>> Bond Investing Strategies: 2011 & Beyond

Excerpts from an interesting article by Shawn Tully:


Substantial Money Flow in Fixed Income

• Since September of 2008, investors have poured a total of $937 billion into bond funds
• The flood of money inflated bond prices to such heights that it drove yields to their lowest level in 50 years.

Chart: Surge of Money in Fixed Income

Why are yields so low?

The Fed is using its immense powers to hold down yields on both short- and long-term Treasuries.

• Once the economy rebounds, the Fed will need to stop buying long-term bonds and substantially raise the Fed funds rate.
• Growth and inflation will once again take hold: for investors, the biggest risks are in longer-term bonds.
• If and when that yields return to their half-century average of 6.76% (say by 2013), the price of the 10-year treasuries would drop by 26%

Chart: How to get Wiped Out in Treasuries

Bond Investing Strategies

Shawn goes on to recommend 4 types of bonds which are still worth investing in:

• Intermediate-term high-yield: E.g. BlackRock's iShares iBoxx High Yield Corporate Bond Fund (HYG) yielding 8% & with an average maturity of 5 years
• Emerging market bonds: E.g. Pimco's Emerging Local Bond Fund (PELAX) yielding 4.2% and with an average maturity of 7 years
• Floating rate bank loans: E.g. BlackRock's Floating Rate Income Trust (BGT) offers a yield of 5.6%
• Go-anywhere funds: E.g. BlackRock's Strategic Income Opportunities Fund (BASIX) yielding 4.1%, and Pimco's the Unconstrained Bond Fund (PUBAX) yielding 2.5%

Continue reading Shawn's article here.

Conclusion

The author makes a few good points in his article, and makes some interesting recommendations. If you consider any of the funds below, do not forget to "comparison shop" for simililar funds with lesser expense ratios and/or with better track records - but perhaps most importantly evaluate the risk each recommendation presents.

Full Disclosure: I have no positions in the securities mentioned in this article.

>> Roubini: A Crash Course in the Future of Finance

>> Economic Recovery & Small Businesses

Small Business Economic Trends
The NFIB recently released its Small Business Economic Trends Survey Report for April 2010. The outlook for small business is still not good.

The Index of Small Business Optimism lost 1.2 points, falling to 86.8. The persistence of Index readings below 90 is unprecedented in survey history.

From the Report (highlights by yours truly in bold):
... While news about the economy has been positive for two or three quarters, small business owners remain quite pessimistic about the future for the economy.
...
Since small firms produce half the private sector GDP, it is hard to envision a sustained recovery without their participation.
...
Capital spending is on the sidelines as is the demand for loans to finance these activities. A revival of capital spending will require a significantly improved business outlook and some support from reluctant customers. Plans to make capital expenditures over the next few months were unchanged at 20 percent, four points above the 35 year record low.
...
The news about the economy and financial markets has been positive for some time, so the source of this pessimism must be found elsewhere such as Washington D.C., the source of most business uncertainty, but also facts on the ground: 34 percent said weak sales are their top business problem and that is what business is all about.


In Pictures: What Recovery? - Small Business Still Hurting













About the NFIB
The National Federation of Independent Business foundation is one of the leading sources of information about small business in the United States. The foundation conducts research about policy-related issues as well as the business practices and economic impact of small firms through its Small Business Economic Trends reports and other economic research studies.

Further reading:

• SBET April 2010 Report: here
  

>> Greenspan's $900Billion Survival Formula

Most people are familiar with the sub-prime mortgage crisis. Reader's of this blog have had a humorous look in previous posts:

• >> Dogbert the CEO : Risky Mortgages & Ponzi Schemes

• >> Subprime Mortgage Primer in Pictures

For a more serious look, see this previous post about Bear Stearn's collapse:

• >> Crash Chronicle : The Fall of Bear Stearns

One the problem started, the finger pointing followed not too long after. Lets take a look into a brief history and the solution proposed by Alan Greenspan, who many believe was the chief architect of this crisis.

The Greenspan Put
Once the subprime mortgage meltdown started, there was a lot of "passing the buck" about who was at fault. Greenspan soon became the person most blamed for the crisis:

- Greenspan legacy: erosion of US financial strength , key comments:

• Since Alan Greenspan took office as Fed chairman, it has taken an average of $3.60 of debt growth to generate $1 of nominal gross domestic product growth versus a long-term average of approximately $1.5 to $1.
  

