GalaTime

• Bloomberg: Record Options Trading Slows After Hedge Funds Fold

U.S. options trading slowed this month from a record pace after hedge funds collapsed and the biggest market swings since 1929 made equity derivatives too expensive to be used as insurance against stock losses.

About 12.5 million contracts linked to shares changed hands each day in November on average, according to data compiled by Bloomberg. That’s 23 percent less than in October.

One reason for the decline is that investors have sold assets to protect against losses by moving money into cash, which reduces the need to use options to protect against drops in the underlying assets.

We aren’t the only ones seeing a big dip in trading volumes.

• Barrons: Reversal of Fortunes Between Stocks and Bonds

. . . the dividend yield on the Standard & Poor’s 500 stock index touched 3.57% at 1:13 PM Eastern time, exceeding the 3.54% yield on the benchmark Treasury 10-year note, according to Bloomberg News. That’s something that hadn’t happened since 1958.

“Dividend yield, like price-to-sales, is one of those persistent metrics. We can all quibble about earnings, but dividends, particularly those of the entire S&P 500, are remarkably consistent,”.

“In a world of deleveraging, both for the financial services arena and for the economy at large, growth is less certain,” he says. “And with the economy eroding sharply, so is inflation. If stocks don’t deliver nominal growth in dividends and earnings, then their yield ‘must’ exceed the Treasury yield, in order to give us any sort of risk premium.”

• Wall Street Journal: Memories of the Depression Still Sea

There are 11.5 million Americans who are 80 and older, according to the U.S. Census Bureau. The period from the Crash of 1929 to the start of World War II shaped their lives, affected how they raised their children, and influences their reactions to today’s economic turmoil.

The memories aren’t all negative. For many, President Franklin D. Roosevelt “was like a god,” recalls Mr. Hague, and there was hopefulness amid the desperation. “People had confidence in the American way — which I am not sure they have now.”

Now, living in Vermont, she thinks only someone in Roosevelt’s mold can rescue America from its slump. “I keep thinking, why doesn’t someone do what Roosevelt did — shut down and start from scratch and give everyone jobs,” she says. “He put a lot of people — young people, older people — immediately in jobs. There were artists painting murals inside post offices and young kids out in the woods clearing away the brush.”

I can’t begin to imagine what it was like. And I do hope that we dont see this again.

Reuters: Boom turns to gloom as crisis hits Dubai

The seaside emirate of Dubai shifted into crisis mode this week as its breakneck building boom stalled, its lending bonanza evaporated and the government pondered wider steps to rescue banks.

. . . investors fear that individuals and corporations alike will have trouble paying back Dubai’s non-bank foreign currency debt estimated at just under $70 billion. Shares in the region have lost around $1 trillion since the beginning of the year as investors fled.

As I’ve said, this is the next big bubble waiting in line to burst:

• Dubai Realty
• Du-bai or Not to buy?
• Readings: Skyscraper indicator, LIBOR signals, Deficits & rupee

PS: Oil now at $50.

• Bloomberg: Berkshire’s Credit Risk Soars on $37 Billion Bet

The cost of protecting against default by Warren Buffett’s AAA rated Berkshire Hathaway Inc. has almost tripled in two months.

The cost to protect against Berkshire being unable to meet its debt payments, based on credit-default swaps, is more than four times that of rival insurer Travelers Cos. At those levels, the swaps are typical of companies rated Baa3 by Moody’s Investors Service, one level above junk. The price may have risen on concern that the billionaire’s firm could lose a $37 billion bet on world stock market values more than a decade from now.

2019! Heck,  given Buffett’s probabilistic thinking, he has considered the (slim) chances that he’ll still be around in 2019 when (and if) these payments come due.

• Pensions & Investments: Excellent timing: Face to Face with John Paulson (July 2007)

Watch the downside, the upside will take care of itself. That’s been a very important guiding philosophy for me. Our goal is to preserve principal, not to lose money. Our investors will forgive us if our returns don’t beat the S&P in a given year, but we are not forgiven if we have significant drawdowns.

The other saying really drives the same point from a different angle: Risk arbitrage is not about making money, it’s about not losing money. If you can minimize the downside, you get to keep all your earnings and that helps performance.

The performance of these subprime pools will not be decided over one month or two months. They will be decided over the next three years. Our investment (commitment is not based on) looking at what these bonds trade at today or tomorrow, but what the losses in these pools will be two or three years from now. Our estimates are that the losses will be well in excess of 6% or 7% and that as time goes on and these losses are realized, the bonds will be downgraded and they will fall much further.

• Express India: Bought for a fortune, stuck in realty slump

. . . according to information from the International Property Consultants (IPC), clients such as Reliance Mutual Funds and Aditya Birla Group, which have only signed letters of intent, are now demanding renegotiations on the lease rent. The last deal transacted was as long back as April. 

