Wednesday, December 30, 2009

The Debts of the Lenders: Russia Warns Against Capital Inflows

First Brazil. Now Russia. Only 2 more BRICs to go (China and

"We need to correct the rules so that it is less interesting for
speculative capital to come running into Russia," Mr Putin told journalists while on a trip to Vladivostok, in the far east of Russia.

He said: "It flows in quite well, works here, but creates problems, because if crisis hits, it leaves quickly."

Tuesday, December 29, 2009

The Debts of the Spenders: Bond Vigilantes Target 2 Year Treasuries

In recent days, the US bond vigilantes have been speculating on the Fed raising interest rates in 2010. Speculative volume as well as poor auctions have resulted in yield spiking dramatically higher.

But bond bears beware, they are pushing against resistance on the weekly chart.

Thursday, December 24, 2009

The Debts of the World: Bond Vigilantes Place Bets on US Treasuries for 2010

The US bond vigilantes are adding to their bets by placing shorts against treasuries:

The most interesting story for the beginning of 2010 is the dollar and its correlation w/the safe haven trade of US treasuries. Everyone knows how the dollar has traded inversely to commodities. But the real story is to be found in the dollar-bond relationship. Normally, dollars and bonds rise in tandem as a flight to safety trade. But as the economic data improves (we can argue about all day about the validity of the official data but ultimately the official data is what moves the market and successful traders long ago figured not to fight the tape) so has the dollar's strength!

This means we can have a higher dollar and weaker bonds at the same time. But don't weaker bonds mean automatically higher stocks? Not necessarily. After the global equity indices explosive rally this year, there isn't much room left to grow.

The following comments goes towards my point earlier this month about EUR/USD.

I predict that fund flows from major institutions will be sloshing around the global financial system in a quest to figure out which country is weakest and thereby short that nation's bonds. The dollar, by virtue of its reserve currency status, will benefit from this comparative weakness. This means we can see market corrections among the most popular carry trades like AUD/USD and BRL/USD w/spillover effects in weaker commodity prices as well as gold.

But in the short term, as the 2-10 year spread approaches record steepness, it may be time to become a bull for the longer end of the curve. Especially after stories like this hit the media.

Further out, I have been considering placing bear put spread trades against the longer end of the curve by buying closer otm strikes on 30 year puts (LEAPs) while selling the same month strike further otm on the same expiration. 2011 and 2012 look like interesting bets w/2012 obviously safer because theta works in the call buyer's favor.

Monday, December 21, 2009

The Debts of the Spenders: Latvian Court Says Its Ok for the State to Go Bankrupt

Little Latvia wants the same benefits that larger countries in the West (the USA and UK) have long managed to enjoy - namely the ability to ring up huge debts without being able to pay for any of it. Unfortunately, since the Latvians are not members of the OECD and do not enjoy the benefits of being "too big to fail" (e.g. capital markets large enough to lure in enough suck-I mean investors), then their ministers are faced with the small problem of finding enough money to somehow repay their debts.

However, the Latvians are also members of the EU and have tied their economic fortunes to the bureaucratic stodginess of Brussels thousands of miles to the west. The resulting Eurozone bailout (all but certain) will result in only more joy for USD/EUR bulls.

DJ Latvian Court Overturns Pension Cuts; Threat To IMF Bailout

RIGA, Latvia (AFP)--Latvia's constitutional court Monday struck down pension cuts that form a key plank of an austerity drive, casting doubt on a crucial International Monetary Fund and European Union-led bailout for the recession-hit Baltic state.

"The decision to cut pensions violated the individual's right to social security and the principle of the rule of law," the court said in its judgment, which cannot be appealed.

It said while the government could tighten its belt at a time of crisis, agreements signed with
international lenders "in and of themselves cannot serve as an argument about the limiting of basic rights" and lawmakers who approved the rushed-through cuts had "not evaluated carefully the alternatives."

The court said the cuts--in force since July, and clawing back between 10% 70% of a pension depending on an individual's status--were illegal and parliament must by March 2010 have measures in place to rescind them.

The cut money itself must be paid back no later than 2015, the court ruled in the case brought by 9,000 individual pensioners. The government won a similar case in November over its decision to stop linking pensions to inflation.

Welfare Minister Uldis Augulis said Monday the government would have to find almost 184 million lati (EUR258 million) to refund unpaid pensions and resume full payments at pre-cuts levels.

It wasn't immediately clear how Latvia's embattled center-right government would meet the challenge, nor what the impact would be on the international rescue package that has been helping keep the country afloat.

Finance Minister Einars Repse said the government may have to ask parliament to amend the budget. He said the government would have to find the money within spending limits agreed with lenders.

The Debts of the Spenders: US Commercial Real Estate in 2010

And the search for yield continues. . .

Thursday, December 17, 2009

The Debts of the Lenders: China Bears on the Dollar

No surprises here. It used to be that central bankers would never discuss the value of currencies, particularly the dollar. But nowadays, everyone from the Japanese, Americans, Russians, Europeans, and Chinese are making currency notations part of public discussion. The latest salvo fired from the Chinese concerns their long term, fundamental views of the US dollar. The statement was issued in response to the House of Representatives approval of the latest increase in the debt ceiling.

“When the U.S. has to fund its deficit through the combination of issuing more Treasuries and printing more dollars, it is inevitable that the dollar will continue to weaken,” Deputy Governor Zhu said at a forum in Beijing today.

Even disgraced former central banker, Alan Greenspan, had this to say about the dollar:

WASHINGTON (Dow Jones)--Former Federal Reserve Chairman Alan Greenspan said in prepared testimony the threat to U.S. fiscal stability is larger than ever, mostly because of rising medical costs.

Averting a situation where the U.S. struggles to finance unprecedented budget deficits "is more urgent than at any time in our history," he said in testimony Thursday before the U.S. Senate Committee on Homeland Security and Governmental Affairs.

Greenspan argued that the problem of large projected shortfalls in Medicare and Medicaid can't be wiped away with more appropriations from Congress. "It is a physical resource crisis," he argued, which will suck more of the U.S. labor force and capital investment into the medical sector.

Wednesday, December 16, 2009

The Debts of the Spenders: Santa Rally and TED

The January Effect/aka Santa Rally is a seasonal effect marked by low volatility and light volume. The dearth of active trading days make for a time when fund managers try to lock in their gains for the calendar year by selling their winners and dumping their losers (for various tax related reasons). The market bias has historically been bullish but here is something that traders might want to pay attention to: the TED spread.

In a low interest rate, weak dollar environment it is easy to fall into the trap of thinking that markets will continue trending higher. But watch for sharp corrections. Clues can be found in the money markets.

For recent history, traders should be aware of the early November high of .262 as well as the September lows of .163. Personally, if the market returns to a test of September lows, I will view that as a contrarian signal and buy some protection against volatility in the form of stock puts or Vix calls.
Adventurous traders can try to time a return to bullishness if they believe the market is due to continue its ascent higher by going long Vix puts at a re-test of the November high.

