Wednesday, August 29, 2007

China opens forex investment agency

China issues first batch of bonds to fund new forex investment agency
Posted: 29 August 2007 1504 hrs

BEIJING: China was to sell nearly 80 billion US dollars worth of government bonds Wednesday in the first batch of a planned special issue to fund a new foreign exchange investment agency, state media reported.

The Ministry of Finance was to issue on Wednesday 600 billion yuan (79.4 billion US dollars) as part of the planned special treasury bonds sale totalling 1.55 trillion yuan, said the China Securities Journal.

Proceeds of the bond issue, authorised by China's parliament in late June, will be injected into the new state forex investment agency, tasked with diversifying and maximising returns on part of the country's huge forex reserves.

Flight to forex coming?

Now you see the ethics of the media, which explains why nobody ever heard that any of this stuff was coming.


The news of last weeks plummeting stock market brought on by the housing bubble debacle, saved only by the infusion of billions of dollars by the Fed, should not be received with fear and trepidation by the working man but with a sense of hope that soon the whole rotten economic scam which is presided over by white collar criminals and their bought and sold lackeys in Washington is hopefully coming to an end.

Congressman: Stock Market Will Eventually Collapse

Ron Paul says martial law provisions in place to deal with economic discord.

Wall Street plunges on concern of economic outlook

Wall Street plunged with the Dow Jones average dropping more than 280 points Tuesday on refreshed concern of economic outlook.

Stocks are up a bit this morning. - M. R.

World stocks slump on new US economy fears

World stocks slumped today amid reports of more damage from the teetering US subprime mortgage sector and falling US house prices.

Ford and GM say factories in US face axe

Saturday, August 25, 2007

EES US Investment Outlook Summer 2007

Recently financial markets have experienced more volatility than any historical period (since such volatility is being measured), according to a volatility index traded as a futures contract on the CME called the VIX. Aside from the anomalous trader profiting from the chaos, many investors have suffered large losses , and more importantly they are seeking safety in bonds and other debt-based instruments which have proven to be unsafe. Many previously high rated AAA bonds have been reduced to junk, and their exposure is almost everywhere. Many funds will invest in these risky bonds, either in the form of the repackaged sub-prime asset backed securities, or in the commercial paper market. For example, many money market funds had invested in CDO's, against the doctrine of the founder of money market funds, Bruce Bent.

"The money market fund was created to provide effective cash management, to guarantee at least a dollar in and a dollar back and beyond that, a reasonable rate of return," Mr Bent says.

Driven by fear, investors have moved quickly into treasuries, a 'flight to safety'.

Aug. 20 (Bloomberg) -- Yields on U.S. Treasury bills fell the most in two decades on demand for the safest securities amid concern over a widening credit crunch.

Bill yields have fallen five straight days as money market funds dumped asset-backed commercial paper in favor of the shortest-maturity government debt. Three-month yields dropped the most since the stock market crash of 1987 and more than in the wake of the Sept. 11, 2001, terror attacks in the U.S, as funds shunned assets that may be linked to a weakening mortgage market.

``The market is totally, absolutely, completely in fear mode,'' said John Jansen, who sells Treasuries at CastleOak Securities LP in New York. ``People are afraid that lots and lots of mortgage paper and mortgage paper derivatives of all sorts is completely opaque and they can't price it.''

The three-month Treasury bill yield fell 0.66 percentage point to 3.09 percent as of 5:06 p.m. in New York. It's the most since Oct. 20, 1987, when the yield fell 85 basis points on the day the stock market crashed, and eclipses the drop of 39 basis points on Sept. 13, 2001, the day the Treasury market reopened after the attacks. The yield has fallen from 4.69 percent on Aug. 13. The bills yielded about 7 percent in mid-October 1987 and 3.2 percent in the days before the September 2001 attacks.

``I've never seen it like this before,'' said Jim Galluzzo, who began trading short-maturity Treasuries 20 years ago and now trades bills at RBS Greenwich Capital in Greenwich, Connecticut. ``Bills right now are trading like dot-coms.''

