantly tightened since 2007.

These charts represent averages and sums across most of a continent. Within this expanse some areas are already experiencing new record bubbles while many others continue to fall deeper into local depressions.

There are several other factors that have affected and will continue to affect the residential real estate recovery.

Factor One: Habitable Vacant Dwellings

AMERICA’S 14.2 MILLION VACANT HOMES: A NATIONAL CRISIS (RealtyTrac)
“As of the first quarter of 2013, there are just over 133 million housing units in America and 10.7 percent of them — more than 14. 2 million — are vacant all year round for some reason or another, according to the Census Bureau."
To this 14.2 million empty dwellings we can add several million additional vacation homes that are only occupied for a few months a year.

Factor Two: Cultural Shift To Multigenerational Households

At least one person is required to create a household and occupy a dwelling. A related question is, what is the average number of empty bedrooms per occupied dwelling in the US? It is at least 1.0 and very probably much higher.

During recent years there has been an increase in average household size and a corresponding drop in the total number of households. This is the result of adult children and grandchildren moving back in with the “folks” to weather the economic storm. Whenever this occurs, two households become one household and residential housing demand is sensibly reduced.

A related trend is adult children who are economically unable to ever leave their parents household. To the extent these shifts are permanent trends rather than temporary expedients this will permanently reduce the per capita demand for residential housing.

Based on results the decline in real household incomes has proven insensitive to a variety of economic theories and policies. Neither the Republican-Bush era tax rate cuts nor the Democratic-Obama Keynesian pump priming at fire hydrant pressures has succeeded in reversing this long term trend. Nor has anything appeared recently to suggest an abrupt reversal is at hand in this key trend of average household income.

In these circumstances the only other possibility for further residential real estate “recovery” would be for government regulators to foster another bubble by effectively relaxing residential mortgage lending standards again.

Three Possible Future Outcomes For U.S. Residential Real Estate

In order, these are: go up further, stay the same or resume declining.

1. Up. The Federal Reserve has already begun withdrawing from its bond buying program, albeit at a slow rate of ‘taper’. This has accordingly led to mortgage rate increases which were accompanied by a prompt decline in existing home sales. It is mathematically impossible for a population with declining real household incomes to propel residential real estate markets higher in the face of higher interest costs.

2. Steady State. At a minimum, this outcome requires that average household income cease declining and that mortgage rates not rise significantly. Neither of these outcomes is likely. The following review of commercial real estate will examine clearly visible economic trends that make further household income declines a certainty.

If we cannot go up and even staying the same becomes doubtful this leaves:

3. Down Again.

 

via Zero Hedge http://ift.tt/1j3uc8B Tyler Durden

Over the weekend, the entertaining @HistoryInPix twitter account posted this distrubing photo of the cemetery where all the radioactive vehicles that were used in the Chernobyl cleanup went to die.

One can’t help but wonder: where is the comparable “cemetery” for the Fukushima disaster cleanup, and does the above photo have anything to do with the recently passed secrecy bill that was “designed by Kafka and inspired by Hitler“…

For those curious to see more of the Chernobyl cemetery, the following documentary should satisfy some of the pent up curiosity.

via Zero Hedge http://ift.tt/1j3u9cN Tyler Durden

Following some early strength in the Asia session, which saw Gold over $1255 (its highest in a month), the European session has seen pressure on the precious metals leak lower. That 'leak' was then helped on its way by the almost ubiquitous 8amET volume dumptaking gold and silver down markedly (though not catastrophically for now). The only other asset class showing any real action is GBPUSD (with GBP being sold aggressively) with Treasuries flat and stocks down modestly but stable for now.

 

 

and the only other asset class moving was GBPUSD…

Chart: Bloomberg

 

Of course, only a tin-foil-hat-wearing blogger would suggest manipulation… oh and the world's regulators as per Bloomberg:

The topic of gold market manipulation during the London AM fix is not new to Zero Hedge: in fact we have discussed both the historical basis and the raison d'etre of the London gold fix, as well as the curious arbitrage available to those who merely traded the AM-PM spread, for years. Which is why we are delighted that none other than Bloomberg has decided to break it down for everyone, as well as summarize all the ways in which just this one facet of gold trading is being manipulated.

Bloomberg begins:

 

 

Every business day in London, five banks meet to set the price of gold in a ritual that dates back to 1919. Now, dealers and economists say knowledge gleaned on those calls could give some traders an unfair advantage when buying and selling the precious metal. The London fix, the benchmark rate used by mining companies, jewelers and central banks to buy, sell and value the metal, is published twice daily after a telephone call involving Barclays Plc, Deutsche Bank AG, Bank of Nova Scotia, HSBC Holdings Plc and Societe Generale SA.

