Thursday, April 30, 2009

The Debts of the Spenders: Agriculture Retains Strong Fundamentals Amid Stock Market Fluctuations

While equities remain very overbought, commodities - particularly agriculture - retains strong fundamentals and technicals. July corn, wheat, and soybeans are poised for technical breakouts. Even the softs are picking up. I posted about the COT (commitment of traders) a few days ago. By itself the data stated there had been an increase of short positions in commodities (particularly in grains) by funds for the PRIOR WEEK.

I have more or less given up trying to predict equity movements but the action in the Chicago and Kansas trading floors has been easier to folllow. That data is meant to be interpreted as a contrarian indicator in a week w/strong govt intervention: both the FOMC and BOJ made announcements. While the world remains in a deflationary environment, the short term effect of massive money printing is definitely having an inflationary effect. And commodities are the first sector to reflect that change in sentiment. So what we are seeing is a combination of short covering in grains as well as a rally built on strong fundamentals.

1) We are entering a cyclically bullish period of the year for agriculture. Spring is planting season. And planting has been delayed. See #2

2) We have ENSO wet conditions. I highly recommend this govt web site and resource. Unlike finance, the govt goes out of its way to make accurate crop and weather forecasts. In any other industry charges of price fixing and collusion would abound. But thanks to the Dept of Agriculture and related federal agencies all this data is free. You also don't need a Bloomberg terminal to access it.

3) The oversold meats and grains mkts rebounded once people realized the swine flu is aptly misnamed - it is more of a human to human transmission than pig-human. Just how many pigs (of the animal kind) do you see walking the streets of NYC or Chicago anyway? Even if there is a culling this would result in longer term supply destruction.

*Disclosure - I am long wheat, corn, and soybeans.

Wednesday, April 29, 2009

The Debts of the Spenders: SEC Investigating 50 Credit-Default Swaps, 150 Hedge Funds

Perhaps the SEC will also look into the suspicious late day trading going on in equities lately. But somehow, I am skeptical of any real changes happening.

The Securities and Exchange Commission is currently investigating 50 cases of credit-default swaps and 150 hedge funds, Chairman Mary Schapiro told the Society of American Business Editors and Writers. The investigations are in line with objectives of the Obama Administration to overhaul financial regulations.

The SEC is also probing more than two dozen municipal securities for potential “fraud, public corruption and price transparency,” Schapiro said.


The Debts of the World: This Week's Bonds and Yen Movements

The last 2 days saw a brutal bond sell-off - particularly in the 10 and 30 year ranges. Interest rates are now back above 3% and 4% respectively.

So what does this mean for bond guru, Bill Gross, and his co. Pimco? Let's go back in time to March 20 to see what a Pimco M.D. (managing director - not physician) has to say:

DJ Pimco's McCulley:Fed Reserve Has Surrendered Its Independence


NEW YORK (Dow Jones)--The Federal Reserve Board relinquished its independence from the U.S. government with its plan to effectively print money to buy U.S. debt, a managing director of the giant bond fund Pimco said Friday.

But Pacific Investment Management Company's Paul McCulley said during a speech in New York that he doesn't see this development as a bad thing, so long as it's temporary. In fact, he said the Fed's move might be the only way U.S. economy can stay out of the "Big D: Depression."

To be fair, Pimco has also been recommending TIPs (treasury inflation protected bonds). But anyone who remembers last spring's inflationary climb would do well to doubt the government's claims of inflation. The returns were not matching the real rate of inflation. Instead, nimble traders (aka bond vigilantes) unconstrained by conservative fund legal limits have been gleefully shorting US bonds of all stripes.

It is also worthwile to note this week's corresponding sell-off in the yen. I posted a few days ago about how the yen was looking overbought on the daily stochastics. Well, it looks like some traders believe we are entering a new period of inflation (the renewed "carry trade" label is a bit much for me considering Western funds are still in shell shock mode ). Keep in mind that Japanese ministers are due to make announcements tonight and later this week. So far, their track record has been singularly impressive in their commitment to debase the yen and return the country to its former export glory. The fact that none of their efforts have really worked for the past 20 years is but an inconsequential fact to Tokyo bureaucrats.

The Debts of the Spenders: Not Enough Bankruptcy Filings in CDS

Here is another legal update on CDS trading. This time the focus is on potential ISDA changes. Like the prior post the slide is from a DE Shaw presentation.* I am going to focus on the second pointer which is the Bankruptcy clause credit event.

The US govt is hell bent on preventing another Lehman or FNM/FRE situation from appearing - the failure of a "too big to fail institution" is a deflationary nightmare for Bernanke and co.

Side note:

While traders are focused on speed and lighting fast execution, attorneys are used to moving in slower circles. Counselors routinely argue and file motions for cases that are 10, 15, even 20 years old. So it comes as no surprise that MOST bankruptcy attorneys are a bit out of the loop here (only in big NYC, Chicago, or London firms see this kind of work and even then it is highly specialized). And have been scrambling to be kept appraised of CDS.

Until a few months ago, most bankruptcy counsel have never even heard of CDS. I know I never did in law school. But now . . they are billing thousands of hours at astronomical rates. It may seem unfair to those readers who are not lawyers but those men and women deserve every single penny. The case law has not even been settled (there isn't even any substantive case law and what scant details do exist are occluded by the Treasury, FDIC, or Fed) and statutory actions are a bit grey right now. I cannot even begin to imagine the amount of hours spent poring through Lexis or Westlaw (proprietary legal databases that are the equivalent of Reuters and Bloomberg terminals for lawyers).

So it's all about publishing legal memos from esteemed white shoe firms (like this DE Shaw slide). However, w/the way this administration is making stuff up EVERY SINGLE DAY, the potential exists for the memo content to become obsolete or even irrelevant w/in days. Still, it's nice to know that some lawyers are benefitting from this fiscal stimulus.

*Disclosure - I am not, nor have I ever been, a DE Shaw counselor or employed by them in any capacity.

The Debts of the Spenders: CDS Legal Considerations and the President's Working Group

Old news for some but valuable insight for others. Slides come from DE Shaw's CDS legal seminar a few weeks ago.

Note the references to the President's Working Group or "PPT."

Tuesday, April 28, 2009

The Debts of the Spenders: Mortgage Modification Meets Bond Vigilantes

Translation: The govt WANTS banks to make liar loans . . . . again. But this time they are actively encouraging poor valuations w/actual subsidies.

Hey - it's all about improving the cash flow fundamentals of the real estate mbs (mortgage backed securities). Will these lower modificatione be enough to halt the tide of Alt-A and option ARM re-sets? Or higher rates of unemployment? Somehow, I still have my doubts.

PS: This news could also have sparked today's bond sell off. The govt destroying its credit rating is never good.

WASHINGTON (Dow Jones)--The Obama administration unveiled a fresh set of incentives Tuesday for mortgage servicers to help strapped U.S. homeowners.
Under a new program, the government will pay mortgage servicers $500 up front and $250 a year for three years for successfully modifying a second mortgage, such as a home equity loan.

Second mortgages have complicated government efforts to help borrowers avoid foreclosure. According to the U.S. Treasury Department, up to 50% of at-risk mortgages have second liens and many properties in foreclosure have more than one lien.

Senior administration officials Tuesday told reporters they expect a significant amount of big banks to sign up for the updated federal program to bring relief to troubled homeowners. Once those firms sign necessary contracts, they'll generally be obligated to modify second liens when they've initiated a modification on the first, the officials said. They also noted that the second lien program will be funded by the $50 billion in Troubled Asset Relief Program, or TARP, funds the administration had already projected to use for home affordability efforts.

The Debts of the Spenders: Swine Flu Overrated Factor in Ag Markets

I posted earlier about the wet weather ENSO conditions forming a bullish environment for grains. That forecast and assessment still holds true w/wheat planting below average for parts of the Mid-west but especially N. Dakota.

The recent panic sparked by the swine flu certainly has the potential to destabilize short term demand pressure. However, if you look at the longer term picture there is a supply crunch building up. And w/the movement away from pork to other alternate meats (such as chicken or beef), certain feeder crops like corn will benefit from a switch in consumer diets. In fact, adventursome traders are taking the opportunity to buy on any pullbacks. To be safe, it is better to stick w/longer term contracts instead of near term futures.

