Tag Archives: debt
Posted on 09. Sep, 2012 by Harvey Sax.
One thing we talk about in our Investment Survival Workshops is learning to develop a horizon further out than tomorrow. I know that sounds obvious but it’s harder to do than you think. Most people including myself, hesitate for a moment to recall what they did yesterday and most of us wake up and think about what we are going to do that day, not the next day or the following week. When I moved from Eastern Standard time to Mountain Standard time zone, I dreaded getting up two hours earlier in the predawn to read the papers and analyst reports. I soon came to the conclusion, though, that if you are worrying about what’s going to happen today, you’re too late already- no matter how early you get up. What’s going to happen today has for the most part been determined in Europe already or prior to that in the Asian markets. No, you need to be worrying about what’s going to happen tomorrow or the following Thursday or some time in the future. With that in mind, I’m worrying about what’s going to happen Wednesday.
1. Apple launch of the new iPhone. Apple will have to hit the ball out of the court . That’s something they have not done since Jobs died. Sales are good and the products shine compared to the competition with one big exception. The hardware, feel, and sex appeal of the new Samsung Galaxy III are greatly superior to the dated series of iPhones now. In fact if Apple doesn’t top it, Galaxy III may be my next smartphone. Apple now represents 5% of the S&p 500 by weighting. It can drag down the index and crush the NASDAQ.
2. Germany’s constitutional court is due to rule on Sept. 12 on whether the euro zone can launch its permanent bailout fund. It will be very bad for the market if they turn this down. This is a real distinct possibility considering that the German press has been slamming Merkel about the recent ECB decision to support Eurozone member bonds in the aftermarket.
The market is deeply overbought to begin with so I think traders should be leery come Tuesday. Wednesday might be a pivotal day. Longer term investors of course won’t be bothered with this noise. They don’t mind watching their portfolios decline 5%. Unfortunately fewer and fewer of those investor are left playing.
Posted on 06. Mar, 2012 by Wilensky.
Back in 2001, Greece had a problem. The struggling country’s debt levels were simply too high to qualify for admittance to the European Union. While these regulations were in place to protect the structure of the European economy, Goldman Sachs was more than willing to step in with a timely loan which provided the necessary liquidity to hide the nation’s accumulated debt load. Essentially a perfect solution for both Greece and Goldman, here is the situation illustrated by Bloomberg:
“The Goldman Sachs transaction swapped debt issued by Greece in dollars and yen for euros using an historical exchange rate, a mechanism that implied a reduction in debt, Sardelis said. It also used an off-market interest-rate swap to repay the loan. Those swaps allow counterparties to exchange two forms of interest payment, such as fixed or floating rates, referenced to a notional amount of debt.
The trading costs on the swap rose because the deal had a notional value of more than 15 billion euros, more than the amount of the loan itself, said a former Greek official with knowledge of the transaction who asked not to be identified because the pricing was private. The size and complexity of the deal meant that Goldman Sachs charged proportionately higher trading fees than for deals of a more standard size and structure, he said.”
Now any seasoned investor knows that when something is too complex to fully understand, chances are you should walk away. And when the other side of the trade demands that you accept the terms without shopping the price around, you definitely walk away. However, the hands of Greece’s Debt Chief were tied by Goldman’s conditions:
“Sardelis couldn’t actually do what every debt manager should do when offered something, which is go to the market to check the price,” said Papanicolaou, who retired in 2010. “He didn’t do that because he was told by Goldman that if he did that, the deal is off.”
Again, this should have been another indicator that Greece was heading into dark waters. Yet greed overcame caution and both parties came to an agreement with a complex structure that exchanged Greek issued debt (in dollars and yen) for euros. Using and off-market interest rate swap to repay the principal, this exchange suggested that the overall load would be reduced. However, “those swaps allow counterparties to exchange two forms of interest payment, such as fixed or floating rates, referenced to a notional amount of debt.” As a result, the trading costs of the deal skyrocketed to more than the total value of the loan itself, allowing Goldman to increasingly charge higher trading fees as the value rose.