 

The fix dates back to September 1919, less than a year after the end of World War I, when representatives from five dealers met at Rothschild’s office on St. Swithin’s Lane in London’s financial district. It was suspended for 15 years, starting in 1939. While Rothschild pulled out in 2004 and the discussions now take place by telephone instead of in a wood-paneled room at the bank, the process remains much the same.

That much is known. What is certainly known is that any process that involves five banks sitting down (until recently literally) and exchanging information using arcane methods (such as a telephone), on a set schedule that involves a private information blackout phase, even if temporary, and that does not involve instant market feedback, can and will be gamed. "Traders involved in this price-determining process have knowledge which, even for a short time, is superior to other people’s knowledge,” said Thorsten Polleit, chief economist at Frankfurt-based precious-metals broker Degussa Goldhandel GmbH and a former economist at Barclays. “That is the great flaw of the London gold-fixing."

There are other flaws.

 

 

Participants on the London call can tell whether the price of gold is rising or falling within a minute or so, based on whether there are a large number of net buyers or sellers after the first round, according to gold traders, academics and investors interviewed by Bloomberg News. It’s this feature that could allow dealers and others in receipt of the information to bet on the direction of the market with a high degree of certainty minutes before the fix is made public, they said.

Yes, the broader momentum creation and ignition perspective is also known to most. At least most who never believed the boilerplate that unlike all other asset classes, gold is somehow immune from manipulation.

 

 

“Information trickles down from the five banks, through to their clients and finally to the broader market,” Andrew Caminschi, a lecturer at the University of Western Australia in Perth and co-author of a Sept. 2 paper on trading spikes around the London gold fix published online in the Journal of Futures Markets, said by phone. “In a world where trading advantage is measured in milliseconds, that has some value.”

Ah, hypothetical – smart. One mustn't ruffle feathers before, like in the case of Libor, it becomes fact that everyone was in on it.

 

 

There’s no evidence that gold dealers sought to manipulate the London fix or worked together to rig prices, as traders did with Libor. Even so, economists and academics say the way the benchmark is set is outdated, vulnerable to abuse and lacking any direct regulatory oversight. “This is one of the most concerning fixings I have seen,” said Rosa Abrantes-Metz, a professor at New York University’s Stern School of Business whose 2008 paper, “Libor Manipulation?” helped spark a global probe. “It’s controlled by a handful of firms with a direct financial interest in where it’s set, and there is virtually no oversight — and it’s based on information exchanged among them during undisclosed calls.”

Unless we are wrong, there was no evidence of Libor manipulative collusion before there was evidence either. And since the cabal of the London gold fix is far smaller than the member banks of Libor, it is exponentially easier to confine intent within an even smaller group of people. But all that is also known to most.

As is the fact that when asked for comments, 'spokesmen for Barclays, Deutsche Bank, HSBC and Societe Generale declined to comment about the London fix or the regulatory probes, as did Chris Hamilton, a spokesman for the FCA, and Steve Adamske at the CFTC. Joe Konecny, a spokesman for Bank of Nova Scotia, wrote in an e-mail that the Toronto-based company has “a deeply rooted compliance culture and a drive to continually look toward ways to improve our existing processes and practices."

Next, Bloomberg conveniently goes into the specifics of just how the gold price is manipulated first by the fixing banks, then by their "friends and neighbors" as news of the fixing process unfolds.

At the start of the call, the designated chairman — the job rotates annually among the five banks — gives a figure close to the current spot price in dollars for an ounce of gold. The firms then declare how many bars of the metal they wish to buy or sell at that price, based on orders from clients as well as their own account.

 

If there are more buyers than sellers, the starting price is raised and the process begins again. The talks continue until the buy and sell amounts are within 50 bars, or about 620 kilograms, of each other. The procedure is carried out twice a day, at 10:30 a.m. and 3 p.m. in London. Prices are set in dollars, pounds and euros. Similar gauges exist for silver, platinum and palladium.

 

The traders relay shifts in supply and demand to clients during the calls and take fresh orders to buy or sell as the price changes, according to the website of London Gold Market Fixing, which publishes the results of the fix.