*Disclosure - I am long wheat, corn and soybeans.

The Debts of the Lenders: Dubai Developments

Coming soon to NYC and London . . . if it hasn't happened already.

Dubai-based real estate firm, Deyaar Development will form a Dhs500 million ($137 million) fund to buy back distressed property sold to investors who can no longer pay for their purchases.

It further added that the fund will offer to buy up distressed properties from investors who have defaulted on their real-estate purchase agreements with Deyaar. However, instead of selling the property in current market conditions, the company will hold onto the units and offer them for rent, providing cash flow for the company.

Monday, April 27, 2009

The Debts of the Spenders: COT Correction

Ok here is the COT data. When I said I couldn't post it earlier it was b/c I was referring to a subscription service that interprets the data against some internal metrics and valuations.

If you want the raw data:

More information can be found here:

The Debts of the Spenders: Swine Flu and Agriculture Prices

Grains could be negatively affected by the outbreak.

Lean Hogs and Pork Bellies will drop violently. As feeders, the grains will probably be affected by the negative sentiment. Since the situation is still developing it is a bit early to tell if prices will remain depressed for much longer. Something like this could keep prices lower for some time.

UPDATE: If you are interested in knowing more, I suggest looking at the COT (commitment of traders) insitutional position which measures regular changes in futures positions among large funds. The data is quite interesting but I can't post it here b/c of copyright concerns.

The Debts of the Spenders: 3x Levered Housing ETFs Coming This Week

Gambling addicts apply! For those who cannot get enough of the 3x and 2x levered ETF (exchange traded fund) action. The long term math says that any 3x or 2x levered etf will eventually decay into a fraction of its original worth. But not before taking traders (these vehicles are not for investors due to the WILD fluctuations in daily NAV value) on a rollercoaster ride.

Those traders who were burned by FAZ, FAS, SKF, UYG, and a host of other etfs might find their appetite diminished (and their accounts depleted). But a whole new class of traders might be lured into these securities.

The initial offerings of both UMM and DMM will occur simultaneously via an electronic auction process managed by WR Hambrecht.

MacroMarkets' subsidiary, Macro Housing Depositor, doubled the number of shares being offered during the IPO to 20 million shares of UMM and 20 million shares of DMM for a total offering size of USD1bn. The firm says the increased offering amount is a result of the high level of interest voiced by the investor community.

MacroShares Major Metro Housing will provide investors with access to the housing asset class, allowing for investment in either the upward or downward movement of home prices. The securities are designed to track the change in US home prices as measured by the S&P/Case-Shiller Composite-10 Home Price Index.

The paired securities will have a five and a half year term and will feature a 3x (300 per cent) leverage factor.

The Major Metro Housing trusts will be fully-collateralized by short-term US Treasury Bills, overnight repurchase agreements secured by Treasury securities, and cash.


Sunday, April 26, 2009

The Debts of the Spenders: Bear Market Rally a Result of Frontrunning the CDS Trade?

After reading many knowledgeable posts from Zerohedge, Accrued Interest, Nakedcapitalism, and Urbandigs (kudos to all the commenters as well), I have come to the conclusion that the bear market rally in equities is the result of an extended short squeeze by quants and other institutional traders trying to do massive arbitrage trades in the most fundamentally weak sectors.

There are many variations of the arbitrage trade but the basic principle seems to consist of a) buying bonds on the company in question (at a substantial discount to par) w/CDS insurance; b) shorting the common equity; and/or c) buying the preferred issue*. The possibility of a big CDS payout is a longer term horizon play. But in the meantime the quants are also periodically short covering to (hopefully) make a profit. *The preferred issue is extra gravy sauce for those funds that want to generate less risky returns since they have historically (as of last September) been viewed as the default safety valve for govt bailouts.

But the best laid plans fell to pieces due to the unforseen extent of the invisible hand. Note that the equity rally has been led by the companies w/the WEAKEST fundamentals - casinos, financials, commercial real estate, luxury retailers, etc. This action suggests that one of two things is happening: a) the long/short arbitrage trade is getting crowded from everyone short covering at the same time to take profit; and/or b) other quants are running short squeeze plays of their own on the most heavily shorted issues by going contrary to the prevailing hedgie herd - e.g. buying the common equity (or more likely taking substantial intra-day futures positions to move the market).

There is also a final factor at play here - the US govt's refusal to accept any publicly traded corporate bankruptcy. So the CDS buyers keep on paying out every quarter and the CDS sellers continue to collect the premiums. Company insiders are also taking the opportunity to sell their common shares. Meanwhile, equity volume among traders is slowly evaporating. And industry shill such as Barron's and CNBC broadcast fund propaganda to the retailer buyers about how the bottom is in.

I don't have access to the kinds of insider data that zerohedge, AI, nakedcapitalism, urbandigs and other good bloggers are privy to. But the scenario I sketched above seems to comport w/what they have been saying in numerous posts since late February.

Thoughts appreciated.

The Debts of the Spenders: Upcoming Legal Compliance Calendar Events

Information is power. And the most recent information is necessary to survive in this day and age.

These events are geared for attorneys. But even non-JD's can benefit (you will have to pay more of course).

Indeed, if you are a trader then you are probably a more committed stakeholder than those who are there only to grab the obligatory CLE (continuing legal education) credits. Those attendees have a habit of showing up 2 times - once to sign their names at the beginning of the course and at the conclusion to receive their certificates. It can actually be shocking to see the levels of non-chalance and sleepiness among some of the legal attendees - these are the same people billing your company $800/hour for securities compliance!



The last event I attended was very educational - it was a preview of the new CDS compliance rules and proposed regulatory structure(s). Since I am not a CDS trader my analysis tends to revert back to legal arcana.

*Disclosure - I have no current affiliation w/the NYC bar but I have been a member in the past.

The Debts of the Lenders: Most of the World on Vacation This Week

Not all week of course but on certain days.

Japanese markets are closed on Tuesday (4/28/09). China, Hong Kong, S. Korea, Singapore, France, Germany, and Italy are closed on 5/1/09 (May Day).

Lower volume on foreign markets could lead to higher volatility among those markets that do remain open.

The days to watch are Wednesday and Thursday which both have full schedules. Wednesday - Rate statements by 3 central banks - New Zealand (commodity currency country), BOJ, and the Fed. Thursday has a similar packed schedule of Japanese and US data including unemployment claims for both nations. I would expect further weakening of the yen to occur on both days simply due to the fact that the BOJ has to come up w/new and inventive means of currency debasement.

The Debts of the Spenders: The US Govt's Plan to Convert Preferred to Common Equity

Excellent article detailing the inevitable.

Equity dilution - whether it is in commercial real estate REITs, banks, credit card companies, auto companies, or any number of overleveraged entities - is inevitable.

Ironically, while dilution is normally a negative for the shareholders, some sectors (most notably CRE) have rallied the hardest in the face of extremely poor fundamentals. This could be b/c the alternative - bankruptcy is considered worse off.

The administration knows that the banking system will need more capital to survive in its present form. The big banks are sitting on billions more losses than can possibly be absorbed by their dwindling equity.* This implies that those further up the capital structure (i.e. preferred shareholders, subordinated and senior creditors) will eventually be forced to eat losses themselves. Unless taxpayers continue to run interference.


Saturday, April 25, 2009

The Debts of the Spenders: Mafia Experiences Growth Period During Recession

Well, at least one industry is experiencing growth.

How soon before we see these effects in other countries like the US or the UK? Historically crime has flourished during times of great economic hardship. The ranks of unemployed and under-employed flock to those who can provide job training, benefits, and rapid promotion.

These are not the small time operators glorified or mis-represented in Hollywood movies or made for tv specials. Instead, the modern organized crime syndicate blurs the line between legitimate and illegal activities w/investments in real estate, restaurants, hotels, and other businesses.

The mafia has also traditionally been involved in one other government monopoly - money printing. Although these days, instead of printing presses all they would have to do is buy a bank and qualify for TARP bailouts.

NAPLES, Italy (AP) - While businesses around the world are hunkering down for survival, the Italian mob is living a golden moment.

Italy's various organized crime syndicates—often lumped together colloquially as Mafia Inc.—are gobbling up gas stations, muscling in on supermarket franchises, making loans to cash-starved businesses, taking over trattorias and acquiring buildings in swank neighborhoods in Rome and Milan, investigators say.

