Steve Cohen at SALT, Paulson at UBS Conf, Whitney Tilson, John Taylor, Jim Rogers, Druckenmiller (5/15/2011)

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Guru/hedge fund link fest (5/8/2011 to 5/15/2011)

Steve Cohen - S|A|C
*Billionaire hedge fund manager Steve Cohen, who runs $14 billion hedge fund SAC Capital, spoke at the SALT Conference (SkyBridge Alternatives) last week in Las Vegas. From the transcript courtesy of
Deal Breaker, Mr. Cohen sees a market pause ("maybe people are worried about a growth scare") but thinks the second half of 2011 will be "decent". He believes the energy sector is "interesting" and the "commodities sell-off provides a nice entry point". He said he's more worried about 2012 as some of the government stimulus wears off. And regarding the budget deficit, Cohen said the bond market could force government action. This is the first time Distressed Volatility has seen Steve Cohen give market calls. When is your blog starting up Mr. Cohen?

*What If the U.S. Treasury Defaults? (Stanley Druckenmiller, who ran money with George Soros) - WSJ (h/t Zero Hedge)
"Some have argued that since investors are still willing to lend to the Treasury at very low rates, the government's financial future can't really be that bad. "Complete nonsense," Mr. Druckenmiller responds. "It's not a free market. It's not a clean market." The Federal Reserve is doing much of the buying of Treasury bonds lately through its "quantitative easing" (QE) program, he points out. "The market isn't saying anything about the future. It's saying there's a phony buyer of $19 billion of Treasurys a week." 
Warming to the topic, he asks, "When do you generally get action from governments? When their bond market blows up." But that isn't happening now, he says, because the Fed is "aiding and abetting" the politicians' "reckless behavior."

*Here's What John Paulson Said On Housing, Financials, Gold and the S&P at UBS's Financial Services Conference (he's bullish on the recovery, sees 40-60% upside in bank stocks and 34% upside in the S&P) Business Insider (5/10/2011) 

*Currency Hedge Fund Manager John Taylor Says ‘Risk Rally’ (higher-yielding assets) Is Coming to an End (FX Concepts) - Bloomberg (5/12/2011)

*Jim Rogers Says Dollar Is Long-Term ‘Total Disaster’ (Jim is "currently long the dollar because the market consensus is for the currency to fall", "short emerging markets", and believes the 30 year bull market in U.S. bonds is coming to an end. But, like the dollar, he's not shorting because "95 percent of the market expects them to decline.") - Bloomberg (5/12/2011)

*Value Investor Whitney Tilson's May 2011 Presentation (T2 Partners), $MSFT, $BRK - Zero Hedge (5/3/2011)

*Cyclical Bulls Within Secular Bears & Their Short Duration - Pragmatic Capitalism (via John Hussman's Weekly Market Comment).
"As the guys at Nautilus Capital note, cyclical bull markets within secular bears have tended to average just 26 months, with an average gain of 85%, while cyclical bears within secular bears have averaged 19 months, with steep average losses of -39%."

*Felix Zulauf turns bearish, expects major correction and QE3 - Credit Writedowns

George Soros Speaking at CATO On Hayek, Reflexivity (4/28/2011)

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Reflexivity Cycle
If you like economics and market behavior you might be interested in this recent discussion at the CATO institute ("Richard Epstein, George Soros, and Bruce Caldwell Discuss Hayek's Constitution of Liberty"). I added the new rap battle between Keynes and Hayek for your entertainment after the video.

To your left is a diagram of a cycle driven by reflexivity (price -> perception -> fundamentals). Read "George Soros, Reflexivity and Market Reversals" by Marvin Bolt at
Seeking Alpha on March 16, 2009 (around the historical market low). Here is a quote from the end of the article.

"We are at a unique time in history. The economy and financial markets have been driven by a variety of reflexive forces resulting in widespread destabilization. However, a fully developed parabolic stock market decline offers strong evidence that the extremes have been reached. Insights from George Soros’ theory of reflexivity, supported by examples from the past, lead us to conclude that the imminent reversal will be breathtaking. As we wrote this, the Dow had just surpassed 7,000 after testing 6,500. Indeed, the reversal might be at hand." That worked out quite well. (Continue reading at Seeking Alpha).

George Soros quotes from the transcript; watch videos after the jump:

"Hayek argued that economic agents base their decisions not on reality but their interpretation of reality and the two are never the same. That's what I called fallibility. Hayek also recognized that decisions based on imperfect understanding are bound to have unintended consequences. But Hayek and I drew diametrically different inferences from this insight. Hayek used it to extol the virtues of the invisible hand, which was the unintended consequence of economic agents perusing their self interest. I used it to demonstrate the inherent instability of financial markets.

In my theory of reflexivity I assert that the thinking of economic agents serves two functions: on the one hand, they try to understand reality that's the cognitive function. On the other, they try to make an impact on the situation and that's the participating or manipulative function. The two functions connect reality and the participants' perception of reality in opposite directions. As long as the two functions work independently they each produced determinate results. But when they operate simultaneous they interfere with each other by introducing an element of uncertainty into both the participants' understanding and the actual course of events. I call the interplay between the two functions that gives rise to the uncertainty reflexivity. 

The two way connection between the cognitive and manipulative functions works as feedback loop; the feedback is either positive or negative. The positive feedback reinforces both the prevailing trend and the prevailing bias and leads to a mispricing of financial assets. Negative feedback corrects the bias. At one extreme lies equilibrium, at the other are the financial bubbles. They occur when the mispricing goes too far and becomes unsustainable and the boom is then followed by a bust. In the real world, positive and negative feedback are intermingled and the two extremes are rarely if ever reached." (read the full transcript)

Jeremy Grantham (GMO): Lighten Up On Risk-Taking; QE3 Required To Keep Speculative Game Going

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Source: GMO
Jeremy Grantham, co-founder and chief investment strategist of
GMO LLC, which manages $108 billion in client assets, released part 2 of his Q1 Investment Letter. He thinks you should "lighten up on risk-taking now and don't wait for October 1 as previously recommended". He did say QE3 could keep the "speculative game going" though, but it is a risky bet.