.. only this time the manipulation is no longer confined to a purely theoretical plane and instead empirical evidence of the fixing leak is presented based on academic research:

Caminschi and Richard Heaney, a professor of accounting and finance at the University of Western Australia, analyzed two of the most widely traded gold derivatives: gold futures on Comex and State Street Corp.’s SPDR Gold Trust, the largest bullion-backed exchange-traded product, from 2007 through 2012.

 

At 3:01 p.m., after the start of the call, trading surged to 47.8 percent above the average for the 20-minute period preceding the start of the fix and remained 20 percent higher for the next six minutes, Caminschi and Heaney found. By comparison, trading was 8.7 percent higher than the average a minute after publication of the price. The results showed a similar pattern for the SPDR Gold Trust.

 

“Intuitively, we expect volumes to spike following the introduction of information to the market” when the final result is published, Caminschi and Heaney wrote in “Fixing a Leaky Fixing: Short-Term Market Reactions to the London P.M. Gold Price Fixing.” “What we observe in our analysis is a clustering of trades immediately following the fixing start.”

 

The researchers also assessed how accurate movements in gold derivatives were in predicting the final fix. Between 2:59 p.m. and 3 p.m., the direction of futures contracts matched the direction of the fix about half the time.

 

From 3:01 p.m., the success rate jumped to 69.9 percent, and within five minutes it had climbed to 80 percent, Caminschi and Heaney wrote. On days when the gold price per ounce moved by more than $3, gold futures successfully predicted the outcome in more than nine out of 10 occasions. “Not only are the trades quite accurate in predicting the fixing direction, the more money that is made by way of a larger price change, the more accurate the trade becomes,” Caminschi and Heaney wrote. “This is highly suggestive of information leaking from the fixing to these public markets.”

Oh please, 9 out of 10 times is hardly indicative of any wrongdoing. After all, JPM lost money on, well, zero trading days in all of 2013, and nobody cares. So if a coin landing heads about 200 times in a row is considered normal by regulators, then surely the CTFC will find nothing wrong with a little gold manipulation here and there. Manipulation, which it itself previously said did not exist. But everyone already knew that too.

Cynicism aside, to claim that this clearly gamed process is not in fact gamed, not to say criminally manipulated (because it is never manipulation unless one is caught in the act by enforcers who are actually not in on the scheme) is the height of idiocy. Which is why we are certain that regulators will go precisely this route. That too is also largely known. Also known are the benefits for traders who abuse the London fix:

For derivatives traders, the benefits are clear: A dealer who bought 500 gold futures contracts at 3 p.m. and knew the fix was going higher could make $200,000 for his firm if the price moved by $4, the average move in the sample. While the value of 500 contracts totals about $60 million, traders may buy on margin, a process that involves borrowing and requires placing less capital for the bet. On a typical day, about 4,500 futures contracts are traded between 3 p.m. and 3:15 p.m., according to Caminschi and Heaney.

Finally what is certainly known is that the "London fixing" fix would be very simple in our day and age of ultramodern technology, and require a few minutes of actual implementation.

Abrantes-Metz, who helped Iosco formulate its guidelines, said the gold fix’s shortcomings may stretch beyond giving firms and clients access to privileged information. “There is a huge incentive for these banks to try and influence where the benchmark is set depending on their trading positions, and there is almost no scrutiny,” she said.

 

Abrantes-Metz said the gold fix should be replaced with a benchmark calculated by taking a snapshot of trading in a market where $19.6 trillion of the precious metal circulated last year, according to CPM Group, a New York-based research company. “There’s no reason why data cannot be collected from actual prices of spot gold based on floor or electronic trading,” she said. “There’s more than enough data.”

Which is precisely why nothing will change. Sadly, that is also widely known.

via Zero Hedge http://feedproxy.google.com/~r/zerohedge/feed/~3/f3zna2xQa_Y/story01.htm Tyler Durden

Following some early strength in the Asia session, which saw Gold over $1255 (its highest in a month), the European session has seen pressure on the precious metals leak lower. That 'leak' was then helped on its way by the almost ubiquitous 8amET volume dumptaking gold and silver down markedly (though not catastrophically for now). The only other asset class showing any real action is GBPUSD (with GBP being sold aggressively) with Treasuries flat and stocks down modestly but stable for now.

 

 

and the only other asset class moving was GBPUSD…

Chart: Bloomberg

 

Of course, only a tin-foil-hat-wearing blogger would suggest manipulation… oh and the world's regulators as per Bloomberg:

The topic of gold market manipulation during the London AM fix is not new to Zero Hedge: in fact we have discussed both the historical basis and the raison d'etre of the London gold fix, as well as the curious arbitrage available to those who merely traded the AM-PM spread, for years. Which is why we are delighted that none other than Bloomberg has decided to break it down for everyone, as well as summarize all the ways in which just this one facet of gold trading is being manipulated.

