Saturday, August 21, 2010

Commentary..August 21.2010

Good morning Ladies and Gentlemen:
Before beginning, I would like to report that 4 banks entered our morgue having taken their last breath of air Friday.
Here are the latest entrants:

Bank Closing Information – August 20, 2010

These links contain useful information for the customers and vendors of these closed banks.

ShoreBank, Chicago, IL 
Imperial Savings & Loan Association, Martinsville , VA 
Independent National Bank, Ocala, FL 
Community National Bank at Bartow, Bartow, FL


You will note that the one bank that bit the dust was Shore Bank in Chicago which has been propped up by Obama and all the bigwigs

in Washington.  Please read this account on the demiseof Shorebank from Zero Hedge.

Failure Of Obama's Pet ShoreBank Costs Taxpayers $368 Million, Which Immediately Goes To Goldman Sachs Among Others

Tyler Durden's picture

After a lengthy attempt to bail out his pet bank, ShoreBank Chicago, Illinois, which included several alleged armtwisting episodes by the administration, the president has finally let the bank die (with its assets valued at about 50% of face). Yet instead of going to hell, it was immediately resurrected with a bevy of new owners, among them Goldman, Morgan Stanley, and BofA, all of whom received nearly $400 million in taxpayer money for their "generosity" to keep the bank zombified even in teh afterlife.

Some details on the bank from the FDIC press release: "As of June 30, 2010, ShoreBank had approximately $2.16 billion in total assets and $1.54 billion in total deposits." In other words, the value of ShoreBank's assets was well below 70% of face, if the bank was undercapitalized at its current deposit level. Continuing: "The FDIC and Urban Partnership Bank entered into a loss-share transaction on $1.41 billion of ShoreBank's assets. Urban Partnership Bank will share in the losses on the asset pools covered under the loss-share agreement. The loss-share transaction is projected to maximize returns on the assets covered by keeping them in the private sector. The FDIC estimates that the cost to the Deposit Insurance Fund (DIF) will be $367.7 million." Netting the incremental cost of taxpayer DIF subsidies, means that the real value of assets was ($1.54 billion - $367.7 million)/$2.16 billion or 54% of face. And this is a bank that Obama wanted to keep alive at all costs? And just who is this "Urban Partnership Bank" that is receiving a taxpayer subsidy of $368 million? Why all the usual suspects of course: "The significant investors in Urban Partnership Bank are American Express Company, Bank of America, Citigroup, Ford Foundation, GE Capital Equity Investments, Inc., Harris Bank, the John D. and Catherine T. MacArthur Foundation, JPMorgan Chase & Co., Key Community Development Corp., Morgan Stanley, Northern Trust Corporation, PNC Investment Corp., State Farm Mutual Automobile, The Goldman Sachs Group, Inc., and Wells Fargo & Company." And so the old "out-of-one-taxpayer-pocket-and-into-another-Wall-Street-pocket" game continues, only this time it includes administration darling banks that should have been liquidated long ago.

By keeping ShoreBank artificially alive for far longer than it deserved, the assets amortized far more than they would have had it been taken into receivership by a non-conflicted bank, and thus the final cost to taxpayers would have been far less.

As it stands, Goldman and 11 other banks are receiving a multimillion dollar gift to conduct a portfolio liquidation run-off of ShoreBank's assets, while merely making sure existing deposits are serviced. At least we now know just how truly angry at Wall Street Obama is.

The funniest bit: this is how efficient the auction process was (from the press release):

FDIC received only one bid, which included an asset discount of $146 million and a 0.5 percent deposit premium. This saved the FDIC's insurance fund $250 million to $334 million over liquidation.

This also padded the top line of the abovementioned banks by $368 million off the bat, over and above whatever they make as they collect the proceeds from the portfolio run off.

In other words, Wall Street's core banks could have come up with any bid they wanted, and the FDIC would have had no choice but to fund the difference, because the alternative would be, gasp, so much scarier. Hm, where have we heard this before.

Full press release (link) and supplemental information (link) to this latest taxpayer gift to Wall Street's kleptocrats.



