GalaTime

• NY Times: A Sea of Unwanted Imports

Unwelcome by dealers and buyers, thousands of cars worth tens of millions of dollars are being warehoused on increasingly crowded port property. And for the first time, Mercedes-Benz, Toyota, and Nissan have each asked to lease space from the port for these orphan vehicles.

• Bloomberg: Junk Bond Yields Reach Record 20% as Economy Declines

Yields on speculative-grade corporate bonds surpassed 20 percent for the second straight day as a declining economy increased the risk of default.

Junk bonds have lost more than $187 billion in market value since August on speculation the U.S. recession will leave a glut of companies unable to meet their debt payments.

About 72 percent of high-yield issuers have bonds trading at so-called distressed levels, or with yields of at least 10 percentage points more than similar-maturity Treasuries, Merrill data show. That ratio implies a default rate of 18 percent in the next 12 months.

• Reuters: Greece braces for shipping storm

In just a few months, dry cargo rates have fallen by more than 90 percent as a five-year boom has turned to bust. For Greece, which owns a fifth of the world’s fleet, that spells trouble.

At 170 million tonnes, its merchant fleet is the largest in the world, ahead of Japan. It is the second biggest contributor to Greece’s 240 billion euro economy after tourism, accounting for 7 percent of output.

Dry cargo vessels that commanded $150,000 a day in May are now earning $7,000 or less. Prices could fall further next year, when a record number of ships are set to flood the market: more than 10,000 new ships are currently on order.

• Business Standard: Few takers for highway projects

The government’s ambitious highway projects under the public-private partnership mode are in serious trouble. Construction companies have either not put in bids or have withdrawn from 20 such projects, which fall under the build, operate and transfer (BOT) scheme.

In the last two months, nearly five highway projects worth nearly Rs 3,000 crore could not find a single bidder.

“We have withdrawn from at least five highway packages after being qualified in the technical qualification stage in the last few months. Most of the highway projects on a BOT basis are not viable because of faulty traffic projections and high cost of construction,”

This is not good. It reduces long-term economic growth. Let’s hope the government gets its act together: Mint - Infrastructure projects may get loan relief

• Hindu Business Line: Goods carriers feel the heat of meltdown

. . . volumes for companies operating in the road logistics business have fallen by as much as 20-30 per cent in the last three months as movement of goods has slowed down.

“Currently, volumes from consumer durables industry are down about 20 per cent and automotive parts would be down 15 per cent.”

The impact of this meltdown is going to be felt more severely by the unorganised segment, which constitutes 85 per cent of the transportation industry.

• Mint: Iran says $22 billion deal to sell 5mtpa LNG to India is dead

Iran says it has scrapped a $22 billion deal to sell 5 million tonnes per annum (mtpa) of liquefied natural gas, or LNG, to India due to a dispute over prices and lack of required approvals. Iran later demanded a higher price than the $3.215 per million British thermal unit (mBtu), to which India raised objections.

The proposed $7.4 billion Iran-Pakistan-India pipeline project is also expected to fall through, even as Iran faces economic sanctions by the US and its allies over its nuclear programme.

India imports 7.5 mtpa of LNG in spot markets, which is sourced by Petronet LNG Ltd and Shell India Pvt. Ltd.

Good for RNRL?

• Hindu Business Line: Numbers belie fears over MF redemptions

Equity AUM has itself fallen by around 25.9 percent from the start of this year. This is largely explained by the erosion in market value of NAVs over this period.

One key trend in equity fund inflows during this period was the shift in fresh money from new fund offers (NFO) to older open end funds from fund houses.

As much as 21.9 percent of the assets under management with Income funds were redeemed during October. 70 percent of redemption has been on open-ended funds while about 19 percent is from the closed-end category.

• Economic Times: Public sector oil firms make profit on petrol, diesel sales

Public sector oil companies have for the first time in more than a year started making profit on sales of petrol and diesel, strengthening the case for a fuel price cut soon. But the oil companies do not want to reduce prices now as they continue to lose Rs 82 crore per day on PDS kerosene and domestic LPG. Kerosene is being sold at a loss of Rs 22.40 a litre and LPG at Rs 343.49 per cylinder.

The government compensates the three refiners for half of their revenue loss on fuel sales by way of oil bonds. Another one-third of the losses are met by companies like ONGC and OIL by way of discounts on crude oil they sell to them.

• Business Standard: More steps to combat crisis

The Reserve Bank of India today announced a slew of measures to attract foreign currency deposits and boost liquidity to mutual funds, non-banking finance companies and exporters.

