Bonds & Interest Rates

A Graphic Presentation

April Employment
A Graphic Review of the Strategic Investment Conference
A Little Over 31 Years
New York, Atlanta, Philadelphia, and Austin

The US employment numbers came out this morning, and they were disappointing. But disappointing does not begin to describe the situation I read about today in Europe. I have just finished up with my conference in Carlsbad, California and am getting back to the room late. I have to get up in a few hours (4 AM is rather obscene) to fly to Tulsa to see my daughter graduate from university, but wanted to drop you a note as I normally do on Friday night. But given the time and the need for some sleep, tonight I will draw your attention to the writing of a few friends and some of the more interesting charts I saw at the conference. It will be a shorter letter than usual, but we will uncover a few real nuggets; and next week I will be back to a more normal writing schedule.

On May 22 I will be doing a webinar with my conference co-host, Jon Sundt of Altegris Investments, where we will talk about what we heard at the conference and some of the material I covered in my speech. This webinar will be a great way for those not able to attend the SIC conference to get a sense of its scope and depth. Because of the nature of the material, and due to SEC regulations, we will need to limit the webinar to accredited investors. If you have already registered at my Accredited Investor website, you should be getting an invitation. If you have not registered and would like to listen in, you can go to and sign up. The call will be at 11 AM Central Time. (In this regard, I am president and a registered representative of Millennium Wave Securities, LLC, member FINRA.)

Also, I will be in Atlanta May 23 (details at the end of the letter). And now for some “nugget hunting.”

April Employment

A few hours after the employment numbers are released, I always get a rather thorough analysis from Philippa Dunne & Doug Henwood of The Liscio Report ( Philippa gave me permission to share this with you just this once. While it may be more detail than you are used to, it will help give you a perspective on how much data is actually tracked. I think Philippa and Doug are some of the best at analyzing employment, and their regular reports are a must-read for me. They call the “labor department” in every state and track what is going on at a very deep level, and also follow tax receipts and flows. (Funds and managers who need detailed analysis like this can contact them for a look at their recent work and decide if you should subscribe.) And now to this morning’s report:

Though it’s likely there are lingering weather influences on this month’s disappointing employment report, as there will be in coming months, it appears that the trend is also slowing. That conclusion is bolstered by the decline in our withholding survey, which we believe to be less weather-sensitive than the BLS numbers, and weakness in our survey was not limited to states sensitive to this year’s unusual weather.

* April’s headline gain of 115,000 was the weakest initial print since last October’s 80,000 (now revised up to 112,000). It’s considerably below the 146,000 average for the second half of 2011, before the acceleration earlier this year. Looking just at the private sector would make those comparisons a little better, but not much. Manufacturing added 16,000, almost all in durables; retail added 29,000, mostly in general merchandise (largely reversing the losses of the previous two months); professional and business services added 62,000, a third of it from temp firms; education and health added 23,000, well below its recent averages (with health care alone adding just 19,000, at the 20th percentile of gains since 1990); leisure and hospitality, 12,000 (more than accounted for by accommodation and food services, up 27,000). Finance was up just 1,000, and mining and logging were unchanged (low natural gas prices seem to have put an end to the fracking boom).

In the loss column: construction, off 2,000, with nonres leading the way down; transportation and warehousing, off 17,000, mostly from ground transportation; information, off 2,000; and government, off 15,000, almost all of it from local government education (where losses have averaged 8,000 a month for the last year). Almost 70% of job gains came from bars and restaurants, temp firms, and retail, which do not seem the strongest foundations for long-term growth.



Taxpayers also victims of ‘hot money’ behind Canada’s condo bubbles

There are three times more condo high-rises being built in Toronto than in New York City and seven times’ more than in Chicago.

The condo bubbles in Toronto and Vancouver are caused by foreign speculation and are making housing unaffordable and creating financial risk for the country in terms of government-insured mortgages. But there’s another issue of vital concern to taxpayers.

There are three times more condo high-rises being built in Toronto than in New York City and seven times’ more than in Chicago. This boom is not the market at work, but is manipulation by “hot money” from abroad.

“I have come across something that I find astonishing, and which amounts to systemic tax fraud by investors, mostly foreign, on a massive scale,” wrote an investor involved in the industry.

He explained how it works:

1. Foreigners sign an agreement of purchase for a condo unit, or for 50 at a time, and put down a 5% deposit. This buys a right to buy the unit in future at a fixed price. In financial markets, this is known as a derivative.

