Seeking Alpha

Dave Kranzler's  Instablog

Dave Kranzler
  • on Real Estate
Send Message
I spent many years working in various analytic jobs and trading on Wall Street. For nine of those years, I traded junk bonds for a large bank. I have an MBA from the University of Chicago, with a concentration in accounting and finance. Currently I co-manage a precious metals and mining stock... More
My company:
Golden Returns Capital
My blog:
Investment Research Dynamics
View Dave Kranzler's Instablogs on:
  • Let's See What's Really Fueling The Stock Market

    (Hint: It isn't fundamentals)

    The run-up in the stock market (the SPX for purposes of this article) has been nothing short of stunning. Since hitting a sell-off bottom on October 4, 2011, the SPX has run-up a nearly non-stop 47.8%. In just the last month, the SPX has run up 7.5%. This is in the face of deteriorating economic indicators and declining corporate revenues. The stock market has for sure taken most observers and professionals by surprise, except for maybe the most passionate "perma-bulls."

    Given this incredible move higher in stocks, I wanted to investigate a couple of possibilities for what is fueling this near-parabolic stock rally. Based on what I've been able to come up with, it's pretty clear that stocks are rocketing higher on Fed fuel and not fundamentals. But don't take it from me, it seems that some high profile billionaire investors are unloading their big positions, especially anything related to consumption: Billionaires Are Dumping Stocks. Let's take a look "under the hood" of the economic and financial system and see if we can figure out why.

    While Bernanke was giving his report on the economy and monetary policy to the Joint Economic Committee of Congress today, in which he pretty much laid to rest any fears that the Fed would "taper" its monetary policy and bond purchase program anytime soon, I decided to look into some of the Fed's monetary data as reported on the St. Louis Fed website. Specifically I wanted to look at the Adjusted Monetary Base, which is the sum of the currency in circulation plus the commercial bank reserves held at the Fed, because this monetary account is the one directly affected by the QE program.

    Here's the most current snap-shot of the Monetary Base going to back to 1984, when the data-series began:

    (click to enlarge)

    Close to $2.8 trillion in money has been printed and used to purchase assets from the banking system, ranging from highly distressed toxic waste to short-term Treasury notes.

    Next I decided to "blow up" the chart above and look at just the last twelve months and compare it to the same time period for a chart of the S&P 500:

    (click to enlarge)

    (click to enlarge)

    As you can see, there is nearly a 1:1 correlation between the near-parabolic growth in the Monetary Base since the end of November 2012 and the near-parabolic trajectory of the SPX since mid-November (marked by the vertical red lines). I don't have time to run the data, but my University of Chicago B-School training visually tells me that the correlation is probably around .8, if not higher, meaning 80% of the move in stocks since November can be attributed to the increase in the Fed's Monetary Base.

    Without doing a data dump of recent corporate earnings reports, we know that regardless of the net income being reported (net income being potentially subjected to many forms of GAAP accounting manipulations), that the revenues being reported by the largest of the SPX companies are flat to down. This is not the sign of an economy that is capable of growth and true earnings expansion. To give one example, Caterpillar (CAT) recently reported its April revenues. Globally sales were down 9% from March, but they were down a shocking 18% in North America: CAT April revenues. This is primarily heavy machinery related to construction and homebuilding. If CAT's sales are plunging like this, it means that construction and homebuilding are likely getting ready to drop pretty hard.

    My point here is that economic and corporate fundamentals are not supporting the rapid move higher in the stock market and the concomitant rapid expansion in the market values of individual companies. To reinforce this point, I wanted to show a chart that I sourced from Zerohedge, which maps out the accelerating decline in the per share operating income of the S&P 500 over the last 12 months:

    (click to enlarge)

    In other words, based on economic and corporate earnings reports which are suggestive of a slow down in the economy, combined with the fact that corporate operating income is plunging, there can be no doubt that the run-up in the stock market is unequivocally not supported by fundamental factors.

    That leaves only the money being printed by the Fed. Wall Street analysts can crow all they want about how the economy is improving and corporate earnings will improve, but the proof so far is in the numbers, which show that just the opposite is occurring.

    Moreover, Fed officials can talk all they want about tapering QE, but if you look at their actions based on the recent move in the trailing twelve month Monetary Base above, not only are they not tapering, they are actually increasing the rate at which they are injecting liquidity into the banking system. In my mind, at least, there can be no doubt that the money being printed by the Fed is what is fueling the stock market.

    Now we can debate whether or not the Fed is serious about "tapering" its printing. But I have no doubt based on the evidence I presented today that if the Fed were indeed to "taper," the stock market suffer a serious and rapid decline.

    The real question now is for how long can this stock market "melt up" last? No one can possibly know that answer for certain, but at this point buying stocks right now is not about analyzing fundamentals and value, but more akin to playing stock market roulette. Anyone who has been fortunate enough to take advantage of being long the stock market should seriously consider hedging or taking a significant portion of their investment off the table.

    Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

    May 23 10:02 AM | Link | Comment!
  • The Comex Is One Big Ponzi Scheme

    When it becomes widely known that all of the people who think they own gold in fact don't own gold, that it's been hypothecated and re-hypothecated so many times that there are 100 claims for every single ounce of physical gold, that is when the prices of gold and silver will really go berserk to the upside, and at that point the shorts will have serious problems - John Embry on King World News

    The press pounced all over the massive smack down on gold/silver last week. Headlines were thrust in everyone's face. Gold dropped $200 dollars in two days and the media wanted to make sure everyone knew about it. Well, guess what? As I write this, gold has gained back over 50% of that two-day, $200 price drop.

    In the aftermath of that sell down, a lot of facts have come to light. But first, the bounce we're seeing is illustrative of the fact that you need to hold on tight in this sector in order to truly benefit from the wealth benefits of investing in physical gold/silver and good mining stocks.

    What's been exposed from this market price correction is that 1) more people now understand why it is important to own physical gold and silver, as evidenced by the fact that the U.S. mint quickly sold out of silver eagles and is on a track to sell a record monthly amount of gold eagles; and 2) there is a serious problem globally with the amount of gold that is available for physical delivery to the buyers who are demanding actual delivery.

    I thought I would go over some statistics from the Comex to illustrate why we know this is the case. You can access daily open interest and warehouse stock reports here: Open Interest and Warehouse gold/silver stocks.

    The total gold held on the Comex is 8.1mm ozs, of which 6.3mm is not available for delivery - i.e. it's investor gold being held in Comex vaults. Stunningly, over 2 million ounces of gold - roughly 60 tonnes - has been removed from the Comex vaults in the last three months. Most of it has come from investor accounts. You have to wonder why all of a sudden big investors have removed their gold from the Comex.

    Investor gold is not "eligible" for delivery on futures contracts. The gold that can be delivered is sitting in "registered" accounts. The amount of registered gold currently is 2.28 million ozs. The total open interest in futures contracts for gold is 416,000 contracts, or contracts representing 41.6 million ozs. Essentially there's 18x more paper gold in the form of futures open interest than there is gold that can be delivered. The June front month for gold has 255,000 open contracts, or 25.5mm ozs open. That's 11x the amount of gold available for delivery.

    In silver the total open interest represents 786.3 million ozs. That represents about 3/4 of global annual silver production, which includes 257mm ozs of recycled silver. So, the total open interest on the Comex is about equal the total annual amount of silver mined globally. There's 39mm ozs of silver available for delivery. In other words the amount of paper silver on the Comex is 20x the amount of silver the Comex has for delivery.

    If about 9% of the June gold contract - and 5% of the July silver contract - longs were to hold for delivery, the Comex would be completely wiped out of its gold and silver and would have to default on the delivery of some of that metal. the Comex has a "force majeur" clause in its contract that allows cash settlement if there's some kind of "act of God" the prevents delivery of the physical metal being demanded. We won't see that happen in the near future most likely, but many of us who have analyzed this market for over a decade believe that at some point the Comex will find a reason to invoke this clause rather than face outright default.

    As demonstrated by my Comex gold/silver inventory example, and by the recent shortage of U.S. minted silver and gold eagles, the amount of physical gold/silver that is available to deliver into investor/end user demands is becoming more scarce

    I think that explains why big investors are removing their gold from the Comex. The Comex is one giant Ponzi scheme. Anyone who is going to rely on the Comex as a source of silver, either for industrial/jewelry manufacture or for investment, is going to be left holding a giant, empty paper bag. That explains why we are seeing a such frenetic activity - not just in this country but globally - by investors looking to get their hands on gold/silver that can be physically delivered into their possession.

    The Comex is only part of the problem. As the severity of the physical gold/silver shortage vs. the paper claims issued (futures, LBMA forwards, OTC derivatives and Central Bank leases and swaps) against that actual amount of physical gold sitting in bank vaults that can be delivered into delivery demands by investors, the price of gold and silver is going to start to go parabolic, as those who want to own physical metal in their possession chase the price higher to achieve that goal.

    Although most of you are not aware, but from 1974-1976, the price of gold dropped 47%. But from 1976 to 1980 the price of gold went up 800%. Given what we know about the massive, unsolvable global financial problems, and the enormous amount of money that will have to be printed to keep the system from collapsing outright, it's a good bet that the next extended move to a higher supply/demand equilibrium price level in the metals will dwarf the move they made in the late 1970's.

    The best way to play this coming move is get long GLD and SLV. More aggressive traders can get long call options on GLD, SLV. You can also speculate using gold and silver futures. Small accounts can trade the e-mini Comex gold/silver futures (32 ozs/1000 ozs), which are 1/3 and 1/5 the size of the big contracts respectively. My only caveat with using futures is that it is highly probable that we are going to see extreme volatility and wide price swings as the market goes into panic mode. If you use futures, make sure you leave enough margin cushion to avoid getting forced out of you position with margin calls. If you can successfully time a move higher, especially using big silver contracts, the amount of money to be made is spectacular.

    Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

    Additional disclosure: The fund I manage is long physical gold, silver, Comex futures and mining stocks.

    Apr 29 6:58 AM | Link | 2 Comments
  • The Frightening Truth About Cyprus: The "Bail-In" Model Was Implemented As Planned

    "If there is a risk in a bank, our first question should be: 'Ok, what are you the bank going to do about that? What can you do to recapitalise yourself?' If the bank can't do it, then we'll talk to the shareholders and the bondholders. We'll ask them to contribute in recapitalising the bank. And if necessary the uninsured deposit holders: 'What can you do in order to save your own banks?'" - Jeroen Dijsselbloem, March 26, 2013 (bold edit is mine, I sourced this quote here: Caveat Depositor)

    That statement - and specifically the phrase used in bold - is directly taken from a global banking agreement for bank rescues that was ratified in 2011 by the G20 members (further elaborated below). Although the U.S. media is not reporting this fact, it is extremely important to know so that you can take the necessary pre-cautions to protect your money.

    Like everyone else, when I saw the first reports that bank depositors in Cyprus banks where going to take a loss on their bank deposits, I was in shock and disbelief. At first it was all depositors, but as the situation unfolded, the deal - known as a "bail-in," was restructured to protect depositors up to their Government insured deposit amount of 100,000 euros. The amount of loss that will be suffered by deposits in excess of 100k euros has not been solidified, but the latest reports suggest it could be as high as 60%.

    What most people do not realize is that when you deposit your money in any bank, from an accounting and legal standpoint, you are loaning the use of that money to the bank. In other words, you become a creditor to that bank. Look at any bank balance sheet and you'll see that "deposits" are listed in the "Liability" section of the balance sheet. Defined as such, it means that as a bank depositor, you are exposing yourself to the ability of the bank to give you back your money when you want it. The bank is your legal counter-party.

    The only reason people believe that their money is completely safe in a bank is the existence of Government-sponsored deposit insurance. The only difference between what is happening in Cyprus now and what happened in the U.S. in 2008 is that the U.S. has the ability to print its own currency in order to bailout the banks and fund depositor insurance. Cyprus is dependent on the ECB to make that decision.

    In addition to printing money, the big bank bailouts in this country and in Europe were funded by the taxpayers. That's exactly what TARP is and, most people are unaware of this, but the Treasury (i.e. the taxpayers) placed a guarantee on a significant portion of the assets the Fed assumed from banks in exchange for providing immediate liquidity. If these measures were not implemented, it is likely that U.S. bank depositors would have suffered the same fate as their Cypriot counter-parts.

    Because the use of taxpayer-funded bailouts would likely no longer be tolerated by the public, a new bank rescue plan was needed. As it turns out, this new "bail-in" model is based on an agreement that was the result of a bank bail-out model that was drafted by a sub-committee of the BIS (Bank for International Settlement) and endorsed at a G20 summit in 2011. For those of you who don't know, the BIS is the global "Central Bank" of Central Banks. As such it is the world's most powerful financial institution. I sourced a copy of this Agreement here: Danger in Bank Accounts.

    I read through the Agreement and was quite stunned by the terms of the agreement and also by the implications for any bank depositor in any country. The bank rescue model lays out a complete, systematic procedure for the rescuing and restructuring of any institution that is considered a "SIFI" - a Systematically Important Financial Institution. Here is a link to the Agreement: Financial Stability Board Rescue Model

    The Preamble specifically states:

    The objective of an effective resolution regime is to make feasible the resolution of financial institutions without severe systemic disruption and without exposing taxpayers to loss, while protecting vital economic functions through mechanisms which make it possible for shareholders and unsecured and uninsured creditors to absorb losses in a manner that respects the hierarchy of claims in liquidation.

    As you can see the agreement references specifically avoiding more taxpayer bailouts. It also refers to bank deposits in excess of Government insured amounts as "uninsured creditors." This is essentially the standard legal bankruptcy model which uses creditor hierarchy (secured lenders, unsecured lenders, preferred equity, equity) and applies to the rescuing of banks.

    This is very important to know about and understand because what is commonly referred to as a "bail-in" in Cyprus is actually a global bank rescue model that was derived and ratified nearly two years ago. It also means that bank deposits in excess of Government insured amounts in any bank in any country will be treated like unsecured debt if the bank goes belly-up and is restructured in some form.

    Because this is a legal Central Banking agreement that will be applied globally, it also means that U.S. bank depositors will not be immune to this rescue mechanism. It means that no one should keep any amount in any bank that exceeds the FDIC guarantee. In fact, I would recommend only keeping enough money in the bank to fund your monthly or quarterly bill paying requirements. Any amount in excess of FDIC deposit insurance will be exposed to the risk bankruptcy.

    Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

    Tags: economy
    Apr 03 3:36 PM | Link | 1 Comment
Full index of posts »
Latest Followers


More »

Latest Comments

Posts by Themes
Instablogs are Seeking Alpha's free blogging platform customized for finance, with instant set up and exposure to millions of readers interested in the financial markets. Publish your own instablog in minutes.