- Reid: It's Greenspan's Fault , key comments:

• Reid's office pointed out that the Fed started to see deterioration in the credit market back in 2003 and 2004, but didn't warn lenders off using the "non traditional mortgages" seen as precursors of what is now a credit crisis until December of 2005, shortly before Greenspan resigned.

But isnt this really a what the Greenspan's put has been all about?
[ Note: The Greenspan put really means that the Fed's monetary policy allowed higher risk taking, becoming a form of privitazing profits and socializing losses ]

For more discussion about Greenspan's "contribution" to the real estate bust such as this chart below, see here:




Greenspan's 1500 word article in the Wall St. Journal

Greenspan, the former Chairman of the Federal Reserve for 19 years, finally spoke out:
- Greenspan's 1500 word op-ed piece in the Wall St. Journal in March 2009: The Fed Didn't Cause the Housing Bubble . Key comments:

• Alan says "Accelerating the path of monetary tightening that the Fed pursued in 2004-2005 could not have "prevented" the housing bubble."
• Its all China's fault! Alan says"As I noted on this page in December 2007, the presumptive cause of the world-wide decline in long-term rates was the tectonic shift in the early 1990s by much of the developing world from heavy emphasis on central planning to increasingly dynamic, export-led market competition. The result was a surge in growth in China and a large number of other emerging market economies that led to an excess of global intended savings relative to intended capital investment. That ex ante excess of savings propelled global long-term interest rates progressively lower between early 2000 and 2005."
  

Greenspan's $900 Billion Survival Formula @ Financial Crisis Inquiry Commission
The Financial Crisis Inquiry Commission (FCIC) is a ten-member commission appointed by the United States government with the goal of investigating the causes of the financial crisis of 2007–2010.

Quoting Greenspan from his testimony to the FCIC on 7th April 2010"
- "I believe that during the past 18 months, there were very few instances of serial default and contagion that could have not been contained by adequate risk-based capital and liquidity. I presume, for example, that with 15% tangible equity capital, neither Bear Stearns nor Lehman Brothers would have been in trouble"

[ Tangible common equity is defined as total shareholder equity minus preferred stock, goodwill and other intangibles.]

Rolfe Winkler explains how this will help: "A bigger equity cushion not only buffers bank creditors from losses — preventing cascading bank runs — it by definition would reduce frothy lending that inflates bubbles in the first place."

Extrapolating the 15% TCE requirement to major US Banks, $869 billion would need to raised:

Nearly $900 billion more to be raised is certainly not feasible. Greenspan also explains why 15% TCE would not be too popular:"Increased capital, I might add parenthetically, would also likely result in smaller executive compensation packages, since more capital would have to be retained in undistributed earnings."

In other words, smaller bonuses.

Credits / Further Reading:
- TCE shortfall Image courtesy Rolfe Winkler at Reuters
- Greenspan's testimony to FCIC available here
- Video of Greenspan's testimony available here

>> The real dollar story

The dollar has been in news in the last few months, with a lot of people calling out saying "the dollar is dead" and "lets have a new reserve currency". So far:


The Dollar's Days are over?
(1) Reuters says Dollar to eventually lose grip on commodity trade

(2) The Independent had news about a "profound" financial change in recent Middle East history wherein Gulf Arabs are planning – along with China, Russia, Japan and France – to end dollar dealings for oil, moving instead to a basket of currencies including the Japanese yen and Chinese yuan, the euro, gold and a new, unified currency planned for nations in the Gulf Co-operation Council, including Saudi Arabia, Abu Dhabi, Kuwait and Qatar. Read more here

(3) Financial Express says gulf states considering dollar alternative for oil trade, gold jumps

(4) Even the UN says the world should ditch the dollar!


The China Perspective
(1) China not happy with the US Dollar, wants an alternative to the dollar

(2) China is also is not happy with the probable fall in the dollar!
Mike Pettis is one of the world's top economist's, and to quote him: "The Chinese are worrying about future weakness in the dollar (which hurts their reserves) while complaining about current strength (which hurts exports)!"

