Manic Monday - Dubai, CitiGroup and GS Move Markets
by Phil - December 14th, 2009 8:28 am
What a morning it’s been already!
Last night, at about 11:30 EST, Abu Dhabi gave a $10Bn bailout to Dubai (until the end of April, anyway) with the following statement from Sheik Ahmed bin Saaed Al Maktoum, chairman of the Dubai Supreme Fiscal Committee: "We are here today to reassure investors, financial and trade creditors, employees, and our citizens that our government will act at all times in accordance with market principles and internationally accepted business practices." That was enough to send the Hang Seng from down 300 points to up 300 points in less than 30 minutes of trading (on both sides of their lunch break) while the Shanghai went from -2.2% to +1.7% and the Nikkei also reversed a 100-point drop, but only managed to get back to even at the close.
US futures trading also went wild, up over 100 points at the time but we’ve given up about half of those gains as of 7:30. Does it make sense that the Dubai crisis, which dropped us from 10,450 back to 10,250 when it came up, should be the catalyst to get us over 10,500 just because they were bailed out? Of course it doesn’t - that’s why we went to cash. This is one of the most ridiculously irrational markets I’ve ever seen. The other "good" news this morning is also the same old songs: Citigroup will repay their $20Bn TARP loan by diluting their stock by about 20% and GS says oil will go to $85 early next year.
I don’t know why they even bother to pretend anymore - they should just put 10 market-boosting statements on a chip that randomly plays one of them whenever the MSM needs a quote for the morning. People don’t seem to notice it’s the same thing over and over and over again so why even bother with the pretense? Speaking of pretense - I mentioned in the Weekend Wrap-Up that we expected this nonsense this morning but, had I realized that Greenspan AND Cramer were going to be on Meet the Press yesterday, I would have gone more bullish as those are the two biggest market hypers GE could have used for this week’s quotes.
Europe seems happy enough with Asia’s recovery and all the bull*** commentary (that’s bullISH - what were you thinking?) and they are up about a point ahead of our open DESPITE the FACT that Q3 euro area employment is down 0.5%, the fifth straight quarter of contraction. All sectors reported declines,…
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Greece risks financial Armageddon while Ireland makes cuts
by ilene - December 13th, 2009 10:07 pm
Greece risks financial Armageddon while Ireland makes cuts
Courtesy of Edward Harrison at Credit Writedowns
The Irish government announced draconian spending cuts of 6 billion Euros in order to stave off a debt crisis in the worst modern-day downturn in the nation’s history. Even so, Irish government
The Greek government, on the other hand, is not taking the same tack. Witness comments by the country’s Premier as reported in the Telegraph by Ambrose Evans-Pritchard:
Salaried workers will not pay for this situation: we will not proceed with wage freezes or cuts. We did not come to power to tear down the social state.
Nice sentiment. But what does that mean in practice? I see this as asking for trouble. The only way to interpret this statement is as a vow not to take the same draconian up to ten percent pay cut measures the Irish are now taking – ones that are likely to lead to strikes and social unrest. But, the reality is the Greeks have no other choice. Either make the cuts or face national bankruptcy. It’s as simple as that.
To be clear, these cuts will mean depression in Greece as similar measures in Latvia have done. Evans-Pritchard says:
Mr Papandreou has good reason to throw the gauntlet at Europe’s feet. Greece is being told to adopt an IMF-style austerity package, without the devaluation so central to
IMF plans. The prescription is ruinous and patently self-defeating. Public debt is already 113pc of GDP. The Commission says it will reach 125pc by late 2010. It may top 140pc by 2012.If Greece were to impose the draconian pay cuts under way in Ireland (5pc for lower state workers, rising to 20pc for bosses), it would deepen depression and cause tax revenues to collapse further. It is already too late for such crude policies. Greece is past the tipping point of a compound debt spiral.
Indeed, as I indicated in a recent post, market participants are talking openly of a bust-up in the Eurozone because of what is happening in Greece and Ireland. The thinking is that the stress of the tie to the Euro would cause the countries…
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2009 REVIEW & 2010 PREVIEW
by ilene - December 13th, 2009 9:50 pm
2009 REVIEW & 2010 PREVIEW
Courtesy of The Pragmatic Capitalist
The following is the excellent 2009 review and 2010 preview by PFG Best:
As we approach year-end, I thought it would be helpful to share a quick recap of 2009 and an outlook for 2010. Feel free to call or email me with any questions: Eaven Horter (ehorter@pfgbest.com).