Tuesday, December 15, 2009

The Debts of the Lenders: Yen To Resume Carry Trade Status in 2010

If I had to make a bet (and I am), I would say that the Federal Reserve will raise interest rates sometime in 2010 despite macro-economic slack in jobs and capital lending. The beneficiary of such changes would be the founders of the carry trade, the deflationary demagogues of Asia, the Japanese.

There’s at least an 88 percent chance the U.S. will raise rates in 2010, up from 78 percent on Nov. 24, futures on the CME Group show. Prices indicate a 46 percent likelihood of an increase by June, up from 30 percent on Nov. 30. By contrast, overnight interest-rate swaps traders see no chance that the BOJ will increase its benchmark next year, Bloomberg data show.

Another beneficiary of interest rate uncertainty will be interest rate futures and options on futures powerhouse, CME Group, whose exchange business suffered from quantitative easing this year. A Federal Reserve committed to low interest rates left the trading environment in a monogamous, one way trading environment. With few parties willing to take the other side of the bet, the exchange suffered from lower volume. If the US economy's outlook begins to improve (however skeptical observers may be of the statistics), then policy makers will be pressured to tighten. Moreover, massive budget deficits are attracting the attention of the bond vigilantes who have been quietly sharpening their proverbial knives in expectation of treasury sell-offs from higher supply concerns. This renewed interest in interest rate speculation may prop the firm's fortunes up again.

Monday, December 14, 2009

The Debts of the Lenders: Chinese Minstry Denies Inflation is Occurring Even As M2 Rises 29%

If that were the case, then why is the government increasing purchases of food stocks (the most volatile component of inflation - especially for emerging market nations). In other news, the Fairy Godmother is leaving coins under children's pillows.

China NDRC: Money- Supply Growth Unlikely To Stoke Inflation

The recent rapid growth in money supply is unlikely to stoke inflation despite a rise in agricultural-product prices, the National Development and Reform Commission, the country’s economy planning agency, said Monday.

“In a situation where overall demand is insufficient, particularly one where there is relatively severe excess capacity in some industries, the possibility that a fast increase in money supply would by itself lead to inflation in the real economy is rather small,” the commission said in a

At the end of November, M2 money supply was up 29.7% from the level a year earlier. Domestic grain and edible-oil prices are unlikely to fluctuate much as government has sufficient reserves, it said. “The government has decided continue to increase the minimum purchase
price for rice and grain in 2010,” the commission said as it vowed to keep buying soybean and corn next year.

The commission also said soybean imports will reach a record high in December, but didn’t provide a detailed forecast. It isn’t necessary to adjust domestic oil-products prices, it said, as the 22-day moving average of a basket of international crude prices is up only 1.85%.

Source CME News For Tomorrow

The Debts of the Spenders: ISM Report Predicts US Growth in 2010

All jokes aside as to what the US manufacturing sector does produce, the nation's supply chain executives see positive growth for 2010. There are some interesting charts in here. I encourage readers to pour over the data.

Sunday, December 13, 2009

The Debts of the Spenders: Bond Vigilantes Place Bets on Eurozone

It is a universal truth that nearly everyone enjoys the benefits of government spending but balks when the bill arrives. Here is a spotlight on 2 of the Eurozone PIIGS (Portugal, Italy, Ireland, Greece, and Spain) the group containing the fiscally weakest EU members.

Despite harsh spending cuts Irish bond yields are creeping higher. The situation in Greece however, continues to worsen.

The Irish government announced draconian spending cuts of 6 billion Euros in order to stave off a debt crisis in the worst modern-day downturn in the nation’s history. Even so, Irish government bond yields have been rising relative to German government bond yields, the benchmark for the Eurozone. Over the past five years the spread had averaged about 40bps. Now it is 170bps. But, the Irish seem to be making the necessary cuts forced on them by lower tax receipts and currency union.

The Greek government, on the other hand, is not taking the same tack. Witness comments by the country’s Premier as reported in the Telegraph by Ambrose Evans-Pritchard:

Salaried workers will not pay for this situation: we will not proceed with wage freezes or cuts. We did not come to power to tear down the social state.

Friday, December 11, 2009

The Debts of the Spenders: The Top 10 Countries Most Likely To Default

No surprises here for those following current events. You might be surprised by the inclusion of others.

The Debts of the Lenders: Chinese Consumers Increase Spending

While the Western consumer - particularly in the USA and the UK - continues to save, his/her Chinese counterpart has increased spending. Of course a lot of this spending is fueled by a government debt bubble. Unlike their American, British, or EU counterparts, Chinese banks are being FORCED to lend by their government (one of the hallmarks of an authoritarian, semi-command and control economy is that officials can have their wishes implemented almost immediately).

The other interesting part of the equation which the article does not address is the potential for a US export boom. As the dollar continues to depreciate from fundamental factors like immense budget deficits and a lack of political will to control spending, US exports become more competitive in the global economy. But the shift from a manufacturing to a service based economy means immense financial and personal turmoil for the unprepared. The much vaunted service economy conceived by Ivory Tower academics has actually resulted in the stratification of society into the haves and have nots.

The Chinese market is “on full tilt — booming is an understatement these days,” said John Bonnell, the director of Asia vehicle forecasting at J.D. Power & Associates.

China is pulling ahead at this particular moment partly because Americans, debt-laden and worried about their jobs, are pulling back. After decades of gorging on consumption, Americans are saving. And the Chinese, whom economists thought were addicted to saving, are spending more.

Among China’s 1.3 billion people, rising incomes are finally making large numbers of Chinese prosperous enough to make big-ticket purchases.

Tuesday, December 8, 2009

The Debts of the Lenders: Japan's Actions Do Not Match Words On Latest Stimulus Plans

Japan recently unveiled its 4th stimulus plan since 2008 thus placing it in the dubious ranks of the world's most indebted nation. Japanese politicians have publicly fretted about the need to reign in spending and reduce the amount of bond issuance in 2010. However, bond traders are unconvinced and have pushed up short interest in JGB's (Japanese government bonds) up to their highest levels ever.

Watch this video:

Monday, December 7, 2009

The Debts of the Spenders: Congress Eyes (Higher) Gas Tax to Close Budget Deficit

Can blood be squeezed out of stones? When one can only spend their way out of a deficit new means of raising cash must be found. Pundits predict that the US Congress is planning to hit an already overstretched consumer with gas taxes. Of course, given the US government's rate of spending, closing the budget deficit has about the same likelihood of reverting to Glass Steagall or overturning NAFTA.

Transportation chief Ray LaHood predicted the federal government's gas tax of 18.4 cents per gallon would not be enough to offset the nearly $500-million gap between how much revenue is available and how much money the department hopes to receive next year.

That dilemma, he said, would present Congress with two choices: Cut some programs or consider increasing fees, including the federal gas tax -- an idea LaHood discussed, but did not explicitly endorse, during Monday's conference.

