11-24-10

GEO-POLITICAL TENSIONS - ISRAEL / KOREA / IRAN

KOREA

S. Korea vows 'stern retaliation' against N. Korea's attacks Yonhap

Japans Calls For Attack On North Korea, Tensions Mount After Shelling Intel Hub

Unpredictable (Korean) geopolitical risk, illustrated FT Alphaville

US to send aircraft carrier to South Korea  FT

Obama Promises `Unshakable' Support for S. Korea  BL

 

SOVEREIGNS

 

Things in Europe are getting worse. Here is a brief summary of all the events in the increasingly troubled continent. 1- Sinn Fein Says Irish PM Has No Support: The opposition party has tabled a motion of no confidence in Irish Prime Minister Brian Cowen (source) 2- Wolfgang Schaeuble admits the end is near: The Irish debt crisis is putting the euro at risk, German Finance Minister Wolfgang Schaeuble warned Tuesday. "We are currently in a difficult international and European environment," Schaeuble said in a budget speech in parliament. (source) 3- General weakness in European credit: CDS indices are mixed with Xover 6 basis points wider at 465bps, HiVol 4bps tighter at 154bps and Europe 2bps wider at 104bps. Holders of 92% of the current outstanding E750 million of Anglo Irish subordinated debt yesterday agreed to accept just 20% nominal value for the paper which will be exchanged for government guaranteed securities (source) 4- Very poor Spanish 3-6 month bond auctions, with yields and Bid To Covers jumping, and the country selling (€3.2 billion) compared to the auction goal of €4-5 billion: Spanish 3-month auction for €2.091bln, BTC 2.34 vs. Prev. 2.77 (yield 1.743% vs. Prev. 0.951%); Spanish 6-month auction for EUR 1.165bln, bid/cover 2.6 vs. Prev. 2.08 (yield 2.111% vs. Prev. 1.285%). Spanish CDS about 20 bps wider as vigilantes consider speeding up the process of collapsing Europe 5- Persistent rumor of Moody's downgrade of Portugal: probability 0.01%. 6- CHF intervention needed but nobody willing to take on Fed: The head of the Swiss National Bank on Tuesday sounded the alarm on the strength of the swiss franc and tied it to the financial turmoil across Switzerland's borders in the Eurozone. Current exchange rate developments are a "major challenge" for Swiss exporters, SNB governing board chairman Philipp Hildebrand said. (source) 7- 3 Month Euro LIBOR, which recently passed above the ECB's 1% key refi rate, and was seen as an improvmenet, is now back lower: When 3 month Euribor broke above the European Central Bank's key 1% refi rate last month it was heralded as a sign of a return to normality, but it has fallen back over the past eight trading sessions. Three month euro LIBOR failed to make the 1% level and is now declining again. On Tuesday, three month euro LIBOR fell 0.25 bps to 0.97375%, sterling 3 month LIBOR fell 0.125 bps to 0.73875% and dollar 3 month LIBOR held steady (source) Elsewhere, three month Euribor fell for the eighth consecutive day Tuesday, with the pace of decline accelerating as it dropped 0.4 basis point to 1.035% from 1.039% Monday. The 3 month Euribor/OIS spread widened 1.25 bps with the banking sector under pressure amidst heightened concern over euro zone peripherals (source) 8- Lastly, the ECB drained €66.0Bn In a 1-week term deposit tender, to sterilize the money used for sovereign debt purchases. The amount drained matched the total volume of government bonds purchased by the ECB and settled as of last Friday and was up from the €65 billion drained previously. On Monday, the central bank reported that it had purchased €713 million in sovereign debt on the secondary market during the week ending November 19. (source) Fears of Domino Effect Pervade Europe  WSJ With the unraveling of Ireland's coalition government Monday, contagion is back on the minds of investors. Portugal reported on Monday that its 10-month budget deficit widened from a year ago. Tuesday, Spain issued short-term debt at a significantly higher cost than a month ago. "I think that's the market's realization; that these are systemic problems that are going to need a (European) systemic solution, this is not a one-off problem with an individual country." Brian Yelvington, fixed-income strategist at Knight Capital.  Rising spreads have hit one country after the other, moving from Greece to Ireland and now to Portugal and Spain.  The worry is that those rising borrowing costs eventually may prove prohibitive, forcing countries to seek some sort of bailout. "People that are betting on contagion are probably making the right bet here,there's not really anything to stop the markets from pushing the next domino over."  David Gilmore, a strategist at Foreign Exchange Analytics. "     GREECE Greece Will Need `Extra Effort' to Meet 2011 Deficit, EU-IMF Say BL   I.M.F. Clears Latest Installment of Aid to Greece NYT SPAIN The Complete Guide To The Oncoming Spanish Debt Crisis That Everyone Is Terrified Of  BI Is The Bond Wolfpack Going To Skip Right Over Portugal And Start Feasting On Spain BI Spanish yields are at record highs this morning. The main event may coom sooner than people are expecting. Spanish 10 Year Bond Spreads Hit All Time Wides  ZH   GERMANY   FRANCE   UK   IRELAND The underwhelming Irish bailout Salmon Markets: Ireland bail-out a failure Telegraph “Rescue or no rescue, Ireland and the other peripheral nations face some difficult times ahead.” Ireland's sacrifice may well sink the eurozone, not save it Prosser Irish P.M.'s own party rebels, plans to replace him AP An effort that could trigger a snap election and delay a massive EU-IMF bailout of Ireland. Who are the bond holders we are bailing out? Golem XIV Ireland's Banks Are All For Sale: Central Banker Reuters IMM positioning: Euro longs unwound ahead of Irish bail-out Danske What Will Happen To Ireland (And Various MNCs) When Ireland Is Finally Forced To Hike Tax Rates  ZH Irish political turmoil complicates financial-system fix  Washington Post What is needed now is an immediate general election so that a new government, with a clear parliamentary majority, can prepare the four-year economic plan, complete negotiations with the E.U. and IMF and frame a budget for 2011," Kenny told reporters in Dublin.   While European governments may have dealt with the immediate crisis facing Irish banks, the greater challenge for European governments will be ensuring that no nation defaults on its debts or drops use of the euro, the common currency.   JAPAN Japanese rushing to Shanghai for better jobs Asahi   The greying of Japan Economist