It’s my belief the main market drivers of 2009 were interest
rates and risk aversion. Let’s first begin with the Federal Funds rate. The last elongated period of sub-2% interest rates lasted 3 years – from December 2001 to November 2004. This time period was post-9/11, when our country rebuilt itself in many ways, where low interest rates led to several “asset bubbles” that did indeed end up popping – easy credit and real estate made for a dangerous duo. We are currently just over a year with the Federal Funds rate under 2%, which dropped below the 2% level in October 2008. The current rate was set just a year ago – a historical low of 0% to 0.25%. However, the US economy and global economies are MUCH worse off now then post-9/11. With this in mind, an easy case can be made that Bernanke’s continued message of an “extended period” of low interest rates is truly not just rhetoric.An interesting consideration for this current recession and interest rate scenario is how much more interconnected the world economies are now versus earlier in this decade. What were emerging economies eight years ago are now developing nations, which makes for less of a reliance on larger countries, such as the United States. An example of this is how the world has moved from a G7/G8 focus to a G20 circle, bringing important players into the global economic decision making process. With this interconnectedness, especially in relation to the United States, we saw a focus on commentary and policy from Foreign Central Banks and the large effects these had on global
markets – just look to interest rate increases in Australia and how that affected the value of the USD and the AUD.Luckily, some of us have learned from our histories and we’ve now begun to see lawmakers take proactive measures in respect to asset bubbles. An example would be the development of “taxation” policies to limit the perceived fast and furious growth that has taken place in certain markets, e.g. Brazil. We’ve even seen it here in…
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BULL VS. BEAR: THE 2010 OUTLOOK
by ilene - December 13th, 2009 9:28 pm
BULL VS. BEAR: THE 2010 OUTLOOK
Courtesy of The Pragmatic Capitalist
A few different perspectives from highly respected traders for 2010. This week we have Todd Harrison vs. Jeff Saut and John Markman:
The bulls:
The bear:
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Hmmm…. Dubai (Again) - More?
by ilene - December 13th, 2009 9:15 pm
Hmmm…. Dubai (Again) - More?
Courtesy of Karl Denninger at The Market Ticker
There is never only one
It appears, in fact, there are a lot of cockroaches…. not only is there an official bond issue (with potential default) there appear to be a whole scad of contractors who haven’t been getting paid for their work over there….
"Some Japanese construction companies are facing very serious debt problems as Dubai can’t pay,” said Seiichi Otsuka, the Japanese consul general in Dubai. “Some companies engaged with the construction of the Metro are facing some payment issues.” He said companies were also owed money by Nakheel.
Oh oh…. And how big is this problem? Nobody seems to be saying, exactly….
“It is inappropriate to reveal details about our arrangements with contractors as we respect the confidentiality of our business exchanges,” said a Nakheel spokesman. “We remain committed to working in partnership with our contractors over the long term.”
Is that especially true when you’re not paying them on time… or at all?
“Certain of the Nakheel Group’s financing arrangements may contain cross-default clauses whereby a default under one of the Nakheel Group’s financing arrangements may constitute an event of default under other” obligations, according to an offering circular for the Nakheel 2011 bonds on Bloomberg.
That could be fun. How do you spell "cascading boom-booms"?
Finally, confirming what I had suspected, the WSJ points out:
But the prospectus notes that "trusts" and "beneficial interests" are alien to Dubai’s laws and that Dubai’s legal system has no track record of adjudicating complex international transactions. Some other disclaimers: Dubai World, the chief guarantor of the Nakheel bonds, doesn’t issue audited financials; the issuer has no attachable foreign assets; the real estate assets under the trust that secure the debt are located in Dubai, which likely wouldn’t enforce a judgment from an English court, the document matter-of-factly explains.
So you mean that banks bought - and own - this crap even though there are no audited financial statements and there are no foreign assets that can be seized (those assets INSIDE Dubai can’t be seized as they’re formally the property of the Emir, and you can’t seize the King’s land you see.)
This looks like a prospectus for MBS that were stuffed full of liar loans!