These mobsters have lots of what is in short supply for many businesses these days—liquidity—as well as centuries-honed expertise in preying on the vulnerable, whose ranks are swelling in the current financial crisis.

It all means the mob is free to sink cash into two areas that lie at the heart of the global meltdown: real estate and credit markets.


The Debts of the Lenders: China Nearly Doubles Gold Reserves

A story bound to make any goldbug happy. Even as the price of retail jewelry falls large institutional buyers like China are stocking up on bullion.

China has quietly almost doubled its gold reserves to become the world’s fifth-biggest holder of the precious metal, it emerged on Friday, in a move that signals the revival of bullion after years of fading importance.

Gold rose to a three-week high of more than $910 an ounce after Hu Xiaolian, head of the secretive State Administration of Foreign Exchange, which manages the country’s $1,954bn in foreign exchange reserves, revealed China had 1,054 tonnes of gold, up from 600 tonnes in 2003.


The Debts of the Spenders: FNM Postpones the Inevitable w/New Liar Loans

Gee. The more things change the more they stay the same.

I still don't see how this is going to solve unemployment or any other number of economic problems. The more govt intervention is mandated the longer the L curve of the recession (depression?) grows:

Faced with growing numbers of homeowners unable to make mortgage payments, Fannie decided to fund loans to borrowers that were instant losers.

The point was to buy time. Even though those loans resulted in a $453 million loss, they helped keep troubled homeowners from defaulting. That meant Fannie for now didn’t have to make good on loan guarantees that may have cost it as much as $2.4 billion.

That’s sure to lead to nasty surprises down the road at individual banks. It also promises to lengthen the economic slump by preventing markets from finding natural bottoms that allow excess inventory to be sold.

Fannie’s program shows how potentially big losses are still festering within the system, unbeknownst to investors.


The Debts of the Spenders: British Vermin Population Rises in Empty Buildings

A somewhat yellow piece of journalism. It's still a very lurid account and a nice break from reading about numbers and legal jargon all day long. It makes me wonder what the situation is like in US cities:

“Sometimes I drive into the car park and there are at least 20 of them in the bins,” said Paul Hood, 46, a north London resident. “You see them running away in the headlights. During the day, they just sit in the bushes sunbathing.”

As the biggest economic bust in 60 years fostered a boom for rodents, municipalities were called an estimated 700,000 times to deal with infestations in the last 12 months, compared with 650,000 the previous year, said Peter Crowden, chairman of National Pest Technicians Association Ltd.

The rat population has swollen by 13 percent this year to more than 50 million, one for every person living in England, according to an industry consensus cited by Crowden. Rats and mice are capable of spreading more than 35 diseases, including a fever inducing nausea and muscle aches passed to humans either via a bite or the rodent’s urine.


The Debts of the Lenders: Yen and Emerging Markets Snapshot

The yen looks like it could potentially weaken some more and provide further fuel for the bulls on stochastics. But the MACD and RSI aren't providing any stronger confirming signals.

A weak yen has an inverse relationship w/equities. Remember that the Nikkei is the second largest stock market in the world after the US and is dominated by exporters. Funds and other large institutions tend to take bigger risks on a weaker yen b/c of the carry trade. While the relationship is not as strong compared to US equities as it is w/the Japanese stock exchange, there is still a definite spillover effect. We do remain very overbought in US equities though.

I have also included a one month snapshot of emerging market sovereign bond spreads for your viewing pleasure. These are the EM and EM diversified spreads from Markit's CDX indices. Unlike CMBX (which switched over to price recently), basis pt spreads are still provided.

Some definite improvement since March lows but spreads are still rather wide. No surprise there since we are coming on the heels of Russian govt rate cuts earlier this week and further calming in E. Europe. Please keep in mind that although while fears of a E. Europe credit meltdown are no longer pervasive (see the recent rally in Deutsche Bank and other Eurozone lenders' share prices w/big exposure) spreads are still wide. And it is debatable whether or not the recent rally in European bank shares is the result of Washington led bailouts or actual bullish sentiment among traders. I am more inclined to lean towards the former than the latter.

The Debts of the Spenders: Insider Selling Increased During April

Not that surprising when you consider the extent of the rally. But the scale is.
See for yourself in this Bloomberg interview:

*Thanks to Erik and Prag Cap for pointing this out.

Thursday, April 23, 2009

The Debts of the Spenders: Too Much Rain Over Paradise (and not enough in others) - ENSO Conditions Turn Mostly Wet

North Dakota has yet to plant any wheat, according to the U.S. Department
of Agriculture. The average for this time of year is 12% planted, and the state had
planted 14% last year. The USDA said 6% of the total U.S. spring wheat crop was
planted as of April 20, up from 2% last week, but well behind the 21% average.

Source: Commodity News for Tomorrow by CME- DJ Newswire]

Ag trading has traditionally been dominated by weather concerns. Only in recent years has volume and speculation picked up. The formerly sleepy grains and softs pits are now more influenced by greater macro-economic trends such as currency fluctuations and spillover effects from equities.

In these times it's good to go back to the basics.

ENSO, or El Nino Southern Oscillation, refers to the weather phenomenon of the El Nino/La Nina cycle of the tropical Pacific Ocean. ENSO has the potential to disrupt the regular weather patterns in Asia, South America, Central America, and North America.

I am focusing on North America since that is where a large bulk of grains are concentrated (the others being Brazil and Argentina).

The consensus among satellite forecasts and climatologists is that we are entering an ENSO neutral phase of the year w/La Nina ending and El Nino beginning. [Edit: But w/a wet bias.] meaning more rain. And too much rain can delay the planting season.

It is also interesting to note that central and southern California as well as Georgia are beginning to show signs of drought risk. This is in stark contrast to other zones. Overall a bullish tone for ag bulls on the weather front for the next 2 months.


For those who miss the 1990's:


The Debts of the Spenders: UK Govt Disappoints REIT Industry

The Government made only minor tweaks to Reit regulations, including making it easier for tenanted pub groups, such as Enterprise Inns, to become a Reit.

Property investors and occupiers were also hoping the Government would lift or reduce the £1bn cost of imposing rates on empty buildings.

However the Chancellor's decision not to address the point in the Budget led to accusations he was piling pressure on landlords and retailers when they are more vulnerable.


Wednesday, April 22, 2009

The Debts of the Spenders: IASB Update - Meetings to Occur in June

I had previously written about IASB, or the International Accounting Standards Board, which is the international accounting rulemaker for non-US corporations and (most) government bodies.

IASB had fallen under pressure from European policymakers to follow similar "relaxations" of accounting standards for off balance sheet activity and level 3 assets. Unlike their cowardly counterparts at FASB, IASB members showed they actually have backbones and rebuffed this pressure. It also helped that the Europeans were divided (as usual) about the issue. The outcome was a non-event and a general postponement to conduct research and gather data (buy more time).

Here is the update: IASB is scheduling a series of 3 SEPARATE meetings in June. It will be a truly international affair w/the meetings set in Toronto, Tokyo, and London. Perhaps this time the views will be more expansive beyond those of old white men. After all, Asian and Middle Eastern investors continue to hold substantial amounts of US and European securities.

The round-table discussions will take place in Toronto on 1 and 2 June, in Tokyo on 8 and 9 June and in London on 15 and 16 June. Each session will be held in public. Interested parties are welcome to register through the IASB’s website on Please visit the project and meeting pages of the website also for further details on venue and the exact timing.


The Debts of the Lenders: Maintaining ZIRP Through JGB Corporate Purchases

Japan has been in a ZIRP driven economy for years now. So how do govt policymakers and corporate heads (they are often one and the same in the zaibatsu driven world of Japanese corporate politics) intend to maintain low rates at a time of massive fiscal stimulus?

Simple. Continue maintaining the paper shuffling game of govt bond issuance. JGBs or Japanese government bonds have historically been soaked up by the domestic market so they are not at risk of raising yields in the face of competition from the Eurozone or even other export driven economies. But even households are being hard pressed to maintain demand in the face of such relentless supply pressure.

So Tokyo's response has been to distribute corporate welfare in the form of bond sales. While this policy is not overtly stated you can read between the lines here. Perhaps Washington DC will enact something similar in a modification of its TARP program (after all US bureaucrats have already copied virtually everything about the deflationary response model from Japan).