Friday, December 4, 2009

The Debts of the Lenders: Asian Emerging Markets Face Food Inflation from Rice Rally

US Rice futures are up 25% in recent months.

Emerging Asia’s Growth Outlook May Get Clipped On Rice Rally

By and large, emerging Asia investors aren’t paying much attention to the rising price of rice. Perhaps they should start. Rice prices have recently surged, nearing the record highs of 2008 as India appears set to become a net importer for the first time in more than 20 years on the
weakest monsoon season in 37 years. The government expects its summer-sown rice output to fall 18%.

The Philippines, one of the largest global rice importers, has also suffered production shortages this year that could increase the country’s demand. On Thursday, prices prompted the Philippines to raise its budget by 21%. Meanwhile, rice futures traded in the U.S. have
increased by about 25% in recent months.

The director general of the International Rice Research Institute Global, Robert Zeigler, underlined the concerns last week in announcing a campaign to raise $300 million over the next
five years to finance research for increasing rice output.

If the cost of rice, the food mainstay of most of Asia, continues to rise relative to other goods and services, the impact on growth in emerging-market Asia, which is expected to lead the world next year, could be crimped. Higher prices would give people less disposable income, and could effect political and social stability.

Food security has become as a major socio-political issue in Asia in recent years due to demand-supply imbalances—a problem expected to grow with increasing populations and potential
climate change.

And rice is not alone. Prices of other food stuffs including sugar, cocoa, tea and Chinese garlic, have been gaining, too.

“Asia’s current recovery is still driven to a large extent by domestic demand and especially household spending,” according to a research report by Frederic Neumann, senior Asia economist at HSBC in Hong Kong. “But, rising food (read: rice) prices could conceivably put such a consumption recovery at risk.”

Aggregate consumption, after all, stalled in 2008 when rice prices soared. Neumann found that the weight of rice on consumer prices even exceeds the impact of energy in some Asian markets.
But a concurrent rise in energy prices could increase the growth impact from rice prices.
Several economists and money managers aren’t yet concerned.

“A rise in rice prices might make me mark down expectations in growth,” said Carl Weinberg, chief economist at High Frequency Economics. “For the moment, that’s not high on my list.”
Simona Mocuta, a senior economist for Asia at Global Insight in Lexington, Mass, added, “By and large, we don’t see the same type of inflationary pressures that we saw in the early part of 2008.”

Source CME News For Tomorrow

The Debts of the World: Will High Grade Corporates Eventually Supplant Government Bonds?

Will high grade corporates eventually supplant government bonds?

The once unthinkable state of affairs - that ultra safe government debt commands a lower yield than private capital - might soon be reversed. Deteriorating fiscal conditions in the UK, USA, and other countries (primarily the Eurozone but feel free to throw in other culprits) might lead to a reversal of fortune for governments.

In particular, I have been looking at the Gilt market for UK government debt. It is possible that the authorities may be forced into a corner over the next year when the BOE's bond purchase program ends in January 2010.

However, the government has a potential ace up their sleeve - the imposition of higher regulatory capital among bank balance sheets. The FSA and its sister agencies in the US and the Eurozone have been contemplating lower leverage ratios among insurance companies, banks, and other private sector financial entities. They have hinted that the "safest" form of capital in terms of liquidity are government bonds as opposed to commercial paper. The sudden demand for government paper could flatten yield curves.

Thursday, December 3, 2009

The Debts of the Spenders: GS Upgrades the Grains

Disclosure: No position in the grains as of now. But I am a bull longer term. GS' recent statement on agricultural prices gives rise to concern though b/c one always wonders if their client services and trading divisions are aligned.

Goldman Sachs Sees Big Upside In Corn Prices In 2010

Corn has the most upside potential of the agricultural commodities in 2010, investment bank Goldman Sachs said Thursday. U.S. use of corn for ethanol is a major factor in the market’s bullish outlook, the bank said in a commodities note.

Low stocks and higher energy prices “suggest material upside” to corn prices, said Goldman.
The bank forecasts Chicago Board of Trade corn futures prices to rise to $4.75 a bushel by the end of 2010 and average prices of $5 a bushel in 2011.

In other grain markets price forecasts, the bank is more neutral. The large 2009-10 world wheat crop and “comfortable” stock levels, combined with minimal demand growth, indicate the wheat market will be well supplied in the coming year, said the bank.

Goldman increased its 12-month Chicago wheat price forecast to $6 a bushel from $5.50 a bushel, with the bullish outlook for corn providing spillover strength. “The potential for corn prices to exceed our expectations would also present upside risk to wheat prices, as feed substitution between wheat and corn has historically kept the wheat/corn ratio within a relatively limited range,” Goldman said.

The 12-month forecast for Chicago soybean futures was revised up to $11 a bushel from $10 a bushel due to growth in demand from emerging economies.

Source CME News For Tomorrow

The Debts of the World: Panama Canal to Replace Long Beach?

Interesting. Long Beach, California is THE entry point into the US for the majority of imported goods - particularly those from China and Japan. However, merchants have long been frustrated by the eternally squabbling Longshoremen's Union that represents dock workers. A little secret - these tradesmen already have some of the highest paid, blue collar jobs in the country (well over 6 figures) but they still want more!

Instead, recent developments in the Colon Free Trade Zone in Panama have re-opened the possibility of an alternate channel into the continental US that links the Far East w/burgeoning ports in Miami and along the Louisiana/Texas coastline.

Moreover, an improved channel spells faster turn around time for the most dynamic trade of all - the Latin America/China trade route that sends raw materials and food supplies to the factory cities and workers lining the East China sea.

Tuesday, December 1, 2009

The Debts of the World: US Cargo Volume Gives Retail Bulls Hope

I was bullish on a rebound on world trade earlier this fall. Spot freight rates are up and so is container volume according to two industry data sources.

Bulls have hope according to two industry sources that see higher container volume and spot freight rate increases:

The Debts of the Lenders: Japan Embarks on Another Round of Quantitative Easing

Dumb and dumber (US and Japan) compete for carry trade flows. Now, the BOJ, pioneers of quantitative easing, have taken a lesson from Bailout Bernanke by accepting "a wide range of collateral" in exchange for ultra cheap money. Nikkei bulls and export starved manufacturers have gotten the green light to go up another few hundred points on the stock index.

But, in the process, each country is debasing their currency and accruing billions (trillions, gazillions, who knows any more?) in debt for future generations to pay off.

TOKYO (Dow Jones)--Japan's central bank unveiled a surprise monetary easing effort Tuesday that could inject up to $115.7 billion into an economy facing deflation and a soaring currency, but it failed to impress financial markets or economists eager for bolder action.

The Bank of Japan's move, which followed increasing political pressure from Japan's new government, underscores the pessimism surrounding the Japanese economy. Japan has posted two straight quarters of economic growth and seen a resurgence in demand for its exports. But declining consumer prices and the yen's strength against the dollar have raised concerns that Japan could slip back into recession.

