Monday, August 31, 2009

The Debts of the Spenders: Muni Bonds Continue Investor Inflows

Billions of dollars continue to flow into municipal bond funds. $1.5 billion flowed for the week ending August.

The article does not mention WHY investors continue to pour money into munis. However, I would venture a guess that a main consideration would be wealthy individuals (the bulk of muni investors have historically been the wealthy eager to shelter their income from high taxes) motivated by concerns of higher federal and local taxes. Most states exclude the gains from muni bonds for their residents while simultaneously penalizing the tax treatment of investment funds in other states.

It is even possible that these investors do not trust the action in equities - especially as the historically bearish fall months of September - November approach. (December could be a different story as that is the month when fund managers try to front run the January effect, a period of extended holidays and low volume that give rise to accumulation).

Saturday, August 29, 2009

The Debts of the Spenders: Swedish Interest Rates Go Sub-Zero

Sigh. Japan III. (The USA is Japan II). And the UK is on the way to becoming Japan IV.

Central banks don't offer negative interest rates unless they are desperate to re-invigorate lending. Or in this case, forced lending since depositors ( in this case commercial banks that have deposits w/the central bank) are penalized for hoarding cash.

Deflation anyone?

The Debts of the Spenders: US Food Prices Slowly Rise

Here's another bit that is sure to add fuel to the ever popular inflation/deflation debate (especially in light of yesterday's large visitor numbers re: the China gold story). After reading the following piece, I have included a link at the bottom of the page to Zerohedge thats show what deflationists have long been arguing: there IS an increase in money supply. . . but it is locked in excess bank reserves (the vast majority held by the Fed) and is not in circulation. Lower velocity of money is a strong deflationary signal.

Economist: US Food Cost Growth To Slow On Econ,Commodity Prices

After two years of above-average food price inflation, the rate is expected to return to more normal rates next year. Corinne Alexander, an agricultural economist at Purdue University, expects 2010 food prices to increase between 2.5% and 3.5%, well under the record 5.5
% that was set in 2008. The 10-year average for food-price inflation, from 1997 to 2006, is about 2.5%, she said in a release.

“One reason we’re not seeing prices go up so much right now is we had a massive recession that caused people to cut back,” Alexander said. In July of this year, the cost of food purchased for the home decreased 0.9% from the same month last year, much lower than usual and lower
than the September, 2008 peak of 7.6%. Food purchased away from home, such as in restaurants, increased 3.2% this past July from the same month last year. That was about average, and lower than the December 2008 high of 5%.

Several factors have been driving the decline in those inflationary numbers, Alexander said. Significantly lower commodity prices, as well as the lower cost of fuel, have been major contributors. “Grain prices peaked last summer. We had $8 corn. We had $13 wheat,” Alexander
said. “We also had $147 per barrel oil.” The recession also slowed growth in developing countries, reducing the demand for meat and other food exports.

That has increased the supply available in the United States, driving down the price.

Source CME News For Tomorrow


No inflation unless money comes out of bank reserves.

[quote]So if all of this printed money is being used by the Fed to purchase toxic assets, where is it going?

Excess reserves, of course. Counting for $833 billion of the Fed's liabilities, the reserve balance with the fed has skyrocketed almost 9000% YoY. Excess reserves, balances not used to satisfy reserve requirements, total $733 billion, up over 38,000%![/quote]

Friday, August 28, 2009

The Debts of the Lenders: Chinese Authorities Tell ISDA They May Default on Commodity Contracts

*Credit Skyline

China’s SOEs May Terminate Commodities Contracts

( China’s state-owned enterprises may unilaterally terminate commodities contracts as they try to cut massive losses from financial derivatives, an industry source told Caijing on August 28.

According to the source, China’s State-owned Assets Supervision and Administration Commission (SASAC) has sent notice to six foreign financial institutions informing them that several state-owned enterprise will reserve the right to default on commodities contracts signed with those institutions.

Keith Noyes, an official with the International Swaps and Derivatives Association, a trade organization, confirmed that he is aware of the SASAC letter, but provided no further comment.

Foreign brokerages usually work through their Hong Kong operations to sign over-the-counter derivative hedging contracts, according to an investment banker whose firm is involved in the business. Hong Kong and Singapore usually serve as venues for arbitration over such transactions.

Most investment banks may "just swallow" any losses arising from canceled contracts, the executive said, adding that any losses are usually made up for with compensating trades.

Investment banks "just earn less" from such transactions, he said.

But any such move would be a major blow to investment banks which service massive commodities hedging operations for Chinese SOEs on the international market, said the executive.

Chinese SOEs have suffered massive losses from hedging contracts since the onset of the global financial crisis. SASAC and the National Auditing Office has been investigating derivatives positions trading since the beginning of the year.

A source from a state-owned company told Caijing that most of China’s SOEs engaging in foreign exchange and international trade have participated in derivatives trading, involving capital topping 1 trillion yuan.

The Debts of the World: How Long Will Algo/High Frequency Trading Last?

*Credit XJaccounting

Like all trends, high frequency/algorithmic trading is bound to become a crowded field. You don't need to understand (most of) the fancy math and algorithms behind the professor's argument. Just think of it in terms of traditional arbitrage - the advantage fades once information turns from asymetrical to a more level field.

For a less math oriented argument, please read Rick Bookstaber:

The Debts of the Lenders: China Becomes World's Largest Gold Market

From Chinese network tv: China has now become the world's largest gold market.
Goldbugs, I might owe you an apology. Still a bit early to say though b/c I believe we remain in a deflationary environment - see the earlier article I posted regarding dollars being cheaper to borrow than yen. A cheaper dollar and lower LIBOR (not necessarily the same thing) mean that markets believe interest rates won't be rising quickly anytime soon.

Anyway, it's no wonder that Chinese consumption of gold has shot up. Earlier this year, I reported that Chinese authorities had been secretly increasing their gold reserves:

It doesn't take a genius to know why China has been stockpiling gold. American fiscal profligacy is foremost on policymaker's minds. Now, it's entering the common man and woman's thoughts.

For the full program:

The Debts of the Spenders: The Dollar Carry Trade - Cheaper to Borrow than Yen

The Wall Street Journal reports that the dollar is now more cheaper to borrow than the yen for the first time in 16 years. LIBOR rates have fallen dramatically during the past year as central banks the world over have flooded the systems with liquidity.

There are 2 stories going on here: 1) liquidity 2) solvency.


This deluge of cheap credit has several important effects, namely a dramatic increase in prices for nearly ALL asset classes - equities, debt, and even credit (agriculture being a sore exception). The intended beneficiaries, multi-national banks, have put this cheap credit (courtesy of the taxpayers) to good use speculating. After all, it's easy to gamble with other people's money and reward yourself even for losing bets.

And even where LIBOR isn't available, banks still have access to quantitative easing measures such as the unconventional TALF, POMO, TOMO, and European equivalents.

In such an environment, it is nearly suicidal to short any asset class favored by the large bank trading desks (agriculture again being an exception . . .I guess watching corn reports isn't as sexy as trading naked CDS instruments and gunning ES futures).


However, keep in mind that this government largesse is only available to large banks and financial institutions. Smaller, less politically connected institutions do not have access to quantitative easing measures (e.g. access to Fed discount window) and sometimes have to use the LIBOR market. When they do, these smaller banks have to pay a premium above the going LIBOR rate b/c of their smaller status. I cannot speak for other banks but in the US at least, commercial banks are required to maintain adequate capital ratios.

In the past, this requirement was met by holding shares of preferred stock in GSEs like Fannie Mae and Freddie Mac. Some banks also bulked up their portfolios w/more exotic asset classes like auction rate securities (whose value and return was determined in periodic auctions) that later proved to be less than liquid. The result has been for the FDIC to shut down 3-4 banks every weekend for the past year since these holdings are often not enough to satisfy regulatory requirements.

Ah, but what about the multi-national banks? Aren't they also suffering from a solvency crisis? Yes and no. There are 2 sets of rules: 1 for the big boys and another for everyone else. But you already knew that, right?

The Debts of the Lenders: J REIT Bailout Fund To Launch September 5

Just in time for the (expected) landslide victory of the old hat LDP this weekend. Which begs the question . . . .what exactly are they going to offer that hasn't been tried before during Japan's lost generation? Keep in mind the LDP is the SAME party that created, maintained, and exacerbated the credit bubbles and subsequent deflationary "L shaped" recession of the past 20 years or so.

Thursday, August 27, 2009

The Debts of the Spenders: Dollar Bears Launch Intra-Day Raid

[correction - UDN, please disregard the earlier reference to UUP as a typo] is the ETF that corresponds INVERSELY to the DXY spot rate for the dollar based against a basket of major currencies like the yen, euro, and pound. As you can see, something happened at 2 PM ET.

