Let's gather for the Chinese New Year and tell stories around the bank campfire

              Imagine there is a tinder and wood filled "log cabin style" campfire that has been constructed, but not lit. Lets call it the bank campfire.   Let's call the firewood "derivatives" and "investment products for the public"   Every minute that goes by without the fire being lit, the stack keeps getting bigger.   But the common people in camp need warmth (economic freedom) so they start to light personal campfires (Ukraine, Thailand, turkey etc.)  The sparks of this unrest are floating dangerously close to the bank campfire. The US fed bank was the assigned fire tender.  The somewhat shady Chinese central bank also has water buckets, but they are leaving in a few hours for a weeklong New Year holiday....

 
      The firewood represents derivatives: complex instruments known as repo loans, gold lease arrangments, interest rate swaps, and mortgage backed securities.  The fuelwood  for the fire also comes in the form of fancy investment products, high frequency trading and other flammable items.

 

To illustrate the fire danger, let's look at a forecaster of consumption: "The Baltic Dry Index"   THe BDI averages the rate international supertankers (ships) are receiving for "dry goods cargo" (Goods that fit in a shipping container).  When the rate goes down, that means demand for space and is slowing down.  Here is a chart of recent BDI rate since 2011.  Note the recent fall.

 

  Since cashflow payments are the drivers of profit in the bank campfire, it is a Growth Driven system, that requires growth of the fuel wood pile in order to avoid defaults and collapse.  It is an inflation based system that is predesigned to fail.  When it fails, bailouts allow the rich to get richer and wipe out the independent guy. 

Unrest and currency collapse overseas, The CIA, and the US DOLLAR

Instability creates dollar demand, and keeps the value high, in the wake of increase in the dollar supply.

The U.S financial interest lies in creating demand for new dollars, so they can keep producing them to pay their debts.  During currency collapses: Serbia in 1992 and  Argentina in 2001 for example,  citizens of those countries turn to paying in dollars instead of their own currency, because it is widely available and more stable.  In times of crisis, most black market trades are done in dollars.  Anyone who has travelled overseas to a 2nd or 3rd world country knows the dollar is preferred for trade and savings by street hawkers.   The same goes for a collapsing developed economy like Argentina, Ukraine, or Serbia.   Taken together, dozens of unstable 1st 2nd and 3rd world economies have a massive demand for dollars and dollar trade which may equal the demand for USD by economic activity within our borders.    When wars and country bankruptcies happen, not only does the dollar gain new users, then US COMPANIES come in WITH dollars in hand, and as the dust settles, BUY UP ALL THE PRODUCTIVE ASSETS IN THOSE COUNTRIES: factories, farmland, heavy equipment, WITH DOLLARS.  Thereby robbing the people of their capacity to restore their own capitalist economy.  

Anecdotal travel experiences confirm consumer is not spending and local government is getting dumber

good thing I shorted the market on tuesday. There are things that I'm seeing on my travels that may help myself and others to get a sense of the consumer and real estate markets -  first person experiences I am having with Americans:

  When I was in Michigan trimming trees after the ice storm, I was surprised that MOST of the suburban homeowners of half acre, 2000 sq ft homes with trees can't afford the cost of a simple "hazard reduction" tree trimming job.  IN FACT, the travelling ragtag tree trimmer crews who came to Lansing to work in the affluent suburbs seem better off financially than the homeowners!  If one studies it, the tree guys had short and long term income potential, by virtue of a productive, gainful employment skill whereas the Lansing residents seemed to have financial anxiety and depression.  Something is wrong with the local economy when upper middle class homeowners cannot afford $700 to cut down a dangerous tree that may fall during the next thunderstorm on their house.

Another telling anomaly I discovered in Lansing, Michigan was that the the towns of greater metro area were publishing debris pickup dates for residents to place branches on the curb for recycling, and the towns were sending the organic debris to the landfill!  Tree branch chips are the most valuable and cheapest, most proliferate natural compost for any gardener.   They are also a great source of renewable, stored energy.  And, as I found out, there was a 100 million dollar wood chip/natural gas power plant project developed by the power company and the city of Lansing, which had recently gone into service. It was the pride of the papers.   I called towns to ask why, when chips can be used at the power plant, or easily sold as composting mulch to farmers or landscapers, were the chips being landfilled.  The answer was that the wood chip power plant was overwhelmed with material and that neither the dump or city procurement offices had the appropriate leasable land to store the chips until spring, so they were being landfilled.  It sounded to me like an inside job!