However, treasuries are still US Dollar based. If Bernake lowers rates, and continues to lower, as indicated by the sentiment of traders, it can only sink the already sinking dollar more. In the next 12 months, if the dollar drops another 20%, and your treasuries have yielded 5%, your net gain is negative 15%. This may seem like simple arithmetic, yet no analyst on the street is mentioning the currency trade. They all know the carry trade, and that it's unwinding, but this is looked at as speculative trading activity. No one is commenting on the greater economic and investment impact of the 'credit crunch' as it relates to the dollar, and what it means for US based investors. They see the problem but not the solution. The current credit crisis is simple to understand.

  • Average weekly wage as of December 2006 is $861 ($44,772 annually)
  • Number of employed persons in US nationally is 135,933,200
  • Total earnings is 5.7 trillion, GDP is 13.1 trillion (7.3 trillion sur-minus)
  • Total national debt is 9 trillion
  • Trade deficit is -$763.6 billion in 2006

The US doesn't have a surplus; we have a sur-minus. This is known as the national debt, but it comes in many forms. One claim is that we have a double deficit, that is, a current account deficit and a fiscal deficit. The consumer, the US government, and US based corporations all have negative savings rates, meaning they spend more money than they have.

What enables the economy to function in the red is a simple credit mechanism, which is unfortunately not backed by anything other than belief in USA. At some point, as the case with the credit market, there could be a 'tipping point' that could cause a whirlwind of dollar selling, a 'flight to convertibles' similar to the credit 'flight to safety'. Even the IMF states in a report that the USD is 30% overvalued.

Many stock analysts are recommending companies based on their overseas operations, placing a great value on companies that derive a great portion of their revenue from offshore markets. This is not a vote of confidence in sophisticated multinational operations; it is a derivative dollar short. These corporations are profiting in Euros and Pounds, and therefore have more gross revenue when repatriating those profits back home in the US Dollar, inflating their revenue by the value of the dollar decline. An investor doesn't need to invest in these stocks in order to profit by a dollar decline; one may simply short the dollar.

Shorting the dollar if you are a US based investor is a natural hedge, because if your trade is wrong, you will benefit from a long dollar position in your savings account (which is dollar based). It seems like a no-brainer, why isn't everyone doing it?

Real estate no longer is an appealing investment (if it ever was). Stocks are currently suffering due to subprime 'credit crisis' related exposure. Bonds are being downgraded to junk; ratings agencies rank bonds AAA one day and junk when they collapse, so what is the point of purchasing high-rated debt instruments?

EES proposes the following:

  • Structured foreign exchange products offered to retail investors. Forex Managed Accounts with a track record, packaged as a structured forex investment.
  • "Dollar short" automated strategies, that pick points to short the dollar based on momentum based indicators and RSI "overbought" style indicators. Instead of taking 1 simple dollar short position, an automated system could day-trade a falling dollar, locking in short term profits and hedge against losing trades.
  • Principle protected products in a risky forex strategy, where only a % of cash is traded with high leverage. For example using a 1m fund, 100k is invested into high risk forex strategies, protecting 90% of capital 100%.

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Wednesday, August 22, 2007

Liquidity Crunch Continues

China Prepares to Dump U.S. Dollars

Citigroup, JPMorgan, Banks Borrow From Fed Window

BOFA controls 650billion in customer deposits, not counting investments (savings deposits) – not counting JP and Citi, 500m a drop in the bucket. What is the point?

A Fear of Foreign Investments

For years, the Bush administration has shrugged off concerns about the trillions of dollars that the United States owes to China, Japan and oil-producing countries in the Middle East, arguing that these debts give no undue leverage to foreign governments.

But at a time of global financial instability, the administration has started to worry that foreign governments are increasingly converting their dollar holdings into investment funds to acquire companies, real estate, banks and other assets in the United States and elsewhere. The fear is that these so-called sovereign wealth funds could destabilize markets or provoke a political backlash.

Saturday, August 11, 2007

Proof that the system is unsustainable in its present form

Hurricane Katrina, an economic and national disaster, could have been prevented by spending a small fraction of the cost up front, compared to rebuilding post-disaster. That estimate is difficult to calculate precisely, but it is in the 1% range. At the time, the system was too cheap to spend the seemingly large hundreds of millions, to save a city from a potential natural disaster that had a high chance of occurring in 50 years, finally costing hundreds of billions. But the collateral damage to society is immeasurable: deaths of victims, lost opportunities of New Orleans residents, crime in Houston, and economic prowess that could have been spent on other projects instead of rebuilding a city that already existed. Imagine if the levy's had been built in 1965 and instead of rebuilding Katrina, we build a national maglev train system, such as exists in many other developed countries (China, Japan, Germany). There is even a proposal to build a maglev in Venezuela, certainly not a country most would consider superior to the United States in terms of Technology. Yet while the US is repairing a flooded and toxic New Orleans, Venezuela is building the train of the future. The question is not about politics, it's about an unsustainable school of thought: is it cheaper to build a dam, or to rebuild your entire city?

