Monday, May 2, 2011

Silver Plunges On China Slowdown Concerns, Dollar Short Covering

In early trading, silver is down nearly 20% from Friday highs, and just under 15% from its Friday closing fixing, hitting just over $42 in a slide of $6 commencing just after 18:25 pm. The reason for the collapse is not immediately clear, although concerns of a Chinese slowdown and overtightening are rumored to have been among the culrpits. The circumstantial evidence is in the OZ pairs, with the AUDUSD which has long been a high beta proxy for China plunging in early trading as well. Oddly enough, gold has been spared most of the carnage in silver, and was down about 1% in early trading. Overall, this appears to be nothing more than a short covering episode in the USd provoked by nothing factual. We will keep an ear open for any incremental data to determine if there is any actual reason for the plunge, such as for example that the BOJ has suddenly decided not to pick up the baton in trillions of monetizations over the next few months, instead of just another bout of technical selling.


And China-Dollar:

Here is Goldman providing some more color on the Chinese slowdown

April PMI readings suggest weaker growth...

Although the official NBS/CFLP and HSBC/Markit PMIs are supposed to be seasonally adjusted already, they both showed seasonality in their historical April readings (the seasonality in the HSBC/Markit PMI is a lot less consistent and significant than the official one). Considering the seasonal bias, the lower reading in the official PMI and unchanged reading in the HSBC/Markit PMI suggest manufacturing activity growth weakened in April.

...and lower upstream inflationary pressures

The latest reading of the Input Price sub-index (note this is a reference index which does not enter the calculation of the headline PMI), which is highly correlated with the sequential reading of PPI inflation (see Exhibit 4), suggests the latter is likely to show further moderation in April as well. At the same time, with the softening of food (especially vegetable) prices, we are likely to see a meaningfully lower CPI inflation reading as well, perhaps to around 5.0% yoy, down from 5.4% yoy in March.

We believe the underling growth momentum indeed has been trending down despite some data issues...

There have been some controversies regarding the relative reliability of the PMIs versus official “hard” data such as industrial production (IP) as a gauge of manufacturing activities. In March, the PMIs apparently were not strong considering seasonality (headline official PMI went up but much less than the rise in March data historically), but hard data almost across the board showed stronger growth than in January-February. We believe the difference might be the result of unstable seasonal factors in the PMIs and other data complications such as the Lunar New Year effects which often distorts monthly data within the first quarter of the year and changes to statistical standards in terms of official IP/fixed asset investment data (see China: March PMIs suggest activity growth continued to moderate, Asia Economics Data Flash, April 1, 2011 for further details) . Besides, the equal weighting methodology of the PMIs meant when small enterprises move differently from large companies, the PMIs would tend to reflect their changes more than hard data such as IP. Having said that, we believe the trend of the two PMI series is generally reliable and they have both been on a downward trend since reaching a peak in 4Q2010 and there is no clear sign of an imminent change to that trend yet. Within 1Q2011, growth in March probably had a rebound but it appears to be a temporary one.

...driven by continued policy tightening and increasingly prevalent power shortages and possibly a slowdown in exports growth

Our channel checks with commercial banks suggest their lending activities have been under continued pressure from regulators in April. At the same time, there have been increasing anecdotal information on the rise in the actual lending rate (commercial banks are free to charge interest rates above the official benchmark lending rate without a ceiling) as a result of the various quantitative controls. Apart from these conventional monetary tightening tools, the government also seems to be broadening the width of tightening by imposing additional administrative controls on investments in aluminum smelting and production in energy-intensive sectors as a result of the increasingly prevalent power shortage in the country which tends to slow domestic demand growth. Besides, the Export Order sub-index of the PMI has been falling rather quickly since the start of the year which deserves a high level of attention though so far it is somewhat at odds with other information such as our Global Leading Indicator which has been a reasonably good leading indicator of exports growth and it has not shown any meaningful softening.