Gold closed down by $6.60 to  $1227.10.  Silver had an awful day closing down 34 cents to 17.98
The open interest on both silver and gold continue to rise setting up a climax war breaking out between the paper bulls and the
paper bears.  The gold comex OI rose by a huge 9643 contracts to 556,143  The silver comex OI rose also by a wide margin resting tonight
at 131,468 up 2710 contracts.It is clear that the banker cartel are petrified about seeing gold above 1230 and silver above the resistance line of 18.50
The COT released after the market closed was also quite revealing:
Here is the Gold COT report:
COT Gold, Silver and US Dollar Index Report - August 20, 2010

-- Posted Friday, 20 August 2010 | Digg This ArticleDigg It! | Share this article | Source: 

Gold COT Report - Futures

Large Speculators

















Change from Prior Reporting Period


















Small Speculators






Open Interest














you can see that the large speculators that were long continued to pile into gold by a huge 16,469 contracts.
Those that were short added to their short position by 2928 contracts.
In the all important commercial category, those there were long decided to lighten up a bit, as they reduced
their longs by 1918 contracts.  The big bully commercial banks like JPMorgan and HSBC decided to add massively
to their short position (supplying the paper unbacked by gold) to the tune of 16,672.
Thus in essence the large speculators were buying gold and the large commercials were supplying the necessary paper.
The small specs have now continued to press into the game.  Those that were long increased their those positions by a rather
large 4126 contracts.  Those that were short reduced their shorts by a tiny 923
The battle of supremacy for gold continues.
And now for silver:

Silver COT Report - Futures

Large Speculators

































Small Speculators






Open Interest












The large speculators that were long in silver continued to add to those positions to the tune of 654 contracts.
Those large speculators that were short silver added to its short position to the tune of 816 contracts.
And now for the all important commercial sector.
Those commercials that were long continued to add to its additions to the tune of 2273 contracts.
The bully commercial bankers like gold added to its short position by a huge 3264 contracts (they supplied the unbacked
paper silver)
The small specs in silver are still not playing in this market having been burnt too often. The longs increased their positions by
a tiny 668 and those that were short reduced its positions by a tiny 485.
And now let us go to the inventory and delivery notices:
Withdrawals from Dealers Inventory   zero
Withdrawals from customer Inventory  n/a
Deposits to the dealer Inventory n/a
Deposits to the customer Inventory 356,584*
No of oz served  (contracts= )    0
No of oz to be served  zero  contracts)  xxxxx
Withdrawals from Dealers Inventory   62,691
Withdrawals from customer Inventory   zerooz 
Deposits to the dealer Inventory  n/a
Deposits to the customer Inventory  zero
No of oz served (contracts =175  17500
No of oz to be served (contracts=842.  87,700  0z

COMEX Warehouse Stocks Aug 20, 2010

And now today's events:
Let us start with silver:
You will note that again zero oz of silver enter the dealer.  I need to see silver
enter this area such that we can finally witness settling of silver accounts.
The comex in the customer section revealed that 356,584 oz was deposited but it was made up of the following
2 transactions:
a deposit of a huge 576,00 deposit and a removal of approximately 270,000 oz leaving
a net 356,584 oz arriving into a customer account at a comex registered vault for a customer.
This went to a customer account and not a dealer account.  The source of the 576,000 oz of silver is
unknown as it belongs strictly to a customer.
There were no new notices served so the total number of silver oz standing for this non delivery month of August remains at
90,000 oz.
And now for gold:
Again we see a massive 62,691 oz leave the dealer inventory and this inventory DID NOT FIND a home
at a registered comex vault.  This inventory did not enter the customer inventory and thus no gold contracts have
been settled.  The gold left to put out a gold fire at some other place like the LBMA which has been receiving massive
requests for physical gold.
The total number of gold contracts served yesterday total 175 or 17500 oz of gold.
The total number of gold contracts served for far this month total :  6554 or 655400 oz of gold.
The total number of gold contracts remaining to be served total 842. or 84200 oz of gold
Thus the total number of oz of gold standing for this delviery month of August is as follows:
655,400 oz  +  84200 oz  + 90,000 =   829,000 oz or  25.84 tonnes of gold.
On Thursday we hadd 877 contracts open to be served.  We got hit with 175 contracts; yet
the OI remained at 842.00  Some of the lost OI resurfaced.
If I am not mistaken, the Sept contract goes off the board on Thursday, August 27.2010
as well as options.  We will start to report on option positions next week.
The front month of Sept still has a huge 376,400 open interest or 188 million oz.
Sept is a big month for silver deliveries as this is the last delivery month before the big December
delivery.  Dec is the only month of the year to have both gold and silver to have deliveries of their respective metal.
October has a very low delivery level as gold players generally avoid October.  November has no gold or silver
December is also the largest delivery month for both silver and gold and generally we see massive activity
in all markets in anticipation of December 1.2010.
In other physical news, the GLD etf added 9.9 tonnes of gold or 317,790 oz of gold.  This gold was swapped from the Bank of England
who received dollars from the GLD sponsors.  This swap can and will be reswapped when the Bank of England gets a call to get its physical back
as  worried patrons demand to see their physical. For those keeping track, the gold ETF has now 1299.468 tonnes to its credit.
Yesterday, released news on official reserves of gold within Russia.  During the month Russia added 15.6 tonnes of gold to its inventory. The total number of tonnes added
so far this year totals 87.5 tonnes which is huge.  The way they are going they should hit a 150 tonnes of gold increase to their reserves.
Here is the report; reports the Russian Central bank has revealed that it added 15.6 tonnes (500,000 ozs) to its reserves in July, compared to 200,000ozs in June. So far this year it has acquired 87.5 tonnes – the total in 2009 was 134 tonnes.

