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A Little Perspective on Silver & The Definitive MF Global Crisis Recap

Precious Metals Outlook: North American Silver Supplies Can’t Keep Up With Demand

“In 2002 the two countries (Canada & USA)produced 87.5 million oz of silver and sold 11 million Silver Eagles and Maple Leaf coins. These coins sales accounted for 12.6% of U.S. and Canadian silver production.

In 2011, just nine years later, the U.S. and Canada are estimated to mine only 53.6 million oz of silver combined, while their total Silver Eagle and Maple Leaf coin sales are to surpass approximately 62.5 million. Thus, their coin sales are 16% greater than their total domestic silver mine supplies”

- Steve St. Angelo

The Effects of The MF Global Crisis on Commodities

In mid December, as a Principal of Rosenthal Capital Management, I reached out to our friends and partners in an attempt to offer sanity and illumination during a time of unprecedented  volatility. The MF Global crisis had unleashed havoc on financial markets and conversations were in order. It was a time to pay homage to Rudyard Kipling’s IF:

If you can keep your head when all about you
Are losing theirs and blaming it on you;
If you can trust yourself when all men doubt you,
But make allowance for their doubting too:
If you can wait and not be tired by waiting….

The following is an outline of those conversations:

1) The volatility of markets this year, while already exaggerated at the end of August, has reached epidemic proportions in the wake of the MFG crisis. Marc Faber described it best in his Dec. 3rd release of the Gloom, Boom & Doom report:

…Overwhelming buying or overwhelming selling are lopsided days in which volume runs 9:1 on the upside or 9:1 on the downside. The few years since 2007 have been marked by an incredible surge in lopsided days, a behavior that has always been previously termed panic buying or panic selling….

Said surge has reached a fever pitch in the wake of the European debt debacle and subsequent MFG crisis as can be seen in the charts below….



Faber explains:

The statistics in the first row (of table 1) are for an entire decade; thus we experienced huge swings less than one-tenth as often as we do now. It is truly frightening to consider that we have already surpassed the previous record of 26 huge downside daily swings in 2008, when the financial system nearly collapsed (see Table 1)….A 50-day moving average of lopsided days (see Figure 2) shows precisely how the current environment compares with the Crash of ‘87 — quite poorly. Note that our moving average quite often falls to zero, meaning no instances of lopsided volume and thus, comfort for investors. In fact, from the start of our chart to June 2007, shortly before one of the most significant stock market peaks in history, our 50-day M.A. was at zero 58% of the time. Since then, there has been one stretch of only six days in which our average resided at zero, a paltry half of one percent. To say there is a dichotomy is completely insufficient.

Faber goes on to explain the impact of High Frequency Trading on the aforementioned data set and finishes with a compelling description of the MF Global crisis, the ramifications of which can be viewed on the right side of Figure 2.  We see year end volatility almost off the chart. I suggest all read this report if you wish for clarity. His invocation of Leo Tolstoy for a description of John Corzine is priceless…”(Corzine) who fits perfectly Leo Tolstoy’s description: ‘A man is like a fraction whose numerator is what he is and whose denominator is what he thinks of himself. The larger the denominator, the smaller the fraction.’”

2) The freezing of 38,000 customer accounts by the trustee of the MFG bankruptcy is causing a temporary dislocation between price and supply/demand reality in the commodity markets.

3) Forced liquidations of these accounts by the trustee is adding to the mayhem and exaggerating the price swings.

4) Uncertainty surrounding the sanctity of segregated customer accounts inside Futures Commission Merchants (FCM) is creating a dearth of liquidity in the commodities markets as clients from all different FCMs not just the 38,000 from MFG scramble to secure capital.

5) Forced Liquidation + Dearth of Liquidity = Asset Prices that DO NOT Reflect Reality.

6) The best time to acquire any asset is during a period of selling capitulation of said asset when liquidity is scarce. Those with capital who are not caught in the massive margin call are king in what can only be termed as the ultimate buyers market.

7) By the time the Trustee of the MFG bankruptcy announces their findings from the ongoing investigation commodity prices will have bottomed.

8a) Question: Where is the customer money? Is it stolen or embezzled? Did it simply vanish as countless clueless senators ask during the hearings on Capitol Hill? Financial TV and periodicals are getting a lot of mileage out of this ‘mystery’.

I will tell you where the money is and forgive me if my certainty sounds arrogant. It is not arrogance but disgust you hear in my voice. A disgust for the drooling manner with which the dogs of traditional financial media slobbers all over any story they can call a ‘mystery’ and pack with innuendo.

For those hooked on the drama I’m sorry to say the story is much more banal. The money is with the counter parties plain and simple. JP Morgan has the money and I’ve no doubt other banks as well. MF Global used massive amounts of leverage and when the European debt markets imploded more collateral was demanded. Don’t get excited this does not mean JPM is guilty of anything other than following business practices of the day. This is only the first week of December, over the next few weeks and no doubt by the time the Trustee of the bankruptcy announces its findings we will read stories that say the ‘mystery’ money is in the hands of JP Morgan and others.

8b) I write this missive today, Jan. 5th and can now prove my early Dec. theory with the following NY Times article….

E-Mail Clues in Tracking MF Global Client Funds

Federal authorities investigating the collapse of MF Global have uncovered e-mails that detail the transfers of money in the firm’s last days, including transfers that contained customer money, according to people close to the investigation.

One e-mail chain refers to the transfer of roughly $200 million that MF Global owed JPMorgan Chase on Oct. 28 — the firm’s last business day before it filed for bankruptcy. In that chain, a senior official in the firm’s Chicago office was told to make the transfer, said the people close to the investigation who requested anonymity because the inquiry was still open.