Bloomberg begins:

 

 

Every business day in London, five banks meet to set the price of gold in a ritual that dates back to 1919. Now, dealers and economists say knowledge gleaned on those calls could give some traders an unfair advantage when buying and selling the precious metal. The London fix, the benchmark rate used by mining companies, jewelers and central banks to buy, sell and value the metal, is published twice daily after a telephone call involving Barclays Plc, Deutsche Bank AG, Bank of Nova Scotia, HSBC Holdings Plc and Societe Generale SA.

 

The fix dates back to September 1919, less than a year after the end of World War I, when representatives from five dealers met at Rothschild’s office on St. Swithin’s Lane in London’s financial district. It was suspended for 15 years, starting in 1939. While Rothschild pulled out in 2004 and the discussions now take place by telephone instead of in a wood-paneled room at the bank, the process remains much the same.

That much is known. What is certainly known is that any process that involves five banks sitting down (until recently literally) and exchanging information using arcane methods (such as a telephone), on a set schedule that involves a private information blackout phase, even if temporary, and that does not involve instant market feedback, can and will be gamed. "Traders involved in this price-determining process have knowledge which, even for a short time, is superior to other people’s knowledge,” said Thorsten Polleit, chief economist at Frankfurt-based precious-metals broker Degussa Goldhandel GmbH and a former economist at Barclays. “That is the great flaw of the London gold-fixing."

There are other flaws.

 

 

Participants on the London call can tell whether the price of gold is rising or falling within a minute or so, based on whether there are a large number of net buyers or sellers after the first round, according to gold traders, academics and investors interviewed by Bloomberg News. It’s this feature that could allow dealers and others in receipt of the information to bet on the direction of the market with a high degree of certainty minutes before the fix is made public, they said.

Yes, the broader momentum creation and ignition perspective is also known to most. At least most who never believed the boilerplate that unlike all other asset classes, gold is somehow immune from manipulation.

 

 

“Information trickles down from the five banks, through to their clients and finally to the broader market,” Andrew Caminschi, a lecturer at the University of Western Australia in Perth and co-author of a Sept. 2 paper on trading spikes around the London gold fix published online in the Journal of Futures Markets, said by phone. “In a world where trading advantage is measured in milliseconds, that has some value.”

Ah, hypothetical – smart. One mustn't ruffle feathers before, like in the case of Libor, it becomes fact that everyone was in on it.

 

 

There’s no evidence that gold dealers sought to manipulate the London fix or worked together to rig prices, as traders did with Libor. Even so, economists and academics say the way the benchmark is set is outdated, vulnerable to abuse and lacking any direct regulatory oversight. “This is one of the most concerning fixings I have seen,” said Rosa Abrantes-Metz, a professor at New York University’s Stern School of Business whose 2008 paper, “Libor Manipulation?” helped spark a global probe. “It’s controlled by a handful of firms with a direct financial interest in where it’s set, and there is virtually no oversight — and it’s based on information exchanged among them during undisclosed calls.”

Unless we are wrong, there was no evidence of Libor manipulative collusion before there was evidence either. And since the cabal of the London gold fix is far smaller than the member banks of Libor, it is exponentially easier to confine intent within an even smaller group of people. But all that is also known to most.

As is the fact that when asked for comments, 'spokesmen for Barclays, Deutsche Bank, HSBC and Societe Generale declined to comment about the London fix or the regulatory probes, as did Chris Hamilton, a spokesman for the FCA, and Steve Adamske at the CFTC. Joe Konecny, a spokesman for Bank of Nova Scotia, wrote in an e-mail that the Toronto-based company has “a deeply rooted compliance culture and a drive to continually look toward ways to improve our existing processes and practices."

Next, Bloomberg conveniently goes into the specifics of just how the gold price is manipulated first by the fixing banks, then by their "friends and neighbors" as news of the fixing process unfolds.

At the start of the call, the designated chairman — the job rotates annua
lly among the five banks — gives a figure close to the current spot price in dollars for an ounce of gold. The firms then declare how many bars of the metal they wish to buy or sell at that price, based on orders from clients as well as their own account.