I might add that the IMF is supplying 15 tonnes of gold per month into the market.  So you can probably surmise that Russia is the recepient of this largesse.  However, Russia is not the
only nation buying gold.  You can bet the farm that China is buying in equal or greater quantities of gold  onto their shores.
The premiums on our central fund of canada and PHYS remain largely in the plus column: (basis Thursday night)

CEF closed at a premium to NAV of 7.8% and PHYS of 9.709% (Wednesday 9.2% and 9.898%).

There were no economic results to report on today. However here are the big economic stories of the day:
Three important things to discuss with this revelation:
1. do you think China is still buying usa bonds?
2. do you think China is unloading treasuries?
3. do you think China is buying gold with the money?
from Jim Sinclair commentary:

U.S. Sounds Alarm at China's Military Buildup 

WASHINGTON—The Pentagon voiced alarm over China's military buildup, saying it was expanding its advantage over Taiwan and investing heavily in ballistic and cruise missile capabilities that could one day pose a challenge to U.S. dominance in the western Pacific.

In its annual report to Congress on Chinese military capabilities, the Pentagon also cited China's advances in electronic warfare. The U.S. government has been the target of cyber intrusions the report says appear to have originated in China and aimed to steal military secrets. "These intrusions focused on exfiltrating information, some of which could be of strategic or military utility," the report said.

Though their two countries are increasingly interlinked economically, ties between the U.S. military and the People's Liberation Army of China have deteriorated since January, when the Obama administration notified Congress of a plan to sell Taiwan up to $6.4 billion in arms.

Defense Secretary Robert Gates has appealed to the Chinese to re-engage to reduce the risk of military miscommunications. But U.S. officials say they have seen few signs of a thaw.

Washington has long voiced alarm over China's military buildup opposite Taiwan. In this year's report, which was delivered months behind schedule, the Pentagon said China's military edge over Taiwan was continuing to "shift in the mainland's favor," the main argument used by the Obama administration in approving the arms deal.


and this commentary on the same subject:

It Looks Like U.S. Government Bonds Aren't Supported By China Anymore 
Vincent Fernando, CFA | Aug. 20, 2010, 3:45 AM

Earlier this week we highlighted how cut its holdings of U.S. government bonds by the largest ever monthly amount in June. Expanding this thread, it should be noted that China's U.S. debt ownership has fallen to $843.7 billion in June from $938.3 billion in September 200,9 according to U.S. Treasury Department released Monday. This equates to nearly an 11% reduction by China.


Yet interestingly, the 10-year U.S. treasury yield has fallen over the same period, despite the meme that China's voracious U.S. debt buying supports keeps America's bond yields low. (Note that China's U.S. debt holdings encompasses more than just ten-year U.S. bonds, however. )


This map says it all:

Jim Sinclair's Commentary

QE to Infinity

There is no other politically expedient solution as the can gets kicked down the road many more times.

Click to view data on growing unemployment in the US…

I will leave you with this wonderful article by Dave Kranzler of the Golden Truth:

Huh? No Inflation?

The mass of men lead lives of quiet desperation - Henry David Thoreau

This article from Bloomberg News this morning grabbed my eyeballs: "Dollar Dinners From ConAgra Threatened By Costs." Heck, I didn't even know there was such an item. It looks to be the food-stamp- family-equivalent of Ramen Noodles for college students (I did a baked potato with melted cheese and hot sauce for variety when I was at the U of Chicago grad school). At any rate, if you read through the article, it would appear that ConAgra can no longer keep the price point at a buck by cutting costs and will have to either raise the price somewhere between 20% and 50% or reduce the size and quality of the portion. Here's the article link: No Inflation?