=DJ Nippon Life To Put Most Of Y1T New Funds In Yen Bonds FY09


TOKYO (Dow Jones)--Nippon Life Insurance Co. plans to allocate most of the about Y1 trillion it has in new funds to yen-denominated bonds, especially in the superlong zone, during the fiscal year started April 1.

"We plan to allocate a large part of the new funds to yen-interest-rate assets, which provide stable income gains," said Tomiji Akabayashi, general manager of Nippon Life's finance and investment planning department.

"We'll limit the distribution of funds into risk assets other than yen bonds, and thoroughly monitor the effectiveness of our fund management plan around the clock," he added.

Among yen-denominated debt, Nippon Life mainly invest in 20-year Japanese government bonds, as well as 30-year JGBs, Akabayashi said.

Insurers usually manage their portfolios so that the life of the assets they hold matches the duration of their liabilities.

Nippon Life held Y18.6 trillion worth of domestic bonds at the end of March, an increase of Y1 trillion from the previous fiscal year. With Y44 trillion in assets in its general account, Nippon Life is Japan's largest life insurer.

Market participants closely monitor life insurers' fund allocation plans because the massive amounts of money the insurers manage can sway the market.

The Debts of the Spenders: LQD and HYG - Another Look at the Bond Markets

My roots are in equities so I decided to take a look at the credit markets from that angle. Below are 2 end of day snapshots for LQD and HYG, 2 etfs (exchange traded funds) that represent high grade (low yield) and low grade (high yield) corporate bonds respectively.

Talk of basis point spreads and CDS trading terminology still remains somewhat arcane to me since I have never worked at those desks. However, I can read the equities tape fairly well and it seems to correspond and confirm w/what the fixed income blogosphere has been saying - that spreads remain wide and the environment generally skeptical of the equities rally.

The Debts of the Spenders: CRE Correction

It appears I was a tad overoptimistic on the bullish side for CRE analysis. I am not a credit trader so there is a bit of a learning curve to overcome (I am focused on the equity and currency side).

Here are some more realistic assessments of the sector:

Tuesday, April 21, 2009

The Debts of the Spenders: Late April Update Narrower CRE Bond Spreads And Bridge Loans

Commercial real estate (CRE) spreads continued to narrow this week. AAA rated tranches continue to trade in a choppy (seemingly) directionless market. But big improvements are evident in the lower rated BBB tranches.

(These narrower spreads are another reason to avoid leveraged ETF funds such as SRS. If you are bearish on CRE then stick w/shorting individual REITs or even the non-levered ETFs such as IYR).

Source: Markit CMBX Indices

Institutional funds have begun to turn bullish on this sector w/comments such as this:

Richard Carswell, business development manager at OPM, which runs a multi-asset property fund, said restrictions on investors removing money from property vehicles had "artificially propped up" bricks and mortar valuations.

He said: "In any future general recovery in sentiment towards property, bricks and mortar will struggle to perform, while Reits, trading as they are on huge discounts to NAV, will substantially outperform bricks and mortar."

But Howard Meaney, head of property investment at LV=, said although losses for 2009 would total 10-15 per cent, declines could reverse in 2010 and recovery could begin in 2011.


How can this be? Commercial real estate spreads narrowing in the face of extremely bearish fundamentals?

But Jeff Bernstein, writer and all around real estate savant, has an alternate theory which he pens in an excellent article, "Loan Extensions - Bridge to Nowhere?"

Stalling tactics! Everywhere I look I see them. The Fed accepting shakier and shakier assets as loan collateral, mortgage forbearance programs and, increasingly, bank loan extensions. In fact, the whole TARP/TALF/PPIP monstrosity embodies it.


Monday, April 20, 2009

The Debts of the Spenders: Lower Market Liquidity, IRA Contributions, and Higher Unemployment

Critics have long contended that the US Labor Dept's unemployment figures are . . . . questionable (to say the least). The govt's refusal to acknowledge reality in the face of mounting evidence to the contrary has elicited scores of complaints from academics, journalists, and investors. However, it turns out that these fudged unemployment figures have another hidden cost besides the government's credibility: fewer IRA contributions.

Under IRA rules, EMPLOYEES are allowed to contribute a certain amount of money each year. With real unemployment on the rise contribution figures are set to fall significantly w/in the next year (if they have not done so already). Moreover, those fortunate to still be employed are exhibiting caution by foregoing contributions or even withdrawing early even in the face of harsh tax penalties to meet the daunting needs of a deflationary spiral where debts become more expensive to service.

Instead, the ranks of under-employed are growing w/recent graduates, immigrants, and even retirees continuing to work but doing so under the grey economy of a cash or even barter based exchange system. Unlike official wage earners (W2 reporting), the under-employed prefer to keep a low profile and avoid attention from the authorities. These cloaks of anonymity preclude them from making retirement contributions.

Finally, the US is beginning to enter the formative years of the baby boomer retirement. This generational shockwave will result in higher levels of withdrawals from retirement accounts: either to meet the needs of an elderly lifestyle and/or satisfy mandatory withdrawal requirements.

The end results are clear - lower inflows of retail investor funds into stocks, bonds, and other securities in the coming years. And w/lower inflows comes greater volatility.

Sunday, April 19, 2009

The Debts of the Spenders: QGRI Update (Nasdaq Government Relief index)

Back in January of this year, NASDAQ released an index that tracks a list of companies receiving government aid. The ticker is QGRI.

The list is not meant to be all inclusive but it does a pretty good job of consolidating corporate charity cases. As the ranks of incompetent companies grows so does the extent and largesse of the US government (realists also point out that the byzantine backdoors of public aid continue to expand in logarithmic proportions).

The QGRI index only contains 25 stocks but these companies share one thing in common - massive exposure to the shadow banking system. Luminaries such as Goldman Sachs, JP Morgan, Citigroup, Wells Fargo, and General Motors are among the top index components.

For a complete look:

Unsurprisingly, the index is generally green based on the 5 1/2 week US stock market rally built on mark to myth accounting and hedgie short covering. (For a more complete review of the stock market rally I recommend Tyler Durden of who covers this aspect in painstaking detail). However, the index is still marginally down for the year when compared against the S&P 500 and DJIA.

*Speculators will be disappointed to learn that the index does not yet offer any options.

Do NOT confuse QGRI w/Qatar General Insurance which shares the same ticker.

Saturday, April 18, 2009

The Debts of the Spenders:401(k)s and the ERISA Timebomb

Trial lawyers are already salivating over the next financial crisis and are sharpening their pencils in anticipation of ERISA 401(k) litigation.

ERISA, or the Employee Retirement Income Security Act, is a wide ranging federal statute that governs employee retirement plans for the PRIVATE industry. ERISA is an extremely complicated legal specialty that attorneys and legal academics can spend lifetimes poring over - which is the reason I will not go into too much detail for fear of tripping onto unrelated tangents.

Quite plainly, the bulk of the litigation will center on charges of breaches of fiduciary duty.

Fiduciary duties exist where one party has a legal obligation to support the interests of another. The fiduciary obligation is heightened when there is a special trust or reliance involved. For example, lawyers, accountants, and stock brokers are three common professions that frequently involve fiduciary duties to their clients. A breach occurs when that trust has been violated to the detriment of the client (and usually to the inverse benefit of the fiduciary).

Company CFOs, corporate human resources, and 401(k) plan sponsors should brace for a potential flood of ERISA litigation that is focused on breaches of fiduciary duty such as charges of fraud, self dealing, and lack of disclosure. Employees were fed a generation of mutual fund and plan sponsor propaganda that blurred the line between"saving" and "investing." While the fund management industry has historically centered on revenue sharing agreements (some would say "kickbacks") the lucrative arrangements form fertile ground for litigation on the aforementioned charges.

During the boom years these industry practices were overlooked in the name of expanding profits. But the receding waters of a deflationary asset spiral and revelations of outright fraud among some of the most storied fund managers (a la Bernie Madoff, Allen Stanford, and a host of other bad characters) are shedding harsh light on the bodies which had previously been submerged.

Understandably, many employees remain wary of 401(k) plans after the massive drubbing investors took in equities last fall and earlier this year. Many plans are still bleeding from outsized paper losses even after an historic 5 week stock market rally.