Here is an excerpt of a comment from Mike Pettis on why it is improbable that the Dollar will not be removed from the status of a reserve currency:
""There has been for decades talk about creating an international reserve currency and it has never really progressed," said Michael Pettis, a finance professor at Peking University's Guanghua School of Management. Managing such a currency would require balancing the contradictory needs of countries with high and low growth or with trade surpluses or deficits, Pettis said. He said the 16 European nations that use the euro have faced "huge difficulties" in managing monetary policy even though their economies are similar. "It's hard for me to imagine how it's going to be easier for the world to have a common currency for trade," he said"


Will the Fed save the dollar?
Earlier this year:
(1) On March 19th this year, the 'Rambo' Fed, determined to avoid a repeat of the great depression committed to buy as much as $300 billion of long-term Treasuries and more than double mortgage-debt purchases to $1.45 trillion. This may more than double the Fed’s balance-sheet assets by September to $4.5 trillion from $1.9 trillion! Bye-bye dollar?

(2) Also earlier this year, the Fed agreed to currency swaps earlier in the year: From this bloomberg article:
""The Federal Reserve and four other central banks announced a currency swap arrangement that will give the U.S. central bank access to as much as $285 billion in euros, yen, British pounds and Swiss francs. ""

The official purpose of such short-term agreements is to finance short-term capital flows; but swap agreements can also be misused to facilitate large interventions in foreign exchange markets. Is this the reason behind this act?

This of course has been tried before, from 1936 to the present the Exchange Stabilization Fund has participated in over a hundred credit or loan arrangements with foreign governments or central banks. What did this attempt to prop the dollar lead to? Here's what happened - the treasury was subsequently forced to issue foreign currency-denominated debt (The Roosa bonds in the 1960s and Carter bonds in 1978) to repay swap drawings.

Here are the details from the Dept. of Treasury website.

{ Recommended reading: A very good article describing this entire chain of events in detail: Fed tries to boost the dollar. }



Putting the Dollar's fall & Gold's spike this week into perspective
Oct 6, 2009: The Independent reported about a dollar alternative to set the value of oil trades. This set in motion the immediate fall of the dollar and a jump in the price of gold.

This was then officially denied by several sources.

Oct 8, 2009: Asian central banks intervened heavily in the currency markets on Thursday to stem the appreciation of their currencies against the US dollar amid fears that their exports could be losing ground against China. More detail here.

Meanwhile, Tyler Durden speculates that there could be a potential deal between US & China to let the dollar slide more slowly, more here.

Or could this all really be an organized short on the dollar? Soros had made $1 billion in 1 trade shorting the British pound in the 1990s, so the possibility remains that someone had an interest in the dollar falling; we shall know with time.


Conclusion - So What is the Dollar story?
We started out with news about calls to replace the dollar with another reserve currency. We also saw that several parties have both short-term as well as long-term interests in the fall of the dollar.

My opinion is that the calls for replacement of the dollar as the reserve currency is noise which will die out with time, there seems to be a low probability of that happening. Meanwhile I expect a slow slide in the dollar, coupled with deflation that has started to continue for some time to come.

( Why deflation? Thats a discussion for some other time :-) )

>> Sophisticated Banking for Retail Investors

Sophisticated banking for retail investors, courtesy South Park. Enjoy :-)

>> Part 2 - Banking Cartels Engineered Financial Crisis Endgame

Jul 11, 2009 - 07:06 AM; By: DeepCaster_LLC

We issue a word of caution to our readers. So long as The Cartel is in a very active interventional mode (e.g. as in taking down the price of Gold and Silver) do not be lured into thinking that the periodic up spikes in the prices of Gold and Silver necessarily present a "breakout" or a buying opportunity. As a practical matter, technical breakouts are sometimes a lure designed to suck in more "longs" prior to a subsequent deeper Takedown.

Nonetheless, it is essential to study the Fundamentals and Technicals even though the Interventionals can override the Fundamentals and Technicals. One must study the Fundamentals not only for all the usual reasons but also because Fundamentals somewhat constrain the timing and effectiveness of Interventions by The Cartel.

Continue reading here

----------------------------------

Probable? Possible? Or hogwash? Please post your comments on what you think about this article.

