Today’s daily is longer than usual because of the heavy volume of emails Ranting Andy and I received. It is our policy to personally answer as many as possible. You can find them in the Mail Box section.
Susan and I arrived in Florida last Monday. Every day has been an adventure, but things are finally starting to settle down. The entrance to our building is just 150 yards away from a state-of-the-art 25,000 square foot spa/health club and we plan to spend four or five days a week working out. As much as I enjoyed having a few days off, I missed writing the daily.
Andy Hoffman did a splendid job of covering for me, especially since it was his first week on the job. In the near future, Andy’s “Rants” will find their way into your email-box as a stand-alone afternoon release – separate from this newsletter. His “Rants” will not be duplicated in the daily. I will continue to cover my usual assortment of quality information and Andy will be, well he will be Andy. His rants bubble over with a sense of urgency and conviction, and in the future we hope you will find the time to read both of our releases.
A week ago I wrote that when gold had a weekly close above $1,650, then the odds favored the correction in gold was over. Gold finished the week at $1,654!
But then things got crazy. Shortly after the market closed on Friday, the CME issued a statement that had Andy and I very concerned. If the CME really meant what they said in their release, about raising the margin requirements across the board for all commodities, then starting in Asia on Sunday evening the markets would implode. Andy rushed to his computer and issued a Special Bulletin to his email list on Saturday afternoon, chronicling what was happening – but 24-hours later, the CME completely reversed their position (thank God). What were they thinking about? They were about to create chaos in the financial markets. Read about it here —
It all started on Friday evening. I received an email from Bix Weir with the following release from Zero Hedge:
CME Goes To Collateral DefCon 1: Makes Maintenance Margin Equal To Initial For… Everything!?
Submitted by Tyler Durden
Update: Based on unofficial statements by the CME, it appears that the exchange has gone the way of inviting more risk by lowering Initial to meet existing Maintenance margin across the board. We will likely only know for certain on Monday. We suppose the proposed explanation will be to minimize margin exposure for onboarded MF positions. Of course, that this is very much counterintuitive at a time when risk is spiking and volume readings per SPAN are soaring, and instead is inviting even more risk, is apparently irrelevant to the exchange.
The most important news announcement of the day was not anything to come out of Cannes (as nothing did), nor from Greece (the merry go round farce there continues unabated). No, it was a brief paragraph distributed by the CME long after everyone had gone home, and was already on their 3rd drink. It is critical, because not only is this announcement a direct consequence of what happened with MF Global several days ago, but because also it confirms one of our biggest concerns: systemic liquidity is non-existent. We confirmed interbank liquidity in Europe was at an all time low earlier today, and can only assume the same is true for US banks. But what is very disturbing is that this is just as true at the exchange level, where it appears the aftermath of the MF collapse is just now being felt. What exactly was the announcement? Unless we are completely reading it incorrectly, it is nothing short of a margin call for tens if not hundreds of billions worth of product. Because as of close of business on November 4, today, the CME just made the maintenance margin, traditionally about 26% lower than the initial margin for specs, equal. For everything. Which means that by close of business Monday, millions of options and futures holders will be forced to deposit billions in additional capital to the CME just so they are not found to be margin deficient, and thus receive a margin call. Naturally, since it is very unlikely that this incremental amount of liquidity can be easily procured in one business day, we anticipate the issuance of hundreds of thousands of margin calls Monday, followed by forced liquidations of margin accounts across America… and the world. Just like when Lehman blew up, it took 5 days for Money Markets to break. Is this unprecedented elimination in the distinction between initial and maintenance margin the post-MF equivalent of the first domino to fall this time around?
Then late Saturday afternoon Bix sent us another email:
I told you it was about to get CRAZY out there…the CME has suddenly reversed the margin increase and CUT MARGINS!
The BATTLES behind the scenes are RAGING. Word coming to me is that the Good Guys shut down the coordinated move by the CME and Banking Cabal to slam silver on Monday morning. Who knows what the real story is but these back-to-back CME releases show just how chaotic it is behind closed doors at the CME.
They are looking foolish as they scramble to SURVIVE.
Anything can happen next week as the gamesmanship rages on.
Stay safe…STAY OUT OF THEIR SYSTEM!
CME Group Clarifies Maintenance Margin Ratios – Exchange to Reduce Initial Margin Ratio to 1.00
By CME Group – Published: Saturday, Nov. 5, 2011 – 11:04 am
CHICAGO, Nov. 5, 2011 – /PRNewswire/ – CME Group today is clarifying its notice to clearing firms regarding margins. In light of the issues customers transferring out of MF Global are facing, while still maintaining appropriate risk management protections for the market, CME Clearing is setting the “initial” margin upcharge to zero. This upcharge is normally applied to customer accounts when they are receiving a margin call.
The intention and effect of these changes are to decrease the size of any margin calls resulting from the bulk transfer of MF Global customers to new clearing members not to increase them.
This is a short-term accommodation to maintain market integrity and provide temporary relief to customers whose accounts have been disrupted by this event.
We apologize for any confusion our initial advisory may have created.
As the world’s leading and most diverse derivatives marketplace, CME Group (www.cmegroup.com) is where the world comes to manage risk. CME Group exchanges offer the widest range of global benchmark products across all major asset classes, including futures and options based on interest rates, equity indexes, foreign exchange, energy, agricultural commodities, metals, weather and real estate. CME Group brings buyers and sellers together through its CME Globex® electronic trading platform and its trading facilities in New York and Chicago. CME Group also operates CME Clearing, one of the world’s leading central counterparty clearing providers, which offers clearing and settlement services for exchange-traded contracts, as well as for over-the-counter derivatives transactions through CME ClearPort®. These products and services ensure that businesses everywhere can substantially mitigate counterparty credit risk in both listed and over-the-counter derivatives markets.
Note in the 24-hour spot gold chart, below, that once again at precisely 3 a.m. NY time gold is taken down by a “not-for-profit” seller in London. This is a pattern that repeats itself over and over again. This is not a random event. It looks like a good day for gold and silver. At 7 a.m. gold is up $20 and silver is up $0.52. It’s time to put Larry Edelson’s bearish views behind us now.