Saturday, February 26, 2011

Gold and silver Repel Raid/Balance Sheet of Fed Balloons/Libya oil stops as civil war approaches

Good morning Ladies and Gentlemen:

Before commencing with my commentary, I would like to introduce to you our latest entrant into the banking morgue, Valley Community Bank of St Charles Illinois:  (courtesy Reuters)

Feb 25 (Reuters) - Regulators closed one bank in the U.S. on Friday, bringing to 23 the total number of bank failures in 2011

In 2010 157 banks failed following 140 failures in 2009.
The bulk of the failures increasingly have been  smaller institutions, those with less than $1 billion in assets, as large banks have recovered more quickly from the 2007-2009 financial crisis.
The FDIC announced the closure on Friday of Valley Community Bank, St. Charles, Illinois, which had about $123.8 million in assets and $124.2 million in deposits as of December 31. First State Bank, Mendota, Illinois will assume the deposits and has agreed to purchase essentially all of the assets.
Banks that failed in 2010 had total assets of $92 billion, compared with $169.7 billion the previous year.
FDIC Chairman Sheila Bair has said the agency expects the number of failures to drop in 2011.
In the FDIC's most recent quarterly report, released on Feb. 23, the agency said the number of banks on the "problem list" grew to 884 from 860.
Most of these institutions will not fail but the list provides an indication of how many banks are struggling.
Earlier this week, however, Bair said the outlook for the industry as a whole is improving including for small institutions.
In its quarterly update, the FDIC reported that banks had combined earnings of $21.7 billion in the fourth quarter of 2010, marking their fourth profitable quarter in a row.
But statistics showed lending continued to contract, down 0.2 percent or $13.6 billion for the quarter, and Bair warned it would have to pick up for the industry to take the next step in its recovery from the 2007-2009 financial crisis.
Washington Mutual, which had $307 billion in assets when it was seized in September 2008, remains the largest bank to fail during the financial crisis. (Reporting by Richard Cowan; Editing by Carol Bishopric)


Gold and silver remarkably withstood all of the banking cartel's raid yesterday.  The bankers were clearly eying silver as they tried to influence the longs to roll or take cash settlements instead of standing.  Gold closed at comex closing time 1:30 pm est at $1408.30 down $6.50 from Thursday's close.  Silver finished the comex session at $32.90 down 28 cents.  In the access market, both metals rose but silver exploded.  Gold finished the access market at $1409.60 and silver finished at $33.38.

Let us now go to the comex trading and see what transpired yesterday.  I would like to add that the open interest data is coming in later and later. The open interest data from the comex may be suspect.

The total gold comex open interest rose 5738 contracts to 510,214 from the Thursday level of 504,476.
Please remember that the data on Friday is basis Thursday night.  The front February delivery month is now off the board.  The new front month of April say its OI rise marginally from 331,160  to 331,257. The estimated volume at the gold comex was pretty good at 132,133.  The confirmed volume on Thursday,( the day the raid commenced during the access market and the wee hours of the morning) came in at an astounding 219,892 contracts. The boys sure used a lot of unbacked fire power.

The total silver comex open interest fell by 4952 contracts to 136,560 from 141,512. Although it is clear that the target of the raid was silver, the drop in OI is astonishing.  There are two scenarios here:

1. the longs had enough and pitched without rolling
2. some cash settlements occurred.

At first glance, I thought that the longs had rolled but I was totally surprised that they did not. They pitched.
Why?  Silver was holding nicely at just under $33.00 and the longs have been resolute for a while.  I am beginning to sense that some cash settlements occurred on Thursday.  This would be risky to the banking cartel because the ex- long holders could again some into the market by buying a March contract.
Maybe that is why the open interest declined by such a wide margin versus gold who endured the same raid.
Of course, all eyes were focused on the front March contract.  The open interest for March declined from 28,275 to 14,259 pretty close to what I thought.  My guess is that the OI for Monday will turn out to be around 8000 or 40 million oz.  Let us wait and see.
The estimated volume on Friday was a huge 102,404 contracts.  The confirmed volume on Thursday was a monstrous 140,409.  Totally unbelievable.  In oz this represents  700 million oz of silver or 1 years annual production if you include China production or 115% of annual production ex China. My goodness the bankers have a lot of nerve to use all of that unbacked fire power.

