Thursday Dec 23 2010
One trader now owns 80-90% of all the copper in the London Metal Exchange Warehouse. One trader holds as much as 90% of he exchange’s aluminum stocks. In the nickel, Inc, and aluminum alloy markets, single traders own between 50-80% of those metals and one firm has 40-50% of the LME’s tin stockpiles.
WSJ, Dec 22, 2010
Governments led by politicians seek to create the illusion of prosperity. Easy money usually brings inflated prices. Indeed the combination of QE II, lots of money and I coupled with virtually zero cost has resulted in some serious inflation. We present this chart as evidence.
Many observe the increase in the price of lumber, top panel, and copper, in gold center panel, and conclude this is a result of economic strength. But I differ from that conclusion. The re and black bars are the one year Treasury interest rate. Yes, all bottomed in late 2008 as the FED eased money to ‘help’ the situation. But the continued ever-lower cost of borrowing money (.25%) coupled with availability of QE I and II, has resulted in massive speculation Note that copper has exceeded its 2008 high, as has lumber. China has also worked to create the illusion of prosperity. We have featured aerial photos of entire empty cities in Mongolia and China. This, like a massive WPA project from the 1930s, keeps people busy and allows the Chinese to claim their economy continues to grow. But it is an illusion; no one occupies the empty buildings. Likewise speculation continues to run rampant in the economies of commodity producing countries as cotton and coffee prices soar. The same thing happened prior to the 2008 crash. Oil reached $145 that summer, and $35 that fall.
The concentration in not just a few but one hand is reminiscent of the Hunt silver debacle that ran the metal to $50 in 1980. The Exchange raised margin requirements, the Hunts could not meet them, and silver crashed, never having been to $50 since.
The Price of Onions
Thursday’s WSJ has a front page photo of an Indian vendor winnowing out the rotten onions. Yet onion prices are five times normal. One seller reports he used to move 30 bags a day, now a mere 10 bags. If onions are becoming rotten without buyers, why are prices so high?
Presumably supply and demand is working here, higher prices fewer sales. But on the same page, the world in awash in crude an don the next page, hedge funds and investors are buying instruments tied to crude, driving up the price. No doubt there is more demand than last year but..did we mention corn prices set a new 29 month high? This is all reminiscent of the price peaks seen in 2008.
There are other obvious echoes from even the recent past.
Accounting Analysis
Ernst Accused of Lehman Whitewash
WSJ page C1 Dec 22 2010
The parallels with Enron are obvious. The Lehman CFO from 2004-2007 had been a senior manager with Ernst, same for the other CFO. Enron created Special Purpose Entities SPEs to move liabilities off the balance sheet. Lehman created Repo 105s to move assets (sub prime loans) off the balance sheet. Ernst earned more than $185 M in fees over ten years. Lehman was their 8tha largest client, Enron was Arthur Andersen’s largest client. Andrew Cuomo, the NY Attorney General, has filed a civil suit.
The next revelation will be that cities and states have made promises they cannot keep, indeed this has already been revealed on Sixty Minutes no less. One critic suggested that Meredith Whitney was wrong about imminent defaults, noting that debt service is usually less than 10% of municipal budgets. True but, there is not enough money to pay the pensions, pay for essential services, and make the debt service. And, let’s face it, the bond holders don’t vote in the local elections. Pennsylvania has already had to loan capitol Harrisburg money to keep going. I also suspect there will be defaults in the quadrillion dollar derivative market but again that is just speculation on my part.
Deutsche finally settled for its part in the KPMG tax shelter scheme by paying $553.6 M and admitting criminal wrong doing. The once proud Texas law firm of Jenkins and Gilchrist is no more for their part I the scheme. Expect more of this in the next financial debacle.
The New Civil War
One of our consistent themes here is the New Civil War. This time the economy I shifting south. This has been the case since the collapse of NYC in 1976, and the construction of the DFW and Atlanta airports. But again South Gains in Census. The 9.7% population growth for this past decade is the slowest since the Depression. This is in keeping with the social mood, which has turned down; people simply do not increase family size during a recession. Texas has gained four House seats, the unionized Northern states continue to lose their tax paying populations, making the day of municipal default that much closer.
Even on cable television, the question is asked, will states losing populations change their policies to reflect the successful South. Well, after decades of post WW II under performance by the Soviet Block nations, did they change their policies, uh no. Instead they ran their economies straight into the ground. Expect politicians in northern states to continue to do the same.
The Big Picture
The money is still flowing into stocks. This cumulative new high versus new low line means the primary direction of the stock market is still up. Until this and the other internal indicators we show turn down, the bulls are in charge.
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