The Debts of the Spenders: Liv-Ex Fine Wine Index and Economic Recovery

Since Fashion Week recently came here to New York City, I decided to cover the economic "recovery" from a different angle. Along w/haute couture, wine sales are considered to be a very visible measure of conspicous consumption.

The Liv-Ex 100 fine wine index measures the snob appeal and is also a great way to watch the development of bubbles form.
As you can see, prices peaked right around the bubble months of $147/oil and has yet to recover. If we are truly in a recovery phase, then haven't wine prices appreciated more?

Also note that 92% of the index is composed of Bourdeauxes (red and white), so keeping abreast of news filters on these vintages might be worth doing. It's not exactly scientific or even tradable, but the Liv-ex index is another tool to keep watch of macro developments.

http://www.liv-ex.com/pages/static_page.jsp?pageId=100

The Debts of the World: Longer Term Outlook for Supply Chains is Bullish

This article addresses several points - key among them the recent thaw in corporate lending. What is not mentioned is the decline in the Baltic Dry Index (BDI) which measures freight rates and is often seen as a proxy for commodities' health.

http://www.supplychainbrain.com/content/blogs/think-tank/blog/article/carriers-beware-of-good-economic-news/

Despite the BDI's abysmal fall, there are also some key issues developing, not the least among them, China's interest in Nigerian oil reserves:

http://www.google.com/hostednews/ap/article/ALeqM5hB_Xs_Q0MTGM6o3yRo50aFrRGkTQD9B11L080


UPDATE:

Here is more info on the BDI. Basically, it's Econ 101, or supply and demand. Too much supply and not enough demand are creating fears of a potential glut. The earlier spike in the BDI this summer was due to slower than expected deliveries which helped temporarily alleviate said perception. Since then, the BDI has fallen nearly 50% from its June 3 peak:

http://www.ft.com/cms/s/0/946c8926-ac90-11de-a754-00144feabdc0.html

Keep in mind though that nothing falls in a straight line forever. Despite dire stories such as this, the outlook is still positive. The BDI may pick up again if scheduled deliveries fail to manifest on time. Or, for more fundamental reasons, large buyers of commodities like China decide to continue importing raw materials.

The Debts of the Spenders: Fed Plans to Continue Treasury Buying Under New Name

Although the Federal Reserve is ending its Permanent Open Market Operations (POMO) for treasuries, it is already planning the continuation of downward pressure on yields through another front.

http://www.ft.com/cms/s/0/e313ceb8-a885-11de-9242-00144feabdc0.html?nclick_check=1

Translation: Money market funds will be buying treasuries. This is a sneaky trick that is a quantitative easing back door. If you have funds in a money market account (most US investors and/or depositors do - particularly those w/brokerage accounts), then you are indirectly buying treasuries through the routine sweeping of accounts.

Is it any wonder then that America's largest creditor, China, is already planning for the inevitable?

http://www.macauhub.com.mo/en/news.php?ID=8167

UPDATE:

In case I haven't made it clear, the Fed is going to replace the full faith and credit of the US government w/the full faith and credit of Lehman, UBS, Bear Sterns, etc. CDO tranche writers. Keep in mind that said bankers in COURT documents BEFORE A JUDGE admitted that their products were "crap and vomit."[actual words used: http://online.wsj.com/article/SB125253656089697449.html]

It may surprise readers that I am actually BULLISH on sub-prime - for the simple fact that I am getting a higher interest rate than treasuries and corporate bonds AND b/c Bernanke is buying them non-stop 24/7 for the past year. His plan to stop buying MBS OFFICIALLY ends
at the end of March 2010 after a 3 month extension. (For those interested, I am going to do a post that focuses more on the RMBS Fed operation later this weekend, time permitting).

But just because I am taking the risk of buying these garbage pails does not mean you, other Americans, or the rest of the world should be too. I made a conscious decision and am aware of the risks involved.