So I decided to update some prices of select everyday commodities - the kinds of goods that the Government conveniently overlooks when calculating its PPI/CPI metrics. This should be eye-opening: measured over the last 12 months, prices of all these items have increased by: copper 37%, corn 35%, pork bellies (bacon anyone?) 350%, cotton 74% and heating oil 33%. The last one bummed me out because I hate a chilly home and winter is coming. Here's the data link if you want to check my numbers: LINK

Let's be clear about one thing. The true definition of inflation is not higher prices of assets, goods and services. Prices in the system that we observe and experience are nothing more than the manifestation of the underlying cause, which is currency devaluation from an increase in the money supply in excess of a country's real economic output. You can't look at this over a short period of time. Take a look at this long term graph of the basic money supply measure, MZM, which is now one of the popular money supply metrics now that the Fed has hidden M3, the real money supply metric used by every other Central Bank:

So ya, over the past few months, the money supply appears to have contracted - slightly (although, it can be argued that MZM under-reports the true money supply, see this LINK and this True Money Supply if you care to be enlightened). Just think about the cost of a cadillac or a college education in 1970 vs. now. An even better measure of the money devaluation that has occurred is that since roughly the mid-1980's, it takes a 2-income household to maintain the same standard of living that a 1-income household could maintain back in 1970. In fact, stripping away the benefits of technology, a lot of analysts would argue that the overall standard of living today with 2-income households is lower than with 1 in 1970. THAT's inflation/dollar devaluation at work. That miniscule drop in MZM that has deflationists chasing their own tail in what can be termed "intellectual sloppiness" is not going to undo the damage of over 50 years of money supply expansion.

One other point to which I would like to draw your attention. You can see from the above chart the increase in money supply has accelerated since 1995. In theory, that increase in money supply should have been backed by a concomitant increase in the GDP. Of course, this was not even close to being the case. What resulted was the series of paper asset bubbles, each one ultimately inflicting more damage on our system. (emerging market debt, internet/tech stocks, housing - housing is a "paper" bubble because it was fueled by the mortgage bubble - and now the Treasury bond bubble, which some would call ultimately the dollar bubble).

Another way to look at the devaluation of the dollar is to measure it against the price of gold. After all, up until FDR did his magic in 1933, anyone could exchange their dollar bills for gold or silver at the Fed "window." In 1971, when Nixon completely shuttered the gold window, thereby completely unleashing the dollar from its tether to to gold, the price of gold was $35. This chart shows what has happened since then:

As you can see, the price of gold has increased 3500%, or the dollar has lost 97% of its value since 1971. Again, try to think about the long term affects of this insidious, long term devaluation of the dollar. My parents bought the home I grew up in 1969 for about $45k. The last sale I heard about around the peak of Denver real estate was $450,000. Given the devaluation of the dollar vs. gold, they would have been much better off taking that $45,000 and buying gold and renting.

Let's tie this back to the opening comments about the surprisingly large 12 month price increases in basic commodities. I would argue that a significant portion of the money that the Fed/Treasury has printed and injected into the system since the credit crisis of 2008 has flowed into commodities. This would be a natural place, besides gold and silver (up 31% and 37% respectively over the last 12 months), for printed money to flow into, as they represent consumable, depletable goods which have value to everyone and could ulitmately be used in a barter system if/when the dollar is ultimately rejected as a medium of exchange. Are you better off holding gold, silver and select commodities or holding paper dollars backed by a Government that would be insolvent if it weren't for its ability to use the printing press? What about the folks who depend on those $1 meals from ConAgra? If I were one of them, I would rush out and buy as much of what is left for a $1 as would fit in my freezer before the price goes up or the content of the package is reduced.

Of course, then again, this is how the hyperinflationary price escalation got started in Weimar Germany and, recently, in Zimbabwe. No inflation? Better check your premises because the facts do not contradict reality. And the reality is that the deflationists are wrong. To conclude, gold is going to go MUCH higher as this drama unfolds.

Late edition. I just read this piece by Egon von Greyerz LINK - Good read I thought this chart was a perfect addition to what I presented above:


I hope you all have a grand weekend.
See you on Monday.

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