Personal Income Tax Extensions

By B.P.T., on July 22nd, 2011

With the federal government looking like it is about to default on its obligation to pay the nation’s debts, it seemed like a good time to remind everyone that it is possible to delay your annual obligation to file your income tax paperwork by submitting an income tax extension form, even though the federal government expects you to pay your taxes on time, unlike the government itself.

According to the IRS, you are able to postpone the date that your form 1040EZ, 1040A, or 1040 is due from April 18, 2011 to October 17, 2011 by filing form 4868.  An even easier way to delay the due date is to use tax preparation software to file for an IRS extension, since it will, e-file your federal extension form, make a payment of tax due, print a PDF copy of the extension you e-filed, allow you to see when your extension has been accepted by the IRS,  and access the forms you need to file a state extension by mail if necessary.

If you do need to delay your income tax filing and you owe taxes, be sure to pay a reasonable estimate of your taxes owed, or you can face stiff penalties.

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Prognostication

By Christopher Briem, on July 22nd, 2011

The news statewide is that the jobs count dropped and the unemployment rate ticked up in June, just as it did for the US as a whole.

To be the optimistic contrarian, I’m going to go out on a limb here and say that when we learn the comparable data for the Pittsburgh region in a little more than a week or so the jobs count will be up and the unemployment rate will drop.   What can we bet on that?

I am working on a predictive model of short term labor force changes in the region.  I should show more guts and put a more specific number on that prediction, but it isn’t quite ready yet.  Maybe soon.



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A Look at Regulation in the Credit Card Industry

By B.P.T., on July 22nd, 2011

The Credit Card Accountability, Responsibility and Disclosure Act, (CARD Act) is now one year old, and the Consumer Financial Protection Bureau released data showing its impact on the credit card industry as it prepares to begin its role as regulator of consumer financial products later this year.

This data showed that credit card late fees dropped from $901 million in January 2010 to to $427 million in November 2010, due to a cap of $25 on the first late fee on an account and $35 for a second late fee within six months of the first offense, and  the number of accounts that were charged late fees dropped by 30%.

Also, the number of accounts that were impacted by an interest rate increase dropped from 15% a year to 2% in the year after the new regulations took effect.

The final change mentioned by the agency was a regulation that prevents credit card issuers from penalizing cardholders for going over the card’s limit, unless the cardholder requests that these charges be accepted.  As a result of this change, many credit card issuers have eliminated over the limit fees that were charged if a transaction pushed an account over its limit.  These fees were as high as $39 before the new rules were put in place.

However, not all of the changes that have taken place since the enactment of the CARD Act have been positive.  Banks have cut perks and added many fees in an attempt to make up the lost revenue, such as application fees, annual fees, inactivity fees, increased balance transfer fees, and even fees for receiving a statement by mail.

Another negative for consumers is that credit card interest rates have risen from 13.26% to 14.27%, making it more difficult to find a low rate credit card, and the amount of available credit has dropped from over $4,400 to $3,900 on the average account, which can hurt those with a high utilization or those who need to apply for a new card.

Overall, the act seems to have accomplished its goals of providing consumers with more information about the cost of credit and the consequences of carrying a balance and protecting cardholders from predatory practices by issuers, but that protection has come at a cost, especially to those with poor credit or lower incomes who have been effectively shut out of the credit market, leaving the results of this regulation mixed at best.

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Incentives Matter

By Simon Grey, on July 22nd, 2011

Why is there widespread cheating by America’s educators? According to Diane Ravitch, who is the research professor of education at New York University, it’s not teachers and principals who are to blame; it’s the mandates of the No Child Left Behind law, enacted during the George W. Bush administration. In other words, the devil made them do it.

