Daily Markets and News Highlights - May 18 2010

[DMac]

A little twist on the old RTM CHOW

http://www.kitco.com/images/live/nygold.gif

http://www.kitco.com/images/live/nysilver.gif

[DMac]

Russia hails Tehran nuclear declaration (http://aljazeera.com/news/articles/34/Russia-hails-Tehran-nuclear-declaration.html)

Russian President Dmitry Medvedev has welcomed the nuclear fuel declaration made by Iran, Turkey, and Brazil on Monday.

"What was done by our colleagues needs to be welcomed. This is the politics of a diplomatic solution to the Iran problem," AFP quoted Medvedev as saying to reporters in Kiev.

"We need to have consultations with all the parties, including Iran, and then determine what to do next," he added.

On Monday, Iran, Turkey, and Brazil made a declaration on a draft proposal according to which Tehran would send the bulk of its 3.5 percent enriched uranium to Turkey in exchange for 20 percent enriched uranium, which would be used as fuel for the Tehran research reactor, which produces radioisotopes for cancer treatment.

Tehran expects to receive the 20 percent enriched nuclear fuel within a year.

But if the deadline is not met, Turkey "will return swiftly and unconditionally Iran's low-enriched uranium," Iranian officials said earlier on Monday.

[DMac]

France has first 'burka rage' incident (http://www.telegraph.co.uk/news/worldnews/europe/france/7735607/France-has-first-burka-rage-incident.html)


A 60-year-old lawyer ripped a Muslim woman's Islamic veil off in a row in a clothing shop in what police say is France's first case of "burka rage".

[DMac]

Conspiracy of Banks Rigging States Came With Crash (Update1) (http://www.bloomberg.com/apps/news?pid=20601109&sid=axH24KWxjVDE&pos=10)


May 18 (Bloomberg) -- A telephone call between a financial adviser in Beverly Hills and a trader in New York was all it took to fleece taxpayers on a water-and-sewer financing deal in West Virginia. The secret conversation was part of a conspiracy stretching across the U.S. by Wall Street banks in the $2.8 trillion municipal bond market.

The call came less than two hours before bids were due for contracts to manage $90 million raised with the sale of West Virginia bonds. On one end of the line was Steven Goldberg, a trader with Financial Security Assurance Holdings Ltd. On the other was Zevi Wolmark, of advisory firm CDR Financial Products Inc. Goldberg arranged to pay a kickback to CDR to land the deal, according to government records filed in connection with a U.S. Justice Department indictment of CDR and Wolmark.

West Virginia was just one stop in a nationwide conspiracy in which financial advisers to municipalities colluded with Bank of America Corp., Citigroup Inc., JPMorgan Chase & Co., Lehman Brothers Holdings Inc., Wachovia Corp. and 11 other banks.

They rigged bids on auctions for so-called guaranteed investment contracts, known as GICs, according to a Justice Department list that was filed in U.S. District Court in Manhattan on March 24 and then put under seal. Those contracts hold tens of billions of taxpayer money.

...continued at link

[DMac]

Russia hails Tehran nuclear declaration (http://aljazeera.com/news/articles/34/Russia-hails-Tehran-nuclear-declaration.html)

Russian President Dmitry Medvedev has welcomed the nuclear fuel declaration made by Iran, Turkey, and Brazil on Monday.

"What was done by our colleagues needs to be welcomed. This is the politics of a diplomatic solution to the Iran problem," AFP quoted Medvedev as saying to reporters in Kiev.

"We need to have consultations with all the parties, including Iran, and then determine what to do next," he added.

On Monday, Iran, Turkey, and Brazil made a declaration on a draft proposal according to which Tehran would send the bulk of its 3.5 percent enriched uranium to Turkey in exchange for 20 percent enriched uranium, which would be used as fuel for the Tehran research reactor, which produces radioisotopes for cancer treatment.

Tehran expects to receive the 20 percent enriched nuclear fuel within a year.

But if the deadline is not met, Turkey "will return swiftly and unconditionally Iran's low-enriched uranium," Iranian officials said earlier on Monday.





