GalaTime

• Zero Hedge: The Periodic Table Of Doomsday Economic Charts

• Bloomberg: Japan Recession Deepens as Factory Output Plunges by Record 10%

The month-on-month decline in factory output exceeded December’s record decline of 9.8 percent, the Trade Ministry said today in Tokyo. Household spending fell 5.9 percent from a year earlier, the biggest drop in more than two years.

Exports plunged 45.7 percent last month, causing the biggest trade deficit on record, the government said this week. Japan has become more dependent on exports in the past decade, making it vulnerable to the global recession. Manufacturers shipped 21 percent of their goods abroad in 2008, up from 16 percent a decade earlier.

• Economic Times: Diamond exporters take to equities

Several diamond merchants plan to acquire share-broking cards on equity bourses. Some have already increased their exposure to gold futures over the past few months.

Exports of cut and polished diamonds fell 26.3% to $663.2 mn in the current fiscal (up to December 2008) from the corresponding period last year. Cumulative diamond exports during the same period rose a mere 2.35% to $10.28 bn. To be listed as a broker on NSE’s cash market, wholesale debt market and F&O segment, requires an interest free deposit of Rs 2.6 crore, apart from net worth requirements and regulatory clearances from Sebi.

• Business Standard: Gold imports on crash course as prices skyrocket

Gold imports fell by a third to 20 tonnes in January this year from a monthly average of 60 tonnes last year. By all available indications, imports will be negligible in February when prices crossed the Rs 15,000-limit.

Sources in the association estimated that total imports would fall to around 400 tonnes in 2009 — one of the lowest in the last decade, and almost 45 per cent lower than last year’s level.

All India Gems & Jewellery Trade Federation Chairman Ashok Minawala said scrap gold sales jumped 20 to 25 per cent from the average daily recovery of 500 kg.

• Mint: ‘Holes in the ground’–the end of the commodity super cycle

In 2008, each one of these factors went sharply into reverse. The global financial crisis resulted in reduced availability and higher cost of debt, affecting commodities through several channels. Leveraged investors were forced to liquidate their positions as leverage was reduced and investors redeemed capital. The reduction in debt also reduced global growth sharply and the demand for most resources.

Resources companies compounded the problems through aggressive acquisitions that were sometimes debt-financed. Unlike financial assets, commodities, for the most part, are subject to the laws of economic gravity—supply and demand.

The most emblematic project of this cycle is a project proposed by Tarek bin Laden, one of Osama bin Laden’s many half-brothers. The project entails twin cities on either side of the Bab al-Mandib (Gate of Tears) strait at the mouth of the Red Sea linked by a 29km bridge across the strait. The project cost was estimated at $200 billion.

• Malaysian Insider: Dr Doom says US govt bonds next bubble to burst

In Asia, avoid real estate in financial centres, but look at things such as soft commodities, which, while volatile, are on an upward trend.

There are also opportunities in pharmaceutical and hospital management companies, and in banks, insurance companies and brokers, especially in emerging economies.

Opportunities also abound in plantations and farmlands in Indonesia, Malaysia, Latin America and the Ukraine. He also advised investors to go long on gold and corporate bonds but to dump US government bonds.

Today being February F&O expiry, it’s time to decide what to do with my F&O positions in the 5 lakh virtual portfolio.

Here’s the trades:

• Closed the other leg of the Nifty call spread - expires worthless.
• Closed the India Cements short @ 99.
• Continue the MCX Gold short.

Portfolio is down ~5% y-t-d. Not bad compared to the Nifty (down ~ 9% y-t-d), but not at all good on an absolute returns basis.

• Bespoke: Financials Wipeout

• LA Times: Beijing’s Olympic building boom becomes a bust

By Rodman’s calculations, 500 million square feet of commercial real estate has been developed in Beijing since 2006, more than all the office space in Manhattan. And that doesn’t include huge projects developed by the government. He says 100 million square feet of office space is vacant — a 14-year supply if it filled up at the same rate as in the best years, 2004 through ‘06, when about 7 million square feet a year was leased.