At an emergency meeting Tuesday, the BOJ adopted a new lending program to provide 10 trillion yen worth of funds for three months at a rock-bottom rate of 0.1%, taking in exchange a wide range of collateral from government bonds to deeds on loans. But the bank stopped short of lowering its key policy rates, also at a low 0.1%.

Source: DJ Newswire

Monday, November 30, 2009

The Debts of the World: Credit Markets React to Dubai

The funny thing is that the CDX.EM index (above right) does not even include the U.A.E. The index is composed of emerging market darlings like Brazil, Turkey, and India. Yet, spreads still widened.

The market action speaks more to traders' realization that they may have been overpaying a premium for emerging markets in general. Emerging markets have generally been the beneficiaries of increased fund flows due to the dollar carry trade.

Other high beta assets like high yield (junk) also sold off (above left). Not surprising when you consider that retail investors have been piling on the train for the past few weeks.

The Debts of the Lenders: China Approves Genetically Modified Rice Crops

Genetically Modified Crops Clear A Hurdle In China

China’s government declared two strains of genetically modified rice safe to produce and consume, taking a major step toward endorsing the use of biotechnology in the staple food crop of billions of people in Asia.

In a written reply to questions from The Wall Street Journal, China’s Ministry of Agriculture said Monday that it had issued safety certificates to domestically developed strains of genetically modified rice and corn, after a years-long process involving trial production and environmental
tests. Further approvals are required before the strains can be grown on a commercial scale, the ministry said, and industry participants said it may take another two to three years for the rice to reach production.

Foreign companies that produce genetically modified crops welcomed the news, which could eventually pave the way for approvals in China of more of their products. “It’s good news in the context of commercial introduction of biotechnology in crops in China,” said Andrew McConville, the Singapore-based head of corporate affairs in Asia for Syngenta AG (SYT, SYNN.VX), a
Switzerland-based agribusiness company.

China is the world’s top producer and consumer of rice, so its use of modified varieties has the potential to alter the grain’s global supply patterns. Widespread production has the potential to complicate trade with places such as Europe that restrict genetically modified foods. On the other side, U.S. companies have been urging China to speed up its approval process for
genetically modified crops.

A spokeswoman for Monsanto Co. (MON), the world’s biggest producer of genetically modified
seeds, which has received Chinese licenses for some of its genetically modified varieties, didn’t reply to a request for comment. China’s officials have been less constrained by public pressure over the sometimes- controversial use of biotechnology in food than those of other countries.

The government has long supported research into agricultural biotechnology as part of a
drive to ensure the nation remains self-sufficient in staple crops. “This is an important achievement in independent intellectual property from our country’s research into genetic-modification technology, and creates a good basis for commercial production,” the Ministry
of Agriculture said.

Genetically modified corn, cotton and soybeans are grown in the U.S., Canada, Argentina and other countries, but genetically modified rice so far hasn’t been grown on a major scale anywhere. Most such crops now available, including the ones developed in China, have been modified to resist pests or herbicides—traits that appeal to farmers eager to boost output.
More recent efforts at genetic modification have aimed at creating benefits more noticeable to consumers. The International Rice Research Institute in the Philippines, for example, has been working on developing what is known as golden rice, which is genetically modified to include vitamin A. The institute hopes to have the rice strain, which it says could help combat childhood malnutrition, on the market by 2011.

Source: CME News For Tomorrow

Saturday, November 28, 2009

The Debts of the Lenders: China's Garlic Bubble

Apparently, Chinese speculators were not content with stockpiling copper. Now, the Financial Times reports that garlic is the newest craze. Wholesale prices of garlic have shot up 15x w/in the past few months. Accounts vary. Official accounts from the Chinese Ministry acknowledge that prices have soared 286 percent since March. Meanwhile, the Economist reports that prices have shot up 40x since the same period.

Fundamental factors like reduction in land acreage for planting have been supplanted by folk beliefs regarding the curative powers of garlic against the swine flu. Then there is plain, old fashioned greed.

"You need a warehouse, a lot of cash and a few trucks. That's how it works," said Mr Lou, describing the tools of the trade for speculators.

"Basically, what you do is try to arrest as much supply as possible, then you bid up the price. Moving garlic from one warehouse to the other, you make millions of dollars."

The Debts of the Spenders: Is Dubai Too Big to Fail?

I have characterized Dubai as a "lender" state on this blog for a while now under the mistaken assumption that they were the main financier of US and other Western government debt obligations. Instead, recent events have revealed that Dubai is instead a net "spender" state that owes a great deal more than it lends out.

I have written about Dubai in the past. The most recent post had a generally positive tone. It is my personal belief that the whole issue is being overblown and that the emirate will be bailed out by their fellow Emirati, Abu Dhabi. Failing that, a coalition of the unwilling led by Bailout Bernanke, Mervyn King, and other Keynesian luminaries will ride to the rescue on their white horses. There will be a catch of course and that will take the form of some sort of political or social capital being redirected towards Abu Dhabi at the expense of the proud Dubai prince(s).

In an era of 0% interest rates, backdoor bailouts, frontdoor bailouts, and sideways bailouts, it is not too hard to imagine that politicians will bend over backwards to help their corporate constituents.

Since the blogosphere has already been abuzz about the topic for several days already, I am directing readers to more developed minds. Here are some good sources:

Tuesday, November 24, 2009

The Debts of the Spenders: When Bad News is Good News at Citi

Like I said in the previous post, the definition of insanity is repeating the same actions over again w/the expectations of different results. How bad must things get before people realize that a redefault rateof 39% is considered better than an industry average of 50%?

In a report due out today, Citi said the redefault rate in the third quarter on its $746.8 billion servicing portfolio did not exceed 39% for loans modified between the second quarter of 2008 and the second quarter of 2009. That rate — the percentage of borrowers who become delinquent 60 or 90 days after modification — was higher than Citi's redefault rate in the second quarter, which did not exceed 29%.

Still, Citi's third-quarter redefault rate was lower than the industry average of roughly 50% reported in September by the Office of the Comptroller of the Currency and the Office of Thrift Supervision.


Monday, November 23, 2009

The Debts of the World: CDX.IG and SPY Overlap?

I've highlighted in purple circles the 2 areas where the markets bottomed for the S&P 500 SPY etf and the CDX.IG index from

Correlation or causation? The time periods overlap.

The Debts of the Spenders: FHA Re-Inflating the California Bubble

According to Einstein, the definition of insanity is doing something over and over again and expecting a different result every time. Lest any readers forget, California was the home of the housing bubble.

SAN FRANCISCO — In January, Mike Rowland was so broke that he had to raid his retirement savings to move here from Boston.

A week ago, he and a couple of buddies bought a two-unit apartment building for nearly a million dollars. They had only a little cash to bring to the table but, with the federal government insuring the transaction, a large down payment was not necessary.

