Thursday, April 28, 2011
It seems as if everyone in the world has an opinion about silver. Is it a bubble? Has it topped? Is it just consolidating before it goes to triple digits?
I have been trading silver directionally with a trend-following approach for many months, but recently exited all my long positions when I came to the decision that a top was imminent.
Still, silver looks way too attractive for me to sit on the sidelines, so now I am trading silver volatility instead of a directional play. The chart below from Livevol.com neatly illustrates my rationale.
Looking at the silver ETF, SLV, for the past six months, one cannot help but observe the ever-widening gap between implied volatilityand historical volatility that has developed during the latter half of March. While it is certainly understandable that there is a great deal of uncertainty about the price of silver going forward, given the extreme recent volatility, I find it hard to believe that traders are betting silver will be about twice as volatile in the next month as it has been over the course of the last month.
For me this is a classic short volatility setup, with straddles, strangles, butterflies and condors looking to be pricing in an excessive amount of volatility. One need not necessarily structure those short volatility trades with the current price of SLV (about 44.18) at the midpoint of the spread. If one thinks silver has topped, why not sell a straddle at 43 or a strangle with a 40-45 spread? For now my focus is primarily a non-directional short volatility play, but one can also make a good case for a short volatility trade with a small directional twist, at least as I see it.
Of course, silver always presents some interesting pairs trading possibilities, typically with gold, but given the recent positive correlation between silver and stocks, an interesting approach is to look at short silver trades as a hedge for long equity positions.
How The Comex Lost 20% Of Its "Registered" Silver In One Week, Or Where There's Smoke Of A Run, There's Probably A Run
A week ago we noted something peculiar: in one day, COMEX depository Scotia Mocatta (one of five in the world) saw a 25% transfer of silver from "registered" (or deliverable physical) to "eligible" (or "undefined" - a distinction discussed previously, and also below). We said: "Canada's largest bullion depository (and one of five total) reclassified a whopping 5.2 million ounces of silver from Registered to Eligible status. In order to get a sense of how big this amount is, which amounts to just under $238 million at today's fixing price, it represents just over 25% of the total silver stored at Scotia Mocatta, and about 5% of the total silver held across all depositories." The reason then given was: "due to a reporting reclassification, 5,287,142 t oz was moved from Registered to Eligible." To our (lack of) surprise, a quick glance at today's silver holdings at the Comex confirms that the trend of reclassification is continuing unabated, and total "physical" silver across the entire Comex universe has now plunged by almost 20%, or from 41 million ounces to 33 million ounces, in the span of one week! And while last week it was Scotia Mocatta, today it is HSBC and the Delaware Depository, and the reason given: "Adjustments include reporting classifications of t oz that were moved from Registered to Eligible. Please see Special Executive Report reference 5736 for additional information. http://www.cmegroup.com/tools-information/advisorySearch.html#." And a further drill down reveals the following link. Many have speculated that there could well be a run on physical silver. But for those looking for a smoking gun, this is probably as close as you will get to one, short of JPM actually declaring "force majeure."
This is from April 20:
And this is from today (link):
As for the detailed reason provided by the CME, we get the following:
A correction to the COMEX Metal Depository Statistics Stock Reports published on April 27, 2011, has been made to reflect a change in the reporting of metal from the Registered category to the Eligible category. This change reflects paper warrants that have yet to be converted to electronic form. The metal represented by these paper warrants, which will now be reported in the Eligible category, will continue to remain eligible for delivery against COMEX futures contracts provided holders of the paper warrants convert them to electronic form.
Exchange metal reported in the Registered category represents troy ounces of metal that meet the contract specifications as defined in the Exchange Rules for which an electronic warrant has been issued.
Exchange metal reported in the Eligible category represents troy ounces of metal that meet the contract specifications as defined in the Exchange Rules for which an electronic warrant has not been issued.
So, a rather odd last minute paper to electronic contract conversion, which mysteriously results in a 20% drop in the physical silver across the entire Comex universe? And this coming at a time when silver is within cents of breaking the all time nominal high? Sure, we'll buy it. But perhaps the Comex can tell us just how many more such "warrants" exist in the system, and whether when all is said and done, where it says 33,322,807 million ounces of registered silver (where it was 41 million last week), it won't be zero, or, who knows, negative?
We, for one, won't wait to find out and demand delivery only when said number hits zero.