If you have a hard time following the intricacies of the loan, that’s the point. It took Greece’s Debt Chief over three months to realize the terms of the loan weren’t nearly as attractive as first believed. How could this happen on such a large scale you ask? Derivatives expert Satyajit Das has a simple explanation, “Like the municipalities, Greece is just another example of a poorly governed client that got taken apart… These trades are structured not to be unwound, and Goldman is ruthless about ensuring that its interests aren’t compromised — it’s part of the DNA of that organization.”
A “sexy story between two sinners” indeed.
Posted on 04. Mar, 2012 by Wilensky.
Interesting interview with David Stockman the other day. The Ex-White House budget director expresses some extremely strong feelings about the direction this country is headed in the upcoming months. Considering his prediction of an event of epic proportions, wouldn’t you rather be on the right side of the trade than out of the market entirely..?
Now 65 and gray, but still wearing his trademark owlish glasses, Stockman took time from writing his book about the financial collapse, “The Triumph of Crony Capitalism,” to talk to The Associated Press at his book-lined home in Greenwich, Conn:
Q: You sound as if we’re facing a financial crisis like the one that followed the collapse of Lehman Brothers in 2008.
A: Oh, far worse than Lehman. When the real margin call in the great beyond arrives, the carnage will be unimaginable.
Q: How do investors protect themselves? What about the stock market?
A: I wouldn’t touch the stock market with a 100-foot pole. It’s a dangerous place. It’s not safe for men, women or children.
Q: Do you own any shares?
The entirety of the interview can be found here: DAVID STOCKMAN: Youd Be A Fool To Hold Anything But Cash Now.
Posted on 26. Jan, 2012 by Wilensky.
Well, it’s looking like the Senate was unable to muster enough votes to reject the newest debt ceiling hike in a 52 to 44 vote. Due to take effect this Friday, we will be looking at a new ceiling of $16.4 trillion with our current levels reaching the $15.4 trillion mark.
“Since roughly $100 billion was plundered from Pension Funds in the past month, The US will have about $15.4 trillion in debt with the Monday DTS. The question then is how long will the $1 trillion in debt capacity last: at $125 billion/month it won’t be enough to carry the US past the election without another massive debt ceiling spectacle.While Congress recently voted down the increase in the US debt ceiling, that vote was largely irrelevant. And all that matters is how the Senate will vote. Watch it live in progress below. It is virtually unlikely that the process of debt ceiling increase will be overturned so within minutes the US should have a brand spaking new debt ceiling of $16.4 trillion.”
Not to mention Treasuries just hit an all time low yesterday, now offering a tantalizing real yield of -2.26 based on 3% inflation. Ouch.
Posted on 13. Jan, 2012 by Ron Rowland.
Guest post: Ron Rowland
One of the best ways to make money in ETFs is to not lose money. I know it sounds obvious, but I can assure you that many people don’t get this key point. So if I can help you do that, then I count it as a success. And today I’ll talk about an ETF category I think you should avoid in 2012: Japan.
What’s Wrong with Japan?
I’ve been to Japan many times. I love the country and the people. Yet I have to tell you that now is not the time to invest in Japanese stock ETFs. Yes, I know the Nikkei Dow looks oversold, but it’s looked that way for years. As I’ve explained before, calling a bottom is tough. And I don’t think Japan is there yet. Here are six reasons why:
#1 — Strong Yen
The yen was very strong in 2011 … which is bad news because it makes Japan’s exports relatively more expensive. And exports are a BIG part of the national economy for Japan.
The authorities are well aware of this, of course, but there isn’t much they can do about it. The Bank of Japan intervened multiple times last year. In every case, the impact of their actions was gone within a few days.
#2 — European Recession
A huge chunk of Japanese exports go to Europe. As you’ve surely noticed, the euro zone is having a few problems. A severe recession — or at best a few years of low growth — seem likely for 2012 and beyond.
If Europeans have no money to spend, their demand for imports (from Japan and elsewhere) is going to plummet. This is another bad sign for Japan.
#3 — Hungry Competitors
Japan reached economic success by beating the developed countries in cheap, efficient manufacturing. Now they have competitors: Taiwan, South Korea, Brazil, India … and of course China.