Banga concedes that the rates have come down from Rs 275 per sq ft per month, but only up to Rs 225-250. IPC, however, says that even at Rs 195, there are no takers today. 

Bought over by DLF at Rs 704 crore, the 17-acre plot stands testimony to the country’s costliest land deal till then. Since its moment of glory, the changing market dynamics has forced the Delhi-based realty player to go back to the drawing board more than once. Plans for a business hotel, mall and multiplex were modified to make way for an IT park. For more than a year now, the massive cranes on site have been at rest and work has not proceeded beyond the basement. 

Still in denial.

• Bloomberg: ABCPMMMFLF Spells Fed Relief for JPMorgan, Citi Shadow Banking

A Fed program to buy as much as $1.8 trillion of short-term debt from U.S. companies means they don’t have to tap backup credit lines provided by banks, which would have forced JPMorgan Chase & Co., Citigroup Inc. and other financial institutions to record the loans on their balance sheets and raise more capital.

Another Fed program, Asset-Backed Commercial Paper Money Market Mutual Fund Liquidity Facility (ABCPMMMFLF), aims to shore up the $1 trillion market for asset-backed commercial paper issued by off-the-books financing vehicles guaranteed by banks.

What an acronym!

• Bloomberg: Goldman Targeted by Investor Complaints of Naked Short-Selling

Investors in the $591 billion high- yield, high-risk loan market are accusing Goldman Sachs Group Inc. of naked short selling to profit from record price declines.

New York- based Goldman is acting against its clients by trying to profit at their expense, the investors said.

“No one ever shorted loans,” Ganz said. “Prices never went down.”

Trading against clients? How horrible. I can’t even imagine such things being done - by say brokers - in India.

• Newsweek: Don’t Trust Anyone In A Tie

Are M.B.A.s the problem?
The New York Times is the problem. High-frequency data is the problem, because we can’t interpret it correctly. Our environment is increasingly complicated, and the data that we choose to single out and interpret isn’t always relevant [to the problem we are trying to understand]. You can always find correlations if you look.

How would you fix the system?
Take risks away from bankers. Let hedge funds—and the high-net-worth people—take it. At least they aren’t threatening society. Also, don’t use an economist as Treasury secretary. The world needs fewer economists in general. I believe in psychology, not economics.

The Black Swan / Taleb juggernaut continues. 2008 markets have been very kind to NNT, as they have been to Roubini.

• 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.

• FT Alphaville: Goldman’s travails: Rumours and reality
  

Persistent rumours — and some more hard evidence - of deepening difficulties at Goldman Sachs are fuelling debate over whether the investment bank will attempt another fund raising ahead of its fourth quarter results next month. The shares hit a five-year low, down 8.5 per cent to $71.21, on Monday after analysts at Barclays became the latest to forecast a Q4 loss for Goldman, citing in part its exposure to private equity.

Reuters reports Tuesday that the axe has already begun falling in Tokyo, where the bank laid off 10 per cent of its investment bankers including 10 from its mergers and capital markets teams.

• Business Standard: India Inc goes slow on capex plans, suffers 30% cost overrun

A study by Credit Suisse estimated a month back that capital expenditure for a clutch of 34 projects with an investment of about $190 billion (around Rs 9.16 lakh crore) faced a 19-month delay on an average. The consequent cost overrun, it reckoned, would be about 30 per cent.

. . . projects planned and under execution over the past couple of years are estimated at $1.5 trillion (around Rs 72 lakh crore).

Reliance Industries is believed to be taking it easy with the Special Economic Zone(SEZ)  in Haryana because it anticipates less demand for such space.

• NY Post: Hedge Fund Chief Short & $weet

Chanos’ short-only fund, Ursus, is up 53.2 percent through the end of October, besting the 30 percent performance Chanos booked in 2007, when he was ranked one of the top 100 traders. For October alone, the $5 billion fund earned its investors a whopping 17.8 percent.

“We are short all of the satellite and most of the cable companies in the US,”.

He was short Moody’s too.

• 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.

• Bloomberg: Gulf Citizens Beg for Bailout Amid Stock Rout

Gulf economies are more susceptible to financial turmoil than in the past because of their greater dependency on international expertise, investment and tourists to diversify away from oil. While Dubai, home to the world’s tallest building and the man-made Palm Island, is considered most at risk, no part of the Persian Gulf will go untouched.

Kuwait on Wednesday became the third Gulf state to prop up its banking system. It did so after losses on currency derivatives at Gulf Bank KSC, the country’s second-largest lender by assets, sparked a surge in customer withdrawals from the bank.