Before going on, there is a new FINRA accounting rules that will come into force on Monday which should scare our bankers:
Courtesy of Jim Sinclair:

New Rules Will Cause Panic For Shorts
Posted: Feb 25 2011 By: Jim Sinclair Post Edited: February 25, 2011 at 9:12 pm

Filed under: General Editorial

Dear Friends,

Between now and Monday, February 28th be prepared for panicked short sellers who cannot make delivery to try every trick in the book to buy back their short positions.

The following is information from Dr. Jim Decosta:

Here is the URL:

Quote: There’s 3 new laws gaining attention in the NSS market reform arena: FINRA 4320 goes into effect on 2/28/11. It mandates 13 day buy-ins for open delivery failures FINALLY applying to shares of non-reporting corporations. FINRA 2010-043, also starting on 2/28/11 reinstates the “short sale exempt” (SSE) marking requirements for trade reporting and the OATS system. Those MMs accessing the bona fide MM exemption from executing pre-borrows or “locates” before admittedly naked short sales must now FORMALLY acknowledge the accessing of that universally-abused exemption. Being that these trades are theoretically being made to “inject liquidity” then the excuse to hide the related trade data from the public’s eyes goes out the window. You can’t have it both ways and claim the bona fide MM exemption and later claim that the related trade data needs to be kept secret because it might reveal a “proprietary trading strategy”.

Truly bona fide MMs that are able to legally access that universally-abused exemption cover their naked short position on the next downtick after their short sale when buy side liquidity is in need of being ejected as share prices fall. The 3rd new rule which is in effect now states that the offers and bids that MMs post must be of approximately the same size. No longer can the offers be of 1 million shares and the offsetting bid good for the minimum 5,000 shares.

The verbiage in 4320 is especially well done as it FINALLY puts the clearing firms that aid and abet this crime wave on the spot. With the FFETF, which is made up of 25 different agencies, now on the scene the transparency has increased markedly. You can imagine how critical the lack of transparency is to a crime involving selling nonexistent securities and then refusing to ever deliver that which you sold AFTER being allowed access to the funds of the investor being defrauded.

Here are the links to the rules SR-FINRA-2010-028 and SR-FINRA-2010-043:

Notice the part I marked in bold in the quote above:
"FINRA 4320 goes into effect on 2/28/11. It mandates 13 day buy-ins for open delivery failures FINALLY applying to shares of non-reporting corporations."

I would also like to give you in graphic form, the change in open interest for silver which occurred during the February month.  This has been provided to me by Michael Koss and I would like to thank him for providing this data for us:


Here is a chart for February25.2011 on deliveries and inventory changes at the comex:

Withdrawals from Dealers Inventory
Withdrawals from customer Inventory
Deposits to the dealer Inventory
Deposits to the customer Inventory
599,542 oz
No of oz served (contracts ) 10
50,000 oz
No of notices to be served zero

Withdrawals from Dealers Inventory
Withdrawals from customer Inventory
3036 oz
Deposits to the dealer Inventory
Deposits to the customer Inventory
No of oz served (contracts 61
6100 0z
No of oz to be served zero

Ok let us begin with the less volatile gold.  I left you on Thursday showing that 55 notices were still to be served upon our longs.  Lo and behold we got 61 notices as we got a few more longs with valid contracts demanding metal.  The 61 notices translates to 6100 oz of gold and the total number of notices served for the month total 11,379 for a grand total of 1,137,900 oz of gold which is now the final number of gold oz standing.  For those keeping score, in tonnage, that translates to 35.39 tonnes of gold.  Not a bad showing!!

There were no deposits of gold into the dealer nor the customer and we only got a minor withdrawal of 3036 oz of gold to the customer.  There were no adjustments.

