Wednesday, July 29, 2009

The Debts of the Lenders: Chinese Bubble Continues To Grow Larger

Credit *bobb513, Gato.chan, Clair_Hayashi, panicof2009

A major disconnect between reality continues to accelerate. One wonders how many shares the smart money is selling into. . . . oh wait - we know where and who already - it was the biggest 1 day drop since 2008 in other sectors.

Keep in mind that there is NO SHORT SELLING ALLOWED in Chinese markets.

The significance behind no short selling is simple - in a period of forced liquidation ( such as a stock market panic ) there is NO bid to catch the ask. Or at least anything remotely near the asking price. And so the ask will keep on dropping until it hits a lower bid. Throw in market orders and you have a formula for a spectacular crash.

Well, savvy and well connected institutional shorts are shorting the credit spreads on CDS (but you have to be an institutional player to play that game). No problem though, the resulting loss paid out by the CDS sellers will be paid out by the taxpayers . . . . again.

July 29 (Bloomberg) -- China State Construction Engineering Corp. jumped 56 percent on its first trading day in Shanghai as confidence in the nation’s economic recovery stoked demand for the world’s largest initial public offering in 16 months.

The biggest drop in Shanghai’s benchmark index in eight months today failed to curb enthusiasm for State Construction stock, which was sold at a higher valuation than China’s four previous IPOs this year. The gain underscores the difficulties the securities regulator faces in reining in speculation on IPO stocks partly driven by record lending.

“The macroeconomic conditions are probably not as positive as we think,” said Xu Jiulong, a Shenzhen-based funds manager at Greatwall Fund Management Co., which oversees more than 9 billion yuan ($1.3 billion). “State Construction is too expensive. The surge is unsupported by its earnings.”

State Construction’s closing price values the stock at 42 times last year’s profit, according to Bloomberg data. The Shanghai Composite Index sank 5 percent, the biggest loss since Nov. 18, tempering a rally that pushed China past Japan as the world’s second-largest stock market by value this month.

“Feverish investor sentiment is driving up the stock price,” said Wang Xiaoyong, a Shenzhen-based analyst at China Merchants Securities Co.

Trading in State Construction shares surpassed the 2 billion end-of-day volume in PetroChina Co.’s Shanghai debut in November 2007. Activity also eclipsed the 2.6 billion shares traded in Industrial & Commercial Bank of China Ltd. on its first day in October 2006.

Chinese demand for IPOs was bottled up after the securities regulator halted first-time sales for nine months to aid a stock market recovery. Companies who sold shares in Shanghai or Shenzhen last year gained an average 152 percent on debut, according to data compiled by Bloomberg.

The Debts of the Spenders: Fungus Attacking US Corn Crop

In comparison to the bearish wheat picture, corn's prospects are improving after a heavy beating since early June.

Fungus Flourishing During Mild Summer, Attacking US Corn Crop

Periodic rains and mild temperatures, while providing what have been perceived as near-perfect growing conditions for crops, have also caused an explosion of disease in U.S. corn fields this summer, threatening to slice yields across the corn belt.

The moist, cool weather has kept corn plants from coming under stress during the yield-crucial pollination period, but Farm Futures market analyst Bryce Knorr pointed out that despite the favorable growing conditions, Monday’s U.S. Department of Agriculture crop progress report “showed corn conditions slipping around three-quarters of a bushel nationwide.”

Source: CME News For Tomorrow

The Debts of the Spenders: Monster Wheat Crop for 2009?

Bearish for wheat if true. But the conclusiver reports will come from USDA reports.

US Wheat Tour: First Day Shows “Monster” Yield Potential

Field surveys on the first day of the Wheat Quality Council’s annual U.S. spring wheat tour showed the crop has the potential to produce the highest yield in years, scouts said.

Based on surveys on 165 fields Tuesday, the average yield calculated for hard red spring wheat was 45.7 bushels per acre, up from the 37.6 bushels last year. That is the highest yield calculated on the first day of the tour since at least 2001, according to data from the council.

“This obviously is a monster crop so far on the first day,” a veteran tour scout said. The tour’s estimate for the day seemed to be “right on” in reflecting the crop’s strong potential, said Ben Handcock, executive vice president of the council. HRS wheat, used to make bread, benefited from “great subsoil moisture” after a wet spring, he said. Cool weather this summer also has given the crop time to develop after being planted late due to the wet, cool spring.
“I think it’s a tremendous crop, Handcock said.

The 2009 Hard Spring Wheat and Durum Tour kicked off Tuesday morning from Fargo, N.D., as about 55 crop scouts - including representatives of the milling and baking industries, universities, grain groups and the media - fanned out on different routes across North Dakota.

Some routes also stretched into western Minnesota and northern South Dakota. Scouts met up in Mandan, N.D, to compare notes. In addition to HRS wheat, crop scouts surveyed five fields of durum, used to make pasta, and 14 fields of hard red winter wheat, used to make bread. The average calculated yield for HRW wheat was 49.3 bushels, up from 45.9 bushels last year.

The average calculated yield for durum was 44.2 bushels, up from 27.4 bushels last year. Scouts expect to see more durum fields Wednesday. HRS wheat and durum yields last year
were hurt by hot, dry weather in western North Dakota. By contrast, wetness in the west this year is expected to help boost North Dakota’s production.

In general, wheat had minor problems with diseases like smut and tan spot but did not show serious disease pressure, scouts said. There were reports of dry topsoil in some areas, including parts of eastern North Dakota that have not seen much rain lately, they said.

A scout on one route that headed south from Fargo and then west into Ransom, Lamoure and Logan counties said moisture looked “a little bit short, but it didn’t look like the plants were suffering from it.” A scout who headed north from Fargo said conditions looked dry heading into Griggs County and that wheat “looked stressed a little bit.”

There were reports of pests in wheat fields, including grasshoppers, aphids and wheat stem maggots. They can reduce grain quality and yield by eating away at plants, but the infestations were described as minor. HRS wheat is generally less mature than normal this year due to the late planting and cool summer, scouts said.

Many estimated it would be about four weeks until the spring wheat harvest could begin. Winter wheat, meanwhile, is nearly ready to cut, they said. The delayed planting of spring wheat was evident as scouts saw “unevenness” in the crop as the tour headed west from Fargo, a veteran scout said. The health of fields also looked “widely variable” because some farmers applied fungicides and ample fertilizer while others did not, one producer on the tour said.

Handcock said he expected scouts on Wednesday would continue to see generally good-looking wheat. Tour participants will depart Mandan and meet up in Devils Lake, N.D., to compare notes after a second full day of surveys.

The tour concludes Thursday in Fargo with the release of final yield estimates around 3:45 p.m. EDT. The tour does not issue a production estimate.

Source: CME News For Tomorrow

Sunday, July 26, 2009

The Debts of the Lenders: Chinese Universities Faking Job Contracts For Recent Grads

Article by way of mpettis - scroll to bottom to see link

Well this is one way of ensuring that everyone has a job upon graduation - simply make them up!

Truly disturbing if this is true. It says the Chinese bubble is precariously close to bursting.

But please keep in mind that the VERY HEAVY hand of the state is omnipresent in China. If anything, employment is probably growing in the state security services to quell dissenters.

As an aside, I am curious as to why the authorities have allowed a story like this to be published. The censors must have missed it. Don't be surprised if the link isn't working in a few days.

A Shaanxi graduate said his university gave him a bogus work contract to inflate its post-study employment figures.

The former student said the contract was for a job at a local company which did not exist and carried the signature of his tutor.

"I had no idea that I already had a job," the student, who had been hunting for work, wrote anonymously on a website.

In order to ensure a high employment rate and deliver a satisfactory work report during the global financial crisis, some Chinese universities have been faking work contracts or employment agreement for graduates, Southern Metropolis Daily reported yesterday.

"Faking employment rates is not an isolated case and it has existed for years in China," an education expert, who wanted to remain anonymous, told China Daily.