While Williams is correct in sarcastically noting the lack of moral fiber among America’s educators, it is worth pointing out that Ms. Ravitch does have a legitimate complaint about No Child Left Behind. Consider the mandates of the bill, as summarized by Wikipedia:

No Child Left Behind requires all government-run schools receiving federal funding to administer a state-wide standardized test (all students take the same test under the same conditions) annually to all students. The students’ scores are used to determine whether the school has taught the students well. Schools which receive Title I funding through the Elementary and Secondary Education Act of 1965 must make Adequate Yearly Progress (AYP) in test scores (e.g. each year, its fifth graders must do better on standardized tests than the previous year’s fifth graders).

If the school’s results are repeatedly poor, then a series of steps are taken to improve the school. Schools that miss AYP for a second consecutive year are publicly labeled as being “in need of improvement” and are required to develop a two-year improvement plan for the subject that the school is not teaching well. Students are given the option to transfer to a better school within the school district, if any exists. Missing AYP in the third year forces the school to offer free tutoring and other supplemental education services to struggling students. If a school misses its AYP target for a fourth consecutive year, the school is labeled as requiring “corrective action,” which might involve actions like the wholesale replacement of staff, introduction of a new curriculum, or extending the amount of time students spend in class. The fifth year of failure results in planning to restructure the entire school; the plan is implemented if the school fails to hit its AYP targets for the sixth year in a row. Common options include closing the school, turning the school into a charter school, hiring a private company to run the school, or asking the state office of education to directly run the school.

The whole is nothing more than liberal nonsense. It’s predicated on the assumption that humans are born tabula rasa and that genetics do not have any correlation to intellectual abilities. In essence all children can be exceptional if only the stupid teachers didn’t hold them back. Thus, the bill attempts to incentivize academic improvement because the theory is that teachers are the ones who need prodded. Not once did it ever occur to the authors of the bill that some children are smart or gifted and others aren’t. It also never occurred to the authors of the bill that the recent failures of the education system aren’t due to a lack of funding.
Anyhow, No Child Left Behind makes the crucial mistake of allowing those who are handling the testing to determine the standards by which they will be tested. This already leads to a cheater’s mindset, since the states now have an incentive to play to their strengths and gloss over their weaknesses. The states also have lots of pressure to improve. Note that each state’s scores each year have to improve on the prior year’s scores (which, if one thinks about it, will eventually become mathematically impossible once one gets perfect scores) in order to have access to federal funding. Since humans vary significantly in ability, this sort of thing is impossible to keep up over time.
Of course, audibly observing that humans are not blank slates, and do, in fact, vary in ability is verboten. And so, as standards become increasingly and comically more difficult, the incentive to cheat becomes stronger, and downright necessary in some cases. Thus, as Ms. Ravitch observes, No Child Left Behind does deserve some blame for creating such a perverse set of incentives. Such is the price of folly.
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Broken Window Fallacy

By Doug Gentry, on July 21st, 2011

The country pulled together to fight in WWII – stimulating economic growth

When we study the Great Depression, and the double dip recession of 1937-38, the class discussion inevitably ends up with the role that World War II played in bringing an end to a decade’s worth of poor economic performance. Which leads us to the question – is going to war good for economic growth, and if it is should we adopt war as an economic growth strategy?

The simple answer is, “no” -  war just diverts a nation’s scarce resources from one activity to another. Even if some resources are idle, the gain is short-lived and a poor investment in long term growth. (Think of a tank burning in the Iraqi desert versus a fleet of trucks hauling freight for 20 years.) In the case of the Depression and World War II, the threat of Nazi Germany and, later, Japan, gave Congress and the President political cover to use deficit spending which in turn stimulated the economy. Ultimately, though, the country’s economic growth came from private investment and private demand after the war.

No worries about the government borrowing money (through the sale of bonds) in the face of an enemyNo worries about the government borrowing money (through the sale of bonds) in the face of an enemy

This brings us to the “Broken Window Fallacy”. With a hat tip to econ major Ryan Chaddock, there’s a nice summary of this parable here. The fallacy poses a similar question – should we go around breaking windows in order to generate more work for glaziers?