Health insurance companies are in chaos

I have spoken with people who work at large health insurance companies, which are mostly located in my metropolitan area.  The conversation goes like this.
     "How is the Affordable Care Act affecting your business?  
   And teh stock answer is: "It's causing chaotic reorganization (eyeroll)"

      Now imagine a world of software programs, billing specialists and call centers having to recode half the software and retrain every employees according to 10,000 pages of rules.  And then having the rules change each week, by executive order.  I suspect there is  a massive loss of productivity and increased labor costs for retraining.

Intro to Dumb Money vs Smart Money

 Smart money is people who either have direct insider information (legal or otherwise), or can make a market turn in their favor through  big money movements and purchases.
       For example:  JP Morgan who owns massive commodity warehouses and makes large market moving trades on the commodity markets is a  smart money force. 
  Congresspeople, who insider-trade their own committee decisions before announcing them to the public is also a smart money action (legal). 
Saudi sovereign wealth funds and Saudi Princes who get guarantees from the FED and  rich warrants to loan to American banks in a crisis are smart money.
 Ted Turner with millions of acres of ranch and mining land is smart money. 
   The rest of us retail investors don't have the connections or the advisors to be smart money and we must play catch up to ride the coattails of smart money actions.  We should consider ourselves to be dumb money, lest we develop hubris and don't foresee government interventions in our trades. 
        The big advantage of being dumb money is that our investments are agile and anonymous.  A billion dollar sale of banking stock raises eyebrows and takes a few days to transact, but a $600 option purchase is immediate and silent.  What I do is try to find underground news affecting stocks and commodities,  survey my market gurus regarding the asset in question, and analyzie price and volume data for patterns.  Then we make a trade that may be WITH smart money, rather than with CNBC Cramer watching, "dumb money" retail investors.    There is no way around it:  Mutual Funds, retirement account managers are dumb money and underground, inside information media is smart money.    Smart money doens't have a dollar denomitated retirement account.  They have a silver mine, a farm, a 100 condo development, a stripmall and a ranch, an oil well, just to be diversified for retirement.  NOTHING is in stocks long term for them.  It is a cycle of accumulation of stocks when dumb money is fearful and distribution of stock when dumb money turns confident.  And we have crested the bell curve from accumulation to distribution zones.     I will explore more about this "smart money distribution dome" in a later post.

Healthcare.gov has a debilitating security issue that made me think about Options ideas for healthcare individual insurers

   Healthcare.gov is very easy to hack, credit card payments in jeopardy

It turns out that the personal and possibly health history information of those who signed up online at healthcare.gov, is retrievable by hackers in less than 5 minutes of hacking.  This video plays a government IT security expert's testimony to congress on this point.  This is terrible news for the planned credit card online payment rollout next month.
     On the heels of the Target disaster, people who were going to pay for their insurance with a debit or credit card will be afraid to be exposed.  Target affected something around 70 million card users, which is at least a third of all people with a debit or credit card, considering the total US population is around 350 million.
      It's likely in the next few days the Executive branch (OBAMA) will realize this and delay online payments.   Included in the statistics of currently enrolled people are people who enrolled but haven't paid their premium and were planning to do so by debit/credit card.  When those people fail to pay, the plan cancels, removing them from the overall statistic.   Enrollment numbers therefore are inflated in a way that the mass media and analysts of publicly traded insurance companies don't yet take into account.  This is bad news for the beneficiaries of ACA, the large health insurers.
     Another reason portending decline of health insurance companies is their dependance on a 75% stoploss bailout provision of the Affordable Care Act.  It states that the federal government will reimburse 75% of losses after the first 8% loss when payouts to doctors and hospitals exceeds revenue from premiums.   At this point, the health insurers are guiding earnings and internally speaking about the bailout provision as a very lucky and necessary thing, because they know the ACA is failing.  The executives at UNH and AET for instance, know that payouts will exceed revenue based on enrollment numbers and demographics being at least the WORST CASE SCENARIO that they originally would have projected.  With a bailout, we cross into the realm of politics rather than law!
    Congressional law can be chagned by new congressional law, and the American taxpayer will soon realize that they are bailing out politically unpopular Obamacare by bailing out the health insurance companies. 
    "Health insurers are evil large corporations that need to be controlled" was one of the main battle cries to get Obamacare passed.  Of course, it was supported by evil health insurers too because assured guaranteed profit to them.  Now we have the political sentiment of "large corporations are evil" which will never go away, as a foundation of the democratic voting bloc.  And we have an unpopular healthcare law that is alienating many middle class democrat voters who are losing their insurance personally, or can see the flawed economic model finally.  And the result is there is not enough political will to undertake a health insurance bailout.  The 24 hour news cycle will be all over this issue, and when the bailout provision is rejected, expect public health insurance stocks head down very sharply.
      I will be giving you, the subscriber "peer around the corner" news on trends that haven't yet been taken into consideration by the markets.   I regularly interact online with dozens of "guru" blogs to try to connect the dots of likely black swan events for stocks and commodities.    I speak with people in different metropolitan economic zones of the United States and travel the country in person to bring my perspective to view market trends invisible to provincial New York and Chicago traders.

