Bill Cara's Blog for Aug 2, 2011 [See Post-Close report]

TOP STORY:
http://on.ft.com/qbRDSx

South Korea's central bank said it bought the gold between June and July to diversify its foreign reserves despite high prices, marking its first purchase in more than a decade and taking its total gold holdings to 39.4 tonnes.

Due to Debt and Deficits.
(list includes a 100 Trillion Dollar Zimbabwean note,a sobering sight)

http://tinyurl.com/3gj4cb4
Jeff Clark , Casey Research

Quote:-
"Morgan Stanley reported in 2009 that there’s “no historical precedent” for an economy that exceeds a 250% debt-to-GDP ratio without experiencing some sort of financial crisis or high inflation. Our total debt now exceeds GDP by roughly 400%.

Investment legend Marc Faber reports that once a country’s payments on debt exceed 30% of tax revenue, the currency is “done for.” On our current path, analyst Michael Murphy projects we’ll hit that figure by October.

Peter Bernholz, the leading expert on hyperinflation, states unequivocally that “hyperinflation is caused by government budget deficits.” This year’s U.S. budget deficit will end up being $1.5 trillion, an amount never before seen in history.

Since the Federal Reserve’s creation in 1913, the dollar has lost 95% of its purchasing power. Our government leaders clearly don’t know how – or don’t wish – to keep the currency strong."

Good morning.

08:30 Personal Income(0.1%)/Spending(-0.2%)
08:30 PCE Prices - Core (0.1%)
15:00 Auto/Truck Sales

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TLM - Talisman Energy upgraded to Market Perform from Underperform at Bernstein based on valuation and its North American opportunity. Price target is $20

VALE - PT Lowered from $45 to $43 @ Dahlman Rose. Buy

WMT - Downgraded at Goldman to Hold. $56 price target. Estimates also lowered.

WMT - Wal-Mart downgraded to Hold from Buy at Jefferies based on recent data checks that indicate risk to Q2 sales and the rest of the year. The firm believes Wal-Mart will be aggressive on pricing to reduce its price gap vs. competitors, which will impact margins. Price target lowered to $56 from $61

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"A new study found that only 20 percent of high school seniors are proficient in geography. Students weren't really bothered by that number because only 3 percent of them are proficient in math." -- Jimmy Fallon

Mark H,

Well, I did get stopped out of TLT due to setting my stop too close — so no guaranty ;-)

"Pimco’s $244bn Total Return fund increased its holdings of government debt for the second consecutive month and returned its overall position in what it terms “government-related securities” to zero for the first time since February, according to a report issued by the company on Tuesday."

If I remember correctly, it was about two months ago that Gross was on CNBC bad mouthing US debt and pushing foreign. Hmmmm?

Does this mean we can't believe him anymore? First Warren Buffet the "Orical of Omaha" and now the "Bond King" !?!

"Still believe we're on the path to financial ruin."

Yeah, and I see no major changes in the near term from D.C. clowns.

Grym

FD: I'm still 60% in fixed income (mostly US) after stops on my 2% in TLT. As VAD says watch what's happening, not what you think should happen. (paraphrased)

In a statement accompanying the decision to hold the cash rate at 4.75 per cent for August, RBA Governor Glenn Stevens said the board had started to worry about the growing rate of inflation.

While the statement said it would now be appropriate for interest rates to "exert a degree of restraint" to combat inflation, the US and European debt crises were cited as reasons for the decision to hold.

http://www.theaustralian.com.au/business/interest-...

A few questions about fiat money:

Why would foreign central banks be gobbling gold/silver and the US abstain?

The US is by far the largest holder of gold. If everyone in the investment community has resigned to "something drastic" has to be done... does Fed see the endgame too?

If they know this story ends w/ SDRs and gold in the SDR basket, why wouldn't bankers be buying gold as well as attempting to suppress price?

Could we be witnessing HB&B and friends preparing for the SDR becoming the reserve/world currency as a way to preserve the current system, albeit with fewer members?

Just thinking aloud because ducks don't seem to line up imo...

It looks like the yield has now violated the default area that you have kindly warned us about.

Spain now looks to be firmly in the bailout zone based on where their paper is trading today and I see Zapatero is scrambling to line up support ("Hello, Frau Merkel..."). Italy has thoughtfully joined Spain in the bailout zone, too, I see, although their threshold for default is probably appreciably better than Spain's (but no longer out of the realm of possibility).

I'm listening for the other shoe to drop...very carefully. The silence from S&P and Moody's is deafening. All this thing needs is a spark.

