Monday, November 30, 2009

The Debts of the World: Credit Markets React to Dubai



The funny thing is that the CDX.EM index (above right) does not even include the U.A.E. The index is composed of emerging market darlings like Brazil, Turkey, and India. Yet, spreads still widened.

The market action speaks more to traders' realization that they may have been overpaying a premium for emerging markets in general. Emerging markets have generally been the beneficiaries of increased fund flows due to the dollar carry trade.

Other high beta assets like high yield (junk) also sold off (above left). Not surprising when you consider that retail investors have been piling on the train for the past few weeks.

The Debts of the Lenders: China Approves Genetically Modified Rice Crops

Genetically Modified Crops Clear A Hurdle In China

China’s government declared two strains of genetically modified rice safe to produce and consume, taking a major step toward endorsing the use of biotechnology in the staple food crop of billions of people in Asia.

In a written reply to questions from The Wall Street Journal, China’s Ministry of Agriculture said Monday that it had issued safety certificates to domestically developed strains of genetically modified rice and corn, after a years-long process involving trial production and environmental
tests. Further approvals are required before the strains can be grown on a commercial scale, the ministry said, and industry participants said it may take another two to three years for the rice to reach production.

Foreign companies that produce genetically modified crops welcomed the news, which could eventually pave the way for approvals in China of more of their products. “It’s good news in the context of commercial introduction of biotechnology in crops in China,” said Andrew McConville, the Singapore-based head of corporate affairs in Asia for Syngenta AG (SYT, SYNN.VX), a
Switzerland-based agribusiness company.

China is the world’s top producer and consumer of rice, so its use of modified varieties has the potential to alter the grain’s global supply patterns. Widespread production has the potential to complicate trade with places such as Europe that restrict genetically modified foods. On the other side, U.S. companies have been urging China to speed up its approval process for
genetically modified crops.

A spokeswoman for Monsanto Co. (MON), the world’s biggest producer of genetically modified
seeds, which has received Chinese licenses for some of its genetically modified varieties, didn’t reply to a request for comment. China’s officials have been less constrained by public pressure over the sometimes- controversial use of biotechnology in food than those of other countries.

The government has long supported research into agricultural biotechnology as part of a
drive to ensure the nation remains self-sufficient in staple crops. “This is an important achievement in independent intellectual property from our country’s research into genetic-modification technology, and creates a good basis for commercial production,” the Ministry
of Agriculture said.

Genetically modified corn, cotton and soybeans are grown in the U.S., Canada, Argentina and other countries, but genetically modified rice so far hasn’t been grown on a major scale anywhere. Most such crops now available, including the ones developed in China, have been modified to resist pests or herbicides—traits that appeal to farmers eager to boost output.
More recent efforts at genetic modification have aimed at creating benefits more noticeable to consumers. The International Rice Research Institute in the Philippines, for example, has been working on developing what is known as golden rice, which is genetically modified to include vitamin A. The institute hopes to have the rice strain, which it says could help combat childhood malnutrition, on the market by 2011.

Source: CME News For Tomorrow

Saturday, November 28, 2009

The Debts of the Lenders: China's Garlic Bubble

Apparently, Chinese speculators were not content with stockpiling copper. Now, the Financial Times reports that garlic is the newest craze. Wholesale prices of garlic have shot up 15x w/in the past few months. Accounts vary. Official accounts from the Chinese Ministry acknowledge that prices have soared 286 percent since March. Meanwhile, the Economist reports that prices have shot up 40x since the same period.

Fundamental factors like reduction in land acreage for planting have been supplanted by folk beliefs regarding the curative powers of garlic against the swine flu. Then there is plain, old fashioned greed.

"You need a warehouse, a lot of cash and a few trucks. That's how it works," said Mr Lou, describing the tools of the trade for speculators.

"Basically, what you do is try to arrest as much supply as possible, then you bid up the price. Moving garlic from one warehouse to the other, you make millions of dollars."

http://www.ft.com/cms/s/0/6a1bb282-da2b-11de-b2d5-00144feabdc0.html

http://www.economist.com/businessfinance/displaystory.cfm?story_id=14973037

The Debts of the Spenders: Is Dubai Too Big to Fail?

I have characterized Dubai as a "lender" state on this blog for a while now under the mistaken assumption that they were the main financier of US and other Western government debt obligations. Instead, recent events have revealed that Dubai is instead a net "spender" state that owes a great deal more than it lends out.

I have written about Dubai in the past. The most recent post had a generally positive tone. It is my personal belief that the whole issue is being overblown and that the emirate will be bailed out by their fellow Emirati, Abu Dhabi. Failing that, a coalition of the unwilling led by Bailout Bernanke, Mervyn King, and other Keynesian luminaries will ride to the rescue on their white horses. There will be a catch of course and that will take the form of some sort of political or social capital being redirected towards Abu Dhabi at the expense of the proud Dubai prince(s).

In an era of 0% interest rates, backdoor bailouts, frontdoor bailouts, and sideways bailouts, it is not too hard to imagine that politicians will bend over backwards to help their corporate constituents.

Since the blogosphere has already been abuzz about the topic for several days already, I am directing readers to more developed minds. Here are some good sources:


http://vixandmore.blogspot.com/2009/11/best-article-on-dubai-debt-problem-and.html

http://www.nakedcapitalism.com/2009/11/dubai-world-restructuring-sovereign-risk-shock-or-no-big-deal.html

Tuesday, November 24, 2009

The Debts of the Spenders: When Bad News is Good News at Citi

Like I said in the previous post, the definition of insanity is repeating the same actions over again w/the expectations of different results. How bad must things get before people realize that a redefault rateof 39% is considered better than an industry average of 50%?

In a report due out today, Citi said the redefault rate in the third quarter on its $746.8 billion servicing portfolio did not exceed 39% for loans modified between the second quarter of 2008 and the second quarter of 2009. That rate — the percentage of borrowers who become delinquent 60 or 90 days after modification — was higher than Citi's redefault rate in the second quarter, which did not exceed 29%.

Still, Citi's third-quarter redefault rate was lower than the industry average of roughly 50% reported in September by the Office of the Comptroller of the Currency and the Office of Thrift Supervision.

Source: http://www.financial-planning.com/news/mod-redefaults-and-risks-2664714-1.html

Monday, November 23, 2009

The Debts of the World: CDX.IG and SPY Overlap?



I've highlighted in purple circles the 2 areas where the markets bottomed for the S&P 500 SPY etf and the CDX.IG index from Markit.com

Correlation or causation? The time periods overlap.

The Debts of the Spenders: FHA Re-Inflating the California Bubble

According to Einstein, the definition of insanity is doing something over and over again and expecting a different result every time. Lest any readers forget, California was the home of the housing bubble.

SAN FRANCISCO — In January, Mike Rowland was so broke that he had to raid his retirement savings to move here from Boston.

A week ago, he and a couple of buddies bought a two-unit apartment building for nearly a million dollars. They had only a little cash to bring to the table but, with the federal government insuring the transaction, a large down payment was not necessary.

“It was kind of crazy we could get this big a loan,” said Mr. Rowland, 27. “If a government official came out here, I would slap him a high-five.”


http://www.nytimes.com/2009/11/20/business/20limits.html

Maybe I should apply for a FHA loan (maxed out of course), get a HELOC loan at 6-7% interest, and then use these funds to buy assets yielding 9-12%. Oh yea, don't forget the ability to rent the property out.

It's the real estate/dollar carry trade - US patriotism at its finest. Apparently, this is more patriotic than risking your life overseas to fight in Iraq or Afghanistan.