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Jon Stewart on Glenn Beck’s Gold Interest
by ilene - December 13th, 2009 11:30 am
Jon Stewart on Glenn Beck’s Gold Interest
H/t to Barry Ritholtz
| The Daily Show With Jon Stewart | Mon - Thurs 11p / 10c | |||
| Beck - Not So Mellow Gold | ||||
|
||||
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Finreg I: Bank capital and original sin
by ilene - December 13th, 2009 11:07 am
This is a very thoughtful article on the banks, the financial system, government and regulation. I share Steve’s feeling of bleakness, maybe more so, because while Steve suggests workable solutions are possible, it seems to me that given the political money system controlling government, real, long-lasting solutions are unlikely. (My yellow highlights.) - Ilene
Finreg I: Bank capital and original sin
Courtesy of Steve Randy Waldman at Interfluidity
I have always flattered myself that I would someday die either in prison or with a rope around my neck. So I was excited when The Epicurean Dealmaker invited me to write about financial regulation and crosspost at a site called The New Decembrists. But my views on the topic have grown both more vehement and more distant from the terms of the current debate (such as it is), and I’m having a hard time expressing myself. So I’ll ask readers’ indulgence, go slowly, and start from the beginning. This will be the first long post of a series.
Banks are not financial intermediaries. Their role is not, as the storybooks pretend, to serve as a nexus between savers with capital and entrepreneurs in need of capital for economically valuable projects. Savers do transfer funds to banks, and banks do transfer funds to borrowers. But transfers of funds are related to the provision of capital like nightfall is related to lovemaking. Passion and moonlight are often found together, yes, and there are reasons for that. But the two are very distinct phenomena. They are connected more by coincidence than essence.
The essence of capital provision is bearing economic risk. The flow of funds is like the flow of urine: important, even essential, as one learns when the prostate malfunctions. But “liquidity”, as they say, takes care of itself when the body is healthy. In financial arrangements, whenever capital is amply provided — whenever there is a party clearly both willing and able to bear the risks of an enterprise — there is no trouble getting cash from people who can be certain of its repayment. Always when people claim there is a dearth of “liquidity”, they are really pointing to an absence of capital and expressing disagreement with potential funders about the risks of a venture. Before the Fed swooped in to provide, 2007-vintage CDOs were “illiquid” because the private parties asked to make markets in them or lend against them perceived those activities as horribly risky at…
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Americans More Pessimistic On Economy, Nation’s Direction
by ilene - December 13th, 2009 9:30 am
Americans More Pessimistic On Economy, Nation’s Direction
Courtesy of Mish
A Bloomberg survey shows Americans Grow More Pessimistic on Economy, Nation’s Direction.
Americans have grown gloomier about both the economy and the nation’s direction over the past three months even as the U.S. shows signs of moving from recession to recovery.
Almost half the people now feel less financially secure than when President Barack Obama took office in January, a Bloomberg National Poll shows.
Those concerns have put consumers in a miserly mood as they head to the mall for holiday shopping, with half the country planning to spend less on gifts than last year and few buyers willing to run up credit-card debt for Christmas.
The mood among members of Obama’s own Democratic Party has shifted most dramatically: While Democrats remain the most positive, the proportion saying the country is on the right track dropped to 58 percent from 71 percent in September. Among independents, 26 percent say the country is on the right track, down from 29 percent in September.
“The recession may be over, but the administration seems to be losing the battle when it comes to winning the hearts and minds of Americans,” says Chris Rupkey, chief financial economist for Bank of Tokyo-Mitsubishi UFJ Ltd. in New York. “This is important because the spending of consumers is the main factor that will turn the economic recovery into a self- sustaining one.”
Poll Highlights
- Only 31 percent expect the economy to improve in six months
- 81 percent say persistently high unemployment is a major threat
- 60 percent say stimulus plans have no effect or actually hurt the economy
- Only 26 percent feel more secure now than when Obama took office
- Only 33 percent view Bernanke as favorable
- Only 8 percent plan on spending more for the holidays, while 47 percent plan on spending less.
Click here to see the Bloomberg National Poll questions, answers, and methodology.
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Wrap-Up - Too Bearish or Just too Early?
by Phil - December 13th, 2009 9:18 am
Well, we’ve been here before.
Once again the market has staged a spectacular recovery on virtually no volume and mixed news. While we went into last weekend just a little bit bearish (about 55%), this Friday the market topped out about 150 points higher than last Friday, closer to the top of our range so we went much more bearish on Friday, perhaps too bearish considering this was the best Friday finish since Nov 6th and we haven’t had a down Monday since October 26th.
