Tuesday, October 30, 2012 - Sandy, FEMA, Elections, Star Wars, Gold

Sandy, FEMA, Elections, Star Wars, Gold

by Sinclair Noe

Of course the over-riding story of the day is Hurricane Sandy. The latest is that the death toll has climbed to 40. Search and rescue missions are constant and ongoing. The death toll included 17 victims in New York State; 10 of them in New York City, along with five each in Pennsylvania and New Jersey. Sandy also killed 69 people in the Caribbean before making its way up the Eastern Seaboard. Haiti was hardest hit by the storm; 54 Haitians died, with 20 still missing. Tens of thousands have been left homeless. Crops were devastated. Many Haitians were still living in tents following the 2010 earthquake. Hurricane Sandy has worsened the threats of cholera and food shortages. We should be proud of how we have responded to this natural disaster, but there is still a lot of damage and it will take time to clean up.

About 8 million people are without electricity. More than 16,000 airline flights have been canceled. The economic damage will be massive. But it's too early to say exactly how much it will be.

The Jersey Shore was hit especially hard. Lower Manhattan was flooded by an 14 foot surge of seawater, a record. Commuter tunnels and subway tunnels are underwater.

Wall Street was closed today, feeling a little under the weather. There was electronic trading in the commodities markets. Gold - .80 = 1710.00, Silver - ,01 = 31.85, crude oil - .02 = 86.57. The New York Stock Exchange and Nasdaq both plan to resume normal trading tomorrow. Wall Street, as represented by the extensive network of exchanges, banks and regulators — has spent the past two days testing systems and assessing the markets in an effort to ensure the trading day goes smoothly. Some trading firms with damaged data centers or facilities have had issues reconnecting electronically with the exchanges. One nearby building that houses several firms sustained significant damage and could hamper their ability to operate. Such firms are now scrambling to move operations and do repairs to be ready for the open on Wednesday.

In advance of Sandy’s march through Manhattan, thousands of sandbags have been stacked in front of the downtown headquarters of Goldman Sachs. It is a picture whose metaphorical value should not be lost on regulators, policymakers, shareholders and the bankers themselves.

And then, of course, there's an election in one week. When asked about disaster relief and FEMA's role in a debate in June of 2011, Romney said, “Every time you have an occasion to take something from the federal government and send it back to the states, that’s the right direction. And if you can go even further, and send it back to the private sector, that's even better.”

Then, according to a transcript of the debate, he added: “Instead of thinking, in the federal budget, ‘What we should cut,’ we should ask the opposite question, ‘What should we keep?' We should take all of what we're doing at the federal level and say, what are the things we're doing that we don't have to do? And those things we've got to stop doing, because we're borrowing $1.6 trillion more this year than we're taking in.”

When questioned by moderator John King of CNN about disaster relief specifically, Romney responded, “We cannot afford to do those things without jeopardizing the future for our kids. It is simply immoral, in my view, for us to continue to rack up larger and larger debts and pass them on to our kids, knowing full well that we'll all be dead and gone before it's paid off. It makes no sense at all."

Today, Governor Romney and President Obama put aside their fierce battle for the White House, avoiding politics to focus on relief efforts after mammoth storm Sandy left millions of Americans struggling to recover. With a week left in a deadlocked race, Obama canceled campaign trips to stay in Washington and supervise storm recovery, while Romney held a storm relief event in the swing state of Ohio but ducked most political talk, including past comments about FEMA. Meanwhile, Vice President Biden told reporters FEMA was doing "one hell of a job," an echo of the comments famously made by former President George W. Bush during the government's botched response to Hurricane Katrina in 2005.

Romney will hit the trail again for rallies in Florida on Wednesday, and Romney's running mate, Paul Ryan, and Vice President Joe Biden also added new campaign stops as the race heads to a finish. Obama on Wednesday will visit New Jersey, which along with New York City bore the brunt of the storm, although he was expected to return to campaigning on Thursday for the final sprint to Election Day.

Before Election Day, we'll have one more jobs report this Friday. Job growth likely picked up in October, but not enough to prevent the unemployment rate from rising off a near four-year low, although that might not matter for next week's presidential election. Coming four days ahead of the election, the employment report on Friday is not expected to shift much from its recent pattern, limiting its impact on voters. Employers are expected to have added 125,000 jobs to their payrolls in October, up from 114,000 in September. The unemployment rate is forecast to tick up a tenth of a percentage point to 7.9 percent after a dramatic 0.3 percentage point fall in September. Most people have an impression of the economy and their minds won't be changed at this late stage. Only a dramatic headline on either number in either direction might move the dial a bit more.

One bit of good news on the jobs front today, Chrysler reaffirmed that the company is not moving Jeep vehicle production out of the United States to China. This had been a bit of a campaign issue. Chrysler in an October 25 blog post had already rejected a statement made that day to a crowd in Ohio by Republican presidential candidate Mitt Romney, that Chrysler was thinking of moving all Jeep production from Ohio to China. Romney, speaking last week to a crowd in Defiance, Ohio, said that he had read a news article that said Chrysler's Jeep brand is considering moving "all production to China." Later, the Romney campaign aired an advertisement that did not repeat the move of production from Ohio but said that Chrysler is considering making Jeeps in China.

