Monday, August 31, 2009

Conspiracy Monday

Can September really be here? Most of June was a rain out, and all of July was a wash out, which left only August for a summer season. Where does all the time go? A bit short on time tonight, so I will spotlight a few items I found interesting. The theme tonight will be "compelling conspiracy theories" to try and make a slow Monday more exciting!

Export of "Gold Compounds" a Booming Business
This story was from back in late May, and I cannot recall seeing it at that time. Today the blog Market Skeptics takes another look at the massive exporting of "Gold Compounds" over the past year and a half (original article at Goldseek and can be found here.)
Key question:
I took special note of how 2,920 metric tonnes of “Gold Compounds” had been exported from the U.S. in 2008. This number seemed BIGGER than BIG – because the U.S is only alleged to have stockpiles of sovereign gold of 8,100 metric tonnes while annual U.S. mine production of gold is roughly 228 metric tonnes. This figure of 2,920 metric tonnes is equal to 36 % of all alleged sovereign U.S. gold stocks or more than 14 times annual U.S. gold mine production. So, I was left wondering, “just what is/are ‘gold compounds’?

I contacted the USGS and queried a qualified individual [who had working knowledge of this data stream] about the definition of “Gold Compounds”. I was told that, according to the U.S. Census Bureau – who supplies not only the definition but the actual reported numbers, gold compounds were typified by industrial type products containing low percentages/amounts of actual gold content – like gold paint.

I then reasoned with the USGS person, if such were the case, why would U.S. exports have increased in 2008 to nearly 3,000 metric tonnes [when the Global Economy was slowing and the U.S. Dollar was strong] from 2007, when U.S. exports totaled approximately 2,000 metric tonnes [when the U.S. Dollar was weaker and the Global Economy was booming]? I noted that this was counter-intuitive and made no fundamental economic sense...

When confronted with reason, the individual for the USGS agreed that the data, as published, did not make logical sense and explained that the U.S. Census Bureau was questioned as to the veracity of this particular line item in their data.

I asked the USGS employee if the gross weight or the gross value [not shown in the table but known to the USGS] of the “Gold Compounds” was queried.

The individual confirmed that their query to the U.S. Census Bureau dealt with the gross value being assigned to these exported goods.

I responded rhetorically, “being an issue of gross value – then let me guess that the U.S. Census Bureau is assigning an astronomically high value to these goods. Such a high value would be COMPLETELY INCONSISTENT with what the U.S. Census Bureau claims these items are- namely, industrial goods. The values being reported would be more in line with these goods being gold bullion or equivalents”.

The individual from the USGS confirmed my reasoning when he responded, “that would be CORRECT”.

At a minimum, this is a very peculiar event. Does the US sell that much gold paint, or those little gold flakes for alcohol shots? Does the US export enough "industrial use" gold to significantly effect US trade numbers? Market Skeptics offers his own idea:
Until someone explains to me what these “gold compounds” were, I am going to assume that they were half the US gold reserves leaving the country.

I am not ready to jump on that ship, but either this is a way to quietly move gold bullion on a large scale back to foreign central banks, or the numbers themselves are fictitious and constitute a blatant data manipulation on trade numbers. In any case, this is an important story.

Banking Bailouts by Other Means
The fact that shares of the worst financial institutions are both going parabolic and doing so on massive volume has been known since June. Finally, a concerted effort to try and put these numbers in perspective is happening, and the picture painted is both not surprising nor indicative of a "real" market.

Guest poster at The Big Picture, Steenbarger, has a nice summary of what has been going on:
Above I took C, FNM, and FRE and expressed their *composite* volumes (e.g., the volumes transacted across all exchanges) as a fraction of NYSE volume. What we see is that, early in 2007, those three stocks accounted for only 1-3% of NYSE volume. During the financial crisis of late 2008 and again as the market was bottoming in early 2009, that ratio skyrocketed to well over 50%...

Again, the question is what all this means. There is no way that mom and pop trader and investor are involved in any meaningful way in generating these kind of daily trading volumes. Nor are proprietary trading shops capable of generating volumes that exceed those of the entire New York Stock Exchange. While I have no doubt that the algorithmic trade close to the market is participating in this movement, the directionality of the involvement suggests that large financial institutions are systematically buying the beaten-up shares of the poster children for TARP: C, FNM, FRE, AIG, and the like.

It is worth noting in this regard that other major (healthy) financial firms, such as GS and JPM, have seen no such surge in their volume or their trading prices.

My best guess? We’re seeing a massive infusion of capital into very troubled financial institutions, no doubt aided by short covering and the participation of program traders and proprietary daytrading firms. Where is the capital coming from? Why has it poured in so suddenly (the really large infusions began in early August)? Why is it coming in at such a pace that it is dominating NYSE volume? Zero Hedge rightly wonders why this hasn’t triggered alarms at the exchange. And why is it happening with only the weakest financial institutions?

If you were the government and you saw that these institutions were on the verge of a major fail, with billions of taxpayer dollars at risk, I’m not sure you’d announce that to the world. Nor, at this point politically, could you ask for yet another bailout package. But you would only pour money into those stocks at a frantic pace (capable of detection) if you perceived a dire need for the capital.

