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

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

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

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

http://www.fxstreet.com/technical/analysis-reports/technical-analysis-eurodollar-futures/

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

http://cotstimer.blogspot.com/2009/10/data-depressing-for-bulls-nikkei-single.html

The Debts of the Lenders: Container Shipping Bailout

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

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

http://logisticstoday.com/global_markets/bailing-stay-afloat-1021/

The Debts of the Lenders: China Plans to Launch REITs

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

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

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

http://in.reuters.com/article/fundsNews/idINSHA25284320091021

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

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

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

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

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

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

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

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

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

http://www.ft.com/cms/s/0/40172ae0-bc1a-11de-9426-00144feab49a.html

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

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

http://www.ft.com/cms/s/0/38250126-bd10-11de-a7ec-00144feab49a.html?ftcamp=rss

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

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

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

http://uk.biz.yahoo.com/21102009/323/uk-unlikely-extend-abs-guarantee-scheme-fitch.html

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

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

http://www.ft.com/cms/4c3b6f7c-12be-11dd-8d91-0000779fd2ac.html

The Debts of the Spenders: Obama To Help HFAs

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

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

http://www.financial-planning.com/news/obama-aims-to-help-HFAs-2664262-1.html

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

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

http://www.gata.org/node/6560

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

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

http://www.finance-commerce.com/article.cfm/2009/10/20/Treasury-aids-needy-borrowers-through-state-agencies

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

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

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

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

Here are some more additional sources:

http://www.washingtonpost.com/wp-dyn/content/article/2009/10/11/AR2009101101549.html