There are no signs of an over-tightening as yet

Despite the softening of the PMIs, they both stayed clear of the 50% threshold and there has been no dramatic fall in other major economic indicators either. While the 50% threshold may mean something different in China than in many other countries as China’s trend level of PMIs appears to be higher, a slightly below trend level growth is what we would regard as appropriate given there is still a clear need for the Chinese economy to lower its level of inflation.

We expect this policy stance to be kept largely unchanged in 2Q2011 compared with 1Q2011 and the downward trend in activity growth and underlying inflation is likely to continue

We believe given the level of CPI and PPI inflation is still above the government’s comfort zone and activity growth appears to be holding up at a healthy level (yoy activity growth may actually rise further because of a low base in 2Q2010), the growth-inflation combination will mean policy makers are likely to continue to keep the policy stance comparable to 1Q2011 (not March, as the policy stance in January-February was much tighter than it was in March). More meaningful changes to the policy stance will likely come in 2H2011 as yoy CPI inflation is likely to start trending down as a result of a change in base and the expected sequential slowdown.


Bob Chapman - 04-29-2011

Bob Chapman : everybody in the world should go out and buy at least an ounce of silver let's help Max Keiser's campaign of 'Buy Silver Crash JP Morgan ' ...Gold and Silver are the safest place to be not the real estate or the stock market says Bob Chapman of the International forecaster

Stocks Keep Rising as Dollar Dips Prepare to take profits soon as sell signals gather

In recent years the equity and commodities markets have been controlled by the U.S. Dollar, though the relationship is an inverse one. That is, when the dollar rises, equities and commodities drop, and when the dollar falls, the two go up.

It appeared earlier this week that the equities market had a lot of strength and it looks as though it still has more power behind it.

Dollar Index
On Wednesday the U.S. Dollar went into a free fall, blowing through my downside price target of $73.30. It was this sharp drop in the Dollar which sent stocks, silver and gold soaring higher yet again in our favor.

Equities Market – SPDR S&P 500 (NYSE: SPY)
Before that sell off in the dollar, I did see fear creep into the market as traders started selling their shares and buying put options expecting the stock market to fall. When I saw this I got excited because it meant higher stock prices were just around the corner. That’s just what happened and that’s when I sent an update out to subscribers noting we should see some fireworks very soon.

While I am bullish on the stocks and metals at the moment and long in several positions I am starting to see signs that a pullback is becoming more likely each trading session. This is when money management is important. I do not want to give back too much profit, but I must make sure we lock in some gains during times when the market is overbought like this.

We continue to ride the trend of higher stock and precious metal prices as the U.S. Dollar spirals down. Our S&P 500 positions are deep in the money and we continue to ride it for all it’s worth, raising our stops as we go.

The big question is if the “Sell in May and Go Away” axiom will take shape or not. I’m thinking it will as when the time is right I will be looking to short the market.

Michael Hasenstab, Morningstar’s 2010 Fixed-Income Manager of the Year: Avoid Treasuries

Kiplinger's Personal Finance - June 2011

Kiplinger's Personal Finance - June 2011
English | 84 pages | HQ PDF | 60.00 Mb

Bernanke’s Speech Brings Inflation to the Forefront…Sort Of

“Our interpretation of the increase in gas prices is the economist’s basic mantra of supply and demand,” mused chairman Ben Bernanke yesterday during his first-ever regularly scheduled press conference.

At that moment, the price of oil reached a new post-2008 high.

This morning, it’s pulled back a bit, but not much. A barrel of West Texas Intermediate goes for about $113.15 right now.

“The Federal Reserve believes that a strong and stable dollar is both in the American interests and in the interest of the global economy,” he also said.

At that moment, the dollar index reached a new post-2008 low.

This morning, it recovered…barely…and clings to 73 by some very closely clipped fingernails.

Back when Bernanke signaled the advent of a new round of easy money – QE2 – during his annual speech at Jackson Hole, Wyo. last August, oil was $75 and the dollar index was at 83…

Performance of Oil and the Dollar Index Since Jackson Hole Speech

We agree it’s, as Bernanke points out, due to supply and demand, but perhaps not in the sense he meant.