GMO May 2011 Quarterly Letter: "Time To Be Serious (and probably too early) Once Again"
"With these headwinds, I do not feel the same degree of confidence that I did, which was considerable, that the Fed could carry all before it until October 1 of this year. A third round of quantitative easing would very probably keep the speculative game going. But without a QE3, there seem to be too many unexpected (indeed unexpectable) special factors weighing against risk-taking in these overpriced times. I had recommended taking a little more risk than was justified by value alone in honor of Year 3, QE2, and the Fed in general. Risk now should be more reflective of an investment world that has stocks selling at 40% over fair value (about 920 on the S&P 500) and fixed income, manipulated by the Fed, also badly overpriced."

"The market may still get to, say, 1500 before October, but I doubt it, especially without a QE3, although the chance of going up a little more by October 1 is probably still better than even. And whether it will reach 1500 or not, the environment has simply become too risky to justify prudent investors hanging around, hoping to get lucky. So now is not the time to float along with the Fed, but to fight it. Investors should take a hard-nosed value approach, which at GMO means having substantial cash reserves around a base of high quality blue chips and emerging market equities, both of which have semi-respectable real imputed returns of over 4% real on our 7-year forecast. The GMO position has also taken a few more percentage points of equity risk off the table."

David Einhorn is Still Short St. Joe and Moody's, Buys Yahoo (Greenlight Q1 Letter)

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According to David Einhorn's Q1 2011 Investment Letter (released on April 29, 2011 courtesy of, Greenlight Capital is still short Moody's (MCO) and St. Joe (JOE), and recently went long Yahoo (YHOO). And now value investor Whitney Tilson, of T2 Partners, has JOE as his largest short position. I'll get into that next. Read Einhorn's amazing report on St. Joe: "Field of Schemes: If You Build It They Won't Come". Per my proprietary valuation models, JOE is worth $7-$15 a share and Yahoo is worth $31-$33 a share. In my next post on Whitney Tilson I'll dig into the longs and shorts in JOE.
"We kept our highest conviction older ideas (including MCO and St. Joe) and our highest conviction newer ideas (including the energy-technology stocks described above)."

House Speaker Boehner on the Debt Ceiling (Economic Club of New York, 5/9/2011)

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The $14.29 trillion debt ceiling is officially in play and Congress has to decide whether to raise it again, and under what conditions. I'm going to post different views on the situation (next David Stockman). Below is the video and transcript of House Speaker John Boehner's remarks at the Economic Club of New York on 5/9/2011. Richard Koo, chief economist at the Nomura Research Institute, believes the U.S. could follow the path of Japan if we cut government spending and borrowing too early after the bursting of a nationwide asset bubble (see INET conference and Bloomberg TV videos). However, even Ben Bernanke, the Chairman of the Federal Reserve, has said that the U.S. must address its budget deficit and national debt. From Bernanke's speech in October 2010:

"Over the medium- and long-term, however, the story is quite different. If current policy settings are maintained, and under reasonable assumptions about economic growth, the federal budget will be on an unsustainable path in coming years, with the ratio of federal debt held by the public to national income rising at an increasing pace.2 Moreover, as the national debt grows, so will the associated interest payments, which in turn will lead to further increases in projected deficits. "

Quotes from John Boehner's address to the Economic Club of New York (read the full transcript below if you can't watch the video):

“It's true that allowing America to default would be irresponsible. But it would be more irresponsible to raise the debt ceiling without simultaneously taking dramatic steps to reduce spending and reform the budget process.

“To increase the debt limit without simultaneously addressing the drivers of our debt -- in defiance of the will of our people -- would be monumentally arrogant and massively irresponsible.

“It would send a signal to investors and entrepreneurs everywhere that America still is not serious about dealing with our spending addiction.

“It would erode confidence in our economy and reduce certainty for small businesses. And this would destroy even more American jobs.

“So let me be as clear as I can be. Without significant spending cuts and reforms to reduce our debt, there will be no debt limit increase. And the cuts should be greater than the accompanying increase in debt authority the president is given.

“We should be talking about cuts of trillions, not just billions.

Greece 5Y Credit Default Swaps At 1372; Up From 399 a Year Ago (Greece 5Y CDS Chart)

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Greece 5Y CDS (Bloomberg)
Greece 5Y CDSs (credit default swaps) are trading at 1372bps, up from 399bps in
January 2010 ("1/30/2010: Pricing of Greek CDS, 10Y Bond Yields Sense Risk (CDS 399bps, 10Y 6.85%"). That is up 243% in a year and three months folks. Did you (or Greece?) scoop some in your retail brokerage account? Ha. Anyone know when CDS will be available for retail consumption? E-mini CDS? Credit default swaps are insurance policies on debt that are priced in basis points per year (the premium or spread). Greece 5Y credit default swaps, similar to CDS on subprime mortgage-backed securities in 2007/8, have been rising for three years now and reflect the country's poor financial health. For more information read announcements made by S&P and Moody's a few days ago. To your left is the 5 year chart of Greece 5Y CDS via Bloomberg.

Recent articles:

Greece restructuring ‘only a matter of time - eFinancialNews

EU and IMF start key Athens visit as Greeks strike - Reuters

EU paymaster Merkel guarded on new aid for Greece - Reuters

Greece will need more aid (Official says Athens hopes for a new $86 billion financing package) - WSJ

Milligan Says `Ultimately' Greece Must Restructure Debt - Bloomberg Video via Washington Post

Roubini’s guide to a Greek debt restructuring - FT Alphaville

Greece taps markets after rating cut, EU mulls help - Reuters
"Greek Prime Minister George Papandreou lashed out at financial markets late on Monday, accusing them of lack of transparency and corruption.