Due to fierce competition among universities, especially secondary-tier ones, the performance and reputation of a school largely depends on its employment rate after graduation, he said.

According to unwritten rules at many universities, students cannot graduate if they do not find a job, the report said.


The Debts of the Lenders: Islamic Finance Predicted Credit Crisis?

Perhaps the Islamic world is on to a good thing. Under the Koran, riba (interest) is forbidden as is investing in businesses that are haram (forbidden) such as casinos and pig farmers. The purchase of expensive items is obtained through creative equity stakes by the "lender" such as buying the product or realty and selling it back to the "mortgagor/borrower" at a profit in installments (devoid of interest of course).

I do not pretend to be an expert in Islamic banking but Shar'ia compliant ( a reference to valid Koranic practices) investing is a growing trend with major institutions such as the FTSE offering a specialized index. And, as Muslims are fond of saying, their numbers comprise a significant proportion of the planet's population. One thing is for sure though, the advent of structured finance, CDS, and CDO offerings so common in the West would never be tolerated in a Shar'ia index.

But what about Dubai, a real estate speculator's paradise? Or the UAE government's questionable investments in Macau and Las Vegas casinos? Are those exceptions to the rule?

More likely they indicate that not even the best of intentions is always respected.

This article is from a Saudi publication in April 2008.

Islamic finance principles stipulate that deals must be based on tangible assets and require tight controls on debt levels, features analysts say offer some protection to investors and ensure corporate accountability.

"At the core of the current subprime crisis is the securitisation of subprime mortgages or debts, a concept that would generally not be acceptable from a shariah perspective," said Arshad Ismail, Dubai-based head of sukuk at HSBC Amanah.

He said sharia-compliant financing also avoided transactions which had an element of speculation and those that are not asset-based, thus providing investors with in-built safeguards.

These features provided early warnings to investors ahead of such corporate debacles as the collapse of Enron and WorldCom.

Both companies were part of the Dow Jones Islamic Market index, which has a screening process under which constituents with unacceptable financial ratios are removed from the benchmark. That happened to Enron and Worldcom.

"They were excluded from the DJ Islamic market index months before the crash - the high level of debt indicated ineffectiveness of control," said Aznan Hasan, sharia adviser to investment bank Aseambankers Malaysia Berhad.

Kuala Lumpur-based Hasan said that securitisation was not permissible under Islamic finance like in conventional debt and that the screening process demanded that a lender could see tangible assets and business activity from a borrower.

"You don't simply give loans to the client, allowing him to do whatever he wants, and this can have a lot of impact on credit vigilance," he said.


The Debts of the Spenders: CFTC Proposes Further Limits on Wheat Contracts

If the CFTC is trying to drive down the price of wheat, these actions are a pretty good way of deterring bulls. Instead of focusing attention on grains, the CFTC should address the cost of carry for other commodity sectors like COMEX gold or NYMEX crude where eggregious speculation has run amok for the past few years.

CFTC Grp Suggests Storage Rate Change To Fix CBOT Wheat

A government subcommittee said Thursday it will recommend regulators consider a variable grain storage rate to narrow the problematic gap between cash wheat prices and futures if other previously approved changes fail.

The proposal, from the Commodity Futures Trading Commission’s Subcommittee on Convergence in Agricultural Commodity Markets, is less sexy than the recent recommendation from a U.S. Senate panel. The panel urged the commission to reform the Chicago Board of Trade wheat futures market by clamping down on participation by index traders.

The CFTC subcommittee thought it would be more “even handed” to acknowledge there are a “number of complicit factors” in the lack of convergence between cash prices and futures, said Jeff Harris, CFTC chief economist and chair of the convergence subcommittee. The group held its second public conference call Thursday to identify a set of possible solutions to improve convergence.

CFTC Chairman Gary Gensler earlier this week told a hearing of the Senate’s Permanent Subcommittee on Investigations that the agency will take aggressive action to fix the CBOT wheat market. The Senate panel has blamed “excessive speculation” by commodity index traders for inflating wheat futures prices relative to cash prices. Cash prices and futures are supposed to converge when futures go into delivery, but cash soft red winter wheat prices have lagged well below futures for at least two years. SRWwheat, traded at the CBOT, is used to make pastries and snack foods.

The concept of a variable storage emerged as the CFTC subcommittee’s top recommendation after other options were ruled out, including a compelled load-out system. Under the proposal, which has yet to be formally written, storage rates could increase or decrease from month to month depending on spreads between the nearby contract and the first deferred contract month.

If the spread was 85% of full carry, the storage rate would be increased by 5/100 cent per bushel per day after the end of the delivery period, according to CBOT’s initial concept proposal. The subcommittee hasn’t finalized what would trigger adjustments or how much rates would be adjusted. Higher storage charges could encourage people to make delivery earlier, as opposed to holding onto wheat to reap the benefits of carry charges. Carry is the cost of taking delivery of the grain and includes storage, insurance and interest. Dynamic storage rates would add “some complexity to the market,” said Dave Lehman, director of commodity research
and product development for CME Group Inc. (CME), parent company of the CBOT.

However, the market would be able to adapt, he said on the conference call. The subcommittee said it won’t recommend the CFTC’s full Agricultural Advisory Committee consider compelled load-out or switching the par delivery point to the Mississippi River Gulf, an export hub.

Compelled load-out is a system that would require holders of long positions to load out physical grain from delivery elevators. However, two ideas will be forwarded to the full CFTC committee for more study, the subcommittee said. They are the concepts of a cash-settled market and a devaluing of delivery certificates as time passes from contract expiration. In a cash settled market, the final settlement price of a futures contract can be determined using an index of cash prices.

The subcommittee is expected to send its recommendations to the full committee in late September following the expiration of the September contract month. Members are waiting to see how previously approved changes to the CBOT wheat contract affect convergence of the September contact.

Source: CME News For Tomorrow

Friday, July 24, 2009

The Debts of the World: Another Way of Looking at the Generation Gap

From time immemorial grumpy seniors have chastised rambunctious youngsters. This ageless struggle is being raised to new heights in the current economic downturn as recent graduates compete w/hardened veterans of several decades. Instead of raising the bar w/more stereotypical rhetoric, let's focus on different metrics.

Penelope Trunk cleverly suggests a new way to determine what generation you are based upon technology use. After looking at the test, I believe most readers will come to the conclusion that they are at least Gen X and above. . . . thus coming to the realization that age is really just a number. And all that other sound and fury hath signify naught but an idiot speaking. :

So here is a test I put together with the help of an interview with Weigel and an evening reading her blog. Add up your points to figure out what generation you're really a part of:

Do you have your own web page? (1 point)

Have you made a web page for someone else? (2 points)

Do you IM your friends? (1 point)

Do you text your friends? (2 points)

Do you watch videos on YouTube? (1 point)

Do you remix video files from the Internet? (2 points)

Have you paid for and downloaded music from the Internet? (1 point)

Do you know where to download free (illegal) music from the Internet? (2 points)

Do you blog for professional reasons? (1 point)

Do you blog as a way to keep an online diary? (2 points)

Have you visited MySpace at least five times? (1 point)

Do you communicate with friends on Facebook? (2 points)

Do you use email to communicate with your parents? (1 point)

Did you text to communicate with your parents? (2 points)

Do you take photos with your phone? (1 point)

Do you share your photos from your phone with your friends? (2 points)

0-1 point –Boomer

2-6 points –Generation Jones

6- 12 points –Generation X

12 or over –Generation Y


*Disclosure I am Gen Y

The Debts of the Spenders: Late July Bull/Bear Spread

*Credit Mizesaw

Bears continue to accrue during the whole month of July. This means that they are either selling long positions or for those going short, getting punished based on incoming retail fund flows.