The 

-Andrew James

US gov't will decide who can be a farmer and who can't

A New US law under consideration will restrict the sale of the most commonly used fertilizer for crops, ammonium nitrate to those approved by the department of homeland security.  This is in response to the Norway bombings.  Homeland security will decide who can be a farmer, who can grow their own food and who can't.  This is a terrible development threatening the sovereignty of our nation.  The ability to grow one's own food and have access to the materials required to do so is as important as the individual's right to bear arms.  it is the basic liberty of human existence, to be able to farm land that you own.   If they didn't restrict fertilizers after they were used in the oklahoma city bombing, why now

twelve year distribution dome patter emerges with highly irregular inverted peak

This is the greatest development this week that I have come across.  The week of March 9th 2003 the lows of the tech crisis in the dow were reached.  There then began a major quantitative easing, and rise in the index until 14000 in october 2007.  Then a crash to march 9th 2009, exaclty 6 years later.  now we have retested 13000 on the dow and came way back from that.  On the ten year chart there appears to be a 12 year distribution dome starting march 9th 2003 with an inverted peak march 9 2009 at the 6626 dow low.  what is the significance of a twelve year distribution dome with an inverted peak?  Comments welcome.

Swiss gold buying to get back to their stated intention of a gold standard

 The swiss are the only countyr that can feasibly get back to a gold standar quickly.  With torrential deposits from european wealthy tax evaders fearing bank account seizure, they are probably buying gold now.  They have to get back to 40% of currency.  They will not increase currency supply, because it would make the 40% more unattainable.  Unlike japan or US which don't care to try for a gold standard, and are actively increasing the money supply and discussing how to do it more.

From Wikipedia: "The Swiss franc has historically been considered a safe-haven currency with virtually zero inflation and a legal requirement that a minimum of 40% be backed by gold reserves.[9] However, this link to gold, which dates from the 1920s, was terminated on 1 May 2000 following a referendum.[10] By March 2005, following a gold selling program, the Swiss National Bank held 1,290 tonnes of gold in reserves which equated to 20% of its assets.[11]" 

I BET THEY'RE BUYING GOLD NOW WITH ALL THE EUROPEAN TAX EVADERS NEW DEPOSITS

debt deal to come before asian market open

Republican John Boehner and Obama were told by Tim Geithner that they need to come up with a plan before Asian markets open sunday evening in order to avoid a strong market reaction.  Boehner has also said that Democrats and Republicans need to come up with a detailed legislative proprosal by July 27th in order to give both houses (Senate and Representatives) enough time to organize and vote on the bill by August 2nd.
In other news, investment analysts have said that the IRS took in more revenue than expected over the past month, meaning there may be enough money to extend default another week in case a bill doesn't get passed.

I don't believe they will be able to come to an agreement on paying the treasury bill.  I am wondering whether this will cause an increase or decrease in copper and precious metals.  The tea party is firm in their beliefs.  None of the tea party republicans agreed with the original bank bailouts that lead us to this debt.  Although the banks have paid back the money, we didn't pay down the debt the US issued to give it to them.  Now that republicans are in control, no more bailouts for these republicans and they are holding firm.  Most tea party republicans live far away from washington and new york where the pain will be felt the most of default.  They live in midwestern states, whose economies will not be destroyed by financial instruments that will go down in a default.   The reaction in the long run will be better, as the economy will start to improve after the initial downfall, and people will have more confidence in US debt if we lower it.