Brazil-Turkey 1, sanctions 0 (http://atimes.com/atimes/Middle_East/LE19Ak01.html)

By Pepe Escobar

As D-Day approached in Tehran, it was as if the whole world was watching a numbers game. Brazilian President Luiz Inacio Lula da Silva, on his way to Iran, said the chances of convincing the Islamic Republic to accept a nuclear fuel swap deal were close to 99%. Russian President Dmitry Medvedev, after meeting with Lula in Moscow last Friday, said the chance was more like 33%. And the United States State Department, via Secretary Hillary Clinton, was all out pre-emptive, betting in fact on 0%.

Lula won the bet. If this was a football match - next month's World Cup will be followed by billions around the globe - the final result would be Brazil-Turkey 1, United States 0, with the golden goal struck in the final minute of extra time.

Welcome to the new axis of deals: Tehran-Brasilia-Ankara. This Monday in Tehran, Brazil, Turkey and Iran, via their foreign ministers, signed a groundbreaking nuclear fuel swap agreement according to which Iran will ship 1,200 kilograms of low-enriched uranium at 3.5% to Turkey in exchange, after a maximum of one year, for 120 kg of 20%-enriched uranium to power the Tehran Research Reactor - everything supervised by the International Atomic Energy Agency (IAEA) and Iran.

Lula described it as "a victory for diplomacy" - all the sweeter after American and Brazilian conservative media relentlessly trashed him for meddling into this high-stakes chess game. United Nations Security Council non-permanent members Brazil and Turkey - playing diplomacy - won against the United States (and its three European allies, France, Britain and Germany) playing confrontation. It was most of all a victory for the BRIC countries (Brazil, Russia, India, China) - the de facto, emerging, global counter-power to US hegemony.

Predictably, the Obama administration and Clinton in particular are bound to rehash the same old spin of Iran "failing" to keep its "commitments"; but that will not convince the real, developing world-heavy "international community" and will only (partially) appease Washington's powerful pro-infinite-war lobby.

Fully non-sanctioned
How do you close a deal like this? Lula was very careful to stress that Brazil, acting as a mediator, always insisted on building "trust" in its evolving dialogue with Iran. Moreover, before arriving in Tehran this past weekend, Lula had spoken at length with all major players - the US, Russia, China and France.

In Tehran, Lula and Turkish Prime Minister Recep Tayyip Erdogan - who flew in at the last minute - finally were able to "sell" the Brazil-Turkey joint proposal for a nuclear fuel swap to Iranian President Mahmud Ahmadinejad and Supreme National Security Council secretary Saeed Jalili only after 18 hours of talks held behind closed doors on the sidelines of the Group of 15 summit. The key negotiators were Brazilian Foreign Minister Amorim, Turkish Foreign Minister Ahmet Davutoglu and Iranian Foreign Minister Manouchehr Mottaki.

Amorim said the deal "must be enough" to prevent a fourth Security Council round of sanctions against Iran, a Washington/Tel Aviv obsession; he stressed, "that is what other countries have always said, that it was necessary to have this agreement, the swap agreement, in order to continue the conversation".

For Amorim, the agreement is a "passport" for even more sizeable negotiations, making sure that Iran is able to exercise its "legitimate right" to pursue a civilian nuclear energy program. Turkey's Davutoglu said the ball was now in the IAEA's court; "Iran will write a letter to the IAEA, and we hope that the IAEA in Vienna will react quickly and positively, so that there will be a result in a very short period of time." He added, "There is no need for sanctions now that we [Turkey and Brazil] have made guarantees and the low-enriched uranium will remain in Turkey." Medvedev, although more guarded in his reaction, lauded the Brazil-Turkey effort and extensively discussed details of the deal with Lula over the phone.

Enrich me, baby
The agreement is only relatively similar to the proposal by the "Iran Six" group (the five Security Council permanent members plus Germany) in October 2009 in Geneva. At the time, Russia and France would come up with the enrichment. Tehran, not satisfied with the guarantees, advanced other possibilities. There was no mutual trust. Negotiations broke down. Now the novelty is the Turkish engagement - a result of the common Brazil-Turkey mediation strategy.

The naysayers' choir is already louder than Metallica. Predictably, the announcement by Tehran that regardless of the deal it would continue to enrich uranium at 20% in its own territory anyway is leading the US and Israel to discredit the whole operation. Brazilian diplomacy considers their critique to be extremely flawed - stressing instead this was the first time Iran had actually agreed to send its own nuclear fuel abroad for enrichment.

