The Debts of the Spenders: EU Picks First President

Perhaps the Europeans made a wise choice after all in selecting the dark horse candidate of former Belgian Prime Minister, Herman van Rompuy, as the new EU President.

A quick look at the nation's debt to gdp ratio will show something very interesting. I borrowed the graph from Paul Krugman's NY Times blog to make the opposite point that Krugman and other financial luminaries have been harping on - that van Rompuy's selection is a poor choice b/c he is not aggressive enough on deflation. Perhaps the wily Belgian knows something that the rest of the West does not.

http://www.telegraph.co.uk/news/worldnews/europe/eu/6609924/Profile-Herman-Van-Rompuy-EUs-new-president.html

http://krugman.blogs.nytimes.com/2009/11/22/joke-europeans/

The Debts of the World: Commodity Funds See Investor Inflows Hit Record High This Year

Commodities ‘09 Investment Inflows Head To Record $60B - Barcap

Investment inflows into commodities are heading for a record high of $60 billion this year to reach a total of $230 billion to $240 billion of commodity assets under management, said Barclays Capital in a note dated Thursday.

Strong inflows during October have continued into the current month, and year to-date allocations into the commodity sector are approaching $55 billion, displacing the previous record of $51 billion during 2006.

“Absent any significant reversal in the macroeconomic outlook, we expect investment flows to remain strong throughout the fourth quarter 2009, heading for a record high of $60 billion for the year as a whole and with commodity AUMs likely to end the year at about $230-240 billion,” Barclays said.

During November, commodities such as copper and gold rallied sharply, with market participants frequently citing a “wall of money” hitting the market as investors picked commodities as an alternative investment.

This week, London Metal Exchange copper hit a 14-month high of $6,992 a metric ton, and gold peaked at a record high of $1,153 a troy ounce. A weakening dollar and ultra-low U.S. interest rates encouraging carry trades also boosted commodities’ profile.

Barclays Capital predicted different commodity markets to take on a more “nuanced” view of supply and demand fundamentals, resulting in a more differentiated price performance within different sectors.

Source CME News for Tomorrow

The Debts of the Spenders: Moody's Puts Hybrid Capital on Negative Watch

UPDATE: Added Bloomberg MBS Link at the bottom.

Important news for those investing in hybrid capital. The Financial Times reports that Moody's and other ratings agencies are considering possible multi-notch downgrades for hybrid bank capital.

Moody’s system had previously allowed its analysts to assume that any official support given to a bank would also cover subordinated debt. But several subordinated instruments have been allowed to suffer losses during the crisis after regulators and other policymakers made it clear they expected the bondholders to share the pain felt by equity holders in bailed-out banks.

Wider ”notching” will also be applied among hybrids, with various issues rated differently depending on certain features,

The article goes on to say that UK banks in particular will suffer dramatic downgrades as a consequence. The changes will reflect the UK government's interference in the capital markets by interrupting bond payments for investors in banks like Bradford and Bingley.

I wrote about hybrid debt earlier here. Despite this potentially negative news, I am still somewhat bullish on hybrid debt b/c there has been no viable alternative proposed yet for TBTF (Too Big to Fail) and the replacement of Tier 2 capital. The Financial Times goes on to note that the market has been trading independently of ratings for some time now.

Here you can see that those hybrid debt w/an underlying Fannie/Freddie component continue to have a floor in price support. As you can see, the Fed continues its program of quantitative easing unabated. The coupons are still paying unlike the constant interruption streams from the Bank of England:

http://www.bloomberg.com/apps/quote?ticker=MTGEFNCL%3AIND

The Debts of the Spenders: New Accounting Law Allows US Firms to Minimize Losses

The Worker, Homeownership, and Business Assistance Act of 2009 economic-recovery package was signed into law last Friday.

CFO magazine reports that the new law allows companies to increase their net operating loss (NOL) from 2 years to 5 for losses incurred in 2008 and 2009. There are big implications here for Q1 earnings reports in 2010.

"The expansion of the NOL carryback period will accelerate a $33 billion refund of previously paid taxes for much of Corporate America in a very short period of time," says John McMahon, director for business tax services at Ernst & Young.

The only companies banned from taking advantage of the new law are those that accepted government bailout money, says tax expert Robert Willens, who heads an eponymous consultancy in New York. Willens explains that the five-year NOL carryback doesn't apply to corporations that allowed the government to buy company stock or warrants in exchange for cash as part of the Troubled Asset Relief Program — even if the company has since repaid the funds.

http://www.cfo.com/article.cfm/14454571/c_14455780?f=home_todayinfinance

The Debts of the Spenders: NASA Ponders Space Stimulus on the Moon

This weekend NASA confirmed that there is water in the Moon.

Preliminary data from a dramatic experiment on the moon "indicates the mission successfully uncovered water in a permanently shadowed lunar crater," NASA said in a statement.