The Debts of the World: Container Freight Rates Mirror Equity Volatility

Record volatility in the equity, fixed income, and credit markets is being echoed in the Baltic Dry Index. Shippers are apparently as confused by the situation as their counterparts in the financial services arena. This is what happens when central banks (namely the Fed) gives 0% loans and free cash to primary dealers and other connected Wall Street insiders to pump the highest beta (junk) stocks and credit. How else can you explain a 30-40% rise in high yield this year?

For my part, I continue to remain bearish on the prospect of an uptick in global trade.

The Debts of the Spenders: Is Iceland the Tip of the Iceberg?

Iceland was THE poster child for a deflating bubble. During last year's credit crisis, the Icelandic government collapsed amid a bailout of several banks. Regulators were forced to nationalize 3 of the nation's banks in order to repay the high yield checking accounts of millions of British, German, and Dutch customers. There were widespread demonstrations and even rioting in parts of the country.

However, fast forward to today. The country is largely peaceful even as unemployment continues to creep upwards.

But the Financial Times paints a different picture. The idyll was bought at a price. Come this fall when the brief summer skies retreat in the face of grey winter, this storm tossed isle in the middle of the Atlantic will face a potential reckoning: freezes on mortgage payments are due to end, government spending will be cut by 20-30 percent, high interest rates (> 12%) will remain, and the summer business boom in tourism gives way to the cold tundra.

Are there any lessons here for the UK or America? Possibly. But then again, key differences remain such as the ability of both nations to draw on greater amounts of capital from foreigners (e.g. better access to Asian and Middle Eastern lenders).

The Debts of the Spenders: European Real Estate Lacks US Investors

One of the most significant changes in the structure of the European commercial real estate market over the last two years has been the withdrawal of US buyers from the market since the credit crunch took hold, according to research from CB Richard Ellis.

Wednesday, August 26, 2009

The Debts of the World: Fallout from Slowing Trade - Consolidation in Shipping and Logistics Industry

This is a timely article since it relates not just to the slowing Baltic Dry Index but also the imposition of stringent, new regulations thrown up by governments.

*Note - this is an ebook format. You must have Java, Flash, or the appropriate web content software installed to view the article successfully.

The Debts of the Spenders: From REITs With Love - A Closer Look at CMBX

Commercial real estate bears continue to get beaten badly. There was a time when I was a CRE bear (earlier this spring/last fall) but that era passed upon realizing the extent of the government's commitment to TALF and POMO (permanent open market operations) purchases in the CMBS market. Even though cash flow modeling and other means of fundamental analysis continue to paint a poor picture, the CMBX index has managed to gather steam while maintaining support levels. Last week's extension of the TALF program into 2010 was the final nail in the coffin for CRE bears.
Keep in mind that commercial real estate was priced for armaggedon earlier this year. Is there a reason to be suspicious of the rally? Yes! But is it possible to fight the unlimited firepower of the Federal Reserve in its quantitative easing? NO!
Bailout Ben has done his job of holding the fort long enough for the cavalry to arrive - in this case, sideline money (an eclectic mix of hedgies, mutual funds, and private wealth) that has watched the March - August equity rally in disbelief. Faced w/the prospect of inflation, fund managers are feeling the pressure to invest their funds somewhere. . . .anywhere. And it seems to be working.

NEW YORK, Aug 25 (Reuters) - Bonds of U.S. real estateinvestment trusts have rallied as thawing credit markets easedconcerns over the sector's liquidity and short-term refinancingneeds, though the continuing need to refinance maturing debtmay spark renewed weakness. REIT bonds have rallied as the companies shored up liquidity with equity and debt sales, and extended maturities on revolving credit lines.
Spreads on REIT bonds have narrowed to 392 basis points, from more than 500 basis points in July, according to Bank of America Merrill Lynch data. The spreads had widened to over
1000 basis points in April. "REIT credit spreads have continued to tighten as near and
intermediate refinancing risk has subsided largely due to much improved access to capital in the form of a thawing unsecured market, higher equity values, and the potential for CMBS
issuance via TALF," CreditSights analysts Craig Guttenplan and Rob Haines said in a report on Tuesday. REITs are expected to benefit from the government's Term Asset-Backed Securities Loan Facility (TALF), which aims to jump-start the moribund commercial mortgage-backed securities (CMBS) market.

Tuesday, August 25, 2009

The Debts of the World: Industrial Capacity Picking Up?

It's a buyer's market for capital equipment, but with the economy's future still uncertain and banks ever cautious, companies proceed with caution.

By Peter Alpern Aug. 19, 2009

Just as the market is ripe for first-time home buyers or those looking for a new car, an overabundance of supply and a dearth of demand has created a rare opportunity in the machine tool market. Companies with strong lines of credit are finding once unthinkable discounts on highly sophisticated equipment.

But, at a time when manufacturers face the most uncertain economy most of them will ever know, and with banks just beginning to show stability, capital equipment investment is a far more tentative undertaking today than at any time in recent decades.

Read the rest of the article here:

Sunday, August 23, 2009

The Debts of the World: Obama Signals to China US Will No Longer Be Primary Consumer

Excellent op-ed from the Peterson Institute for International Economics as republished by the Financial Times. The imbalance of fund flows is a core topic of this web site so I felt compelled to show this link.

The authors do an excellent job of portraying the Obama administration's handling of the savings glut that Asian savers, particularly China, faces vis a vis declining American consumption.

Saturday, August 22, 2009

The Debts of the Spenders: HY and SPY Compared

This just goes to show what a casino the markets have become. HY, or high yield, is compared against the SPY etf that tracks the S&P 500.

Friday, August 21, 2009

The Debts of the Lenders: Brazilian Farmers Hoard Soybeans

Exporters Frustrated By Lack Of Brazilian Soy

Brazilian soybean farmers are frustrating exporters by hanging on the last of their soybean crop in hopes of getting better prices, industry sources said Friday.

“We have destinations that would like to receive beans, but we can’t buy volumes at the moment,” a chief trader at a major U.S. soy exporter said.

Brazilian farmers have already sold around 90% of the 2008-09 soy crop, so farmers are holding onto their remaining beans in order to speculate on higher prices. Brazil produced around 57.1 million metric tons of beans in 2008-09 compared with 60 million tons in 2007-08, according to Brazil’s National Commodities Supply Corp. Some states, such as Parana, Brazil’s No. 2 soy producer and Rio Grande do Sul, the No. 3 soy producer, have more stocks because they harvest later. But Mato Grosso, the No. 1 soy producer, and other states in the center-west soy belt have few soybeans left for sale.

Moreover, farmers with soybeans to sell are waiting for prices to rise and aren’t in a rush to sell, said industry sources.

This is normal for the inter-harvest when most exporters tend to turn to the U.S. for their soybeans rather than the southern hemisphere, the trader said.

Trade may increase if farmers need cash to pay for the new planting season, but most farmers are well capitalized, he said.

They may also sell if farmers expect the likely bumper new U.S. soy crop to push down prices, he added.

Brazilian farmers begin to plant in September onwards in parts of Mato Grosso state.

Steve Cachia, a grains analyst at Cerealpar, said smaller Brazilian and Argentina soy crops this season have made the situation tighter than normal.

“Ten percent of beans remain to be traded, but these will run out in the coming weeks or months,” Cachia warned. Cachia said that aggressive buying, however, isn’t occurring at the moment. It seems that exporters and local crushers have good stocks and will try to extend these until beans become available from the U.S., he said. They may have also anticipated the shortages and bought earlier, he said. Soybeans were trading at 48.50 Brazilian reals ($24.46) per 60-kilogram bag on Friday at the port of Paranagua.

Brazil is the world’s No. 2 soy producer after the U.S

Source: CME News for Tomorrow

The Debts of the World: Where did the Bears Go?

An oldie but goodie from earlier this spring.

Thursday, August 20, 2009

The Debts of the Lenders: Ocean Freight Rates Projected to Fall on Lower Chinese Demand

Sea Freight Rates Seen Falling On Lower China Demand

Ocean freight rates are expected to recede in the third quarter as supportive dry bulk commodity buying by China declines and the other major world economies fail to compensate.

In August, the Baltic Dry Index - a barometer of shipping costs for commodities such as iron ore, coal, grain and fertilizer - saw its sharpest slide since October, when freight rates were heading below break-even levels. The index is often seen as a key leading indicator for commodities and global trade.

The BDI was down 90 points Wednesday to 2614, well off its yearly high of 4291 on June 3, although still about four times higher than December’s 22-year low.