“It was kind of crazy we could get this big a loan,” said Mr. Rowland, 27. “If a government official came out here, I would slap him a high-five.”

Maybe I should apply for a FHA loan (maxed out of course), get a HELOC loan at 6-7% interest, and then use these funds to buy assets yielding 9-12%. Oh yea, don't forget the ability to rent the property out.

It's the real estate/dollar carry trade - US patriotism at its finest. Apparently, this is more patriotic than risking your life overseas to fight in Iraq or Afghanistan.

Sunday, November 22, 2009

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.

Friday, November 20, 2009

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

Wednesday, November 18, 2009

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:

Tuesday, November 17, 2009

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.

Sunday, November 15, 2009

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:

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.

Friday, November 13, 2009

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.


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.


Thursday, November 12, 2009

The Debts of the Lenders: Foreign Governments Threaten Dollar Carry Trade with Intervention

Front page articles from the Financial Times and Wall Street Journal:

Keep in mind the timing. President Obama is set to visit China next week amid a series of high profile meetings with senior officials.

China’s central bank on Wednesday acknowledged the case for a stronger renminbi, days ahead of the arrival in Beijing of US president Barack Obama for talks expected to highlight mounting international concern over Chinese currency policy.

US officials like Treasury Secretary Tim Geithner and Fed Chairman Ben Bernanke have repeatedly reiterated a strong dollar policy. However, what they do not say is how that will be accomplished.

Ironically, any correctional moves in the dollar will come about as a result of foreign intervention and not by any actions by the US, which continues to gleefully print its way out of trouble. This means that the US is currently enjoying the best of both worlds as it can truthfully say that its actions are resulting in a stronger dollar - just through the indirect means of having other nations bail out their export sectors by buying short term Treasury obligations.

Who would've thought that Russia (of all places) would be unhappy about an appreciating ruble? After all, earlier this year, President Putin had to publicly make several comments about arresting the Russian currency's slide.

Thailand, South Korea, Russia and the Philippines have been snapping up dollars this week in order to hold down the value of their currencies, traders said Wednesday, as the U.S. currency wallowed near 15-month lows.

Experts estimate that some of the largest emerging economies may have spent as much as $150 billion on currency intervention over the past two months, judging from the growth of their international reserves, according to data from Brown Brothers Harriman. While that's not a huge amount in the currency markets, which have turnover of more than $3 trillion a day, traders pay keen attention to what the authorities are doing and where they are likely to intervene.

This begs another question. Is gold in a bubble?

The Debts of the Spenders: Agra Lobby vs. Refiner Lobby in Ethanol War

In what is critical news for corn traders and the oil majors, the legislative battle between their respective lobbyists is heating up. Proponents of clean energy have pressured the US Congress and the Environmental Protection Agency (EPA) to increase the amount of biofuel in their gasoline blend. President Obama is also believed to implicitly support the big agra lobby in his calls for a more green environment. Cynics also note that Obama drew much of his original political support from Illinois and the surrounding Mid-Western farm belt states. It would not be an exaggeration to say farmers miss the 2008 days of high priced corn.

A motley mix of refiners, food producers, and marine engine companies have snapped back at any sort of higher involvement by claiming that the markets are not ready yet to absorb this new technology in sufficient capacity. A major drawback is higher food prices as crops get re-routed to biofuel instead. More tellingly, the refiners have struggled with slim profit margins all year long. Indeed, the US energy majors - Chevron, Texaco, Exxon, etc. - have refinery operations that have become cost centers instead of revenue generators.

Refiners Rally Against Higher Ethanol Blend

Several U.S. oil refiners may have stepped up their investments in ethanol production this year to meet regulatory requirements, but at the same time the refining industry is waging a battle against a waiver that would allow more of the biofuel to be blended into gasoline.

The U.S. Environmental Protection Agency is considering a waiver that would allow the percentage of ethanol that could be blended into gasoline for conventional vehicles and power equipment to rise to 15% from 10%. The EPA has a Dec. 1 deadline on whether to grant this request, which was submitted in March by Growth Energy, a proethanol industry group representing 54 producers that is headed by retired U.S. Army General Wesley Clark. Among the companies backing the organization are POET LLC, ICM Inc., Western Plains Energy LLC and Green Plains Renewable Energy (GPRE).

Proponents say more blending of ethanol into gasoline is good for the environment and will foster a greener economy. But a wide coalition of refiners, food producers and marine-engine manufacturers say engine technology isn’t ready for more ethanol in gasoline, and food prices will increase if more of the corn-based fuel is produced. Moreover, refiners fear that higher
ethanol blending would cut into gasoline consumption even more. The refining industry has been struggling with narrow margins all year due to sharply lower demand amid the economic downturn for refined products— and experts predict that gasoline consumption in industrialized countries will likely stagnate for decades to come.

Source: CME News for Tomorrow

Tuesday, November 10, 2009

The Debts of the World: Look to Credit Markets for Clues on Volatility in Upcoming Months

Last week, the 3 major Western central banks confirmed that we will be in a low interest rate environment for quite some time. A lot of the uncertainty leading up to their committee meetings was reflected in the CBOE's Vix which measures volatility. Specifically, the volatility reflected concerns among traders that central bankers would turn hawkish on inflation. Such fears were well founded since a slew of other central bankers had already tightened lending. Central bankers in Brazil, Australia, and the Far East had signaled a potential end to the easy money gravy train with a barrage of trading taxes, interest rate hikes, and general rhetoric about the need to restrain the flow of credit.

However, the Fed, BOE, and ECB eased such concerns with statements that basically said low rates are here to stay for at least 4-6 more months. Together, these bankers represent the vast majority of the Western capital markets.

The weekend G20 meeting (formerly the G8) also confirmed agreement among policymakers that a low interest rate environment is here to stay for the foreseeable future. The G20 meeting includes the emerging market nations which have been the main beneficiaries from a healthier credit environment.

Interest rate futures and options on futures reflect agreement about this cheap money environment. Fed funds futures reflect an uptick. Rates are calculated from 100-r, where r is the contract's value. Thus, higher futures are indicative of lower rates. Indeed, the market quotes show that (as of this time) rates will remain <1% in the US throughout 2010. This piece of information is critical as it indicates the dollar carry trade will stay w/us for a while.

Eurodollar futures also reflect near consensus about a low rate environment. The Eurodollar futures contracts covers intra-institutional lending on the commercial paper mkts (e.g. money mkts). I wouldn't be surprised to see the ED futures turn bearish slightly ahead of April-May 2010.

So, if rates are set to remain below where will the potential iceberg be?

The same place it was last year -the structured credit and secondary bond markets.

The Wall St Journal recently reported that the market for credit card backed debt is experiencing some volatility due to recent accounting rule changes.
The new rules state that banks issuing the securities must account for them as if they were on their balance sheets.

Under the old accounting standard, card issuers -- such as Citigroup Inc., Bank of America Corp., American Express Co., Capital One Financial Corp., J.P. Morgan Chase & Co. and Discover -- would package pools of credit-card loans and sell them to investors.