For more information:

The Debts of the Lenders: China Inflating BRIC Bubble Again

Excellent article from the Professor who quotes a variety of senior Chinese cadres on the economy. For more background, skip to the bottom and view an older story I wrote at the beginning of the month, "Chinese Power Struggle" :

There seems to be a serious debate among Chinese policymakers over the stimulus package.

The debate lists, on one side, people centered on the PBoC, the CBRC and the National Bureau of Statistics, who are worried that the stimulus may be exacerbating Chinese imbalances.

On the other side are people in the State Council, the Ministry of Commerce and in the provincial and municipal leadership who are more worried that any half-heartedness will lead to a significant rise in unemployment.



The key take away here is that China continues to be worried about preserving one-party rule. As an authoritarian regime whose legitimacy is increasingly being questioned (not least because the "Communist" moniker is widely derided) by both internal and external sources, political leaders are keen to co-opt opposition or crush them if necessary.

Recent events in Xinjiang SAR (Special Administrative Region) and Tibet point to growing unrest among ethnic and religious minorities. But a far larger problem is the potential domestic revolt among the huge floating pool of migrant workers. Historically, Chinese revolts have been triggered by peasants that overthrew the old emperor before installing a new dynasty.

China must also balance its future energy needs w/public diplomacy by continuing to acquire reliable sources in Central Asia, Siberia, Africa, and the Middle East. Once confined to a regional zone, Beijing is increasingly flexing its muscles against US spheres of influence. And its most powerful tool of diplomacy is not its nuclear arsenal but control over US finances in the bond markets.


The Debts of the Spenders: Bernanke Floods Congress W/Lengthy Mortgage Proposal

Bernanke is targeting yield spread premiums and closed end mortgages. Most of these proposals actually look consumer friendly - a rare surprise from an organization dedicated to supporting its Wall Street constituency.


Thursday, July 23, 2009

The Debts of the Spenders: Unemployment Gap Between Blacks and Whites Widens

An alarming statistic that shows green shoots are not really growing.

While unemployment rose steadily for white New Yorkers from the first quarter of 2008 through the first three months of this year, the number of unemployed blacks in the city rose four times as fast, according to a report to be released on Monday by the city comptroller’s office. By the end of March, there were about 80,000 more unemployed blacks than whites, according to the report, even though there are roughly 1.5 million more whites than blacks here.

Across the nation, the surge in unemployment has cut across all demographic lines, and the gap between blacks and whites has risen, but at a much slower rate than in New York.

Economists said they were not certain why so many more blacks were losing their jobs in New York, especially when a large share of the layoffs in the city have been in fields where they are not well represented, like finance and professional services. But in those sectors, the economists suggested that blacks may have had less seniority when layoffs occurred. And black workers hold an outsize share of the jobs in retailing and other service industries that have been shrinking as consumers curtail their spending.

“African-Americans have been hit disproportionately hard,” said Frank Braconi, the chief economist in the comptroller’s office. “The usual pattern is that the unemployment rate among African-Americans tends to be about twice as high as for non-Hispanic whites, but the gap has widened substantially in the city during the past year.”

Historically, the unemployment rate for blacks has always been higher than for whites. But since the start of the recession, in December 2007, the overall rate has risen by 4.6 percentage points — driving the black unemployment rate as high as 15 percent in April. The jobless figures among blacks became enough of a national issue that at a White House news conference last month, President Obama was asked what he could do to “stop the bloodletting in the black unemployment rate.”

Additionally, read this article:

In some U.S. states, nearly half of the job seekers who have stopped looking for work have done so because they simply don't believe they'll find anything. Indeed, the number of discouraged workers nationwide has more than doubled in the past year. This trend won't be reflected in the widely publicized unemployment rate, as discouraged workers aren't included among the unemployed. Still, in states as diverse as Mississippi, South Dakota, and New York, the span of this often invisible slice of workers signals a population losing its hope.

Between the third quarter of last year and the second quarter of this year, Mississippi averaged the highest percentage of discouraged job seekers among its marginally attached--nearly 50 percent, compared with 32.6 percent nationwide. South Dakota ranked second after Mississippi, with 48.5 percent of marginally attached workers classified as discouraged. Florida, Michigan, Connecticut, West Virginia, and New York followed in ranking for the highest rates of discouragement.



Wednesday, July 22, 2009

The Debts of the Spenders: Karachi Stock Exchange Recovery

*Credit Dying_Bear.

Wow, this rally is really something. I had thought that the BRIC emerging market recovery was something special but the Karachi Stock Exchange (KSE), based in Pakistan also experienced a nice rise. Keep in mind that we are speaking of a country that is widely rumored to shelter Osama bin Laden and run by a military junta which is routinely involved in large scale engagements with insurgents.

So, what is behind Karachi's rise? Is it a return to the mean? Or are Western policymaker's actions starting to have an effect?

*Disclosure - I continue to be short Pakistani politicians and long the possibility of an India-Pakistan WW3.

The Debts of the World: El Nino Outlook Late July 2009

My take on this story is not so much on Australia but the weather effect on the other side of the Pacific - particularly in South America. Argentine soybeans and wheat have already been negatively affected by poor weather and inept government planning. But El Nino has to develop soon since as the year progresses, this will have less of an effect (remember Argentina is on the OTHER SIDE of the hemisphere so the seasons are reversed).

Meanwhile, in the US grains continue to have a favorable outlook which dampens bullish prospects. I posted earlier about trend funds being net short grains like wheat and corn. My outlook still remains bullish longer term as an unusually cool summer can give rise to early frost.

But to be fair, this cool weather has given rise to government bureau predictions of ripe growing conditions for crops as hot weather tends to dry the plants. Also, the deflationary outlook continues to hover over the global economy and this can dampen demand for agricultural products because of a stronger dollar (e.g. increased risk aversion).

Australian Bureau: El Nino Developing In Pacific

Ocean conditions in the Pacific Basin suggest an El Nino event continues to develop, and should these conditions persist as predicted into spring, 2009 will be considered an El Nino year, the Australian government’s Bureau of Meteorology reported Wednesday.

Pacific Ocean surface temperatures, which drive El Nino events, currently exceed El Nino thresholds and are around 1 degree Celsius above average, while cloud patterns and rainfall along the equator are becoming consistent with a developing El Nino, it said in a regular review of climate indicators.

A large amount of the sub-surface water of the tropical Pacific is also warmer than the long-term average, particularly in the east, which is also consistent with an El Nino, the bureau reported.

“All international climate models predict the tropical Pacific to continue to warm and to be above El Nino thresholds throughout most of the second half of 2009,” the bureau reported.

“As all models surveyed agree El Nino conditions will persist, and as historically the southern winter is a time of good model predictability, the probability of El Nino conditions remaining through 2009 is high,” it added.

El Nino usually refers to the extensive warming of the central and eastern Pacific and cooling in the western Pacific. It generally leads to a major shift in weather patterns across the Pacific and in Australia and is usually but not always - associated with below-average rainfall in eastern and southern Australia, potentially withering winter crops such as wheat and barley.

But the bureau warned some current indicators run contrary to the “normal” development of an El Nino, which is usually associated with sustained strong negative values for the Bureau’s Southern Oscillation Index. The SOI has risen in recent weeks and is now strongly positive, standing at +12 in the 30 days ended July 20, up from a monthly value in June of -2 and up from - 12 at times in May and June, the bureau reported.

Source CME News For Tomorrow

Tuesday, July 21, 2009

The Debts of the Spenders: Corn Wars - Index Funds vs Black Box Traders

Earlier this year, the index funds were advancing based on heightened inflation fears. They have not changed their tune. But now, the short term traders like quants are winning.

CBOT Corn Spec Funds Go Net Short, Market Eyes More Selling

Speculative funds last week moved net short in Chicago Board of Trade corn futures for the first time since April, and analysts and traders differ on whether funds will extend their short positions much further.