Meanwhile in Europe, Reuters reports an overwhelming majority of Greek Socialist lawmakers have agreed to vote in favor of contested austerity reforms, sharply increasing the odds of securing parliamentary approval for the measures.

Near-bankrupt Greece needs to push through spending cuts and tax measures worth 13.5 billion euros as well as a raft of reforms to appease EU and IMF lenders and secure bailout money needed to avoid running out of cash next month. After months of negotiations on the austerity plan, the Greek Prime Minister announced that talks had been completed and implored his allies to back the package. The prime minister's New Democracy party and the Socialist PASOK have between them 160 deputies, nine more than they need for an absolute majority in parliament.

Not much in the way of corporate news today, but there was an announcement that George Lucas is selling LucasFilm to Disney for $4 billion, and Henry Blodget did a nice article on the company that Lucas built, without the aid of venture capitalists. How did George Lucas build a company worth $4 billion without any outside investors?

Here are the key points:

• He quit an early career when he realized it wasn't right for him (he wanted to be a race-car driver...until he almost got killed in a crash)
• He made a type of product he loved and cared deeply about (movies)
• He made--and learned from--lots and lots of different products (There were many Lucas movies before Star Wars)
• He evolved (Lucas's early movies were artsy non-commercial films)
• He studied and learned from the best mentors (Francis Ford Coppola, among others)
• He became friends with other extremely talented people in the industry (Steven Spielberg, among others)
• He was shrewd (He sold his directing services to Fox Studios for Star Wars for cheap--but kept all the merchandise, licensing, and sequel rights, which Fox didn't want)
• He was very, very patient (Unlike many of today's entrepreneurs and investors, Lucas wasn't looking for a "quick flip." Lucasfilm was founded in 1971, 41 years ago).
• And of course, it helps when the force is with you.

Not exactly an overnight sensation, but a good recipe for success.

Let's talk about gold, and maybe silver too. There are a few trends developing in the metals markets that deserve our attention.

One of the last big trends in gold was back in 2004, when the GLD exchange traded fund was formed. Suddenly people could invest in gold, without the hassles of holding the physical metal; also, it was an easy trading platform. The Exchange Traded Product, or ETP, trades like a stock; you can enter or exit a trade is seconds. The only problem is that you don't actually own gold, you own paper. Theoretically, that paper is backed by physical gold, but you can't actually exchange it for coins or bullion.

The market meltdown of 2008 changed people's comfort levels with regard to holding paper gold compared to physical gold. Total coin and bar purchases are up 96% since 2009, while net additions to ETs are down 73% over the same period.

While ETPs include the ownership of physical bars, it's clear that increasing numbers of investors are buying more bullion than proxies. This is a remarkable shift, especially given the claimed popularity of GLD.

The shift is even more dramatic with silver. Investors have tripled their silver bullion purchases since 2007, while the exchange-traded vehicles sold 26 million ounces more than what they bought to back their funds last year.

Why is this happening? And what does it mean?

There may be some concerns about the ETPs; do they really have the physical metals in the appropriate quantities to back up their paper? Another reason for the shift is certainly due to global economic, fiscal, and monetary concerns. Remember, the recovery in the US has been mediocre in our eyes, but compared to the rest of the world, the US economy looks great. In times of global economic concerns, people gravitate to precious metals as a safe haven play. Then, you might remember the MF Global fiasco. There is concern that holding a paper receipt for metals is not enough, that the brokerage might hypothecate the assets in an account, and you are back to hold nothing more than a worthless piece of paper. Having metal in your control and at your disposal lets you avoid dependence on counterparties.

Last year, Hedge fund manager John Paulson started taking delivery of physical gold, moving away from paper gold. Now, the trend seems to be spreading to countries taking delivery of physical gold from central banks.

The demand story for silver is quite different; silver is the poor guys' precious metal; demand takes the form of jewelry and coins. Overall silver jewelry sales in China were up 19.3% in the first 9 months of this year, compared to last year. And don't forget that silver is an industrial metal; one of the big applications is in the solar industry, and output is expected to increase ten-fold in the next 4 years; that means lots of silver will be used.

Another important consideration is the increase in the monetary base. The price of gold tends to move in pretty close relation to the expansion of the monetary base. Since the Fed declared QE to Infinity,  it's logical to conclude that this expansion of the monetary base will continue. If it grows at the same pace through January 2014, there is a high likelihood the gold price will reach $2,300 at that point. That's roughly a 30% rise within 15 months. Some may argue that there's no law saying this correlation must continue. That's true. And maybe the Fed doesn't print till 2014. That's possible. But it's not just the US central bank that's printing money; the European Central Bank (ECB) President Mario Draghi has declared that it will buy unlimited quantities of European sovereign debt; Japan's central bank is expanding its current purchase program by around 10 trillion yen ($126 billion) to 80 trillion yen; the Chinese, British, and Swiss are all adding to their balance sheets.

One more point, the precious metals market is actually quite small. The investment market for silver is actually less than the market capitalization of Wal-Mart, so when these metals prices start to move, they can move fast.