You may have noticed yesterday's mid-market metals slaughter...
The Chicago Mercantile Exchange (CME) increased margin requirements for silver futures contracts to $6,500 from $5,000 per contract (a contract is 5,000 ounces of silver). You can read the full press report here. The price increase will take place after market close today. Immediately after the news, silver fell. Then gold fell.
The blogosphere viewed the CME's move as a last-ditch effort to keep metals' prices down (silver is up 66% this year... gold jumped 27%). It's not... The CME's actions were intelligent. First, considering silver's soaring price, a margin increase makes sense. Traders should be required to post more collateral to control a higher dollar amount of silver. Second, silver was in a speculative frenzy. All of this new money needed to learn a lesson: The metals market is volatile. The CME's actions led to a marketwide rout. Even Treasurys, the traditional safe-harbor, plunged.
Today, the Intercontinental Exchange (ICE) raised margins on cotton from $4,000 to $5,600. Another exchange raised margin requirements for soybeans. Again, conspiracy theorists will say this is the government's attempt to manipulate commodity prices across the board. The government wants to suck excess liquidity out of metals and spread them into stocks, bonds, and real estate. After all, rising gold and silver prices is a central banker's worst nightmare. The exchanges are simply covering themselves. They're on the hook for more money, so they need more money upfront from traders.
Wise investors will use this correction to add to their positions, or sell puts on mining stocks that until recently were too expensive. The Fed is still printing lots of cash. The fundamentals haven't changed.
In August, one of the best hedge-fund managers in history, Stanley Druckenmiller, closed his fund. Porter argued we'd see more hedge funders "hang it up" as credit tightened and opportunities became scarcer...
Druckenmiller's career happens to correlate perfectly with the largest inflation in history. As credit multiplied between 1980 and 2010, folks like Druckenmiller were paid unbelievable sums for managing the resulting capital flows. But... the credit spigot has been tightening up, at least for private capital. Now, the only bubble left is the one being blown up by Washington in the form of Treasury obligations. – Porter Stansberry, August 18, 2010, S&A Digest
While another hedge-fund great, Seth Klarman, isn't closing his fund, he is returning money to investors. Klarman's fund, Baupost Group, generated $6.5 billion in net investment profits from January 1, 2009 through September 2010 (in addition to roughly $2 billion in management fees), bringing total assets under management to around $23 billion. Now, Klarman will return 5% of investors' cash at the end of the year because the firm's "opportunity set is smaller than it has been in some years."
Another hedge-fund heavyweight, Bill Ackman of Pershing Square, discussed real estate yesterday at a charity conference in Chicago. Ackman said he's bullish on the housing market – in particular, single-family homes. He said home affordability is at its highest in many years. Ackman also said he doesn't think interest rates will stay low for long. He shares this view with the current king of the hedge-fund world, John Paulson.
Jeff Clark nailed yet another trade for his S&A Short Report readers... In his November 2 issue, "The Death of the Bond Market: Part II," Jeff alerted readers to U.S. Treasurys' 30-basis-point rally:
It may not seem like much, but this tiny 0.3% increase indicates an important change in the long-term trend. We now have a two-month-long series of higher highs and higher lows. In other words, the Federal Reserve's attempts to manipulate long-term interest rates are failing. Despite the threat of another quantitative easing program, there's not enough money flowing into the long-term bond market to keep up with the ever-increasing supply. Bond prices are falling, and interest rates are rising.
Jeff recommended buying calls on the UltraShort 20+ year Treasury ETF (TBT). Yields on the 10-year, the most-followed Treasury bond, jumped from 2.59% to 2.71% today. Jeff's recommended options are up 91% in six trading days.
In Jeff's latest issue, published yesterday, he told Short Report readers how to make 200% shorting shares of an American icon. This company's input cost is soaring, and it hasn't yet passed those costs to the consumer. Jeff says the shrinking margins will hurt the company's earnings next quarter (expectations are already priced for perfection). Plus, Jeff says shorting this stock now is super-low risk:
This is an ideal spot to short the stock. If it breaks through resistance, we can exit the trade immediately for only a small loss. On the other hand, if resistance holds and the stock turns lower, the odds increase that it'll break through the support line of the wedge.
To sign up for the S&A Short Report and make 200% shorting this bloated blue-chip, click here...
New highs: Keyera Facilities Income Trust (KEY-UN.TO), Coca-Cola (KO), Puda Coal (PUDA), Enterprise Products (EPD), EV Energy Partners (EVEP).
Good to see some gun-loving, bird-hunting readers on the list... Need to get something off your chest? Weigh in here... feedback@stansberryresearch.com
"Judging by the anti-gun comments of the individual that identifies himself/herself as 'Peace Lover' in Tuesday's Digest, apparently has never had to fight very hard to get where they are in life. In contrast, our forefathers looked tyranny in its face, fought it, and defeated it in order to truly be free men. These brave men used good guns to fight bad guns.
"'Peace Lover' may not see a need for guns in the gated utopia where he/she resides, but evil does exist in the real world, and to quote the late great Col. Jeff Cooper – 'Evil cannot be defeated by running away from it.' When evil has guns, how do you suppose you defend yourself against it? Call 911? Try asking a 100 pound woman dealing with a 250 pound attacker which method of defense she would choose at that moment.
"As for your Argentina bird shooting trip, you surely won't be disappointed. Argentina is practically overrun with birds. The locals there welcome sport shooters in order to keep the bird population in check, not to mention the boost to their economy from all the visiting shooters. As long as what you shoot is eaten, the resource is not wasted. Make sure you have a reliable gun and a healthy shoulder, as you will be experiencing non-stop action all day!" – Paid-up subscriber Gerald Douglas
Regards,
Sean Goldsmith
Baltimore, Maryland
November 10, 2010