There Are Massive Risks In Emerging Markets Too  BI

 

One of the interesting things that's happened over the last couple years is that investors have begun to perceive emerging markets as not only faster growing, but also safer thanks to less indebtedness and central banks that aren't perceived to be pumping like crazy (that's not exactly accurate, but it's the belief).

4- STATE & LOCAL GOVERNMENT

Munis Yielding More Than Treasuries for First Time Since Crisis Amid Sales BL

Investors withdrew $3 billion from open-end municipal bond mutual funds in the week ended Nov. 17, the most in almost 19 years...

United STRAITS of America: The Muni Bond Crisis Is Here EW

Muni-Bond Issuers May Face Default `Crunch' as Stimulus Ebbs, Lehmann Says BL

5- CENTRAL & EASTERN EUROPE

7- RISK REVERSAL

8- COMMERCIAL REAL ESTATE

9-RESIDENTIAL REAL ESTATE - PHASE II

Residential construction in United States: Will 2011 be another year to write off? NBF

Fannie Mae, Freddie Mac and the Coming Wave of Foreclosure Buybacks RealtyTrac

'Shadow Inventories,' a Dark Cloud Over Housing Barron’s

14- CORPORATE BANKRUPTCIES

Kamikaze Capitalism: GOP out to destroy Farrell

GOP Puts the `Lame' Back in Lame-Duck Session Baum

OTHER TIPPING POINT CATEGORIES NOT LISTED ABOVE

21-US RESERVE CURRENCY.

