Tag Archives: dollar
Posted on 23. May, 2012 by Harvey Sax.
European Banks Unprepared for Greek Exit From EuroBy Elena Logutenkova, Liam Vaughan and Gavin Finch | Bloomberg – 1 hour 27 minutes ago
Europe’s banks, sitting on $1.19
trillion of debt to Spain, Portugal, Italy and Ireland, are
facing a wave of losses if Greece abandons the euro.
While lenders have increased capital buffers, written down
Greek bonds and used central-bank loans to help refinance units
in southern Europe, they remain vulnerable to the contagion that
might follow a withdrawal, investors say. Even with more than
two years of preparation, banks still are at risk of deposit
flight and rising defaults in other indebted euro nations.
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 23. Jan, 2012 by Harvey Sax.
The first thing I look at when I read Barron’s round table is the results of the panelists picks from last year. On that accord, one would do well by skipping most of it. There are though, two investment gurus, Bill Gross and Felix Zulauf that tend to make me money. None the less read the whole article and make up your own mind.. It can be found here.
Gross: Next, in a world of financial repression where 10-year Treasury bonds yield 2% and 30-years, 3%, certain state bonds and utilities yielding 5% and 6% are decent relative values. It doesn’t mean that they are without risk, and certain states have huge liabilities. I might even live in one. But a number of levered funds own relatively safe A-rated and double-A-rated municipal bonds and yield 7%, plus or minus. One is the Pimco Municipal Income Fund II [PML]. It is a $700 million fund and trades at a 5% premium to net asset value. It provides a 7% tax-free yield by investing in 5% municipal bonds and borrowing at 25 basis points.
Invesco Van Kampen Municipal Opportunity Trust [VMO] also is 40% levered. It buys A-rated and double-A-rated municipal bonds and levers a 4% to 5% return up to 6% or 7%. Munis have done well in the past few months. But 7% tax-free sounds pretty good, and I’ll take it for 2012.
In past years you recommended mortgage REITs such as Annaly Capital Management [NLY]. Do you still like them?
Gross: Annaly levers six to seven times, which doesn’t sound too risky relative to an investment bank that levers 10 to 15 times. Annaly buys almost exclusively government-agency-backed mortgages, so we’ll call it credit-risk free. The real risk is the cost of money, and prepayments on their holdings. Annaly and companies like it are sort of modern-day banks without any infrastructure. Like banks, they aggregate deposits and make a spread. Annaly isn’t on my list this year, but conceptually, a 14% yield from a six-times-levered agency-backed investment portfolio is better than a 2% yield from a bank stock when the bank has borrowed 10 to 15 times its assets and has a cumbersome infrastructure.
Zulauf: I assume the world economy is decelerating. China’s economy will slow more than expected, but the Chinese government won’t do anything dramatic to stimulate it. China will ease somewhat, but in piecemeal fashion. That is why those looking for China to get us out of the doldrums are wrong.
Zulauf: Last year China’s GDP grew by 9.1%. This year they will publish something like 7.2%, but the slowdown in reality will be more pronounced, and it will affect those who depend on China. The U.S. economy could grow by 1% or 1.5%. In Europe, I expect the next stage of the crisis — the ratification of a fiscal agreement — to be critical. I can’t believe all the countries in the euro will ratify it, because it would lock them into a depression for five years. There will be exceptions, and that will trigger the next crisis.
Felix Zulauf’s Picks
|10-Year U.S. Treasury*||1.96%|
|Australian 3-Year Bond Future**||3.16|
|Gold (spot price, per ounce)***||$1,617.95|
|Australian Dollar v. U.S. Dollar||1AUD=$1.02|
|Turkish Lira v. U.S. Dollar||$1=1.88 lira|
|iShares MSCI Emerging Markets Index FD / EEM||$38.23|
|* Sell when yield falls to 1.20%. ** March 2012 contract. *** Buy when prices fall below $1,520 probably some time this summer.|
We remain in a deleveraging world, and the deflationary process is intensifying. In the stock market, valuation compression has been at work since 2000. Occasionally we have had bull-market rallies when stimulus has been applied in major quantities. The last fiscal stimulus was in 2009, because all governments have realized they have too much debt. Fiscal stimulus is the only thing that works in this economy, and that will come later. We have to fall into a crisis that triggers a policy response. Equity markets around the world will top out during this quarter and then enter the next down leg in the cyclical bear market that started last spring.