The French and the Germans - echoing Washington - already insist the Brazil-Turkey mediation success will not prevent Iran from reaching an overall agreement with the IAEA. The Western axis is actually obsessed with preventing Iran from developing any uranium enrichment in its own territory - something that goes against the nuclear Non-Proliferation Treaty (NPT) itself.

There's no evidence, certified once again by the IAEA this spring, that Iranian nuclear material at the Natanz plant has been diverted to a weapons program. There's no evidence Iran is attempting to enrich uranium at 95%, as part of a nuclear weapons program. None of this will prevent Washington from deviating from its rush towards a fourth round of Security Council sanctions. It doesn't matter that the votes are not there - and will never be there.

The 10-point, detailed declaration on the nuclear swap deal, read by Mottaki at a press conference in Tehran, is not getting and will not get much play in Western corporate media; but it reaffirms Iran's commitment to the NPT, recognized by both Brazil and Turkey; and characterizes the agreement as "a starting point to begin cooperation".

Iranian Supreme Leader Ayatollah Ali Khamenei, not immune to playing to the global South galleries, remarked after meeting Lula that the US was so keen on trying to pre-empt the Brazilian effort because it could not bear the sight of "two independent countries", Brazil and Turkey, acting like top diplomatic powers.

What may have happened is that the BRICs, plus Turkey, in a concerted effort these past few weeks, have made it very clear to the Iranian leadership that without any sort of agreement the US would keep on pushing for more and more crippling sanctions - and everyone knows what happened to Iraq in 2003.

So both Khamenei and Ahmadinejad seem to have got the message. But the key was still to find a deal that preserved Iranian dignity. Lula is right; the operative concept is "trust". Will Washington and its allies bow to the evidence? Or will they insist on playing a loser's game?

[DMac]

Divided L.A. council votes to eliminate 761 positions while seeking concessions from unions (http://www.latimes.com/news/local/la-me-0518-la-budget-20100517,0,6664949.story)


The lawmakers, on an 11-4 vote, eliminate dozens of child-care positions, reduce library hours and scale back the number of trees that will be trimmed.

[DMac]

Oil futures portending a slow, dragged on deflation? ???


Money illusion and 'real backwardation' in oil (http://www.commodities-now.com/news/portfolio-management/2635-money-illusion-and-real-backwardation-in-oil.html)

London, 18 May 2010

Forward commodity prices are not properly accounting for the impact of inflation. "Money illusion" was the term coined by Cambridge economist John Maynard Keynes to describe the tendency of people to be fooled by thinking in nominal rather than real terms, ignoring the effect of inflation on the purchasing power of money.

It is usually associated with unsophisticated retail investors. But there is evidence it is misleading a much wider group in the commodity markets, and long-term commodity prices are being mis-valued as a result.



While this is discouraging producers from selling their forward production, it is also creating a potential source of returns for long-term investors frustrated by the damage wrought by the contango nearby.
Real Forward Prices

Chart 1 (download PDF below) shows the forward curve for light sweet crude oil futures on NYMEX at the close of business on May 14: along its entire length. Prices rise from $72 for the Jun 2010 contract to $81 for Dec 2010 , $86 for Dec 2013 and $90 for Dec 2015 .

But NYMEX prices are fixed in cash terms. They take no account of inflation. If inflation runs at an average of 3 percent per year, the $90 Dec 2015 contract will be worth only $77 (present value terms) when it matures in just over five years time.

Chart 1 shows the forward curve adjusted for a family of inflation rates (ranging from 1 percent to 5 percent per year). In real terms, the curve is no longer in contango throughout its entire length. Real prices flip into backwardation sometime between April 2011 and January 2013, depending on the inflation rate chosen.

Only for average inflation of 1.75 percent or less for the next five years (which is exceptionally low) does the curve remain in contango along its entire length. For any rate above 1.75 percent, quoted forward prices do not rise fast enough to offset the impact of inflation (Chart 2) especially beyond Dec 2010 (Chart 3).
Are Futures Too Cheap?

For inflation of more than 2 percent, averaged over five years, the market is offering investors the opportunity to buy forward crude futures for less than today's spot oil price, in real terms. There are three possible explanations for this strange state of affairs:

(a) The market expects oil prices to fall in real terms over the next five years (because supply remains ample or demand is expected to fall as conservation and substitution bite into consumption). In this scenario, peak oil is a myth. Prices will actually drift lower (in real terms) as previous shortages dissipate.