>> Part 1 - Banking Cartels Engineered Financial Crisis Endgame

Jul 11, 2009 - 06:36 AM; By: DeepCaster_LLC

“…what is the reason for this “seemingly random monetary mess that multiplies its momentum every day? The answer, in one word, control. The elite/insiders already have control of the financial system, but they wanted more, much more…and it was not random, it was planned.” (emphasis added)

“How will all the above manifest itself in your life? The answer: “All you own will shrink...your income, assets, net worth, will shrink year after year in real terms inflation adjusted and possibly also nominally.” - HS Letter, April 27, 2008.

Continue reading here

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Probable? Possible? Or hogwash? Please post your comments on what you think about this article.

>> Bernanke about the Great Depression - We did it

Here are the words of Ben Bernanke at the Conference to Honor Milton Friedman at University of Chicago, Chicago, Illinois on November 8, 2002:

" Let me end my talk by abusing slightly my status as an official representative of the Federal Reserve. I would like to say to Milton and Anna: Regarding the Great Depression. You're right, we did it. We're very sorry. But thanks to you, we won't do it again. "

Thats right. Bernanke himself said that the Fed indeed "created" the great depression.

Continue reading here

>> The man behind the AIG Crash

Almost a year after A.I.G.’s collapse, despite a tidal wave of outrage, there still has been no clear explanation of what toppled the insurance giant. The author decides to ask the people involved—the silent, shell-shocked traders of the A.I.G. Financial Products unit—and finds that the story may have a villain, whose reign of terror over 400 employees brought the company, the U.S. economy, and the global financial system to their knees.

By Michael Lewis August 2009

Six months ago, I received an odd phone call from a man named Jake DeSantis at A.I.G. Financial Products—the infamous unit of the doomed insurance company, staffed by expensively educated, highly paid traders, whose financial ineptitude is widely suspected of costing the U.S. taxpayer $182.5 billion and counting. At the time A.I.G. F.P.’s losses were reported, it became known that a handful of traders in this curious unit had sold trillions of dollars of credit-default swaps (essentially unregulated insurance policies) on piles of U.S. subprime mortgages, but its employees hadn’t yet become the leading examples of Wall Street greed. And so this was before Jake DeSantis and his colleagues found themselves suburban-Connecticut outcasts, before their first death threats, before the House of Representatives passed a bill because of them (taxing 90 percent of their large bonuses), before New York attorney general Andrew Cuomo announced he was going after their paychecks, and before Iowa senator Charles Grassley said that A.I.G.’s leaders should follow the Japanese example and “either do one of two things, resign or go commit suicide.”

Continue reading The Man Who Crashed the World

>> Gold Update

A friend had asked for an update on gold (http://aprioritrader.blogspot.com/2009/01/gold-makes-move-short-term-trade.html#7475612474474657231) , so here it comes :) - 

(I) $GOLD Elliot Wave Preview (Daily Chart)

Above is the slightly long-term chart of the gold continuous contract (courtesy stockcharts.com), and it seems that are in the middle of the 3rd wave of the 5th. Gold has had a nice long period of consolidation before that, and looks to be gearing to run up. $1000 will be a strong resistance, expect a correction back to $920 levels.

(II) Updated on 06/07 - Inverse H&S On Weekly Chart

Enjoy :-)

>> S&P 500 Earnings as on 05-15-09

Courtesy: http://www.chartoftheday.com/

>> US Banks Stress Test Results Preview

There has been a lot of noise about the stress tests for the banks. The results are not "officially" out yet, but lets have a look at what the media outlets seem to have so far:

• 16 of top 19 banks are technically insolvent? {HSBC is an american bank?}
• Keefe, Bruyette & Woods' own stress test: the industry could need $1 trillion additional capital to meet regulatory definition of "well capitalized"

The stress test results are officially out in May, and:

• The Fed's methodology for the stress-test 
• The govt is pushing banks to act now
• The US Treasury Dept delayed the results of the stress tests for the post-earnings season

From a recent reuters report:
U.S. regulators want the top 19 banks being stress-tested to have at least 3 percent tangible common equity(TCE), according to a source familiar with the regulatory talks.

3%TCE for $1 of tangible assets = 33x leverage.