And now over to the strange silver comex:

The comex folk notified us that 599,542 of of silver was deposited to the customer account.
However there was a really strange entry with respect to deposits and withdrawals between the customer and dealer.  On Friday, they announced that a dealer received 1,259,831 oz of silver and this was marked as a gain in inventory to the dealer.  The customer provided 1,260,887 oz and that left his inventory to arrive at the dealer.  Normally this comes as an adjustment.  Not yesterday.  I do not know why this occurred, other than shear chaos must have been the order of the day at the silver comex floors.

The next entry totally surprised me.  I told you on Thursday that all of the outstanding contracts longs in silver have been fulfilled.  Somehow a long with 10 contracts was screaming blue murder that he was not filled on his options that he exercised on Feb 1.2011.  The comex folk then satisfied him to the tune of his 10 contracts or 50,000 oz of silver.
Thus we must give you a corrected total monthly total for silver exercised.
The total notices now sent down total 572 for a total of 2,860,000 oz of silver.


Michael Koss has been supplying me with a spread sheet on the changes in open interest in silver.
I am having difficulty in transposing the data onto my blog.  I will provide it for you later this afternoon
in an addendum. I am very grateful to him for providing this data to me.

Late last night, the comex folk supplied the data on how many gold contracts and how many silver contracts were to be served on first day delivery notice March 1.2011.  From Ed Steer:

Well, the CME Delivery Report has deliveries posted for March 1st already. The report showed that 823 gold, along with 252 silver contracts, were posted for delivery on that date. In gold, the big issuer [820 contracts] was the Bank of Nova Scotia in its proprietary trading account...and the big stopper [776 contracts] was JPMorgan in its client account.

In silver, the big issuer [250 contracts] was HSBC USA...and there were a lot of companies on the receiving end of these deliveries...the biggest being the Bank of Nova Scotia with 97 contracts. For first day notice in silver, I was expecting far more delivery activity than this. We'll see how things progress as the first week as the March delivery month unfolds.


I have never seen such a tiny amount of silver oz being served on the first day notice ie. only 252 contracts.
I will know the total number of silver oz standing at 1;30 on Monday afternoon.
The gold contracts are also very large which means we had a huge number of option holders exercising their contracts and standing for metal.  This represents a huge 82,300 oz of gold oz already standing.
This is getting to be quite exciting to watch.

Let us see how our non physical ETF's fared:
First GLD:

Total Gold in Trust

Tonnes: 1,211.57
Value US$:

Thursday's reading was identical:
we neither lost nor gained any inventory.

And now for SLV:

Ounces of Silver in Trust342,931,016.800
Tonnes of Silver in Trust Tonnes of Silver in Trust10,666.35

On Thursday, the total was:  identical.

again we neither gained nor lost any inventory on Friday.

and now for our physical ETF's/

The Sprott silver fund PSLV  (PHS.u) registered a huge 15.56% premium to NAV on Friday.
The Sprott gold fund PHYS  (PHY.u) registered a positive to NAV of 3.47%

The central fund of canada (CEF.a) registered a positive to NAV of  9.3%.

It seems the world is after the silver component in our ETF's.


Let us head over to the COT report:

First the gold COT:

Gold COT Report - Futures
Large Speculators
Change from Prior Reporting Period

Small Speculators

Open Interest



non reportable positions
Change from the previous reporting period

COT Gold Report - Positions as of
Tuesday, February 22, 2011

 as you can see, those large speculators that have been long continued their assault on gold to the tune of an additional 16,024 contracts.  

those large speculators that have been short, continued to supply a lot of unbacked paper to the tune of 8444 contracts.

And now for our famous commercial bankers:

those large banks that are close to the physical metal added to their longs to the tune of 4783 contracts.  
those banks that are perennially on the short side provided an astounding 17,963 contracts of unbacked paper as they added to their already stratospheric short position.

Even our small speculators got into the act with the small specs that have been long adding a very large 5735 positions to their longs.  Those that were short added a tiny 135 positions to that short position.