In another story, overleveraged hedge funds will collapse, losing billions, without any consideration of implementing risk management software, or advanced systems to mitigate market downturns.

There is not much argument to defend the kind of thinking (or lack thereof) that creates such situations. As the American mentality goes, you can just pay your way out, so no one pays much attention to efficiency. But what if you don't have the money? This is a major flaw in thinking of policy makers in government and corporations. They assume that in their lifetime, the government will have the power of the purse to bail them out of any disaster, as the fed is now bailing out defaulting borrowers of loans. We assume we can spend our way out of any bind, and if we run out of money, the fed will bail us out by 'injecting liquidity' into the economy.

Secondly, many countries operate as they do being supported by the US and the US Dollar. If they get into the mess, they can always call Uncle Sam. But who will bail out the fed if the fed collapses? (any collapse will be called "reorganization" or "restructuring" and will be spun and woven into a blanket of keywords and sound bites so it will seem that it is still in control but morphing into an institution of the 21st century)

It is a difficult scenario for many to imagine, who have grown up in a world fueled by cheap oil, a relatively stable world political scene, and a negative output capacity. However a global meltdown is not only likely, based on all existing evidence, it is highly probable. Not just institutional crisis, not a bankruptcy, major system wide meltdown, to the level that basic infrastructure will collapse, such as we have seen in the mid-west, and people (of all classes) will lack basic services and necessities. The system is connected in ways that cannot be easily explained but can be easily understood. Bank of America has 650 billion in customer deposits, and is a known provider of banking services to small businesses. If BOFA experienced a 'liquidity crisis', and there was any delay in customer deposits, imagine the repercussions in the local economy. Most small businesses run on little or zero credit lines, and depend on weekly cash injections, payments, and invoicing to stay afloat. Moreover, most employees live from paycheck to paycheck, and are 2 paychecks away from major financial disaster. Every company claims they are safe from a crisis, and backup measures can be implemented in the event of such crisis, but none of them can understand how interdependent they are of each other. Moreover, they are taught to be salesmen and believers of their own company, not analysts or skeptics. This means if a crisis was on the horizon, no one inside these institutions would even notice. Any critique of their policies is labeled conspiracy or fanaticism, which is supported by the public view that everything should be happy and pretty, leave the negative dark discussion to crackpots living in the woods. Yet when the house burns, they are apparently surprised how this has happened. After a period of the egotistical denial phase "how could this happen in united states??" there is the blame game, then redemption. What we have not seen is the widespread understanding that the system itself is the problem, not corporate greed, global warming, or criminals, or foreign dictatorships, or drug use by teens, or any other likely societal scapegoat. Just keep shopping and everything will be fine, as bush said in his latest speech, we are a country of Does and Innovators, and we have created eBay; therefore our economy is resilient and capable of thinking and innovating our way out of an 8 trillion USD based debt bill.

Today (August 10th,2007) on Bloomberg TV, several guests from the banking community assured viewers that the "credit crunch" would not affect Money Market funds. These are treated by many banking customers as savings accounts, many do not understand that a money market account is not a cash account but is a type of debt-security which is sold by the bank to 3rd party buyers. These buyers could theoretically renege on their obligations, putting the holders of the money market funds out of the money. Under normal circumstances, the amount of defaulting loans is so rare that they can be covered by insurances and profits. But if there is a system-wide 'credit-crunch' (which is incorrectly titled, a better title would be 'money crunch' or 'cash crisis' as there is plenty of credit but not much cash), borrowers might feel they can get a better deal by not repaying, suffering through a bankruptcy or debt restructuring, and renege on their obligations.