One of the most contentious areas is in company stock plans. Employees who contributed under a matching plan into the company stock face large losses and potential insolvency. For example: GM and LEH. Litigants in similar suits will be sure to invoke claims that they were denied full disclosure of the company's financial health. In many cases, these charges will even be accurate.

Friday, April 17, 2009

The Debts of the Spenders: Emerging Market Flows Pick Up

Is the stock market rally real? Regardless of fundamentals, the effect of ZIRP has pushed a lot of risk taking into emerging markets on both the equity and bond side from mid-March to mid-April. The emerging market bond spread is from Markit's CDX.EM index. Apparently not even recent turmoil in Thailand and Russia have put a dent in bond traders' confidence levels.

Here is a good summary of both the equities and bond side:

NEW YORK (Dow Jones)--Inflows of $1.7 billion into emerging-market equity funds posted a sixth straight week of net inflows on the week to April 15, with all regions receiving fresh money as risk appetite rebounded, fund tracker EPFR said Friday.

EMEA equity funds took in a net $28 million, their best showing since the third week of June 2008. Latin America-dedicated funds received $385 million, while emerging Asia fund took in $738 million. Geographically diversified Global Emerging Markets funds took in $619 million.
For the year, emerging market equity funds have received inflows of $7.3 billion, while developed market equity funds have had outflows of $56.1 billion.

As for bonds, emerging-markets bond funds enjoyed their best week since early August as risk premiums have shrunk, EPFR said.

Emerging-market bond fund took in $137 million on the week, with hard-currency funds took in $123 million, and local-currency funds had $15 million in outflows. Blended funds had inflows of $28 million.

-By Claudia Assis, Dow Jones Newswires

The Debts of the Spenders: Another Look at TIC Data - Foreign Official Institutional Flows

I had previously written about the large jump in Japanese institutional purchases of Treasuries. Here is a more detailed perspective:

Net foreign purchases of long-term securities were $22.0 billion.

  • Net foreign purchases of long-term U.S. securities were $20.8 billion. Of this, net purchases by private foreign investors were $25.9 billion, and net purchases by foreign official institutions were negative $5.1 billion.
  • U.S. residents sold a net $1.2 billion of long-term foreign securities.

Monthly net TIC flows were negative $97.0 billion. Of this, net foreign private flows were negative $106.3 billion, and net foreign official flows were positive $9.3 billion

Thursday, April 16, 2009

The Debts of the Lenders: TIC Data Confirms Yen Weakness for Early 2009

Scarcely 3 months ago, some forex commentators speculated that the USD/JPY would strengthen all the way to the low 80s/upper 70s. 2 and a half weeks ago, the USD/JPY had weakened further until was at 90. Now it is floating around the 100 range.

Have the Japanese fundamentals changed? Not exactly. Exports to the US remain weak as consumer spending is still on life support. BUT the demand for yen has slackened as Japanese households have become more confident and made a cautious return to risk by leaving JGBs (Japanese government bonds) and venturing slowly back to higher yielding investments in foreign shores. Evidence of such returns can be found in the cross pairs such as JPY/AUD, JPY/BRL, and JPY/CAD (3 commodity currencies).

But the biggest catalyst was the purchase of a net $27 billion increase in US treasuries (of all maturities) in February 2009. The bulk of this buying was probably government or institution oriented as the BOJ has run out of room to cut interest rates and has run into a large wall of public anger over government fiscal stimulus plans. Money managers and bureaucrats had to find new new ways to lend hard earned Japanese savings and found it in the traditional channel of subsidies to Uncle Sam.

Once again, however I caution readers that this is lagging data. March has been a singularly poor month for hedgies who - if one is to believe accounts from the financial blogosphere - were not particularly well positioned for the staggering equities rally. Many were caught net short and might face an increased demand to "unwind" their positions via the carry trade. Moreover, the yen is facing some technical weakness as short term it looks oversold on the stochs and MACD.

The Debts of the Lenders: Foreigners Sell $5 Billion of US Equities in Feb 2009

Not surprising when you consider that February was a horrible month for
equities. This data is a lagging indicator after all.

But the bigger picture becomes more apparent after you combine this
data w/news from other sources such as comments from the NYSE
Chairman that most institutional money has sat out the March equity
rally and analysis from the inimitable writers at Zero Hedge who have
covered the quant jockeys' control of the US stock market through
dark pool operations.


Wednesday, April 15, 2009

The Debts of the Spenders: US Tea Parties Rally Nation

Patriots took to the streets to protest a nation's spending binge gone mad. Months of bad bank bailouts, poorly planned public works, and the continued outsourcing of US jobs to foreign shores found outlets in ranks of angry protesters. Like any nascent "movement", the protesters came from diverse backgrounds. While this is an indication of how widespread public anger has grown, the varied nature of the protesters makes them vulnerable to co-optation by larger institutional players, such as the embattled Republican Party, eager to use them to further their own ends.

FRANKFORT, Ky. – Whipped up by conservative commentators and bloggers, tens of thousands of protesters staged "tea parties" around the country Wednesday to tap into the collective angst stirred up by a bad economy, government spending and bailouts. The rallies were directed at President Barack Obama's new administration on a symbolic day: the deadline to file income taxes. Protesters even threw what appeared to be a box of tea bags toward the White House, causing a brief lockdown at the compound.


The Debts of the Lenders: Asia Re-Affirms Commitment To Treasuries In TIC Data

Despite months of angry rhetoric about the debasing of the US dollar China continued to purchase bonds throughout February 2009. Hong Kong and Caribbean banking centers registered increases in treasury purchases (2 widely acknowledged Chinese "backdoor" capital outlets).

The biggest increase in Treasury purchases was Japan at + 27 billion and comprised the largest increase in Asian acquisitions.


The Debts of the Spenders: The Mathematical Decay of Leveraged ETFs

In volatile times, the retail investor has been offered the opportunity to "self-hedge"through leveraged ETFs (electronically traded funds) which are basically mutual funds on steroids.

These are daytrader tools and should be used only for those looking to make quick in and out exits and entries. Otherwise the mathematical decay inherent in the re-balancing of the net asset value (NAV) will debase the funds faster than Bernanke at the printing press.

Savvy traders know that it's better to hedge the old fashioned way - through normal options or even futures. Speculators can also buy single otm options several months in advance and simply wait for the inevitable decay to set in.

Even the CME agrees in its own report:

In volatile markets (similar to those in the third and fourth quarter of 2008), the self-hedged portfolio of leveraged ETFs actually delivered net losses upwards of 7 percent in a month.

Saturday, April 11, 2009

The Debts of the Spenders: US Grain Futures

While much of the financial blogosphere remains riveted on the continuing drama of banking bubbles, another market has been quietly but steadily preparing itself for the inflationary effects of a jobless US recovery.

The Chicago and Kansas trading floors (the grains pits and their electronic equivalents) are more often associated w/more traditional and somewhat boring commodity traders. Unlike the sexy OTC market of off balance sheet derivatives, questionable bond spreads, and no limit political Texas Hold'Em, grains traders are a stodgy bunch. They operate under something called RULES, TRANSPARENCY, and MARGIN. Old fashioned concepts to be sure but we are talking about your dad's generation of traders and not a bunch of jumped up quants pushing arcane black box models.

For a brief shining moment last summer and spring the grain traders were able to feel the heat of the world's spotlight when corn breached $7 and the world press could not repeat the words "ethanol" and "oil alternative" enough. Then came the deflationary plunge in the fall and winter.
Fortunes were lost and agriculture hedging desks were crucified at the packaged food conglomerates.

But agriculture traders are a hardy and resistant lot. Their business is built around cycles and the ageless rhythm of the seasons. (Trivia tip - did you know that agriculture traders were the first to invent futures trading and technical analysis? Ancient Egyptian and feudal Japanese traders used cycle analysis and candlesticks respectively).

Savvy traders knew that the fundamentals have not changed - in fact they have become more bullish than ever. The world economic crisis has transformed from individual government money printing (US and G7) to coordinated money printing (G20 and pan-Asian fiscal stimuli attempts).

Commodity guru Jim Rogers has often pointed out that farmers are not getting any younger (populated w/aging boomers the world over) while the global population continues to increase.