A short position is held by a trader who agrees to deliver a commodity at a future date. Holders of short positions are expecting prices will drop. Friday’s supplemental commitment of traders report from the Commodity Futures Trading Commission showed that the “trend-following” funds were net short 4,738 contracts as of July 14. Those funds had reduced their long positions by 11,848 contracts and increased their short positions by 11,606 contracts during the preceding week.

It was the first time since the week ended April 28 that the speculative funds had been net short.

Analysts say the liquidation was prompted by a long stretch of favorable crop weather, which is fueling expectations of a high-yielding crop. Also, the U.S. Department of Agriculture said June 30 that farmers would plant 87 million acres this year, the second-highest U.S. total.

Another factor, said Jeff Hainline, director of Advance Trading, is concern about the potential for the CFTC to limit speculation in the markets. A Senate subcommittee recently issued a report examining excessive speculation in the wheat market, and the CFTC has announced plans to enact speculative position limits in the energy market.

A lot of the speculative, or trend-following funds are “black box” traders that simply trade based on the recent trend, said Rich Feltes, vice president and director of research for MF Global.

Index funds, meanwhile, have continued to add to their net long position, noted Arlan Suderman, analyst for Farm Futures. The mostly long-only funds added 8,267 contracts to their long positions and added 4,800 contracts to their short positions, putting them net long 313,242 contracts, the CFTC said.

Suderman said the index funds were increasing their net long position “based on these long-term inflationary perceptions.” Traders and analysts differ on whether the speculative funds, having gone net short, will further extend their short position.

The market’s movement will depend on whether funds continue to liquidate, they said. Feltes said the funds typically “get long a lot more than they get short. “I would say that the selling that has been in the market from the liquidation of the trend-following funds, except for soybeans, is likely going to ease or abate in the weeks ahead,” Feltes said.

But that doesn’t mean prices won’t remain under pressure, he said. The market has yet to feel the weight of selling by the U.S. farmer, “who still holds over 2 billion bushels of old crop corn and is frozen in the headlights in this waterfall formation in corn.

Source: CME News For Tomorrow

Saturday, July 18, 2009

The Debts of the Spenders: Cash Crunch Hits Philadelphia

Pennsylvania is not commonly thought of as an indebted state, nor Philadelphia prone to fiscal excess - at least, not to the extent of sister cities in California, Nevada, Florida, and Michigan.

Only a few weeks after Independece Day celebrations, the nation's first capitol announced it would be unable to meet future fiscal obligations.

Philadelphia Mayor Michael Nutter on Friday blamed the drastic move on the failure of the Pennsylvania legislature to act on his request for authorization to raise the city sales tax and change the formula for the city's contribution to its employee pension plan. Mr. Nutter said these items are necessary to help close a projected city budget deficit of $1.4 billion over the next five years.

The city will delay spending on anything other than payroll, debt service and emergencies, until passage in Harrisburg of a state budget and laws related to the sales-tax and pension proposals. Philadelphia's sales tax would increase by one percentage point to 8% for five years under the proposal.

"These steps come amid a growing cash crisis which must be addressed immediately," Mr. Nutter said at a news conference. He has attributed the city's budget shortfall to broader economic weakness, which has eroded tax revenue, coupled with rising city pension obligations. Similar forces have pinched state and local governments throughout the country.

There were signs Friday afternoon that state lawmakers were moving on the budget and the city's tax and pension proposals.

The Debts of the Spenders: California Unemployment Rate Breaks 11%

And these are the official rates. One wonders just how bad the situation truly is. Meanwhile, the stock and equity markets continue to price in green shoots. More like green weeds.

The recession continued to punish California as employers cut 66,500 jobs in June to put the state at an unemployment rate of 11.6 percent, the nation's sixth highest.

Friday, July 17, 2009

The Debts of the Spenders: Yahoo Interview W/Ron Paul

Even though Ron Paul is a goldbug, his talking points continue to resonate common sense regarding fiscal stability, financial regulation, and central banking. In this clip, he also addresses foreign policy and unemployment.

The Debts of the Spenders: Will Obama's Health Care Lead to Stagflation?

Can America afford socialized medicine? Many writers don't think so. Although I agree wholeheartedly with this section:

Typical of Obama reforms, the measure is being rushed through Congress without adequate discussion of consequences, without bi-partisan consensus, and with scant disclosure by the Democrat party that has filibuster-proof control of the US Congress. Most Republicans are expected to vote against the measure.

Thursday, July 16, 2009

The Debts of the Spenders: British Backdoor To Hide Commercial Real Estate Losses

July 16 -- (Bloomberg) -- U.K. banks may transfer commercial property loans into real estate investment trusts to purge their balance sheets of debt and avoid future writedowns.

Banks are considering using REITs as publicly traded “exit vehicles” that could limit the losses they and their borrowers face, said Ian Marcus, head of real estate at Credit Suisse Group AG. The British Property Federation has recommended the idea to the government as a solution for state-owned banks weighed down by real estate loans, said Peter Cosmetatos, the London-based industry body’s finance director.

“It’s obviously being considered by all relevant parties because the sector needs to recapitalize and that is one methodology of doing so,” Marcus said in a telephone interview. The concept is in its early stages, he said.



The Debts of the Spenders: May TIC Data

Foreign institutions continue to sell treasuries.

Big exception here is China which decided to accrue more interest.

Treasury International Capital (TIC) Data for May

WASHINGTON – The U.S. Department of the Treasury today released Treasury International Capital (TIC) data for May 2009. The next release, which will report on data for June 2009, is scheduled for August 17, 2009.

Net foreign purchases of long-term securities were negative $19.8 billion.

  • Net foreign purchases of long-term U.S. securities were $7.9 billion. Of this, net purchases by private foreign investors were $31.3 billion, and net purchases by foreign official institutions were negative $23.4 billion.
  • U.S. residents purchased a net $27.7 billion of long-term foreign securities.

For more info on TIC analysis:

The Debts of the Spenders: Massachusetts Investigates Levered ETFs

Galvin Investigating Leveraged ETFs

By Money Management Executive
July 16, 2009

Massachusetts Secretary of State William F. Galvin is investigating the sales materials of fund companies that sell leveraged exchange-traded funds, The Boston Globe reports.

The state has sent letters to three of the leaders in the space, Direxion Funds, Rydex Investments and ProShares.

“These are highly volatile instruments,” Galvin said. “We want to make sure that if they are sold to average investors, they are told there is risk here. This is not a save-and-hold investment.”

Specifically, Galvin is investigating whether leveraged ETFs should be sold with detailed warnings about the funds’ ability to double or triple losses. He is also concerned that there are 140 leveraged ETFs on the market with $33 billion in assets.

Late last month, the Financial Industry Regulatory Authority asked brokers and registered investment advisers to provide it withinformation on the sale of leveraged and inverse exchange-traded funds between Oct. 1, 2008 and March 30 to investors who held them for 10 business days or longer. The authority is looking for all sales and marketing materials, customer communications and complaints, arbitration claims and written supervisory procedures regarding the sale of such funds.

But the companies at the heart of the probes defend both their approach and marketing strategies, saying they are complying with current regulations.


Wednesday, July 15, 2009

The Debts of the Spenders: PIMCO Urges Fed to Inflate Faster

Bond giant, PIMCO, is urging the Fed to print faster as a way to offset deflation. While PIMCO has a good track record of investing, they are also prone to talking their book w/o disclosing conflicts of interest.

“The way to make monetary policy effective is for the central bank to promise to be irresponsible,” McCulley wrote in a July commentary posted to Pimco’s Web site, citing a 1998 paper written by Princeton University economist Paul Krugman.
If consumers and businesses continue to hoard cash, monetary policy makers may need to boost inflation until prices are as high as they would have been without deflation, McCulley wrote.

Stop right there. McCulley makes valid points. But he does not say how or where the government spending should be targeted.