China’s demand for iron ore and coal, key ingredients in steel production, had helped the BDI rise sharply in the first half of 2009. As of July, China was importing nearly 55% of globally traded iron ore, and about 10% of coal. Massive queues outside major ports have crimped supply and helped elevate freight rates, but this situation isn’t likely to continue.

“There is no doubt the last few months have been unprecedented and unsustainable when it comes to China’s appetite for iron ore imports,” said Peter Hickson, UBS AG’s managing director of global materials strategy.

While rates could rise again as early as the fourth quarter, Hickson expects a 30% fall in the BDI in the third quarter compared with the second quarter. He recently increased this forecast from 15% in early June, as China’s appetite for iron ore showed signs of slowing.

Capesize ships, the largest of the four vessel classes calculated into the BDI, are the primary transport method for iron ore on the major routes to China from Australia and Brazil, the largest producers.

Source CME News For Tomorrow

The Debts of the Spenders: Free Markit CDS Price Quotes

Due to great demand, Markit has finally released a free CDS pricing report. Prices are for 5 year only. Anyway, be sure to bookmark it.

Wednesday, August 19, 2009

The Debts of the Spenders: US College Graduates Face Miserable Prospects

Bad news for a consumer oriented economy. Americans have long been reknown for living from paycheck to paycheck. But an extended period of poor employment prospects will depress their discretionary spending power.

The other takeaway here is something that many parents have long chided their children on:
liberal arts/humanity degrees are a waste of time and money unless you graduated from an Ivy League institution (in which case you don't have to do anything except breathe). Instead, the majors that lead to the quickest job transition are areas that parents - particularly immigrant parents - have long known about: hard sciences and engineering. There is also another path not mentioned in the article - trade school. A technical degree can be immensely valuable right away as it prepares graduates for a job and indeed forces them to learn entrepreneurial skills almost right away.

The Debts of the Lenders: Chinese Speculators Stockpile Copper

Great article from Bloomberg. The gist of it is that now you have pig farmers and housewives in China speculating in copper and nickel. Smells like a bubble to me.

My take on this whole story is to closely watch the Peruvian markets for signs of weakness. Why? B/c Peru is a large base metal exporter and the strength of its currency is closely tied to the shiny metals - specifically copper.

Pig farmers in Guangzhou province were buying copper or nickel, Liu wrote, citing CCTV. Residents in Wenzhou city of Zhejiang province, “famously investment savvy,” are reportedly using bank loans to stockpile copper scrap, with one merchant saying he has stored 20,000 tons, Liu wrote.

Housewives in Wenzhou may have stockpiled metals as “they just have too much cash on hand,” Eramet’s Deng said.

The People’s Bank of China scrapped lending quotas in November, triggering a record 7.73 trillion yuan of new loans this year. M2, the broadest measure of money supply, rose 28.4 percent in July from a year earlier.

Metal traders have reported incidents when “a rich man walked into our office and asked us what had been the lowest and highest prices of nickel,” Scotia’s Liu wrote. “After telling him those prices, he said the current price was low and he placed an order.”

Tuesday, August 18, 2009

The Debts of the Lenders: China Expands Trade Ties W/Argentina

Argentina. . . breadbasket of South America and home of thundering herds of cows. Chinese investors have kept Argentina in their eyes for quite some time now along w/another South American powerhouse, Brazil. Officials explain their reasoning below:

Interview: China's Guangdong province seeks more economic cooperation with Argentina

BUENOS AIRES, Aug 17, 2009 (Xinhua via COMTEX) --
by Juan Manuel Nievas, Alejandra del Palacio

China's Guangdong province is looking for more economic cooperation with Argentina, a visiting Guangdong government leader said Monday. Xie Pengfei, deputy secretary general of Guangdong and director of the Development Research Center of Guangdong, was here for a China-Argentia seminar.

There would be very good cooperation between both sides in the future, which would promote mutual economic development, Xie told Xinhua. The cooperation could be in the form of a joint venture or through direct investment by a Chinese company in Argentina, Xie said.
He added that his province, home to 95 million inhabitants, was developing rapidly and was ready to invest in Argentina, mainly in the technology, agriculture, vehicle and tourism sectors.
"We are open to everything in this country," he said.

Noting that Guangdong would have no problems with raising investment capital, Xie said: "We just have to find the right partner." Guangdong's gross domestic product grew 10 percent to 3.06 trillion yuan (420 billion U.S. dollars) in 2007. Bilateral trade between China and Argentina totaled 14.4 billion dollars last year, 45 percent more than in 2007, siad Yang Shidi, an economic adviser from the Chinese embassy in Argentina.

Guangdong also planned to invest in other countries, such as Brazil, Chile, Bolivia, the United States, Philippines, India and Australia, according to Xie.

Monday, August 17, 2009

The Debts of the Lenders: Chinese Commodity Imports to Slow in Q3 and Q4 of 2009

China’s Commodities Imports To Moderate In 2H 2009 - RBS

China’s commodities imports are likely to moderate in the second half of this year as the boost from restocking, arbitrage opportunities and an easy credit policy starts to fade, Royal Bank of Scotland said in a report issued Monday.

“While China’s explosive commodity import and fixed investment demand surprised positively in the first half, it is likely to disappoint in the second half,” Ben Simpfendorfer, the bank’s China economist, said in the report.

China’s recovery will generally look more ordinary in the second half compared with the rest of the world, as the impetus from stock-building slows, it said.

The country’s urban fixed-asset investment in the January-July period rose 32.9% from the first seven months of last year, slowing from a rate of 33.6% on year in the first half, according to data issued by the National Bureau of Statistics. New yuan loans also fell sharply to CNY355.9 billion in July from CNY1.53 trillion in June.

People’s Bank of China Vice Governor Su Ning said earlier this month that loan
growth is likely to slow in the second half from levels in the first half, partly because
banks often concentrate on getting loans out earlier in the year, and government backed
investment projects are likely to taper off.

Restocking was a major reason for China’s rising commodity imports in the first
half, while arbitrage opportunities presented by lower foreign prices helped bring a simultaneous jump in imports of both base metals and bulk commodities, RBS said in the report.

Buying for state reserves kept local prices for many commodities higher, increasing the attractiveness of imports.

In the first half of this year, the country’s State Reserve Bureau was reported to have purchased 590,000 metric tons of aluminum, 159,000 tons of zinc and 235,000 tons of copper.

China imported 26.48 million metric tons of soybeans in the first seven months of this year, up 28% from a year earlier, as domestic prices were kept high by the build-up in state reserves.

However, as stock-building has slowed and arbitrage opportunities have narrowed, demand for imported for base metals and bulk commodities has been slowing, it said. The central bank has recently warned that it could fine-tune its moderately loose monetary policy, raising concerns that cash liquidity could tighten and weighing heavily on sentiment recently in local markets from equities to futures.

“This (expected tightening) will curb speculative demand for commodities,” said
RBS. Iron-ore spot prices began to ease last week after nearly doubling since touching lows in April. Domestic steel prices also faltered following a three-month run higher.

Source - CME News for Tomorrow

The Debts of the Spenders: US Officials Extend TALF into 2010

Oh well. This doesn't really come as a surprise. The Feds had been on a hiring binge to attract structured finance personnel (the same people who had previously created these problems).

At the last FOMC meeting, Bernanke and friends set October as a deadline for the end of POMO Treasury purchases. But more unconventional measures of quantitative easing remain - particularly in the private sector loan markets. The fact that the Feds had to extend the TALF further into next year is a sign that policymakers believe the recession will continue to deepen.

WASHINGTON (Dow Jones)--The U.S. Federal Reserve and Treasury Department extended into next year their Term Asset-Backed Securities Loan Facility, a key program aimed at boosting the flow of credit to businesses and households and the distressed commercial real estate market.

The extension is a significant committment from U.S. officials to continue to help the economy recover from the financial crisis amid ongoing troubles facing the commercial real-estate industry and continued fragility of credit markets.

Government officials had previously announced that they would authorize TALF loans through Dec. 31. But with markets for certain securities still suffering, officials said Monday they will extend TALF loans against newly issued asset-backed securities and legacy commercial mortgage-backed securities through March 31, 2010.

The Fed and Treasury also approved an extension of TALF lending against newly-issued commercial mortgage-backed securities, or CMBS, through June 30, 2010, pointing out that new CMBS deals can take a significant amount of time to ar

The Debts of the Lenders: Family Feud in Saudi Arabia Sparks Credit Crisis

Saudi groups’ dispute sparks lending fears

The financial travails of two prominent Saudi companies locked in a bitter dispute has caused banks in Saudi Arabia to clamp down on lending to private sector companies, setting back the economic recovery in the world’s top oil producer, the FT reported, citing Brad Bourland, chief economist at Jadwa Investment. Mr Bourland estimates that the problems of Ahmad Hamad Algosaibi & Brothers Co and Saad Group, which is owned by Maan Al-Sanea, the Saudi billionaire, have knocked about 500 points off the Saudi stock market index and forecasts will shave 0.5 per cent off the kingdom’s growth this year.