Bastiat’s point, in a way, is about opportunity cost- unless resources are idle, they must be shifted away from one activity in order to be shifted toward another.

[...] Even if breaking the window were to increase production in the short run, the act cannot maximize capital or wealth in the long run simply because it will always be better to not break the window and spend resources making valuable new stuff than it is to break the window and spend those same resources replacing something that already existed.



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Stephen Taylor: Research Chinese Investments Carefully

By The Gold Report, on July 21st, 2011

Stephen Taylor Growth is where you find it. Taylor Asset Management founder and CEO Stephen Taylor is an active global investor who loves Latin America, China and certain event-driven natural resource plays that he expects will provide big growth to investors who have made a bet on his Taylor International Fund. In this exclusive interview with The Gold Report, Stephen shares his best ideas—ideas that have multi-bagger potential.

The Gold Report: You had an interesting career that included being a floor trader on the CBOE when you were at Lakota Trading. You mastered skills there that could never have been developed in any other way aside from being on the floor of the Exchange. How does that inform what you do today, considering that so many of your current equity holdings are micro-cap, small cap or China-related and may not have derivatives attached to them?
Stephen Taylor: I started on the floor back in the days of floor trading, when it was open outcry and traders stood next to each other yelling and screaming. This was before the screen-based computerized trading of today, and it allowed you to see the emotional elements of markets up close and personal.

TGR: That’s actually what I was getting at.

ST: When you were going down to the trading floor, you could hear the roar of the crowd before you got there. Depending on that tone and the volume you could tell if the market was up, if it was down, how fast it was moving. In the trading pit itself you saw those periods when fear or greed would take over. There’s nothing like seeing it up close and personal and watching individuals or firms panic and make trades that maybe with the passage of time would not appear to be completely rational. So, in that sense it was an invaluable experience.

TGR: Your Taylor International Fund is heavily weighted in natural resources and emerging markets. Given that this space has seen a pullback and is generally soft at this point, how is your fund pacing so far in 2011?

ST: Well, we’ve taken our lumps. We’re not too far behind some of the resource-related averages, such as the TSX Venture. We’re down a little bit over 10% this year. But, you know, volatility is something that comes with this space. It’s something we’re comfortable with as long as we believe in the companies and the management teams that we’re investing in. We maintain a long-term perspective. We seek out and encourage our investors to maintain a long-term perspective. So, we’re not really rattled or shaken by these sorts of pullbacks. It just goes with the territory.

TGR: Do you think of the volatility as your friend?

ST: In many cases, absolutely. Not everybody likes volatility. Not all funds are able to deal with it. But it does present some opportunities. I think we’ve seen some overdone selloffs in the resource space. We’ve seen some extreme selloffs in the China space. And that’s presenting some good opportunities, in our opinion.

TGR: Your China positions represented about half of your portfolio when you last spoke to The Gold Report six months ago. Some of these were private equity. The due diligence would be daunting to most people. How do you research and verify these assets, liabilities and valuations in what I might refer to as esoteric investments?

ST: As you know, diligence is an ever-present issue, not just in this China space, but in the resource space as well. We are big believers in looking at management teams that have delivered in the past. We look at the partnerships that management teams and companies have, and the banking teams that they choose to deal with. We look at the strategic investors that they bring along, as well as the firms doing their auditing and legal counsel. We do site visits, and repeatedly meet with management teams. We try always to look at what companies do, and not what they say.

TGR: Is there any China counterpart to Sarbanes Oxley Section 404, requiring executives to be responsible for their financials?

ST: Well, I would point out that SarbOx has certainly not been a panacea in and of itself here in the U.S. A number of the high-profile blowups here in the U.S. were Sarbanes-Oxley-compliant, or at least testified that they were. Ultimately, whatever regulatory structure you have is only as good as people backing it up. With respect to China, clearly it’s a developing market. Their financial markets are not as mature as those in North America or Europe, and it’s an ongoing process. I think you’ll continue to see some progress being made in that area over the next year or two, especially with respect to allowing for broader SEC investigation and actions in China and harmonization of accounting standards.