US bonds getting bought again today along w/ Gold and the Swiss Franc as money managers are running out of places to hide. SLW & GDXJ looking very spry today.

watch the ' snake dance ' at GMO.. hedges seem to want it back at the $ 4.30's.. IF permit comes, incentives kick in ( China ).. who knows, but $ 7.00 doesn't seem unreasonable... best to you...

If gold production costs are going up, do : 1) Miners scale back? (2) Increase production? (3) Hedge ? (4) Push price of gold higher ? (5) Invest more in scale/equipment ? (6) Focus on junior miners ?

Healthcare stocks down about 1 1/4 percent on increased volume. When in doubt, take it from Medicare is the bankers' motto.

Bill,

I think these two situations go together.

The POG may seem high but if there are many people who might splurge on a discretionary holiday but instead say to themselves : I can buy so many ounces of gold with the money that I was going to blow.

Now I like to have my cake and eat it too. The day I went to have a look at Atlantis last December I was on a $249 p/p 7 day cruise.

My impression last December from the 3 Caribbean cruises that I took was that the Canadian market was keeping the entire industry afloat. Yields were so bad this past year, more ships than usual were re-positioned to Europe. Yields have been frighteningly bad this summer in the Med. Easy to book at $499 p/p in high season.

I don't see #3, NCL, pulling through. They were hoping for an IPO to lay off some of the risk but that's now dead in the water.

It is only Tuesday(!).

Bill,

Of note on the cruise line majors CCL and RCL. I follow their financials
and here's what I've found:

RCL recently announced earnings; CEO Fain called 2Q a 'blowout quarter'.
They reinstated their dividend and their business outlook is positive.
They are extracting more revenues from passengers, quarter after quarter.
They did lower their guidance, but that was mostly due to a major screw up by the CFO.

CCL, the largest owner/operator, and RCL together control over 80% of global capacity.
Add NCL in there and it's 90+%.

All three recently signed firm contracts for newbuildings, in addition to the newbuildings that are to be delivered this year and in '12. They are all expanding and expanding globally.

NCL just announced excellent earnings, improving per passenger revenues and occupancy loads.

All three operators continually have full ships. Their occupancy loads always exceed 100%. It's based on double occupancy. They have extra bunks in the cabins.
They are able to lure vacationers away from the likes of Atlantis.

Yes, a cruise vacation is one of the first things to get axed by consumers
with less disposable income, but the big three survived the great recession with ease. They lowered the ticket price, kept the ships filled and sailed on. They compete against land based resorts/hotels. Unlike the Marriotts and Disneys of the world, CCL, RCL and NCL do not pay corporate income tax.

Now the oil tanker stocks are another story. Getting crushed today. Their outlook is bleak.

all the best
kp84

Any guesses on YE2011 gold price? Here's some history, courtesy of a junk
email I received from "Casey Research". $1,729 sounds about right.

Year Summer Date Year-End Gain
Low
2001 265.10 6-Jul 276.50 4.3%
2002 302.25 1-Aug 347.20 14.9%
2003 342.50 17-Jun 416.25 21.5%
2004 384.85 11-Jun 435.60 13.2%
2005 415.35 1-Jun 513.00 23.5%
2006 567.00 20-Jun 632.00 11.5%
2007 642.10 27-Jun 833.75 29.8%
2008 786.50 15-Aug 869.75 10.6%
2009 908.50 13-Jul 1,087.50 19.7%
2010 1,203.50 4-Jun 1,405.50 16.8%
2011 1483? 1-Jul
Average 16.6%

The industry uses a standard two to a cabin metric for a given ship.
So that ship has a baseline 'double occupancy' figure.
Some cabins have a third and fourth bunk. So the line item in
the SEC filings of all the cruise lines that says 'Occupancy' will be a figure
exceeding 100%.
And they do.

Smith Travel Research Inc reports on occupancy rates for the land based hoteliers, and it is based on any occupancy. The idea is to show that a room has been sold for the night, regardless of how many are in rollaway beds.
(confirmed with STR, Inc.)

As for revenues, the hoteliers use a Revenue per available room, while the cruise industry uses a revenue per passenger to measure performance.

Yep... one of the few doing its own thing in the miners group

I don't think anyone is worried about any S&P downgrades today. It seems like money is running from equities and a little bit from europe to hide in treasuries. Once the bill passes, presumably the US Treasury will have a large amount of money to borrow. Will all that new supply make a dent in all this demand we're seeing?