"Profiteering, CDS, derivatives traded without any transparency are threatening to blow up whole countries," he told an anti-corruption conference." /

S&P Downgrades Greece to B; Moody's Places Greece B1 Bonds On Review For Possible Downgrade; 2-Year Greek Bonds Yield 25%

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Source: Wikimedia Commons
Before reading these announcements, look at what Greek bonds are yielding as of May 10, 2011. Click the link for the Bloomberg quote.

3-month Greece Government Bond 8.06% (updated on May 9); 
6-month Greece Government Bond 6.13%;
1-year Greece Government Bond 6.26%;
2-year Greece Government Bond 25.17%;
5-year Greece Government Bond 16.377%,
10-year Greece Government Bond 15.43%,
30-year Greece Government Bond 10.41%.

From Moody's Investors Service yesterday:
"Moody's places Greece's ratings on review for possible downgrade

London, 09 May 2011 -- Moody's Investors Service has today placed Greece's B1 local and foreign currency government bond ratings on review for possible downgrade.

Moody's decision to initiate this review was prompted by:

(1) revisions to fiscal metrics, most notably the significant upward revision of the 2010 general government deficit;

(2) increased uncertainty about the sustainability of Greek sovereign debt in the context of potential delays in the achievement of fiscal consolidation targets; and

(3) concerns about the probability and the implications of a delayed and weaker economic recovery.

Moody's review will focus on the factors that will drive the country's debt dynamics over the next few years.

Moody's says that a multi-notch downgrade is possible if it concludes that there is large risk that Greece's debt metrics are on an unsustainable path. In Moody's view, such conditions would materially increase the risk of debt restructuring over the short to medium term. Under such conditions, euro area policymakers have stated that future loans from the Exchange Stability Mechanism would be extended only if private creditors were to bear some of the losses. If the path of Greek debt-to-GDP were to appear unsustainable, then Greece might itself have an incentive to seek a change in the terms of its debt obligations." [continue reading at]

From Standard and Poor's on May 9, 2011:
"Ratings On Greece Lowered To 'B/C' From 'BB-/B' On Rising Rescheduling Risk; Remain On CreditWatch Negative

Nomura's Richard Koo Warns U.S. Could Repeat Japan's Mistakes! (INET Bretton Woods Video)

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Source: Nomura
Richard Koo, Chief Economist at Nomura Research Institute, spoke at the INET Bretton Woods conference on April 6, 2011. Mr. Koo sees similarities between Japan's deflationary experience from 1990 to 2005 and the U.S. today (zero percent interest rates, QE2).

He first compared the US housing market (S&P/Case Shiller Home Price Index) to Japan's housing market when they crashed 14 years apart (2006 in the U.S; 1992 in Japan). I put up a snapshot of the chart. Read his slides while watching the video: The World in Balance Sheet Recession: What-Post 2008 U.S., Europe and China Can Learn From Japan 1990-2005 (

He strongly believes that once an economy experiences a nationwide asset bubble, the Government must step in to borrow and spend until the private sector recovers (finishes deleveraging balance sheets), or risk an economic crash. So how does the story end in the the U.S.? I'm hearing either Weimar Republic style hyperinflation, Japanese deflation or 70's style stagflation. FYI, according to Clear Capital's Home Data Index, U.S. home prices dipped below the March 2009 low in April (read more).

May 2011 Rail Report by AAR (Link)

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The May AAR (Association of American Railroads) Rail Time Indicators report is packed with freight data and economic trends through April 2011. Find the archive here and weekly rail statistics here.

Clear Capital: U.S. Home Prices Dip Below March 2009 Low (4/2011)

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According to Clear Capital's "Home Data Index™" (HDI), U.S. home prices through April 2011 dipped below the March 2009 low. Also this can't be good, "‘Underwater’ Homeowners Rise to 28 Percent: Zillow" (Bloomberg). Read the full report at Clear Capital.

Relative Index Value (Source: Clear Capital)
"Clear Capital® Reports National Double Dip

U.S. home prices double dip as West, South and Northeast regions fall prey to the last grip of winter.

TRUCKEE, CA – May 5, 2011 – Clear Capital ( today released its monthly Home Data Index™ (HDI) Market Report, and reports prices have double dipped nationally 0.7 percent below prior lows experienced in March 2009. This month’s HDI Market Report provides the most current (through April 2011) and relevant analysis of how local markets performed compared to the national trend in home prices.

Report highlights include:
  • National quarterly home prices changed -4.9%; while year-over-year national price changes reached -5.0%.
  • National home prices have fallen 11.5% over the previous nine-month period, a rate of decline not experienced since 2008.
  • In a sign of the continued volatility and fragility of home prices, all the major Metropolitan Statistical Areas (MSA) tracked in this month’s report showed quarter-over-quarter price declines.
  • National REO saturation rate reaches 34.5%.

“The latest data through April shows a continued increase in the proportion of distressed sales that are taking hold in markets nationwide,” said Dr. Alex Villacorta, director of research and analytics at Clear Capital. “With more than one-third of national home sales being REO, market prices are being weighed down as many markets have not regained enough footing to withstand the strain of the high proportion of REO sales.

In light of the compounding effects of winter’s seasonal slowdown and increased distressed sale activity, the market now faces the true test of whether prices can rebound in the historically active spring season,” added Villacorta.

As national home prices reached new lows this past winter, hopes remain for a spring revival. Markets have entered uncharted territory, however, as this current home buying season will be the first since 2008 without any tax credit incentive. A note of caution to those looking for a strong end to 2011: The last time no incentives were in place and distressed inventories were this high, home prices fell sharply."