Please read a more comprehensive assessment available here:

http://www.nakedcapitalism.com/2009/09/guest-post-do-ben-and-tim-thelma-and-louise.html

and here:

http://www.zerohedge.com/article/rumored-source-reverse-repo-liquidity-not-bank-reserves-money-market-funds

The Debts of the Spenders: Putting Government Mortgage Purchases into Perspective Part 2

Here is a fine article from the Financial Times that puts my prior post about mortgage backed securities rallying into perspective.

http://www.thepeninsulaqatar.com/Display_news.asp?section=Business_News&subsection=market+news&month=September2009&file=Business_News200909241023.xml

I would like to add that from a yield perspective, these trash buckets can actually offer decent returns based upon the Federal Reserve's continuing support of the housing market.

IMPORTANT NOTE:

Moreover, some - if not most - of these offerings are structured in the form of convertible bonds, which are an added bonus. Convertible bonds are hybrid securities that allow the issuer to conserve cash flow by reducing interest payments. In exchange, the holder can convert the debt into equity at a pre-determined strike price.

CONTEXT:

In the US financial sector, many financials have to decrease their leverage exposure while at the same time maintaining steady cash flow.

Banks MUST re-capitalize equity at the expense of debt. I believe this was Bernanke's/Geither's plan all along. Banks must draw down their leverage (debt) by diluting equity to levels seen before the "Greenspan put." I place this at a conservative 2000-2001 level (before 9/11 made Greenspan lower rates aggressively).

Some readers may disagree and think that it should be lower to pre-LTCM levels or even pre-Gramm-Bleach-Blilely Act (when Glass-Steagall was abolished). This time frame is earlier - late 1990s levels of leverage. Or the time before structured finance even existed.

The actual time frame is irrelevant. All we need to know is that financials need to wind down debt exposure and increase their equity shorings to meet stricter regulatory standards such as Tier 1 capital ratios. Across the board, all regulatory agencies - US, European, Canadian, Chinese, Middle Eastern, etc. - have clamped down on the amount of leverage financials can use.
(For more information on regulatory ratios, I recommend readers do a google search on BASEL II CEBS).

These distressed debt sales packaged as convertible bonds are the key to doing so. While I find it highly unlikely that these bonds will ever trade at original book value again (e.g. close to par), they have experienced substantial gains and offer nice returns for savvy investors. Gain can also be protected by holding offerings in tax protected vehicles such as certain trust instruments or IRAs. Examples of distressed bond offerings that appreciated quite nicely in this year: WSF, BMLRQ, and AZM.

Note - If you are a goldbug or inflation hawk, then bonds are not for you. Inflation can eat away at your real returns. Although I am a long term dollar bear, I do not consider inflation to be a serious issue near term. The US and most Western economies still have to go through a period of debt purging.

*Disclosure - I have long positions in some distressed debt investments including AZM.

The Debts of the Spenders: 2009 US Retail Import Volume Projected to be Lowest Since 2003

This data comes fresh from a trade association so I trust their numbers. The projections are based on August import volume. Cyclically, summer is the time for US retailers to place their orders w/overseas factories.

The report is bearish as it projects volume to be low through January. In other words, a slow holiday sales season. Store buyers and supply chain managers have been focusing on trimming costs instead of expanding. Cost cutting also means margin squeezing on the supplier side.

Nothing that industry folk and savvy investors have known about for weeks now - if not months. Still, I wonder how much longer an equity rally in the retail sector can last.

http://www.nrf.com/modules.php?name=News&op=viewlive&sp_id=788

The Debts of the Spenders: Putting Government Mortgage Purchases in Perspective.

A picture says a thousand words. The picture is a series 7 bond asset backed credit index product from Markit.com made up of sterling components like Wamu asset backed certificates (bank run last September), Bear Sterns bonds ($2/share deal in early 2008)and Nomura loans (acquisition spinoff from the Lehman salvage operation).

