April 2008


Interesting developments are afoot with regards to Federal Reserve policy;

From the Financial Times,

Fed looks to extend debate on liquidity
By Krishna Guha in Washington

Federal Reserve policymakers will discuss paying interest on bank reserves in a closed door meeting on Wednesday. Such a move could in theory allow the Fed to expand its liquidity support operations without limit.

The discussion will take place alongside the Fed’s regular meeting on monetary policy, at which officials are expected to agree to cut rates another quarter point (25 basis points) to 2 per cent and hint at a possible pause in June.

Under a law passed in 2006, the US central bank will gain the authority to pay interest on reserves in 2011.

The meeting on Wednesday is based on that timeframe and will not be followed by any announcements.

However, the meeting could spark an internal debate as to whether the Fed should consider asking Congress to bring forward this authority to help it deal with the current credit crisis.

Many experts think that would be a good idea. Vincent Reinhart, former chief monetary economist at the Fed, said paying interest on reserves would allow the Fed to “expand their liabilities to support more asset purchases”.

A number of other central banks already have the authority to pay interest on reserves, as well as the authority to lend banks money.

In normal times they can use these deposit and lending rates to put a corridor around the main policy rate, and prevent it from being buffeted too far away from the level they aim to set.

But at times of financial market stress, the ability to pay interest on reserves takes on added significance. Currently, the Fed cannot expand or contract its balance sheet without altering the overall supply of reserves and changing its main policy rate, the Fed funds rate.

All it can do is change the composition of its balance sheet – absorbing more duration risk, liquidity risk or credit risk from the private sector.

But if the Fed was able to pay interest on deposits, it could use that rate to put a floor under the Fed funds rate.

That would free the US central bank to conduct liquidity operations that were larger than the size of its current balance sheet – roughly $800bn.

“The point…would be to allow the Fed to expand its balance sheet without having to drive the fed funds rate to zero in the process,” said Goldman Sachs.

Advertisements

Though gold-focused mutual funds used to own mostly companies involved in mining gold, there are now funds that own bullion itself, including the popular StreetTracks Gold Shares

Gold’s meteoric rise is largely due to the popularity of an ETF, StreetTracks Gold Trust “GLD”. Launched a couple of years ago, by the beginning of this month it has attracted assets of more than $19.26 Billion.

Since shares in the trust represent ownership of one-tenth ounce of physical gold, the trust is sitting on 343 metric tons of the stuff, more than the Bank of England — indeed, more than all but 16 of the world’s central banks.

The ETF has more assets than the next five largest gold mutual funds combined, and is the world’s largest trove of gold in private hands. It dominates its marketplace more completely than any comparable investment portfolio. Among technology funds, for example, no single fund is bigger than even two of its biggest rivals.

It has consumed a big chunk of global demand — 13% or 14% of annual mine supply,” Singlehandedly the ETF shouldered aside typical factors affecting the gold market and became the big driver of gold’s price. Traditionally, jewelry demand and hedge-fund speculation were the culprits.

Bullion’s price also surged upward because gold producers decided six years ago to stop hedging their future production, or selling next year’s output at today’s price

With prices at current levels, and cost of extraction having consumed marginal profits due to high energy bills, it is quite likely that producers will start to lock in profits by selling future supply, and reinstating hedges.

If, energy prices were to fall, and remain low, the profitability of extraction would again swell margins, but, would there still be the demand?

Here is the current data;

From the data, we can readily see that the current [and recent past] high prices have curtailed demand within the jewelry and commercial fields.

Also, the high prices have elicited sales of investment gold holdings through coins/bars/etc. The smaller investor, is seemingly cashing out.

As in the initial run up, the Gold ETF’s account still for huge quantities of physical gold. Under the law, GLD will buy or sell the physical, as baskets are purchased or sold;

FUND SUMMARY
The investment seeks to strive to reflect the performance of the price of gold bullion, less the Trust’s expenses. The Trust holds gold, and is expected to issue baskets in exchange for deposits of gold, and to distribute gold in connection with redemption of baskets. The gold held by the trust will only be sold on an as-needed basis to pay trust expenses, in the event the Trust terminates and liquidates its assets, or as otherwise required by law or regulation. The Trust is not managed like an active investment vehicle, and it’s not registered as an investment company under the Investment Company Act of 1940.