And as a reminder for those unfamiliar, here is a distinction between "registered" (real) and "eligible" (somewhat "questionable"), courtesy of SilverAxis
For those who aren’t familiar with the terminology, the registered category of COMEX warehouse bullion stocks generally refers to gold and silver bars against which COMEX warehouse receipts are outstanding. The COMEX publishes these stocks on a daily basis and they can be found here: Silver | Gold. The registered category is the total pool of gold and silver available at any time to meet delivery requirements under expiring futures contracts or to establish initial futures contract positions through a transaction called exchange-for-physicals (I’ll explain this another time). It is important to realize, however, that many parties holding COMEX gold and silver in registered form have no intention of making their holdings available for delivery. By this I mean that such parties are neither (1) holding a short futures position against the warehouse receipt nor (2) willing to sell their registered metal (warehouse receipts) to a party with a short futures position. Indeed, a substantial portion of those holding registered metal would have acquired the COMEX warehouse receipts by holding long futures positions for delivery. In other words, these registered stocks are held for investment and not for commercial purposes.
In comparison, the eligible category of COMEX warehouse bullion stocks generally refers to bullion held in the warehouses that meets the specifications of an acceptable COMEX bar (proper weight, size, purity and refiner) but does not have a COMEX warehouse receipt issued against it. For example, an investor might purchase several 1,000 oz. bars of silver from a dealer and then deliver the bars for allocated storage at a COMEX warehouse. This is a private arrangement and has nothing to do with the COMEX. Unless these bars are officially registered (the easiest way to do this is through the aforementioned exchange-for-physicals), they will remain in the eligible category until withdrawn from the warehouse by the investor. Thus, the appropriate way to treat eligible COMEX warehouse bullion stocks is that they represent metal that could potentially be registered at some point in the future but cannot presently be used to make delivery under a short futures contract.
During periods of crisis, investors often flee risky asset classes and invest in assets or commodities that they feel will hold value. Silver is a prime example.
Investing in Silver
While collecting jewelry with a high silver content or silver coins is the method preferred by some, there are downsides to consider. For example, there is the issue of finding a safe place to store such merchandise. Finding a buyer for a particular piece may also be difficult. Plus, there is sometimes a very big markup on certain pieces.
But there is an alternative for investors who want to gain exposure to silver: the stock market. Check out these five simple silver stock plays.
|Year to Date %|
Silver Wheaton Corp(NYSE:SLW)
Silvercorp Metals Inc.(NYSE:SVM)
Endeavour Silver Corp.(NYSE:EXK)
iShares Silver Trust(NYSE:SLV)
Pan American Silver Corp. (Nasdaq:PAAS)
The price of silver can fluctuate widely. In 2008, the price of silver had risen to about $21.44 an ounce, a huge increase given that just a couple of years prior it was trading around $11. But not too long after that spike, silver lost its luster, and the price floundered to $8.40. However, in a little over 2 years, silver has popped up to $47.81
Investors tend to flock to precious metals (like silver) in times of market crisis. Widespread international acceptance and recognition of this circumstance makes it likely that this trend will continue in the future. Adding a little silver to your portfolio might help you mitigate risk; the five stocks presented here are a great starting point for your silver stock search.
|Stock||Industry||Market Cap||YTD % gain|
|Sandridge Energy Inc.(NYSE:SD)||Oil and Gas Exploration||5.11B||69.95%|
|Frontier Oil Corp.(NYSE:FTO)||Oil and Gas Operations||2.97B||55.58%|
|Weight Watchers International, Inc. (NYSE:WTW)||Personal Services||5.59B||104.27%|
The Bottom Line
With four stocks from four different industries that have yielded more than 50% returns, it's clear that the "Big Board" still has its share of market crushing stocks.
The Nasdaq jumped to a 10-year high as U.S. stocks rallied on Wednesday after Fed Chairman Ben Bernanke's first-ever press conference did nothing to short-circuit investors' optimistic outlook on the economy.
All three major U.S. stock indexes extended gains after comments from Bernanke at his press conference, where he reiterated the Fed's stance that inflation was a transitory problem related largely to commodity price pressures.
The Nasdaq Composite Index closed at 2,869.88, its highest close since December 12, 2000. Among the day's leading Nasdaq gainers were retailers and biotechnology names.
The Russell 2000 Index hit an all-time closing high of 858.31 as investors kept buying small-caps, a sector associated with a strong outlook for economic growth.
Tom Sowanick, chief investment officer of OmniVest in Princeton, N.J., said the Federal Reserve is "inviting asset inflation" as reflected in the stock market's price action.
The Fed's policy-setting Federal Open Market Committee said in a statement it intends to complete its $600 billion bond buying program in June as scheduled.
At the news conference, Bernanke said there was "a bit less momentum in the economy" and he foresaw "a relatively weak number, maybe under 2 percent" for growth in gross domestic product in the first three months this year, indicating the Fed is likely to maintain its accommodative policy despite worries about inflation.
"He handled himself real well. He didn't fumble anything," said Alan Valdes, director of floor trading at DME Securities in New York. "In all honesty, I would give him a B-plus. He held himself up well. He didn't trip over any questions."