The most effective way to free up funds is to hit the area where Americans devote the largest parts of their budget - health care spending. Health care is the black hole of both public and private finance since costs continue to rise year in and year out. But if the government is able to free up funds by removing the biggest variable cost from consumers' lives then that leaves more room for consumers to load up on flat screen tv's, x-boxes, leather sofa sets, and gas guzzling SUVs. Then there is at least some hope that the government will receive a return on its investment through stronger tax receipts and avoid the costs of paying for negative externalities like combating higher crime rates or increased workfare costs.

By the way, wishing for inflation is never a good idea as you might just get it:

Prices paid to U.S. producers rose in June by twice as much as anticipated, led by surging gasoline costs, a Labor Department report showed yesterday. The 1.8 percent increase in prices paid to factories, farmers and other producers followed a 0.2 percent gain in May, the department said. Excluding food and fuel, so-called core prices rose 0.5 percent.

The Debts of the Spenders: Option ARMs Continue to Bleed

Over 1/3 of Option ARMs are in default. And this data was as of April 2009. How much worse has it gotten since then?

Not even the banks know for sure since under revised FASB rules, they continue to be able to book projected income as full income . . . . rather than the tiny amounts that borrowers are sending in - not even enough to make the full interest payments as the original author points out.

As featured on:

The Debts of the Spenders: Health Care Inflation - The High Cost of Living In America

While the deflation/inflation debate continues to rage among academics and traders, one area of consumer spending has continued to rise uninterrupted year after year for well over a generation. Health care costs - the biggest block to consumer consumption (in other areas) - is steadily growing into a giant monster that forces Americans to devote more of their savings for the inevitable high cost of living.

This problem is becoming particularly acute as the Boomer wave reaches maturity and starts withdrawing savings/liquidating assets to pay for costly medicines and medical treatments. No amount of Generation Y spending on Xbox's, iPods, and other youthful gadgets is going to be enough to offset their elders' withdrawal of spending dollars. Not when hospital beds routinely cost 5 digits and up.

But never fear, there is a solution available as Steven Colbert points out. The trick is in allocating health care funds as one of the 3 sacred cows of Congressional spending - Guns, Credit, and Corn. This is a pointed reference to the War lobby, Bank lobby, and Agricultural lobby.

Average premium increases on the rise

The average premium increase for health insurance has been decreasing in recent years, but 2009 saw a bump of over 10 percent for all plan types. According to the 2009 Compensation Data Insurance, conducted by Compdata Surveys, premiums increased 7.7 percent in 2008 and 10.7 percent in 2007; this year average premiums increased almost to 2007 levels, at 10.3 percent.

PPO plans and POS plans saw the greatest increase at 11.1 percent and 11.2 percent, respectively. HMO plans had a slightly lower increase, at 7.3 percent. HDHP plan premiums increased 10.6 percent.

Employers are more or less in agreement on the best way to cut costs. Over 88 percent are coordinating benefits to rein in rising costs, while 76.9 percent use a network of health care professionals. Nearly 60 percent passed the cost on to their employees by increasing their portion of the premium.

Insurance companies contribute an average 11.2 percent of payroll to the cost of health benefits, the same cost to provide dental, life, retirement, disability and other non-mandated benefits together.

Tuesday, July 14, 2009

The Debts of the Spenders: TARP for Small Business Loans Meets Lender Reluctance

Tarp Capital for Small Businesses Is Back in Play

By Emily Flitter, American Banker
July 14, 2009

The White House is weighing another attempt to help small businesses with bailout funds, but doubts remain about whether lenders will bite.

Just how the Trouble Asset Relief Program might be used to aid small businesses has not been decided, but the issue is expected to be aired this morning at a meeting with the head of the Small Business Administration, lawmakers and industry leaders.

"This is a signal that the White House continues to be concerned about the credit crunch on small businesses," said Christopher Crawford, who was to attend and is the president and chief executive officer of the National Association of Development Companies.

But a previous effort to direct some of Tarp's $700 billion toward small business sputtered.

In mid-March the administration unveiled a $15 billion plan to buy securities backed by SBA loans in an attempt to jump-start the secondary market for small-business loans.

Yet broker-dealers, who held the securities, balked. Many said they feared they would have to meet the same tough conditions imposed on financial institutions receiving Tarp capital infusions, including having to issue stock purchase warrants to the government and abiding by restrictions on executive pay.

Observers said SBA lenders may have a similar reaction the second time around.

"The challenge is: How do they get rid of the Tarp restrictions so that lenders will participate?" Crawford said.

It remained unclear Monday whether the administration will try to strengthen traditional SBA programs that provide loan guarantees for private lenders or provide aid directly to SBA lenders.

Using Tarp money to benefit small business could also face legal questions. For example, some benefits for small businesses were provided by the economic stimulus package, such as lower borrower fees and increasing the amount of an SBA loan that is guaranteed. But it is unclear whether the administration could use Tarp to pay for those benefits, since Congress had approved using stimulus funds to pay for them.

Even an SBA spokesman said it was too early to know what the program would look like, and he cast doubts on whether the aid for small business loans would come from the bailout program, which has largely focused on keeping banks and other institutions solvent.

"This is one of many ideas that have been put out for consideration among members of the administration," said Jonathan Swain, the SBA's Assistant Administrator for Communications. "Any discussion of utilizing Tarp money is preliminary and any speculation on the specifics of how that would work is premature."

Those expected to attend the meeting today in addition to Crawford included Karen Mills, the SBA administrator; Senate Small Business Committee Chairman Mary Landrieu, D-La.; Tom Burke, the head of Wells Fargo & Co.'s SBA lending division; and representatives of various financial services trade associations.

"This is more of a continued dialogue," said Tony Wilkinson, the president and chief executive of the National Association of Government Guaranteed Lenders.

Crawford said it made the most sense to direct bailout funds to expand existing programs at the SBA, rather than create a new framework for providing credit to small businesses, since the agency has the best track record.

"This is the reason why the White House has to turn to the SBA," he said. "The SBA has the conduits to get the money on the street."


The Debts of the Spenders: Wells Fargo Sues Itself

*Credit to Clair Hayashi.

Due to state foreclosure laws, Wells Fargo was required to list itself as BOTH the plaintiff and defendant in court forms. In other words, Wells Fargo sued itself.

Yes, attorneys for Wells Fargo the plaintiff were issued responses by attorneys for Wells Fargo defendant.

Wells Fargo hired Florida Default Law Group., P.L., of Tampa, Fla., to file the lawsuit against itself.

And then Wells Fargo hired another Tampa law firm -- Kass, Shuler, Solomon, Spector, Foyle & Singer P.A. -- to defend itself against its own lawsuit, according to court documents.

Monday, July 13, 2009

The Debts of the Lenders: Mid-July 2009 Look at BRIC Equities

These charts are for the Brazilian, Indian, and Russian exchanges. I have included both weekly and daily charts to show that although the BRICs have staged impressive rallies this year SO FAR, they have yet to regain their 2008 highs.

The Debts of the Lenders: Commodities Hit the BRIC Wall of China

Have commodities hit the BRIC wall of China? Shanghai has been one of the only markets to continue rallying even after US, European, and fellow Asian markets retraced their impressive gains. (Note: this post is best reviewed in relation to the next post: "Mid-July Look at BRIC equities").

Indeed, the other BRICs (Brazil, Russia, and India) have already seen sharp to medium drops in profit taking among traders.

Questions continue to be raised about the sustainability of Chinese equities - especially when IPOs are oversubscribed by a ratio of several hundred percent, exports are slowing, internal unrest is growing (see the Uighur riots), and manufacturing jobs disappearing.

Indeed, the Chinese equity boom is based on A LOT of leverage. Simply put, there is a MASSIVE liquidity drain going on in the Chinese system - they make Greenspan look like a little boy.

It looks like the Chinese authorities are setting themselves up for an epic drop sometime in the future.