Summary;  the bankers provided huge paper and the longs took on those positions.

and now for silver:
Silver COT Report - Futures
Large Speculators

Small Speculators

Open Interest



non reportable positions
Change from the previous reporting period

COT Silver Report - Positions as of
Tuesday, February 22, 2011

Here, our large speculators that have been long added a tiny 219 positions to their longs.
Those large speculators that have been short, added a very healthy 1933 positions to their shorts.
Ignore the spreaders.
And now for our famous bankers.
Those bankers (commercials) that have been long silver sensed a massive raid coming in silver so they pitched some of their longs to the tune of 2116 contracts.
And now for our heroes, JPMorgan and friends, that have been perennially short from the time of Alexander the Great, surprisingly only added 630 contracts to their short position in total contrast to gold. 
The small specs also got into the silver game.  They added 4123 contracts to their long positions.
They lessened their exposure on the short side by 337 contracts.
Conclusion:  we did not learn much from the silver COT as compared to gold. 

In other physical news with respect to silver came from King World News, where James Turk stated that silver is in greater backwardation to the tune of 1.16 and the USA dollar is in trouble.
Here is the link to the commentary and it is important for all of you to read:

Dollar precarious, silver backwardation grows, gold explosive, Turk says

 Section: Daily Dispatches
9:15p ET Friday, February 24, 2011
Dear Friend of GATA and Gold (and Silver):
Interviewed today by King World News, GoldMoney founder James Turk calls attention to the precarious position of the U.S. dollar on the dollar index chart, reports that silver's backwardation is deepening, and finds the gold chart explosive. From Turk's lips to the Great Market Manipulator's ear -- and we don't mean Bernanke. You can read excerpts from the interview with Turk at the King World News Internet site here:
Or try this abbreviated link:


Now let us see some of the big stories of the day.

The turmoil in Libya continues where we have been notified that the oil has ceased flowing from this oil rich nation.

Here is a great commentary from the Casey report on the Libyan  oil situation where the oil has stopped flowing.  This is very serious to the Europeans who import a lot of oil from Libya.
There is also major problems in Algeria another large importing nation of oil:

courtesy  the Casey report.. author  V Vuk.

I urge you to read this commentary slowly to absorb its significance.

Analyzing the Libyan Crisis

By Casey Research Energy Team

Tensions in the Middle East plus transportation constraints: Where art thou going, oil prices?

The oil picture is always complex, but right now things are about as complicated as they can get. The unrest in Egypt has settled for the moment, but the future there is not yet clear as the military takes control on promises of free elections. Tensions are rising in Algeria, where the unofficial unemployment rate is along the lines of 40% and protesters are demanding change. Yemen and Bahrain are unsettled, to say the least. And now Libya is embroiled in the most violent protests to rock the Middle East during the current wave of uprisings, with 40-year ruler Colonel Muammar Gaddafi sending snipers and helicopters to shoot down protestors in the capital city Tripoli.

Unrest in Egypt mattered because of the Suez Canal and the Suez-Mediterranean Pipeline, which together transport almost 2 million barrels of oil per day. Protests in Libya and Algeria - with Libya inching closer and closer to full revolution status - matter because both are important oil producers and key suppliers to Europe. Algeria produces some 1.4 million barrels of crude each day, while Libya spits out 1.2 million barrels a day. Libya is Africa's third largest oil producer after Nigeria and Angola and has the largest crude oil reserves on the continent, concentrated in the massive Sirte Basin.

The Egyptian revolution has not yet disrupted oil supply. In Libya, however, things are very different. Global oil companies are pulling employees out of the country, leaving exploration projects and producing wells sitting idle.

Al Jazeera reported that oil has stopped flowing at the Nafoora oilfield, which is part of the Sirte Basin. The largest and most established foreign energy producer in Libya, Eni of Italy, is repatriating its nonessential personnel. German firm Wintershall is winding down its wells, which produce 100,000 barrels daily, and flying 130 foreign staff members out of the country. Norwegian Statoil is closing its Tripoli offices and pulling foreign workers out. OMV of Austria, which produces 34,000 barrels of oil a day in Libya, is evacuating most of its workers. And BP is flying its staff home as well, leaving its exploration operations unattended.