Until the accounting rule was changed, these securities didn't have to be included on the banks' balance sheets, so they weren't subject to the same accounting standards and disclosures required for on-balance-sheet items.

But critics argued this rule allowed companies to hide risky assets in these off-balance-sheet items. The new rule will force card issuers to bring off-the-book credit-card loans onto their balance sheets and set aside additional reserves to account for potential losses in these securities.

Another potential hurdle that banks face is the $7 trillion in short term refinancing crunch. The Financial Times reports that financial institutions are racing to refinance ahead of the G20 consensus on low interest rates.

The flood of expiring debt will hit the US and the UK hard – with $2,000bn of debt coming due by 2012 – and could curb banks’ profits or force them to charge individuals and companies more for their services.

In the US, the market for credit default swaps – a gauge of investors’ fears about companies’ health – is already signalling concern.

Tim Backshall, chief strategist at Credit Derivatives Research, said investors’ perception of risk, as measured by banks’ CDSs, was relatively low for the next three years.

But, on average, from three to five years the risk jumps about 30 per cent.

The healthiness gauge of short term debt can be read in the Eurodollar futures market (see above). Need I tell you that the liquidity driven rally is really based on short term debt? Perhaps, we can even see a return to the days of the TED spread rearing its head again in the not so distant future.

The Debts of the Spenders: 2009 Soybean Harvest at Record Levels

USDA Forecasts Record 2009 Production For U.S. Soybeans

U.S. 2009 soybean production is expected reach a record high 3.32 billion bushels, as the U.S. Department of Agriculture on Tuesday raised its crop size and yield estimates.

In its monthly crop production report, the USDA said the 2009 crop estimate is 2% above its October forecast and 12% above 2008’s level. Yields are also seen up from last month and last year, at 43.3 bushels per acre, which, if realized, would be the largest ever. The USDA raised yields by 0.9 bushels from October’s estimate, which itself would’ve been a record, and 3.6 bushels from last year.

The soybean crop estimate is bigger than what the industry was expecting. Analysts surveyed by Dow Jones Newswires expected the soybean crop at 3.269 billion bushels, with a yield of 42.7 bushels. The rise over the previous month was expected, but the gain was greater than anticipated. Early harvest results have shown high yields, even as harvest was delayed last month because of wet weather. Harvest is 75% done as of Sunday, below the 92% done on average as of this date.

The USDA said yields are either unchanged or higher in all states except Georgia, Iowa, Mississippi, and Texas. Heavy rains in October in Mississippi will lead to “hindered yield expectations,” the USDA said. Some analysts expected to see USDA possibly cut harvested acres because of problems with excessive rains in the Delta, but the USDA left its forecast for harvested area unchanged at 76.6 million acres.

The greater production caused USDA to lift its estimate for the ending stocks by 40 million bushels, to 270 million for soybeans, compared to last month, the government said in its monthly supply and demand report. Ending stocks are what is left after accounting for supply and use.

Some of the extra production is going to more exports and more soybean processing. Soybean exports rose by 20 million bushels to 1.325 billion as import demand by China, EU countries and Russia are seen consuming more. The USDA also lifted the soybean crush by 5 million bushels to 1.695 billion bushels. Soybeans are crushed into two products—soymeal and soyoil.

The USDA also noted greater competition for U.S. soybeans from South America as that region is expected to grow more of the oilseed. USDA cited increases for Brazil, Argentina, Paraguay and Uruguay. Brazil, the second biggest soybean producer after the U.S., is expected to harvest 63 million metric tons, up 1 million from October because of an expected hike in harvested area. Argentina’s production is seen up 500,000 tons to 53 million as producers switch some land to soybeans from sunflower seed.

Source: CME News for Tomorrow

Monday, November 9, 2009

The Debts of the Lenders: Caijing Editor Resigns Under Pressure

For those who don't know, Caijing has been the leading independent news agency in China. Under the stewardship of their editor, Hu Shuli, Caijing reporters have repeatedly pushed the line about what are (un)acceptable topics to cover. Media in China is generally censored although the authorities have experimented in recent months w/a newfound sense of liberalism.

Most of these "ok" topics have been about criticism of the USA and Europe's poor handling of the economic crisis. Almost no coverage has been devoted to internal problems such as the restive Xinjiang province and Tibet.

Caijing reporters pushed the limits w/the release of generally negative stories on the economy, naming such issues as unemployment, bubble buildups, poor health care networks, and shady real estate practices. Such action have displeased the Party elders and provoked a backlash among the authorities. Apparently one of the latest casualties is that of Ms. Hu's resignation.

The Debts of the World: Supply Chain Cash Flow Slows

Is this a bearish macro signal? Higher supply chain spending indicates a belief among companies that is generally bullish. In contrast, lower supply chain spending indicates a general bearish belief.

“An abrupt slowing of payments and cash flow throughout the supply chain typically indicates a waning confidence in sales,” says Jim Swift, president and CEO, Cortera.

“But we’ve seen similar spikes occur in the past, as supply chain stakeholders make significant upfront investments in preparation for the holiday shopping season. What makes this one potentially puzzling is the timing."

The Debts of the Lenders: Lula da Silva on the Promise of a Better Tomorrow

The Financial Times recently sat down to an interview w/Mr. Lula da Silva, President of Brazil, and one of the key leaders in the BRIC (Brazil, Russia, India, China) emerging market bloc. Mr. da Silva is cautiously optimistic about the future. Here are a few key comments:

“Not long ago I used to dream of accumulating $100bn in foreign reserves,” he says, still smiling broadly. “Soon we will have $300bn (€202bn, £180bn).”

“I am against the state being the manager of the economy. The state has to be strong – but as a catalyst of development. And we have run sound fiscal and monetary policies. That is why the banking sector did not break down during the crisis.”“I was reacting to comments by people who put the blame for the crisis on migrants,” he says.

“That’s how we will build a strong alliance among the Brics. At our first meeting I suggested we should begin trading in our own currencies. We don’t need the dollar. It’s just cultural and it can change.”

Perhaps there are a few lessons here that the more advanced economies in the West can learn from. Please note that Brazil has benefitted from a rush of hot money via the dollar carry trade, particularly in commodity price levels. Oil futures contracts have remained in contango for quite some time (where future exceeds spot). Now prices for longer dated contracts are pushing $100/barrel and renewing fears of inflation. In such an environment, demand for dollar denominated assets such as commodities will continue to rise or at least keep level.

But in the interest of fairness, here is another opposing perspective from noted economist Nouriel Roubini.


Wednesday, November 4, 2009

The Debts of the Spenders: Is Warren Buffet a Corn Trader?

Is Warren Buffet betting on corn? The billionaire investor with a famously long term view caught the public eye this week by disclosing his holding company, Berkshire Hathaway, had recently acquired a large stake in American railway company, Burlington Northern Sante Fe (BNI). BNI runs a profitable freight line conveying containers full of stuff from coast to coast. One such route includes crossing the bread basket of America, the Great Plains, where acres of corn and wheat are grown and harvested every year.