The challenge for Japan is that all these other countries can do the very same things that put Japan on the map. And in some cases, they can do it better. Nations like Brazil have other advantages, too, like better access to natural resources and geographical proximity to key markets.
#4 — Aging Population
Japan is, on average, one of the oldest nations on the planet. Furthermore, the relatively small number of young adults has a very low birth rate.
The resulting imbalance is making it harder and harder for Japanese industry to keep growing. Older workers hang on to their jobs for dear life while younger people have no way to gain skills. We’re seeing a similar pattern here in the U.S., but in Japan it’s a much bigger problem.
#5 — Massive Government Debt
Japan’s national debt is projected to surpass 1 quadrillion yen in 2012. A big cause is the population imbalance noted above. All those older people require heavy spending on health care and pensions.
To stay afloat, Japan will almost certainly need to raise taxes on both individuals and businesses. And higher taxes won’t make it any easier to create economic growth.
#6 — Political Instability
Japan’s parliamentary government used to work pretty well. Now it’s turning almost as dysfunctional as Italy and Greece.
Consider this: Japan has had six different prime ministers since 2006. The current occupant, Yoshihiko Noda, took office in September 2011 and is already under fire.
The real problem isn’t the government; it’s the voters and their unrealistic expectations. Changing leadership is just a symptom.
Posted on 16. Aug, 2011 by Harvey Sax.
As always Buffett is illuminating and comforting. He is the nation’s economic compass and a person we can consider a genuine national treasure if there ever was one. In this great interview with Charlie Rose he likens the budget debate as a game of chicken with two cars lined up heading toward one another. Both parties think the other will turn away before mutual self destruction except suddenly one party throw the steering wheel out the window. Suddenly the other driver realizes he is dealing with an insane person, aka the Tea Party.
Posted on 08. Aug, 2011 by Maxwell Leary.
(Reuters) – The crises at the heart of the international financial and political system go beyond the debt woes currently gripping the Western world and to the heart of the way the global economy has been run for over two decades.
After relying on it to deliver years of growth, lift millions from poverty, keep living standards rising and citizens happy, nation states look to have lost control of globalization.
In the short term, that leaves policymakers looking impotent in the face of fast-moving markets and other uncontrolled and perhaps uncontrollable systems — undermining their authority and potentially helping fuel a wider backlash and social unrest.
In the longer run, there are already signs the world could repeat the mistakes of the 1930s and retreat into protectionism and political polarization. There are few obvious solutions, and some of the underlying problems have been building for a long time.
Full article provided by Reuters @:
Posted on 05. Aug, 2011 by Maxwell Leary.
(Reuters) – Bond markets may be succeeding where political opponents have failed, pushing Prime Minister Silvio Berlusconi closer to the exit and opening up fresh uncertainties as Italystruggles to avoid financial disaster.
The spread between yields on 10-year Italian bonds over German Bunds briefly climbed past the equivalent Spanish/German spread on Friday morning, underlining the perception that Italy now poses the major threat to euro zone stability.
Berlusconi’s response to the crisis, blaming international conditions and pledging unspecified measures to boost growth, has fallen flat with markets suddenly focusing on his divided government and longstanding weaknesses in the Italian economy.
Full article available @:
Posted on 02. Aug, 2011 by Maxwell Leary.
WASHINGTON (Reuters) – Congress buried the specter of a debt default by finally passing a deficit-cutting package on Tuesday, but the shadow lingered of a possible painful downgrade of the top-notch American credit rating.
Just hours before the Treasury’s authority to borrow funds ran out, the Senate voted 74 to 26 to pass a hard-won compromise to lift the government’s $14.3 trillion debt ceiling enough to last beyond the November 2012 elections.
President Barack Obama, who will seek a second term next year, was expected to immediately sign the deal into law, although without any White House ceremony.
His signature would draw the line under months of bitter partisan squabbling over debt and deficit strategy that had threatened chaos in global financial markets and dented America’s stature as the world’s economic superpower.
There was little suspense about the outcome of the vote in the Democratic-controlled Senate.
Full article provided @:
Posted on 18. Jul, 2011 by Maxwell Leary.
Will The U.S. Default Before Greece?