What's going to happen in commodity prices

If you follow our posts on commodityworldnews.com you will see there is a new demand pressure on the gold and silver market.  An asian marketplace has opened in 2011 and last friday small futures contracts for gold and silver became available through 350 million Bank of China savings accounts.  Anyone with a Bank of China savings account has access to these 10 oz gold future contracts.  The exchange is located in Southwest China, the video is available in my previous post.  Due to this development and the massive bailouts about to happen in Europe, gold and silver will continue to go up.  Corporate earnings are coming out next week, and  if US earnings numbers come out poor, the prices of commodities will retreat (with the exception of copper and nickel as monetary metals.)  If earnings come out neutral or positive, it will be a matter of time before they will be bad, and when that happens commodity prices will fall hard.
           Another downward pressure on a segment of commodities, underreported but discussed in a previous post, is the incredibly great growing season in the Northeast and Midwest for farms.  Due to record high prices in April and May reports are in that US farmers planted the most combined acreage for corn, wheat, rice, and soybeans ever, and the weather has been PERFECT FOR GROWING.  If there are no anomalies the rest of the season, a  bumper harvest in everything planted. I see firsthand effects of this in my landscaping business, bushes and gardens in full sun are growing at surprising rates.  I am going to trim certain full sun hedges four times this year, that I previously trimmed only twice a year.  And because the farmland east of the mississippi is the best producing farmland in the world, the growth rates this year will keep world food prices from rising above $6.50 per 60 lbs for corn or spring wheat.  We have had the hottest season in 100 years east of the mississippi in 2010, and the rainiest year in 100 years in 2009.   Now we will have one of the best growing seasons in a 100 years.  Also, with the good harvest, farmers will be able to buy large new equipment and prepare more land for next year, keeping food prices in check and farms profitable.
      In the short and intermediate term prices of everything but food prices will inflate upward.  When  corporate earnings turn south this quarter or next year, commodity indexes will be cut in half from their highs while only monetary metals will continue way up.  Stock prices will follow the commodity indexes down by half.   But the Dow Jones and S&P (priced in dollars, not gold) could hit new highs with all the government bailouts and liquidity infusions before this happens.  The only thing moving sharply up now is monetary metals (best bets are gold and silver)  Food prices may fall sharply when the harvest numbers come in and there is a report of growth in China slowing at the same.  This could happen anytime between now and October.  Click on one ad while you're here if you like my posts, to keep me going.

Explaining price action in gold. Buyers in china? Also, Legendary commodity trader Andrew McGuire gives his opinion on new chinese exchange

The chinese government stated on July 1st that they had 30% more than reported loans to municipalities for construction projects on their books.  So there is possibly 30% more public sector economic activity than previously realized in China.  There is another Chinese economic story.  A new physical precious metals exchange, accesible to all Asians opened up in China.  Here is a post from Ned Naylor Leyland's blog 24hourgold.com which helps explain recent gold price action from the last 5 trading days. 

Published : June 29th, 2011
"Today was the inauguration ceremony replete with myriad ministers and mandarins from central and regional government.
This initiative is supported at the highest levels in China with SOEs as shareholders, the support of the Beijing Gold Exchange and SAFE (State Administration of Foreign Exchange).
PAGE are buying into the concept that leverage has its limits and that leasing must also be carefully monitored.
This new exchange is international facing, in line with Yunnan province being China's formal gateway to trade with its neighbours.
This exchange with a FIX (8am Beijing time) has major ramifications has the potential to improve price discovery and show up the shabby efforts of its competitor markets.  
The biggest bombshell however, is the offer of Rmb contracts for international investors, agreed by SAFE.  
The international part of the Exchange's business is expected to be available by Q4.
Meanwhile, plugged straight into the platform are the customers of Agricultural Bank of China (320million retail + 2.7million corporate) who are able to trade 10oz mini-contracts.
To give an idea of the scale here, if 1% of their customers bought one contract that would represent around 100tonnes of physical.

Irish, Spanish credit default prices rise and german bonds rally

July 6 (Bloomberg) -- Italian and Spanish government bonds fell for a third straight day after Moody's Investors Service cut Portugal's credit rating below investment grade, raising concern the region's debt crisis will infect more nations.

Portuguese two-year yields and credit-default swaps surged. The 10-year Italian yield reached the highest since November 2008 as Handelsblatt reported that 40 percent of investors in Germany see contagion spreading to Spain and Italy. German bunds rose the most in almost two weeks, even as the nation prepared to sell 4 billion euros ($5.8 billion) of two-year notes.

"The latest rating move on Portugal succeeded in reintroducing a new round of uncertainty, which will support demand for safe-haven assets, at least in the near term," said Charles Diebel, head of market strategy at Lloyds Bank Corporate Markets in London.

The yield on 10-year Italian securities advanced 11 basis points to 5.10 percent at 8:41 a.m. in London. That pushed the difference in yield, or spread, to similar-maturity German debt 17 basis points wider to 216 basis points. The 4.75 percent securities maturing in September 2021 fell 0.81, or 8.10 euros per 1,000-euro face amount, to 97.74.

Two-year Portuguese yields surged 155 basis points to 14.50 percent. Spanish 10-year yields rose seven basis points to 5.55 percent, increasing the spread over bunds to 258 basis points.