ZH does a great job of covering the Chinese fundamentals in this and other older articles:

The Professor is on point as always:

Sunday, July 12, 2009

The Debts of the Spenders: IRS Declares California IOUs to be Securities and Not Legal Tender

Banks have good reason to be wary of accepting California IOUs as valid legal tender because only the Federal government has the authority to issue money. This is a basic principle enshrined in the Constitution. Article 1, Section 8 clearly states:

The Congress shall have Power To lay and collect Taxes, Duties, Imposts and Excises, to pay the Debts and provide for the common Defence and general Welfare of the United States; but all Duties, Imposts and Excises shall be uniform throughout the United States;

To borrow money on the credit of the United States;

To regulate Commerce with foreign Nations, and among the several States, and with the Indian Tribes;

To establish an uniform Rule of Naturalization, and uniform Laws on the subject of Bankruptcies throughout the United States;

To coin Money, regulate the Value thereof, and of foreign Coin, and fix the Standard of Weights and Measures;

To provide for the Punishment of counterfeiting the Securities and current Coin of the United States;

So, it comes w/little surprise that the IRS has declared California IOUs to be securities or negotiable instruments similar to checks. After all, they cannot contravene something that is taught in high school civics classes.


Interestingly enough, this has opened up a whole new Financial "Wild West" where speculators are working on arbitrage opportunities to trade, lever, and exchange the IOUs on secondary markets.

Friday, July 10, 2009

The Debts of the Spenders: The End of Employer 401k Matches?

Translation: The little guy's money rolls in every pay period because ma and pa and Uncle Sam have convinced him that socking away as much as he can every pay period for that small 15% match on his first 6% is the path to wealth.

Goodbye 401(k) Match

By Money Management Executive
July 10, 2009

Whereas in previous recessions, companies that suspended 401(k) matches always brought them back, this time around, consultants to defined contribution plans tell the Associated Press, companies are thinking about doing away with the matches forever or reducing them drastically from the typical 50 cents match for the first 6% an employee puts in.

That said, some companies are looking at tying matches to profits, giving them the flexibility of making no contributions in bad years, or possibly using the money for other benefits, such as healthcare.

It’s easy to understand why large companies would consider eliminating the matches, consultants say. On an individual basis, it may not seem like much; a worker earning $50,000 a year who contributes 6% a year typically receives a $1,500 boost from their employer. For a firm 15,000 employees strong, those matches can amount to $25 million a year.

Fearing mandatory healthcare legislation in Washington, coupled with rising costs, many employers are afraid “about what the rules will be and what’s the cost,” said Mark Ritter, an executive director at Grant Thornton. “The thought is, ‘We may have to rob Peter to pay Paul, and depending on how the healthcare initiative impacts our company, we might have to get the money from the 401(k) match.’”

Employers “realize that the floor can fall out from under them now, and they want to stay loose,” Ritter continued.

Ginny Olsen, a principal with Towers Perrin, agreed: “We have a number of conversations going on at this point. There is a high level of employer interest in making sure they’re spending money for benefits most effectively.”


The Debts of the Spenders: Obama Mandatory IRAs?

Obama IRAs Could Raise $100 Billion in Five Years

By Money Management Executive
July 8, 2009

One of President Obama’s proposed financial reforms would require employers that do not offer a 401(k) to automatically enroll their employees into an IRA. If implemented, it would give the biggest boost to the retirement savings industry since the creation of the 401(k) in 1980, enrolling 40 million new investors, and attract more than $100 billion within five years, The Wall Street Journal reports.

It would require companies with 10 or more workers that have been in business for at least two years to participate. It would deduct 3% of workers’ salaries and invest it very conservatively, in inflation-indexed savings bonds, money market mutual funds or stable value funds. Once the portfolio reaches $3,000, it would be moved over to a target-date funds.

Experts estimate that it would cover 40 million of the 75 million Americans who do not have access to a 401(k) or other defined contribution plan. Naturally, they applaud the retirement protection the measure would offer, but they fear that small businesses could balk at the cost of having to hire a payroll service or accountant to manage the IRAs. Others criticize the plan for not investing the money aggressively enough

Thursday, July 9, 2009

The Debts of the World: Bubblicious!

Who can print the fastest?

UK Looks at 125% LTV

Former US Treasury Secretary Admits Geithner Works for Goldman

Foreclosure Freeze Had Little Impact

AIG Equity Worth Zero

Chinese Drain Liquidity From the System

Tuesday, July 7, 2009

The Debts of the Spenders: The French Challenge Dollar Hegemony at G8

The wolves smell blood. Now, France is joining Russia, India, China, and even Brazil in questioning the legitimacy of a flawed monetary system built on excess leverage and lax oversight.

The call to find an alternative to the U.S dollar as the global reserve currency is gaining momentum as France joined calls by China, India and Russia for a review of the world's currency practices.

French Finance Minister Christine Lagarde challenged the dollar's supremacy “in a world that has changed because of the crisis and the growing role of emerging countries.”

The questioning of the U.S. dollar as the key currency for central banks by a leader of a major European economy gives renewed life to the issue at this week's Group of Eight summit meeting in L'Aquila, Italy. The U.S. dollar has long served as the dominant medium of exchange, and tends to dominate the official money reserves that countries hold through their governments and at their central banks.

The Debts of the Spenders: Regulatory Capture of the SEC

Although this article is more than 11 years old, the author's main points remain as striking then as they do now. She wrote of the SEC at the inception of the Dot Com bubble where large market participants such as Goldman Sachs used their influence and leverage to push for agenda friendly legislation and rule making.

The SEC is not captured by a single group of regulatees. Instead, it is subject to
the influence in three different areas corresponding to its three realms of regulation, each defined by one of the three central pieces of enabling legislation that define the SEC’s mission. The Division of Corporate Finance writes and administers the rules pursuant to the Securities Act of 1933, which provides for disclosure regarding the character of securities sold to the public; the Division of Market Regulation writes and administers the rules pursuant to the Securities and Exchange Commission Act of 1934, which provides for the regulation of securities exchanges and dealer markets to prevent unfair practices; and the Division of Investment Management, writes and administers the rules pursuant to the Investment Company Act of 1940, intended to provide for registration and regulation of mutual funds and investment advisers.

Market Regulation is the division of the SEC concerns itself with the rules
concerning stock trading. This division is captured by the two large incumbent
organizations that trade stock, the National Association of Securities Dealers, and the
New York Stock Exchange.

The Division of Investment Management is captured by the trade group that
represents mutual funds, the Investment Company Institute. The incumbent firms in the industry are, not surprisingly, largely content with the status quo. The status quo is one in which the central legal document and sales brochure, the mutual fund prospectus, is mainly impenetrable to investors.

The division of the SEC that approves prospectuses for new securities issued and
regular disclosures for companies with publicly traded stock is not captured by the
companies who issue securities, its direct regulatees. Instead, it is captured by the lawyers who prepare their disclosures and the underwriters who take them public. This capture is easy to understand. The lawyers and underwriters are far less numerous than the issuers, and since they are involved in offerings every day, rather just from time to time (as are the issuers) they are far better informed as well.

The Debts of the Spenders: US Fed Advises Customers To Make Sure that Their Banks Accept California IOUs

B/c you know. . . they might not be considered legal tender by the biggest recipients of corporate welfare.

Release Date: July 2, 2009

For immediate release

The California State Controller's Office has announced that it may issue registered warrants, or IOUs, for some payments as early as today. These registered warrants would not be payable immediately, but rather on a future date. These warrants will be identified with the word "REGISTERED" on the front.

Customers are advised to consult with their banks before depositing a registered warrant and should ask the following:

  • Will the bank accept the registered warrant for deposit? Some banks may have arrangements to advance funds to depositors prior to the warrant's payment date.
  • When will the funds be made available for withdrawal? These warrants will not be subject to the normal, federal check-hold limits and therefore could be subject to extended holds.
  • Is there a potential to incur fees? The State of California will likely return unpaid any registered warrants that it receives before the payment date. Therefore, depositors of these warrants may be subject to returned-deposit fees if their banks attempt to collect these warrants before they are payable. In addition, if customers rely on these funds to make other payments, they may be subject to overdraft or bounced-check fees if the warrants are returned.