Thus, should investors start selling the GLD ETF, the Fund, would liquidate physical gold, thus increasing the supply of physical gold on the market.

The only question that remains is; what would trigger the selling of ETF investment holdings?

*Speculation
*Reversal within US$
*Interest rates rise in US

The interest rates and US$ are really both tied to inflation, of which currently is/has driven the price of gold and other commodities. This inflation bulge was exacerbated via the near collapse of the US Financial system through poor, non-existent lending standards, via sub-prime, merger, share buybacks etc that is currently working through the excesses.

New search technology helps execs make sense of all that’s being said (good or bad) about a company in the blogosphere. Why everyone from hedgies to Motorola is signing on.

By Carleen Hawn
April 28, 2008

For finance executives, staying on tiop of market information has become a daily ritual. Check the Bloomberg terminal, check the wire services, check the stock price. CFOs who fall behind the curve can find themselves getting tripped up on conference calls by research analysts, or worse, misjudging how corporate news will play in the marketplace.

Wading through the daily dose of news, information and flat-out gossip can be remarkably time-consuming, however. Corporate managers have long had to cope with data from traditional sources such as stock exchanges and regulatory bodies, as well as news reports. Now they must also deal with the swell of opinions and rumors appearing daily on Internet discussion boards and blogs.

That’s no small task—but it’s a vital one given the growing influence exerted by Web commentators. To get a better sense of what’s being said in the blogo-sphere, some companies are turning to a new technology that sorts so-called “unstructured data”—that is, info that can’t be easily categorized by a traditional database (blogs, for instance). In most cases, the software relies on sophisticated algorithms and search tools to trawl the Web and aggregate hard-to-categorize information. The info is then packaged into e-mail feeds or sleek dashboards that display how corporate information is portrayed. In other cases, “user-generators” deliver a fresh financial perspective that isn’t available from traditional sources (see the story on Wikinvest on Page 13).

The result? Users—institutional investors, asset managers and corporate executives—receive organized financial information in a hurry, and in a format that can give them a qualitative edge.

Hedge funds and institutional investors have been the early buyers of the information. But the market appears poised for rapid expansion, with interest from corporate clients picking up. Said Penny Herscher, CEO at FirstRain, an unstructured data specialist: “If you’re a CFO, you have to see the same information that your investors are seeing.”

Sean O’Dowd, capital markets senior analyst at Financial Insights, a unit of IDC, puts total revenue from unstructured data research at $100 million right now. But over the next five years, O’Dowd thinks, the market will top $250 million. “It will mushroom,” he predicted.

Jay WatsonCOLOR-CODED CONTENT “Once it’s in the Wall Street Journal, it’s old news,” says Kevin Pomplun, founder of SkyGrid, which aggregates information and then analyzes its tone. Sentiment journey

If corporate customers and institutional investors are suddenly glomming on to the importance of unstructured data, so too are providers of more traditional research. Last year, Reuters bought Waltham, Mass.-based ClearForest, while Goldman Sachs made a minority investment in Connotate Technologies of New Brunswick, N.J. And Dow Jones agreed to distribute its news feed on the InfoNgen platform—owned by Instant Information—which monitors content from roughly 15,000 sources, including e-mail, blogs and search engines.

Venture capitalists appear to be picking up the scent as well. SkyGrid, an unstructured data search specialist launched in 2005, has raised $2.25 million in venture capital in two rounds, from Tim Draper of Draper Fisher Jurvetson, a VC firm in Menlo Park, Calif., and New York-based angel investor Esther Dyson. The company came out of stealth mode in February.

SkyGrid uses Web crawlers and search algorithms to amass thousands of financial news stories on a topic or company. But SkyGrid does something no other aggregator does: It applies another set of algorithms that filter for semantics and natural language, to quickly convey to clients the actual tone of the news. Most important for investors, SkyGrid also indicates how that mood is changing in real time.