Read more at Clear Capital.

Updates: Gold, Silver, S&P, Treasuries, Munis, Greece, Housing, Fed (5/4/2011-5/9/2011)

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Links to articles and videos on gold, silver, equities, munis, Treasuries, housing, Greece, EU rates and Fed governors.

Interview with Jim Rogers: Why Gold Can Go Higher ( 5/9/2011

Deutsche Bank To Invest $1 Billion In Oil And Gold For John Paulson (ClusterStock) 5/9/2011

Kass: Sell the Rallies ( 5/9/2011

Treasury Volatility Approaching Four-Year Low as Bonds Rally at End of QE2 (Bloomberg) 5/9/2011

Moody's Mulls Greece Downgrade On Debt, Recovery Concerns (WSJ) 5/9/2011

S&P cuts Greek credit rating to B (Financial Times) 5/9/2011 -EUR/USD is selling off; currently at 1.43581.

EU eyes lower rates for Greece, Ireland amid chaos (Reuters, CNBC Video)

Morgan Stanley Follows Goldman, Downgrades Economy (Zero Hedge) 5/8/2011

BOJ Warns Monetization May Lead To Severe Inflation, Rise In Long-Term Interest Rates; Yet Will Buy ¥350 Billion In Bonds (Zero Hedge) 5/8/2011

*Goldman Sachs Chief Equity Strategist David Kostin kept his 1,500 target on the S&P despite a H2 2011 GDP downgrade by GS economists (click the links to read more at Zero Hedge)

JPMorgan's Thomas Lee Raises 2011 S&P Target to 1,475 (Bloomberg)

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Source: BloombergTV
JPMorgan's Chief U.S. Equity Strategist, Thomas Lee, raised his year-end (2011) target on the S&P to $1,475 from 1,425, and his 2012 EPS estimate to $105 from $102 (14.04 multiple = 1,475). During his interview on Bloomberg TV on May 2, 2011 (see below), Lee said to watch stocks relative to "tail assets" (ex. gold and oil) to prove that the move is real. He believes the death of Osama Bin Laden will help this correlation, since gold and oil are used as terrorism insurance (terror premium in the price).

"We should see relative performance of stocks versus what we call tail assets. In other words, if stocks begin to outperform gold; stocks versus oil; we know investors are starting to believe this."

On Treasury yields moving lower (10-year went from 3.77% to almost 3.25%).

"It just shows you the Treasury market is a lot more than just about QE, *because I think everyone was thinking Treasuries (yields?) would back up because of QE (*double check this). But, you know what? Maybe a lot of it is discounted. It is really hard to tell what the 10-year is telling us. I would just tell you, I'm worried if the 10-year is at 4.5 to 5.0%; that would really destroy the case for stocks."

Mr. Lee believes we are in a structural bull market. I thought we were in a cyclical bull market?

SPX 1475 2011 Target, 1,250 Low (FreeStockCharts)
"It's been a very tough market. Remember people have been kind of bearish on this; they've been wanting to sell every rally here and it's been hard to embrace this as a secular bull market" (does this mean the Dow won't hit Charles Nenner's target of 
5,000 in 2013?)

A few weeks ago Lee said the S&P will not breach the 1,250 low this year. I embedded that video as well. If you look at the chart to your left, 1,475 looks possible if the S&P were to rise to the vertex point of the 2-year wedge. By the way, ever since the market bottomed in March 2009, Tom Lee's S&P targets have been spot on.

JP Morgan's Tom Lee: S&P Target 1,300, 14.5x 2011 $90 Earnings By Year End - June 15, 2010

JP Morgan's Thomas Lee on 2010: S&P Will Hit 1300, Cyclicals.. - December 16, 2009

JP Morgan's Lee Sees Recovery, S&P Target 1,100" - June 17, 2009

Jim Chanos: China's Economic Growth Path Is Unsustainable (CNBC)

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Jim Chanos (Source: CNBC)
Famed short seller Jim Chanos, who runs the $6.7 billion hedge fund Kynikos Associates (went short Enron before it collapsed), was on CNBC yesterday. If you're a hyper-bull on China and "resource economies" (Brazil, Australia and Canada etc), you might want to take his view into consideration. Watch the video after the jump.

"Well, we have what we think is an unsustainable growth path for china. They are growing on the back of investment, and specifically real estate construction. So the consumer as a percent of China's economy is actually dropping, Maria. Net exports, are also dropping interestingly enough. All of the slack and then some is picked up by construction. Particularly and most concerning, high-rise construction of offices and condos in the tier one, tier two and tier three cities. Fixed asset investment including land, according to the Chinese, is now 70% of their economy. And to put that in perspective, the asian tigers in the mid-90s, that grew so fast and then blew up, had a number about half that. About 30% to 35%. So China has embarked on something almost unprecedented here."

Related blog post (4/25/2011): "
China Has 64 Million Vacant Apartments, Shanghai Property Index Near Inflection Point (000006.SS Charts), Andy Xie On Inflation"

SEC Charges UBS With Bid-Rigging 100 Muni Bond Reinvestment Transactions, Pays $160 Million

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Source:, UBS transactions pdf
Another investment bank gets charged with f'ng over municipalities! UBS is paying $160 million to settle bid-rigging charges that affected "at least 100 municipal bond reinvestment transactions in 36 states". Last year Bank of America paid federal and state authorities $137 million to settle bid rigging charges. Here is the
SEC complaint v. UBS.

Source: (hat tip DealBreaker).

SEC Charges UBS with Fraudulent Bidding Practices Involving Investment of Municipal Bond Proceeds


UBS to Pay $160 Million to Settle Charges

Washington, D.C., May 4, 2011 — The Securities and Exchange Commission today charged UBS Financial Services Inc. (UBS) with fraudulently rigging at least 100 municipal bond reinvestment transactions in 36 states and generating millions of dollars in ill-gotten gains.