Please note that Buffet is not betting on the price of corn. Instead, he is betting on the VOLUME of production increasing w/in the next few years. This does not necessarily mean prices will fall. Factors such as weather, pests, and spoilage will continue to add elements of uncertainty to the trade.

Some background: Harvest season is nearly over. Seasonally, most grains - including corn - are going to lie fallow until late winter's sowing. Speculative activity will begin to pick up in early December and again in late February as traders focus on March deliveries and the potential for new crop planting. Yearly highs are typically achieved in late May/early June.

Because of last year's commodity bubble, adding 2008-2009 's sharply higher prices will raise the average price range. Indeed, charting the past 10 years (1999-2009) will show a divergence from longer range charts like the 30 year.

To add further uncertainty into the mix, overplanting of soybeans within the past year has led to talk among some farmers of switching over to corn production while their soy fields lie fallow.

Through BNSF, Buffett Going With The Grain, Specifically Corn

Berkshire Hathaway’s $34 billion purchase of the Burlington Northern Santa Fe Corp. (BNI), billed as a wager on the economic future of the U.S., could also be a bet on the continued expansion of the corn industry, especially into the Great Plains.

Berkshire Chief Executive Warren Buffett called Monday’s purchase an “allin wager” on the economic future of the country, raising hopes among the grain industry for better railway conditions.

“It’s recognition of the large amount of capital investment that has gone into this [railroad] industry over the past 10 years—both in terms of upgrading track—and computerization,” said Bill Nelson of Doane Agricultural Services. “The story behind the purchase is that investment is
in position to start returning a lot of dollars to investors ... certainly grain export is one of the major elements involved there.”

Grain transported to export terminals in the Pacific Northwest, Gulf of Mexico, Mexico and the Great Lakes comprises approximately half of all the agricultural commodities that BNSF hauls annually. BNSF is the nation’s leading rail corridor for corn, the country’s largest single crop.
“This is a great year for Berkshire Hathaway to be investing into railroad transportation,” said Joe Victor of Allendale Inc. “With a record corn/soybean crop coming in, it should be a great year to move grain, very much like late 2006/early 2007,” before the U.S. economy began to falter.

BNSF is already the nation’s largest rail carrier of agricultural products, transporting more than one million carloads of farm commodities in 2007, nearly half of which were corn and wheat.
With some 20 billion bushels of all types produced annually, grain is engrained into the U.S. economy, and accordingly, so is grain transportation. The U.S. Department of Agriculture estimates that railroads originate approximately 35% of all domestic grain shipments each year.

“As for grains in particular, if we don’t fix the locks/dams of the major river arteries of the U.S., then railroads are going to be more important to shipping grain,” said Mike Zuzolo of Global Commodity Analytics & Consulting LLC. With almost all of BNSF’s 32,000 route-miles of track lying west of the Mississippi River, observers say Buffett’s big buy—the largest ever made by his
Omaha investment firm—is also a vote of confidence for continued expansion of corn into the Great Plains, a landscape that for generations had been dominated by unending miles of spring and winter wheat.

Buffett is “betting on future of cash grain industry in Great Plains, because a large percentage of grain grown here moves to the coast by rail,” said Nelson, of Doane Agricultural Services. “Yields are improving, so grain volumes are. Look at where these crops have migrated and where the investment money has gone: into the Plains and into corn.”

A USDA map now classifies counties as far west as the Nebraska-Wyoming border as “major production areas” for corn, a crop once primarily grown east of the Missouri River. Victor attributes the westward march of corn to improved genetics resulting from the development of new biotech hybrids—a technology that has not yet been adopted in the wheat industry.
“Wheat is 10 years behind on biotech,” he said. “The big picture is more corn acres, and fewer wheat acres, in the U.S.” The USDA concurs, publishing baseline forecasts in February that predicted “a gradual shift to corn, and away from other crops,” through 2018, partially due to
“gains in exports that keep corn demand and producer returns strong.”

Corn yields almost four times as many bushels of grain per acre as wheat, naturally resulting in far greater demand for transportation.

Source CME News For Tomorrow

The Debts of the Lenders: India Buys 200 Tons of Gold, Minister Says North America and Europe Have Collapsed

Yesterday, the New Delhi Reserve Bank revealed that it had bought 200 tons of gold in exchange for dollars. The sale came from the IMF's reserves.

But that's not all. In unusually provocative language, Pranab Mukerjee, India's finance minister said that, "Europe collapsed and North America collapsed." Other statements included "We have money to buy gold. We have enough foreign reserves."

Unlike the other BRIC economies, India is not reliant on export driven sales of raw material commodities and/or cheap manufactured goods. So, there has been no traditional dollar peg that has driven its trade relationship w/the outside world. Under the current and past administrations, India has been slowly but steadily shedding its Nehru era Socialist ties when the country was still politically and economically tied to Soviet Russia.

Since the end of the Cold War, subsequent administrations have embarked on an economic liberalization program and met stunning success - most notably in the business processing outsourcing (BPO) sectors which includes IT work. But much of the country remains predominantly agrarian in nature. Other stumbling blocs include the powerful presence of trade unions in the southern provinces and long running Communist insurgenices in the north-east. Then there are the recurrent security problems with Kashmir and Pakistan to the north-west.

The price of spot and forward gold rose in the markets to hit a yearly high of $1087/troy ounce.

Monday, November 2, 2009

The Debts of the Spenders: US Restaurant Executives Grow More Optimistic About Business Outlook

So, why am I posting about restaurant owners/managers, a subject that has never been covered on this blog before? The reason is simple. Dining establishments are representative of American business. And most of these businesses lie on the smaller end of the scale.

The 2008 US Census reports that most establishments employ less than 20 workers. Examining small business sentiment can lead to valuable clues in larger macro trends such as hiring, capital improvements, and loan applications. (Employment is a lagging indicator. Loan applications for capital improvements are leading indicators).


The following survey was completed by restaurant chain executives. But keep in mind that most restaurant chains operate on a franchise model.

Friday, October 23, 2009

The Debts of the Lenders: Eurodollar Futures and Commitment of Traders Turn Bearish

I haven't covered the Eurodollar futures in a while but it is a topic I discussed earlier in the year as a potent tool of discovering which way the market is headed.

Ms. Nicole Elliot of Mizuho is cautiously bearish on the Eurodollar contract "Possibly attempt the tiniest of shorts " but believes the longer term trend on the contract is up for the foreseeable future. Her track record is quite good by the way.

The persistently overbought Eurodollar contract has contributed to lower interest rates and greater liquidity sloshing among institutions. Greater liquidity = more risk taking. More risk taking = higher commodity prices and corresponding commodity currencies like the Aussie and Real. So, it goes to reason that a lower Eurodollar contract means higher interest rates (increased borrowing costs) that hamper risky business.