10 year US paper has nearly retraced 100 basis points from the Apil high (3.57% print was high for the year). That is a 26% move in bond prices in less than 4 months. That is incredible. TIP's have relatively outperformed TLT (regular bonds), although I'm noticing a mild divergence occuring in the last 2 days as deflation fears (irony?) seem to be taking slight hold.

Still, the downgrades must inevitably come, althought the longer it takes for the ratings agencies to act, the more its already priced in and will have no effect on trading.

I am also holding SLW SEP calls at the $40 strike, although I did not buy them correctly and and still in the red as we speak ($1.95 basis). I remain quite confident in them turning into a beautiful profit, however. These are the most aggressive calls I have right now. The XLF OCT $15 put has been a good investment as well (bought for $0.58, now trading at over $0.90).

By the end of this week, I believe US bonds will have outperformed US equities YTD. We shall see. Its still about the return of capital, not the return on capital.

I must admit, I was fooled by that fresh ATH just a few weeks ago! I took no position, though. All I hold is PM related.

Chart attached. Is a Dow Theory sell signal coming up?

Well, looking today at the change (including dividends) in 12 months and 5 years we have:

GLD: +39% / +147%
GDX: +23% / +48%
FXF: +35% / +61%
XRT: +33% / +53%
SPY: +15% / +9%

(I included XRT because it has been "always" one of the best growing etf, and finally I understood that I'd better go long instead of short with it!)

(US) Fitch analyst Riley: Will not rule out revising US rating outlook to Negative by end of August; Downward revisions to US GDP have been worse than anticipated
- Says affirmation of US ratings earlier today reflects economic outlook and the positive outcome from US debt ceiling agreement.
- Says while the deal was a positive, more needs to be done to lower the deficit to support AAA rating.

- NOTE: Earlier today: Fitch now expects to conclude its scheduled review of the U.S. sovereign rating by the end of August.

see attached.

by NYUGrad to bb

“There is probably a misinterpretation that the industrial usage for silver will fall. The reality is that the industrial usage is very much alive and that physical demand will definitely remain strong. There have been a lot of houses recommending short silver, long gold positions and I wonder if gold continues its move here, as I suspect it will over the coming months, that at some point there will be another short squeeze in silver.” - Ben Davies interview at KWN

Got silver?

Hi West; they're also moving towards communism, 6 countries now.. I'm curious why the belief they're moving away from Washington? Edit, forgot to mention smart azz comments off;-)

Its mostly about Brazil and my hats off to them. The US has a right to focus on 9/11 but I believe we've gone far too far in these efforts. Remember, never let a good crisis go to waste! We can't move without someone monitoring us. Who was it that stood most to gain from the scanners? Police state maybe?
Regards
Earl

I didnt believe it one bit and bought hxd.to about 2-3 days later at 8.71 and when hxd broke out I sold that because I didnt believe it either at 9.14

I just think breakouts and breakdowns are not what they used to be with machines trading the traders. Until that changes I will be a paranoid frenatic trader.By my standards....lol

caveat: I bought ng.to a few days ago and it gapped up today,try as I might I couldnt pull the sell trigger. no idea why but I think it was the "this time its different bug"..

Clueless politicians pose in front of the news cameras today, backslapping and bullsh*ting, saying we did our best.
Now the blame game will begin as we head towards the 2012 election.

More debt and little cutting, as we hurl off the cliff. As the US consumer faulters amidst a recession, a decimated housing industry and banks not lending, there is evidence of a weakening Euro economy, and slow downs beginning in emerging markets, China and Japan. Several countries have inverted yield curves, a sure sign of a slowdown.

A global economic slowdown lies ahead. They usually occur after an oil price shock. Except this time, there are many
more people using oil and production is becoming more difficult. Looks like the shock may continue.

Japan said it stands ready to intervene on behalf of the Yen, perhaps a cloak to cover buying of US Treasuries, coming to the rescue of the US who has to unload a ton of bonds in the next 30 days. We have been asking who would buy all this debt. Looks like Japan stands ready to help. Japan prints money to buy UST's. Bennie prints to buy UST's. The ECB may join the party soon. And gold rises. Some central banks are buying gold as demonstrated by S Korea this past week.

So the politicians shout about jobs, jobs, jobs. So much demand for discretionary goods was pulled forward by government programs for washers,dryers, air conditioners, windows, cars, trucks, houses, etc. A slowdown should be expected. And President Obama called for more unemployment checks today. Harry Reid railed against those elite
who fly in private jets and " who own those yachts and the oil companies" all who get special tax breaks. He says we need to take their money. VP Biden calling tea party folks "terrorists".