I thought this was an interesting article on default and earnings by Van Dijk
“The fundamental backing for the market continues to be solid. It is important to keep your eyes on the prize. There’s lots of news out there, and much of it is more dramatic than earnings results, but rarely does it have more significance for your portfolio. Earnings are, and are going to remain, the single most important thing for the stock market. Interest rates are important, but a distant second.”
To read the full article please visit: http://www.dailymarkets.com/stock/2011/07/18/will-the-u-s-default-before-greece/
Posted on 16. Jul, 2011 by Harvey Sax.
These days the headlines ‘calamity’, the ‘disaster”, ‘financial Armageddon’, and the”Titanic sinking” are used to describe what will happen if Congress refuses to pass the debt ceiling authorization in a timely manner. If the U.S. government defaults on its sovereign debt obligations and other payment obligations, there will be an immediate downgrade of our trillions of dollars of debt to something less than AAA. This will cause enormous upheaval and increased interest costs, thus exacerbating the already enormous burden of debt the country shoulders. These events could lead to an uncertain chain reaction of cascading financial upheavals around the world; events that no one can predict with any degree of certainty other than certain that none of the ensuing results will be good. That is as succinct an explanation as I can provide.
How far is this from the facts on the ground, though? Normally when a credit is put on watch for possible downgrade there is a precipitous drop in price and spike in yields. What happened to US Treasury market when the two leading independent credit agencies, Moody’s and S&P first started warning about the impending credit event?
As you can see from this chart, the US Treasury price continues to rise in value as the rating agencies issue one warning after another. The various warnings by the credit agencies have the opposite effect on price. When rates go down, long-term debt instruments go up in value. The U.S 30 yr Treasury bond has steadily risen in the face of these downgrade warnings. This is the exact opposite of what normally happens to the price of debt instrument that is hit with downgrade warnings. The calamitous consequences of a U.S. debt downgrade drive a flight to safety, to the very instrument that is being downgraded. In other words, the more unlikely repayment of the debt obligation is, the more people want it. This kind of contrary cause and effect can only be explained by the following scenarios.
1. The prospect of not getting paid by the U.S. Government is so calamitous that stocks and other risk assets sink in value and people run to the safety of the very asset class, US debt that is getting downgraded. That of course makes no sense whatsoever. This is analogous to a lifeguard at the beach shelling ,”shark!”, and everyone running into the water instead of out of it.
2. The bond market really doesn’t believe there is any chance whatsoever of not getting paid by the U.S since we can print money. What’s the problem? It’s just that most risk assets classes around you are worth less and by consequences U.S. debt goes up in relative value. In that scenario being late on payments is worth more than the stuff that pays on time because it’s just a matter of time before the economy gets worse and good businesses deteriorate in the near future. Carrying that logic to its logical conclusion, let’s say U.S. debt obligations delay payments for extended periods. The economy goes into contraction, markets are in shock, and the value of the defaulted U.S. paper skyrockets in value. The less likely we are to pay interest, the more desirable the debt obligation.
If this topsy-turvy Alice in Wonderland logic makes sense, why not default now? In fact instead of paying interest on the debt, charge buyers to own the paper. You want our worthless debt obligations, you have to buy them. Pay up, you pay us interest, to the US Treasury for the right to have the US government not honor its obligations. The louder you scream “sharks!” the more people run to safety of the water.
I don’t believe this. People are not that stupid. Even if the rating agencies declare U.S. debt something diminished from Triple AAA people are just not buying it. Until there is a better currency than Treasuries it won’t matter much what the rating agencies determine the paper is. The U.S is still the safest broadest base of currency in the world and that alone makes it AAA. When people start really running into the sea when the lifeguards warn of sharks, then that’s the time to abandon the boat but not now.
Posted on 15. Jul, 2011 by Live Trading News.
Last Update: July 15, 2011 04:08 ET
Debt Limit and Wall St
Paul A. Ebeling, Jnr.
Wall Street not concerned about US debt ceiling hassle or default
In Washington DC, the fight over to raise or not to raise the US federal debt limit grows stranger by the day.
The White House says the limit must be raised by August 2nd, or the government will not be able to pay its bills, possibly including US bonds held around the World. But as the deadline nears, US stocks and bonds, if they could talk, are saying So What!