In the example of Goldman's Alpha fund, a sophisticated asset diversification tool has been developed, with no clear risk management for losing trades. Of course in the hedge fund world you don't disclose what your quant strategy is, but the fact that the fund has consistently lost money is proof that there is no risk management which is working.

There is no clear conclusion to these thoughts, because we do not have a clear picture of the extent of the crisis, and reports are still being created, investigations still taking place. Many of which will be released on or before Monday, but it is a process that can take weeks or months. We can expect volatility – normally one would say "a flight to safety" but now that bonds and real estate and stocks are all scratched off as being 'safe' – and money market funds are also in question, many investors may not know where to feel safe.

Thursday, August 9, 2007

Credit Crunch spreads

World stocks slide...

ECB moves to help banking sector

The European Central Bank (ECB) has pumped 95bn euros (£63bn) into the eurozone banking market to allay fears about a sub-prime credit crunch. BNP Paribas Freezes Funds as Loan Losses Roil Markets

Aug. 9 (Bloomberg) -- BNP Paribas SA, France's biggest bank, halted withdrawals from three investment funds because it couldn't ``fairly'' value their holdings after U.S. subprime mortgage losses roiled credit markets.

The funds had about 1.6 billion euros ($2.2 billion) of assets on Aug. 7, after declining 20 percent in less than two weeks, spokesman Jonathan Mullen said today. The bank will stop calculating a net asset value for the funds, which have about a third of their money in subprime securities rated AA or higher.

Wednesday, August 8, 2007

Renowned Bird Flu Expert Warns: Be Prepared

Renowned Bird Flu Expert Warns: Be Prepared
There Are "About Even Odds" That the Virus Could Mutate to an Easily Transmitted Form, He Tells 'World News Tonight'

China may sell off Treasury bonds if US imposes trade sanctions - report

Tuesday, August 7, 2007

Sub-prime is spreading, global cash crunch.

Frankfurt Trust Halts Redemptions at Fund Amid Subprime Concern

Housing's ills imperil condo deals
Miami Herald, FL - Aug 5, 2007
Instead of shouldering the development costs alone, Cay Clubs adopted a familiar strategy in South Florida: selling off rooms in resorts as condo-hotel ...

The 'money is just not available to make the necessary payments and continue to maintain Cay Clubs' long-term viability during this down market,'' Chief Executive Dave Clark in May wrote to condo buyers awaiting lease-back checks.

American Home Mortgage to close Friday

Home builders' CEOs make timely stock sales Sub-prime crisis may trigger global meltdown Fed will act on market slide if warranted: Poole Bear Stearns Halts Redemptions on Third Hedge Fund After Losses American Home Can't Fund Mortgages, Shares Plummet Murdoch wins control of Dow Jones Tangle of loans feeds foreclosure crisis DOW JONES INDUSTRIAL AVERAGE
Oil settles at a record high above US$78 on inventory expectations

* 07 Aug 07: 02:43GMT (SGA) - FX NOW! USD/JPY, NZD/JPY Flows - Times:Deutsche and JPMorgan hit by sub-prime crisis (PRESS)

More on subprime worries and banks' exposure. The Times article "Deutsche and JPMorgan hit by sub-prime crisis as lender falls" reported that Deutsche Bank and JPMorgan are totting up their exposure to the latest American sub-prime mortgage casualty after they were named yesterday among the biggest creditors of American Home Mortgage, which has filed for bankruptcy protection. As of the end of March, American Home Mortgage had total borrowings of $4b (GBP1.9b). Last week it had been trying to secure a buyer for two of its businesses, but it failed to close a deal. It also sought to cut costs by dismissing 90% of its staff. FX markets continue to watch any impact of stock markets, though markets, JPY carry trades stable at the moment, USD/JPY 118.80.WL

Mortgage crisis ripple effect seen in other sectors
Dallas Morning News (subscription), TX - 2 hours ago
Large and small corporations are also paying more to borrow – if they can find anyone willing to lend them cash. The same goes for flashy private equity ...

Monday, August 6, 2007

Sub-prime crisis may trigger global meltdown

A LEADING Wall Street economist has warned of a possible global financial meltdown if the problems in the US sub-prime mortgage market claim more institutional scalps.

Moody's chief economist Mark Zandi said the pre-conditions for global shock were in place and "one or two more Bear Stearns events" could have a profound psychological impact on investor confidence.