The United Arab Emirates said Oct. 12 it would guarantee deposits of all local lenders and large foreign banks. It also set up a $19 billion facility to help banks make loans. Saudi Arabia, the world’s largest oil exporter, put $2.7 billion into a government-run bank in Riyadh to provide no-fee loans to low- income citizens.     

Dubai - The one bust no one’s talking about yet.

Bloomberg: Goldman Drops Coverage of Ethanol Makers After VeraSun Fails

Goldman Sachs Group Inc.’s analysts abandoned coverage of the ethanol industry today after VeraSun Energy Inc., the largest publicly traded U.S. ethanol maker, filed for Chapter 11 bankruptcy protection.

Pacific Ethanol Inc.’s half-decade money-losing streak will continue for at least another five years, Murti and Mody said in the note. Pacific’s shares fell 87 percent this year.

Was this the shortest bubble amongst the many created during the 2003-2007 period?

• Yahoo: Manufacturing sector contracts to 26-year low as new orders and production slow

In what some economists called a sure sign of recession, the Institute for Supply Management said Monday its manufacturing index fell to 38.9, the lowest reading since September 1982.

Monday’s reading was dramatically below this past September’s reading of 43.5 and far lower than economists’ expectations of a reading of 41.5.

Why is this a surprise? Have you seen the Baltic index lately? Or copper prices? Steel? Chinese manufacturing statistics?

• Brad Setser, CFR: Where is My Swap Line?  

Korea is a highly developed emerging economy. In a lot of ways it already has emerged. But it isn’t part of the G-7 (or G-10) and doesn’t have a swap line with the Fed that allows the Bank of Korea to borrow dollars from the Fed by posting won as collateral. That means that it has to rely on its foreign currency reserves - and its government’s capacity to borrow dollars in the market - to support its banks. Unless, of course, Korea could draw on a set of East Asian swap lines, and effectively borrow from Japan and China.

Hungary is scrambling for euros. Ukraine’s government is scrambling for dollars and euros - both to back its currency and to cover the maturing foreign currency borrowing of its banks. Pakistan’s government needs dollars. Korean banks are scrambling for dollars. As are Russian banks. And Kazakh banks. And Emirati banks.

• Mint: Shipowners see business slowing as funds dry up, confidence ebbs

In the last three months, tanker rates have dropped by 10-15%. During the same period, dry bulk shipping rates have dropped by 80-90%.

Great Eastern Shipping, Mercator Lines Ltd, Shipping Corp. of India Ltd (SCI) and Essar Shipping Ports and Logistics Ltd, among others, own 106 dry bulk carriers, or 32.4% of India’s total fleet of 879 ships.

Around 90% of the world’s $14 trillion (Rs683 trillion) trade is handled via trade credit.

• DNA: MF discretionary window opened further

Till now, funds were allowed a discretionary window of 150 bps (up to 50 bps lower or 100 bps over their indicative yields) to make adjustments in yields to allow for market anomalies. Now, this has been enhanced over four-fold to 650 bps (up to 150 bps lower and 500 bps over the indicative yields). 

Valuations of credit instruments have become skewed on account of adverse liquidity conditions, with papers issued by real estate companies, particularly, turning illiquid.

Indicative yields. Managerial discretion. Caveat emptor, I say.

• Jim Grant, Wall Street Journal: The Confidence Game

Destroying confidence, however, is what governments do best. And the confidence they can restore is usually the kind that got us where we are today. Inflation and moral hazard led directly to the immense overvaluation of equities and residential real estate — and of the bloating of the leverage that sustained those prices. Yet, to cure what ails us, credit creation and the public guarantee of banking liabilities are the policies today most favored.

For the first time in a long time, stocks, tradable bank loans and mortgages are becoming cheap. The bear market is truly a value restoration project. Wall Street will be going on sale — if the government will let it.

• Jayanth Varma: Mutual funds cannot borrow their way out of redemption trouble

When a bank borrows to repay depositors, there is a capital cushion that can take losses on the assets side. When this capital is gone, the bank also needs to be recapitalized and cannot solve its problems by borrowing from the central bank. A mutual fund does not have any capital separate from the unit holders. This means that the only prudent way for a mutual fund to repay unit holders is by selling assets. If it borrows, then it is exposing remaining unit holders to leveraged losses.

In the current scenario, therefore, the NAVs of many debt oriented mutual funds today are not very credible. The only way to establish true NAVs is if the underlying paper is sold. Giving the mutual funds a credit line delays this day of reckoning. The danger is that the sophisticated corporates who are redeeming today get a good deal and the unsophisticated retail investors still holding on to their units will be left with all the rotten assets.

• MISH: Where Are Food Prices Headed?

Useful set of agricultural commodity charts.