2. Many developers include in the agreement of purchase the right to “assign” this right to buy at a fixed price. In financial markets, this is called creating a futures market. This assignment of a right to buy at a fixed price turns buyers into speculators (unless they want to move in or rent out the unit) who are set up to flip the units for a profit as prices are pushed upwards.

The Australians were victims of the same shenanigans and shut it down and now Canada must too

3. Some developers, and intermediaries, are in the business of helping speculators flip their rights and pocket a fee for doing so. For instance, Mr. X from Asia pays $15,000 for the right to buy a $300,000 condo, then, when the price of similar units rise to $400,000, he can assign the right, get his deposit back and make the $100,000 difference. There is a frenzy of this speculation going on which makes prices escalate so rights can be bought and resold over and over again before a building is completed.

4. The paperwork for these agreements is kept in-house and my source said one intermediary told him that there are no T-5s issued to the speculator or to the Canada Revenue Agency, something that stock and futures market intermediaries must do so that taxes can be paid on the $100,000 trading profits. Instead, the profits vanish, possibly along with the paperwork, and taxes paid will be by the end user if they buy, rent out the unit and make a capital gain down the road.

“[Condo] brokers tell me I can flip my assignment and pay no tax and there is no paper trail. They say we do it all day long,” said the investor who asked to remain anonymous.

Under CRA rules, foreigners making Canadian-sourced income are fully taxable by the federal and provincial governments. In Ontario or BC, the total tax bill would be 46% or $46,000 in tax for $100,000 profit.

The unpaid taxes could be staggering, said a real estate agent. In Toronto, 20,000 condo units have been sold each year for the past five years. Let’s assume one-quarter were sold to foreign speculators who flipped the assignment and made $100,000 profit without paying taxes. Their Canadian-sourced income would total $500 million a year, and they would owe 46% of that in taxes or $230 million.

Most condo developers may not be involved in this game, but a few – notably developers with Asian and Middle East owners or backers and buildings located in downtown areas – certainly are.

So this is what must happen. As I argued last week, Ottawa must forbid the purchase by foreigners of any residences in Canada as Australia did in 2010 after foreign speculation and tax evasion damaged its housing market.

The Canada Revenue Agency should send in auditors to the lawyers and intermediaries and developers who have the lists of those who signed agreements of purchase. If they did not close on those deals, and the deals sold for more money than the agreements, then auditors must work backwards and assess income taxes.


condoto np4

Nine Takeaways From Earnings Season

With earnings season now virtually over, it is time to ask why, despite a majority of the companies beating expectations, is the S&P inline with where it was when earnings season started. There are two main reasons why the market has not been impressed: the percentage of “beaters” is nothing spectacular on a historical basis as was shown previously, especially in the aftermath of aggressive cuts to Q1 top and bottom line forecasts heading into earnings reports; more importantly, even with Q1 earning coming out as they did, the bulk of the legwork still remains in the “hockeystick” boost to the bottom line that is completely Q4 2012 loaded, as bottom up consensus revisions to the rest of 2012 are negative despite Q1 beats. As Goldman summarizes: “1Q 2012 will establish a new earnings peak of $98 on a trailing-four-quarter basis. With 88% of S&P 500 market cap reported, 1Q EPS is tracking at $24.10, 1% above consensus estimates at the start of reporting season and reflecting 7% year/year growth.” So far, so good. And yet, “Despite the positive surprises, full-year 2012 EPS estimates are unchanged relative to the start of earnings season, and currently stand at $105 vs. our top-down forecast of $100. Over half of consensus 2012 earnings growth is attributed to 4Q. Margins at 8.8% have hovered near peak levels for a year, but consensus expects a sudden jump in 4Q to a new peak of 9.1%. We forecast a further decline to 8.7%.”

As a reminder Q4 is when all the unanswered questions are expected to clash violently: to NEW QE or not to NEW QE, the “5% of GDP” fiscal cliff, US elections and the 18th National Congress of China, the debt ceiling, and not to mention Europe which will be there all along. And let’s not forget Apple: “Apple is likely to be the top contributor to S&P 500 EPS this
quarter. Exxon (XOM) had been the top S&P 500 EPS contributor since
2003, but Apple surpassed it last quarter.” If something happens to the coolness factor of AAPL, watch out below. Hopefully margins will somehow find a way to boost themselves to all time records among all this uncertainty.