“He never admits it’s the inflation of the money supply that’s the problem,” Rep. Ron Paul told MarketWatch yesterday, after putting himself through the mild torture of watching the news conference.

“The [Federal Open Market] Committee expects the effects on inflation of higher commodity prices to be transitory,” spake the chairman.

The Fed can no longer assert “inflation” is a nonissue. So the line now is that it’s a “temporary” one.

But even the Fed now admits that consumer prices will likely rise this year higher than the Fed would like. After wrapping up its two-day meeting yesterday, the Fed’s Open Market Committee forecast a headline CPI between 2.1% and 2.8% during 2011.

That’s higher than their original target zone of 2%.

(Yes, it’s the Fed’s goal for your money to be worth 18% less over a 10-year span. And true, that doesn’t seem to fit in with the Fed’s mandate of “stable prices” or their stated belief in a “strong dollar”… but that’s a story for another day. And not to worry, the Fed informs us, CPI will magically return to a 1.4-2% range in 2012.)

“I do believe that the second round of securities purchases [QE2] was effective,” Bernanke said. “We saw that first in the financial markets. The way monetary policy always works is by easing financial conditions. We saw increases in stock prices.”

And there it is… the wealth effect, writ large. The Fed favors the stock market. Savings and investment in a traditional sense be damned.

“Hear, hear!” cheered stock traders, who brought the Dow and S&P to new post 2008 highs. This morning, both indexes have added to those gains and the Dow is now a hair above 12,700.

In sum, the higher inflation target was the news nugget that made its way out of the back end of Bernanke’s dog and pony show yesterday.

Everything else was status quo: Zero-interest rate policy remains in effect… and the $600 billion in new Treasury purchases at the center of QE2 will proceed as scheduled through the end of June… after which the Fed will continue rolling over existing debt to make this chart go flat, at least for a while…

The Fed's Balance Sheet Since the Start of the Credit Crisis

As an aside: The word “gold” did not slip from the chairman’s tongue once while he held court. But the spot price powered to its own new all-time high… and sits still there now at $1,534.

Silver busted through $48 as the chairman spoke. This morning the blaise metal has powered its way to $49.08. Meaning today could be the day the 1980 record of $50 finally goes down.

Where to from here? If the past is prologue, we’re due for something along the lines of when QE1 ended in early spring last year: The S&P fell 13%… and the VIX, the market’s “fear gauge,” zoomed up 48%. Then in August, Ben gave his Jackson Hole speech, and the rest is history.

We figure the Fed will lather, rinse… and repeat: Wait for the stock market to correct, and then launch QE3.

For reference, the S&P is up 28% since, and the VIX is below 15 as we write – as low as it’s been since mid-2007.

5 Reasons to Shift Into Car Dealer Stocks: LAD, AN, KMX, GPI, SAH, PAG, ABG

When it comes to betting on the automotive sector, nothing’s as wild as the dealer. Auto manufacturers may have their stops and starts, but shares of major car dealer chains are on a tear – prices of the right stocks have risen as much as 193% since last July.

Top names in the sector include: Lithia Motors (NYSE:LAD), AutoNation (NYSE:AN), CarMax (NYSE:KMX), Group 1 Automotive (NYSE:GPI), Sonic Automotive (NYSE:SAH), Penske Automotive Group (NYSE:PAG), and Asbury Automotive Group (NYSE:ABG).

One way to sift through these stocks is to use price-to-earnings-to-growth (PEG) ratios, which measure valuation in the context of expected growth, may be even better. A PEG ratio of less than 1 points to an undervalued stock, while a PEG ratio of more than 1 indicates a stock price higher than the company’s earnings growth.

Asbury has the lowest PEG ratio at 0.4;. Lithia, Group 1, and Sonic all have PEG ratios of 0.6. AutoNation’s PEG ratio is 1.0. CarMax is higher than its peers at 1.32. That’s probably a long way of saying that there’s still good upside potential in this group of stocks.