Yuan begins trading against the rouble China Daily

“The pace of internationalizing the yuan is accelerating”

22-SHRINKING REVENUE GROWTH RATE22-SHRINKING REVENUE GROWTH RATE

Fed Trims Outlook on Growth, Jobs  WSJ

Fed officials downgraded their assessment of the economy at a November meeting as they debated the benefits and costs of bond purchases, minutes showed. Long Slog Federal Reserve officials' new forecasts for unemployment: 2010: 9.5%-9.7% 2011: 8.9%-9.1% 2012: 7.7%-8.2% 2013: 6.9%-7.4% 'longer run': 5%-6%

24-RETAIL SALES

26-GLOBAL OUTPUT GAP

31-FOOD PRICE PRESSURES

32-US STOCK MARKET VALUATIONS

 GENERAL INTEREST

A recession to remember: Lessons from the US, 1937-1938 VOX

MARKET WARNINGS

Is A Dropping VIX Masking Rising "Fear" In Most Other Asset Classes... And Does Hedge Fund SPY Pair-Hedging Explain The Market Melt Up  ZH

 

As the trading year draws to a close, and as the QE2 driven melt up shows little sign of relenting (or breaching the 1,200 S&P level), the ever popular VIX, or "fear index" continues to plumb new depths. For many this is a superficial sign of complacency and lack of risk of any major moves within stocks. However, as BNY's Nicholas Colas demonstrates, this is far from the truth as to what is happening below the surface. While highlighting the grind lower in the VIX, Colas observes that "the options market has been busy pricing in higher levels of perceived risk across a variety of asset classes, most notably investment grade bonds, silver, and emerging markets. In fact, of the 20 asset classes and industrial sectors for which we track risk pricing in the options market, 15 show heightened levels of investor concern for the upcoming 30 day period." How does Colas explain this remarkable divergence? "I am tempted to say that the sector IVs are actually better representatives of the market’s take on future volatility, and the lower expected volatility of the market as a whole comes from macro investors who think the next month will be smooth sailing.   Conversely, those traders who use sector ETFs and their options to hedge specific single stock positions see a different and potentially more volatile story developing." We tend to agree with the second explanation, which also leads to another surprising conclusion...    As most hedge funds now tend to hedge idiosyncratic risk using broad systemic hedges, most notably the SPY, which continues to be the most shorted (and "longed") hedge fund ETF, which, due to its being the most actively traded (or, some would say, churned) security by volume on US capital markets, in turn feeds the HFT relay to force robots to believe that due to daily pressure pushing the key market ETF higher or lower, the prevailing move in stocks should be higher (via forward feedback loops), when in fact hedge funds are shifting increasingly more bearish (short individual stocks, and net SPY buying) thereby explaining the constant move higher in stocks, and lower in the VIX. Is hedge fund pair trade hedging (now that everyone is terrified of shorting individual stocks as pair trade hedges) with ETFs solely responsible for the daily move higher? We will likely not know with certainty until a forensic analysis of the market can be conducted after the next mega-crash, although recent observations of market moves lead us to believe that this could be one possible explanation. Then again with all modern-day feedback loops which have no formal start or end, in a market in which one wing-flipping butterfly can cause a market flash crash, who really knows...   We hope to revisit this most fascinating emerging feedback loop theory at a later date, but for now, here are Colas' complete observations on why anyone trading purely on a dropping VIX may be in for a rude awakening.   If the Boys Want to Fight, You’d Better Let Em   Only 36 shopping days left until Christmas, and 29 more trading days left in 2010. The S&P 500 is up some 7.5% year to date, and the most recent prices on the CBOE VIX Index come in just shy of 20. The options specialists at ConvergEx don’t like it when I call that the “Fear Index,” but since that’s the shorthand many on the Street use to describe the VIX we’ll use it here. Just for today – I promise. I will go back to “Expected price volatility/cost of insurance” with the next installment of these monthly assessments of the options market and risk pricing.   The bottom line on the VIX is that both in terms of its absolute level and general trend, there just doesn’t seem to be any real fear in the U.S. equity markets. If the market is metaphorically a gathering place of buyers and sellers, then the current environment resembles a Seattle coffee shop. A quiet murmuring crowd. The low hiss of the milk foamer. Maybe someone playing Jewel covers on an acoustic guitar in the corner. The VIX is below 20 and has been moving lower in a calm collected manner since May. Over the last month, for example, the Fear Index (sorry, options guys) has come in from 20.6 to less than 19 yesterday.   Other parts of the options market, however, look more like a roadside bar on Hells Angels initiation night. The VIX is down over the last month, yes, but just look at our accompanying graph with 19 other industrial sectors and asset classes. That exhibit shows what is essentially the “VIX of…” these groups. You will notice that expected volatility in large cap U.S. stocks (S&P 500) is in the distinct minority when it comes to declining levels of fear. Here are a few examples of where the options market clearly sees more reason for near term concern:   Among asset classes outside of stocks, the options market has seen incremental concern in Investment Grade Bonds, Silver, Emerging Markets, Junk Bonds, International Stocks, and Gold. You might at this point ask how we calculate these changes. The answer is that the proliferation of Exchange Traded Funds tracking diverse asset classes has led to an active listed options market for these securities and the asset types they track. From there you simply calculate the Implied Volatility for the options associated with the ETF in question. We use www.ivolatility.com as our source for the data presented here.   Most of the sectors within the S&P 500 are seeing higher levels of expected near term volatility, even though the VIX itself is down. This includes Energy, Consumer Staples, Materials, Tech, Health Care and Consumer Discretionary. When you think about it, this is an oddball observation. How can the expected volatility of the index decline if the individual sector IVs are increasing? Low price correlations might explain the difference, except correlations are quite high at the moment. I am tempted to say that the sector IVs are actually better  representatives of the market’s take on future volatility, and the lower expected volatility of the market as a whole comes from macro investors who think the next month will be smooth sailing. Conversely, those traders who use sector ETFs and their options to hedge specific single stock positions see a different and potentially more volatile story developing.   The last point I would like to make is on Gold. There has been some concern of late that the yellow metal has topped out for the year and perhaps for good. Looking at the data from the options market, the “Gold VIX” doesn’t show either extreme complacency or extreme worry. It is exactly in the middle of its historical range of 15-25, with a current reading of 20. Maybe that puts Gold in the coffee shop rather than the roadside bar, but it does seem that the risk pricing in the options market does not support any overly positive or negative call.