Saturday, August 15, 2009

The Debts of the Lenders: China Attracts Private Equity Deal Flow In Yuan

Are things really that bad in China? Many bears have been writing off China as an overleveraged bubble - including me. After all, lending has exploded this summer among Chinese banks w/private analysts estimating that M2 increased 27-30% in June alone. But even as macro conditions continue to deteriorate, investment continues to flow into China.

The key difference though is in the MANNER and TYPE of foreign investment.

1) Manner - Private equity by definition sidesteps the equity markets and focuses on project finance and other types of deal placements. While the export sector will certainly continue to suffer based on weaker Western factory orders (especially critical in the upcoming holiday retail season), there are many areas in the Chinese economy that will continue to do just fine . . . if not grow outright. Examples include - water treatment, agriculture, internal infrastructure, health care, IT, and energy exploration.

China is like an adoloscent child recovering from a steroid binge. Investment in the aforementioned sectors makes sense as they are basically disease treatment - meant to fix or moderate the worst excesses of 9-14% annual growth (even higher in the eastern seaboard cities). Industrial pollution, poorly constructed roads and buildings, the removal of an iron rice bowl (the Maoist era state security system), and depleted oil wells are all signs that Beijing has to address. . . and soon.

The business partners in private deals will likely be state actors such as local governments or federal agencies. Private equity is taking a longer term perspective here that effectively sidesteps the dislocations and volatility of the equity markets.

2) Type - The headline says it all. China is growing impatient w/dollar hegemony and is keen to bring its own currency out onto the world stage. All year long, Chinese diplomats have continued to publicly question the safety of their dollar, agency debt, and treasury investments. This nervousness has been reflected in the efforts of US diplomats to re-assure their trade partners in a hyper-active game of shuttle diplomacy w/Geither, Clinton, and other senior officials jetting off on a moment's notice to Beijing and Shanghai. While Chinese officials have been acquiesced to such efforts (for now), efforts are still being made to stimulate their own currency.

The article points out that Chinese authorities are keen to maintain investment funds within the country through exchange controls. This will limit the return on joint ventures initially but fund managers are apparently taking a longer view. Bond offerings and other less public instruments will continue to be offered in placements to foreign investors.

Conclusion - China is currently in the midst of an internally created debt fueled bubble as of early June. Sooner or later, there will be a correction in their equity markets (Shanghai or Hang Seng).

Anyone who thinks China can lift the world out of the recession needs a reality check. For all its advancement, the Chinese economy remains smaller than the US, EU, or even Japanese markets. The Chinese might be able to save themselves but not the whole world. But for those investors willing to take a longer term view and also be comfortable w/a return several years down the line. . . then China remains a sound investment.

Private equity drive to raise renminbi funds

By Henny Sender in New York

Published: August 14 2009 03:00 | Last updated: August 14 2009 03:00

US firms, such as Blackstone and the private equity arm of Goldman Sachs, are establishing investment companies in China to raise renminbi funds from local investors and take stakes in local companies with Chinese partners, according to people familiar with the matter.

The move is another step towards making the Chinese currency more widely available, and a further signal that Beijing is determined to improve the standard of corporate management in China.

The two private equity firms join banks such as Citibank, Bank of East Asia and HSBC in their ability to offer renminbi products.

By tying up with Chinese partners, Blackstone and Goldman hope to gain an advantage in securing deals in China. So far, foreign private equity firms have been frustrated by the relative lack of deal flow in a country where economic prospects are so seductive.

Friday, August 14, 2009

The Debts of the World: Credit Markets Hit Resistance?

Technical analysis's track record w/credit markets is mixed or non-existent depending on who you talk to. Still, these charts give a glance at institutional sentiment (as opposed to retail mutual funds).
EM- emerging markets
IG- investment grade
HY- high yield (junk bonds)
IG HVOL - similar to IG but w/an eclectic mix of financials, home builders, retailers, and restauranteurs.

For more information, I suggest Urbandig's recent post on CMBX credit prices:
Bond markets absolutely lead equities - even if there is an occasional lag.
Another comparison I recommend is checking the prices and charts for: LQD (Investment grade bond etf) and HYG (high yield junk bond etf).

Thursday, August 13, 2009

The Debts of the Lenders: India Begins To Experience Food Inflation Hunger Pangs

Not surprising really when you consider that the sub-continent has not experienced any significant rise in sea temperatures this year.
Jim Rogers must be rubbing his hands with glee. Any attempts at official intervention are likely to exacerbate bullish speculators.

Satellite image from NOAA.

India Food Prices Rise On Drought, High Import Prices

With 167 of India’s 626 administrative districts declaring a drought this year, prices of staple foods have risen by an average 30% and as much as 40% in some cases. The government wants imports to help bridge the domestic supply gap and rein in prices, but that may be easier
said than done. Efforts to encourage imports so far have had limited success because of higher international prices while what is seen by many as a last resort - subsidizing imports - could
drive up prices even further, making imports more difficult.

It’s a double blow to the government this year. Poor monsoon, coupled with rising global prices have put policy makers in a dilemma,” said Harish Galipelli, head of research at JRG Wealth Management. The government may give more import incentives but that may not work, as any new incentive will only push world prices even higher, said Sanjay Tapriya, director of finance at Simbhaoli Sugar Mills Ltd., a leading sugar producer in the country.

India faced a similar situation in 2006-07 and 2007-08, when a decision to import as much as 7 million tons of wheat amid falling domestic stocks pushed up international prices so much
that the country was left paying an import price of INR16,000 per ton by the time the program ended, compared with a price of around INR8,000/ton at the start of the program.

Sure enough, prices rose also because of other factors such as tight global supply, but India’s decision to enter the market after a gap of nearly six years was seen as a major catalyst for the sudden surge in prices. Prime Minister Manmohan Singh has said the government is ready to undertake open market intervention again to prevent the rise in domestic prices caused by insufficient rains.

“We need to be aware of the possibility that reduced production of kharif (summer-sown) crops in the current year may have an inflationary impact on prices of food items in the coming
months,” Singh said at a special meeting of federal and provincial officials earlier this week. “We should not hesitate to take strong measures and intervene in the market if the need were to

India’s Meteorological Department has estimated that rainfall during the June-September monsoon season this year will be substantially below longterm average, severely reducing plantings and damaging standing crop in many parts of the country. Rainfall was 29% below average as of Aug. 11. Analysts have said the country may face the worst drought in 50 years if rainfall remains weak during the rest of the season. Monsoon rains in June were the lowest in 83 years.

“A continuation of status quo in the remaining weeks of this monsoon season will lead to a severe drought in 2009,” rating agency Crisil said this week.

“In our assessment, a fifth of the country is reeling under drought conditions,”
brokerage Kotak Securities said in a report, forecasting an 18% fall in summer-sown food grain production and a 13% drop in total food grain output in 2009-10.

Morgan Stanley has halved its earlier forecast of India’s agricultural growth to 1.5% in fiscal 2009-10 although the government is yet to officially revise its target of a 4% growth in agriculture production this year. According to federal farm ministry, the area under paddy cultivation has fallen 20% this year to 22.82 million hectares. The wheat crop, which is
mainly winter-sown, may also be affected due to insufficient soil moisture, according to analysts.

Sugar cane acreage is down at 4.3 million hectares as of Aug. 6, compared with 4.4 million hectares at the same time last year. Sugar production in the current crop year ending September 30 is estimated to be 14 million to 15 million tons, down sharply from 26.3 million
tons in the previous year. Production of pulses could fall by 11% to 13 million tons in 2009-10
while demand is estimated to be 17-18 million tons.

Domestic sugar prices have risen almost 40% to INR2,800/100 kilo grams in the last six months while prices of pulses have risen by 20% to 40%.

Even wheat and rice haven’t been spared despite the country having ample stocks of both the grains following two bumper crops. Wheat prices in the spot market, for example, have risen to INR1,175/100 kg from INR1,110/100 kg in just a month. “There is hardly any wheat left with the private trade in the open market,” said Ajay Goyal, president of the
Maharashtra Flour Millers Association.

The price of rice has risen by 10% to 15% in the last three months. The federal government, which has already announced a slew of measures such as allowing duty-free import of sugar and pulses until March 2010 and re-imposition of export restrictions on most agriculture products, may be forced to take further measures to ease the pressure on prices.