(b) The market is assuming inflation will remain low (less than 1.75 percent over the next half-decade). The economy might even suffer deflation. Sluggish growth and surplus capacity will ensure prices rise slowly, even decline. In a low-growth, deflationary environment, demand for oil, and oil prices, are unlikely to rise much.

(c) The market is mis-valuing far forward contracts, marking them too low to fully reflect the compounded effect of rising prices over five years.

Neither explanation (a) (falling real oil prices) nor (b) (general deflation) seems consistent with expectations of a gradual global recovery and medium-term tightening of the oil market as demand picks up and new sources of supply prove difficult and costly to bring onstream. So explanation

(c) (futures contracts are undervaluing expected future oil prices) is the most plausible.
Risk Premiums Disappear at Front-End

The undervaluation of forward oil contracts (in real terms) is another form of "risk premium" investors can capture in return for assuming price risk. Keynes used the concept of "normal backwardation" to explain why prices for futures contracts tended to understate the market's actual expectation of future spot prices.

Normal backwardation enabled hedgers (who he assumed to be mostly producers who want to be net short of commodity futures) to pass risk to investors (who must be net long) by enabling investors to lock in a price increase (on average). The market does not have to be in an actual backwardation. It is enough that futures prices are below the market's (unobserved) expectation about future spot prices. While this is easier to achieve in a market that is actually backwardated, it is still possible in a contango, provided the forward prices are still below where the market thinks spot prices are likely to rise in future.

In a similar vein, Gary Gorton and Geert Rouwenhorst, in their famous 2004 paper on "Facts and Fantasies about Commodity Futures", suggested investors could capture an embedded risk premium from running long positions in a diversified basket of commodity futures contracts.

In practice, normal backwardation and embedded risk premiums have long since evaporated at the front end of the curve as index funds and other long investors have piled in and the trade has become increasingly crowded.
Real Backwardation Persists at Back-End

But there may still be a premium embedded in far forward contracts. Nominal contango is hiding a "real backwardation" in inflation-adjusted forward prices (as Chart 1 clearly shows). Investors are still being offered the opportunity to buy long futures contracts at a discount to expected future prices, if inflation remains relatively brisk (Charts 2 and 3).

For higher inflation rates, the real backwardation is substantial. Using the Dec 2010 futures prices as a baseline rather than Jun 2010 (which show signs of distress owing to limited storage capacity), current oil prices is trading around $81 per barrel.

If inflation runs at 2-3 percent per year for the next five years, spot prices should rise to between $89 and $93 per barrel by the end of 2015, about in line with the current forward curve, to keep pace with the devaluation of money.

But if inflation rises faster than this, or real prices increase, investors should be able to lock in gains. Gains could be much higher if oil prices rose in real terms to incentivise more exploration and production, and restrain demand, or if inflation averages more than 3 percent.

Equally, investors will make a loss if inflation (and therefore nominal oil prices) is lower than 2 percent. Forward oil prices (like those for other commodities) still offer a risk premium for long investors, and potential to hedge against inflation.

But the effect is likely to be temporary. As more investors shift their positions further down the curve to escape the negative impact of contango, it will force the curve's back end into bigger contangos as well, and they will gradually compete away the risk premium here too.

Moreover, investors are taking on quite a bit more risk for their "risk premium". They are taking a view on inflation (>3 percent) as well as real oil prices. For forward contracts to be worth buying, inflation must average over 3 percent per year in 2010-2015. Moreover the oil market must remain tight for longer.

The prospect of big gains in real prices is much smaller over a 5 year period than over 1-2 years. Both demand-side and supply-side elasticities are much greater over 5 years as consumers and producers have time to make significant adjustments to their behaviour.

Nonetheless, for investors with a bullish medium-term view on the oil market, and more concerned about the prospect for inflation than deflation, far forward crude oil futures still offer good value for the moment.

[DMac]

I'm listening in now.

Saturday, May 15th

http://www.kingworldnews.com



Eric Sprott has over 35 years of experience in the investment industry and manages roughly $5 billion. Eric has been stunningly accurate in his writings for quite some time and is one of the highly respected industry professionals who foresaw the current crisis and chronicled the dangers of excessive leverage as well as the bubbles the Fed was creating while correctly forecasting the tragic collapse we are all enduring. In this interview Eric discusses the loss of confidence in paper, when juniors will take off to the upside, the US re-entering a bear market, gold friendly events leading gold into new highs, busted governments, the financial lunacy of massive debt, the resiliency of gold, the “nuclear option” & much more.