The State of California has provided additional information on these registered warrants at

The Debts of the Spenders: US Wheat Exports Capture Speculators' Attention

Specs are already lining up for the seasonal late August - mid-October (prime harvest season) trade. Here is a closer look at the demand story.

Analysts Look For Pickup In US Wheat Export Demand

Demand for U.S. wheat is expected to increase in the coming weeks as winter wheat cutting winds down in areas and importing nations wade back into the market following a drop in prices, analysts said.

It was encouraging for export demand that Egypt’s state-owned wheat buyer, the General Authority for Supply Commodities, bought 60,000 tons of U.S. soft red winter wheat in a tender last week, they said. Egypt, a major buyer on the world wheat market, is known for being “very, very price sensitive,” so its purchase may indicate other countries will also see value in U.S. wheat, said Dan Manternach, ag services director at Doane Advisory Services.

“If even Egypt thinks now is the time to buy, that’s a very good sign,” Manternach said.
Active winter-wheat cutting has weighed on prices lately, and there’s speculation that harvest lows are in place or close at hand. Chicago Board of Trade September wheat traded Monday around $5.25 a bushel, down more than $1.75 from an eight-month high hit on June 1.
“I would have to expect you’re going to see better demand creep into the market,” said Brian Hoops, president of Midwest Market Solutions. “Egypt purchased one cargo from the U.S., and I
would expect they’ll be back in if prices stay cheap.”

Others were more skeptical. A CBOT floor trader said U.S. wheat is still too expensive to be a strong competitor for world-export business and that the sale to Egypt was too small to mean much. Larry Glenn, broker and analyst at Frontier Ag, said the sale was “encouraging,” but U.S. wheat is still “overpriced” on the global market. GASC bought U.S. wheat for $188.99 a ton and French wheat for $189.50 a ton. U.S. wheat was generally priced higher than French or Russian wheat in bids submitted to GASC, according to a breakdown of bids for the tender. U.S. bids, outside of the winning bid, ranged from $193.35 a ton to $202 a ton. French wheat was bid from $185.87 a ton to $197.20 a ton, and Russian wheat was priced from $174 a ton to $185 a ton.

It wasn’t too surprising to see Egypt snub Russia, despite its low prices, following a recent spat between the countries over the quality of Russian wheat, an analyst said. The U.S. is seen as a more reliable supplier than Russia, although concerns about the quality of new-crop U.S.
SRWwheat may encourage buyers to book supplies earlier than normal, he said. Head scab, a fungal disease, has been found on wheat in the Midwest and Southern U.S., according to reports. Also known as Fusarium head blight, head scab is caused by rain during the flowering stage of development and can lower grain quality and yield.

Worries about the availability of good quality U.S. wheat could be prompting buyers to “start to sniff around a little earlier than they normally would,” said Bryce Knorr, market analyst for Farm Futures. “They’ve already started trying to scout out supplies.”

Worries about scab-infected wheat have helped basis levels firm up at the U.S. Gulf, analysts said. Importing countries are “thinking if the basis is firm now, maybe we better lock” wheat in before the markets begin their traditional period of recovery following a seasonal harvest
slump, Manternach said.

“Our prices are more competitive” than they have been lately, he said. “There is some concern about the quality of the new-crop wheat. The basis has been surprisingly strong.”

CBOT wheat could see a seasonal recovery of 40 cents to 60 cents from now until Thanksgiving, Manternach said. Glenn said the markets could recover 30 cents to 50 cents after recent losses.

Source: CME News for Tomorrow

Sunday, July 5, 2009

The Debts of the Spenders: Basic CDS Legal Definitions and Case Law

Credit default swap (CDS) rulemaking remains wrapped in a byzantine array of arbitration and legal settlements. As such, case law is scant and federal regulatory reform even less so. This legal mine field is behind much of the push for a single national or several, competing regional CDS exchange(s). Regulators believe that the introduction of exchanges will bring much needed oversight and transparency to the process.

For non-CDS traders, the closest conceptual comparison are that CDS instruments are like futures and/or options contracts - except when they're not.

Instead of having standardized delivery and settlement procedures, CDS instruments function as bilateral contracts w/nominal industry supervision. A "self-regulating" industry group, ISDA (International Swaps and Derivatives Association) is nominally in charge of overseeing all disputes. However, as events last year demonstrated, they have little power to compel uniformity or performance among market participants.

Generally, a single master agreement governs the relations between the parties to a CDS. From here, individual swaps, confirmations, and other changes branch off from the main body or "tree."

The master agreement will also specify the terms of the CDS contract such as the identities of the "reference entity", "reference obligation", payment triggers, coverage period, settlement procedures, margin requirements, and notice requirements.

Unlike futures contracts, NONE of these terms is standardized by an exchange (although there is some general language that remains the same). The terms can - and are - in flux.

Reference entity refers to the specified debtor and is typically a company or nation. Reference obligations specify the particular debt that is covered - which infamously includes tranches of debt such as CDOs or MBS.

While parties can generally agree on whether a SINGLE entity defaults, confusion reigns when ONE entity among a multitude of entities defaults (such as in a tranche type situation). Has the entire tranche lost its worth when only one issue has defaulted? What about the % of that issue in relation to the entire tranche? What about the relation of that tranche to the same sector? What about the relation of that sector to other neighboring sectors? And so it goes. There were instances when the underlying assets in the tranche were marked to zero. And there were others, when the underlying assets were marked at par value. The truth is somewhere in between.

The MOST critical - and litigated - issue is the margin requirement. This is the cost that a seller must provide to insure that the buyer is able to take full delivery of his purchase should the contract move "in the money" by the settlement date. Like futures and options sellers, the CDS seller does NOT necessarily have to pay out the cost of the entire contract (b/c the contract can move back "out of the money" again) by the settlement date.

But if the OVERALL margin requirement increases - or the NUMBER of scheduled margin payments increase (which both depend on the specific clauses in the contract), then they can represent a crippling blow to the cash flow of a CDS seller. If the CDS seller is an insurance company, consumer bank, or other financial body that is required by state or federal law to have OTHER margin requirements, then the cash flow problem becomes even more crippling. All of a sudden, there is a need for the CDS sellers to liquidate assets at will in order to meet their other obligatory margin requirements.

In 2008, the CDS sellers wrote naked options w/no regulatory oversight from the CFTC or SEC to check their actions. In fact, mounting evidence shows that federal regulators who knew of these problems decided to abandon their duties and instead capitalize by making calculated bets that exacerbated the problem (Ahem...Henry Paulson).

So, what has changed between then and now? Quantitative easing and FASB rule relaxations for fair value. Financial institutions can once again mark the value of their collateral to mythical standards. Regardless of the deteriorating fundamentals.

I don't have time to provide full coverage of the following cases. It is also doubtful whether this information would be of much use to market skeptics and retail traders (the intended audience of this web site).

VCG v. Citibank N.A.
2008 WL 4809078

Aon Financial Products v. Societe Generale
476 F.3d 90 (2nd Cir. 2007)

Deutsche Bank v. Ambac Credit Products, LLC
WL 1867497 (S.D.N.Y. 2006)

The Debts of the Spenders: Overnight Fed Loan Hits 7% While FDIC Closes 6 IL Banks

Karl Denniger of Market Ticker first pointed out the alarming 7% overnight loan made at the Fed discount window early Thursday morning.