 

If there are more buyers than sellers, the starting price is raised and the process begins again. The talks continue until the buy and sell amounts are within 50 bars, or about 620 kilograms, of each other. The procedure is carried out twice a day, at 10:30 a.m. and 3 p.m. in London. Prices are set in dollars, pounds and euros. Similar gauges exist for silver, platinum and palladium.

 

The traders relay shifts in supply and demand to clients during the calls and take fresh orders to buy or sell as the price changes, according to the website of London Gold Market Fixing, which publishes the results of the fix.

.. only this time the manipulation is no longer confined to a purely theoretical plane and instead empirical evidence of the fixing leak is presented based on academic research:

Caminschi and Richard Heaney, a professor of accounting and finance at the University of Western Australia, analyzed two of the most widely traded gold derivatives: gold futures on Comex and State Street Corp.’s SPDR Gold Trust, the largest bullion-backed exchange-traded product, from 2007 through 2012.

 

At 3:01 p.m., after the start of the call, trading surged to 47.8 percent above the average for the 20-minute period preceding the start of the fix and remained 20 percent higher for the next six minutes, Caminschi and Heaney found. By comparison, trading was 8.7 percent higher than the average a minute after publication of the price. The results showed a similar pattern for the SPDR Gold Trust.

 

“Intuitively, we expect volumes to spike following the introduction of information to the market” when the final result is published, Caminschi and Heaney wrote in “Fixing a Leaky Fixing: Short-Term Market Reactions to the London P.M. Gold Price Fixing.” “What we observe in our analysis is a clustering of trades immediately following the fixing start.”

 

The researchers also assessed how accurate movements in gold derivatives were in predicting the final fix. Between 2:59 p.m. and 3 p.m., the direction of futures contracts matched the direction of the fix about half the time.

 

From 3:01 p.m., the success rate jumped to 69.9 percent, and within five minutes it had climbed to 80 percent, Caminschi and Heaney wrote. On days when the gold price per ounce moved by more than $3, gold futures successfully predicted the outcome in more than nine out of 10 occasions. “Not only are the trades quite accurate in predicting the fixing direction, the more money that is made by way of a larger price change, the more accurate the trade becomes,” Caminschi and Heaney wrote. “This is highly suggestive of information leaking from the fixing to these public markets.”

Oh please, 9 out of 10 times is hardly indicative of any wrongdoing. After all, JPM lost money on, well, zero trading days in all of 2013, and nobody cares. So if a coin landing heads about 200 times in a row is considered normal by regulators, then surely the CTFC will find nothing wrong with a little gold manipulation here and there. Manipulation, which it itself previously said did not exist. But everyone already knew that too.

Cynicism aside, to claim that this clearly gamed process is not in fact gamed, not to say criminally manipulated (because it is never manipulation unless one is caught in the act by enforcers who are actually not in on the scheme) is the height of idiocy. Which is why we are certain that regulators will go precisely this route. That too is also largely known. Also known are the benefits for traders who abuse the London fix:

For derivatives traders, the benefits are clear: A dealer who bought 500 gold futures contracts at 3 p.m. and knew the fix was going higher could make $200,000 for his firm if the price moved by $4, the average move in the sample. While the value of 500 contracts totals about $60 million, traders may buy on margin, a process that involves borrowing and requires placing less capital for the bet. On a typical day, about 4,500 futures contracts are traded between 3 p.m. and 3:15 p.m., according to Caminschi and Heaney.

Finally what is certainly known is that the "London fixing" fix would be very simple in our day and age of ultramodern technology, and require a few minutes of actual implementation.

Abrantes-Metz, who helped Iosco formulate its guidelines, said the gold fix’s shortcomings may stretch beyond giving firms and clients access to privileged information. “There is a huge incentive for these banks to try and influence where the benchmark is set depending on their trading positions, and there is almost no scrutiny,” she said.

 

Abrantes-Metz said the gold fix should be replaced with a benchmark calculated by taking a snapshot of trading in a market where $19.6 trillion of the precious metal circulated last year, according to CPM Group, a New York-based research company. “There’s no reason why data cannot be collected from actual prices of spot gold based on floor or electronic trading,” she said. “There’s more than enough data.”