The idea here is that corporate news alone doesn’t move a company’s share price. The investing community’s perception, as well as the media and Internet portrayal of that news, also drives the stock price. Thus it can be equally important for CFOs and institutional investors to track the sentiment about a news item and not just the item itself.

HOW IT WORKS: SkyGrid’s first column displays headlines from traditional news outlets. The center column culls from blogs and other Internet sources. All items are color-coded, indicating positive, negative or neutral stories. The fever chart below reflects the prevailing sentiment about the company. A screen shot of a SkyGrid dashboard (at left) shows how this works. The dashboard displays a list of items about Apple Computer. At first, the search results look a lot like what you might see on wire service terminals, including chronological lists of stories about the company.

But the similarity ends there. Besides mainstream news sources, which appear at left, SkyGrid’s center column displays content from blogs like Gizmodo. “We know from experience that news breaks faster in the blogosphere,” said SkyGrid’s 26-year-old founder, Kevin Pomplun. “Once it’s in the Wall Street Journal, it’s old, so for our clients the information we pull off blogs is more valuable.”

Look more closely and you’ll also see that the results are color-coded. Positive stories about the iPod maker are identified by a green icon. Negative stories are red; neutral news stories are coded white. SkyGrid breaks down the positive, negative and neutral news in percentages at the top left of the screen as well. So without even stopping to read the headlines, an investor or CFO can assess in seconds whether the overall sentiment on a company is bullish or bearish. SkyGrid also produces a fever chart showing the linear development of the mood on a company. Unlike similar graphs on Bloomberg or Yahoo Finance, SkyGrid’s charts are based on news items, not past stock price performance. Such a feature could prove beneficial to CFOs or IR chiefs, who might be able to arrest negative news sentiment before it hits a company’s stock price.

Greg Parsons of CP Capital, a SkyGrid client, said the sentiment tracker can prove invaluable. A number of times, he noted, “a shift in sentiment has preceded negative news” coming from companies.

SkyGrid clients pay $500 a month per user for the service, which isn’t much (by comparison, a Bloomberg terminal costs $1,800 a month). The company has less than $1 million in annualized revenue, but sales are growing. One signal: When the company launched the technology following its beta test in February, it had just 30 users. Now it has more than 100.

Mr. Pomplun feels confident that revenue will pick up dramatically. That belief, he says, stems from SkyGrid’s product—and the amount of unparsed information that bombards corporate managers and institutional investors every day. Said Mr. Pomplun: “We want to accelerate the wisdom of crowds.”

Fascinating algorithm

FirstRain, a Foster City, Calif., company, has a similar agenda. The company already boasts several corporate subscribers, including the finance departments at Motorola, E2open and Talecris Biotherapeutics. FirstRain also provides customized daily and weekly news feeds to more than 500 money managers and professional investors.

The company applies several patented algorithms to the data it pulls from blogs, wikis, discussion boards, industry trade publications, even far-flung international resources and very small regional newspapers. “It’s the obscure sources of information that investors need to make money on the margins,” explained Ms. Herscher. “For our clients, it’s not really about speed, but the fact that there is richer [qualitative] information on the Web.”

A feed can cover a host of subjects, including obscure information about supply chain vendors or corporate partners. To supply that, FirstRain relies on more than 100 research analysts in Gurgaon, India, whose sole mission is to review Web content for substantive value.

In January, First-Rain launched a new product, Management Monitor. One of the application’s strongest features is its management turn-over report, which pulls news about executive departures from around the Web, then represents it in a graph. Relevant Web items about companies in the turnover report give context to the numbers. Management Monitor also pulls together “comments” and “no comments” from executives, as well as topic-driven Web items.

The goal is to distill unstructured data into concise data points and trends, revealing competitive intelligence rivals don’t possess.