I’m not inclined toward conspiracy theories, but it’s difficult to imagine a scenario in which this is not a (frighteningly necessary) coordinated capital infusion, with taxpayer dollars ultimately at work in financial markets.


The bumped up stock prices may allow secondary offerings to occur for the lucky few. Another angle is that the US government is buying the shares of these firms from foreign holders. Remember from last Wednesday's post "Repudiation of US Financial Engineering" it was clear that the US government is taken agency debt off the hands of foreign holders and exchanging them for treasury buys. I think that in a similar manner the US may be taking the holdings of the institutions listed above off the hands of foreign holders as well. In any case, the blatant manipulation going on in these stocks would be a case for the SEC to be involved in, if only they wanted to get involved.

Shadow Inventory; Conspiracy Theory or Real?
It is becoming group think that the housing market is bottoming based on a bunch of indicators that point to a somewhat less terrible market. I have offered that until I know how banks are handling all the foreclosures they have, I cannot make a call. Two opposing views are on display today to further confuse the issue.

Calculated Risk covers a Diana Olick CNBC piece on how Bank of America states they are handling their foreclosure process:
Bank of America:
Foreclosure sales have been abnormally low since we learned of the pending implementation of the administration’s Making Home Affordable program. From that point, we delayed the initiation of foreclosure proceedings and sales for customers that may eligible for a loan modification under MHA. As a result of this policy, our foreclosure sales in recent months have been as little as half the normal pace we experienced before. ...
Now that Making Home Affordable programs are operational, we do project an increase in foreclosures as we exhaust every available option to qualify customers for modifications and other solutions.
We do not hold foreclosed properties off the market.

So Bank of America does not hold foreclosure properties off the market, UNLESS, they are holding them off the market based on yet another mortgage modification plan to be enacted. Is that even an answer?

Dr. Housing Bubble offers another take on "Shadow Inventory" and the post today is a must read if you want to understand the games being played. Some excerpts:
Apparently acknowledging shadow inventory is like holding onto childhood superstitions like believing in Santa Clause or the financial Easter Bunny. Over the last week, many of you have sent me articles where many authors both amateur and professional have started attacking shadow inventory and started proclaiming that it was a myth. Shadow inventory does not exist according to these new articles. Some of these authors went ahead and made up their own definitions of shadow inventory which in itself is curious since this inventory supposedly does not exist. The problem of course is that there are many definitions of what shadow inventory is so I will try to reiterate what I have been talking about for months...

What is shadow inventory? First, shadow inventory is housing units that are not making it onto the public market for one reason or another. There is speculation surrounding why this is happening. Lenders are overwhelmed and simply do not have the human capital to handle the glut so goes one theory. Others speculate that lenders are simply too incompetent to have a system in place to handle the mess they created.”...

(See article for graphic) The public can see 465 homes with 114 short sales and 48 foreclosures. But the reality is, there are some 1,639 properties either in pre-foreclosure, default, or bank owned. Now, if we remove the public listings that would leave us with 1,477 homes not showing up. Given the entire MLS inventory is 465 I would say that is a rather significant number. Most of these homes will default. This is something we already know. This is in fact shadow inventory. Banks are simply self-serving and are holding off on foreclosing on homes because to do so, would implode their business. That is, they would need to take an immediate and gigantic write-down.

The article has plenty of graphs and real time housing data points to back up his opinion. Bank of America only has their reputation behind their claims. I leave it to you to decide who is more believable.

Have a good night.


GawainsGhost said...

Yeah, shadow inventory is a problem. But the real reason I suspect these banks are holding off on foreclosure is because once they actually do seize the home, they have to pay taxes on it.

Anyway, I thought I would be driving the Mazda today. Called my insurance agent this morning, told him to get the paperwork ready, then I had some work to do, but when I got to the insurance company this afternoon, he had put my father, who is deceased, my mother, who is 70, my sister, my brother and my niece, all of whom live in Austin, on the policy. Good grief.

I told him, no. None of these people are ever going to drive this car. Do you think I want to pay insurance on a top end sports car for a 20 year old girl, who lives 400 miles away? I want a separate policy in my name only for the truck and the RX-8.

So he has to redo all the paperwork, and I have to go back and sign it tomorrow. And my mother has to go in to have my father, brother and sister taken off her policy. What a mess. Insurance salesmen, you got to keep your eye on them.

So I'll hopefully take possession tomorrow. Meanwhile, the Mazda is prominently featured on the showroom floor at the dealership. Yeah, no doubt. It's probably the first and only 2010 RX-8 Grand Touring model in South Texas. Soon it will be mine.

getyourselfconnected said...

sorry about the paperwork mix up, the same thing happens to my wife because she has the same name as her mom so things always get messed up. New car smell, sweet!

watchtower said...

"it will be mine ....oh yes will be mine "

Wayne Cambell checking out a guitar at a music store on 'Wayne's World'

I'm excited for you Gawain, hope it goes well tomorrow.

getyourselfconnected said...

a Waynes World reference? We have fallen!

watchtower said...

It was either the 'Wayne's World' reference or a line out of a Beatle's song...

: )

W said...

In addition to the Anakin/Vader pic I noticed you have a pic of the Sith Master from The Old Republic.

getyourselfconnected said...

good eye. They have yet to reveal the sith master's name, but if you have seen the Old Republic game trailer he is a terifying figure.