And when will that end?
Zulauf: It could end in the second half of 2012 or in early 2013. The market could drop 20% from the first quarter’s high. Therefore we will need ammunition later this year or early next year to buy. My first recommendation is capital preservation, or cash. It doesn’t return anything but you’ll need it to buy when asset prices become cheap.
Schafer: What’s the symbol? [Laughter around the room.]
Zulauf: You figure it out. The U.S. dollar will strengthen against other currencies temporarily, until the policy response comes. We are at the very end of the secular decline in bond yields. Yields on less-safe bonds, such as those issued by Greece and Italy, have already bottomed. Bonds perceived as top-quality will see a low in yields later this year. Ten-year U.S. Treasury yields will hit 1% to 1.20% before ticking up to 2.10% or 2.20%. There will be a horrendous move down triggered by intensifying deflationary pressures as money looks for so-called safe havens. I recommend 10-year Treasuries as a trade. When the yield reaches 1.20%, sell.
Investors should own some gold. But gold also will be subject to deflationary pressure and have a cyclical correction. The first part of the correction was the $400 drop to $1,520 an ounce from $1,920. Gold is now bottoming and could retrace half its losses. Then it could decline again in the second quarter, and you could buy it again in the summer. The low will be lower than $1,520. Then gold will rally in the next two years to a new high.
In what form would you buy gold?
Zulauf: I own physical gold, although you can buy the GLD [ SPDR Gold Trust] exchange-traded fund. I hedge my position by selling futures contracts against it, but I closed my hedges recently because a temporary retracement is coming.
Gross: You have more of an emphasis on deflation and I have more of an emphasis on inflation two or three years out. If the 10-year bond yield fell to 1.25% and headline inflation was 2% to 3%, wouldn’t that be bullish for gold?
Zulauf: Yes, but some aggressive players are overinvested in gold. If some other assets go wrong for them, they will be forced to create liquidity and sell their gold positions.
Hickey: That’s what happened in 2008.
Jennifer Altman for Barron’sFelix Zulauf: “I would short the Australian dollar against the U.S. dollar.”
Zulauf: My next idea is how to play the slowdown in China. It will dampen prices for commodities, natural resources and Australian exports. China’s boom was the main driver for the Australian economy in the past 10 years. Australia’s last recession was in 1991. Despite rising exports to China, Australia runs a current-account deficit of more than 2% of GDP. GDP was up almost 2% last year. There is a budget deficit of around 3%. The current-account deficit was easy to balance because there was tremendous investment in the Aussie dollar. It was the so-called high yielder among currencies. Carry traders [who borrow in cheap currencies to buy higher-yielding ones] have bought it, along with individuals and even central banks. Holdings of Australian dollars are widespread, but now the Aussie dollar will suffer.
Why is that?
Zulauf: The strong investment inflow led to credit growth when interest rates already were too low. That led to a tremendous real-estate boom, with prices tripling. If China slows as dramatically, Australia will be hurt. The Australian central bank started raising interest rates in the fall of 2009. They went from 3% to 4.75% in November 2010. Last November they cut them to 4.5%. Now Australia is tightening fiscal policy because it has a growing deficit. The government cut spending, and as we have discussed, fiscal policy works much better in this environment than monetary policy. Short-term interest rates have declined to 3.2% and could fall another percentage point.
There are Australian government-bond futures with a three-year maturity. The yield is the difference between 100 Australian dollars and the futures price, which is currently A$96.84. That means the yield in the futures market is 3.16%, and it could rise by another percentage point in the next 12 months. This is a conservative play and you can lever it. It is a liquid market. The Reserve Bank of Australia will have to cut rates a lot more. Therefore, I would short the Aussie dollar against the U.S. dollar. The Aussie dollar has nearly doubled in the past three years against the U.S. dollar, from 60 cents to $1.02. It could correct by 20%.