With foreign journalists banned from the country, phone lines cut and Internet access mostly severed, it is almost impossible to know just how much of Libya's oil supply has been disrupted (one report pegged it at 6%). But Libya's second largest city, Benghazi, has fallen to protestors, and it is in the country's east, where the oil fields lie. With politicians defecting and government buildings literally burning in Tripoli, it is clear that, whether Gaddafi stays or goes, disruptions will continue and uncertainty is the new normal in Libya. If Gaddafi does go, it is not at all clear who can lead the country's next phase, as Libya is a country bereft of institutions, with a non-cohesive army and old tribal structures that are both divisive and weakened.

The price of oil responded to Libya's instability immediately. Europe-traded Brent oil prices hit above US$108 per barrel on Feb. 21, a high not seen since just before the recession, in September 2008. The West Texas Intermediate (WTI) oil price, which reflects the American market, also gained notably, adding US$3 to reach almost US$92 per barrel.

The head of oil research at Barclays Capital, Paul Horsnell, described the current situation as potentially worse for oil than the Iran crisis of 1979. "That was a revolution in one country, but here there are so many countries at once. The world has only 4.5 million barrels per day of spare capacity, which is not comfortable."

There are several comments to make about all of this.

First, oil prices might run out of control again. High oil prices reduce the amount of money people have to spend on other things, shrinking demand in the wider economy. Eventually a tipping point is reached where confidence collapses. Given the recent global recession, you might expect OPEC to act quickly to prevent that cycle, but the wave of protests across the Middle East and North Africa has OPEC leaders just a tad bit distracted. Many are now wondering aloud if Saudi Arabia will be the next nation to see protests. In that context, what happens to the world economy is not exactly a priority for OPEC leaders right now - they are focused on survival. This is not an environment conducive to the kind of quick decision-making necessary to control oil prices.

Second, remember that benchmark prices for oil do not have a strong relationship to supply and demand. That is why prices could shoot up - speculation and manipulation by hedge funds and hoarders have as much impact as an actual change in supply. And a final benchmark price stems from a complex summation of interlinked spot, physical forwards, futures, options, and derivatives markets, which means the paper market is almost as important as the physical one.

The current spread between the two main benchmarks - Brent and WTI - is one example of how the benchmark pricing system fails to properly represent the oil market and all its complexity. WTI has historically been slightly cheaper than Brent, but over the last year the discount has spread to a record of as much as US$19 per barrel. The difference reflects ample supply in the U.S. Midwest (WTI is an American benchmark) compared to a squeeze on supplies from Europe's North Sea.

While that part makes sense, why is the Brent price used to determine three-quarters of the world's oil contracts, including those in Asia? A market with very low production volumes is used to price markets with very high production elsewhere in the world.

The system has led to many other nonsensical situations, like the fact that many U.S. oil refiners and consumers pay prices that track Brent, not WTI, so right now American gas station prices reflect greater-than-US$100-a-barrel oil even though the North American benchmark hasn't yet passed US$92. When you add in the fact that no one really knows what's going on in the world's fastest-growing oil market, China, you have all of the ingredients for serious mispricing.

Third, transportation infrastructure plays a key role in oil pricing. North African oil and gas are especially important to Europe because the only other place with pipelines running into Europe is Russia, and no one likes relying on Russia for energy. Russia already exports 7 million barrels of oil each day, which constitutes roughly 10% of global production.

To get around reliance on Russia for both oil and gas, European countries have been working to build more pipelines from North Africa, including a new, US$1.4 billion Algeria-Spain gas pipeline set to open in March. The desire to avoid increased reliance on Russia is another factor driving the Brent benchmark upwards; European prices for natural gas and liquefied natural gas are also on the rise, for the same reason.

Right now in the all-important oil world of the Middle East and North Africa, short-term supply, future prices, ownership and preferred trading partners are all up in the air. Libya's potential revolution poses a real threat to oil supplies - as mentioned, we only have 4.5 million barrels a day to spare, and Libya produces 1.2 million. On top of that, the fact is that oil prices are not decided in the most rational ways, and speculation plays a major role.

Can we profit from all of this? If you believe oil is on the rise, there are ways to get direct exposure to the price of oil, as well as many oil companies worth considering.