"The discovery opens a new chapter in our understanding of the moon," it added, as ecstatic scientists celebrated the landmark discovery.

"Yes indeed we found water and we did not find only a little bit but a significant amount," said Anthony Colaprete, project scientist and principal investigator for the 79-million-dollar LCROSS mission.

This is very exciting news.

The project would not have really been possible w/o the participation of one man, Bill Stone, and his visionary quest to become a modern day Christopher Columbus. Here is some earlier perspective to put things into context:

http://www.mefeedia.com/video/12434721

http://www.ted.com/talks/bill_stone_explores_the_earth_and_space.html

Apparently, NASA took Mr. Stone seriously enough to send several satellites and rockets into the area.

The eventual plan is to turn the South Pole of the Moon into an orbital relay station for further exploration of the Solar System.

Congratulations Bill Stone.

The Debts of the Spenders: Are CoCos the Answer to Solving Systemic Risk?

CoCos or "contingent convertibles" are bonds that convert to equity at a pre-determined event. But unlike regular convertible bonds, their trigger is based on a regulatory event instead of a price change. Risk managers, attorneys, and regulators are having a heated - if somewhat arcane - discussion about the value of these bonds. Supposedly, they will buffer banks' capital bases w/o resorting to dipping into the taxpayer base or diluting common equity with the issuance of new shares.

So, will it work?

Last week, Lloyd's of London offered £ 7.5 billion of CoCo bonds. So, now other banks are watching developments closely to see if the market will respond positively. I am aware of this issue and covered it earlier here: The underlying assets of these bonds can vary but include RMBS, CMBS, and other illiquid securitized tranches.

In the shady world of OTC (over the counter) finance, the big secret is that many European firms are huge holders of agency debt (Fannie and Freddie bonds) as well as more esoteric holdings.

1) CoCos are a stop-gap measure in the race to plug "Too Big To Fail" (TBTF). While regulators and politicians have publicly wrung their hands that they are going to "do something" about large financial institutions they have really done nothing except waste taxpayers' money on endless task forces, roundtables, and mutual myopia. The more effective solution would be to simply break up the banks into several smaller pieces. But alas, that solution would end Wall Street's and Europe's oligopoly on global finance.

2) Another aspect to consider is the dollar. As the value of the greenback continues to devalue so is the cost of carry for non-US (foreign banks). Many non-US banks - especially in the traditionally volatile emerging markets but also Western Europe - hold a large number of dollar denominated loans. Banks hold these loans because for historical reasons, the dollar is the world's reserve currency and offered a safe haven in the face of political and econoic volatility (a critical factor for emerging markets). But the value of these loans improves as payment conditions ease up for borrowers. Accordingly, these banks can book an increase in their asset values and/or a decrease in their liabilities.

Conclusion: In the meantime, I am bullish to steady on these bonds. After all, they are a bet on the status quo doing everything it can to perpetuate itself.

Source:

http://www.ft.com/cms/s/0/d791f38a-cff4-11de-a36d-00144feabdc0.html

Disclosure: I hold some of these aforementioned convertible bonds. Not in Lloyd's though.

The Debts of the Lenders: JGB Yield Spikes Draws Bond Bears

Japan's finances have traditionally been the closed purview of the all powerful zaibatsu corporate industrial complex. But as Japan's failed experiment in quantitative easing draws the nation down into 200% debt to GDP indebtedness, foreign observers have been sounding the alarm. Nearly 25% of Japan's budget goes towards servicing its debt obligations alone.

Doubt was cast on Japan's finances earlier this week by David Einhorn, macro hedge fund chief of Greenlight, who famously predicted the insolvency of Lehman Brothers. Although Einhorn obviously was talking his book (he is shorting JGBs), his concerns echo the voice of other (mostly foreign) critics. Fundamental factors are the reason behind Japan's indebtedness. Hostile attitudes towards foreign immigration (even among other Asian countries), declining birth rates, the rise of China as a competing export center, and persistent unemployment are all factors edging into the equation.

His comments cast a sharp divide between the foreigner and native view of the bond market. Traditionally, the Japanese government has been able to rely on a captive market of fund managers, retail investors, and corporate honchos to soak up its debt. But that is changing.

A senior UFJ Bank of Tokyo Mistubishi portfolio manager claimed that JGB yields are going to hit 2% in 2010. Now, that may not sound like a lot compared to other markets. But when you consider that nearly every other nation in the world is also pursuing a quantitative easing program - not to mention the already mentioned 25% debt servicing component of the budget - a few points move will make a big difference.

On the other hand, the sanguine Japanese government can also move to buy up its own debt. That would depress the value of the yen and provide much needed relief to its export sector. However, that is only a shorter term solution.


Source:

http://www.ft.com/cms/s/0/8194552e-ce62-11de-a1ea-00144feabdc0.html