. . . it raised the interest rate on foreign-currency deposits by 75 basis points with immediate effect and extended until March the special repo window to meet the liquidity requirements of mutual funds and non-banking finance companies.

. . . it would consider proposals from Indian companies to buy back foreign-currency convertible bonds. The buyback will be financed by the company’s foreign currency resources held in India or abroad and/or out of fresh external commercial borrowing (ECB).

The bank also reduced the risk provisioning for the commercial real-estate industry to 100 per cent from 150 per cent.

The RBI continues to work weekends. I imagine things are looking  ugly from their end.

The latest (Nov 08) edition of the RBI bulletin is out. Here are some charts of interest:

Yield curve is less flat as compared to July 2008 but nowhere near normal:

Credit spreads widened starting August:

Institutional investment in equity markets is significantly lower than a year ago:

Back in August, I wrote this post: Inflation? No problem (by December 2008)

I predict that by December 31, 2008:

• WPI in India will be below 8% (yes, single digits!)

This was at a time when inflation was in double digits & rising, and when the pundits were projecting 17-18% WPI by now. Well, here is the latest inflation data, via Economic Times: Sharp dip in inflation makes room for rate cuts

India’s wholesale price index, the most widely watched inflation measure, rose 8.98 percent in the 12 months to Nov. 1, well below forecasts for a rise of 10.37 percent.

. . . a decline in global commodity prices, robust domestic agricultural output and a fall in demand in a slowing economy helped bring the rate to single-digits well ahead of earlier expectations.

That’s close to my target of < 8% by December 31st, and we still have 2 months to go. Meanwhile, this is more ammunition for further rate cuts from the RBI.

• Business Standard: Exports shrink in October: DGFT

Non-oil exports dipped 20 per cent in October against a small 3 per cent rise in September, he added. Gujral attributed the decline to waning demand from the United States and the European Union. In dollar terms, the two markets account for over 35 per cent of India’s total exports. The non-oil exports account for over 80 per cent of India’s export basket and industries like gems and jewellery and handicrafts have been the hardest hit.

• Bloomberg: Pakistan’s Inflation Jumps to 25%; Near 30-Year High

Pakistan’s inflation accelerated to near a three-decade high in October, placing further strains on a nation that the International Monetary Fund says needs $10 billion to avoid defaulting on its debt.

The nation’s foreign reserves have also shrunk to $3.71 billion on Oct. 25 from $14.2 billion a year ago, raising concern that Pakistan will not be able to pay its $3 billion debt servicing costs due in the coming year.

Conditions attached to an IMF loan would include an increase in the central bank’s benchmark interest rate to 15 percent from 13 percent, as well as a 31 percent rise in tariffs on electricity and other utilities.

Scary.

• Haaretz: Diamond prices fall by 5%

Diamond traders and the rest of the industry woke up Friday morning to a major shock. At 6:00 A.M. the semi-official price list for the diamond industry, the Rapaport Diamond Report, was updated and all prices were lowered by about 5%. The diamond industry, known for its secrecy and behind-closed-doors transactions, suddenly found itself in the spotlight. 

While Rapaport may have tried to calm fears, the sudden 5% loss on paper in the value of everyone’s merchandise did not sit well with the traders. This is a problem in particularly for those diamond traders who have used their gems as security for loans.

Wow. Even a near-monopoly couldn’t manage to hold prices up.

• Houston Chronicle: Oil prices low? Chevron CEO says no

O’Reilly tossed aside the notion that oil prices are low. Although half its unprecedented summer high of more than $145 a barrel, $60-$70 oil is still pricey.

On a global basis, it’s the equivalent of 240 million barrels of oil a day, if you can transfer all the energy into oil terms. Put it in gallons per second, it’s 120,000 gallons per second. That’s oil, coal, gas, nuclear, all the sources of energy that the globe uses.

At some point, inevitably demand growth will occur again. We’re in a demand shrink at the moment, based on all the data. Two things have to happen. The price has to stimulate that — that’s how markets work. And that in turn has to help stimulate economic growth.

• Bloomberg: China Announces 4 Trillion Yuan Economic Stimulus

China announced a 4 trillion yuan ($586 billion) stimulus plan to spur expansion in the world’s fourth-largest economy, helping sustain global growth as the U.S., Europe and Japan teeter on the brink of recession.

The funds, equivalent to almost a fifth of China’s $3.3 trillion gross domestic product last year, will be used by the end of 2010.