For example, FirstRain recently ran an item indicating that Netflix might be expanding its offerings. It culled the info from a blogger who had posted details about his experimentation with game downloads for Microsoft’s Xbox 360 that he’d pulled off Netflix. A large mutual fund manager in New York City who had a stake in Netflix read the piece in his FirstRain news feed—and immediately called Netflix CEO Reed Hastings. The investor hadn’t known that the movie rental service was developing a game console strategy.

In another example, FirstRain recently pulled a story from a regional Alabama paper about a local McDonald’s experimenting with a new test product. That bit of information came as news to some investors who follow the restaurant chain.

David Rosenfeld, the director of research at New York-based William Jones Investment Management, is a FirstRain client. “We try to get information from [a company’s] management, but they are…restricted on what they can actually say,” he said. “So that makes secondary information that much more important.”

FirstRain’s service is not cheap. Investors pay anywhere from $10,000 per person per year (for professional investors) to as much as $75,000 for organizations such as corporate finance departments.

It’s money well spent, said Mr. Rosenfeld. “There’s too much going on [on the Web], and it would be too hard to create an inventory of relevant potential information. It wouldn’t be realistic.”FW

By Pratima Desai
LONDON, April 28 (Reuters) – Investment money flooding into silver has overwhelmed poor fundamentals and helped it to outperform gold, but the tide could be turning for precious metals and the probability of large losses is rising.

Silver’s price falls in percentage terms are likely to dwarf those seen in gold, which some fund managers say has stronger supply/demand fundamentals.

“History shows that when you get a substantial correction in precious metals, silver falls more than gold … It’s a more volatile market and smaller in value terms,” said Stephen Briggs, analyst at Societe Generale.

One big reason behind surging prices has been the tumbling dollar, making commodities priced in dollars cheaper for holders of other currencies. The weak dollar also prompts producers to raise prices to protect profit margins.

Last week the dollar fell to record lows against the euro, to beyond $1.60, an event which has caused many to question whether further losses can be sustained and whether it has bottomed.
“The dollar is not going to keep on depreciating forever,” Briggs said. He expects gold prices to average around $900 an ounce next year from $1,025 this year and silver to average $15.50 compared with $19.20.

Financial uncertainty, which has underpinned precious metals since last August is to some extent becoming less important to investors seeking the higher returns stocks and bonds offer.
With a weakened case for holding precious metals, prices have started to slip. Spot gold is now around $893 an ounce compared with a record high of $1,030.80 on March 17 and silver at $17 from a 27-year high of $21.24.

Goldman Sachs recently said it expects to see gold prices at $835 an ounce in 12 months and silver at around $15.50.

RECYCLING
From the end of last year to March 17, silver prices surged by more than 40 percent, while gold was up more than 20 percent. Silver’s heftier gains were built on investor flows.
Barclays iShares silver trust, the biggest silver exchange traded fund listed in the United States, now holds more than 5,770 tonnes of silver, a rise of about 10 percent since the end of last year.
Gold holdings by New York-listed StreetTracks Gold Shares, the world’s biggest gold ETF, stand at 591 tonnes, down about 5 percent since end-December.

“Silver is probably going to fall more than gold in percentage terms,” said Wolfgang Wrzesniok-Rossbach, head of sales at German metals trading group Heraeus.

“From an industrial and jewellery point of view, there has clearly been a decline in demand. There has been a lot of additional material coming to the market in the form of scrap.”

More than 20,000 tonnes of silver were produced globally last year compared with around 2,500 tonnes of gold.

The surplus in the physical silver market is expected by some analysts to rise to around 2,500 tonnes from a surplus of around 900 tonnes in 2007. The physical gold market could see a surplus this year of 600 tonnes from 500 tonnes last year.

“Fundamentals come into play when prices are coming down,” said John Reade, analyst at UBS. “Silver doesn’t have gold’s fundamentals.”

ONE SOURCE OF DEMAND
Silver is often a byproduct of other metals such as lead, zinc and copper, where miners are trying to ramp up production with some success.

That means more silver on the market and together with scrap recycling, supplies are set to jump this year, while overall demand, including that from ETFs is expected to fall.