The Markit iTraxx SovX Western Europe Index of swaps on 15 governments rose six basis points to 236 at 8 a.m. in London. An increase signals deteriorating perceptions of credit quality.

Portuguese Downgrade

Portugal is scheduled to auction as much as 1 billion euros of three-month bills today.

Moody's cut the long-term government bond rating for Portugal to Ba2, or junk, from Baa1, and said the outlook is negative. Discussions to involve private investors in a new rescue plan for Greece make it more likely that the European Union will require the same pre-conditions in the case of Portugal, Moody's said in a statement.

A new proposal on investor participation in a Greek aid plan will be discussed in Paris today, the Financial Times said, citing two people involved in the talks.

Ten-year bund yields fell six basis points to 2.95 percent. They reached 3.05 percent on July 1, the most since June 9. Two- year German note yields also slid, falling four basis points, to 1.61 percent.

A report today will probably show German factory orders dropped 0.5 percent in May after gaining 2.8 percent a month earlier, according to the median estimate of 33 economists surveyed by Bloomberg.

German bonds returned 0.1 percent this year, compared with 2.6 percent for U.S. Treasuries and 2.1 percent for U.K. gilts, according to indexes compiled by Bloomberg and the European Federation of Financial Analysts Societies. Greek bonds handed investors a loss of 15 percent, while Portuguese securities lost 19 percent, the indexes show.

--With assistance from Emma Charlton and Anchalee Worrachate in London. Editors: Keith Campbell, Matthew Brown.

Read more: http://www.sfgate.com/cgi-bin/article.cgi?f=/g/a/2011/07/06/bloomberg1376-LNWFFD1A1I4H01-2J3ICLV6V4FD5NDUER64OLA5K7.DTL#ixzz1RKc3yvTT

Chinese banks gave more loans over the last few years than previously reported

By TOM ORLIK

How bad can things get for China's banks? Temasek Holdings isn't waiting around to find out.
The Singapore state investment fund, manager of a $133 billion portfolio and the biggest foreign investor in China's banking sector, has sold 49% of its shares in Bank of China and 8% of its China Construction Bank holdings for a total of US$3.6 billion. The timing of that move and the involvement of long-term strategic investor Temasek ring alarm bells about the outlook for the mainland's banking sector.
Last week, China's National Audit Office announced that the banking sector is exposed to some $1.3 trillion in local-government debt. In the days that followed, press reports said that local-government financing vehicles in Shanghai and Yunnan could default on their debts.
Those debts are an insignificant fraction of the total owed across the sector, but investors are concerned they represent the tip of a default iceberg. Concern about the overhang of bad debts, and the absence of a clear resolution plan from the government, mean bank valuations have taken a hit. Bank of China is down 13% since the beginning of June, and China Construction Bank is off 14%.
Temasek has yet to comment on its divestment. A longer-term desire to diversify its assets may have played a role. But it's also possible it is trying to get ahead of the curve, with rumors that Bank of America—the second-largest investor in China Construction Bank—plans to sell down a portion of its holdings.
Sales into a weak market, even if Temasek has come out US$1.2 billion up on its initial investment according to WSJ calculations, also suggest a certain nervousness. Markets seem to have drawn the conclusion that major investors are concerned about hidden risks in the banks. And the negative signal couldn't have come from a more significant stakeholder.
Temasek has been the largest single institutional investor in Bank of China— holding 12.5% of the stock before Wednesday's sale—and the third-largest in China Construction Bank. When Royal Bank of Scotland, Bank of America and UBS sold down their holdings in China's banks during the financial crisis, Temasek won political points with Chinese officials by actually increasing its exposure.
Bank of China fell 3.6% in Hong Kong on Wednesday amid heavy trading following the Temasek news, and China Construction Bank wasn't far behind.
The bigger question, however, is what lies ahead. Two factors loom large: the extent of bad debts in the system, and the banks' scope to grow through the problems. The signs aren't encouraging on either front.
A report by Moody's estimates that nonperforming loans in the banking system could rise to 8%-12% from the current 1.1%. At the same time, a two-year lending bonanza has seen China's loan-to-GDP ratio soar to 127% in 2010 from 101% in 2008. Bad debts will add to the banks' costs. Past excesses mean that even when the government eases its credit controls, the scope to grow through the problem by pushing more loans out the door is limited.
Whether nonperforming loans actually rise to the feared levels remains unclear, given how little is known about asset quality at China's banks. But Temasek's sales suggest not everyone is giving them the benefit of the doubt.
Write to Tom Orlik at Thomas.orlik@wsj.com