Posted on 11. Jan, 2012 by Wilensky.
Index Funds, Where Are We Now?
While following important economic news as it continually streams through headlines, its akin to wrapping your mouth around a fire hose to quench your thirst; however it’s essential to consider how these developments are affecting your investments. Take a look at how a couple of major indexes and index funds have performed since the beginning of the year…
PowerShares DB US Dollar Index Bullish (NYSE:UUP) -1.53%
SPDRS S&P 500 Index (NYSE:SPY) -1.22%
PowerShares QQQ (Nasdaq:QQQ) 0.94%
Europe, Australia-Asia iShares MSCI EAFE Index (NYSE:EFA) -15.77%
United States Oil (NYSE:USO) -1.82%
iShares Comex Gold Trust (NYSE:IAU) +9.57%
iShares Barclays 7-10 Year Treasury (NYSE:IEF) +12.70%
The S&P 500 index, as tracked by the SPDRS S&P 500 Index fund, has fluctuated over the year; however, this fund did start to rise in recent months as investors moved in. From the beginning of the year to now, the S&P 500 (as well as the DJIA) has at times seen gains of close to 10%. However, for 2011 the performance has just below zero. (For a complete guide, check out our Index Investing Tutorial.)
Pullbacks and Producers
Gold futures prices, followed by the iShares Comex Gold Trust fund, have continued to trade at record highs. IAU has recently settled at $15.70.
Technology is currently flat compared to the beginning of the year as top PowerShares QQQQ fund holdings like Apple (Nasdaq:AAPL), Qualcomm (Nasdaq:QCOM) and Google (Nasdaq:GOOG) are all flat as well.
Posted on 14. Aug, 2011 by Harvey Sax.
It should be recognized that a disorderly default or exit from the eurozone, even by a small country like Greece, would precipitate a banking crisis comparable to the one that caused the Great Depression. It is no longer a question whether it is worthwhile to have a common currency. The euro exists, and its collapse would cause incalculable losses to the banking system. So the choice that Germany faces is more apparent than real – and it is a choice whose cost will rise the longer Germany delays making it.
Posted on 14. Aug, 2011 by Harvey Sax.
I think the exit of the PIGS from the EURO is inevitable. How can I play that? I’m not sure if the Euro goes up or down on that. If the worst credits leave, then the currency gets stronger. But before that happens, the boat is going to creak and moan until they throw Jonah into the sea. So the Euro is going to weaken as the ECB puts in good money after bad?
It seems that monetary union without political union is a fundamentally flawed idea. Now that the strains of this unequal partnership are showing on the public debt fault lines, it warrants a closer look on how this could impact investments. Clearly no major country is going to default in the sense of ultimately refusing to pay back debts at all. They will default in what they pay you back. If you are owed 100 of something, you may get only 50 of that something back or maybe something like drachmas instead of euros.
We hear a lot about how our debt in this country is spiraling out of control. Indeed it is by many measures but I think it is important to contrast it with the debt/GDP ratios of most countries. In that regard according to the C.I.A. Fact Book,the U.S is healthier than most industrialized economies. For example the U.S. at has a far better ratio than Germany.
A little background on the euro from Wikepedia. The euro (sign: €; code: EUR) is the official currency of the eurozone: 17 of the 27 member states of the European Union. It is also the currency used by theInstitutions of the European Union. The eurozone consists of Austria, Belgium, Cyprus, Estonia, Finland, France, Germany, Greece, Ireland, Italy, Luxembourg, Malta, the Netherlands, Portugal, Slovakia, Slovenia, and Spain. The currency is also used in a further 5 European countries (Montenegro, Andorra, Monaco, San Marino and Vatican City) and the disputed territory of Kosovo. It is consequently used daily by some 332 million Europeans. Additionally, over 175 million people worldwide use currencies which are pegged to the euro, including more than 150 million people in Africa.