MP3 Link (http://www.kingworldnews.com/kingworldnews/Broadcast/Entries/2010/5/15_Eric_Sprott_files/Eric%20Sprott%205%3A15%3A2010.mp3)





John Hathaway has almost 4 decades of market experience and is known internationally for his writings about the U.S. economy, gold, silver, commodities and much more. He is one of the most respected institutional minds in the world today regarding gold. In this interview John discusses the current state of the gold market, more money crowding into gold, the coming mania, what lengths the governments will go to to keep their flawed business models in place, an acceleration of trouble with paper, gold stocks, consolidation in the mining sector and much more.

MP3 Link (http://www.kingworldnews.com/kingworldnews/Broadcast/Entries/2010/5/15_John_Hathaway_files/John%20Hathaway%205%3A15%3A2010.mp3)

[DMac]

Japan Challenges China on Nuclear Buildup (http://gsn.nti.org/gsn/nw_20100517_6151.php)

Monday, May 17, 2010
Japan pressed China on Saturday to end production of new nuclear weapons or to curb additional atomic buildup, Agence France-Presse reported (see GSN, May 4).

"Amongst the P-5, it is only China which is increasing its nuclear arsenal," Japanese Foreign Ministry spokesman Kazuo Kodama quoted Katsuya Okada, the nation's top diplomat, as saying. "Therefore I would like to request the Chinese government either to reduce the number of nuclear arsenals or at least commit ourselves not to increase its nuclear arsenals from the current level."

Beijing in 2009 had 186 deployed nuclear warheads, according the Stockholm International Peace Research Institute.

Okada's plea was rebuffed by his Chinese counterpart, Chinese Foreign Ministry spokesman Ma Zhaoxu said in a statement yesterday.

"Foreign Minister Yang Jiechi refuted the irresponsible remarks by Japan on the spot," the release states. "He pointed out that China's nuclear strategy and nuclear policy is transparent. China's nuclear disarmament proposals and efforts are obvious. China's position is legitimate, transparent and above reproach."

Beijing has called for the elimination of all nuclear weapons, and its arsenal is intended only to discourage atomic aggression from other countries, Ma said in the statement

[DMac]

South Korea To Formally Blame North Korea For Torpedo Attack On Thursday (http://www.zerohedge.com/article/south-korea-formally-blame-north-korea-torpedo-attack-thursday)

Europe is broken, HFT traders are about to make cameo appearances on "How to catch a predator", Iran and Israel are scrambling to weaponize plutonium, and now South Korea is about to escalate its involvement with North Korea, by formally blaming Pyongyang for the recent torpedo attack. What happens next nobody knows, but something tells us Hillary Clinton will be completely useless (as usual) in resolving whatever conflict develops out of this. As WaPo reports: "South Korea will formally blame North Korea on Thursday for launching a torpedo at one of its warships in March, causing an explosion that killed 46 sailors and heightened tensions in one of the world's most perilous regions, U.S. and East Asian officials said."

More from WaPo (http://www.washingtonpost.com/wp-dyn/content/article/2010/05/18/AR2010051803094.html?hpid=topnews):

South Korea reached its conclusion that North Korea was responsible for the attack after investigators from Australia, Britain, Sweden and the United States pieced together portions of the ship at the port of Pyongtaek, 40 miles southwest of Seoul. The Cheonan sank on March 26, following an explosion that rocked the vessel as it sailed in the Yellow Sea off South Korea's west coast.

The officials, who spoke on the condition of anonymity because South Korea has yet to disclose the findings of the investigation, said that subsequent analysis determined that the torpedo was identical to a North Korean torpedo that had previously been obtained by South Korea.

South Korea's conclusion underscores the continuing threat posed by North Korea and the intractable nature of the dispute between the two Koreas. South Korean President Lee Myung-bak must respond forcefully to the attack, analysts said, but not in a way that would risk further violence from North Korea, whose artillery could -- within minutes -- devastate greater Seoul, which has a population of 20.5 million.

Time to diversify Au holdings with some Pb.