The reality of the jobs issue is: The payroll number in the United States stands at 131 million, the same as it was ten years ago. And wages are actually lower than 10 years ago. Not a good outlook for an economy which is 70% driven
by the consumer. Oh and there are some large corporate layoffs (+10,000) coming in the next two quarters.

More stagflation ahead accompanied with monetization/ dollar destruction.

that power generation needs will not diminish. Populations will continue to grow. Heck, maybe coal and solar can be used to hedge against each other. So, the debt bondholders will be payed, and we, the citizens, get stuck with the bills. However, world governments have less jingle to play with now, so more focus will be on cost expenditures. Maybe Tom Burnett won't be ' leaving the lights on ', but the room will still be for rent. Odd as it may seem, perhaps most industrialized nations will be on equal footing soon - since most of these curriencies amount to about the same thing.. To borrow a phrase, ' its just that some are more equal than others '.. I still believe the US will have a tarriff attitude adjustment with China. Thinking that Obama and future leaders will push money toward clean coal tech. and gas generation. The two can co-exist. It comes down to basic survival. DC knows that the populas can't go back to 1930's style life - it just won't work. But, let the rest of the world catch up to where we were. It will help everyone involved. How low do prices go ? Don't know, but I look at aci and marvel at their locations and reserves and rail systems- simply outstanding.

Hi Nebish I just searched and found these charts for the Gold:Silver ratio at Goldprice.org. Seems the 16:1 ratio was in 1980 at the peak of the last bull market in precious metals.At end of April this year it was 32:1 , is currently
41:1

http://tinyurl.com/3uymt5r

what is the reason? it appears that the market is confirming the coming QE3 or whatever the name will be called.

there is no other news which could push the gold price. silver price increases by $1.6 today as well.

But some of the gold miners are actually down. Does it say today's gold price is a temporary pop in response to today debt ceiling increase bill signed?

Asia market will be the indication.

I feel the gold price will drop if Asian market does not follow through.

From Saturdays Globe & Mail:

The total tax burden on Americans, as a percentage of gross domestic product, stood at 24 per cent in 2009 – lower than it was in 1965 and still falling. That compares to 31.1 per cent in Canada, 34.3 per cent in Britain, 42 per cent in France, 37 per cent in Germany and 43.5 per cent in Italy. The Japanese, Australians and South Koreans all pay significantly more.

http://tinyurl.com/3ksk68g

Dave M,

I have no idea how the taxes on individuals are balanced are in the other countries mentioned, but US tax collections have fallen due to unemployment and underemployment in recent years and yet, are favoring the wealthy.

The tax rates could/should be raised without a doubt. The wealthiest have never had such low brackets in 60 years, they have refined the use of loopholes, dodges and received great breaks such as 15% for hedge fund managersbeing classed as agents.

The worst offenders are the largest corporations like GE who paid nothing in 2010. I can remember back in the 1970s when I saw an article in LIFE magazine saying Teddy Kennedy paid less in taxes than I paid that year. (It was when the K family sold the Chicago Merchandise Mart.)

Grym

The oil is tied to the operation perspective while gold price may be tied to monetary perspective, in my opinion.

if I am correct, the price of gold is more structural change. Have you ever thought about what China central bank is doing lately after you heard S. Korea central bank was buying gold?

The price did increase a lot in July I guess S. Korea did have an impact on this.

Remember a lot of commentary including James Turk's mention that typically July & August are quiet month and the price typical is low in a calendar year. I think S. Korea bank realizes that and purchases it in July.

If I am correct, you will a very high price in September once people come back from the vacation.

Sure West, LOL if I were sitting in Brazil I'd be very proud. They have a long way to go to be putting a man on the moon (metaphor only) but absolutely what they've done for their people is tremendous. I hope for the people's sake the big money folks in that country don't try to take it all from them as has happened in the US. We were like them once... Everything the banksters have stolen from the people of the US came from this nations soils, waters and on the backs of the people. Class warfare is the progressive, communist thing, the progressive Lennonist will show up soon enough to take our lands if we don't adopt a conservative attitude and generous giving sharing attitude, the exact opposite of the progressive state cradle to grave nightmare. We're still flesh&blood last time I checked and I'm totally imperfect but that won't stop me for trying to do what I can here at home. I like free markets without the revolving door regulation farce.
Take care and hope you did good today,
Earl

http://tinyurl.com/3ql3lbx

johnuk -

Here's the long view on the gold:silver ratio starting with the sun and the moon.

http://www.bullionbullscanada.com/index.php?option...

