Archive for December, 2010

How does the AUD survive?

December 29, 2010 Comments off

What the heck is happening with the AUD?  How does it survive at these levels for another 6 months?

  • The economy in Australia is starting to slow dramatically.
  • The Australian housing market is slowing dramatically – and there is a whiff of panic in the air.
  • Inflation is not quite high – 2.8%.  Various measures of core inflation look tame as well.  2.8%!
  • China is raising rates to stem their inflation – which should decrease inflationary pressure on Australia.

All of this points to a rate cut at some point rather soon, right?  The Carry Trade is a big reason why the AUD is in constant rally mode.  Rate cuts kill carry trades, we saw a AUDUSD unwind earlier this year after the flash crash.

But here we are at AUDUSD parity.  At some point the AUDUSD is going to lose 20 handles in a few days, like it did in 2010.

The goal is to make this trade pay off.  Short term options lose so much value so rapidly, but long term options may not move in price nearly as much.  Medium Term options are very difficult to use because they change from a long term option to a theta drain at some point.

A series of short term, deeply out of the money options?   You could probably pay a total of 1% for 6 months worth of these, and then expect to make 5-6% if the scenario pays off.   Not bad risk reward.  These are the Feb Puts, so you have roughly 40 days until expiry.   You could get the 91s for roughly .10.

Categories: Main

Panic in China?

December 29, 2010 Comments off

From the Financial Times: Minimum wage in Beijing is up 50% in 6 months.

Are they worried about a non-violent overthrow?  Is a revolution imminent?  Is the inflation rate there really 25%?  I do not have much insight into what is causing this change.

But the total wage is only $175 per month.  That means just a few months back the minimum wage was roughly $110 per month.  Beijing is an expensive city for real estate – more expensive than NY and certainly more expensive than Chicago.  You literally could not live on $1500 a year in Chicago – you would likely starve to death.

If this is like every other growing city in the world, people move there and get low paying job while living with relatives until they can find better jobs that allow them to get a place of their own.

If you read down into the FT article:

“In just the last three months we’ve already had to raise entry-level starting wages 60 per cent just to get people to come to a job interview,” said Jade Gray, chief executive of Gung Ho Pizza, a Beijing-based gourmet pizza delivery service. “With rising rents, the much higher cost of ingredients and now wage inflation, many businesses in the services industries are going to find it impossible not to pass on much higher costs to consumers.”

Overall, hard to tell what is really happening over there. On one hand, this is probably happening everywhere. On the other hand, this a business owner complaining about rising wages – they may as well report “The Sky is Blue.”

But under what circumstances does the government feel that raising the minimum wage 2X in 6 months is necessary?  I think the only reasonable circumstance is “Panic at losing power.”


Categories: Main

5 Year to post one of the largest 2 month moves in the last 40 years

December 29, 2010 Comments off

Unless something dramatic happens later this week, the 5 year will post a huge percentage move. That is a log scale chart of the 5 year.  Rates have doubled in the last two months.

The move is nearly as large as the moves during the worst parts of the crisis, when there was widespread and legitimate fears the financial world was about to blowup. What is the comparable fear or hope today?

There have been a few comparable moves over the last few decades.  All of these happened at the beginning phases of a recovery, and all of them took longer than 2 months.  If I recall, the bond vigilantes were vocal during those times too.   Only one of these moves continued, the move during the 00’s.

With rates so low, it is difficult to make comparisons.  Real rates have had a huge rally, but they are below their historical norms.  It is easy to imagine that real rates would have a recovery to the 1% level or so, and inflation gets back up to 2%.   and all of a sudden we have 5 year rates back up in the 3% range.   But will this happen next month?

On an absolute scale, this move is less unusual.  but when rates go from 5% to 6.5%, it just isn’t as big of a deal to me as when rates go from 1% to 2.5%

I wrote most of this post last night (Tuesday Night), and with todays ripping move back maybe the 5 year may not have as large of a move as I thought.   But those are still big, big moves.

The 30 yields closed lower than the lowest print yesterday.   The 10 year closed below the close on Monday, 5 year did too. I am sticking with my buy the news, sell the fact trade idea for QE II.

Categories: Main

Watch what I do, not what I say: The U.S. Consumer

December 28, 2010 Comments off

In the last week we have had a flurry of positive economic numbers.

Still, U.S. Consumer Confidence is down.  This is despite a 5.5% increase in spending from MasterCard over last years holiday season.  If you look at the Gallup numbers, you can see reported spending was a bit higher, but not 5% higher.

I am starting to think there may be a significant underestimation of spending in the Gallup numbers, due to the general idea of the word of the year, “Austerity”.

