Letter to the Editor
by Rob Kirby
KirbyAnalytics.com
December 13, 2006

Year end is generally a great time to reflect back on the year that was. Doing so often allows one to consolidate their thoughts – or perhaps gives cause to “bind” a collection of thoughts into a more concise, comprehensive framework.

I was prompted to reflect back a bit myself in recent days – by a fellow writer, who, after reading a recent piece of mine – took umbrage and contacted me, questioning my apparent disregard for technical analysis and slighting of the mainstream financial press.

My response to this query seemed to me to have substance of its own and enough “flow” – that I actually added a bit to it and decided I’d share it with a wider audience;

XXXX;

Actually, I really raised the question as to the value of both technical analysis and fundamental analysis. My point is that everyone should stop and consider the quality of the INPUTS [data provided by conflicted parties] and base assumptions.

I have a great deal of respect for both Tim Wood and Frank Barbera – and their work – and their discipline. Frankly, having grown up in the Institutional markets in the 1980’s – I’ve witnessed the power and predictability of TA [technical analysis] in what used to be FREE MARKETS. 

Interestingly, we didn’t have “conundrums” back then. When money supply meant something and it grew too fast – the bond market vigilantes barked – and EVERYONE listened - rates when up until money growth slowed and recessions happened.

Nowadays – if a bond market participant dares to accumulate a position that is perhaps FUNDAMENTALLY CORRECT [by shorting a pile of, say, 10 yr. bonds] – he/she is guaranteed that J.P. Morgan [through machinations in their 58 TRILLION NOTIONAL DERIVATIVES BOOK] or the Fed themselves will AMBUSH them with such a “torrent of liquidity” that they may well be “fundamentally correct” but out of a job too. 

From the Contrary Investor: 

"Here's a little fact for you. In the thirteen trading days ended December 7th (last week), the Fed conducted five coupon passes for a total of $5.7 billion. That number happens to equate to 15% of total YTD domestic equity mutual fund inflows as of last week. That's a coupon pass almost every other day for thirteen trading days. Get the picture? We don't know if this rapidity is a record number of coupon passes over a short period of time, but we have to question just what the heck the Fed is doing here. Why the need for so much newly printed money in rapid fire fashion? Maybe it's no wonder the US dollar has been feeling so blue as of late. Do you think the foreign community is watching the NY Fed website? "

"One last set of numbers. For the two weeks ended December 8, the Fed completed $83.25 billion in temporary lending (repo) to the markets. Please note this is a gross number and not net of prior lending activity maturities. But the gross number is a bit staggering for a two week period. " 

We need only ask the folks at Amaranth what happens when you “lever up” and do what is fundamentally correct. As the Wall Street Journal reminds us,

“Backed by borrowed money and a deep-pocketed fund, Mr. Hunter [Amaranth’s Nat. Gas trader] took on more exposure to certain futures contracts than do some big investment banks employing more than 100 energy traders, say several traders and ex-colleagues. He sometimes held open positions to buy or sell tens of billions of dollars of commodities.”

And Bloomberg tells us,

“…Amaranth borrowed about $4.50 for every dollar of its own equity at stake, according to documents it distributed to investors……”

But does anyone stop to wonder “who” lent the money in the first place and why so little media attention is focused on this angle of this sordid story - identifying the enablers? We’re well aware that J.P. Morgan et al was quick to swoop in for first pecks at the carcass – purchasing the “wrong longs” for pennies on the dollar to “cover” their coincidental – or perhaps not – massive short position in Nat Gas – who lent all the money in the first place? 

According to the same Bloomberg article cited above,

“Morgan Stanley Chief Financial Officer David Sidwell, speaking in an interview last week, said ``we don't see any material impact'' from Amaranth's losses. Goldman Sachs Hedge Fund Partners LLC, a U.S. registered fund of funds, and Goldman Sachs Dynamic Opportunities Ltd., a London-listed fund of funds, reported that returns may be affected by Amaranth's losses.”

And,

“Losses for prime brokers, including Goldman and Morgan Stanley, probably will be confined to forfeited fees from sponsoring Amaranth, said an industry executive, who declined to be identified.”

At least we can all sleep better knowing that Goldman’s financial performance was not impinged too badly since they heroically managed to salvage their year,

'Bonus heaven' at Goldman Sachs after record year

By Jenny Anderson 

Published: 2006-12-13 09:41:02

NEW YORK: Money is not supposed to grow on trees. Unless you happen to work at Goldman Sachs.

Scores of Goldman bankers and traders were to find out, starting Wednesday, what their bonuses will be, and chances are that they will be impressive. The bank is paying $16.5 billion in compensation this year, an average of roughly $623,418 per employee……

Hands In Your Pocket, Hands In Your Pocket

Now, not that we were speaking of CONFLICTS OF INTEREST, but if we stop to consider the fishy smell of Goldman’s coincident “rebalancing act” of their GSCI weighting of unleaded gasoline and the resulting crash of gas pump-prices in the lead up to the mid term elections; I guess it’s easy to dismiss this whole incident and say that Nat Gas was in a bubble all along. Of course the Nat. Gas storage facilities we can’t see or measure are all full. The government's EIA has told us so.

Fort Knox and West Point are full of gold too – don’t you know? But no one is allowed to see it or audit it, either. Perhaps this explains why the U.S. Treasury [or FED] conducts Gold Quality Swaps with the Bank of England for “deliverable gold bars” – because they have so much of their own to sell.

All of this, of course, has come from a Fed that claims they want to be “more transparent”. This is all compounded and allowed to perpetuate itself – largely due to a mainstream financial press that has essentially ceased to function. How else can institutions like J.P. Morgan strap on 5 TRILLION worth of notional derivatives in a single quarter and not even be able to find an interviewer from CNBC to talk about it and report the scoop?

My common sense tells me that proponents / adherents of TA are NOWADAYS actually charting / mapping / tracking what amounts to a fraud in a good many of our key financial markets.

My sense is that many foreigners are growing increasingly aware of these shenanigans. Sounds like some of them are getting a little restless too.

Not that I approve of the tactics – but some of the above, if it’s true - might even explain some of the “high handed” tactics being practiced by Messrs. Putin and Chavez. 

Additionally, my common sense tells me that in all likelihood – no one really has a “model” that will accurately predict when a fraud will end – so I hope, for their sakes, their disciplines have them “the right way around” when the music stops – because chairs are going to be mighty difficult to find when it does. 

© 2006 Rob Kirby
Editorial Archive

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Rob Kirby
Kirby Analytics
Toronto, Ontario, Canada
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