Bullish US grain traders agreed and booked a solid month of profits for March and early April based off the USDA reports. Prices were mixed as of Thursday's close but sentiment remains bullish ahead of strong fundamentals.

Here are some highlights for this season:

-USDA Raises Forecast For US 2008-09 Soybean Exports

The U.S. Department of Agriculture said Thursday that it is increasing its U.S. soybean export forecast for the 2008-09 marketing year to a record-high 1.21 billion
bushels, up from the March prediction of 1.185 billion.

-USDA Lowers Forecast For 2008-09 US Wheat Ending Stocks

The U.S. Department of Agriculture lowered its forecast for U.S. wheat ending stocks for the 2008-09 marketing year by 16 million bushels just a month after raising that forecast by 57 million bushels.

The new ending stocks forecast, released Thursday with the USDA’s monthly
World Agricultural Supply and Demand Estimates report, is 696 million bushels, up
from the March forecast of 712 million bushels. On March 11, the USDA set that
712-million-bushel forecast by raising it from the February forecast of 655 million

-Global Soybean Prices Likely To Rise Further In ‘09 - Indus

Global soybean prices are likely to rise further later this year, fueled by sustained Chinese demand, industry participants attending a grain and oils conference said Thursday. “Soybean prices have room to go up” further as China’s edible oil demand is expected to grow by 3%-4% this year, based on the assumption that the country’s gross domestic product will grow by 6%, Robert Horster, risk director of Cargill Investments (China) Ltd., said at a conference held by the China National Grain and Oils Information Center.

-USDA Sharply Lowers US Rice End Stocks Forecast

The U.S. Department of Agriculture on Thursday lowered its 2008-09 forecast for U.S. rice ending stocks to just 22.2 million hundredweight, down from the March
prediction of 30.2 million hundredweight.

“All rice ending stocks are projected ... 27% below last month and the lowest stocks since 1998-99,” the USDA said in its monthly World Agricultural Supply and Demand Estimates report.

Source: Commodity News for Tomorrow CME Report For Thursday, April 9, 2009

Thursday, April 9, 2009

The Debts of the Spenders: Inflationary Impact on P/E, Corporate Taxes, And Asset Values

While bears continue to moan about the fundamentals the administration is setting the grounds for an economic recovery and higher interest rates. To be fair, I am as bearish as anyone on the bullish prospects but it's suicide to fight the tape. Go w/the flow.

A 3 day holiday weekend, light volume, and technical selling in the forex markets are all indications of the MM's pushing the tape to the bull side [EDIT: also Vix <40]. Just like they did in Thanksgiving and Christmas.

Meanwhile, here is an excellent piece of analysis that I came across:

The Obama administration and the US Congress are laying the foundations for high inflation when the economy eventually recovers from the recession.

US equity investors should be ready for the effect that a rapidly devaluating currency may have on earnings-per-shares and price-earnings ratios.

How inflation increases corporate taxes

Companies with fixed assets are usually allowed to deduct the depreciation of these assets based on historical cost.

For example, if a company buys a machine for $10 million with an expected life of 10 years and no residual value, it may be able to deduct $1 million a year from income, thereby effectively reducing its tax burden.

When inflation is three percent a year, the tax benefit from depreciation will be reduced by about 15% over a ten year period, compared to the real value of the deduction that would have accrued in a non-inflationary environment.

However, if inflation were to run 25% over a ten year period — as has occurred in developing economies that can’t get government spending under control, the tax benefit from depreciation will be reduced by 76%.

For companies with substantial fixed assets and the need to replace depreciating equipment, high inflation, combined with declining deductions for deprecation, in real terms, will effectively increase their corporate tax burden, reducing cash reserves, and threatening continued operations.

Since, under inflation, government spending is out of control, the authorities are not amenable to lowering taxes, forcing corporations to increase prices faster than current inflation to stay in business.

This leads to even higher inflation.


Wednesday, April 8, 2009

The Debts of the Spenders: Pension Tension and Derivative Problems w/GASB 43, 45, and 53

Since we are in an accounting frame of mind (especially after the ratings downgrade of municipal bonds released earlier this week), I have decided to revisit an old topic of mine that I wrote extensively about back in academia.

GASB 43 and 45. You MUST understand these accounting rules if you are investing in annuities, muni bonds, or anything linked to state and local finance. They are the equivalent of M2M for ALL non-federal US governments that mark PENSION costs at fair value instead of the old method of cash outlays for the fiscal year. GASB stands for Government Accounting Standards Board and is the public sector equivalent of FASB.

GASB 43 and 45 are unlikely to go away anytime soon. States have already spent billions in complying with these rule changes. Since state governments often have constitutional mandates to have balanced budgets this has led to strained tensions w/ratings agencies and institutional bond buyers.

But wait. In fact, it gets a lot worse.

Did you know govts were trading derivatives too? Their exposure to "swaptions" or OTC bilateral derivatives w/private banking is already spelling trouble. But this summer should really become interesting w/the advent of GASB 53.

"Governments are required to implement Statement 53 for periods beginning after June 15, 2009. Early application is encouraged."

Not only are state and local governments already marking pension outlays to fair value but soon they can add derivative losses as well by this summer!


So public pensions (teachers, police, and fire unions) will claim that they "MUST meet contractual obligations legally" and raise taxes on people who have no jobs, can't earn interest income on their savings, and who increasingly lack medical insurance. The end result is that government workers are making more in retirement than they ever did on salary.

At some point people are going to get angry.

The Debts of the Spenders: The Job Search Bubble

These days it seems that there is more money to be made in selling services to the unemployed
. . . than to the employed. It's not so strange really.

Leaving aside the questionable government statistics on unemployment and other macro data, the unemployed ranks continue to grow and w/it comes individual frustration and desperation.

A cynic might even go so far as to say that these people are being exploited b/c of their circumstances.

Tuesday, April 7, 2009

The Debts of the Spenders: Summary of Rail Freight Traffic

Rail freight traffic is a critical component of greater macro-economic activity. Traders also look at the DJ Transportation Average which remains heavily weighted towards railroads.

Railfax offers an excellent summary of US Rail Traffic.

The numbers look quite bearish. For more information go to their web site.

Monday, April 6, 2009

The Debts of the Spenders: European Leaders Pressure IASB to Follow FASB M2M Changes

Hmmm. Looks like I was a bit premature in saying that IASB would get to preserve its independent status. European finance ministers are also facing pressure from banking lobbyists to game their numbers. So far, IASB is resisting the pressure admirably.

In predictable fashion, the Europeans remain divided about the best path(s) to follow. The ECB has remained traditionally cautious about inflation while the peripheral EU states are all too aware of their lack of leverage (pun intended) in the sovereign bond markets. However, that is not to say that IASB will not follow through w/a similar accounting modification of fair value rules. M2M is a convenient scapegoat for political posturing.

Any sort of modification or even suspension of accounting rules could result in one of the biggest head fakes of 2009. Although banks will be able to mark their illiquid assets higher (watch for those Level 3 asset disclosures in the footnotes) reality will bite back even more viciously further down the road.

The greater macro-economy is not improving. Housing prices continue to slide - both in the US and abroad. Commercial property values are falling. Unemployment continues to climb month after month. More starkly tax revenues are falling while public aid is rising.

The only reason why there is a period of temporary "recovery" is b/c basis point spreads have narrowed in the credit markets - and only then b/c of unprecedented government money printing.

Banks MAY be able to avoid facing further losses by transferring their debt burdens onto an increasingly skeptical and angry public but at the cost of increasing the debts of a nation.

There is a limit after all to quantitative easing - and it is called basic supply and demand. Interest rates WILL rise in the future. The only question is not "IF" but "WHEN."

[EDIT: I cut most of the newswire story over copyright concerns. If you are interested in reading the full thing or wish to comment to the writers I have left their names. ]

=DJ ECOFIN: E.U. Fin Mins Calls For New Acconting Rules
By Gabriele Parussini and Leos Rousek


PRAGUE (Dow Jones)--European finance ministers pointed to recent changes to U.S. accounting rules as a source of concern, with most clamoring that European rules also change to avoid giving U.S. banks a competitive advantage.

"We need a level playing field," said French Finance Minister Christine Lagarde. She cited an "urgent need to reexamine accounting principles."