[Of course, with skyrocketing oil prices, alternative energies, becoming more attractive, will also see their day in the sun. In the upcoming issue of Casey's Energy Report, Marin and his team introduce a new standard to - for the first time ever - compare apples and oranges, i.e., the energy output of oil/gas and geothermal energy. The result would amaze you. Learn more about the future of geothermal and how to profit in this free report.]

Another Surprise Trade Reversal for China

By Kevin Brekke

When multi-nation, free-trade agreements began to emerge in the 1980s, they were accompanied by ample criticism that warned of detrimental consequences for the labor forces of the industrialized Western markets. Manufacturing in higher-wage countries, it was speculated, would systematically be relocated to lower-wage jurisdictions, and good-paying jobs would be lost in the process.

Probably the most widely known trade agreement is NAFTA, the North American Free Trade Agreement, which was signed in 1992 and came into force in 1994, creating a trilateral trade bloc between Canada, Mexico and the U.S. The number of nations and regions entering into similar trade agreements has since exploded, and today a dizzying array of acronyms exists for these multilateral trade blocs. You can see a list of them here.

Following on the heels of NAFTA's implementation came the arrival of Maquiladoras, Mexican factories close to the U.S. border to which raw materials and parts were shipped and subsequently assembled into a finished product ready for export. Many of these factories were owned by American manufacturers that moved their plants from the U.S. to Mexico, and the speculation about the loss of American jobs became a reality.

The Maquiladora model of wage arbitrage in manufacturing grew rapidly. However, it was a trade structure between neighboring states that has since been overtaken by trade between non-border states. And nowhere is this growth more evident than with China.

The 2001 entrance of China into the World Trade Organization (WTO) was a very important event for the economic development of the country and followed the establishment of permanent, normal trade relations with the United States in 2000. These two events recognized China as an equal partner in the world economic community and added momentum to the pace of the economic globalization process already underway.

Over the decade following China's WTO membership, the country has emerged as a global trade powerhouse, expanding its export sector by leaps and bounds as hundreds of foreign companies rushed to exploit wage and cost differentials by shifting domestic production to the Chinese mainland.

Much of the criticism directed at the loss of jobs during this time had been countered with the so-called "They sweat, we think" argument, the gist of which goes something like this: with the growing importance of the FIRE (finance, insurance, real estate) economy and technology in the developed world, jobs with low barriers to entry and lower wages had become less desirable. As such, the manufacturing jobs (sweat) sent abroad would be replaced with jobs that required highly skilled or educated (think) employees. The specialized skills needed to fulfill these positions created a higher barrier of entry, called for higher wages, and would secure these jobs within an economy. The mundane task of product assembly, itself an artifact of the industrial age, was no longer needed in the information age.

A component in this argument is the vital role of research and development (R&D). After all, many of the goods that are eventually manufactured in China and brought to market, or the processes that are used in product development, are the consequence of an idea that ends with a new gadget, drug or killer app, or the improved version of an existing one.

And this is the spot in the sweat vs. think fairytale where we meet up with the big bad wolf; China is emerging as an R&D hub.

A report published this month by Deutsche Bank Research reveals that China is now a net exporter of R&D services. China is about ready to huff and puff and blow down the house of cards erected around the developed world's R&D export model.

Space constraints do not allow for an in-depth look at the report's findings, but here is a brief outline of some of its facts and figures:
  • Over 90% of the world's leading technology companies not only manufacture worldwide, they also carry out research and development worldwide.
  • Emerging market economies have more than doubled their R&D spending in the last 10 years, to 1.2% of GDP, almost half the 2.5% spent by Western economies.
  • The traditional R&D centers of Japan, the EU, and the U.S. are assigning a significantly higher share of R&D contracts to external sources.
  • Indications of a fast-growing transfer of knowledge and innovations from emerging markets back to industrial nations are surfacing.
The last item above includes an interesting twist on the way in which this transfer is taking shape, known as "knowledge-augmenting." This is a strategy where emerging markets are developing technologies that are planned specifically for use in industrial nations. Assisting countries such as Germany and the U.S. to enhance their technologies will, in turn, result in further reliance on the manufacturing capabilities of countries such as China. A nifty little trick.