TGR: When you founded the Taylor Fund in November 2008, you had $10 million under management, I believe. How much do you currently have under management?

ST: We’re a little under $50 million at this point.

TGR: So, you have almost five times the assets you started with two and one-half years ago. Has that growth occurred mostly without new investment?

ST: It’s been a combination of organic growth, some new investment and some follow-on investment from existing investors.

TGR: Have you reopened the fund to new investors?

ST: We haven’t formally reopened the fund. I suspect that we may do that sometime in the fourth quarter. That’ll be our three-year anniversary and an appropriate time to take a look at it.

TGR: That’s when the lockup will end for your initial investors?

ST: That’s correct, at least for a portion of them.

TGR: In a fund of this type, you really have to be as comfortable with the investor as the investor has to be with the portfolio manager.

ST: Oh, absolutely. In an ideal world, all funds would be that way. As a manager, it’s vital to know the risk tolerance and financial profile of your investors. I couldn’t operate nearly as well if I were concerned that some of my investors were taking inappropriate risks for themselves. It really has to be a good match.

TGR: You have to walk a narrow path, where you hold enough different positions that you’re not dangerously under-diversified, but where at the same time you can potentially achieve outstanding capital appreciation. Currently, how many different securities does your fund own? How are you weighted by country and sector?

ST: We have approximately 45 positions right now. In terms of weighting, we’re probably 20% in the energy space, 20% to 25% in the mining space, and we have probably about one-third in China-related investments. We currently have a 2% or 3% weighting in the financial space, but I suspect that will change to about 10% in the next few months. And we have roughly 5% or 6% in cash.

TGR: In part, you buy very small companies, some of which are in the micro-cap range. In many cases, they probably require some tinkering or restructuring. Do you think of yourself as an active investor or an activist investor? How do you see yourself?

ST: We like to look at ourselves as being positive, additive, collaborative shareholders. We like to think of ourselves as always having a good relationship with management teams. Depending on that relationship, CEOs will reach out and may ask for our input from time to time. We like to work on a collaborative basis in a win/win situation. Having said that, there are times when we have had to become active.

One case that I mentioned in the December interview was the Chapter 11 case of Meruelo Maddux Properties, Inc. (OTCPK:MMPIQ). It unfortunately required a lot of time and effort on our part, and it’s something that we’re happy we did. As part of the confirmed reorganization plan, which we believe will be effective this week, I will be taking a board slot there. So, I’m going to restrict my comments on that for now.

TGR: You invest in event-driven situations, and I assume distressed situations as well. Can you describe events and other situations where you might enter a position?

ST: By event-driven, we mean company-specific events that we believe will drive increased shareholder value. That could be a new project. It could be drill results. It could be a financial restructuring. In the case of Meruelo Maddux, it was bankruptcy reorganization. Another company that we were involved in early, of which I continue to be a big fan, is Red Eagle Mining Corp. (TSX.V:RD). I love Red Eagle Mining. We participated in this company as a private venture and knew it would ultimately move toward an IPO, and that it would bring in some very attractive additional properties in Colombia.

TGR: What’s your favorite region?

ST: Central and South America, because of its mining companies. We are big fans of Lumina Copper Corp. (TSX:LCC), which has its Taca Taca project in Argentina. The drill results just seem to get better and better. Its recent spinoff of the royalty company was very shrewd in our opinion.

Anfield Nickel Corporation (TSX.V:ANF) in Guatemala has the same management team as Lumina and is very good. Also, Silvermex Resources Ltd. (TSX:SLX) in Mexico is ramping up production now and is very good. We continue to like silver here. We think these are terrific names.

In New Zealand, we like energy companies, including Tag Oil Ltd. (TSX.V:TAO) and New Zealand Energy Corp., which should be having an IPO in the near term. We’ve been an investor in three rounds of private funding in the company, and think it’s really worth a look at the IPO.