To settle the SEC’s charges, UBS has agreed to pay $47.2 million that will be returned to the affected municipalities. UBS and its affiliates also agreed to pay $113 million to settle parallel cases brought by other federal and state authorities.

When investors purchase municipal securities, the municipalities generally temporarily invest the proceeds of the sales in reinvestment products before the money is used for the intended purposes. Under relevant IRS regulations, the proceeds of tax-exempt municipal securities must generally be invested at fair market value. The most common way of establishing fair market value is through a competitive bidding process in which bidding agents search for the appropriate investment vehicle for a municipality.

The SEC alleges that during the 2000 to 2004 time period, UBS’s fraudulent practices and misrepresentations undermined the competitive bidding process and affected the prices that municipalities paid for the reinvestment products being bid on by the provider of the products. Its fraudulent conduct at the time also jeopardized the tax-exempt status of billions of dollars in municipal securities because the supposed competitive bidding process that establishes the fair market value of the investment was corrupted. The business unit involved in the misconduct closed in 2008 and its employees are no longer with the company.

How Social Media Is Changing Investing (Milken Institute Panel)

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I'm about to watch this right now. Social media is definitely changing the investment and trading game. This panel features @JonNajarian (OptionMonster) and @SellPuts (MerlinOne Trading Partners) who I follow daily on Twitter. It also features Scott Burns of Morningstar, Tom Lydon of ETF Trends and Chris Albinso of Panorama Capital. No rep from StockTwits? I've been on Twitter for over two years now and the wealth of actionable information is unbelievable. You have to filter through it though. Engaging in conversations and monitoring live streaming conversations on Twitter can both improve your analysis and gauge sentiment very well.

Conversation Between George Soros and Paul Volcker at Bretton Woods Conference (INET Video, 4/10/2011)

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George Soros, Chairman of Soros Fund Management, and Paul Volcker, former Chairman of the Federal Reserve, had a conversation at INET's 2011 Bretton Woods Conference on April 10, 2011. Below I embedded the full video courtesy of the Institute for New Economic Thinking ( Soros did a speech on his theory of reflexivity at an INET conference last year in the UK.

Doug Kass Is Short SPDRs With Call Options As Hedge (CNBC 4/28/2011), SPY Chart Inflection Point

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Doug Kass was on CNBC's Fast Money last week (4/28/2011) and said he was shorting SPDRs ($SPY) with out-of-the-money call options as a hedge. Is that what the out-of-the-money XLI June $40 calls were doing last week? Or was the action betting on a test of the 2007 high ($42) before June expiration (6/17/2011). 200,000 contracts were opened in two days. XLI is the industrials ETF.

With the recent rapid sell off in the U.S. Dollar, Kass mentioned that a currency problem was "one of the forces behind the 1987 crash". He believes high gas prices and depreciating home values are not helping the consumer.

If I remember correctly, Doug Kass was on Kudlow in late 2006 and early 2007 warning about a recession coming due to housing. I found a Kudlow and Company clip from 11/27/2006 featuring Doug Kass and embedded it below. He was in the same camp as Gary Shilling (see pt. 1) during that time period, and Shilling is also bearish today! Read: Gary Shilling – Five Things that can Derail the Recovery (Advisor Perspectives h/t PragCap). Are we repeating 2007?

SLV Puts Rally On Volatility; Testing Trend Line, 20DMA (SLV, VXSLV Charts)

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Silver continued its sell off on Monday and $SLV puts were loving the volatility. On April 25, 2011, a SLV October $41-$33 put spread caught my eye that traded 10,000 contracts on each strike. I'm not sure if it was a backspread or vertical debit spread, but a debit spread made sense as a six month hedge or trade imo.

From the 
snapshot of the option chain: 10,000 October $41 puts last traded at $3.00 and 10,000 October $33 puts last traded at $1.05. If it was a debit spread, the trader paid $1.95 to put on the trade. With decent timing, SLV volatility spiked on a sell off and the SLV Oct $41 put closed at $4.45 today. Not bad! SLV closed at $42.83. On another note, remember 100,000 July $25 puts traded a few weeks ago? Interesting trade.

The ETF is testing an important trend line and the 20 day moving average. If you look at the weekly chart there is a 2-year ascending channel that could catch SLV if it breaks down. Spot silver is currently trading at $44.83. See a live 24 hour chart of silver spot here. Check out SLV and VXSLV charts after the jump.

Silver Comex Futures Getting Knocked Down Again (5/2/2011)

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Here we go again with silver. The Silver Comex July Future (SIN11) fell 12% at the low (48.19 to 42.20)! It is now down 8%. Remember spot silver lost 9% on April 25 after all of those puts traded? Clearly silver volatility was ready to erupt. I've been watching the silver ETF ($SLV) and will provide an update tomorrow. Below are charts of Spot Silver in $USD (intraday) and the Silver July 2011 Future (4 months and 1-year chart).

Overnight, the silver future pierced through its 20-day moving average and uptrend line from January, but was able to rally back above those levels. It is now testing 4/26-4/27 resistance. That was a bloody candle. Keep an eye on that trend line. As stated in my previous post, protecting against downside volatility made sense when looking at the chart. I provided links to articles on silver after the charts.

Spot Silver in USD/oz Lost 9% Last Night (49.30-44.72), Bounced Back - Chart

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Last night (4/25), Spot Silver in USD/oz hit an intraday high of $49.30 and an intraday low of $44.72 (-9.2%). It has since bounced back to $45.59. SLV's run looked exhausted on the chart and needed downside protection (imho), at least in the short term. Yesterday I saw an interesting SLV put spread that traded in October out-of-the-money. There are a few events coming up that could increase silver volatility: Bernanke's press conference on Wednesday, the debt limit vote and end of QE2. Inflation reads, margin hikes and China FX reserve diversification could also affect silver trading. In the next few days I'll go over SLV in more detail with charts, recent option trades, implied volatility, articles and embedded videos. Watch the price of spot silver live below courtesy of Kitco (refresh browser).


