Better recovery than expected

• US economy returned to growth in the Q3; 3.5% was stronger than expected
• Unemployment still at 9%
• Latin America weathered the crisis well: resulting in rapidly appreciating currency and influx of capital that could encourage future bubbles
• House income fell 3.4%, while expenditure rose 3.4% - people acting on credit
• DB posted it's best quarterly net profit ever at E$1.4bn

Savings and Loan all over again?

• BNP and SocGen consider 'life assurance sales' to be an important part of their business, while most other banks are divesting insurance business to raise capital (Lloyds and RBS have large insurance businesses are in dire need of capital, and are likely to sell)
• China's sovereign wealth fund: mining, energy, and real estate
• 2007 to Jan 2009, $1500bn flowed into US money market out of more risky assets

Summary of the Savings and Loan Crisis (1990)

• Greenspan cut rates, promised to keep them low, openly lent to banks
• Banks borrowed at 3%, bought longer dated treasuries at 6%. Recapitalized, provided liquidity to other areas
• Equity and emerging markets went up, bond yields fell. Recovery by 1993
• Greeenspan started to tighten in 1994
• Banks were very highly levered, 10YR collapsed (yields soared), no more liquidity
• Mexican tequila crisis

Today:

• Banks are loading up on government debt. Governments are already starting to raise rates? Could this all happen again?
• 2 YR notes were in record demand at the latest auction - investors do not see an economic recovery anytime soon - keep rates low

The Big (Quantitative) Easy

• Two biggest European rescues: Lloyds (43.5%), Royal Bank of Scotland (70% state owned).
• Rights issue 99% subscribed - investors have confidence in the banks to repay state loans
• Regulators suggesting that bank compensation be given in shares, which gradually mature, as to avoid excessive risk taking
• Verizon wireless: owned 55% Verizon Communications, 45% Vodaphone
• Amazon: IPO in Dec 1999, it gained 6,000% in 30 months; subsequent bubble lost 94% of value. All and all, has still beaten the S&P 22%.
• 10-year bond reaches 3.5%, attributed mostly to supply (deficit of $1,400bn - 10% GDP), and lack of demand as investors look for more yield in equities and corporates.
• Foreign ownership of JAP debt at 6%, compared to 50% for the US
• JAP: Aging population is no longer saving, which means the country can no longer run a large deficit without excess domestic savings
• quantitative easing: buy distressed assets, wait to be repriced

Soros on regulation

• China: tightly regulated foreign investment; just allowed investments to resume - signaling they believe the economy is back on track
• Dubai: total debt of 80bn held by the royal family. Looking to refinance shorter term loans as longer term debt in the current favorable credit conditions
• Iron ore gradually moving to the spot market, as it had been done purely by annual negotiations previously
• Brazil: imposing tax on foreign inflow to moderate currency appreciation. IMF says that more fundamental solutions are necessary, but these take a long time time to implement, while a tax, although flawed, complex, and 'porous', may be the best immediate response

Soros: financial markets always present a distorted picture of reality. Instead of developing towards equilibrium, they develop towards bubbles. Bubbles are not irrational, as it pays to follow the crowd for awhile: no amount of regulation will fix this.

• Regulators (as Greenspan said previously) need to accept that bubbles can't be recognized
• Money supply in addition to credit has to be controlled - govt should be able to impose tighter margins due to economic color
• Prevent systemic risks by making large institutions report their larger positions, to make sure not too many people are one side of a trade
• Since the government can't credibly withdraw its 'too big to fail' insurance plan, it must instead actually make sure banks don't use this last line of defense: by reducing leverage, eliminating proprietary trading
• Regulation isn't needed now, but later. Banks are 'earning' their way out of the recession, and it is profitable for them to do so, and only reduce their profitability once things have stabilized.