We like Miranda Gold Corp. (TSX.V:MAD) in the U.S. We like Largo Resources Ltd. (TSX.V:LGO) in Brazil and in Canada. Largo has made some great progress since we last spoke. It’s completed the financing on its Maracas vanadium project, and the drill program is now underway in the Northern Dancer tungsten-molybdenum project up in the Yukon. This company continues to make great progress.

TGR: What’s the near-term catalyst with Largo?

ST: I think you could see some drill results out of the Northern Dancer project. The company began the drill program for a pre-feasibility study up there. They will begin construction on the Maracas project. I think vanadium is a metal that we’re going to hear a lot more about in the years ahead, and Largo arguably has the best undeveloped vanadium deposit in the world down in Brazil—one of the best markets. So, I think you’ll keep seeing good things about them.

TGR: Silvermex acquired the La Guitarra silver mine and put it back into production. Is that the principle growth driver here?

ST: Yes. You saw the first quarter production coming out, and it’s ramping nicely. The company has a shrewd, experienced team. It’s a bunch of ex-Hecla Mining (NYSE:HL) guys.

TGR: Going back to Miranda Gold for a moment. It’s a micro cap; about a $22 million market cap. Is there an exit strategy for the company?

ST: I’ve known Miranda Gold President and CEO Ken Cunningham for a lot of years. It just seems like people are finding more and more gold closer to his neck of the woods in Nevada, where Miranda has a great land package. And I like to say that Ken has a good nose for gold—I think over the next few months the company’s going to find some. It’s a dynamic company, and it has some great JV partners. It’s shown the ability to get into new jurisdictions such as Colombia and Alaska. I have a lot of respect for Ken and his team. I think they know how to find gold.

TGR: Miranda shares have been strong over the past month—up about 15%. I presume this is about the initial drill results from the Red Hill Project.

ST: That could be a lot of it. That stock is down 30% or so since the first of the year. I just think it’s a bargain. It’s been way oversold. I think there’s good potential news coming out of Nevada; don’t forget the joint venture with Red Eagle on a number of Red Eagle’s Colombian projects.

TGR: You also like energy.

ST: Yes, I like Saratoga Resources Inc. (OTCQB:SROE). It’s a Louisiana-based oil and gas company active along the Gulf Coast. It was in Chapter 11 a couple of years ago and management just refinanced some long-term debt. It’s completed two equity rounds this year and we participated in both. It’s our understanding that The Blackstone Group LP (NYSE:BX) is a big participant in the most recent round. Management owns a substantial stake in the company and is highly incentivized.

As the company has emerged from Chapter 11, it’s been able to spend on the necessary capex to bring back online a lot of the existing production that suffered during the Chapter 11 process. We see the company’s production and revenue growing very sharply over the next few quarters. Now that refinancing is out of the way, I think that stock has a lot further to go.

TGR: Do you see this a distressed situation or as a turnaround story?

ST: It’s a little of both. It had been a distressed situation, and like a lot of companies that have found themselves in the last few years with good operations and good managements but weak balance sheets, it got caught in a bind. Often it’s just a case of needing to find the right type of investor to step up and lead that first equity round or to bring in a few partners and demonstrate some confidence in these companies and their management teams, and be willing to be the first person in the water. We felt we played a little bit of that role with Saratoga. We’re playing that role with Pan Pacific Bank. It’s the type of role we don’t shy away from, and we think we could really earn some outsized returns for investors willing to take that risk.

TGR: You mentioned Anfield Nickel a bit ago. The stock is flat over the past six months, but it’s up about 49% over the past year. Do you feel there’s a lot more to go there?

ST: I think there could be. The recent preliminary economic assessment on its Guatemalan nickel zone was very decent. But it also is only based on a portion of that deposit. We think the company may be positioning for either a full or partial sale. The presence of Lumina guys [Lumina CEO] David Strang and [Chairman and Founder of Pan American Silver Corp. (TSX:PAA)] Ross Beaty as significant shareholders in Anfield is a very positive sign.