Here you can see how many investment funds, such as Barclay's, have decided to unload their mortgage backed security toxic assets to the public again. Selling at the top?

http://www.bloomberg.com/apps/news?pid=20601087&sid=as5f4rMU.gbE

Now, this doesn't necessarily mean the bonds will lose all value. The Federal Reserve is still committed to buying toxic assets for the forseeable future. Just because Treasury purchases are due to wind down at the end of September does not mean the government will stop supporting the mortgage markets. Far from it. Indeed, from an income perspective, these bonds may actually generate some decent returns.

Keep in mind that many of these assets have been trading well below book value for quite some time now.

http://www.bloomberg.com/apps/news?pid=20601068&sid=aL935UZL17oE

*If you are interested in seeing more juicy bits of goodness, please go to Markit.com's web site and click "Markit ABX Indices" under the All Products tab on the right. Then click "Markit ABX.HE Current prices" from the table on the left.

Indeed, Markit describes its ABX index as

"[A] liquid, tradeable tool allowing investors to take positions on subprime mortgage-backed securities via CDS contracts. The index has become a benchmark for the performance of subprime RMBS. Its liquidity and standardization allows investors to accurately gaugue market sentiment around the asset-class, and to take short or long positions accordingly. "

You will now see a chart appear. Focus on the "High, Low, and Price" columns. Here, you can see just how far from grace many of these products have fallen. . . and where they currently trade. For a visual representation, click on the highlighted name to the left.

Disclosure - I have never worked for Markit.com and have no stake in its products aside from deriving informational value.

The Debts of the Spenders: Has Rust Fungus Spread to US Soybean Crops?

The soybean outlook continues to be bearish for 2010 based on overplantings among farmers looking to rotate away from lower corn prices earlier this year. However, the soybean fungus disease (which has been an intermittent topic of discussion) has reared its head again during the late harvest season.

Soybean Rust Spreading Fast, But May Be Too Late To Harm Crop

Asian soybean rust is spreading rapidly, threatening late-planted fields as far north as the lower Ohio River Valley within the past few days.
The plant disease has been found in a total of 59 counties in Alabama, Arkansas, Florida, Georgia, Kentucky, Louisiana, Mississippi, Missouri and Tennessee during the past week alone.

“We’ve had ideal weather for soybean rust,” said Allen Wrather, University of Missouri extension plant pathologist. “A slow-moving low-pressure system brought intermittent rain and mild temperatures.” Weather conditions affect spread of the fungus. Rust spores must have 10-14 hours of wet-leaf contact before they germinate and infect the plant. Warm, dry
sunshiny weather often kills the seedspores outright.

Spores of the fast-moving fungus are spread by the wind and can cause rapid yield losses, unless almost immediately countered by chemical fungicide. Even so, some farmers may choose not to spray, due to the late onset of the disease, this season. Most soybean fields in southeast Missouri are now at filled-pod stage of development, Wrather said. “Their yield will not likely be reduced by rust.” However, late-planted soybean plants that emerged in July are just now beginning to fill the seed-pod. "Yields of those plants may be reduced by rust if not treated with a fungicide,”
he said. “The decision to spray is an economic decision. Fields with low
yield potential, say 20 bushels, might not pay to spray.”

Fungicide applications usually cost $12-$15 per acre. “As the soybean crop matures, more soybean rust reports are expected north of the current distribution” area, warned the USDA on Tuesday.

Soybean rust hasn’t yet been detected in Indiana, although it has been reported across the Ohio River in northern Kentucky. “It is possible that rust is present in southern Indiana at very low levels, and we have increased scouting in those areas in order to document any finds,” said
Purdue University plant pathologist Kiersten Wise. “Even if soybean rust is
detected over the next few weeks, the level of disease would be very low, and the majority of the soybean crop is past the point of economic damage occurring.”

The USDA’s latest rust infection forecast says more rust-favoring wet weather is anticipated this week as an area of low pressure moves northeastward across the Great Plains.

Source: CME News for Tomorrow