Source CME News For Tomorrow

The Debts of the Spenders: US Rail and Truckload Freight Volumes Pick Up

Marginal improvement anyway.

The Debts of the Spenders: 401k Money Continues to Roll In

Yet another sign that equity markets continue to move out of sync w/economic fundamentals. But we have entered a manic depressive stage where things have become more manic than depressive. The impact of sideline retail money that sat out the March - June rally period is just beginning to take effect . . . . even as institutional insiders continue to sell. Still, the effect of mutual fund inflows is not to be underestimated as a key area to focus in on is fund managers' desire to window dress their way through quarterly statements.

SAN FRANCISCO (MarketWatch) -- Despite the recession, more workers ramped up retirement-plan contributions in the second quarter than reduced them, reversing a trend in the previous three quarters of more workers' cutting contribution rates, according to a Fidelity Investments study of plans it administers for 11.2 million participants.

While the vast majority of workers kept their contributions steady in the second quarter, about 5% increased their deferral rate and just 3% decreased their rate. Earlier in the economic downturn, the portion of participants cutting their contributions topped 6%, according to Fidelity.

The average account balance rose to $53,900 in the second quarter, a 13.5% increase from the first quarter, primarily driven by the stock-market rally and employer contributions, said Scott David, president of Workplace Investing with Fidelity Investments.

Workers who maintained a long-term view and "stayed the course during the market turmoil of 2008" are being rewarded now as 401(k) balances improve, he said.

Retirement savers who had a balance with Fidelity in the last five years and maintained that balance saw 35% increases. While the capital markets helped, those who didn't liquidate and move to cash are reaping the rewards, David said.

"You're buying more shares when prices are down, fewer shares when prices are up," he said. "Those who didn't take a loan and withdrawal are very far down the road to recovery."

Wednesday, August 12, 2009

The Debts of the Spenders: Skeptics Question USDA Soybean Forecast

Questions focus on the validity of USDA estimates regarding the projected supply, frost concerns, and Chinese demand. The overall sentiment had been net bearish per the latest Commitment of Traders report but prices had been pushed slightly higher on outside pressure from dollar weakness. (The DXY dollar index saw a 1 year high in short interest per the COT index as well - please keep in mind that high short interest in any one sector makes the overweighted traders vulnerable to a fade).

USDA Soy Yield, Demand Estimates Raise Analyst Skepticism

The U.S. Department of Agriculture on Wednesday projected U.S. 2009 soybean yield and production at levels below market expectations, and the demand projections sparked skepticism among analysts on the validity of the government estimates.

U.S. soybean production is estimated at record levels, but analysts see the potential for that projection to climb in future USDA crop reports in the absence of a weather threat. “Favorable weather for developing soy crops in their critical month of August so far, and above-average condition ratings set the stage for production estimates to head north from here,” said Bill Nelson, analyst with Doane Advisory Service.

The USDA projected 2009 U.S. soybean production at 3.199 billion bushels with a yield of 41.7 bushels per acre. The production figure was below the average Dow Jones survey estimate of 3.213 billion, with yields below the average estimate of 42.1 bushels/acre. August is when
soybeans enter their pollination stage and that is when crop yields are set.

Compared to last year, soybean production is forecast 8% higher. Based on Aug. 1 conditions, yields are up 2.1 bushels per acre from 2008. If realized, this will tie for the fourth highest yield on record, according to USDA. With the exception of Illinois, yields are forecast higher or unchanged from last year across the corn belt and Great Plains.

“If the first fall frost holds off in the eastern Midwest, and western belt states Iowa, Minnesota, and Nebraska can dodge any late problems, we will see production outlooks go up,” Nelson said.
The decline in the USDA’s yield estimates were textbook changes, as historically USDA drops its yield forecast from July to August by 1/2 bushel an acre, Nelson added. In July USDA used a trend line yield of 42.6 bushels an acre for the 2009 soybean crop.

“It was a little surprising to see USDAlower the soybean yield, when they raised yields for
most other crops,” said Gavin Maguire, research director at e-hedger in Chicago.
However, weather will play a significant part in determining finial yield and production.

Soybeans in the eastern Midwest in particular are vulnerable to crop losses from a normal fall frost due to lagging maturity brought about by late planting. USDA reported Monday that 55% of the crop was setting pods, down from the five-year average of 72%. In Illinois, 42%
of the crop is setting pods, below the average of 77%.

As a whole, U.S. soybean crops are 17 percentage points behind their averages, leaving too many states vulnerable to a normal frost, said Joe Victor, analyst with Allendale Inc. The average frost date for 60% of U.S. soy crops from Ohio to Nebraska is Oct. 5, Victor said.

Meanwhile, demand estimates raised some eyebrows as well, with traders questioning how USDA lowered Chinese imports when China has given indications of raising its import potential.
Tuesday, China’s deputy chief of the economic and trade department under the National Development and Reform Commission, Liu Xiaonan, said China’s domestic soybean output growth can’t match the rate of rising demand, so imports will continue to rise. China will also
encourage processing plants to increase their soybean reserves as well, he said. The China number provides a discrepancy as the country continues to advance in poultry and dairy with crusher demand for soybeans seen outpacing domestic supplies, Victor said.

The U.S. is on target for record firstquarter demand, and USDA has underestimated soy demand in August compared to the final figure in six of the last eight years, said Rich Feltes, director of research at MF Global at a press briefing sponsored by the CME Group. However, some analysts see the potential from smaller demand. Demand is centered on China, but it
needs more diversity as struggles in the livestock industry could limit feed demand for soymeal, Maguire said. More exports can be expected from Brazil and Argentina on higher output, taking
some demand from U.S.

Source CME News for Tomorrow

The Debts of the Spenders: NYSE Euronext Suspends CDS Clearing

Not a single trade in 8 months. Must be the competition.

I commented on the CDS clearing environment earlier in January:

Tuesday, August 11, 2009

The Debts of the Spenders: New Legal Developments In OTC Derivatives

Some interesting developments that I received from the ABA's Committee on Law and Accounting. (The ABA stands for the American Bar Association)

Dear Members of the Law and Accounting Committee: Here is an update on some interesting recent developments:
1. The Obama Administration today released its proposed legislation regarding regulation of over-the-counter derivatives. Here is a link to Treasury's press release:
The legislation would subject swap dealers and "major swap participants" to sweeping regulation. Notably, the term "major swap participant" is defined by reference to accounting concepts:
MAJOR SWAP PARTICIPANT.—The term ‘major swap participant’ means any person who is not a swap dealer and who maintains a substantial net position in outstanding swaps, other than to create and maintain an effective hedge under generally accepted accounting principles, as the Commission and the Securities and Exchange Commission may further jointly define by rule or regulation."
The intent obviously is to exclude entities engaged in "legitimate" hedging transactions from the new law. However, the idea that this will be determined by reference to the complex standards of hedge accounting under GAAP is rather remarkable.
2. The Financial Accounting Foundation and the Financial Accounting Standards Board issued a response on August 1 to the Recommendations of the Advisory Committee on Improvements to Financial Reporting. A link to its response is attached:

The Debts of the Lenders: Indian Drought Extends Grip Over Bullish Sugar Prices

Sugar bulls continue to get juiced. As of Friday, the Commitment of Traders showed commercials had pumped their long positions into a 12 month highs. Sugar is already at 28 year highs - how much longer can it continue rising?

India Cuts Aug Rainfall Estimate; Drought Looms

India’s weather department late Monday sharply cut its rainfall
forecast for August to 10% below normal from an earlier estimate it would be 1% above average, fueling concerns about a nationwide drought.

The seasonal rains were 28% below the 50-year average in the June 1-Aug. 9 period, the weather department said. Scanty rains are threatening a recovery in Asia’s third-largest economy as 60% of the farmlands are rain-fed.

Finance Minister Pranab Mukherjee Tuesday said a drought was looming over at least 161 of the country’s 625 districts, but played down concerns, stating he was optimistic the economy would still grow at the earlier estimate of over 6% in the fiscal ending March 2010.

“There is no point in pressing the panic button. This country has the capability of handling a drought situation,” Mukherjee said.

However, the federal finance secretary, Ashok Chawla, said weak rains may push up prices later in the current fiscal.

The annual monsoon rainfall is crucial to summer-sown crops like rice, sugar cane, pulses and oilseeds. Plantings during the season are down by 20% to date, Mukherjee said.

India’s sugar production in the current marketing year ending Sept. 30 is expected to fall to about 15 million tons on lower
sowing, down from 26.3 million tons a year earlier. India, the world’s largest sugar consumer, turned a net importer of the
sweetener in the current marketing year.