TGR: What about a China play?

ST: In China, I think LianDi Clean Technology Inc. (OTC:LNDT) continues to show terrific results. I mentioned it in December. The stock has been overly beaten down here, and I think it’s a real bargain at these levels.

On the China space in general, a lot of the good U.S.-listed Chinese companies will not tolerate these extremely depressed valuations for long. I believe you’ll see them move to delist from the U.S. and relist in places like Singapore or Hong Kong in order to receive fair and higher valuations. I think that’s a move that a lot of investors may not fully appreciate. Certainly the shorts may not be fully thinking about that yet.

LianDi is trading for two times next year’s earnings here, but in a place like Singapore or Hong Kong, it could probably be valued at 8 or 10 times earnings very easily. If you’re a short, you might have a problem there.

TGR: This has all been very exciting, Steve. Thank you.

ST: Thank you very much.

Stephen Taylor is chairman and CEO of Taylor Asset Management, a Chicago-based investment management firm focusing on small-cap domestic equities and emerging markets. He also serves as a portfolio manager for the Taylor International Fund, Ltd., a small-cap equity fund. In addition to emerging markets, Stephen’s area of expertise includes private equity, restructuring and turnaround situations and both small- and mid-cap companies. He has considerable experience in the natural resources and finance industries in Canada and China.



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Real estate stream of consciousness

By Christopher Briem, on July 21st, 2011

So we statrt with the Trib: East Liberty Target counts on food shoppers.  Points for mentioning Mansmann’s department store.  How come nobody ever mentions any of the Autenreith’s that were all around town?

Which just makes me wonder… how many residential townhomes could you fit within the footprint of the Shakespeare St. Giant Eagle? or I suppose of the entire Shady Hill Plaza where it sits is the better question. Just idle, and hypothetical mind you, questions is all.

Speaking of real estate.  Nationally the news of late has been almost universally bad with mostly accelerating declines went it comes to the state of real estate markets. See just a few headlines:

MSNBC: The housing slump is far worse than you think-Key housing market statistics point to years of stagnation

BloombergBusinessWeek: The Housing Horror Show Is Worse Than You Think

WashPo: Shiller Says U.S. Housing Market `Stuck in the Doldrums’

Yet our news today is sublimely understated. PG: Home Values Rise in Region.  Do the division and the annual % increase is really quite remarkable in absolute terms, but in light of what is happening everywhere else is another thing altogether.  Given low inflation, the ‘real’ real estate appreciation here continues to be unprecedented in the region’s history.   Some headlines still emphasize slow transaction flow: PBT:Pittsburgh region home sales down in June (and I am not sure what the ‘average median home price’ is quoted in that piece means), but again I am not sure transaction flow as a metric means as much as some think.  What if transaction flows are down because the demand out there can’t find a local supply of real estate it is looking for? What would you expect to see?   Rising values maybe?  Then there is this big national issue that so many folks elsewhere are trapped in underwater mortgages that they can’t sell and move on which is probably a big part of what is going on.

To complete the trifecta the Trib headline is conflicted: Home sales dip, but average prices rise, but buried in it may be the true headline of it all in a quote from a local real estate professional saying “prices continue to appreciate despite fewer sales because there are fewer, low-priced foreclosed properties on the market”. If true, that is the story.  I have not seen enough data to either concur or not, but in many ways I am the last to find out these things.



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Economic Events on July 21, 2011

By B.P.T., on July 21st, 2011

At 8:30 AM EDT, the U.S. government will release its weekly Jobless Claims report. The consensus is that there were 415,000 new jobless claims last week, which would would be 10,000 more than the previous week.

Also at 9:45 AM EDT, the weekly Bloomberg Consumer Comfort Index will be released, providing an update on Americans’ views of the U.S. economy, their personal finances and the buying climate.

At 10:00 AM EDT, Federal Reserve Chairman Ben Bernanke will testify before the Senate regarding financial reform.