CURRENCY WARS

China Inflation May Be Too Hot for Controls Amid Cash Glut BL

Q3 EARNINGS

MARKET & GOLD MANIPULATION

How the 'experts' get the insider info Fortune

While The U.S. Prints And Spends, Russia Loads The Boat With Gold  Golden Truth

 

This chart is sourced from Casey Research, Ed Steer's Gold and Silver Daily.  The Russian Central Bank purchased another 600k ozs of gold in October (some is purchased on the open market, some is purchased from internal mining production).  I think the message of this chart, combined with China's demure announcement about accumulating a lot more gold, is pretty clear:  get ready for some kind of gold-based currency standard at some point down the road. Year-to-date Russia has accumulated 4.6 million ounces.  That's roughly 131 tonnes.  That's a lot of gold, especially considering that the ECB sold barely any of the 400 tonnes permitted under the Washington Agreement.  Now we know why the IMF decided to unload 404 tonnes.  Think about where the price of gold might be if the IMF had not supplied the world this year. I mentioned earlier in this week in the comment section that it was my belief that, other than France, the EU Central Banks are largely out of gold - either via leasing or outright sales.  Anyone who has studied this topic thoroughly, of course, knows that it is likely that most if not all of the U.S. gold is either sold or leased.  Given the aggressive and large-scale accumulation underway by China, Russia, Iran, et al, 2011 should prove to be a very interesting year for anyone who has already positioned themselves ahead of what will inevitably be a substantial move higher in the price of gold, especially as valued in U.S. dollars.

AUDIO / VIDEO

QUOTE OF THE WEEK

“Have politicians got the courage to make those who earn money share in the risk as well? Or is dealing in government debt the only business in the world economy that involves no risk?” Merkel “The thought that you can create a prosperous economy by inflating is an illusion” Volcker “We sure have to maintain some confidence in the dollar or none of this would work" Volcker

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