Which is precisely why nothing will change. Sadly, that is also widely known.

via Zero Hedge http://feedproxy.google.com/~r/zerohedge/feed/~3/f3zna2xQa_Y/story01.htm Tyler Durden

After last week’s economic fireworks, this one will be far more quiet with earnings dominating investors’ attention: US financials reporting this week include JPM and Wells Fargo tomorrow, BofA on Wednesday, GS and Citi on Thursday, BoNY and MS on Friday. Industrial bellwethers Intel (Thurs) and General Electric (Fri) are also on this week’s earnings docket. On the macro front, this coming week we have two MPC meetings – both in LatAm. For Brazil consensus expects a 25bps hike in the policy rate. For Chile consensus forecasts monetary policy to remain on hold. Among the data releases, one should point out inflation numbers from the US (CPI and PPI), Eurozone, the UK and India. We also have three important US producer and consumer surveys – Empire Manufacturing, Philadelphia Fed (consensus +8.5), and U. of Michigan (consensus 83.5). Among external trade and capital flow stats, we would emphasize US TIC data, as well as current account balances from Japan and Turkey. Finally, the accumulation of FX reserves in China is interesting to track as it provides an indication of CNY appreciation pressure.

With seven Fed speakers scheduled for the week, including Bernanke, the markets could get a better sense of the Fed’s thinking after the weak labour market data last Friday.

Monday, 13 January

• US Fed speakers: Lockhart
• US Federal Budget Balance (Dec): consensus USD-44.0bn, previous USD-135.2bn
• Japan CA Balance (Nov): consensus JPY-368.9bn, previous JPY-127.9bn
• India CPI (Dec): consensus +10.1%yoy, previous +11.2%yoy
• Also interesting: Italy IP (Nov), Israel Trade Balance (Dec)

Tuesday, 14 January

• Fed speakers: Plosser, Fisher
• US Retail Sales (Dec): consensus +0.1%, previous +0.7%
• Euro Area IP (Nov): consensus +1.8%yoy, previous +0.2%yoy
• France Harmonized CPI (Dec): consensus +0.9%yoy, previous +0.8%yoy
• Italy Harmonized CPI (Dec, final): consensus +0.6%yoy, previous +0.6%yoy (flash)
• UK Core CPI (Dec): GS +1.9%yoy, consensus +1.8%yoy, previous +1.8%yoy
• Turkey CA Balance (Nov): consensus USD-4.3bn, previous USD-2.9bn
• Also interesting: US Business Inventories (Nov), China FX Inflows (Dec), Ukraine Trade Balance (Nov)

Wednesday, 15 January

• Fed speakers: Evans
• Brazil MPC: GS and consensus expect a 25bps hike in the policy rate to 10.25%yoy. Given the dovish central bank undertones contained in both the minutes of the Nov 27 Copom meeting and the subsequent Quarterly Inflation Report (QIR) we expect the Copom to moderate the magnitude of rate hikes (following five consecutive 50bp moves). However, given the pressure on the BRL, the December IPCA inflation surprise which frustrated the central bank public commitment to deliver inflation in 2013 below the 5.84% level of 2012, and the stickiness of headline, core, and inflation expectations, we assess a 35% probability of another +50bp hike on Jan 15.
  Brazil IGP-10 Inflation (Jan): GS +5.60%yoy: previous +5.39%yoy
• US Empire Manufacturing (Jan): consensus +4.0, previous +1.0
• US PPI (Dec): consensus +0.4%, previous -0.1%
• US Fed Beige Book
• Japan Machinery Orders (Nov): consensus +11.7%yoy, previous +17.8%yoy
• Spain Harmonized CPI (Dec, final): consensus +0.3%yoy, previous +0.3%yoy (flash)
• Also interesting: Japan Corporate Goods Prices (Dec)

Thursday, 16 January

• Fed speakers: Williams, Bernanke
• US Philadelphia Fed Survey (Jan): consensus +8.5, previous +6.4
• US CPI (Dec): consensus +0.3%, previous flat
• US Initial Jobless Claims: consensus 325K, previous 330K
• US Total Net TIC Data (Nov): previous USD+194.9bn
• Euro Area CPI (Dec, final): consensus +0.8%yoy, previous +0.8%yoy (flash)
• Germany Harmonized CPI (Dec, final): consensus +1.2%yoy, previous +1.2%yoy (flash)
• Also interesting: US Homebuilders’ Survey (Jan), UK RICS Housing Market Survey (Dec), Canada International Securities Transactions (Nov)