Her colleagues at the informal two-day summit in Prague that ended Saturday agreed, issuing a statement calling for the issue to be addressed "immediately" and noting the U.S. rules "could provide (U.S.) financial institutions with much more flexiblity" to navigate the current credit crisis.

But Swedish Finance Minister Anders Borg warned that, while global accounting standards should be uniform, they should also be rigorous. "For us, it's also very important that the value of an asset is the value of an asset," he told Dow Jones Newswires.

"Accounting rules appear cold and technical but ideologies lurk within them," said Giulio Tremonti, Italy's' finance minister.

"The Americans, who were supporting the mark-to-market principle, suddenly changed their minds," he added. "Europe should follow."

France's Lagarde said that the region's finance ministers will ask the European Commission to pressure the International Accounting Standards Board, or IASB, to "examine the modifications needed for the valorization of impaired assets."

In their joint statement, the ministers said the U.S. rule changes were made "with the aim of accurate valuation of assets in illiquid markets."

Sweden's Borg, however, sounded a note of caution. "If there are problems within a balance sheet, we don't solve the problem by hiding it," he said.k "The principle of transparency is the most efficient way of dealing with this problem of impaired assets."

By Gabriele Parussini, Leos Rousek, and Christopher Emsden, Dow Jones Newswires;

(END) Dow Jones Newswires
04-04-09 0927ET
Copyright (c) 2009 Dow Jones & Company, Inc.

The Debts of the Spenders: Peter Schiff on M2M Changes

Peter Schiff is a notorious goldbug, that particular breed of perma-bear that believes gold is the answer to everything. While I don't normally take goldbugs that seriously b/c of their more outlandish conspiracy theories, they serve useful functions as heralds of approaching storms.

And there are many storms brewing in 2009.

Mr. Schiff is on point here w/his criticism of FASB's changes. He also could not resist a parting shot at Obama (Schiff was the economic adviser for Ron Paul):

Despite the pleas from bankers and politicians, mortgages are not plagued by a lack of liquidity but a lack of value. If sellers would be more negotiable, there would be plenty of liquidity. Who knows, at the right price I might even buy a few. The problem is that putting a market price on these assets would render most financial institutions insolvent, which is precisely why they do not want to let that happen.

Going from the sublime to the completely ridiculous, in a speech at the just-concluded G20 summit in London, President Obama urged Americans not to let their fears crimp their spending. It would be unwise, he argued, for Americans to let the fear of job loss, lack of savings, unpaid bills, credit card debt or student loans deter them from making major purchases. According to the president, "we must spend now as an investment for the future." So in this land of imagination (where subprime mortgages are valued at par), instead of saving for the future, we must spend for the future.


The Debts of the Spenders: Bill Moyers - US Financial System Is A Ponzi Scheme

This video has been circulating on various blogs for a few days now. The message is not new for long time readers, academics, and traders who are all too familiar w/the root causes of the economic debacle. But what is different is how the mainstream media has now caught on to the blatant theft and lies foisted upon the public.

After watching it, I believe the video should be required viewing - even if many of the points are already familiar - simply b/c the speakers speak of complex matters in plain English (which after all is the theme of this web site).

The Debts of the Spenders: Quantitative Easing Might Fail the UK

Remember my earlier post about watching the UK for signs of hyper-inflation?

Or the various Jim Rogers videos about the UK's fiscal stimulus programs?

[Edit - I have cut most of the story over copyright concerns. You can read the full thing by contacting DJ Newswire].
=DJ HEARD ON THE STREET: UK Treasury Faces Hard Choices


So severe is the deterioration in the U.K. public finances that when Chancellor Alistair Darling delivers his budget on April 22, he will have to make some very hard choices indeed.

Public borrowing is likely to overshoot Mr. Darling's forecast by £17 billion ($25.24 billion) this year alone, according to the Institute of Fiscal Studies. By 2015/16, it reckons, public-sector net debt will have risen to 81.4% if one includes the International Monetary Fund's estimate of £130 billion of U.K. losses from financial-sector bailouts. To balance the budget by then, Mr. Darling must find an extra £39 billion per year, equivalent to 2.7% of gross domestic product.

Given the fragility of the U.K. tax base, with corporate and income tax receipts likely to be structurally lower as a result of the collapse in the City of London, that should mean spending cuts rather than tax increases that might drive companies and individuals offshore. The IFS reckons he would have to freeze spending for five years to fill the black hole in the accounts. That would mean deep spending cuts for many departments.

Whether Mr. Darling has the political strength for an austere budget a year away from an election amid rising unemployment must be open to doubt. But failure to act threatens an even worse outcome: rising inflation and a showdown with the Bank of England. BOE Governor Mervyn King has already warned that any further fiscal stimulus could push up inflation -- already persistently higher than the BOE's forecasts -- which, if left unchecked, could raise doubts about the credibility of the BOE's inflation target.

That could leave the government facing the hardest choice of all: whether to allow the BOE to put up interest rates in a recession and abandon quantitative easing, thereby forfeiting the ability to monetize its debt; or, to remove the BOE's inflation target -- and with it, risk destroying what remains of the U.K.'s financial credibility.

(END) Dow Jones Newswires
04-06-09 1415ET

The Debts of the Spenders: US Office Rents Drop the Most in 7 Years

Prepare for a "jobless recovery" as employers continue to scale back hiring and cut back on office expansion.

"You really only fell off the cliff in the fourth quarter 2008," Victor Calanog, Reis director of research, said. "It's really sobering to see that even though we're technically at the beginning of this downturn, the magnitudes of the declines, the fact that they're registering historic levels, is really sobering."

The declines in rent and occupancy along with frozen credit markets could accelerate delinquency rates for U.S. office buildings, Reis said. Not only will borrowers find it difficult to refinance maturing loans, declining fundamentals will erode property values.


Sunday, April 5, 2009

The Debts of the Lenders: The Return of the Carry Trade?

Perhaps I should re-classify Japan under the "Debts of the Spenders" after considering the adventures in extreme money printing that BOJ bankers and Tokyo politicians have embarked on in the past few months.

The yen-dollar pair broke psychological resistance of 100 at the end of last week. Some bullish commentators (remember - USD/JPY trades INVERSELY so a weaker yen is indicative of a return to risk taking) are calling for a return to >110 levels which haven't been seen since last August.

Has the economic situation on the ground improved?

Errr..... not exactly. But trillions in central banker liquidity are definitely having an effect in the currency markets.

However, caution lies ahead! Aside from Q1 earnings and a still (relatively) strong dollar, the economic situation in both Japan and the US seems more indicative of traders fleeing the yen in search of another safe haven currency. De-leveraging is largely over but some trades still need to be unwound - especially the disastrous hedgie arbitrage trades in mid-March that sought to take advantage of a short common equity of financials/long preferred equity of financials play.

A vicious short squeeze in Citibank (the most widely known example but there were other financial bank names involved) decimated hedgie accounts and sparked a nearly 3 week stock market rally as panicked shorts scrambled to cover in the face of what the media has dubbed a "return to normality" and has sucked in a lot of retail money in the past few weeks.

So will the yen keep on weakening? And by extension will the equity rally continue?

Watch the Aussie this Tuesday.

The RBA (Royal Bank of Australia) is making a rate announcement on April 7 (this Tuesday) while the BOJ is scheduled to give a press conference the same day.

Why am I bringing the Aussie into this discussion?

Remember, the Aussie is a "commodity currency" and along w/the Brazilian real, New Zealand Kiwi, and (arguably) the Canadian Loonie, the cross pair trades against the yen represent the clearest direction of risk as seen through INSTITUTIONAL currency money flows. Surging or declining commodity prices are reflected in the countries that depend on commodity exports for the majority of their GDP.

Friday, April 3, 2009

The Debts of the Spenders: CDX Spreads Narrow

Corporate bond spreads are finally beginning to show some improvement as they belatedly catch up to the equity rally. Slight improvements are apparent in HY (high yield) junk bonds while the IG (investment grade) trades at a narrowed basis pt spread.

The way to read these graphs is simple: spreads are inversely related to price. As the spreads narrow, or decline, index prices improve. The falling spreads go a great deal towards explaining what has been eluding equity T/A chartists - that despite remaining in overbought conditions the rally may persist for a while longer as SENTIMENT and investor psychology improves.