Also at 10:00 AM EDT, the Leading Indicators report for June will be released. The consensus is that this index increased 0.3% last month, following an increase of 0.8% in May.

Also at 10:00 AM EDT, the FHFA House Price Index for May will be released, providing more information about the direction of the housing market.

Also at 10:00 AM EDT, the Philadelphia Fed Survey report for July will be released.  The consensus is that the index will be at 5, which would be an increase of 12.7 points from the previous month.

At 10:30 AM EDT, the weekly Energy Information Administration Natural Gas Report will be released, giving an update on natural gas inventories in the United States.

At 4:30 PM EDT, the Federal Reserve will release its Money Supply report, showing the amount of liquidity available in the U.S. economy.

Also at 4:30 PM EDT, the Federal Reserve will release its Balance Sheet report, showing the amount of liquidity the Fed has injected into the economy by adding or removing reserves.

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Why Won’t Sprott Buy More Silver For PSLV and crash COMEX?

By Bron Suchecki, on July 20th, 2011
Kid Dynamite has come out all guns blazing in his latest post. His post goes into detail into a point I raised in my last post – why isn’t Sprott doing secondary share issues for his silver fund?
He has a point. By not issuing more shares in the face of demand, all that happens is investors are paying $120 for $100 worth of silver. This means $20 worth of silver is NOT being bought and taken off the market, which takes pressure off the bullion banks.
The response that if he did a secondary that it would reduce the premium, hurting the existing investors, is valid. But the point is he shouldn’t have allowed that situation to develop in the first place. Now he is caught. By not wanting to hurt existing investors he is diverting silver demand AWAY from taking physical off the market INTO just bidding up the premium.
In any case, I would counter the “reduce premium” argument by suggesting that Sprott could do the secondary in a way as to probably cause no loss to existing holders. Consider that PSLV has 22.3 million ounces. A 20% premium suggests there is at least demand for 4.46 million ounces (20% of 22.3moz). I think most would agree, however, that he could do a secondary for double that given the profile and trustworthyness of his fund.
COMEX has registered stocks of 26.8moz. Consider if Sprott slowly bought 8.92moz of silver futures and then stood for delivery. That is ONE THIRD of the entire COMEX stock. What do you think that would do to the price of silver when Sprott and others assert that the physical market is currently so tight? Those that believe this would have to expect that you’d get a price increase that would easily cover any decrease in PSLV’s premium.
And the argument that Sprott shouldn’t do it because COMEX would cash settle does not hold water. Even if the
cash settlement price is below the current “real” physical price, it would still probably be above his purchase price (as silver is in a bull market). In any case, if his actions were able to cause such a significant and high profile failure to deliver, then the resulting price move really would be “explosive”, producing a profit on his existing silver holdings that would cover any loss (if any) on the cash settlement of his futures contracts, and benefitting existing PSLV holders to boot.
It is a win win: if COMEX delivers they take a huge hit to their stocks, if they don’t, the price gets a huge hit to the upside. Personally I don’t think it would play out this way. Bullion banks would source silver to deliver into the Sprott contract and thus maintain COMEX stocks. But that is just a theory. Until someone with the capability to make such a move does it, it is all talk, both on my side and theirs.


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Since You asked…

By Doug Gentry, on July 20th, 2011

This is a time of the year when I meet new people or get reacquainted with old friends, and once we run out of the usual “status update” conversation, someone often asks about the economy and the current crisis about the debt ceiling. I’m going to break a self-imposed guideline for this blog, and actually represent my opinions in a pretty straightforward manner. Usually my goal is to help students reach their own, informed opinion. This time – straight to the punch line…