[Most Recent Quotes from]

Jeremy Grantham: "Days of Abundant Resources and Falling Prices Are Over Forever"

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GMO Commodity Index (Source: GMO April 2011 Letter)
Jeremy Grantham's April 2011 Quarterly Letter is available at Here is the summary.
"Time to Wake Up:  Days of Abundant Resources and Falling Prices Are Over Forever

Jeremy Grantham

Summary of the Summary
The world is using up its natural resources at an alarming rate, and this has caused a permanent shift in their value. We all need to adjust our behavior to this new environment. It would help if we did it quickly.

  • Until about 1800, our species had no safety margin and lived, like other animals, up to the limit of the food supply, ebbing and flowing in population.
  • From about 1800 on the use of hydrocarbons allowed for an explosion in energy use, in food supply, and, through the creation of surpluses, a dramatic increase in wealth and scientific progress.
  • Since 1800, the population has surged from 800 million to 7 billion, on its way to an estimated 8 billion, at minimum.
  • The rise in population, the ten-fold increase in wealth in developed countries, and the current explosive growth in developing countries have eaten rapidly into our finite resources of hydrocarbons and metals, fertilizer, available land, and water.
  • Now, despite a massive increase in fertilizer use, the growth in crop yields per acre has declined from 3.5% in the 1960s to 1.2% today.  There is little productive new land to bring on and, as people get richer, they eat more grain-intensive meat.  Because the population continues to grow at over 1%, there is little safety margin.
  • The problems of compounding growth in the face of finite resources are not easily understood by optimistic, short-term-oriented, and relatively innumerate humans (especially the political variety).
  • The fact is that no compound growth is sustainable.  If we maintain our desperate focus on growth, we will run out of everything and crash.  We must substitute qualitative growth for quantitative growth.
  • But Mrs. Market is helping, and right now she is sending us the Mother of all price signals.  The prices of all important commodities except oil declined for 100 years until 2002, by an average of 70%.  From 2002 until now, this entire decline was erased by a bigger price surge than occurred during World War II.
  • Statistically, most commodities are now so far away from their former downward trend that it makes it very probable that the old trend has changed – that there is in fact a Paradigm Shift – perhaps the most important economic event since the Industrial Revolution.
  • Climate change is associated with weather instability, but the last year was exceptionally bad.  Near term it will surely get less bad.
  • Excellent long-term investment opportunities in resources and resource efficiency are compromised by the high chance of an improvement in weather next year and by the possibility that China may stumble.
  • From now on, price pressure and shortages of resources will be a permanent feature of our lives.  This will increasingly slow down the growth rate of the developed and developing world and put a severe burden on poor countries.
  • We all need to develop serious resource plans, particularly energy policies.  There is little time to waste."

China Has 64 Million Vacant Apartments, Shanghai Property Index Near Inflection Point, Andy Xie On Inflation

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10y Shanghai Property Index (000006.SS) - Yahoo Finance
If you missed it, 
SBS Dateline Australia did a story on China's property market last month (March 20, 2011). It was mainly about China's ghost cities, vacant malls and 60 million vacant apartments. Is this considered GDP growth to nowhere? Watch the segment below or at

Even though China is a command economy, at some point there has to be a real estate correction. Right? At the moment, the Chinese government is most concerned about its economy overheating and inflation. China's central bank is trying to fade inflationary pressures and real estate speculation by increasing bank reserve ratios, downpayment requirements, interest rates and letting the Yuan rise [Reads: "China’s Stocks Cap Weekly Decline on Inflation; Yuan Advances" (Bloomberg), "Yuan forwards touch 3-year high on inflationary pressure" (Financial Post), "China's March housing inflation slows, tightening in place" (Reuters), "China Increases Down-Payment Requirement for Second Homes" (WSJ)]. By the way, what is up with these "shark loan" auctions?
4y Shanghai Properties Index

Andy Xie, an independent economist and former Asia-Pacific economist at Morgan Stanley, thinks the PBOC is behind the curve on inflation and that China is headed towards stagflation. From his recent article in Caixin Online:

"at this point, China’s monetary-policy makers are too far behind the curve. Inflation is entering crisis territory, as consumer prices for many products and services rise at double-digit rates. Signs of panic have appeared along with hoarding which, when it spreads, could trigger a social crisis."
Mr. Xie thinks the PBOC should raise rates by 300 basis points!

"To change course, policy tightening must shift away from credit rationing and toward market mechanisms. Moreover, the interest rate must be lifted out of the negative column: It should be raised at least three percentage points to allay public fears. These changes are needed as soon as possible."

Recently, inflationary pressures, due to rising fuel costs and port fees, caused truckers in China to go on strike. Read: "Truckers In China Protest Rising Fuel Costs (Oil, Gasoline Price Charts)" and "Strike reinforces China’s fear of inflation" (, 4/24/2011). Also check out this post at Also Sprach Analyst: "China Is Ageing, And The Rich Are Fleeing". *ASA just tweeted this, "Hong Kong assets have ‘peaked’: analyst" (MarketWatch).

S&P Revises US Sovereign Debt Outlook to Negative, AAA/A-1+ Rating Affirmed (Text, Related Indicators and Articles)

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NYSE (Source: Wikimedia)
If you haven't read this by now, Standard & Poor's revised their outlook on U.S. sovereign debt (Treasuries) to "negative", and they "believe there is at least a one-in-three likelihood that we could lower our long-term rating on the U.S. within two years". Below is the full media release via

U.S. Indicators to watch:

US Dollar Trade Weighted Index (St. Louis Fed); Spot Dollar Index - DXY (Bloomberg); U.S. Treasury Yields (St. Louis Fed); Spot Gold - XAU/USD ( and the US Treasury 5Y Credit Default Swap in Euros - ZCTO CDS EUR 5Y (Bloomberg). I couldn't find 10Y CDS online anywhere.