The U.S. Consumer does not feel very confident, but this recovery has been stable for the last few months.  Unless there is a large disruption in the next few months, expect consumer confidence to increase as the news becomes consistently positive.  Of course, this might be the case if there are large bank nationalizations, or the banking system freezes up again due to a mis-management of perceptions of the Euro Solution.

If we begin to add substantial numbers of jobs, or hours worked increases, we could see a dramatic shift in sentiment.

GDP numbers do not care about the attitude towards spending.  All that matters is the amount of economic activity.  Tax receipts are up, spending is up, corporate profits are up, and inflation is tame.  We may see a rather large GDP print for Q4.


Categories: Main

The nationalizations begin: BoA sued by Allstate

December 28, 2010 1 comment

I had a post this morning about how the big banks are likely to be nationalized.

Well, now BoA is being sued by Allstate – for securities fraud.

The suit, which seeks unspecified damages, alleges fraud, negligent misrepresentation and violation of U.S. securities laws. In addition to Bank of America and Countrywide, Allstate names as defendants former Countrywide officials including former chairman and chief executive officer, Angelo Mozilo.

I’ve read the trust documents and prospectuses for some of the securities purchased by the Fed and Pimco.  I have it from a former Countrywide guy that they used boilerplate language for nearly all of their documents – and I believe it.  Countrywide was issuing lots and lots of securities over the few years before the bubble burst.  The only way they could keep up was to standardize the process.

If you have a Bloomberg, you can pull up these documents yourself and read them.  It is quite clear that these were supposed to be nearly risk free.  Risks like losing 50% of the principle in 18 months were not disclosed, because these were AAA securities.  Not only that, you can see the average credit score for the remaining mortgages in the pool.

Somehow, 30% of people with 715+ credit scores are not paying their mortgages.

What are the options here for BoA?

  • Settlement
  • Win the lawsuit
  • Lose the lawsuit

Two of these options force immediate bankruptcy and nationalization for BoA.

Settlement opens up every Countrywide deal from 2005 on to a settlement, and must open them to charges of SEC-investigation-worthy securities fraud.  Losing the lawsuit does the same thing but in a more expensive manner.

So fight they will.  But with the fight comes discovery.  These documents will be part of the public record.

As a result, the risk for BoA is not just that Countrywide misrepresented the securities, but also that the entire robo-signing scandal will be uncovered with this lawsuit. Allstate’s lawsuit will put the entire conveyance process into the public record, and it is likely to show that a material portion of the notes were not conveyed to the trust in a proper manner.

The problems with conveyance are different from the Allstate allegations, but they will be uncovered as part of the discovery process.

You can picture the process easily:

  1. Allstate says “They lied to us about what kind of securities are backing the trust and how much risk these securities have”
  2. BoA says, “No, we did not.”
  3. Allstate says “We lost 50% on AAA rated securities in a matter of months. You didn’t say we could lose that much so fast. We agree with the securitization process, but the only way to lose so much so fast is for there to be far worse loans inside the trust than you represented.  Our question: What is really in that trust for the securities? Prove what is in the trust now, and what was in the trust when you sold it to us.”
  4. Judge says “Allstate has a point. That’s a lot of money to lose on AAA rated securities. Show me what is in the trust.”
  5. BoA says “A dog got into our files cabinet, and peed everywhere.  We don’t have it all.  Can you accept these fakes we just printed up?”
  6. Allstate says “Those are fakes.”
  7. Judge says, “I agree.”
  8. BoA gets nationalized.

BoA gets nationalized unless the paper work is in order. Every indication we’ve seen has shown this paperwork is not in order.

When you have large, smart, well-funded people suing BoA for misrepresentation of the securities, how much longer can the facade be left in place?

Categories: Main

Links 12-28-2010

December 28, 2010 Comments off
Categories: Main

How to spot a Banking Paradox: This post is untrue

December 28, 2010 1 comment

This guy says the banking industry has already paid the piper:

The Worst Is Over And The Full Bill Has Already Been Paid By The Banks

But then I look at the second lein information posted by Mike Konczal and see that the banks likely have hundreds of billions of second lein loans they haven’t written down.  And then I see that there is a huge shadow inventory of homes.  And then I see that the robo-signing scandal is getting worse by the day – and the put-backs will result in the banks being insolvent.

I am no Reggie Middleton, but if all of these posts are true, something strange must have happened to the ordinal numbers over the holiday break.  I should wait for the other parts of the “Worst is Over” write up to see all of his numbers, but I will go out on a limb here: The banks are bankrupt and will be nationalized in 2011.

Categories: Main
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