Bear Stearns, the fifth-largest securities firm in the US, shocked global markets during the week when it announced that two of its mortgage investment funds previously worth about $US1.5 billion had little or no value left in them.,25197,22146420-643,00.html

Sunday, August 5, 2007

Dollar is down, market is down

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Contango Investing Blog

US unemployment hits a six-month high

The fresh snapshot of employment conditions around the country, released by the Labour Department, also showed that new job creation slowed. Employers increased payrolls by 92,000 last month, the fewest add-ons in a single month since February.

Rip off Britain!

I wonder if the exchange rate is being fudged, because market forces should equalize the prices at both ends (after taxes). - M. R. Cramer loses it on CNBC (with good reason) Loonie won't reach parity, poll suggests

Weak US data put pressure on dollar

The dollar staged a broad retreat after weaker-than-expected US employment and business activity data overshadowed the turbulence of credit markets and focused minds back on the economy

Saturday, August 4, 2007

Cash seeks safe yields

    * 03 Aug 07: 17:46(LDN) - FX NOW! EUR/ISK, JPY/ISK Flows- ISK decline of over 3% today, highlights risk in carry trade

Iceland's currency has joined in with the rest of the market and given in to the broader markets reduced interest in exotic instruments, which includes a large flow of Glacier bonds that offered yield hungry investors returns that were hard to match. Supporting these purchases and contributing to the heavy demand were leveraged players that felt the easy funding in JPY at rates under 1% made an investment in Icelandic debt where official rates are 13.30% too good to be true. It was, while JPY added to returns with its steady and apparently officially supported decline, almost too easy. Over the last two weeks, the "carry trade", where ISK is a prime example of a high yielder, has suffered like the rest of the high yield market and more. Lower liquidity and the relatively specialized nature of the market has contributed to the limited liquidity when it is most needed and today's rally in ISK/JPY from 0.5230 to 0.5410 highlights the risk that has been ignored, but is inherent in the trade. EUR/ISK has also climbed, with lows of 85.40 to highs of 88.20. Capitulation, rebalancing bond positions to stay with market indices and general flight goes a long way to explaining the 3.20% and higher decline in ISK while the "carry trade" suffers even more. M.B.

Big Bank Failure Could Turn Credit Crunch Into Global Crash

The seizing up of the world credit markets—triggered by the collapse of the household debt bubble in the United States—may turn from a slow-motion collapse into a thorough crash, if one or more major investment banks fails in the near future.

Another devastating decline for the Dow

Wall Street ended another rollercoaster week with the Dow industrials plummeting about 280 points Friday amid continued credit market fears, sparked by Wall Street bank Bear Stearns.

German bank reveals £12bn exposure to sub-prime mortgages

The international financial system suffered fresh convulsions yesterday as it emerged that Germany's IKB Deutsche Industriebank, one of the country's leading small business lenders, has about £12 billion of exposure to high-risk sub-prime mortgages in the United States.

Corporate Shape-Shifting: Is its End Near?

Corporations often seem to be above the law and are. While corporations cite rights normally accorded individuals, they are rarely held to standards of equal responsibility. A single individual would have been imprisoned for an oil spill of Exxon Valdez magnitude but Exxon got off with a payoff. An individual responsible for the deaths of 8,000 at Bhopal might have gotten hard jail time for life or, in Texas, death at the end of a needle. Union Carbide, by contrast, got slapped on the corporate wrist for the deaths of 8,000 the night of December 3, 1984. There is, in fact, no definitive total of deaths.

American Home Mortgage Says It Will Close

American Home Mortgage Investment, the troubled mortgage lender based in Melville, N.Y., will close today, making it the latest company to fail this year as loans made to home buyers, some even with solid credit histories, go bad.

An economy is like an engine. A good design is an engine able to power itself, with power left over to do some work. But as load is added to the engine, the engine has to work harder and harder until the sum of the work load plus the energy needed to keep the engine running exactly equals the maximum power the engine is capable of. Then the engine starts to stutter. And if the load increases again, the engine stalls and quite running entirely.

ABC News: Home Lender Goes Bust

American Home Mortgage Investment Corp plans to close most operations on Friday and said nearly 7,000 employees will lose their jobs as the lender becomes one of the biggest casualties of the U.S. housing downturn.