May 4, 2011

Pop Goes Silver!

May 4, 2011

Equity markets have opened weaker this morning after yesterday’s moderate sell-off. The ISM non-manufacturing composite came in at 52.8 vs. expectations of 57.5 and March’s 57.3. The market has been signaling a defensive rotation as healthcare, telcos, consumer staples, and utilities have led the market while energy and industrial stocks have been weak. Combined with the weaker 10-year yield, the defensive rotation suggest that the odds of a mid-cycle slowdown or recession have increased.

According to the Energy Information Administration gasoline will cost the average consumer $1200 more in 2011 than it did in 2009. The current national average of $3.97 is 48% higher than it was in September. Some relief may be in sight as gasoline for September delivery closed yesterday 4% below the June contract. A number of seasonal refinery shutdowns are expected to also come back online over the next few months.

That popping sound you heard may have been the bubble in silver. The chart below shows the 20% correction in silver over the past week after the giant run-up since December. Hedge funds such as Soros Fund Management and Passport Capital have reportedly been dumping silver since volumes exploded over the past few weeks. The silver ETF (SLV), typically a thinly traded security, has been trading higher volumes than the S&P Spider (SPY) over the past few weeks. Typically the volume on the SPY is 8x that of the SLV.

Portugal agreed to a $116 billion rescue package from the IMF and EU. Prime Minister Socrates is awaiting a response from the nation’s opposition parties.

A US Senate report accusing Goldman Sachs of deceiving clients has been referred to both the DOJ and the SEC. Speculation is that Lloyd Blankfein may be charged with perjury in his Senate testimony last year.

The Woodrow Wilson Center for International Scholars issued a report concluding that the US could miss out on a huge infusion of Chinese capital due to political obstacles created by the US. The report cited a potential global investment by China of $2 trillion over the next few years.

APAC markets were weak last night as commodity prices continued to decline and China discussed potential further tightening. The ASX, Kospi, and Shangahi each lost 1%, Hang Seng 1.3%, Taiex 0.2%, Singapore Straits 1.2%, and Sensex 0.4%.

A paper from the IMF says that the US was able to rapidly pay down its huge WWII debt through a combination of economic growth and tight financial controls. The tight financial controls were abandoned around 1980, according to the report.

Treasury Secretary Geithner has concluded that the US can continue making payments on debt and other expenditures until August without raising the debt ceiling. Tax receipts are running better than expected and the Treasury is controlling the timing of certain non-critical payments. The prior deadline was early July.

According to the Economist (again), household formation in the US will rise as the job market recovers. Rising household formation will help stimulate the housing market. In 2010 375K households formed, the lowest number ever and well below the prior 10-year average of 1.3 million.

The Pension Benefit Guaranty Corp (PBGC) has a $23 billion deficit, and is looking to increase its take from employers by $16 billion over the next decade to help make up the shortfall. The agency is under major financial stress after taking on the pensions of the auto industry.

European markets are weak across the board.

Have a great morning.


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