Trillions of taxpayer dollars pumped into the system are having a more pronounced effect.
Will it last? Hey -all it takes to produce fresh capital is a single push of a button by bureaucrats to mint fresh cash or monetize existing government debt. The end road of course is stagflation - little to no economic growth in the face of rising interest rates. Commodities do well in such an environment. Fixed income does not.

Source: Markit's CDX Indices

EDIT: In case you couldn't tell the HY is the one w/the bigger spreads. IG is the one w/smaller spreads.

The Debts of the Spenders: Charles Weil of the FHLB Resigns

It's nice to know that there are some honest government figures still out there:

Bowsher, who was comptroller general of the U.S. from 1981 to 1996, had a simple reason for resigning last week as chairman of the Federal Home Loan Bank System’s Office of Finance. He didn’t want to put his name on the banks’ combined financial statements, because he was uncomfortable vouching for them. Bowsher, 77, had held the post since April 2007.

The job Bowsher left is a crucial one. The Office of Finance issues and services all the debt for the 12 regional Federal Home Loan Banks. That’s a lot of debt -- $1.26 trillion as of Dec. 31, making the FHLBank System the largest U.S. borrower after the federal government. The government-chartered banks, which operate independently, in turn supply low-cost loans to their 8,100 member banks and finance companies. If any of the FHLBanks were to fail, taxpayers could be on the hook.

Now the question for taxpayers is this: If Charles Bowsher can’t get comfortable with these banks’ financial statements, why should anybody else be?


The Debts of the Spenders: IASB Refuses to Follow FASB Footsteps In M2M Changes

Translation: Bye bye European banks. (EDIT: Please do not rush out to short European banks. Depending on your time frame you can get crushed. Again see the legal disclaimer. Do your own due diligence and research. W/political intervention a part of daily trading even the zombie banks can manage a decent dead cat bounce or two).

It seems that at least people overseas are somewhat intelligent about financial matters. Hiding hideous losses under pretend accounting has never worked. At least IASB has the guts not to fold before political posturing . . . . . so far. For those who have been living under a rock, FASB caved in to Congressional pressure when politicians desperate to protect their lobbyist friends on Wall Street issued a de facto order to change accounting rules. The vote was approved yesterday for certain modifications to mark to market, or "fair value" accounting.

DJ Intl Acctg Board: No Change For Now In Fair-Value Rules -FT


The International Accounting Standards Board has announced it won't follow the lead of its U.S. counterpart, which agreed Thursday to ease "mark to market" rules in a bid to boost banks' finances, the Financial Times reported Friday.

Banks that follow the London-based IASB's rules therefore won't get the break conceived for their U.S. rivals by the Financial Accounting Standards Board's unexpectedly swift move away from so-called fair-value accounting.

The IASB, whose rules apply in more than 100 countries, including those of the European Union, has said it will instead proceed with a full, faster review of how it accounts for financial instruments. A draft proposal is expected in less than six months.

Many U.S. banks had urged relaxation of the rules, saying it was unfair to be forced to peg investments' value to market fluctuations, resulting in big losses, when such ups and downs are temporary.

Full story at ... abdc0.html

Thursday, April 2, 2009

Profile Update

I updated my profile for those who are curious. This was always sitting in the back of my mind as something to do. After getting email questions from some people that kept mis-pronouncing or mis-spelling the name I felt that I had to offer some clarification.

So there you go. Just click on "About Me" to the left.

The Debts of the Spenders: Trichet Confirms Eurozone Bond Fears w/Lower Rate Cut

The ever cautious ECB cut rates by 25 basis points. This is a clear signal that Trichet and other Eurozone central bankers are fearful of the bond beast. As I have said many times before, the ECB has less room to maneuver w/quantitative easing than other nations such as the USA, Japan, or even the UK. These 3 nations are giant vacuum cleaners that threaten to suck out all the demand from the sovereign savers (the Debts of the Lenders which I call here).

Sovereign savers such as China, Japan, and S. Korea are more economically wed to America and the dollar than they are to the Euro. Why? For one thing, their economic co-dependency has been over 50 years in the making - an outgrowth of Pacific trade policy. The same cannot be said of the Socialist Europeans which don't produce anything signficant except overpriced luxury exports - which are hardly in demand at this economic juncture - and a bloated public sector.

As for the UK, their quantitative easing support derives strongly from the Middle East oil exporters which maintain significant financial outlets in the City of London (not to mention in psuedo-tax shelters such as the Isle of Man). Gulf Arabs have a love/hate cultural co-dependency w/the UK that extends beyond the financial realm to cultural and social affairs. This is a colonial era legacy that continues to cloud the minds of the ruling elite of Saudi Arabia, Kuwait, etc. w/delusions of British grandeur.

While the sun may have already set for the British Empire in terms of real politik, the same cannot be said of the colonial mentality that continues to instill a subdued environment of cultural inferiority among the Arab elite. If you think I am joking then take the expat culture for example - Western (e.g. Caucasian) managers remain preferred hires in many business circles as they are perceived to add a veil of "legitimacy" to business dealings. To be fair the same thing can be said of Asian businesses.

But I digress. Trichet issued vague assurances that the ECB would issue more substantive details in the future about quantitative easing. What he really meant is that the Eurozone has yet to get its financial house in order. In fact, some savvy traders have already capitalized on the structural imbalances of the Maastricht Treaty to short the sovereign bonds of peripheral member EU states (e.g. in anticipation of higher yields) b/c there is no such thing as a "Eurobond".

Wednesday, April 1, 2009

The Debts of the Lenders: Another Look at China's SDR Proposal

China stunned markets earlier last week when it openly challenged dollar hegemony by calling for an alternate reserve currency. The markets have since recovered and have basically called China's bluff as nothing more than political posturing ahead of the G20 meeting later this week.

Today both Chinese and US officials refused to comment on any currency negotiation except to say that it is off the table . . . . for now.

However, that does not change China's displeasure w/American fiscal profligacy. So, w/that in mind let us take a closer look at the SDR or special drawing rights.

SDRs are a form of "currency" that is composed of a basket of currencies. In the past that basket has traditionally been composed of major G7 currencies such as the Dollar, the British Pound, the Euro (the German Mark and French Franc before the Eurozone's integration) and the Japanese Yen. SDRs are not true currencies in the sense that they can be freely traded at the retail level.

Instead SDRs are an INSTITUTIONAL form of "currency" which acts more like a claim or ticket w/a supra-national body such as the IMF and other international organizations. In other words the SDR is an INTERNAL accounting unit. The value is more political than economic as you will be unable to find any commercial banks that trade in such things.

Goldbugs will perk up b/c the SDR has a history of being tied to paper gold and silver. But that is a tangent which I will not explore further here.

China created an immense buzz by suggesting - through both words and actions - that it would move to circumvent dollar hegemony by inserting its currency, the Yuan, as a 5th possible component of the SDR currency basket.

Will it happen?

Slowly but steadily. But any substantive change is unlikely to happen w/in the next 2 weeks.

Instead, I encourage readers to focus on the fundamentals - The Debts of the Spenders (G7 countries) and the Debts of the Lenders (emerging markets like China and the Arab oil states).

Dollar imbalances generated from a generation of cheap labor and commodity sales have contributed significantly to the current deflationary environment. The search is on to find a new "safe haven" (translation - a new borrower nation or group of nations) away from the dollar.

In the immediate forefront is the Eurozone's desperate attempt to fuel further bond offerings. Unlike Washington, London, and Tokyo, Asian lenders are less familiar w/(e.g. fewer trade ties) w/the EU. While China may have critical ties to INDIVIDUAL Eurozone nations like Germany they have fewer stakes w/the peripheral members such as Spain or Greece.

Therefore there is LESS of an incentive for China, Japan, or any savings rich nation to buy the sovereign bonds of the Eurozone. While they MIGHT buy German or French bonds the underlying structural flaw of the Maastricht Treaty prevents Spain and Greece from debasing their currency as they have in the past. This amounts to further pain for the stronger members like Germany which are pressured to bailout the periphery. That is something few German taxpayers would want.

So, the Chinese solution has been to form some sort of peripheral "body w/in a body" that has supervisory authority over debtor nations like the USA and can dictate spending terms. While this is par for the course in the corporate lending world such notions brush against political complications in the sovereign legal realm.

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