Biotech stocks helped boost the Nasdaq, as Regeneron Pharmaceuticals Inc surged 28.6 percent to $67.05 after its experimental cancer drug, Zaltrap, being developed with Sanofi-Aventis, extended survival in patients in a late-stage trial.
The NYSEArca biotechnology index gained 2.8 percent.
The Dow Jones industrial average gained 95.59 points, or 0.76 percent, to 12,690.96. The Standard & Poor's 500 Index rose 8.42 points, or 0.62 percent, to 1,355.66. The Nasdaq Composite Index climbed 22.34 points, or 0.78 percent, to 2,869.88.
GE BUOYS DOW, STARBUCKS FALLS LATE
General Electric helped lift the Dow, rising 2.7 percent to $20.65 after the company's finance chief said GE's profit growth over the next few years will be the fastest it had seen in a decade.
Boeing Co, Whirlpool Corp and WellPoint Inc also moved higher after topping analysts' consensus expectations. Boeing, also a Dow component, rose 0.8 percent to $76.12.
Whirlpool gained 0.9 percent to $88.65 and WellPoint added 3.5 percent to $75.54.
According to Thomson Reuters data through Wednesday, of the 220 companies in the S&P 500 that have reported earnings, 73 percent have posted earnings above estimates.
After the closing bell, Starbucks Corp warned that rising fuel and dairy costs will take a bigger chunk out of earnings than previously anticipated, sending shares down 1.8 percent to $36.54 in extended trade.
Volume was modest, with about 7.59 billion shares traded on the New York Stock Exchange, NYSE Amex and Nasdaq, slightly below the daily average of 7.73 billion.
Advancers outnumbered decliners by a ratio of almost 2 to 1 on the New York Stock Exchange, while on the Nasdaq, eight stocks rose for every five that fell.
By Jesse of Jesse’s Cafe Americain
[Note from admin: Jesse has simply nailed this run in PMs, particularly silver. Read his stuff. If you aren't familiar, "Blythe" who he makes reference to is Blythe Masters, head of commodity trading at JPM. It has been alleged that they're short quite a bit of silver.]
Gold Daily and Silver Weekly Charts – Blythe On Her Own In the Cold, Après Ski
Yesterday was options expiration and the precious metals were clubbed mercilessly and clumsily, with little attempt to hide it.
Today the metals markets rebounded strongly after a somewhat weak start.
As I had mentioned I came out of cash and bought the dip in the precious metals sector yesterday, rather heavily, running cash to effectively zero. There was picking up the fallen among those wild tigers, the silver miners, and in some size. Their beta is pretty impressive, and nice when it runs your way.
The buys in the stocks that had fallen to long term support were big fat targets. And they bounced with a vicious flourish today, gaining momentum steadily after the FOMC announcement.
I flipped the hedges early, and just let the metals run into the afternoon, trimming back into the close to raise some cash back again for more opportunistic buys. I like to get my money off the table and let the profits run.
So what next? The formation on the gold chart looks good, and the support on the correction helped to draw the cup of the inverse head and shoulders a little more firmly. Yes there will be draw downs and corrections along the way, but gold looks headed for 1590 and probably beyond, but one leg at a time.
Silver is a juggernaut. I had to force myself to buy heavily in that rugby scrum of a market yesterday and it paid off extraordinarily well.
If they want to be really Machiavellian they’ll hit the metals tonight and tomorrow again, but its getting so old it might not work, and they’ll have to retreat to try and defend another level higher.
And thanks Blythe. You’re the best, baby.
"It's what you learn after you know it all that counts."
John R. Wooden
Expert A: WRONG – int swap beyond 3 years are traded on a SPREAD BASIS meaning there is a cash bond trade IMEBEDDED. I did these trades. Lots of times I had to find the bonds so my trades could happen.
I’ve written many paper on this.
Hedging Mechanics of Interest Rate Swaps > 3 yrs. Duration
Interest rate swaps > 3 yrs. in duration customarily trade as a "spread" - expressed in basis points - over the current yield of a corresponding benchmark government bond. That is to say, for example, 5 year interest rate swaps [IRS] might be quoted in the market place as 80 - 85 over. This means that the 5 yr. swap is "bid" at 80 basis points over the 5 yr. government bond yield and it is "offered" at 85 basis points over the 5 year government bond yield. Let's assume that 5 year government bonds are yielding 1.90 % and the two counterparties in question consummate a trade for 25 million notional at a spread of 84 basis points over. Here are the mechanics of what happens: The payer of fixed rate pays [1.90 % + 84 basis points =] 2.74 % annually on 25 million for 5 years. The other side of the trade - the floating rate payer - pays 3 month Libor on 25 million notional, reset quarterly - typically compounding successive floating rate payments at successive 3 month Libor rates so that actual cash exchanges are settled "net" annually. To ensure that the trade remains a "true spread trade" [and not a naked spec. on rates] and to confirm that 1.90 % is a true measure of where current 5 year government bond yields really are - the payer of the fixed rate actually buys 25 million worth of physical 5 year government bonds - at a price exactly equal to 1.90 % - from the receiver of the fixed rate at the front end of the trade. So, in this regard, we can say that 25 million IRS traded on a spread basis creates a "need" for 25 million worth of 5 year government bonds - because it has a 5 year bond trade of 25 million embedded in it.