Here's what OptionArmageddon's results of running the stress tests look like (pay special attention to the L2(mark to model) and L3(mark to imagination) assets as a multiple of TCE column as well :

(Chart courtsey OptionArmageddon.com)

Related post: >> Mark to market to Mark to imagination : blame the doctor

>> Crash Chronicle : The Fall of Bear Stearns

Recap of Bear Stearns' history and the crisis it faced

Bear Stearns, founded in 1923, had been an aggressive player in the financial markets for many years. One of the pioneers of mortgage-backed securities in the 1980s, Bear was heavily involved in the packaging of sub-prime mortgages during the housing boom. As the prices of these securities slipped in 2007, Bear bought not only for its own account but also for its hedge funds that it established for its wealthy investors. Bear's purchases were financed with short-term borrowings that were collateralized against these securities. But as the market continued to tumble, lenders demanded more cash to secure their loans. When Bear knew it would not have enough cash to cover the margin, it went to JPMorgan, one of its lenders. Both then turned to the Fed to arrange a $30 billion dollar loan guarantee against Bear's assets to prevent the firm from going bankrupt.

From $172 a share to an almost a 98.4% wipeout for investors
Bear sold for $172 a share at the end of 2007, once valuing the firm at over $20 billion. The Fed agreed-on price on March 16 '08 was $2, about $250 million, which represents a 98.4% wipeout for investors. The higher price agreed to a week later ($10/share) actually reduced the Fed's exposure to Bear's troubled assets.

Lets take a peek at Bear Stearns chart:


Where does the blame lie for Bear Stearns collapse?
William D. Cohan’s new book, House of Cards, provides a gripping narrative of the company’s downfall, largely in the protagonists’ own words, which has the side benefit of making vivid the vain, combative, materialistic, and male-dominated culture of the firm.

The behind-the-scenes actions of long time Bear CEO Jimmy Cayne, as well the the replacement CEO Alan Schwartz, only two months after replacing Cayne as CEO was missing in action at an annual Bear Stearns media conference in Palm Beach, Fla., during the March panic that would force the company into JPMorgan’s grasp days later.

You can read a few interesting excerpts from the book here

How is the Bear Stearns purchase working out for JP Morgan?
At the time the deal was announced, the banks said it expected Bear to generate roughly $1 billion in after-tax earnings over the next 12 to 18 months.

It's uncertain if Chase will be able to live up to that promise considering that Bear Stearns' appetite for risky assets trailed only that of Lehman Brothers and Merrill Lynch.

But most analysts agree that if the Bear deal were going to lead to massive writedowns for Chase, as was the case with Bank of America after its 11th-hour purchase of Merrill Lynch last September, it would have happened already.

Continue reading more here

Related articles / Credits :

• Jeremy Siegel's article from which I borrowed about Bear's history and wipeout, here
  
• JP Morgan one year after Bear Stearns
• Bear Stearns chart courtesy TheStreet.com

>> The electronic $550 Billion run on the US Banks

Rep. Paul Kanjorski of Pennsylvania is the chair of the subcommittee on Capital Markets, Insurance, and Government Sponsored Enterprises. The subcommittee reviews laws and programs related to the U.S. capital markets, the securities industry, the insurance industry generally (except for health care), and government-sponsored enterprises.

He was on C-SPAN's Washington Journal on January 27th, and explains how the Federal Reserve told Congress members about a "tremendous draw-down of money market accounts in the United States, to the tune of $550 billion dollars." According to Kanjorski, this electronic transfer occurred over the period of an hour or two.

Its debatable whether this electronic money market run nearly destroyed the US Economy, as is claimed by various articles on the internet. However its worth listening to what he exactly had to say.

Here is a brief transcript of what Kanjorski says (I am paraphrasing to an extent here):

"On Thursday Sept 15, 2008 at roughly 11 AM The Federal Reserve noticed a tremendous draw down of money market accounts in the USA to the tune of $550 Billion dollars in a matter of an hour or two.

Money was being removed electronically. The treasury tried to help with $150 Billion. But could not stem the tide. It was an electronic run on the banks

The treasury intervened but had they not closed down the accounts they estimated that by 2 PM that afternoon. Within 3 hours $5.5 Trillion would have been withdrawn and within 24 hours the world economy would have collapsed."