When the Discount Rate is 0.5% and you pay 7% there is only one reason: Whatever you have won't qual for the discount window. And since they will take goddamn near anything, it means YOU ARE ****ED.!-More-Obfuscation.html

For the actual Fed loan:

MEANWHILE.... the FDIC closed 7 banks on Thursday - 6 of them in Illinois. The Chicago Tribune recently reported that ALL 6 of the IL banks belong to the SAME company: the Campbell Group.

Moreover, the FDIC explicitly stated that the root cause of the IL banking failures was primarily on losses stemming from CDOs.

Hmmm, coincidence?

Founders Bank had gone on a search to try to raise about $50 million in capital after suffering securities losses in the first quarter and falling to an "undercapitalized" status.

The failure of the Campbell family's bank resulted primarily from losses on investments in risky instruments known as collateralized debt obligations and other loan losses, the FDIC said.

Friday, July 3, 2009

The Debts of the Spenders: Falling Food Prices Are Further Proof of Deflation

Inflation bugs love to tote rising energy and food prices as 2 items that stick out from the US government's reports on inflation. That was true at this time last year. However, falling food prices indicate that their argument has not kept up w/the times. Food prices at the retail level have fallen for 3 straight quarters - or roughly ever since Lehman Brothers imploded last September. Energy prices have also fallen since the 2008 high of crude $145/barrel.

US Food Prices Trend Lower For Third Consecutive Quarter-AFBF

Retail prices for food products at U.S. supermarkets declined slightly for a third consecutive quarter, according to the latest American Farm Bureau Federation Market basket Survey conducted in May.

The AFBF’s informal survey showed the total cost of 16 food items that can be used to prepare a meal was $46.29, down about $1.12, or 2%, from the first quarter of 2009. Of the 16 items surveyed, 10 decreased, five increased and one remained the same in average price compared
with the prior quarter.

Items whose prices declined the most included Russet potatoes, boneless chicken breasts, eggs, sliced deli ham and whole milk, and these accounted for most of the decrease in the average price of the overall marketbasket. Also lower in price were ground chuck, down 12 cents; sirloin
tip roast, down 11 cents; flour, down 9 cents for a five-pound bag; bacon, down 7 cents per pound; and toasted oat cereal, down 5 cents for a nine-ounce box.

“The quarter-to-quarter price decline reported by our volunteer shoppers indicates that consumers are seeing some relief at the grocery store. Even more significant is that average retail prices for eggs, milk, chicken breasts and bacon for the second quarter of 2009 are significantly lower than one year ago,” said AFBF economist Jim Sartwelle.

Overall, the average price for the market basket of foods declined $3.10 or about 6% over a year’s time. Retail egg prices dropped 26%, milk decreased 22% chicken declined 19% and bacon was 11% lower compared with a year ago, the survey showed.

Industry analysts said lower costs for energy and feed grains, compared with a year ago, are among the key factors contributing to the reduction in retail food prices. The foods that declined the most in price are among the least-processed items in the marketbasket, the release said.

“AFBF’s second quarter market basket survey tracks closely with the federal government’s May 2009 Consumer Price Index report for all food, which showed a slight decline of -0.2% for the fourth consecutive month.”

As retail grocery prices have increased gradually over time, the share of the average food dollar that America’s farm and ranch families receive has dropped, AFBF said. “Starting in the mid-1970s, farmers received about one-third of consumer retail food expenditures for food eaten at home and away from home, on average. That figure has decreased steadily over
time and is now just 19%, according to Agriculture Department statistics,” Sartwelle said.

Using the “food at home and away from home” percentage across-the-board, the farmer’s share of this quarter’s $46.29 market basket would be $8.80. AFBF, the nation’s largest general
farm organization, has been conducting the informal quarterly market basket survey of retail food price trends since 1989.

Source: CME News For Tomorrow

Thursday, July 2, 2009

The Debts of the Spenders: Can you Balance California's Budget?

Try this interactive exercise courtesy of the LA Times:

The Debts of the Spenders: Spanish Consumer Credit Falls 33%

Trichet must print more! Only 1% interest rate? How about making it .00001% interest rate?

Consumer credit fell by 33.7% in the first quarter, to €5.796 billion, and late payments rose to 17.54%, according to the National Association of Financial Institutions Credit (Asnef).

Of this total, 4.254 billion euros corresponded to consumer goods, which fell by 23.9% and 1542.3 million euros to the automotive sector, which fell by 51%.

Asnef stressed that the fall in the consumer sector has been mainly due to losses on personal loans, due to the sharp decline in the credit available for consumer goods and by the contraction of revolving credit associated with credit card usage.

The Debts of the Lenders: Vietnam, the Canary in the Coal Mine

For the past 25 years (China) and past 15 years (Vietnam), GDP growth has been 9-12% consecutively - year over year. In some provinces and cities, it was more like 16-18% growth rate (for ex: Shanghai or Ho Chi Minh City). They are 2 of the most dynamic emerging markets and more politically stable beta countries out there in the index.

But all that growth was based on EXPORTS.

For the first time in almost a generation, GDP growth in these 2 Asian countries is being led by STIMULUS - aka govt money printing. How long can it last? I don't know. But the signs are telling.

A slowdown in the export market has forced the govt to adopt inflationary tactics to provide a bump in the economy.

I like to compare Vietnam as an analogous to the Chinese situation - it is China in the early 1990s. But w/one important difference - Vietnam has a smaller forex reserve than China. And therefore is more vulnerable to shocks in the export market. There is an economic dislocation going on - deflating property and equity bubbles while rising food and energy prices.

Combine the 2 and you have the potential for severe political unrest. Perhaps even the potential for an Vietnamese or Chinese Mousavi to emerge (a reference to an Iranian politician whose rise to prominence was fueled by economic dislocations in a deflating property bubble and rising energy/food prices).

The Debts of the Lenders: Chinese Power Struggle Over the Dollar

The official comments from the Chinese media continue to repeat in a schizophrenic loop - one day, they issue calls for a stronger dollar and no plans to change reserve currency status. But the next day, there are bombastic attacks against the dollar/treasuries and calls for a new world order led by a China backed SDR currency.

Well, which is it?

The fallacy in most Western media reporting is that reporters tend to assume that whenever China speaks, it is w/one voice. This is not true. Even in a tightly controlled police state, there is room for dissent - especially in a country as large as China.

The West is hearing an INTERNAL debate that is being made public for two audiences:

a) Domestic audience
b) Western audience

A) Those of us outside China are unable to grasp the full story but details are slowly beginning to emerge:

It seems as if a power struggle is currently playing out between the Foreign Ministry and the Central Bank - both of which are at loggerheads. This is what happens when diplomacy mixes w/economics and finance.

The foreign ministry's goal for the past 25 years has been to promote a cheap yuan in order to lead export based economic growth and provide jobs for the legions of poorly educated peasant class. In contrast, the Central Bank has a more realistic grasp of the global macro situation and is trying to slowly diversify state assets away from the dollar.

Here is some food for thought. What would happen if China were to mark all their dollar denominated assets right now to fair value? They lent money that will never be paid back - at least not in real terms (nominal yield is a different story).

China's economy is held together w/Keynesian scotch tape. Contrary to popular opinion, they have a lot more overcapacity than commodity bulls believe.

B) This debate is being broadcast to the West in order to gauge Western policymakers' reactions to the arguments of each faction. After digesting these reactions, each side has a better assessment on the facts and can prepare for the next verbal riposte.

On a longer time scale, the factions are preparing for China's emerging role as a political and economic counterweight to the OECD. Additionally, these moves are also being orchestrated for the benefit of other observers that are currently sitting on the sidelines, such as the other BRIC states. Such strategy hearkens back to the Cold War era when Maoist China hastened to extend its sphere of influence among the UN Non-Aligned Movement.

Some analysts have described these moves as a global game of chess. A better analogy would be "weiqi", or "go" (as the game is popularly known in the West) where the players wage a "3d" battle w/black and white stones that is spread across multiple dimensions. Instead of exchanging stones though, the stakes are a lot higher.

Blog Archive