Archive - Feb 2010

The Libyan government has been sounding off lately about boosting the profile of its oil and gas market, but it’s questionable whether international companies will ignore the government’s missteps in the industry - not to mention the recent lackluster energy finds - and keep injecting money into the North African country. The head of Libya’s National Oil Corp., Shokri Ghanem, has his eye on expanding gas exploration and production in a bid to raise exports to Europe, as well as privatizing oil refineries and the petrochemical sector, according to an interview he gave this month to the Oxford Business Group. Once an international outcast for its penchant for terrorism and weapons of mass destruction, Libya now wants foreigners to take a greater stake in the oil market and in turn encourage local firms to play a larger role as well.

Survival is the name of all games. Investing is a rather serious game with a twofold objective: 1) the portfolio must avoid extinction, and 2) the portfolio must increase in value. Because of the nature of the nature of the universe, these two objectives often come into collision. To survive, allocations must avoid, hedge or exploit unpredictable, often catastrophic events. To grow, capital must long risk to some degree. There are better ways to insure portfolios and limit risk than naked shorts and longing ATM puts. Given enough time, these are money losers. Worse, you get exposure to anti-meltups, before you profit from any meltdown. Presented are some extinction proof strategies for how to do it. Also are some implementation strategies I tried to work through.

In a letter to Edolphus Towns, Darrell Issa says: "it is imperative that the Committee obtain all information in the possession of the Federal Reserve Board of Governors and the Treasury Department related to the AIG bailout, including the decision to pay AIG's counterparties at par and subsequent efforts to prevent disclosure of information related to the payments. Senator Jim Bunning, who is familiar with documents in the possession of the Board of Governors, publicly stated that the Board of Governors is in possession of documents that show troubling details about Chairman Bernanke's role in the AIG bailout. As I wrote to you on January 26, 2010, my office has received information from a whistleblower that confirms Senator Bunning's public statements. We now know from several sources that both the Federal Reserve and the Treasury Department are in possession of documents that are essential to inform the Committee's investigation."

Apparently what the Fed thought was sufficiently well "telegraphed" to the market, was "telegraphed" only to Goldman, and maybe a few others. Here is how the Fed is now doing some serious late day damage control before Asia opens, with backtracking courtesy of Fed Board member Elizabeth Duke.

DUKE: DON'T EXPECT THURS DECISN TO LEAD TO TIGHTER FIN CONDTNS

DUKE: DISC WINDOW CHANGES ONLY A REVERSAL OF SPREAD REDUCTN

DUKE: EXPECT BNKS TO USE PRIV SOURCES FOR NORML FUNDNG

DUKE: CONTINUE TO EXPECT NO LOSS ON CREDIT TO BEAR STEARNS, AIG

DUKE: IF HAD TO REDO, WOULD VOTE AGAIN TO MAKE LOAN TO AIG

David Rosenberg, and several other economists, as well as Steve Liesman, share their first perspectives on the sudden (yet oh so "telegraphed") discount rate hike. David can not be too happy as a tightening policy will likely not be very beneficial to a dated-Treasury long position. The question that everyone is grappling with: if this is a first step to "normalization", with every aspect of the market being abnormal, just how far will the Fed really go?

Scott Rasmussen [President of Rasmussen Reports] observes that the American people are “united in the belief that our political system is broken, that politicians are corrupt, and that neither major political party has the answers.” He adds that “the gap between Americans who want to govern themselves and the politicians who want to rule over them may be as big today as the gap between the colonies and England during the 18th century.”

China recently raised the Reserve Requirement Ratio by 50 bps to 16.5% for its domestic banks. This is the second hike in the past month and certainly not the last as China’s economy is still sprinting ahead. While equity markets have begun to price in the risk of “global exit strategies,” currency markets have yet to consider the implications of continued strong underlying growth in China. It is likely that additional Chinese monetary tightening will be accompanied by pressure to revalue the yuan.

The dollar funded carry trade is now over.

Ben Bernanke knows that the Fed's exit strategy is flawed, so he keeps thinking up new schemes to sop up "excess reserves" from the banking system. The latest is to allow money market funds by Treasuries directly from the Fed. Will this idea work? Will it positively impact the dollar? Will the Fed start draining the pond soon?

BOTTOM LINE: The Federal Reserve Board has voted to increase the discount rate by 1/4 percentage point, to 3/4%, effective tomorrow. It has also decided to shorten the typical maximum maturity for primary credit under this facility to overnight, from 28 days, effective March 18, increased the minimum bid rate on the Term Auction Facility to 1/2% from 1/4%, and confirmed plans to phase this facility out. In its announcement, the Board has stressed that all of these are normalizations of its discount liquidity facility and not to be taken as a sign of impending tightening in monetary policy more generally. - Goldman Sachs

And just what HY investors did not want to hear after the Fed shocker: Lipper FMI just reported that High Yield bond funds saw $915.77 million in outflows for the week ended February 17, while bank loan mutual funds saw $160.9 million in inflows. Keep in mind last week was one of the largest outflows in HY in recent history at just under $1 billion. The high beta dumpage is officially on.

Will the Steepener/Carry Trade/Long Stock bandwagon please proceed calmly in single file through the exit of the burning theater. Tightening starts:
"The changes to the discount window facilities include Board approval of requests by the boards of directors of the 12 Federal Reserve Banks to increase the primary credit rate (generally referred to as the discount rate) from 1/2 percent to 3/4 percent. This action is effective on February 19." - Federal Reserve

Not that this should surprise anyone at all, but it does seem to sound pretty official now.

Amazing how the herd is so easily spooked in one direction or another. After 26 years of "piling into bonds", are investors finally fed up and now more interested in stocks? Or maybe speculators are eyeballing Mr. Trichet to see if he utters some statement regarding possible Euro intervention???

"Royal Navy warships were on standby on Thursday to protect commercial shipping to the Falkland Islands as Gordon Brown said Britain would take a robust stand against Argentine encroachment on the resource rich South Atlantic territory." One would guess that a war between Britain and Argentina is simply the latest thing that would bring the market to an uncontrolled, frenzied melt up (on give or take 3 shares). And while the US market responds to no external stimuli any more, this latest development reported by Telegraph, will likely not help the Gilt's recent concerns. "This is modern defence diplomacy in action," an MoD official said. "The warships are there to protect the UK interests in the South Atlantic. If the Argentines were interfere with the free movement of shipping on the high seas that would be illegal and we would make a decision to use our deterrence force."