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The Death of Market Fundamentals

Posted: Aug 02 2010     By: Jim Sinclair      Post Edited: August 2, 2010 at 6:15 pm
Filed under: General Editorial
To Own Gold is to Vote with your feet where Government is Concerned. –Jim Sinclair “A Pocketbook of Gold”
Dear CIGAs,
If the past three years has taught us anything about markets, it is that they will do what they are set up to do. OTC Derivatives, financial Ponzi schemes (Madoff etc) and gyrating Fed policy are but a few of the machinations determined by the new market Fundamentals… the Fundamentals of government policy.
The political and legislative environment creates new Fundamentals that economic realities were supposed to. As government becomes more self-indebted, and politically captured by special interests, the markets reflect these political realities instead of the economic fundamentals they should.
None of this is news. It has been going on for years. But it is not as benign as it used to be. At the outset its just favouritism: a (usually no-bid) government contract is awarded and a company share price roars on the back of it. Legislative tweaking portends winners and losers. But then things get out of hand.
An early signal was found not only in the insanity of the mortgage backed securities markets and their attendant derivatives, but was also evident in the energy industry. Nobody in their right mind believes that fundamentals had the slightest thing to do with crude oil’s move from 2006 to 2008 – but the shrill cry of “Peak Oil” (Hat Tip Media) sure did help. (Where is it now?) Far more likely is that a couple of market participants decided to clear some competition from the market by running it to ridiculous levels, and make a large amount of money along the way… and enlisted the Media’s help. A natural bull market presented a great opportunity to push the market to unnatural levels and then drop it like a stone. Fundamentals had no role. Not even the first Gulf War when the borders of Kuwait and Saudi Arabia fell, produced a similar event in terms of scale, though the market was overrun with fear. Even before the Algos started ripping markets up and down for fun and profit the game was on.
The West Coast electricity market did a similar thing – by creating unscheduled maintenance that somebody had (personally) “scheduled”. $40 million+ people got their eyes gouged out for months on end, but it sure was fun for someone. A similar situation occurred (several times) in the German power market around the turn of the millenium. An American utility or marketer would simply buy every KwH in sight, along the curve, bar none, in a one or two hour space of time, until people who needed the physical power position to meet actual customer demand were forced to follow them, whereupon the relentless buyer would line up every bid in the market and try and unload everything in one shot. Many times it worked. But the US utility industry blew itself up in fraud, and the main German companies refused to trade with them after a while. Deregulation had happened – but the fall back for the near-monopoly German utilities was to say, “I don’t like you as a credit risk. So I can only trade in very, very small size with you.” The gamers were forced out. They killed their own game in the rush for personal glory.
The charade of options expiry in the Gold market is similar. Get the market up, knowing that call buyers are the public and liked to go naked, and the put buyers are usually market makers trying to butterfly their position and get short the at-the-money strike in expiry. Just before expiry the market is whipsawed down. The public goes out worthless on the call side and the market makers (volume traders) get expired near or at their long strike (i.e. max. loss) and are forced out. Next time around – spreads are wider. It’s an attractive strategy if you can control the underlying for a few hours at the right time of the month. If you can’t – tough luck. Only a fool would trade in such a game. People should roll out weeks before expiry – but the public never does. They hang right on in there every time because the market gets so close to going in the money. (Like the Bbanks aren’t aware of this psychology!). The professionals have a name for these people: They’re called Screen Jockeys… and in case you didn’t know – it’s a term of derision.