Going back to Goldman, here are the firm’s nine takeaways from Earnings Season:

A total of 421 firms in the S&P 500 have now released 1Q 2012 results representing 88% of the equity cap. Below we highlight 9 takeaways:

1. More surprises than average. The percentage of firms beating consensus EPS expectations by more than one standard deviation (our definition of a positive surprise) exceeds the historical average. The number of firms missing by more than one standard deviation is in-line with the average. Of the 421 firms that have announced results this quarter, 42% of firms beat expectations and 13% have missed. The ten year historical average of beat and misses equals 40% and 13%, respectively (see Exhibit 1).

2. Earnings above expectations. 1Q EPS is tracking 1% above the consensus estimate at the start of reporting season, $24.10 vs. $23.88 (see Exhibit 2). The median surprise over the past ten years has been 1.8%. The 1Q estimate fell by 3% between the start of the 4Q 2011 reporting season in mid-January and the start of the 1Q 2012 season in early April, which aided the level of surprise. Accounting differences between adjusted and operating results for PRU and PFE reduced aggregate earnings level.


Goldman Earnings 1

The Gold Market’s Steep Wall of Worry: Mark Hulbert

“We’re all set up to go to the upside…and it just remains to be seen how far and how fast JPMorgan et al will allow prices to rise.”


The Kitco website went down for scheduled maintenance for about two and a half hours in the wee hours of Friday morning…and did not come back on line until after I’d hit the ‘send’ button on Friday’s column.

During that time, the low price print for gold was in for the day…and maybe even for this move down.

Once that low was in, which came shortly before 10:00 a.m. in London, gold began to rally.  It really took off once the jobs numbers were released at 8:30…and the price got hit the moment that happened.

But the gold price continued to rally until an amazing out-of-the-blue rally in the dollar index showed up around the London p.m. gold fix…and that put a temporary kibosh on the gold rally. Once the dollar rally burned itself out, the gold price began to rally anew, but never made it back to it’s earlier high…and once Comex trading ended at 1:30 p.m. in New York, the gold price got sold off a few dollars in the close of electronic trading.

The low for the day in morning trading in London came in around the $1,625 spot mark…and the New York high [$1,648.50 spot] came about 9:50 a.m. Eastern.

The gold price closed up $6.30 on the day.  Net volume was pretty healthy at around 132,000 contracts…so it’s a good bet that JPMorgan et al had to use some heavy lumber on the gold price yesterday morning in New York to prevent it from getting away on them.

gold 397-470x298

Silver’s price path was mostly same, except the low of the day came about 11:15 a.m. in London…quite a bit later than the low in gold.  After that the silver price followed the gold price very closely.

The silver price closed at $30.34 spot…up 27 cents from Thursday’s close.  Net volume was pretty heavy at 39,000 contracts.


Global Insights – May 4th

Kevin Konar

»» Most equity markets pulled back meaningfully with the exception of Asian indices. The sell-off accelerated following Friday’s lackluster U.S. employment data.

»» Investors should keep an eye on Germany. It has succumbed to Eurozone headwinds. (page 2)

»» The U.S. jobs report shouldn’t be a big surprise—it resembles many others in this recovery cycle. The problem is America is climbing out of a much deeper canyon than before. (page 3)

»» Global Roundup: Updates from the U.S., Canada, Europe, and Asia. (pages 3-4)

Click Here to read the complete analysis

Juniors vs. Senior Mining Stocks

One of the questions that we receive on a regular basis is whether one should invest in junior or senior mining stocks. The answer is that diversification is the way to go, but that’s not the full reply as weights in the diversified portfolio can still favor either juniors or senior stocks.

The reply to this question depends on when the question is asked – there are times when juniors outperform and there are times when they underperform the senior mining stocks. Before providing you with a chart of the junior-senior ratio, let’s take a closer look at the situation in the general stock market, ale the latter is highly correlated with juniors in the long term (charts courtesy by

$SPX (S&P 500 Large Cap Index) INDX

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In the long-term S&P 500 Index chart, we have much the same outlook as we saw last week. The recent correction appears quite similar to the one of 2010 and the consolidation seen in RSI levels is also similar. Back then, prices rose nearly 15% in about three months following the small correction. Self-similar patterns (like this one) are quite reliable, so at this point, stocks appear ready to move higher.