The report, titled "International division of labor in R&D: Research follows production," discusses many other nuances and aspects to the story (India is an up-and-comer) and is definitely worth a read. It paints a picture of emerging markets in general, and China in particular, that will likely challenge the generally held view that the primary role of these markets is to supply the world with cheap, unskilled labor.

The U.S. and other technology leaders will likely be sweating as they wonder what the emerging world economies are thinking next.

Vedran again. Well, that's it for today. I just wanted to make two quick notes, the first being on Statoil. In yesterday's article, I mentioned potential plays on oil companies with low geographic diversification toward the Middle East. However, the Energy Team has reported that Statoil is pulling out of the Middle East in both of their recent pieces. Just to clarify that this isn't a contradiction: Statoil only has 44 employees in Libya, and the oil production amounts to 7,000 boe per day. In comparison, the Norwegian production equals 784,000 boe per day and involves 18,094 employees.

Also, I wanted to remind everyone that today is the cut-off for our early-bird conference registration. You can still save $200 off the regular fee if you sign up before midnight today. Still undecided? For a glimpse of what Casey Summits have to offer, watch a snippet of the keynote speech by Eric Sprott from last fall's event. And it's not just the great faculty we always manage to gather - this year, for example, John Williams, economic whistleblower of Shadow Stats fame, will join us - it's the limited number of attendees that makes a true meeting of the minds possible. You can expect this caliber of information, as well as specific stock picks by the grand-masters of investment, when you sign up for the Summit in Boca Raton, FL, April 29 - May 1.

Thanks for reading and subscribing to Casey's Daily Dispatch.


Late last night zero hedge produced this commentary. It seems that the munis are in big trouble and AIG is exposed to the tune of 47 billion dollars.  This would definitely cause QE III.

Will AIG Implosion 2.0 Lead To QE 3.0?

Tyler Durden's picture
·         AIG

There was a time when everyone thought CDOs are perfectly safe. That ended up being a tad incorrect. It resulted in AIG blowing up, recording hundreds of billions in losses and almost taking the rest of the financial world with it, leading ultimately to the first iteration of quantitative easing. A few years thereafter, several blogs and fringe elements suggested that munis are the next major cataclysm and will likely require Fed bail outs (some time before Meredith Whitney came on the public scene with her apocalyptic call). It would be only fitting that the same AIG that blew up the world the first time around, end up being the same company that does so in 2011, and with an instrument that just like back then only an occasional voice warned is a weapon of mass destruction: municipal bonds. AIG dropped over 6% today following some very unpleasasnt disclosures about its muni outlook, and corporate liquidity implications arising therefrom: "American International Group Inc., the bailed-out insurer, said it faces increased risk of losses on its $46.6 billion municipal bond portfolio and that defaults could pressure the company’s liquidity." So how long before we discover that Goldman has been lifting every AIG CDS for the past quarter? And how much longer after that until someone leaks a document that the company's muni strategy was orchestrated by one Joe Cassano?
From the Risk Factors section in the company's just issued 10-K:
The value of our investment portfolio is exposed to the creditworthiness of state and municipal governments. We hold a large portfolio of state and municipal bonds ($46.6 billion at December 31, 2010), primarily in Chartis, and, because of the budget deficits that most states and many municipalities are continuing to incur in the current economic environment, the risks associated with this portfolio have increased. Negative publicity surrounding certain states and municipal issues has negatively affected the value of our portfolio and reduced the liquidity in the state and municipal bond market. Defaults, or the prospect of imminent defaults, by the issuers of state and municipal bonds could cause our portfolio to decline in value and significantly reduce the portfolio’s liquidity, which could also adversely affect AIG Parent’s liquidity if AIG Parent then needed, or was required by its capital maintenance agreements, to provide additional capital support to the insurance subsidiaries holding the affected state and municipal bonds. As with our fixed income security portfolio generally, rising interest rates would also negatively affect the value of our portfolio of state and municipal bonds and could make those instruments more difficult to sell. A decline in the liquidity or market value of these instruments, which are carried at fair value for statutory purposes, could also result in a decline in the Chartis entities’ capital ratios and, in turn, require AIG Parent to provide additional capital to those entities.
Some more gasoline in the fire from Bloomberg:
AIG said that “several” issuers of bonds it holds have been downgraded, amid budget pressures. As of Dec. 31, the company had more than $700 million of state general-obligation bonds from California, which has the lowest Standard & Poor’s credit rating of any U.S. state. It also held more than $200 million in the bonds from Illinois.