The euro is the second largest reserve currency as well as the second most traded currency in the world after the United States dollar. As of June 2010, with more than €800 billion in circulation, the euro has the highest combined value of banknotes and coins in circulation in the world, having surpassed the U.S. dollar.[note 14]Based on IMF estimates of 2008 GDP and purchasing power parity among the various currencies, the eurozone is the second largest economy in the world.
Needless to say if the euro were to unwind or collapse it would cause severe global dislocation and possibly an unprecedented buying opportunity as the world did just fine before the euro and will certainly survive it’s demise. People will smell the stench before there is an actual corpse. There will be a race to turn in your euros for something else and the currency will decline. Shorting the FXE , Rydex Euro Trust Currency shares will be an obvious play.
The FXE represents the relative value of the euro vs. the U.S. Dollar. There is a current perception that the risk on trade requires the Dollar to go down and the euro to rise. So in recent months as the market has risen, the euro has also gained in value vis a vis the Dollar. So shorting the FXE could provide some hedge to U.S. stock market declines. Put on the FXE would be another more quantifiable way of putting this trade on.
Posted on 27. Jun, 2011 by Harvey Sax.
Dollar seen losing global reserve status
By Jack Farchy in London
The US dollar will lose its status as the global reserve currency over the next 25 years, according to a survey of central bank reserve managers who collectively control more than $8,000bn.
More than half the managers, who were polled by UBS, predicted that the dollar would be replaced by a portfolio of currencies within the next 25 years.
Posted on 08. Apr, 2011 by David Spinowitz.
The ongoing slaughter of the US dollar is sending everything that still has value, especially hard assets and commodities. WTI Crude Oil just hit $111.25….1st time since 08….On a side note, China, Asia’s largest oil consumer, raised retail prices of gasoline and diesel for the second time this year, starting Thursday, as international crude oil prices continue rising, China Business News reported on Thursday. The benchmark retail price for gasoline will rise by RMB 500 a metric ton on April 7 and that for diesel will increase by RMB 400, the National Development and Reform Commission (NDRC), said on Wednesday. According to several energy information institutions, the retail price of 90# gasoline will rise by 5.63% to RMB 9,380 per tonne, and that of 0# diesel will gain 4.9% to RMB 8,530 per tonne, the paper said.” Bottom line – pretty soon the entire WTI curve will be in backwardation (Backwardation says that as the contract approaches expiration, the futures contract will trade at a higher price compared to when the contract was further away from expiration. This is said to occur due to the convenience yield being higher than the prevailing risk free rate).
Source: Zero Hedge
Posted on 01. Apr, 2011 by David Spinowitz.
It would be great if I’m wrong but chances are we’ll see prices for crude hit $140 before we see $80 barrels again….After hovering around $103 a barrel for the past week, light, sweet crude had jumped to over $107 a barrel on the Nymex (and Brent over $117 a barrel). Let’s take a step back and try to understand why this is happening……
The situation in Libya is looking like a shit-show. Pro-Gadhafi forces have pushed back rebel forces, in spite of the coalition-imposed no-fly zone. Plus the reports of British Ops & the CIA tearing it up in Libya, doesn’t make matters any better. And let’s not forget about the geopolitical unrest in Syria, Yemen and Bahrain.
The situation in Libya raises a broader, far more concerning set of questions. If it can happen in Libya, why not in Saudi Arabia, where the government is still essentially tribal in nature and will not be winning any prizes for their human rights record anytime soon. Women are still not allowed to drive. Take their 12 million barrels/day off the market, even for a few days, and the geopolitical implications are large, very large (despite the fact that the US imports only 2 million barrels a day from the mid east).Having said that, Canada is now our largest foreign supplier, followed by Mexico and Venezuela (I’ll save my opinions on Chavez for a later date). But oil is a globally traded commodity, and if you prick the supply line in one place we all have to pay. Remove Saudi Arabia from the picture, and the results could be catastrophic, for China first, but for ourselves as well.
While unlikely, if the US keeps demand relatively flat through the use of new alternatives (which there are a great deal of), new conservation efforts and a growing economy, China promises to eat up all of this increase. That my friends, is when the sushi hits the fan. I think oil could easily hit $300/barrel by 2020. (more…)