“Silver is very dependent on one source of demand — ETFs. You can’t get excited about silver in the same way as gold. Silver doesn’t really have the same cachet,” Briggs said.

“Demand from the photographic sector has been falling fast … It’s no longer an important source of demand.” For gold, the picture is somewhat different. Mine production is expected to hold steady this year, but analysts expect output in South Africa, a major producer, to fall over coming years because the ore that remains is deep and expensive to access.

Fabrication demand — jewellery and coins — is expected to continue unabated as rising incomes in emerging market countries such as China and India allow people to choose gold over silver.

The supply and demand curves for silver as a commodity have had over the last fifteen years extended periods of deficits. This is partly due to the fact that silver supply is in large part a by-product of other metal production, or from scrap.

Silver Supply;
Silver is mined world wide, much as previously noted from polymettalic mines.
Approximately 530 million oz mined each year
Approximately 230 million oz year from scrap [mostly jewelry]

Total production:
Estimated mine production…………………….62 billion oz
Bars & Coins……………………………………..21 billion
Jewelry…………………………………………..20 billion
Fabricated products……………………………21 billion

Silver Demand;
On the demand side, the price for silver is economically insensitive. This is due to the following characteristics of silver;

*price increases in silver can be generally passed onto the consumer
*price increases in silver do not impact profit margins
*world has large inventories of silver [5000 yrs+]

The interesting story with silver, is in the same way as gold, silver is traded as a financial asset. Silver, like gold has during periods of history acted as money or a currency of trade.

Currently silver trades in financial asset forms;
*Physical
*Futures
*Options
*ETF’s
*Common shares of production companies

Volume of trades;
Circa 50 million oz/150 million oz per day
Circa 30 billion oz/year

During the 1990’s this was substantially higher.

The Gold/Silver ratio [basis of trades]
This ratio has through traders lore been mooted to exist and be a profitable way to trade the two separate commodities.

The ratio has varied through history from a low of 14/1 to a high of 100/1
The fluctuations are quite high. Silver has had historically a more volatile price.

Historic Ratio’s:

Year…………………………..Ratio
1687-1777…………………14.5/15.5
1800-1900…………………15.0/17.00

1925……………………….29.7
1926……………………….33.1
1927……………………….36.5
1928……………………….35.3
1929……………………….38.8

1970……………………….20.5
1971……………………….26.6
1972……………………….34.7
1973……………………….38.2
1974………………………33.9
1975………………………36.5

1979………………………27.6
1980………………………29.6
1981………………………43.6
1982………………………47.2

1994………………………72.9
1995………………………74.8
1996………………………74.8
1997………………………67.9
1998………………………53.2
1999………………………55.9

2000……………………..55.9
2001……………………..61.9
2002…………………….67.3
2003…………………….74.2
2004…………………….61.3
2005…………………….61.5

% Changes in price [random years]
2003………………………Gold +12.5%………….Silver +35.9%
2004………………………Gold +7.0%…………..Silver +6.8%

Just as a point of interest, “The Wizard of Oz” was an allegorical tale depicting the political struggle between William J Bryan Vs W. McKinley in the US Presidential race and the issues surrounding the Silver Purchase Act 1890

At about this time there was available an arbitrage available between a Gold dollar, and a Silver dollar that could be bought for $0.60 [risk free profit of $0.40]

Valuation;
There are three equally valid methods of valuing silver. The first is on a commodity basis, the second on a financial asset basis and the third on an aggregate ratio basis.

Commodity basis……………………………Value = cost of production
Financial basis………………………………Value = inflation hedge
Ratio basis ………………………………….Value = aggregate ratio over 5 yrs

Ratio value =……………………………….65.0
[$662.0 * 65 = $10.18] thus @ $16.0 overvalued
Inflation value =……………………………$5.38
Commodity value…………………………..[no value calculated yet]

With Silver closing at $13.003/troy oz I would say that silver is currently very overvalued on a fundamental basis [financial] and is in speculative territory.

After I have calculated the *production value* a slightly clearer picture might present itself.