Of course, the sluggish first-quarter economic data released on Thursday may dampen investors’ spirits. The U.S. economy posted an anemic 1.8% growth rate in the first three months of 2011, pressured by higher gas and food prices. A further buzz-kill: new unemployment claims rose by 25,000 last week. Economists had expected them to drop by 12,000.

Still, one quarter with stormier than expected stats does not, on it’s own, sink retail auto sales. In fact, here are five reasons shares in these companies are still a pretty good bet.

1. Fewer Cars = Higher Margins. The triple disaster in Japan will reduce short-term inventories on some of the most popular vehicle models from Toyota (NYSE:TM), Honda (NYSE:HMC) andNissan. The disaster already has taken a heavy toll on production in Japan — Toyota alone lost 62% of its vehicle output in March.

2. Higher Gas Prices. I know, that logic seems crazy. And in truth, higher gas prices are never a good thing for the economy. But Paul Taylor, chief economist for the National Automobile Dealers Association recently said that higher gas prices will fuel consumer demand for small cars and hybrids. The rule holds true both for new and used cars. Because there were fewer new car purchases or leases during the 2007-2009 recession years, there are fewer used vehicles available now. That means higher prices for buyers and better margins for dealers.

3. Pent-up Demand. The recession’s sharp pullback in consumer confidence – and spending – is rebounding. During those recession years, consumers were content to fix up the old jalopy rather than drop a lot of cash on a new model. But the economy is improving (albeit with stops and starts). And consumer spending did increase by 2.7% in the first quarter, “well above the consensus estimate of a 2% gain,” Goldman Sachs noted on Thursday.

4. Credit Availability. Consumers are finding it a little easier to get credit and the auto lending market is growing more competitive. That makes it far easier for consumers to “sign and drive” their dream cars off the dealer lot.

5. Technology-assisted Sales. After the huge shakeout in the auto retail space, dealers have made great strides toward using technology to more cost effectively manage inventory and market vehicles. Giving consumers the power to access vehicle information online and essentially comparison shop through independent sites like is improving dealers’ business models and positioning them for strong future growth.

Cheney got something right

"Deficit terrorists" are gutting governments and forcing the privatization of public assets, all in the name of "deficit reduction". But deficits aren't actually a bad thing. In today's monetary scheme, in which most money comes from debt, debt and deficits are actually necessary to have a stable money supply. The public debt is the people's money.

Former vice president Dick Cheney famously said, "Deficits don't matter." A staunch Republican, he was arguing against raising taxes on the rich; but today Republicans seem to have forgotten this maxim. They are bent on stripping social programs, privatizing public assets, and gutting unions, all in the name of "deficit reduction".

Worse, Standard & Poor's has now taken up the hatchet. Some bloggers are calling it blackmail. This private, for-profit rating
agency, with a dubious track record of its own, is dictating government policy, threatening to downgrade the government's long-held triple AAA credit rating if congress fails to deal with its deficit in sufficiently draconian fashion. The threat is a real one, as we've seen with the devastating effects of downgrades in Greece, Ireland and other struggling countries. Lowered credit ratings force up interest rates and cripple national budgets.

The biggest threat to the dollar's credit rating, however, may be the game of chicken being played with the federal debt ceiling. Nearly 70% of Americans are said to be in favor of a freeze on May 16, when the ceiling is due to be raised; and Tea Party-oriented politicians could go along with this scheme to please their constituents.

If they get what they wish for, the party could be over for the whole economy. The Chinese are dumping US Treasuries, and the Fed is backing off from its "quantitative easing" program, in which it has been buying federal securities with money simply created on its books.

When the Fed buys Treasuries, the government gets the money nearly interest-free, since the Fed rebates its profits to the government after deducting its costs. When the Chinese and the Fed quit buying Treasuries, interest rates are liable to shoot up; and with a frozen debt ceiling, the government would have to default, since any interest increase on a US$14 trillion debt would be a major expenditure.

