Morning Reading – January 18, 2011

Streetwise Professor: The Gambler’s Fallacy

The BP move smacks of desperation.  The company reminds me of a gambler who has lost several big hands in a row, and figures that his luck just has to change.  The most recent big loss, of course, was in the Gulf of Mexico.  But it has also suffered major losses in Russia.  These include the effective expropriation of the Kovytka gas project; Gazprom refused to provide transportation from the field, the company was at risk of losing its license which required it to produce (which it couldn’t do because it couldn’t transport and sell), so it ceded the stake to Gazprom.  The other big loss involved BP’s current CEO, Robert Dudley, who was run out of Russia–literally–in a battle between BP and its Russian partners for control over the TNK-BP joint venture.

And of course other western majors have had bad experiences in Russia.  Shell over Sakhalin II.  Exxon over Sakhalin I.  This is why despite the fact that there is oil in Russia, other majors are not rushing out to do deals there even though they, like BP, are intent on finding new reserves.  As an example,Chevron Conoco-Phillips just sold its stake in Lukoil.

But BP has had its successes in Russia.

Just kidding.

FT BeyondBRICs: Fund file: emerging market bond warning

Geoff Blanning, manager of the Schroder ISF Emerging Markets Debt Absolute Return fund, is reported to have raised his cash position to the maximum permitted, a move instigated by his fears surrounding the short-term prospects for the sector. His reasoning makes good sense.

FT BeyondBRICs: India: inflation “surging” says Subbarao

If any further hint were needed that the Indian central bank is planning to raise rates at its next meeting next week, it came on Monday with a warning from governor Duvvuri Subbarao about “surging inflation”.

JESSE’S CAFÉ AMÉRICAIN: Is JPM Covering Up a Naked Silver Short Held By China As a Claim Against the Yanks?

The point that both Harvey and Ted Butler have made is that China is behind the big short in silver being held by JPM and HSBC (Hong Kong and Shanghai Banking Corporation), but if pushed for delivery will throw its unsatisfied metal claim with the US on the table and will say, ‘Get it from them.’

JESSE’S CAFÉ AMÉRICAIN: An Interpretation of the China Silver Short Theory and Fractional Reserve Bullion

This is my interpretation of the China silver short theory as expressed by others, but especially the respected analyst Harvey Organ. As you may recall, Harvey was the trader who helped to identify the notable lack of actual bullion in the vaults of Scotia Mocatta, causing a minor scandal. There have also been other claims of a significant leverage or ‘fractional reserve selling’ in the physical bullion markets, with a circumstantial evidence of a potential 100 to 1 leverage involving unallocated bars and claims of cross ownership of bullion held by some of the large ETFs.

FT Alphaville: Record-breaking, forecast-busting UK inflation

Hitting the tape now, some uncomfortable reading for the Bank of England’s Monetary Policy Committee.

The Big Picture: QOTD: On the Real Economy

Any portfolio manager who is overly reliant on macro economics and fundamental analysis will run into a timing issue.

The Big Picture: BoE has big problem on its hands, Euro rates higher

The Fed’s soul mate in the policy of cheap money and QE, the Bank of England, has a big problem on its hands as the UK reported Dec CPI rose 3.7% y/o/y, the fastest rate since Nov ’08 and the 12th straight month above 3%. The m/o/m CPI rise of 1% was the highest since at least ’96 and the UK 10 yr Gilt yield is rising to the highest since May ’10 in response.

The Big Picture: Shanghai Breaks 200-day, Commodities Next to Roll?

During the 1990’s when the emerging markets were still emerging a friend of ours wrote a research report on pre-restructured busted Russian debt titled, No Rush to Buy, No Russians Buying.  The point was the Russians knew the prospects for the debt much better given the country’s lack of transparency and the general relative ignorance of foreigners.

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