Source:
- Liveleak : Rep. Kanjorski: $550 Billion Disappeared in "Electronic Run On the Banks"
- YouTube : CSPAN Rep Paul Kanjorski Reviews the Bailout Situation
- C-SPAN Video : Rep. Paul Kanjorski (D-PA), Chairman of the Capitol Markets Subcmte

>> The $596 Trillion derivatives problem

Yes, you read that right. $596 Trillion. Thats a Trillion, with a T. [ Lets name this number RBN (Really Big Number) :) ]. Now that I have your attention, lets get to the details -

- This is the size of the derivatives market, as reported in the recent report by the Bank for International Settlements , the numbers are thus thus as on Dec '07.
- This $596 Trillion represents the notional value of outstanding derivatives in all categories
- $393 Trillion by volume = 2/3rd of RBN => represents interest rate derivatives
- $58 Trillion by volume => represents credit default swaps
- $56 Trillion by volume => Currency derivatives
Long and short derivatives should, in an ideal world, net out each other. Note:
- BIS assesses the net "risk" as $14.5 Trillion, this represents the gross market value of all contracts
- the gross credit exposure is a now-small-sounding $3.256 Trillion

Key things to remember ::
- This number is too big to be "taken care of" in case of an un-orderly unwinding
- Counterparty risk is going to be a problem
- Most of these contracts could be hiding under off-balance-sheet vehicles

( Image Information:
- The Bubble Nebula, as captured by Hubble
- Image credits : NASA, Donald Walter (South Carolina State University), Paul Scowen and Brian Moore (Arizona State University).
- Image details here )

>> Citi Collapse and the bailout

The CitiGroup Bailout

Week-end reading about the "Too big to fail" CitiGroup collapse and the recent bailout. Vikram pandit has got a sweet deal for Citi:
- Citibank did not see red flags
- Citi;s woes started with the failed Wachovia bid
- Vikram Pandit scores a great deal for CitiGroup . Decide if this sounds should be read as US Tax-payers screwed-over again, here is the bailout summary:
- Under focus is the bundle of assets earlier valued at $340-350 billion, now "valued" at $306 billion on Citi's books ("just 11% down")
- Of this number, Citi will absorb the first 29-odd billion, rest the nice US Govt will take 90% of the hit with the remaining Citi's problem.
- Treasury takes the next $5 billion hit
- FDIC takes the next $10 billion hit
- Rest of the losses to to the Fed
- Add to that Citi will get a financing line from the Fed if these losses start to realize
- Citi gets to keep the income stream from these assets

In return, the US govt gets / enforces :
- $7 billion worth of preferred stock, $4 billion to the treasury and $3 billion to the FDIC
- The preferred stock pays 8% dividend
- Common stock will not pay a dividend of more than $.01 a quarter

Here is the term sheet.


CitiGroup - More looming trouble from SIVs

Citi perhaps has $1.1 Trillion of assets in an off-balance-sheet SIV, says bloomberg. Highlights:
- According to Citigroup's most recent financial statement, filed in May, the bank's $1.1 trillion of off-the-books assets as of March 31 included $760 billion of QSPEs and $363 billion of unconsolidated VIEs.
- Here is another article Bloomberg article on Citigroup SIVs : Citigroup SIV Accounting Looks Tough to Defend


Related : The Wells Fargo Ruling
On a related note, as for Wachovia being stolen right under Citi's nose:
- "The Wells Fargo Ruling" : Changes to Section 382 of the tax code - a windfall for US Banks


More Citi Articles:
- CitiGroup buys into Spanish infrastructure fund . You read that right :)

Also Read :
>> The $596 Trillion derivatives problem

>> Week-end Reading : Gold, GE, IMF Outlook, Britain bailout and Steel

• GEs creaky balance sheet
• Real price of gold soars
• IMF financial Global Warming Chart
• Britain plans bank bailout worth hundreds of billions
• Consumer Credit in USA Drops for First Time in 10 Years : read at WSJ and MW
  
• Steel: Steelmakers Face Softer Demand : read at WSJ and FT
• And the IMF World Economic Outlook Oct '08 : read it here

>> Lessons from 124 banking blowups : IMF Working Paper

The International Monetary Fund has recently published working paper which counts 124 banking crises in the last 27 years, in countries like Japan, Argentina and Britain. It introduces and describes a dataset on banking crises, with detailed information about the type of policy responses employed to resolve crises in different countries.

Read the paper here