A similar situation now exists in that bastion of public interest – the stock market. Trading is simply impossible. Stop-losses can’t be held as orders because they will be used against anyone with a position. As related in M. Lewis’ latest book, the Chinese Walls that supposedly exist in the multiple platforms that trade a single stock should be properly considered as “Bullshit”. Charts are painted to flush people out. What passes for a market is now just a serious of raids up and down the flagpole to shake the hell out of its minor participants. If you aren’t equipped to play “chase the algos” (entry ticket c. $40 million for the technology and servers), your money will simply be taken. The market has for hundreds of years taken money from weak hands, but now anyone without a first class algo can be considered and proven as weak. Fundamental analysis will not help the small trader. It’s simply pointless to participate. Instead of tree-shaking… now the whole damn forest is being shaken. As explained in the book “A Pocketbook of Gold”, any individual with the slightest amount of margin will be destroyed by the hyper-over-leveraged banks that don’t have to mark to market, never have a margin call, and have a government guaranteed, taxpayer funded bailout. These are the NEW fundamentals. You want to participate on the other side of this, so call “trade”? If you do, you need serious help. Do you want to play with the take-down artists, the chart painters and algo-drive market-bashers? (To Mr Sinclair’s “haters” of the past fortnight please recall his relentlessly iterated warning to abandon all Gold trading and margin at $548 per ounce, and hold the core as insurance only.)
The result is that retail has had it with the so-called “market”. Outflows are increasing steadily, while liquidity swamps financial institutions unwilling to do anything other than sit on the liquidity. The bail-out looks like a bail-in. Only idiots like the zero-return in a decade (and a lot less if properly numerated against Gold) pension funds are left. The suckers have woken up and are refusing to play. Computer driven markets go from awash with liquidity to zero liquidity and back again in seconds. It’s enough to make a schizophrenic look balanced. Risk is fully on, then fully off, then fully on again several times in a given day, soon to be in a given hour, minute, second, mille and then micro-second. Trade if you have a death wish only. As the public exits, the algos will now attack each other in a macabre pas de deux of death dance.
Government, of course, is playing its part too in the death of the markets by destroying the value of fundamental analysis. The capitulation of FASB to a government/Fed dictated policy of suspending the assessment of fair value has, as its corollary, the suspension of even the possibility that ‘fair value’ can still, in fact BE determined. Since the government now determines market outcomes, reading Maoist “Wall Posters” is now all one has. (“If one knows the nuances, the walls tell all” was the nod for Deng Xio Peng’s political destruction. This is what we have been reduced to.) As if analysing Greenspan’s FedSpeak wasn’t enough to live through, we now must be scanning the horizon all day for the QE II, instead of analysing a company’s worth and prospects. Resistance may be futile, but participation is now idiocy. Money supply is viciously ramped up and then completely shut-off, at a whim, and with few but opaque methods for observation. When people are buying the stock market only because they envision a Bernanke money-printing induced melt-up, it’s time to leave. That is no reason to be in the marketplace, it is a reason to avoid it.
Previous market participants are sick of trying to decide the level of deceit in Government statistics. No one can anticipate whimsical “on the hoof” policy (like occupying Iraq), so everyone is fearful of investing. Money is going to the mattress like a Spaniard living under Franco. Germans and other Europeans are rushing into the Swiss Franc in outright fear of what politicians might do next. The level of trust from the investing public has never been lower. Government won’t let Fundamentals play out, just like they refused to take a recession ten years ago. The Fed can trump all fundamentals until, of course, they can’t any longer, and they blow up everyone including themselves (i.e. sovereign default). When proper valuation is suspended for as long as possible and seemingly, hopefully, forever, one would be advised to spend their time building a nuclear resistant financial bunker, preferably lined with Gold. It could give a whole new meaning to the old adage that the “Fundamentals always win in the end”. In the new intonation, the emphasis is on the word “end”. An “end” that seems to be in the process of being succinctly arranged.
In the search for absent fundamental indicators, “Shadow Stats” became preferred, but that only detracts from confidence. It does nothing to enhance it. Mr. Williams does not sit at the Fed or in Government. Most likely, it will be QE to infinity, because the disastrous outcome of a Treasury market implosion could be even more devastating than perpetuating a depression. QE is a government played trump card that destroys Fundamental analysis by moving the pricing numerator. Desperation is palpable. It’s why the Government is actively destroying any attempt at fundamental analysis. The sustaining of the smoke and mirrors game demands it. If Government continues to spend, they eventually go bust from debt. If they head down the austerity path, you’ll never have enough GDP to SERVICE the debt. They’re cornered. Devaluation de facto or de jure (i.e. default) is the only possible outcome short of waiting for inevitable systemic collapse along with the hyper-inflation which will give you about as much warning as a Tsunami on your visible horizon. As Mr. Sinclair has related, “Gold is financial High Ground, when a Global Tsunami hits.” Prepare accordingly.