The National Stadium, known as the Bird’s Nest, has only one event scheduled for this year: a performance of the opera “Turandot” on Aug. 8, the one-year anniversary of the Olympic opening ceremony. China’s leading soccer club backed out of a deal to play there, saying it would be an embarrassment to use a 91,000-seat stadium for games that ordinarily attract only 10,000 spectators. The venue, which costs $9 million a year to maintain, is expected to be turned into a shopping mall in several years, its owners announced last month.

• Wired: Recipe for Disaster: The Formula That Killed Wall Street

For five years, Li’s formula, known as a Gaussian copula function, looked like an unambiguously positive breakthrough, a piece of financial technology that allowed hugely complex risks to be modeled with more ease and accuracy than ever before. With his brilliant spark of mathematical legerdemain, Li made it possible for traders to sell vast quantities of new securities, expanding financial markets to unimaginable levels.

His method was adopted by everybody from bond investors and Wall Street banks to ratings agencies and regulators. And it became so deeply entrenched—and was making people so much money—that warnings about its limitations were largely ignored.

• Business Insider: Eastern Europe About To Go Bust, Taking Western Europe With It

Eastern Europe has borrowed $1.7 trillion abroad, much on short-term maturities. It must repay – or roll over – $400bn this year, equal to a third of the region’s GDP. Good luck. The credit window has slammed shut.

Almost all East bloc debts are owed to West Europe, especially Austrian, Swedish, Greek, Italian, and Belgian banks. En plus, Europeans account for an astonishing 74pc of the entire $4.9 trillion portfolio of loans to emerging markets.

We are nearing the point where the IMF may have to print money for the world, using arcane powers to issue Special Drawing Rights. Its $16bn rescue of Ukraine has unravelled. The country — facing a 12% contraction in GDP after the collapse of steel prices — is hurtling towards default, leaving Unicredit, Raffeisen and ING in the lurch. Pakistan wants another $7.6bn. Latvia’s central bank governor has declared his economy “clinically dead” after it shrank 10.5% in the fourth quarter.

• Big Picture: Bear Market Comparisons, 1929-2009

• Economic Times: Wealth managers devise new strategies to woo investors

Leading the race, the newly launched SMC Wealth Management Services is promoting their portfolio management scheme - the arbitrage scheme, perhaps first of its kind in the wealth management space. Under this scheme, ‘basket trading’ is one of the main strategies used to generate reasonable returns.

Basket trading is a single order to buy or sell a set of 15 or more securities taking advantage of the difference between the sum total of weightages of those stocks and the index level under which stocks are enlisted.

Yay, now you can pay 15 times the brokerage!

Derman: A Sigh is Just A Sigh

Fundamental Theorem of Finance.

“Security prices exclude arbitrage if and only if there exists a strictly positive value functional, under the technical restrictions that the space of portfolios and the space of contingent claims are locally convex topological vector spaces and the positive cone of the space of contingent claims is compactly generated, that is, there exists a compact set K of X (not containing the null element of X ) such that C = {x ? X : x ? 0} = U ?K for ?>= 0.”

Yeah, try explaining that to the keyboard-punching, money-minting, school-ditching teenagers sitting in brokers’ trading rooms in Mumbai, doing cash-futures arb.  :-)

• Financial Express: Why has India coped rather well with the decline in capital inflows?

. . . at a time when equity capital inflows have taken a hit of $6 billion a month compared with the peak, where debt flows have done badly, and exports have done badly, how is it that the rupee has found stability without much interference from RBI?

The decline in the price of crude oil of $89 per barrel gives a benefit of $5.5 billion a month or roughly $65 billion a year.

The benefits to India of this changed international environment extend beyond crude oil. India is largely a commodity importer or a commodity re-processor. Numerous commodity prices have dropped, including energy, metals, agriculturals, etc. Indian imports of capital goods, machinery, telecom equipment, computer equipment have all benefited from the global softness in prices. These changes have helped reduce the import bill.

• NY Times: When Consumers Cut Back: A Lesson From Japan

• Hindu Business Line: Equity funds sitting on Rs 20,000-cr cash chest

The proportion of cash to total equity assets has gone up from 10.1 to 20.5 per cent between January 2008 and now.