The package announced today, of which 100 billion yuan is earmarked for this quarter, will go toward low-rent housing, infrastructure in rural areas, as well as roads, railways and airports.

• Business Standard: Pantaloon’s turnover shoots up 87 per cent

Kishore Biyani’s Pantaloon Retail, the country’s largest listed retailer, has posted an 87 per cent growth in Diwali sales from its value retail formats — Big Bazaar and Food Bazaar — compared with the year-ago period, the highest growth rate in three years.

Consumers are spending more on value for money products. All categories in food and fashion are doing well. In fact, the same store growth of 50 per cent in value formats is a record increase for us,”

One of the few retailers who’s got it right in India.

• Bloomberg: Bloomberg Sues Fed to Force Disclosure of Collateral

Bloomberg News asked a U.S. court today to force the Federal Reserve to disclose securities the central bank is accepting on behalf of American taxpayers as collateral for $1.5 trillion of loans to banks.

The lawsuit is based on the U.S. Freedom of Information Act, which requires federal agencies to make government documents available to the press and the public, according to the complaint.

The Fed staff planned to recommend that Bloomberg’s request be denied under an exemption protecting “confidential commercial information,”.

Now who’s going to sue the RBI?

• Bespoke: Country Default Risk

• Financial Times: The oil-major prop desks cometh
  

Prop desks largely depend on four different strategies to outperform the market.

(1) Superior access to information (both from greater proximity to the market and other players, as well as the type of “inside information” that the regulators frown upon but which has proved the lifeblood of markets and impossible to eradicate).

(2) The ability to dominate pricing by running large positions relative to the size of the overall market and therefore move the market in the traders’ own direction (either taking big enough prop positions, or drawing a large volume of customers into reinforcing trades).

(3) The ability to run complementary and reinforcing positions in related markets (eg cash, physical and derivatives) so positions in one can be used to support positions in another.

(4) Using significant leverage to magnify marginal trading advantages on thousands of trades (the strategy of picking up nickels in front of steamrollers).

• Bloomberg: Crude Oil Falls Below $60 in New York, Lowest Since March 2007

Crude oil fell below $60 a barrel in New York for the first time since March 2007 as a global economic slowdown cuts demand for fuels. Prices, which have tumbled 59 percent since reaching a record $147.27 on July 11, are down 37 percent from a year ago.

U.S. fuel demand during the past four weeks averaged 19.1 million barrels a day, down 6.7 percent from a year ago.

Who would have thought?

• Bronte Capital: Berkshire Credit Default Swaps
  

I am quite familiar with Berkshire - about as familiar as you can get by reading stat statements and the like . . . If 9.11 had been nuclear they might have had problems - but as my “Risk Aversion Berkshire Style” post makes clear fat tail risk is not part of the formula.  

So why is the five year credit default swap spread on Berkshire over 200bps?  I have no idea and it makes no sense to me.  Maybe it is just irrational bearishness about everthing (ie BUY HARD) or maybe there is something I do not know.

Now that’s scary.

• Prudent Bear: Rate Cuts everywhere

ECB cuts rates by 50 basis points, more action expected

UK interest rates slashed to 3%

Bank of Korea Lowers Rates for Third Time in a Month

Swiss central bank cuts interest a half point

• Naked Capitalism: Roubini Foresees Chinese Hard Landing

There is thus now a growing risk of a hard landing in China. Let us be clear what we mean by hard landing. In a country with the potential growth of China hard landing would occur if the growth rate of the economy were to slow down to 5-6% as China needs a growth rate of 9-10% to absorb about 24 million folks joining the labor force every year.

The decline in total orders has been even stronger than in export orders, thus suggesting a weakening in both domestic and export demand.

Chinese exports to the U.S. were growing at an annualized rate of over 20% a year ago; while the most recent bilateral trade data from the U.S. now show that this export growth has now fallen down to 0%.

• NY Times: In Modeling Risk, the Human Factor Was Left Out

“The price of an asset, like a house or a stock, reflects not only your beliefs about the future, but you’re also betting on other people’s beliefs,” he observed. “It’s these hierarchies of beliefs — these behavioral factors — that are so hard to model.”

The quantitative models typically have their origins in academia and often the physical sciences. In academia, the focus is on problems that can be solved, proved and published — not messy, intractable challenges. In science, the models derive from particle flows in a liquid or a gas, which conform to the neat, crisp laws of physics.

• VC Circle: Brokerages Feel The Heat; Q2 Profits Down By 57%

F&O turnover has been < 40,000 crores over the past few days. Margin calls & higher margin requirements have destroyed volumes.