Source: CME News for Tomorrow

The Debts of the Lenders: Early August Emerging Market Bond Index

Markit's CDX.EM tracks the composite performance of emerging (bond) markets. If you pull up equity charts, you will notice a close correlation between the two w/bonds typically telegraphing moves in equities.
Right now, the concern is whether or not China has created over-capacity in infrastructure development. Based on recent Baltic Dry Index data, cargo ships full of steel, copper, iron, and coal have dropped off significantly.
Shorting emerging markets is also a play typically associated w/a stronger dollar/lower bond yields.

The Debts of the Spenders: US Patients Turn To Bartering for Medical Services

The shadow economy continues to grow in leaps and bounds. This Yahoo article underscores a crisis area - US health care costs. W/the REAL unemployment rate at 17-18%, consumers are constrained in their spending activities. The debt fueled consumption bubbles of the past are being traded in for old fashioned exchanges.

The rise of the grey market in medical services was also prevalent in Argentina nearly a decade ago. Could the US also be heading in the same direction?

Cash, check or a cord of wood for that doctor visit? As health care costs climb, old-fashioned bartering has seen brisk growth since the economy soured.

Hillsborough, N.J.-resident Robert Josefs traded his Web site designing skills for nearly $1,000 in dental work last year when he had no insurance, and many other patients are learning that health care debts don't always have to be settled with sometimes-precious cash.

Health care bartering has risen dramatically since the recession began, as people lose their health insurance and consumer spending drops, said Allen Zimmelman, a spokesman for the Bellevue, Wash.-based trade exchange ITEX Corp.

ITEX Corp. has seen its health care business rise 45 percent over the past year. The exchange, which has 24,000 members, now fosters about $1 million a month in health care bartering.

The Web site Craigslist says overall bartering posts have more than doubled over the past year as the recession took hold.

People who barter for health care say the practice allows them to stretch their resources or receive care they couldn't afford. But bartering can be tricky, and not every health care provider will consider it.

Some doctors are open to bartering directly with patients. Others do their trading through an exchange like ITEX.

Monday, August 10, 2009

The Debts of the Lenders: America's Generation Y Find Jobs in China (Or Do They?)

A positive piece of news? Or a misguided piece of journalism? After reading the article I was filled w/more questions than answers.

Foremost among the questions in my mind were: 1) How representative is this group of people of US hires? 2) What is the cultural mentality of the Chinese employers?

Here is what I mean: all the employees interviewed in the article were a) Caucasian and b) Ivy Leaguers. This is not exactly representative of America's education pool. Race and class have always been important distinctions in hiring. But the facade of racial and class equality that wavers in the United States is stripped away in a foreign market w/alien laws.

Quite bluntly, it seems that these employees were hired more for their external characteristics than any internal elements. Status and the desire to project a "Western" appearance have always been strong elements among Asian employers. In countries like Japan and Thailand, this can take on ludicrous heights such as the importation of B grade actors to sell toothpaste and corn pizza on late night tv re-runs.

But a more positive aspect occurs in the wholesale trade and technical skills areas where Chinese employers are eager to hire those w/experience and/or connections in supply chain management, logistics, or any kind of engineering and technology fields.

However, keep in mind these Western imports will have to compete against a wave of Chinese college grads (see below).

BEIJING — Shanghai and Beijing are becoming new lands of opportunity for recent American college graduates who face unemployment nearing double digits at home.

Even those with limited or no knowledge of Chinese are heeding the call. They are lured by China’s surging economy, the lower cost of living and a chance to bypass some of the dues-paying that is common to first jobs in the United States.

“I’ve seen a surge of young people coming to work in China over the last few years,” said Jack Perkowski, founder of Asimco Technologies, one of the largest automotive parts companies in China.

Jonathan Woetzel, a partner with McKinsey & Company in Shanghai who has lived in China since the mid-1980s, says that compared with just a few years ago, he was seeing more young Americans arriving in China to be part of an entrepreneurial boom. “There’s a lot of experimentation going on in China right now, particularly in the energy sphere, and when people are young they are willing to come and try something new,” he said.

And the Chinese economy is more hospitable for both entrepreneurs and job seekers, with a gross domestic product that rose 7.9 percent in the most recent quarter compared with the period a year earlier. Unemployment in urban areas is 4.3 percent, according to government data.

Chinese unemployment has been a recent - but recurring topic - covered on this web site. Earlier in the summer, I posted links to STATE MEDIA stories that revealed Chinese universities had been faking job statistics for recent grads. Now compound their woes w/this:

Deeply depressed and ashamed about her failure to find a job to take up when she graduated, and consumed with guilt about the financial sacrifices her family had made for her, Miss Liu brought her studies and her life to a premature end by drowning herself in a ditch full of freezing, filthy water.

"She did it because she was worried she wouldn't be able to find a job and so she wouldn't be able to repay us," her grief-stricken father, Liu Shangyun, told The Sunday Telegraph. His eyes were downcast as he recalled how he saw her alive for the last time, just two weeks before her death.

"I took her back to college. She seemed normal and she sent me a message saying, 'Don't worry, I'm OK,'" said Mr Liu. But the next time he saw her, it was to identify her body.

China faces a huge glut of graduates. With 1.5 million graduates from last year still out of work, there are simply not enough jobs to go around, and the problem has been exacerbated by the impact of the global financial crisis.

For Beijing, which in October will celebrate 60 years of communist rule in China, soaring graduate unemployment could not have come at a worse time.

The Debts of the Spenders: Clarification on POMO

In my previous post, I stated that POMO targets 3 fixed income areas: 1) treasuries 2) GSE debt and 3) GSE MBS debt.

Analysts predict that Bailout Ben will end quantitative easing by the end of this August (to be announced at the next FOMC meeting). Specifically, they mean the treasury purchase program.

However, the issue of #2 and #3 remains silent in much of the press coverage.

It is my belief that the Fed will continue buying/backstopping GSE and GSE MBS debt. The reason is simple - to maintain downwards pressure on housing interest rates or more specifically to prevent rate spreads from widening too far in the ABX market. After all, Treasuries are a relatively small part of POMO quantitative easing operations. The bulk of the Fed's purchases are in monetizing the loan portfolios of banks which is a program that runs in the TRILLIONS.

KEY POINT: Any actions the Fed undertakes HAS to please America's #1 creditor, China.

This means that fiscal authorities have to pay more than lip service to a strong dollar policy. They may try to find a way to bundle the commercial and residential loans (CMBX and ABX respectively) into some kind of new bailout program but any such measures won't fool the currency markets for long.

Thankfully for the US, the rest of the "spender" nations such as the UK and EU bloc are in even worse shape. Bloated budgets, anemic capital markets, flagging tourism (a big revenue generator for socialist Europe) and a weak consumer base mean that their governments will likely be forced to revert to deeper q.e. programs by the fall.

The spender-lender dynamic is a well explored theme in this web site where "spender" nations (e.g. G8 minus Russia and Japan) function as safe haven flows for "lender" nations (emerging markets plus Russia and Japan). Lenders are characterized by large current account surpluses that they use as a form of state funded mercantilism to foster export driven growth. In times of stress, lender states direct their surplus funds into the capital markets of their former colonial masters.

This means that any sort of quantitative easing programs undertaken by either set of nations will lead to a weakening of their respective currencies and a strengthening of the dollar vis a vis capital flows. Such macro weakness will also serve as a buffer to support treasury yields from rising too quickly.

At this point it is too premature to say what the catalyst would be for a surging dollar/lower bond yields but weak factory orders from US and European retailer orders for the holiday season could be a potential trigger. A lack of orders would lead to a slowdown in commodity prices for industrial inputs like oil, iron ore, and copper . . . .which would negatively affect other "lender" nations like Russia, the Middle East Gulf Coast states, Brazil, and Australia.

Sunday, August 9, 2009

The Debts of the Spenders: The POMO Controversy Revisited - A Closer Look at ABX and CMBX Indices

Recently, the blogosphere has been abuzz w/speculation about Permanent Open Market Operations (POMO) and the potential for a levered ramp job in the equities markets. Most writers' attention has been focused on outright Treasury purchases. The jury is still out on whether correlation = causation.

In the meantime, remember there are 3 areas in which the Fed's POMO intervenes : 1) outright treasuries, 2) agencies, and 3) agency MBS.

Don't forget to include the prominence of the latter 2 categories. Fed buying of agency/agency MBS is NECESSARY to maintain low spreads on the ABX and CMBX indices (moreso the ABX indices b/c the focus is on Fannie Mae/Freddie Mac GSE debt but there may also be spillover effects in trading from related sectors) in credit markets. Especially telling when you consider Asian lenders are no longer buying those debt classes as vigorously as before.