Today the Treasury is paying a very low 0.25% on securities of nine months or less, and interest on the whole debt is about 3% (a total of $414 billion on a debt of $14 trillion in 2010). Greece is paying 4.5% on its debt, and Venezuela is paying 18% - six times the 3% we're paying on ours. Interest at 18% would add $2 trillion to our tax bill. That would mean paying three times what we're paying now in personal income taxes (projected to be a total of $956 billion in 2011), just to cover the interest.

There are other alternatives. Congress could cut the military budget - but it probably won't, since this option is never even discussed. It could raise taxes on the rich, but that probably won't happen either. A third option is to slash government services. But which services? How about social security? Do you really want to see Grandma panhandling? Congress can't agree on a budget for good reason: there is no good place to cut.

Fortunately, there is a more satisfactory solution. We can sit back, relax, and concede that Cheney was right. Deficits aren't necessarily a bad thing! They don't matter, so long as they are at very low interest rates; and they can be kept at these very low rates either by maintaining our triple A credit rating or by borrowing from the Fed essentially interest-free.

The yin and yang of money
Under our current monetary scheme, debt and deficits not only don't matter but are actually necessary in order to maintain a stable money supply. The reason was explained by Marriner Eccles, governor of the Federal Reserve Board, in hearings before the House Committee on Banking and Currency in 1941. Wright Patman asked Eccles how the Federal Reserve got the money to buy government bonds.
"We created it," Eccles replied.
"Out of what?"
"Out of the right to issue credit money."
"And there is nothing behind it, is there, except our government's credit?"
"That is what our money system is," Eccles replied. "If there were no debts in our money system, there wouldn't be any money."

That could explain why the US debt hasn't been paid off since 1835. It has just continued to grow, and the economy has grown and flourished along with it. A debt that is never paid off isn't really a debt. Financial planner Mark Pash calls it a National Monetization Account. Government bonds (or debt) are "monetized" (or turned into money). Government bonds and dollar bills are the yin and yang of the money supply, the negative and positive sides of the national balance sheet. To have a plus-1 on one side of the balance sheet, a minus-1 needs to be created on the other.

Except for coins, all of the money in the US money supply now gets into circulation as a debt to a bank (including the Federal Reserve, the central bank). But private loans zero out when they are repaid. In order to keep the money supply fairly constant, some major player has to incur debt that never gets paid back; and this role is played by the federal government.

That explains the need for a federal debt, but what about the "deficit" (the amount the debt has to increase to meet the federal budget)? Under the current monetary scheme, deficits are also necessary to avoid recessions.

Here is why. Private banks always lend at interest, so more money is always owed back than was created in the first place. In fact investors of all sorts expect more money back than they paid. That means the debt needs to be not only maintained but expanded to keep the economy functioning. When the Fed "takes away the punch bowl" by tightening credit, there is insufficient money to pay off debts; people and businesses go into default; and the economy spins into a recession or depression.

Maintaining a deficit is particularly important when the private lending market collapses, as it did in 2008 and 2009. Then debt drops off and so does the money supply. Too little money is available to buy the goods on the market, so businesses shut down and workers get laid off, further reducing demand, precipitating a recession. To reverse this deflationary cycle, the government needs to step in with additional public debt to fill the breach.

Debt and productivity
The US federal debt that is setting off alarm bells today is about 60% of gross domestic product (GDP), but it has been much higher than that. It was 120% of GDP during World War II, which turned out to be our most productive period ever. The US built the machinery and infrastructure that set the nation up to lead the world in productivity for the next half century. We, the children and grandchildren of that era, were not saddled with a crippling debt but lived quite well for the next half century. The debt-to-GDP ratio got much lower after the war, not because people sacrificed to pay back the debt, but because the country got so productive that GDP rose to meet it.