Friday, 17 January

• Fed speakers: Lacker
• US U. of Michigan Consumer Sentiment (Jan, prov.): consensus 83.5, previous 82.5
• US IP (Dec): consensus +0.3%, previous +1.1%
• US Capacity Utilitzation (Dec): consensus 79.1%, previous 79.0%
• US Housing Starts (Dec): consensus -9.2%, previous +22.7%
• UK Retail Sales ex-Autos (Dec): consensus +3.2%, previous +2.3%
• Also interesting: Japan Consumer Confidence (Dec), Russia Trade Balance (Nov), Czech Republic CA Balance (Nov), Brazil GDP (Nov), Poland CA Balance (Nov)

Visually, from BofA:

Finally, key events and concerns for the coming week via SocGen:

LACKLUSTER HEADLINE US RETAIL SALES

Headline retail sales are set to clock in at a lacklustre 0.1% mom in December. Retail control, excluding movements in auto, building materials and gasoline outlays, is forecast to climb by a healthier 0.5%. A jump up in January consumer confidence, with the preliminary Michigan report forecast at 88, should ease any downside
fears on the US consumer, however. The January district Fed survey are expected to show some further improvement, consistent with the PMI manufacturing index remaining in the 56.4 to 57.3 range seen over Q4. Finally, we expect housing starts to take a breather in December with a pullback, but forecast a gain in building permits.

UK HOUSING DATA TO BE CLOSELY WATCHED BY FPC

The RICS housing survey will offer further evidence as to just how strong the housing sector is. As highlighted by Chief UK Economist Brian Hilliard in 2014 – tasks for the FPC and MPC, we expect the FPC to be left to deal with any excesses rather than the MPC in 2014. December CPI is set to clock in close to target at 2.2%, slightly up from 2.1% in November as utility price increases start to bite. We forecast December retail sales at -0.2% mom or +2.7% yoy in volume terms.

BCB TO HIKE SELIC RATE TO 10.25%

Inflation and inflation expectations will drive a final 25bp rate hike from the BCB in this cycle on Wednesday. Already at 10%, the Selic target is having a visible impact on the real economy. To the mind of our lead Brazil Economist, Dev Ashish, this just serves to illustrate that Brazil is facing a classic stagflation scenario where reforms are critical for both growth and inflation and where the size of real interest rate increases required to fully control inflation would simply stifle the real economy.

via Zero Hedge http://feedproxy.google.com/~r/zerohedge/feed/~3/50sbVsu0ooE/story01.htm Tyler Durden

It was inevitable that virtually at the same time as Goldman said the S&P is overvalued “by almost every metric” that the firm would go ahead and slam US equities in only its first tactically bearish call on US stocks in over a year.

Recall from Friday night:

S&P 500 valuation is lofty by almost any measure, both for the aggregate market (15.9x) as well as the median stock (16.8x). We believe S&P 500 trades close to fair value and the forward path will depend on profit growth rather than P/E expansion. However, many clients argue that the P/E multiple will continue to rise in 2014 with 17x or 18x often cited, with some investors arguing for 20x. We explore valuation using various approaches. We conclude that further P/E expansion will be difficult to achieve. Of course, it is possible. It is just not probable based on history.

 

The current valuation of the S&P 500 is lofty by almost any measure, both for the aggregate market as well as the median stock: (1) The P/E ratio; (2) the current P/E expansion cycle; (3) EV/Sales; (4) EV/EBITDA; (5) Free Cash Flow yield; (6) Price/Book as well as the ROE and P/B relationship; and compared with the levels of (6) inflation; (7) nominal 10-year Treasury yields; and (8) real interest rates. Furthermore, the cyclically-adjusted P/E ratio suggests the S&P 500 is currently 30% overvalued in terms of (9) Operating EPS and (10) about 45% overvalued using As Reported earnings.

Sure enough, here comes Goldman’s global portfolio strategy research team headed by Nielsen, Oppenheimer, Kostin, Garzarelli, and Himmelberg, and pulls another leg out of the Fed-driven rally.

We downgrade the US equity market to underweight relative to other equity markets over 3 months following strong performance. Our broader asset allocation is unchanged and so are almost all our forecasts. Since our last GOAL report, we have rolled our oil forecast forward in time to lower levels along our longstanding profile of declining prices. We have also lowered the near-term forecast for equities in Asia ex-Japan slightly. Near-term risks have declined as the US fiscal and monetary outlook has become clearer.

 

 

Our allocation is still unchanged. We remain overweight equities over both 3 and 12 months and balance this with an underweight in cash over 3 months and an underweight in commodities and government bonds over 12 months. The longer-term outlook for equities remains strong in our view. We expect good performance over the next few years as economic growth improves, driving strong earnings growth and a decline in risk premia. We expect earnings growth to take over from multiple expansion as a driver of returns, and the decline in risk premia to largely be offset by a rise in underlying government bond yields.