The production value of one of the higher efficiency miners and an aggregate cost basis of some randomly picked silver miners gave a production value of;

Production value = $3.90
Investment value = $5.38
Ratio value = $10.18
Spot price = $16+

Some rather large differences in the prices

The supply of silver from above-ground stocks on a net basis dropped by 4 percent in 2006 to 194.4 Moz. The decline was the result of a shift of net producer hedging to the demand side. Total scrap supply provided the market with 188.0 Moz of silver in 2006, virtually unchanged from 2005.

Supply from Above-Ground Stocks
(Million ounces)………………………………….. 2005………………………… 2006
Bullion
Implied Net Disinvestment…………………… -77.2……………………….. -64.5
Producer Hedging……………………………… 27.6 ………………………….-6.8
Net Government Sales……………………….. 65.9…………………………. 77.7
Sub-total Bullion ………………………………..16.3…………………………… 6.4
Old Silver Scrap………………………………. 186.4………………………… 188.0
Total…………………………………………… 202.7………………………… 194.4

From the demand graph, it is quite easy to visualize the gap that exists between industrial demand/pricing/supply and where the current price is. This would suggest a speculative component within the pricing currently, based in no small measure on US$ weakness.

From “Kat” an interesting history of the ratio of prices twixt Gold/Silver;

The banking crisis, as noted several weeks ago, pretty much resolved with Bernankes intervention and rather innovative solutions to the banks dilemmas. Whether they were all legal, is immaterial, they cauterised the hemmorage.

Not so easy a problem to solve will be the increasing momentum within unemployment. Employment is known as one of the sticky economic metrics, and for good reason.

The crisis will simply morph from the financial sector [in stock market terms] into any and all sectors where employment impacts the financial condition of the statements.

Economic data in the US have taken a notable turn for the worse. Most im­portantly, the already weakening employment outlook is being further undermined by a widely diffused build-up in inventory and falling profitability. History suggests that the latter two factors lead to significant employment losses.

While the financial system, within the major money centre banks and broker/dealers, have taken steps to enhance balance sheets, they speak essentially to addressing the consequences of excessive leveraging and imprudent financial alchemy. As such, the nasty turn in the real economy may fuel another wave of disruptions that, this time around, would also have an impact on mid-size and smaller banks

The focus will also be on the reaction of policymakers. Here the outlook is mixed. The good news is that the crisis is now moving to an area where traditional policy tools are more effective. This is in sharp contrast to the situation of the past few months, where central banks were forced to use instruments that were too blunt for the purpose at hand.

But there is also bad news. The sharp slowdown in the US real economy will occur in the context of continued global inflationary pressures. As such, the Federal Reserve’s dual objectives – maintaining price stability and solid economic growth – will become increasingly inconsistent and difficult to reconcile. Indeed, if the Fed is again forced to carry the bulk of the burden of the US policy response, it will find itself in the unpleasant and undesirable situation of potentially undermining its inflation-fighting credibility in order to prevent an already bad situation from becoming even worse

Hours worked, is the sharp end of the stick with regards to employment. Employment is sticky, thus, overtime hours are always reduced prior to any permanent reductions in the workforce.

We have seen over the past few months increasingly poor employment stats, sugar coated via the birth/death black box model

Let’s look at different sectors;

Financial sector

Construction;

Retail;

Mining;

Transport & Utilities;
Note here, the interesting divergence twixt the real economy, and stockmarket.
More on this at a later date.

Education & Health

But you get the general idea. The market has been through all of this previously, historically speaking, thus, it is unlikely that there will be a new bull market, based on the facts that too many sectors are going to be problem areas.

Obviously, further analysis into business cycles, sector rotation, and asset classes would potentially improve returns down the short-term, intermediate term road.

I have been a naysayer in the past on this Australian biotech, however, they seem to have turned the corner from speculative start-up to investment grade [not there yet]

There is potential also that they may be subject in the future to an acquisition, as many of the huge behemoth US drug companies are running pretty lean on pipeline.

I like trading high priced stocks. Has anyone traded this stock before, or even better trading it currently? Check it out.

« Previous PageNext Page »