That could explain the anomaly of Japan, the global leader today in deficit spending. In a CIA Factbook list of debt to GDP ratios of 132 countries in 2010, Japan topped the list at 226%. So how has it managed to retain its status as the world's third largest economy? Its debt has not crippled its economy because:
(a) the debt is at very low interest rates; (b) it is owed to the people themselves, not to the International Monetary Fund or other foreign creditors; and
(c) the money created by the debt has been used to produce goods and services, allowing supply and demand to increase together and prices to remain stable.

The Japanese economy has been called "stagnant", but according to a review by Robert Locke, this is because the Japanese aren't aiming for growth. They are aiming for sustainability and a high standard of living. They have replaced quantity of goods with quality of life. Locke wrote in 2004:
Contrary to popular belief, Japan has been doing very well lately, despite the interests that wish to depict her as an economic mess. The illusion of her failure is used by globalists and other neo-liberals to discourage Westerners, particularly Americans, from even caring about Japan's economic policies, let alone learning from them. [And] it has been encouraged by the Japanese government as a way to get foreigners to stop pressing for changes in its neo-mercantilist trade policies.
The Japanese economy was doing very well until 1988, when the Bank for International Settlements raised bank capital requirements. The Japanese banks then tightened credit and lent only to the most creditworthy borrowers. Private debt fell off and so did the money supply, collapsing the stock market and the housing bubble. The Japanese government then started spending, and it got the money by borrowing; but it borrowed mainly from its own government-owned banks.

The largest holder of its federal debt is Japan Post Bank, a 100% government-owned commercial bank that is now the largest depository bank in the world. The Bank of Japan, the nation's government-owned central bank, also funds the government's debt. Interest rates have been lowered to nearly zero, so the debt costs the government almost nothing and can be rolled over indefinitely.

Japan's economy remains viable although its debt-to-GDP ratio is nearly four times that of the United States because the money does not leave the country to pay off foreign creditors. Rather, it is recycled into the Japanese economy. As economist Hazel Henderson points out, Japan's debt is twice its GDP only because of an anomaly in how GDP is calculated: it omits government-provided services. If they were included, Japan's GDP would be much higher and its debt to GDP ratio would be more in line with that of other countries.

Investments in education, healthcare, and social security may not count as "sales", but they improve both the standard of living of the people and national productivity. Businesses that don't have to pay for healthcare can be more profitable and competitive internationally. Families that don't have to save hundreds of thousands of dollars to put their children through college can spend on better housing, more vacations, and other consumer items.

Turning the national debt into a public utility
Locke calls the Japanese model "a capitalist economy with socialized capital markets". The national debt has been "monetized" - turned into the national money supply. The credit of the nation has been turned into a public utility.

Thomas Hoenig, president of the Kansas City Federal Reserve, maintains that the largest US banks should be put in that category as well. At the National Association of Attorneys General conference on April 12, he said that the 2008 bank bailouts and other implicit guarantees effectively make the too-big-to-fail banks government-guaranteed enterprises, like mortgage finance companies Fannie Mae and Freddie Mac. He said they should be restricted to commercial banking and barred from investment banking.

"You're a public utility, for crying out loud," he said.

The direct way for the government to fund its budget would have been to simply print the money debt-free. Wright Patman, chairman of the House Banking and Currency Committee in the 1960s, wrote:
When our Federal Government, that has the exclusive power to create money, creates that money and then goes into the open market and borrows it and pays interest for the use of its own money, it occurs to me that that is going too far. ... [I]t is absolutely wrong for the Government to issue interest-bearing obligations. ... It is absolutely unnecessary.
But that is the system that we have. Deficits don't matter in this scheme, but the interest does. If we want to keep the interest tab very low, we need to follow the Japanese and borrow the money from ourselves through our own government-owned banks, essentially interest-free. "The full faith and credit of the United States" needs to be recognized and dispensed as a public utility.

Ellen Brown is an attorney and president of the Public Banking Institute, In Web of Debt, her latest of 11 books, she shows how a private cartel has usurped the power to create money from the people themselves, and how we the people can get it back. Her websites are