  1. The 2011 deficit (estimated at $1.5 trillion) and the accumulated national debt (over $14.3 trillion) are not the most pressing economic issues facing the country right now. They are important, but several notches down from the top of the list. This year’s deficit is just over 10% of GDP, which is high, but not crushing. There are ways to deal with these issues, as I’ll share further down. They are presented as a crisis only because the Republican Party and the Tea Party are using them to push a small government agenda. While I don’t agree with that goal, it’s fine for some to support it, but holding the economy hostage by manufacturing a crisis tied around the debt ceiling makes no sense.
  2. Investment in economic growth has slowed dramatically. This is particularly true in education – at all levels. It is also true in basic research. Up until the last 20 years or so the U.S. has surfed the wave of economic change, by investing in new thinkers, and making infrastructure and other investments that will improve productivity. These seem left out of current debate options.
  3. The slow recovery and weak demand for goods and services is the number one problem facing the country. The Federal stimulus is winding down, the Federal Reserve has decided that they don’t need more quantitative easing, and government at all levels is cutting employment. All the while personal consumption dropped in the most recent quarter, along with the fixed asset portion of Investment (inventories increased as a partial offset.) The uptick in unemployment and the very slow growth in employment drags down demand for goods and services. We are sliding down the same hill that the U.S. economy did in 1937-38, when Congress and President Roosevelt worried more about public concern for the debt than about sustained growth. Then we slid into a quick, nasty recession. That’s a danger now, too.
  4. Inflation is not a pressing problem. The inflation we have seen this year is in food/commodities and energy. The food price spiral might well continue for awhile – I don’t have an independent sense of the true drivers. Even if food prices rise there are other elements of the Consumer Price Index that are holding steady. The rising energy prices are probably related to uncertainty about political conditions in the Middle East. Those concerns should soften soon.Inflation is something to watch out for, particularly with all of the money created by the Federal Reserve in the last three years – money created to help stabilize the economy. It is important that the Fed watch for signs of incipient inflation, driven by very high money supply, but I am confident they will act correctly and aggressively when that happens. That point is not now.
  5. Bond investors are not abandoning US Treasuries for fear of default. US bonds respond to typical market forces, though they have an element of future gazing in them. If you hold a 10 year bond, and a potential buyer thinks the US might default on that bond, then the buyer will expect a higher yield (lower price/higher interest rate). That isn’t happening now. The bond market for US Treasuries is not showing signs of investors being worried about US debt.

So, what to do….

  1. To tackle the most pressing problem – the slow recovery – the Federal government should be stimulating demand, through more government spending (on the part of Congress) and more quantitative easing (on the part of the Federal Reserve). Tax cuts can be part of this but they should not be across the board. The most effective, stimulative tax cut on the Federal level is the payroll tax for Social Security and Medicare. Those funds need help, and there are ways to fix them, but a payroll tax benefits mostly working people who will use the increased take home pay to consume.
  2. To help with the deficit, we should remove the Bush tax cuts, and speed our exit from Iraq and Afghanistan. The Bush tax cuts disproportionately benefited higher income families, who use the extra money for non-consumption activities. When some politicians complain that raising taxes on the wealthy takes money away from job creators, there is no empirical evidence and scant theoretical basis for that claim. Along with repealing those tax cuts there are plenty of opportunities to strengthen the tax code and reduce the dreaded loopholes. Despite what many politicians say and the media parrot, this is not hard. It just takes clear headed thinking and political courage.
  3. The real budget deficit challenge, at the Federal and State levels primarily, is the cost of healthcare. Increasing costs and inefficient uses of services put pressure on Medicare, Medicaid (which impacts states as well), the VA, the Dept. of Defense, and government employment costs at all levels. We should be strengthening and extending the healthcare reform efforts beyond just extending coverage – to include incentives for cost efficiency and efficacious treatments.
  4. Restore and enhance funding for education at all levels. Resist the temptation to make education accountable on a short term basis, while hobbling it from producing the long term benefits derived from basic research and liberal arts education. This is an area in particular where Federal spending, even if they result in deficits, is a good investment. Cutting taxes on the wealthy is not a good use of a deficit. Deficit spending should support short term stimulative needs and long term productivity enhancements.


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