Instead, nations like Taiwan and China have drastically cut their Agency MBS and Agency debt positions ... but to do so they had to increase their treasury positions. They have, however, cut the maturity on their treasury portfolio to shorter term durations.

Fixed income speculators like PIMCO and Blackrock stepped in late last fall to buy up agencies in the belief that the Fed would backstop these purchases. And they were correct.

In today's environment, stabilization of particular credit markets and lending in general remain important objectives of the Fed and Treasury.

To see some nice ABX and CMBX charts:

Saturday, August 8, 2009

The Debts of the Lenders: (CHIX) Chinese Volatility Index

Something to watch for the future. Developed by Alphashares and debuted earlier this summer in July, the CHIX tracks the Hang Seng and Shanghai exchanges.

To see the CHIX (be sure to bookmark this link on bloomberg). This is only a static picture file, if you click on the bloomberg flash link July/August volatility can be seen more dynamically:

Other sources:

All questions on the CHIX calculation should be directed at alphashares which developed the index:

The Debts of the Lenders: El Nino To Bring Bullish Brazilian Soy Crop

Bullish for supply. Bearish for prices. Earlier this year, concerns about drought in South America prompted frenzies in Argentina and Brazilian exchanges. But now, favorable weather should impact crop prices in the opposite direction.

El Nino To Bring Favorable Rain To Brazil’s Soy Farmers

El Nino should bring favorable rains to Brazil’s southern soy growing states, raising the likelihood of a record-breaking 2009-10 soy crop, according to soy specialists. Brazil’s southern states of Parana, the No. 2 soy producer, and Rio Grande do Sul, the No. 3 soy producer, suffered from a prolonged drought during the 2008-09 crop season. As a result, Parana in particular experienced hefty soybean losses.

The upcoming 2009-10 crop, however, is expected to be a bumper crop of more than 60 million metric tons compared to 57.1 million tons from the 2008-09 crop, according to private consultancies such as Cerealpar, AgRural and Celeres. The 2008- 09 has already been harvested.

Inclement weather could hamper the yield, but industry analysts expect this year that El Nino, a global weather phenomenon that usually warms temperatures in the Pacific, will favor farmers this year.

“El Nino traditionally brings wet weather to the south of Brazil and this should remove the threat of the drought that occurred for the 2008-09 crop,” said Michael Cordonnier, president of
Soybean & Corn Advisor.

Cordonnier said that recent El Nino cycles resulted in good rains in southern Brazil and subsequently good yields as well. He pegs Brazil’s 2009-10 soybean crop at between 61 million-62 million tons. This could rise further if soybean prices continue an upward trend. Celso Oliveira, a meteorologist at local weather service Somar, said Brazil’s southern states should be helped by good rains.

“El Nino should bring double, triple or even more rain to the south of Brazil this year,” Oliveira said.

Source: CME News for Tomorrow

Friday, August 7, 2009

The Debts of the Spenders: UK Extends Gilt Repurchase Program

Coming soon to the USA. Expect to see the DXY (dollar index) take a further beating this fall if Ben Bernanke extends his quantitative easing program. This is a near certainty IMHO due to

1) declining inability of foreign lenders to buy US bonds (ahem I'm looking at you Japan w/170% GDP spending and .000001% interest rates)

2) continuing weakness in US housing and commercial real estate (ability to refinance is critical to prevent widening CMBX spreads - no it was never meant to protect the homeowners - what you actually believed that political drivel?)

3) competition w/other "spender" nations increasing their bond re-purchase programs

4) potential Obama health care plan (which I actually support b/c it will be a great driver of fiscal stimulus and highly inflationary - something goldbugs will love). The Fed will be forced to buy more bonds in order to keep rates down for the aforementioned reasons.

5) holiday retail weakness. Hohoho! Santa Claus is not visiting China this year. Now is the time for US and European retailers to place their orders w/Chinese factories. "Back to school" sales are already shaping up to be disappointing. Now combine that w/a potential liquidity crunch w/ merchants unable to finance their wares and operations during the critical Oct-Dec months where a majority of their profits are based.

*Note - I love the Telegraph even though one of its main authors, Ambrose Pierce, re: financial matters is a paranoid perma-bear. I mean, just look at the headline of the story!

The Debts of the Spenders: Improved Corporate Bond Confidence Powers Fixed Income and Equity Rally

Source: CMBX NA AAA index from Markit

Bears have good reason to scratch their ears over the fundamentals but the high quality bond indices indicate growing confidence - or should I say growing confidence in government intervention.

[UPDATE]: But here's a contrasting picture. The volatility in credit markets could be b/c someone keeps taking the wrong side of a trade.

The Debts of the Spenders: Early August ENSO Watch

Orange indicates warmer sea temperature areas - ripe conditions for ENSO positive anomalies to occur.

The Debts of the Spenders: NASDAQ Acknowledges Flash Trading As a Blatant Abuse of Power

Now, the most vaunted of financial doyennes has come out against Flash trading - the notorious industry practice where institutional insiders get to front run smaller traders through priviledged glimpses of data milliseconds before everyone else sees them. The Financial Times ran this interesting opinion piece by a senior NASDAQ spokesman who VOLUNTARILY agreed to stop flash trading:

Exchanges should unite to end flash orders

By Bob Greifeld

Published: August 6 2009 18:34 | Last updated: August 6 2009 18:34

As noted in a letter last week to Mary Schapiro, chairman of the Securities and Exchange Commission, Nasdaq OMX has been examining questions related to the increasing prevalence of “flash” order types in the cash equities market, as well as a related trend in US markets towards “darkness” – activity or orders not transparent to the full market.

In looking at the use of flash order types, it is important to understand where they came from, why they exist and why electronic markets including Nasdaq OMX have adopted them. Flash orders originated from and remain an accepted practice of exchanges with a trading floor, with the effectiveness of the “flash” limited by the distance a human voice could travel. These voice flash orders are the raison d’ĂȘtre for people who work on the floor of an exchange. As technology was added to floor trading operations, automation of these flash capabilities occurred through systems such as Block Talk on the NYSE. In addition, fully electronic versions of this floor flash capability were introduced by the CBSX and Direct Edge.

Kudos goes to Zerohedge, Mark Denniger, and all the other web bloggers who work hard to retain transparency among markets. Their efforts have finally brought institutional recognition of these blatant abuses of power - even when they are not recognized. Then again, that is the key to their success. The presence of many ANONYMOUS heavy hitters on these web sites who post and cross-post is essential to maintaining the free flow of information.

Thursday, August 6, 2009

The Debts of the Lenders: Chinese Policymaker Says Inflationary Talk is Too Premature

Now, even the Chinese are beginning to admit that talk of inflation is a bit premature. However, that has not stopped them from being big buyers at 20 year TIPs auctions (and soon to be 30 year). Plenty of room remains for the Treasury to increase the supply of TIPs although any new issuance has to be balanced against existing bondholders' interests (e.g. downwards pressure on prices). After all, who in their right mind would lend the US government at under 4% for 20+ years w/o expecting a rise in interest rates?

Still, for now, deflation continues to reign over global markets in spite of Chinese officials' attempts to force lending.

Please keep in mind that all figures below are the official Chinese statistics.

15:16, August 05, 2009

With signs of economic recovery, prices are changing. Real estate prices, stock prices, prices of staple agricultural products, industrial raw material prices have recovered to some extent, together with the current sufficient liquidity, people start to worry about there will be inflation during the second half of the year. Vice President Chen Houyi of the Chinese Association of Laws of Economics said that it is too early to talk about inflation right now.

Judging from the overall situation, the general price level in China is relatively stable. In the first half of the year, CPI fell 1.1%, PPI fell 5.9%. In June, CPI fell 1.7%. This shows that the current prices are still at a relatively low level.

At present, price levels are in recovery. This is to cover the large decline of prices over the past two years. Generally speaking, when CPI hits 3% there is an inflation warning. According to a study by Chinese Association of Laws of Economics, only when CPI reaches 4.5 percent can we say inflation is on the way. So now it is not realistic to predict signs of inflation. Quite the contrary, at present we need to be on guard against the risk of deflation to a certain extent.

Rich liquidity certainly paved the way for inflation. By the end of June, the balance of broad money supply (M2) reached 56.9 trillion yuan, up by 28.5 percent; balance of narrow money supply (M1) hit 19.3 trillion yuan, an increase of 24.8%; balance of the amount of currency in circulation (M0) reached 3.4 trillion yuan, an increase of 11.5%.