 

Over 3 months our conviction in equities is now much lower as the run-up in prices leaves less room for unexpected events. Still, we remain overweight, as near-term risks have also declined and as we are in the middle of the period in which we expect growth in the US and Europe to shift higher.

 

Regionally, we downgrade the US to underweight over 3 months bringing it in line with our 12-month underweight. After last year’s strong performance the US market’s high valuations and margins leaves it with less room for performance than other markets, in our view. Our US strategists have also noted the risk of a 10% drawdown in 2014 following a large and low volatility rally in 2013 that may create a more attractive entry point later this year.

Of course, how the above trade fits with Goldman’s top trade #1 for 2014 revealed in November, which was to go long the S&P funded by an AUD short, one can only wonder.

And now the muppets start to wonder: should we do what Goldman is telling us to do, and blow up as always, or do what Goldman’s trading desk is doing, which probably is buying risk from all those who are selling. Ah, questions.

via Zero Hedge http://ift.tt/1agWxDg Tyler Durden

It was inevitable that virtually at the same time as Goldman said the S&P is overvalued “by almost every metric” that the firm would go ahead and slam US equities in only its first tactically bearish call on US stocks in over a year.

Recall from Friday night:

S&P 500 valuation is lofty by almost any measure, both for the aggregate market (15.9x) as well as the median stock (16.8x). We believe S&P 500 trades close to fair value and the forward path will depend on profit growth rather than P/E expansion. However, many clients argue that the P/E multiple will continue to rise in 2014 with 17x or 18x often cited, with some investors arguing for 20x. We explore valuation using various approaches. We conclude that further P/E expansion will be difficult to achieve. Of course, it is possible. It is just not probable based on history.

 

The current valuation of the S&P 500 is lofty by almost any measure, both for the aggregate market as well as the median stock: (1) The P/E ratio; (2) the current P/E expansion cycle; (3) EV/Sales; (4) EV/EBITDA; (5) Free Cash Flow yield; (6) Price/Book as well as the ROE and P/B relationship; and compared with the levels of (6) inflation; (7) nominal 10-year Treasury yields; and (8) real interest rates. Furthermore, the cyclically-adjusted P/E ratio suggests the S&P 500 is currently 30% overvalued in terms of (9) Operating EPS and (10) about 45% overvalued using As Reported earnings.

Sure enough, here comes Goldman’s global portfolio strategy research team headed by Nielsen, Oppenheimer, Kostin, Garzarelli, and Himmelberg, and pulls another leg out of the Fed-driven rally.

We downgrade the US equity market to underweight relative to other equity markets over 3 months following strong performance. Our broader asset allocation is unchanged and so are almost all our forecasts. Since our last GOAL report, we have rolled our oil forecast forward in time to lower levels along our longstanding profile of declining prices. We have also lowered the near-term forecast for equities in Asia ex-Japan slightly. Near-term risks have declined as the US fiscal and monetary outlook has become clearer.

 

 

Our allocation is still unchanged. We remain overweight equities over both 3 and 12 months and balance this with an underweight in cash over 3 months and an underweight in commodities and government bonds over 12 months. The longer-term outlook for equities remains strong in our view. We expect good performance over the next few years as economic growth improves, driving strong earnings growth and a decline in risk premia. We expect earnings growth to take over from multiple expansion as a driver of returns, and the decline in risk premia to largely be offset by a rise in underlying government bond yields.

 

Over 3 months our conviction in equities is now much lower as the run-up in prices leaves less room for unexpected events. Still, we remain overweight, as near-term risks have also declined and as we are in the middle of the period in which we expect growth in the US and Europe to shift higher.

 

Regionally, we downgrade the US to underweight over 3 months bringing it in line with our 12-month underweight. After last year’s strong performance the US market’s high valuations and margins leaves it with less room for performance than other markets, in our view. Our US strategists have also noted the risk of a 10% drawdown in 2014 following a large and low volatility rally in 2013 that may create a more attractive entry point later this year.

Of course, how the above trade fits with Goldman’s top trade #1 for 2014 revealed in November, which was to go long the S&P funded by an AUD short, one can only wonder.

And now the muppets start to wonder: should we do what Goldman is telling us to do, and blow up as always, or do what Goldman’s trading desk is doing, which probably is buying risk from all those who are selling. Ah, questions.

via Zero Hedge http://ift.tt/1agWxDg Tyler Durden