Other market sentiment timers like Mr. Alex Roslin who uses Commitment of Traders analysis are more bearish and note the accelerated outflow of fund buying by big institutions.

Thursday, October 22, 2009

The Debts of the Lenders: Container Shipping Bailout

Container shipping is ready for a bailout courtesy of the German, French, Israeli, and Chilean taxpayers. Companies include Hapag-Lloyd (Germany), CMA CGM (France), Zim (Israel), CSAV (Chile) and CCNI (Chile).

But attention is being targetted on the two European firms since Hapag-Lloyd is the world's 6th largest firm and CMA CGM is the world's 3rd largest by size. Shipping executives and trade officials in other countries are vigorously protesting what they (rightly) see as unfair competition. The protests are being lodged at the highest levels of the EU but commissioners have so far been nonchalant about the whole affair and dismissive of what they consider a local matter.

The Debts of the Lenders: China Plans to Launch REITs

Much has been said here about the speculative bubble like nature of the Chinese equity and property markets. In this latest news, Reuters reports that Chinese fund managers plan to launch publicly traded REITs that will be listed on native exchanges. REITs typically invest in residential and commercial real estate. Since this is China a large number of commercial properties will be industrial in nature.

The addition of REITs will ease the access of institutions to retail money by allowing nearly anyone to gamble in an already overheated property and equity market. That might even include foreigners which have been pretty much restricted in their financial activities.

Further details are pending final review by the China Securities Regulatory Commission (CSRC), the financial regulatory body.

Wednesday, October 21, 2009

The Debts of the Spenders: Is Corporate M+A Poised For a Comeback?

CFO magazine ( a great read by the way for those interested in knowing what's going on among corporate finance departments - warning wonk alert! ) reports that mergers and acquisitions, or M+A for short, may be poised for a return. But uncertainty about the macro level situation - especially credit - has dampened potential hopes of a sustainable recovery.

The author interviewed a Corning executive (manufacturer of industrial glassware) who was cautiously optimistic about the future but voiced concerns about extreme valuations. Such thoughts are directly connected to the months long run up in the equities market that have pushed many underlying stocks well above book value and historical valuations.

Corning's cash position makes the company less dependent on the credit markets for midsize deals. It also learned valuable lessons from the previous downturn in 2002, when the telecom bubble burst. "We decided then that we wanted to be prepared for the next downturn, whenever it came, by building up a significant amount of cash," Flaws explains. "We've done that, and have almost no debt coming due short-term. We're prepared to do deals now and we have the money to do them."

So what is he waiting for? "The valuations are higher than we think they should be," he says. "There were some companies we were interested in acquiring a few months ago, but the valuations were more than what we thought appropriate. Now they're lower and likely to get lower still."

This article was published before earnings season. Let's put his comments into context. The trend for the market has been a run UP into earnings only to be followed by an equally swift exit by profit takers (sellers) eager to cash out. . . . even though guidance has been for the most part positive. CFOs and other corporate finance personnel are patiently waiting for a return to more realistic levels.

The credit markets need to get revived as well. Despite the equity and bond rally (another source of financing for companies besides traditional bank loans), financing for deals is still hard to acquire - particularly for the debt fueled private equity market, including the sub-set of LBOs or leveraged buy outs (the "L" in leverage should tell you right away that there is a heavy reliance on financing).

The Debts of the Spenders: UK Property Prices Almost Back To Mid-2008 levels

Almost. Prices are almost back to where they were during last year's property bubble. The catalyst of course is quantitative easing, the controversial policy tool that debases the underlying currency so as to increase liquidity flows and maintain artificially low interest rates.

In particular, COMMERCIAL property prices have experienced the strongest surges.
The Financial Times reports that London is the center of a demand led recovery. Rental growth remains strained and is the key to any sort of sustainable recovery.

A lot of foreign money is returning - not necessarily from Eastern Europe/Russia which saw outsized bids last year - but mostly from the cash rich Middle East Gulf states. London has long been the second home of the Arab diaspora. Savvy fund managers saw the writing on the wall and capitalized on this concentration of wealth to open Sharia or Islamic law compliant funds. Some of the recent property acquisitions are no doubt part and parcel of the recent uptick in Islamic finance again.

All is not well however as the structured finance component of the deal flows are still experiencing problems. Fitch ratings analysts believe that the UK government's ABS scheme will not be extended past tomorrow's deadline. The ABS program was notable because NO ONE used it.

The government designed the scheme to reopen the UK RMBS market by offering guarantees covering credit or extension risks at a cost of about 25 basis points over Libor plus the median five-year credit default swap spread on the issuer.

There has been no take-up, 'primarily because CDS swaps for banks have widened significantly since the start of the banking crisis, making the scheme's economic unworkable for more originators', Fitch said.

Widening spreads are a bad sign despite Fitch's attempt to put a positive spin on the story by saying there are market led solutions developing. It indicates a fundamental disconnect between buyers and sellers over valuations. In healthy times, the spreads would be narrower but now the wide spreads are telling me that sellers continue to hold onto a higher price for other reasons besides valuation, including the fear of taking a large write - off on their books. So, they just continue to sit on the asset and hope that the government's liquidity schemes will eventually lift all boats higher.

In the meantime, here is a nifty tool that will allow readers to see if a RESIDENTIAL property is underwater as measured by the loan to value (LTV)ratio. Numbers over 100 indicate negative equity.

Tuesday, October 20, 2009

The Debts of the Spenders: Obama To Help HFAs

This post is meant to provide more clarity to yesterday's article about the latest Treasury bailout.

I would like to report more details of the plan but neither Treasury or Obama Administration officials have provided further details. However, for what it's worth, the brunt of the program is to be borne by the HFAs.

Monday, October 19, 2009

The Debts of the Spenders: Treasury To Buy Fannie and Freddie Loans

I must be getting deja vu because I thought this already happened.

One year ago, then Treasury Secretary Paulson promised these would only be temporary measures. Back then, it was the equity and the bonds. Now, this time. . . .

Well, at least they are cutting out the middlemen this time. When the Fed bought (they never sold) Treasuries and agency backed securities from the Treasury, they were forced to go through the primary dealers, a network of investment banks that profited from their personal connections with government officials.

Actually, you can make the argument that in the prior instance, the Fed prints money through quantitative easing. Here the Treasury is only printing money directly w/the printing press.

Both methods are forms of money printing but the first method is more "efficient" since it benefits fixd income desks at large banking firms like Goldman Sachs.

Some more additional context. Earlier in the same day, the Federal Reserve began testing a series of repo operations. Repos, or reverse purchase agreements, are methods by which the Federal Reserve attempts to withdraw liquidity from the system. Bond traders were temporarily frightened by the prospect of the largest - in some cases - only buyer withdrawing its presence. Bernanke was quick to reassure traders in a public statement that all was well.

Now, he is backing up his words with action from the Fed's sister agency, the Treasury Department.

Here are some more additional sources:

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