Balance of RMB loans of financial institutions hit 37.7 trillion yuan, up by more than 4.9 trillion yuan. Data shows that from January to June this year, banking institutions invested 7.37 trillion yuan in new loans.

Judging by the gap between M2, the indicator of excess liquidity and nominal GDP growth rate, the current liquidity situation is at its most relaxed state in a decade.

At present, when liquidity shrinks, lots of projects started in the first six months of this year will face funding difficulties, so the monetary policy will have to maintain a moderate easing state to a certain degree.

Therefore, it is too early to talk about inflation, while to guard against inflation is taking precautions before it is too late.

By People's Daily Online

The Debts of the Lenders: China Regulators Tighten Bank's Derivative Controls

China would tighten rules on domestic banks' derivatives operations after financial institutions suffered losses during the global downturn, the country's banking regulator said on Wednesday.

The move would discourage lenders from trading complicated overseas derivatives products and help institutions avoid financial risks, the China Banking Regulatory Commission (CBRC) said.

Banks will not now be allowed to take part in complex derivatives transactions between domestic companies and overseas financial institutions, in a bid to avoid risks from overseas entering the domestic market, it said.

The country's banks have been asked to explain or introduce the use of derivatives products to their clients in an "understandable and clear" way, so that they would fully realize potential risks.

Banks should also make thorough assessments between derivatives products and the institutions before introducing the products to institutions, so these financial tools would meet exactly the demands of their clients.

Banks should be responsible for providing institutions and companies with timely information about products, and re-assess their value for clients.

Chinese companies and financial institutions suffered great loss during the global financial crisis last year, and many of these resulted from derivatives trading activities.

In March, China's State-owned Assets Supervision and Administration Commission urged centrally-administrated state-owned enterprises to strengthen control over derivatives transactions.

The CBRC said it would keep a close watch on lenders' activities and strictly monitor derivatives products transactions.

Source: Xinhua

Wednesday, August 5, 2009

The Debts of the Spenders: POMO Correlated W/Equity Rallies

A must read. Evil Speculator does a great job of covering a potential coincidence. You be the judge.

POMO (perm open market operations) highly correlated w/equity pumps:

The Debts of the Spenders: MERS v. Cabrera - A Housing Love Story Told Around America

Who owns/is liable for the note? Hehe. In the legal world, we call this constructive or inquiry notice in regards to who owns title to negotiable instruments. In a battle between subsequent buyers, the onus is on the purchaser of the new note to prove that they took FOR VALUE and in good faith.

Read here how the Court reacted to lenders' argument that they should be entitled to ownership even though they never conducted appropriate due diligence:

The best part: scroll down to page 8 where counsel for the lenders explains that his client just collects the money and is not actually a real party in interest. They are just a middleman. So, they are actually 2 or 3 steps removed from the process. The court did not react kindly to this argument.

So, how is all this relevant to today's environment?

Sadly US politicians like President Obama have turned to these same middlemen to "save" American housing by re-financing. Yes, that's a great idea. Give responsibility to the same doofuses who DIDN'T EVEN DO A TITLE SEARCH on their mortgage notes.

WASHINGTON (AP) -- Billions of dollars the government is spending to help financially pressed homeowners avert foreclosure are passing through -- and enriching -- companies accused of preying on the people they're supposed to help, an Associated Press investigation has found

The companies, known as mortgage servicers, are middlemen who collect monthly payments from homeowners and funnel the money to the banks or investors who hold the loans. As the only link between borrowers and lenders, they're in the best position to rework the terms of loans under the government's $50 billion mortgage-modification program. The servicers are paid by the government if the changes keep homeowners from falling behind on payments for at least three months.

But the industry has a checkered history. The AP found that at least 30 servicers have been accused in lawsuits of harassing borrowers, imposing illegal fees and charging for unnecessary insurance policies.

More recently, the companies also have been criticized for not helping homeowners quickly enough -- delays that lead to more fees for homeowners and profits for servicers.

Tuesday, August 4, 2009

The Debts of the Spenders: Early August Crop Outlook

Disappointing news for agriculture bulls. For soybeans, hurricane winds have not spread the fungal spores far enough inland and away from the Gulf Coast. But that might change as August is cyclically the busiest month of the year for hurricanes. As for wheat, I agree w/the analyses that an early frost is unlikely to occur in September.

Soybean Rust Damage Fears Could Be A 2009 Bust

Asian soybean rust appears to be a bust once again in 2009, representing the fifth consecutive season in which the plant disease has failed to cause appreciable damage to the top U.S. oilseed crop. The airborne fungus - which has been known to produce yield losses of 10% to 90% in other parts of the world via premature defoliation - has been found in 33 U.S. counties from Texas to Florida this season. That’s up from 27 as of early August 2008.

“There are more positive sites in the central Gulf area this year, but you should be aware that the disease is progressing very slowly,” said University of Kentucky plant pathologist Dr. Don Hershman. “The lack of tropical weather systems so far this summer has helped to keep soybean rust in check. There is little cause for alarm until soybean rust begins a northward trend.” Hurricane winds are suspected as the vehicle which originally carried rust spores to the continental U.S. from infected South American fields in late 2004.

Anne Dorrance, an Ohio State University plant pathologist, said hot temperatures which dominated the Deep South earlier this summer have also helped to keep the disease bottled up in Texas, Louisiana, Alabama, Florida and Georgia.

“At this point it doesn’t look like anything is going to happen on the soybean rust front over the next few weeks during the critical time of flowering and pod setting,” said Dorrance. “If rust comes in at the end of August, it’s not going to have a yield impact, because it’s just coming into the state too late.”

Forecasts Bode Well For US Spring Wheat As Harvest Nears

Forecasts that call for rain in the northern U.S. Plains during the first half of August and minimize the risk of an early freeze bode well for U.S. spring wheat, meteorologists and crop specialists said. Hard red spring wheat, used to make bread, has the potential to produce a record average yield this year thanks to a wet spring and cool summer, according to results from the Wheat Quality Council’s annual crop tour. The tour, which surveyed fields across North Dakota last week, calculated the average 2009 HRS wheat yield at 46.2 bushels per acre, up from the 2008 average of 37.7 bushels.

Producers were cautiously optimistic about the projection, as cutting won’t begin for a few weeks due to late planting. Rain at harvest or an early freeze could still reduce yield or quality, they said. However, “the chances are pretty low” of having a frost or freeze in early September, said Mike Tannura, meteorologist and commodity analyst for T-Storm Weather. North Dakota, the largest spring wheat-growing state, only sees a freeze by Sept. 15 about one year out of 10, he said.

Instead, the crop should benefit from warm, wet weather during the first half of August, Tannura said. Scouts on the wheat tour said plants could use another shot of moisture, and Tannura said warmth will help with development.

Source CME News For Tomorrow

The Debts of the Lenders: Chinese Officials Allegedly Engaged in Student Identity Theft Ring

More shennanigans going on in China. Recent graduates getting their files stolen by corrupt officials and then being re-sold on the black market.

Note: This article is best read in conjunction w/an older post:

Published: July 26, 2009

Local officials said the files were lost when state workers moved them from the first to the second floor of a government building. But the graduates say they believe officials stole the files and sold them to underachievers seeking new identities and better job prospects — a claim bolstered by a string of similar cases across China.

Perhaps no group here is more vilified and mistrusted than China’s local officials, who shoulder much of the blame for corruption within the Communist Party. The party constantly vows to rein them in; in October, President Hu Jintao said a clean party was “a matter of life and death.”

Critics contend that China’s one-party system breeds graft that only democratic reforms can check. But China’s leaders say the solution is not grass-roots checks on power, but smarter oversight and crime-fighting.

But in Wubu, a struggling town of 80,000 banked by steep hills and coal mines, citizens say that local officials answer to no one, and that anyone who dares challenge them is punished.

“When the central government talks about the economy and development, it sounds so great,” said Mr. Wang, the day laborer. “But at the local level, corrupt officials make all their money off of local people.”

Student files are a proven moneymaker for corrupt state workers. Four years ago, teachers in Jilin Province were caught selling two students’ files for $2,500 and $3,600; the police suspected that they intended to sell a dozen more. In May, the former head of a township government in Hunan Province admitted that he had paid more than $7,000 to steal the identity of a classmate of his daughter, so his daughter could attend college using the classmate’s records.

The government’s answer, they said, was to reject any inquiry, place the graduates’ parents under police surveillance and repeatedly detain them. Last February, they said, five parents trying to petition the national government were locked in an unofficial jail in Beijing for nine days.

“What is the point of continuing to live?” the father said. “Sometimes I want to commit suicide. These corrupt officials destroyed all our hopes.


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