Related articles, blog posts and counterpoints:

“But S&P are intelligent men.” (UBS note) - Stone Street Advisors; Credit Suisse: America Is Not Broke (Household Net Worth/Government Debt; Household Net Worth + Government debt/GDP) Charts - Pragmatic Capitalism; China Proposes To Cut Two Thirds Of Its $3 Trillion In USD Holdings - Zero Hedge.

'AAA/A-1+' Rating On United States of America Affirmed; Outlook Revised To Negative

Publication date: 18-Apr-2011 09:01:33 EST

  • We have affirmed our 'AAA/A-1+' sovereign credit ratings on the United States of America.
  • The economy of the U.S. is flexible and highly diversified, the country's effective monetary policies have supported output growth while containing inflationary pressures, and a consistent global preference for the U.S. dollar over all other currencies gives the country unique external liquidity.
  • Because the U.S. has, relative to its 'AAA' peers, what we consider to be very large budget deficits and rising government indebtedness and the path to addressing these is not clear to us, we have revised our outlook on the long-term rating to negative from stable.
  • We believe there is a material risk that U.S. policymakers might not reach an agreement on how to address medium- and long-term budgetary challenges by 2013; if an agreement is not reached and meaningful implementation is not begun by then, this would in our view render the U.S. fiscal profile meaningfully weaker than that of peer 'AAA' sovereigns.

Truckers In China Protest Rising Fuel Costs (Oil, Gasoline Price Charts)

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Have you seen the charts of oil and gasoline recently? Protests do not surprise me.

*Update: Shanghai offers fee cuts to defuse drivers' strike at port (Reuters)
Chinese Trucks Idle as Protests Continue (Wall Street Journal)
Chinese Truck Drivers Block Road Over Gas Prices (NPR)
Third day of Shanghai strike threatens China exports (Reuters)
Q+A-What is behind the Shanghai truckers strike? (Reuters)
Fuel price strike rattles Beijing (Financial Times)
First Person Account From Inside The China Protests (Zero Hedge)
Truck drivers go on strike at Shanghai ports (AFP)
Related: High crude prices threaten China's oil price controls (WantChinaTimes)
Related: Oil Price Rise Fueled by Investment Funds (VOANews)
Related: Obama blames oil speculators for rising prices! (Reuters)
Related: Oil prices to ease in H2 as disruption fears wane (MoneyControl)
Related: Goldman Sachs tells investors to take profits from oil, cotton and copper (Telegraph)

NYMEX Unleaded Gasoline (

West Texas Intermediate Crude Oil (

Brent Crude Oil (

Buffett's Letter on Muni Insurance; Berkshire Insured Detroit Revenue Bonds After FGIC

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BHAC/FGIC Collaboration (MSRB)
After a post I did a few days ago on Detroit's
2011-12 budget, I found out that Berkshire Hathaway's AAA rated subsidiary, Berkshire Hathaway Assurance Corporation, insured $767 million Detroit revenue bonds on a second-to-pay basis. These bonds were re-marketed and converted into fixed rates in 2008. Berkshire insured $385 million Detroit water revenue bonds (official statement at and $382 million Detroit sewage disposal revenue bonds, but only if bond insurer FGIC failed to pay. Principal and interest payments are backed "solely" by net revenues of pledged assets (water and sewage funds), not by taxes like general obligation bonds.

At that time the large muni bond insurers, Ambac, MBIA and FGIC, were being downgraded as losses mounted on toxic credits they insured (MBS). As a result, Buffett wanted to leverage his AAA rating and grab share in the muni insurance market. Issuers wanted Berkshire's guarantee because it lowered interest payments. Berkshire eventually "pulled out of municipal bond insurance" when he thought he wasn't being compensated for the risk (GuruFocus). Read Buffett's 2008 investment letter below for more details. It is interesting that Financial Guaranty Insurance Co.'s parent company, FGIC Corp., filed for bankruptcy in August 2010 and its insurance company had its muni bond insurance reinsured by a division of MBIA in early 2009. Counterparties squared.

"The majority of FGIC Co.-insured bonds were reinsured in January 2009 by National Public Finance Guarantee Corp., the investment-grade, muni-only insurer owned by MBIA Inc." (Bond Buyer)

From Bloomberg on May 1, 2008 on the Detroit bond deal:

"May 1 (Bloomberg) -- Detroit sold about $383 million of bonds carrying insurance from Berkshire Hathaway Assurance Corp., marking the first foray by Warren Buffett's four-month- old guarantor into the primary market for U.S. municipal debt."

"Detroit sold Berkshire-backed bonds at yields ranging from 2 percent on debt due in July to 4.75 percent on bonds set to mature in 2027. The largest single series of bonds -- $136 million of debt paying a 5.75 percent rate and due in 2031 -- were priced to yield 4.67 percent, 13 basis points less than Municipal Market Advisors' index of top-rated debt at similar maturities. A basis point is 0.01 percentage point."

More information from The Bond Buyer (4/30/2008):

"As the finance team crafted the transaction, they met with several monoline bond insurers with the hope of leaving the FGIC policy in place and bringing in a secondary insurer for additional protection. Officials considered Financial Security Assurance - which insures a remaining piece of the water and sewer bonds - but the insurer backed off because of its heavy coverage of much of the city's outstanding debt.

Only Berkshire Hathaway was interested in acting as a secondary insurer with FGIC, according to a source. "They didn't have the same idea about FGIC being in place on the bonds as the other insurers had," he said. "The Berkshire insurance really gilds the lily [on the bonds]." It will mark the first time that BHAC will act as insurer on a primary market transaction, officials said."