CIGA Pedro

Jim’s Mailbox

Posted: Aug 02 2010     By: Jim Sinclair      Post Edited: August 2, 2010 at 6:09 pm
Filed under: Jim's Mailbox
Jim Sinclair’s Commentary
CIGA Richard B is the "go to man" on the real events taking place every Friday. This is a subject you must understand if you wish to know what is really taking place inside the financials.
Please take the time review this as Richard has taken many hours to keep you informed of fact, not fancy.
It is apparent that many commentators make up much of what they report on. Here we deal in sourced fact.
Summary of Week’s Bank Failures
Dear CIGAs,
On Friday evening, July 23, 2010, the FDIC announced five more bank failures, bringing the totals to 108 so far this year and 275 since 2007. The five banks closed this week had collective assets of about $1.9 billion and deposits of about $1.8 billion.
Their closings cost the FDIC an estimated $335 million, about 19% of deposits. So far this year, bank closings have cost the FDIC an estimated $18.88 billion.
All five closings involved the FDIC entering into loss-share agreements with the acquiring banks. As a result, the total value of assets under FDIC loss-share agreements increased by $920 million, to about $180.82 billion.
FASB-Blessed Asset Overvaluations
Each of the FDIC’s press releases describing bank failures provides a glimpse into the extent to which bank management may have been exaggerating the value of the bank’s assets. Ever since the beginning of 2009, when the Financial Accounting Standards Board rolled back fair value requirements, bank management has had a dangerous amount of leeway to employ cartoon-like “mark-to-model” values for banks’ hardest-to-value assets.
For example, Bayside Savings Bank of Port Saint Joe, Florida, had stated assets of $66.1 million and deposits of $52.4 million. The FDIC estimated its closing cost $16.2 million. Based on that estimate, the bank’s assets were really only worth $36.2 million, and had been overvalued by 83%.
NorthWest Bank and Trust of Acworth, Georgia, had stated assets of $167.7 million and deposits of $159.4 million. The FDIC estimated its closing cost $39.8 million. Based on that estimate, the bank’s assets were really only worth $119.6 million, and had been overvalued by 40%.
Coastal Community Bank of Panama City, Florida, had stated assets of $372.9 million and deposits of $363.2 million. The FDIC estimated its closing cost $94.5 million. Based on that estimate, the bank’s assets were really only worth $268.7 million, and had been overvalued by 39%.
Truth Getting Stretched in FDIC Reports
Two other bank failures announced this week are forcing me to raise a red flag regarding the degree to which Manipulation of Perspective Economics is starting to skew the information contained in FDIC press releases. What bothered me about these announcements was the combination of the FDIC projecting relatively small losses, yet describing resolution structures that made it clear the FDIC could barely give away the failed banks’ assets.
In both cases, the acquiring banks only took over about half of the failed banks’ assets, and even then, required the FDIC to guarantee most of their value with loss sharing agreements. The FDIC ended up having to retain the rest of the assets, a total of about $550 million (stated value) between the two. You really have to wonder what the value is of assets the FDIC cannot get another bank to take over even with a guarantee against 80% of unexpected losses.
Having to retain that many assets is the last thing the FDIC needs right now. As Greg Hunter pointed out in his article last week, the FDIC is already sitting on some $35 billion in assets from previous bank failures that it has yet to sell.
The harder officials work to disguise the plain truth of what is going on, the more I worry about how serious the problems really are.
Respectfully yours,
CIGA Richard B.