Chartis’s portfolio has been reduced to about $36.3 billion, and 99 percent of the municipal holdings are rated A or better, AIG Chief Financial Officer David Herzog said in a conference call today with analysts.
And the greatest thing is that like "back then" nobody has any clue how bad the situation truly is:
“The risk is real,” said Phillip Phan, professor at the Johns Hopkins Carey Business School in Baltimore, in an interview today. “They’re going to have to do a lot more homework before they can quantify how bad the situation is.”
In typical financial fraud fashion (and for a great corollary on this, read Jon Weil's recent expose on how Citigroup, with the assistance of KPMG, lied to everyone about its risk exposure), the company represented that all is well... three short months ago.
The insurer had said in its third-quarter filing in November that it “does not expect any significant defaults in portfolio holdings of municipal issuers over the near term.”
People are shocked. SHOCKED.
Justin Hoogendoorn, a bond strategist with BMO Capital Markets in Chicago, said he was surprised by AIG’s statement. “What are they seeing that we’re not seeing?” he said.
And yet another confirmation that our capital market is nothing but a mixture of central planning and certified idiocy:
“Since about mid-January, you’ve got a nice rebound in the market,” Hoogendoorn said.
Some more facts:
AIG’s gross unrealized gains on the municipal bond portfolio narrowed to $1.73 billion on Dec. 31 from $3.32 billion at the end of the third quarter, according to the filing. Rival insurer Travelers Cos., which holds a $39.5 billion municipal portfolio, said last month that gross unrealized gains on the securities narrowed to $1.6 billion from $2.8 billion during the period.

The figures, reflecting market fluctuations that aren’t counted toward earnings, are monitored by investors and rating firms as a gauge of financial strength.

Property-casualty insurers buy municipal bonds with policyholder premiums and hold the securities to pay future claims. Travelers, the only insurer in the Dow Jones Industrial Average, said this month its portfolio may face a higher risk of defaults, which could result in investment losses and reduced income.

“There are a number of things that you can be concerned about at AIG, and this is one of them,” said Cliff Gallant, an analyst at KBW Inc., who has an “underperform” rating on the stock.
We can't wait until it is confirmed that Zero Hedge readers (or at least 36% of them) were right, and the Fed will have no choice but to bail out AIG (again) this time by buying up muni bonds.
The investor presentation can be read here in its entirety, while the earning call transcript is reproduced below, courtesy of Bloomberg.

On Thursday, Tyler  Durden noted that the Fed's balance sheet has swollen close to 2.5 trillion dollars as the Fed has drawn down the SLP facility .  We would have reached the debt ceiling limit already if the Fed did not do a "swap" with the treasury.  Basically, this was put in place to provide liquidity in the crisis of 2008-2009.  Now the treasury swapped this facility with cash from the Fed where the Fed swells its balance sheet as an asset and the liability is the cash to the treasury to spend.  Hyperinflation is coming closer and closer to our us.

Here is this important article:

Adjusted Monetary Base Goes Vertical

Tyler Durden's picture

Just in case there was any confusion in the interpretation of the M2 chart, here is the latest just released Adjusted Monetary Base.

click on blue for chart of adjusted monetary base.
A succinct reminder from Mises Institute: "The Adjusted Monetary Base is the one monetary component completely under the control of the Federal Reserve." As we expected a month ago when predicting the end of the SLP program, look for this chart to surge to about $2.7 trillion as the combination of SLP unwind and another $500 billion in UST purchases adds another $600 billion to the BASE. The increase of $142 billion in the last two weeks is the 5th largest Adjusted Monetary Base expansion in history. The ongoing verticalization of this chart may result in some further acuteness of inflationary expectations.
And some other pretty charts:


I hope you all have a grand weekend.

I will try and answer all of your questions either late tonight or early tomorow

all the best

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