Our plays this week turned very bearish to balance out the more bullish set we took in the first week of the month (see last week’s Wrap-Up). Almost all of our bullish trade ideas have already made 20% and some are way over our goals as we were able to cash out a lot more winning bullish plays and press our bearish plays, turning the $100K Portfolio extremely bearish and twice as invested as last week. Big winners from the last wrap-up included:
- DIA $104 puts sold at $2.25, now $.55 - up 75%
- DIA $103 puts sold at $1.65, now .30 - up 81%
- SONC Jan $10 puts sold for .85, now .55 - up 35%
- DIA $104 puts sold at $2.55, now $55 - up 78%
- BAX artificial buy/write (too complicated to summarize) - over goal already!
- AMZN Dec $150 calls sold at $4, now .10 - up 98%
- USO Dec $39 puts at .82, now $3.50 - up 326%
- FXP Dec $8 puts sold for .70, up 64%
- OIH Dec $120 calls sold at $3.25, now .27 - up 92%
- AMZN Jan $140/135 bear put spread at $2, now $3.60 - up 80%
- IWM $60 puts sold for $1.30, now .72 - up 44%
- NSH June buy/write at $18/20.25, now $25.86 - ahead of goal
- AMZN Dec $145 puts sold at $5 (average), now .25 - up 85%
- AMZN Dec $150 calls sold at $3, now .10 - up 96%
- TBT June $42/26 bull call spread at $1.80, now $2.60 - up 44%
- TBT June $42 puts sold for $2.15, now $1.30 - up 40% (pair trade)
- SRS Dec $8 puts sold for .42, now .17 - up 60%
- FXP Jan $6 calls at $1.40, now $2.10 - up 50%
- IYR Dec $46 calls sold for .85, now .20 - up 76%
USD Dec $30 calls sold for $1.80, still $1.80 - up 43%- DIA Dec $104 puts sold at $1.60, now .55 - up 65%
Of course we had a few trades from that week that went bad too as well as many that are still in…
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On the Value in Housing
by Chart School - December 13th, 2009 9:10 am
On the Value in Housing
Courtesy of Jake at Econompic Data
Felix Salmon recently made the case in his post Against Liquidity:
Investing shouldn’t be about safety: it should be about calculated risk.
and…
Liquidity is not ever and always a good thing.
And I completely agree. But both of those points seem to be in conflict with a more recent post of his The Housing Speculators Return. I don’t always agree with Felix Salmon, but I typically understand his thought process. That is not necessarily the case in this post. Per Felix:
It bears repeating: homes aren’t investments, they’re places to live. If you can buy a nice house for less than you’d otherwise pay in rent, then go ahead and buy — no matter what the market looks like, or where mortgage rates are. On the other hand, if you’re looking for an “investment”, stick to securities. You can sell those much more easily when you need some money, and they won’t drive you into possible bankruptcy and homelessness if they go down rather than up.
Let me go through my grievances with that one paragraph, then I’ll detail my personal thoughts on housing more broadly.
Homes Are "Only" Places to Live
In addition to living in a home, a house can serve as a long term investment that produces income (i.e. he makes just that point with his alternative to owning… RENTING, which is just paying another homeowner for the right to live in that home).
Rent Must Be More than a Mortgage Payment to Justify Owning
This ignores the fact that rents (typically) rise, while a fixed rate mortgage payment doesn’t. BLS data shows that the cost of renting typically rises by the rate of inflation over the long run.
Thus, if you plan to live in that home for a long period of time (there were previous generations who bought to live in home the rest of one’s life), then as long as rent moves higher than a mortgage at some point in time, you may be better off (not to mention the tax benefits of writing off interest). That includes after 30 years when a homeowner no longer has a mortgage, but renters are still paying rent.
Stick to Securities When Investing
The below chart is from another post from June and shows that it wasn’t just homes that fell dramatically in value in 2008 (equities, high yield credit, ABS, etc… all fell as much or more than housing in that…
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Philip R. Davis is a founder Phil's Stock World, a stock and options trading site that teaches the art of options trading to newcomers and devises advanced strategies for expert traders...
Ilene is editor and affiliate program
coordinator for PSW. She manages the Favorites backup site
(