Monday, May 2, 2011

Why the Bin Laden death likely marks a stock market top

From Arabian Money:

The euphoria in the United States about the killing of Al Qaeda chief Osama bin Laden in Pakistan earlier today is likely to be followed by a final surge in the stock market, but that could well be the top of this rally.

As the sensational news broke just before by a late-night statement from President Obama, Americans celebrated in the streets outside the White House. Stock futures indicated that Wall Street would celebrate too by opening higher, with a flight from safe haven assets like gold, silver, oil and bonds.

Silver under attack

Silver also came under attack from a revision of margins in the Comex futures market which pulled the precious metal sharply away from its 1980-high of $50. But any retreat will probably be relatively short lived because silver is in backwardisation with the future price lower than the spot price due to very high demand for physical silver.

However, the death of Bin Laden is typical of a market top, the good news that stretches an overbought market to its final limit. And after more than two years of rallying from the lows of March 2008 the S&P 500 is looking very highly valued.

A price-to-earnings ratio on one calculation of 27 and yield of just 1.8 per cent is a very highly stretched stock market. This reflects the ultra-low interest rates available to banks borrowing from the Federal Reserve that everybody agrees is unsustainable in the long-run but is just uncertain how long that run might on

Buy the Dips

From Zero Hedge:

Two key factors that appear to be contributing to the rapid move in overnight silver (and subsequent jump to pare half its losses) is i) the fact that Bolivia, despite being in a cash crunch has for the time being yielded to miner demands and has put its nationalization plans (as discussed previously here) on hold, and ii) there has been a dramatic bout of selling coming out of nowhere, despite the PM complex having opened very well bid earlier on, in what appears a coordinate effort to nuke silver exclusively.

From the WSJ: "Opposition from Bolivia's independently organized miners stopped President Evo Morales from implementing plans to boost state control over the country's mines Sunday, according to leading officials who were advocating takeovers of the country's vast mineral wealth. Mr. Morales has generally used May 1 labor day festivities to highlight his socialist agenda of reverting the country's energy and mineral resources to state ownership. On previous labor days, he announced nationalizations of Bolivia's strategic hydrocarbon reserves and the electric power grid, with mass rallies and military displays. This year, however, anticipated takeovers of the mining sector failed to materialize." None of this however, is news, as Coeur d'Alene and, of course, Sumitomo, the two biggest silver miners in the politically embroiled country already were assured their facilities would not be touched so we fail to see how this non-news is in any way validating of a nearly 20% move. Elsewhere, Bloomberg notes what appears to have been a massive coordinate attack on silver starting just before 6:30 pm Eastern.

From Bloomberg:

"We opened up this morning n New Zealand exceptionally well bid across the board," Jonathan Barratt, managing director at Commodity Broking Services Pty, said in a phone interview from Sydney today. "We got a high in gold and then we got massive sell orders in the spot market and the price fell through. When futures opened the market fell again."

Looks like the old sell into low volume trick to flush the stops and kill the weak hands has worked again. Throw in last week's two CME margin hikes and Friday night's margin bonanza by MF Global, and one had a perfect storm set up for another wipe out in silver to start the week.

In the meantime, silver promptly managed to retrace over 50% of the move shortly after the dump. At this point whatever holders remain following last week's margin action and this evening's fine example of shock and awe will likely need far more energy and capital to be shaken out by the same entities whose primary goal is to prevent the surge in silver and ongoing capital-sapping collateral calls. Since none of the actual fundamentals before the long-term trajectory in silver (and gold) have changed, this appears like a rather attractive entry point.

Lastly, one should recall that silver had a mini 10% correction last week and not only promptly recovered but nearly passed the $50 level shortly thereafter. This time will not be any different.

Barack Obama Announces Osama Bin Laden's death

Al-Qaeda leader Osama Bin Laden dead

Even though he was rumoured to have died in 2001, he is really dead this time, apparently.

From the BBC:

Al-Qaeda founder and leader Osama Bin Laden has been killed by US forces in Pakistan, President Obama has said.

The al-Qaeda leader was killed in a ground operation outside Islamabad based on US intelligence, the first lead for which emerged last August.

Mr Obama said after "a firefight", US forces took possession of his body.

Bin Laden was accused of being behind a number of atrocities, including the attacks on New York and Washington on 11 September 2001.

He was top of the US "most wanted" list.

The US has put its embassies around the world on alert, warning Americans of the possibility of al-Qaeda reprisal attacks for Bin Laden's killing.

Crowds gathered outside the White House in Washington DC, chanting "USA, USA" after the news emerged.

Bin Laden approved the 9/11 attacks in which nearly 3,000 people died, saying later that the results had exceeded his expectations.

He evaded the forces of the US and its allies for almost a decade, despite a $25m bounty on his head.

His death will be seen as a major blow to al-Qaeda but also raise fears of reprisal attacks, correspondents on

America's reckless money-printing could put the world back into crisis

From the UK Telegraph:

Last week, Ben Bernanke suggested that the US base interest rate will stay close to zero for an "extended period". It's been there since December 2008.

Traders took these words to mean that the Federal Reserve won't hike rates until the first few months of 2012 at the earliest.

Bernanke also pledged to do whatever is required to keep America's economic recovery on track – confirming that the second programme of "quantitative easing", or QE2, would be completed. These two related announcements – the "reprieve" and the "sugar rush" – sent Wall Street into renewed spasms of synthetic joy.

In the real world, US growth is slowing sharply. Annualised GDP rose just 1.8pc during the first three months of 2011, down from 3.1pc the quarter before. America remains mired in sovereign, commercial and household debt.

Yet as the Fed chairman spoke, US stocks hit their highest level since before the sub-prime crisis. The tech-heavy Nasdaq, incredibly, closed at a 10-year peak.

So the Fed will keep on "printing" virtual money – at least for now. By the end of June, it will have purchased $600bn (£363bn) of longer-term Treasuries, with the US government effectively buying its own debt from funds created ex nihilo. That's on top of the original $1,750bn (£1,048bn) QE scheme, launched in late 2008.

America's base money supply – the bedrock of the world's reserve currency – has doubled in little more than two years. Despite consternation among many US voters, and dismay – rapidly turning to anger – across the world, most of America's political elite refuse even to debate QE. Such is the state of democracy in the "land of the free and the home of the brave". And America is not alone.

Bernanke's utterances caused gold to jump another 2pc. Silver – known as "poor man's gold", another "inflation hedge" – spiked 6.5pc. But the real story was the plunging dollar. Against a basket of five major global currencies, the US currency fell sharply and is now at its weakest since July 2008. The Fed's "real broad dollar index", a 26-currency composite and adjusted for inflation, is testing levels not seen since 1979.

Yet still Tim Geithner puffed-out his chest and reaffirmed America's "strong dollar" commitment. "Our policy has been, and will always be, as long as I'm in this job, that a strong dollar is in America's interest," the US treasury secretary on