-- Posted Tuesday, 27 December 2011
Graceland Updates
By Stewart Thomson
posted by Goldseek
1. If there is a flow of capital that portrays the current mindset of the average global investor perfectly, it is likely the incredible demand for so-called “risk-free” investments.
2. “If the last two weeks are any indication of how next year will start, there’s near-insatiable demand….We have a significantly shrinking supply of risk-free assets in the world and U.S. Treasuries are one of the few left.” - Ira Jersey, interest-rate strategist at Credit Suisse Group AG, in an interview with Bloomberg News, Dec 21, 2011.
3. Ira is referring to the incredible demand for US Treasuries and T-Bills. Amongst hedge funds and the public, the European crisis has ignited a surge in dollar bullishness and euro bearishness.
4. Click this Bloomberg bid-to-cover ratio chart for United States 4 week T-bills. You are looking at a spike in the ratio to a mindboggling level of 9:1. A ratio of 2:1 is considered successful. A 9:1 ratio, especially given the fact that these bills pay absolutely no interest, shows you the incredible level of investor fear that exists around the world.
5. The longer term T-bonds showed a 3:1 bid-to-cover ratio in the latest auction, indicating powerful demand from terrified investors who want to avoid risk. These investors will clearly pay any yield penalty to get perceived safety for the bulk of their capital.
6. Please keep in mind that there are two sides to every trade; for every seller of a euro, somebody has to be a buyer, or there is no trade. Talk and analysis about where the euro is going should always play second fiddle to liquidity flows studies.
7. Click this euro liquidity flows chart from sentimentrader.com now. Hedge funds are generally not as heavily capitalized as the commercial traders (banks) are. They buy most of their leverage from the banks, who are on the other side of their trades quite often. That’s not a good situation to be in, if you are a hedge fund.
8. When your bookie is on the other side of your trades consistently, you have to realize you might be classified by your bookie as a mark, rather than a customer.
9. The fund managers are aware of the bookie-gambler relationship, but hope that they can make a “big score” with their leveraged play, and get out before the deep-pocketed commercial traders reverse the trend with their gargantuan buying. Enormous leverage brings huge risk, but if a fund can call a really big move, the profits made can be many billions of dollars.
10. A lot of hedge funds definitely have a lot of paper profits now from shorting the euro, but greed is a very powerful emotion, and hedge funds have a tendency to overstay their time on many trades.
11. What a lot of amateur investors don’t understand is that the banks and prime brokers often continuously loan more capital to the funds to enlarge their positions. As the funds “add to a winner”, the fact is that it doesn’t take that much of a reversal in price to cause a dramatic reduction in the net liquidation value of their positions.
12. If you look at the red and blue circles that I have drawn on that euro COT report chart, you can see that the public is at record levels of bearishness on the euro, for the life of this chart. The funds are also very bearish, while the deep-pocketed commercials are holding a record bullish stance. Read more>>