Credit ratings in the news:
Fitch Drops $4.6 Billion of Detroit Water and Sewer Bonds (BondBuyer, April 1, 2011)
Detroit Water and Sewer Revenue Bonds Are Downgraded by Moody’s (BusinessWeek, December 20, 2010)

Since Berkshire Hathaway was directly involved in analyzing municipal credits before the market and economy collapsed in 2008, Warren Buffett is probably a decent source for analyzing municipal credit risk. In Buffett's 2008 letter, he warned about the potential risks involved in insuring muni credits. Read the full portion about tax-exempt bond insurance after the jump.

"Insuring tax-exempts, therefore, has the look today of a dangerous business – one with similarities, in fact, to the insuring of natural catastrophes. In both cases, a string of loss-free years can be followed by a devastating experience that more than wipes out all earlier profits. We will try, therefore, to proceed carefully in this business, eschewing many classes of bonds that other monolines regularly embrace."

Video: Facebook Townhall With President Obama, Mark Zuckerberg (4/20/2011)

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Watch the video after the jump courtesy of facebookguests on Livestream. Parts 1 and 2 are archived below. Zuckerberg just asked him about the debt.

St. Joe (JOE) May $24 Call Volume; BlackRock, Fidelity Magellan Own a Huge Chunk of Shares

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JOE May 24 Call (
St. Joe (JOE:NYSE) saw 1,120 May $24 call options trade with 131 open yesterday. It looks like 653 calls traded on the International Securities Exchange (ISE) at 0.91 and the rest traded on the AMEX. JOE has been trading in a sideways channel for 3 years now and is now testing the 200 day moving average. With institutions and mutual funds loading up on the company, you have to wonder if there will be a major short squeeze or a deal led by Fairholme's Bruce Berkowitz, even though the company is only worth
$7-10 per share! David Einhorn, hedge fund manager at Greenlight Capital, is, or was, short $JOE shares and released a detailed research report explaining why. On February 8, 2011, St. Joe announced that it was "exploring financial and strategic alternatives to enhance shareholder value".
JOE 3yr chart -
"The Board intends to consider the full range of available options including a revised business plan, operating partnerships, joint ventures, strategic alliances, asset sales, strategic acquisitions and a merger or sale of the Company. The Board of Directors has retained Morgan Stanley & Co. Incorporated to assist it in the evaluation of these alternatives." (source)

Look at all of these institutions loading up. Joe Ownership via Fidelity Magellan (FMAGX) disclosed that it owned 7.4% of the company in a March 31, 2011 13G filing (Fidelity owned 11.4% in total), BlackRock owned 17.69% of JOE in total (13G filing), Fairholme Fund (FAIRX) owned 28.86% (13D filing), T-Rowe owned 11.2% (13G filing) and the Janus Contrarian Fund owned 8.8% of JOE (13D filing). Janus Capital Management owned 13.2% of JOE in total.

Michael Burry's Vanderbilt University Lecture (Video)

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Source: Youtube via Vanderbilt
Dr. Michael Burry, who made billions of dollars shorting tranches of subprime mortgage backed securities via credit default swaps (before
John Paulson's big short), gave a lecture at Vanderbilt University on 4/5/2011. In June of 2005, Burry used Deutsche Bank to buy his first credit default swap contract (a credit derivative that insures against losses on subprime MBS tranches). In early 2010, Dr. Burry was featured in Michael Lewis's book "The Big Short" and was on 60 Minutes. He also dissed the Federal Reserve, Ben Bernanke and Alan Greenspan in a New York Times oped last year ("I Saw the Crisis Coming. Why Didn’t the Fed?"). He remains very critical of the Federal Reserve and regulators since they failed to foresee the financial crisis (and shut down the financial crack houses before they became a systemic risk). If you can't watch the video, the blog Distressed Debt Investing transcribed the speech. Remember, Michael Burry was a former neurology resident, turned value investor, who was the first hedge fund manager (and credit trader at a big bank?) to buy credit default swaps. Burry placed his first CDS trade six months before the ABX indices were created (1/2006), which Paulson & Co printed money on. I'm listening to his FCIC interview right now and will transcribe the key points. It is hilarious. The mortgage-securitization-CDS engine remains, to this day, the biggest financial joke I have ever seen.

Detroit's 2011-2012 Budget, $200M Savings Needed (Mayor Dave Bing)

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Detroit, Michigan - Source: Wikimedia
I'm following the financial situation in
Detroit, as I have been for a while now. Not only is the City of Detroit a distressed municipality, there is also the possibility that the State of Michigan could intervene if there's a financial emergency. I linked to the the budget documents, FY 2010 Comprehensive Annual Financial Report and articles after the jump. I'm trying to find yields and recent trades on Detroit muni bonds through TRACE/MSRB databases on This is from Mayor Dave Bing's budget address:

"Good morning Honorable City Council. My budget presentation today marks the next step on the City of Detroitʼs path back to financial stability. We face challenges unlike any the city has ever seen, challenges that demand bold action and a business approach that this administration is prepared to take. We do not have the luxury of waiting for someone else to solve our problems.

Mayor Dave Bing
• We must find savings of $200 million in this fiscal year to present a balanced budget.

• If we do nothing, our deficit which today stands at $155 million will grow to approximately $1.2 billion by Fiscal Year 2015.

• Pension and medical costs are rising at an uncontrollable and unsustainable rate. From 2008 through 2011, the City of Detroit cut $40 million from service delivery to offset the rising cost of benefits.

• Without action, benefit costs will consume a larger and larger portion of our operating funds, potentially growing to 50% by 2015.

• Since 2000, revenue is down from $1.1 billion to $753 million. Our population is down more than 200,000 according to the recent U.S. Census report.