The DJIA fell 54 pts Thursday, and stands about where it did at the beginning of the month. The yield on the 10-yr T-Bond, which usually rises when investors see it as a riskier bet, is considerably lower than earlier this year. It may seem an odd reaction by investors, it is not.
Take the Who Cares reaction from the bond market. In theory, investors in US Treasury bonds should demand higher interest payments when there’s a greater risk they will not get their money back, in this case, in the event of a default next month.
Instead, the yield on the 10-yr T-Note rose only slightly Thursday, to 2.95%. In February, when the US economic recovery seemed stronger and the debt limit was a distant threat, it was 3.74%.
But in this market size is the Winner. The US has US$14T in outstanding Treasury bonds. That dwarfs government bonds of any other Nation. US debt is held more widely and traded more often than any other government’s IOU.
That matters because pensions, private investment funds and central banks the World over want to know that they can buy and sell these holdings fast, what investors call liquidity.
During the credit crisis of Y 2008, investors bought US Treasury’s because they were perceived as not only safe but liquid.
It is nice that Switzerland is a safe place, but if you’re the Russian or Chinese central bank, it is just too small a place.
Another reason the markets are calm: the US may seem a more dangerous place to park your money given its rising debt, but much of the rest of the World is not doing well, either.
Europe is trying to contain a debt crisis. Yields on bonds of various countries there have gone up recently.
So, the USA looks to be the best in a Bad World, so people have no choice but to invest here.
As for stocks, there is plenty of news, and some very good, to distract players from Washington’s problems.
US companies are issuing their financial results for the latest Quarter, and they are expected to post big profits, + 15%, according to a survey by data provider FactSet.
JPMorgan Chase reported profits + 13% Thursday, higher than analysts had expected. The stock rose sharply on the news.
Wednesday, Moody’s Investors Services warned it might take away the United States’ Top-credit rating if it missed even one interest payment on its bonds.
In testimony before Congress on Thursday, Federal Reserve Chairman Ben Bernanke said a US default could throw the financial system into “chaos.”
The DJIA closed at 12,437, down 0.4%. The S&P 500 closed at 1,308, down 0.7%.
The United States hit its current US$14.3T debt ceiling in May. For a new debt ceiling to last to the end of Y 2012 would require raising it by about US$2.4T.
A default would drive up the cost of government borrowing for years to come. That would translate into higher interest rates for everybody else, making it more expensive for corporations to finance spending projects and for Americans to take out mortgages or other loans.
The bigger fear is that a default could freeze the short-term lending markets that keep money moving throughout the Global financial system. US Treasuries, and other government-backed debt are the most widely used collateral for loans in these markets.
A default and a downgrade of US debt would lower the value of that collateral. Lenders might respond by forcing borrowers to sell other assets to post more collateral. The fallout could resemble what happened when Lehman Brothers collapsed in Y 2008.
The prospect of such terrible consequences may be exactly the reason investors are not all that worried.
One prominent analyst said, “There is just too much at stake politically and economically for a deal not to get done. It seems hard to believe that any politician would want his or her name attached to a default of US debt.”
Many other investors are assuming the same thing. Wall Street has been expecting a deadline-beating deal since the debt-limit became a subject of debate earlier this year.
No one knows how close Washington can get to the deadline without triggering a sell-off, but he says that if enough investors start to worry, the fear could feed on itself.
In financial markets, you are playing with people’s confidence, and if enough people start thinking it is a catastrophe, it could become one. So, I believe that the pol’s are quite aware of the situation and will deal responsibly with it no matter what “noise’ is broadcast from DC or the media. Stay tuned…
Paul A. Ebeling, Jnr.
Paul A. Ebeling, Jnr. writes and publishes The Red Roadmaster’s Technical Report on the US Major Market Indices, a weekly, highly-regarded financial market letter, read by opinion makers, business leaders and organizations around the world.
Paul A. Ebeling, Jnr has studied the global financial and stock markets since 1984, following a successful business career that included investment banking, and market and business analysis. He is a specialist in equities/commodities, and an accomplished chart reader who advises technicians with regard to Major Indices Resistance/Support Levels.