Here's a great chart of silver demand by major consumption groups up to 2010 from The Silver Institute.

http://www.silverinstitute.org/supply_demand.php

Looks like silver consumption in the medical field is on the decline as hospitals switch to digital from photo plates although this transition is slowing in 2011 with the global economic depression. Every other group looks to be surging. Industrial demand includes solar panels.

It's a fascinating metal with seemingly endless potential when considering its max reflective quality, highest thermal/electrical conductivity, and antimicrobial use in the medical/baby spoon/athletic wear industries.

"As I pointed out a week ago: “The chart above shows that since June 20, the goldminers (GDX) have overtaking the $GOLD [and $SILVER] on the upside. As I opined, this was likely to happen, but “It’s only when GDX far outstrips the momentum of the gold and silver metal on the upside that the overall gold rally will exhaust itself and pull back for a rest.” First the Gold Bulls must stake out their new trading range, which could now be $1600 to $1650 for $GOLD.”

That’s happening. Next will be the move of capital into the miners."

Buying SLW calls very aggressively, having learnt a little from the mid-June run, looking to milk SLW calls as the miners pop here.

A little cautious as gold futures could be making a lower high in the hourly time frame and silver and double top. We'll see how that pans out by opening time. Perhaps gold is at the top of its new trading range. Let's see how the miners react to immediate softness that may ensue as this $1600-$1650 trading range develops itself. Hopefully, they play catch up.

oversold is being kind imo... That is an absurd number, a little panic involved this afternoon?

Per FINVIZ http://tinyurl.com/42c4mct

ALOHA!!

The show that never ends!!!

So while our Congress has been debating the debt ceiling and playing with budget numbers let me fill you in on what Congress has been spending and debting over the past ten months of the FY2011. KLUS-R-US ...

TEN MONTHS HERE!!!!

JUST TEN MONTHS AT THE US TREASURY ... NOT EVEN A FULL YEAR!!!

For AUGUST 1, 2011 the total YTD outlays for just four line items ...

OUTLAYS
DEFENSE VENDORS-$325.8BIL
MEDICAID-$232.3BIL
MEDICARE-$459.8BIL
SOC SEC-$498.1BIL
TOTAL=$1.516TRIL

For AUGUST 1, 2011 total net outlays(gross outlays minus redemptions) ...
NET OUTLAYS=$3.64TRIL

For AUGUST 1, 2011 total YTD net debt added to US DEBT ...
NET DEBT=$781BIL

If you add net outlays and net debt you get ...
$4.417TRIL

For AUGUST 1, 2011 total YTD tax revenues ...
TOTAL NET TAX REVENUES=$1.36TRIL

Congress debates cutting $2.4TRIL over ten years when they are spending $3.64TRIL in ten months! Wow ... no wonder Moody's sees the "negativity" here!

Those of you who want to delude yourselves that raising taxes will make a difference should move to California, unless you expect Americans will sit still for a 325% increase on their tax liabilities across the board. The US Treasury would need to raise revenues of $3.1TRIL to just break even with net outlays and net debt for the past ten months.

TEN MONTHS ONLY!!!

To compare tax brackets to the 1960s is one thing, but then why not give back all those deductions that no longer apply now, like all those AGI limits on medical deductions and every other SCH A itemization. Not to mention AMT. Not to mention lowering all the entitlement limits down to 1960s levels and all the lower payroll %%% ... If you want to do true tax comparisons then make them equal!

I am anxiously awaiting this Thursday, the usual big debt day, at the US Treasury, although on August 1st, Monday, the US Treasury issued $102BIL in Treasury Notes, so who needs debates????? Electoriat comicus ...

http://www.telegraph.co.uk/finance/markets/questor...

It's a one asset mining company in a country with political risk. However, seems to be an issue with local authorities, not associated with the civil strife in populated areas.

See attached chart. FWIW & DYODD.

speaking of civil strife, I see Mubarak is in court on charges of conspiring to kill protesters.

http://www.telegraph.co.uk/news/worldnews/africaan...

I wonder if other killers posing as leaders in the region will see this and a)consider fleeing, b)strengthen their backbone and bloodletting or c)attempt to negotiate. Either way, the future doesn't look bright for them, regardless if these thugs win this round against their respective peoples.

Hi Les, my industry uses silver as a catalyst, reacting oxygen and ethylene to make ethylene oxide. However, there are countless mostly unstudied other derivative reactions that occur which are removed through a quenching section. It just makes me wonder what all must occur in the body with regard to reactions... We do lots of research on catalyst change crews due to the dust. You sure can turn blue LOL.
Take care
Earl