- Interest rate swaps of duration < 3 years are typically hedged with strips of 3 month Eurodollar futures instead of government bonds.
In recent years the Chicago Mercantile Exchange [or CME] has developed an interest rate swap - futures based hedging product for the 5 and 10 year terms. I acknowledge the existence of these products but due to their 200k contract size and amounts traded, as reported in archived CME volume data, they do not materially impact the numbers in this presentation.
As demonstrated, Interest Rate Swaps create demand for bonds because bond trades are implicitly embedded in these transactions. Without end user demand for the product – trading for “trading sake” creates ARTIFICIAL demand for bonds. This manipulates rates lower than they otherwise would be. In short, there are not enough U.S. Government bonds IN EXISTENCE to adequately “hedge” J.P. Morgan’s interest rate derivatives book. That’s why we can deduce that these interest rate derivatives are, in fact, the “undeclared” [stealth] central plank of U.S. monetary policy.
Expert B: There were tens of trillions in IR swaps (which incidentally are NOT in any way used in the Treasury market but only to convert fixed to floating and VV) when neither banks nor the fed were loaded to the gills with USTs. There is no synthetic linkage between the UST market and the IR swaps market. If on the other hand you can show a direct correlation between Treasury swaptions and rates then I would be all ears as that is precisely the way the refexive relationship between USTs and a derivative could be impacted.
Expert A: I think you should re consider your assertion. Why don’t you give me a good reason why 5 institutions are taking hundred of trillions worth of settlement risk [bonds settle T + 2] in an environment where they allegedly are afraid to lend overnight funds to one another and interbank lending has virtually come to a standstill???
There are no end users for virtually ANY of this hundreds of trillions in notional trade.
Due to this, bond trades are very difficult to even settle and there are customarily HUGE amounts of “fails” every month:
In this study (an update and revision to our 2007 working paper), we estimate the total value of trade settlement failures in the US bond markets. Analyzing data from multiple sources, we show that the value of settlement failures is rising. Regulatory and market efforts to reduce the problem have been largely unsuccessful. In April 2008 fails todeliver in bond m
No, I don’t feel that my explanation is weak at all. I brokered and documented int. rate swaps off a bond desk that I started for about 8 years. I know what goes into doing these trades. This is a CIRCLE JERK of unthinkable proportions. I think you need to think about it a little bit longer.
Expert B: The assumption that IR swaps is there to simulate UST demand is very week absent aLOT of additional proof.
Expert A: I’ve heard this guy on tv before and he sounded like he knew what he was talking about. However, in this article – HE IS WAY OFF BASE: He states:
“If U.S. finances were really as bad as the commentariat suggest, and have been suggesting for decades, Treasuries would be in freefall.”
This is pure rubbish. The US is insolvent. Interest rates are rigged beyond belief. Market rates of interest should be and historically have been set at the real rate of inflation plus 200 – 250 basis points. We know that real inflation rates are running at approximately 6 % [see John Williams – Shadow Stats – work].
That would put the BASE for market rates of interest for government securities at somewhere near 8.5 %.
So why aren’t rates that high?
OTC interest rate swaps [highlighted in yellow] maturing beyond 3 years HAVE REAL CASH GOVERNMENT BOND TRADES IMBEDDED IN THEM. A very substantial portion of the 120 Trillion identified in the yellow box [principally held by 5 institutions who are VERY close to the FED / Treasury] ARE interest rate swaps maturing in more than 3 years. This int. rate swap edifice acts as a HUGE sponge that soaks up an unbelievable amount of physical government bonds creating artificial scarcity.
We know that these trades can only be for nefarious reasons BECAUSE the Office of the Comptroller of the Currency [OCC] tells us there are NO END USERS for these trades [this is really misdirection because the real “end user” is the Fed to effect U.S. Monetary Policy.
The maintenance of the int rate swap edifice [which at its root is a high frequency bond trading mechanism] creates staggering volume of paper trades in bonds [like the LBMA creates untold volume of trade in paper metal trades] which artificially “SETS THE PRICE” of capital at arbitrary levels.
Sorry Mr. Tamny, THIS IS WHY an insolvent institution like the U.S. Government is able to “borrow” [if you can really call buying your own debt borrowing] at low rates.
It’s the biggest CON JOB the planet has ever seen.