March Madness – Cyprus, Dell, Gold
March Madness is in full swing, with all kinds of craziness on and off the court. The market anticipated a final hour deal with Cyprus and it was right. We have become accustomed to a crisis emerging, lots of hoopla, and then a last minute can-kicking Band-Aid. It seems that the West (Europe, US, and Japan) continue (and successfully for now) to wait until the last minute and just print their way out of a problem. I have a sneaking suspicion that it will work for now, but we are just loading up these government and central bank balance sheets will trillions of debt. Are we becoming complacent as crisis after crisis is resolved in the final hour with more government intervention? What happens when it doesn’t work? The VIX (measure of market implied volatility / risk) is reflecting this complacency, but don’t worry the government, Fed, ECB, or some money printing agency will just print more and bail them out; the market is fine. The unfortunate reality is that while the Western governments add debt to their books, while printing their way to prosperity, there is really a great emerging market growth story, a great commodity opportunity, and also a new energy boom story – all of it being over-shadowed by Western political circus and debt.
There was certainly some madness on the court with the seed 15 team (Florida Gulf Coast) making it to the “Sweet 16”. There was also madness over the weekend in Cyprus, Dell, and Texas.
Cyprus Fall Out?
The market (pre-market futures) seems to reflect that the last minute deal, as expected, is now a story to be moved to the back burner. Perhaps the market is right and this was just another speed-bump in the Euro Debt parade.
However, the deal does look very ANTI-Russian. Notice the one bank (Laiki) that is going to be “resolved” (meaning closed down and the majority of deposits over 100,000 euros will be lost) is the one bank that the majority of Russian’s billions are on deposit. Germany was very vocal about letting this one bank take the fall in any Euro Bailout. The accounts with 100,000 or less will be moved over to another Cyprus bank that will be receiving additional help from both the EU and Cyprus. The EU is picking “good” and “bad” banks, which they will let and choose to fail and others to support. The estimate of Russian money in Cyprus banks is close to $40 billion (from businesses and individuals), which is 40% of Cyprus bank deposits, with Laiki bank the biggest. I don’t think Russia will sit idly by and let this happen. Remember, the EU is a big purchaser of Russian gas, energy, and commodities and Russia has been known to limit supply, control costs, and possibly even raise tariffs. This could trigger some commodity/gas price increases. Only time will tell.
The unusual deal with DELL, Michael Dell / Silverstone just got a little crazier with activist investor Carl Icahn & Blackstone now jumping in the mix upping the bid price of the stock to over $15, but for only part of the company. Dell has been losing ground in their core business as competition heats up, margins are squeezed, and as the entire computer industry becomes a commodity. Dell ventured off into the server, cloud, and service industry; however, unlike IBM that made the successful transition out of hardware and into the software/service business, Dell has not been able to let go of their retail PC market where costs rise and margins shrink. It is a similar story over at Hewlett Packard HPQ, but they have even more problems with their management circus and a lack of focus. Dell shareholders are unsure what is going, not just with the company’s vision but now also with both of these rather odd and confusing deals. I doubt it will have any major impact to the sector as a whole, but it could be a deal to watch as we see the computer hardware landscape become a rail thin margin business. IBM got out early and refocused their business; I am not sure if Dell and Hewlett Packard can do the same.
Texas has purposed a state law to set-up a sovereign gold depository. If the law is passed Texas will be the first state to have a sovereign gold depository for private citizens. There are currently two types of gold depositories; Sovereign for federal gold deposits (such as Fort Knox), and private (such as Brinks) which can store and transport gold privately. The Texas law (if passed) would be the first sovereign depository for private gold.
A provision in the 10th amendment states that if the Federal government purports to confiscate the citizen’s gold, the state of Texas would state that is null and void.
Next week is the 80th anniversary of FDR’s gold confiscation, in which the Federal government confiscated the citizen’s gold (gold that was used as store value). This law would protect citizens gold under Texas state sovereignty.
In 1973 the IMF demonetized gold and we saw gold being stored in foreign depositories, the US being the largest. A few years ago Hugo Chavez had Venezuela’s gold repatriated and at the time the media joked about it and his paranoia. Recently Germany has just passed a law to repatriate their gold from the US. The Netherlands and several Scandinavian countries are discussing repatriating theirs and Switzerland has just passed a referendum to do that as well. We are starting to see a slow re-monetization of gold as nations are now looking to get back their PHYSICAL gold and store it themselves. The primary driver of this concern is the massive rise in sovereign debt of Western nations, the huge and growing deficits, the massive leveraged bailouts, and the non-stop money printing.
While we are seeing the slow repatriation of gold on the sovereign nation level, this is the first state that is actually concerned with protecting citizens against its own Federal government. I heard someone mention the US federal government would never confiscate people’s gold, but it already did once, who’s to say it won’t again?
I’ll let you decide. Is Texas being paranoid? What about Germany, Switzerland and other nations that are repatriating their gold? It was a Texan hedge fund manager that purchased a billion in gold futures that wanted to take physical delivery and our own reserves couldn’t immediately fulfill that obligation. It seemed apparent from his experience that even our futures market gold reserves are a leveraged institution (fractional reserves). Maybe it was his personal experience that triggered the Texas legislation to take notice. Maybe Hugo Chavez wasn’t so paranoid after all.
Support & Resistance
The pre-market futures were in positive territory this morning after it seemed the Cyprus deal was resolved at the last minute. However, I am not sure how much fallout it will cause with Russia and if that could trigger some commodity issues down the road. I don’t think the Cyprus story is over.
We closed right on that number; is it resistance or a straddle strike? While Dell is a small player in the tech heavy index, the story could bring attention to the industry as a whole.
This is a straddle strike in my mind. The Cyprus story seems resolved, but what are the broader repercussions? Pre-market futures look higher and the VIX at 13.5 is still pretty low, relatively.
The broader based market had remained fairly strong; however, we could be in for a slight pull back in the near term before heading higher.
This is a short trading week (Good Friday), but we have some economic data releases and a few interesting stories that could bring a little volatility to the market.
I think the Texas gold story is fairly interesting and while I don’t think it is a game changer in the gold market, it could be a slow and far reaching leading indicator. I will be most interested to see if the legislation passes and if there are any federal repercussions.