Europe export recovery in jeopardy

• Rats leave the sinking boat: CIT CEO resigns
• 20% of hedge fund managers found to intentionally misstate their fund size and/or earnings history (holy crap!)
• European Central Bank (ECB) is concerned about euro appreciation; Europe's export-led recovery will stagnate; past material changes to the euro exchange rate have only occurred when the US Fed and other central banks have intervened

Don't need a rating agency to sell bonds

• US wants to retrofit coal fired plants for cleaner emissions. TRADE: which companies are doing this?
• JPMorgan has 40% of its profit from London; currently questions about future management makeup
• Google and Apple are no longer sharing board members - a sign of more contention (Apple does not want to sell a device that requires Google's network services to function)
• Companies prefer bonds to bank loans: in some cases, it's riskier to borrow from a bank than the bond markets. Banks used to fund working capital, but those markets froze up, so companies are looking to use longer term bonds to settle immediate cash needs (example: GE financing arm)
• If companies start hiring, central banks will need to raise interest rates to stem inflation, which will remove one of main drivers for a recovery
• Citi: first US institution to offer banking in Philippines (remittances)
• Other big banks looking to Asia for growth. HSBC head moved from London to HK
• EMEA: Europe, Middle East, and Africa
• Moody's Global speculative grade default rates: 12%, low of 2% in 2008. Predicted to come back down to 3%; US Junk is up 50% this year
• Russia looking to be the best preforming this year as oil has risen and global recovery seems apparent
• Vanilla ABS is back; Lloyds and Volkswagen. European privacy laws make it hard to publish data on the contents of these structures . Investors aren't asking for more loan level information than previous, but demanded a larger subordinated cushion

Nickname for Argentinian bonds: Mistresses

• Citi pays $600k fine for using derivatives to escape taxes
• Argentina defaulted on $95bn of debt 8 years ago - largest sovereign default in history; blamed it's problems on the IMF; ultra low interest rates are causing some investors to take a look
• IMF predicts contraction for Saudi Arabia, followed by growth. TRADE: pick up cheap oil companies on thesis worldwide demand will again rise?
• Companies buy tailored derivatives because such products precisely match the risks to be hedged and avoid messy accounting problems; in this way eliminating OTC derivatives is not the key - what is needed to avoid systemic risk is proper reporting of exposures and the reporting of transparent prices
• a weaker dollar is the right kind of recovery: shrink current account deficit, and an export-led recovery is the best growth strategy
• last year: anyone borrowing in YEN to buy AUS would have lost 45% in 3 months.
• Telefonica increased its dividend 22%. Too soon?

Andrew Hall is my hero

• Citi sells Phibro to Occidental Petroleum, since they couldn't pay their star trader Andrew Hall as the government still has a 34% stake in the company
• Trade deficet recuded to 30.7bn, due to greater exporting of services and less oil consumption
• Canadian jobless rate from 8.7 to 8.4, signaling recovery
• Cheap dollar is what the US needs; we're able to close to the trade gap by exporting more while making external consumption less attractive. Export based countries are trying to weaken their currency against the weakening dollar, but doing so will only drive inflation
• Trade-weighted dollar has recovered back to levels before the crisis
• Investors are looking to take physical delivery of commodities. This is stupid. How can you exploit this? Sell vol?
• Who wants to be trading commodities in Wall St where a regulator is going to set your salary? -- head of oil trading at a big commodities bank
• Vitol, Glencore, Trafigura, Gunvor, Mercuria instead of GS,MS, Barclays, or DB
• Bernanke: interest rates may rise earlier than expected; US 10YR up to 3.39
• US is entering earnings season

Liquefied Natural Gas

• UST called for all 'standardized' OTC derivatives; big manufacturers, transport and resource companies have complained since the original reform plans would require large margin accounts for outstanding swaps. In the past, companies were allowed to purchase loans from banks or use their assets as collateral. Provisions have already been made to exempt participants who do not own 'substantial positions' in swaps
• Europe: argument between exchanges and banks over dark pools (crossing networks: price only published after trade). Exchanges argue that the pools are subject to regulation
• CIT: more insurance than debt
• Bermuda looking to be center for catastrophe (very extreme events with sizable losses) bonds
• LNG: prices fell most of 2009 as recession hit demand; cool summer led to less electricity demand. Storage will hit 3,800bn cubic feet - highest ever. AUS looking to be the new leader of LNG (Chevron, Royal Dutch Shell, ExxonMobil - investing $38bn). Likely to surpas Qatar (current largest) in 2020 - China will be largest customer
• BG Group (UK), ConocoPhillips (US), Petronas (Malaysia) have all signed steals for coal bed methane extraction in Queensland

Sell correlation

• global equity markets loose ground as US equity market figures provoked doubt on the strength of the economy rebound: surprise slowdown in manufacturing
• manufacturing activity > 50 -> signals expansion
• CDS question: who is providing insurance on CIT? TRADE: short those who may be holding CIT insurance if you believe CIT will go bankrupt
• KKR (Kohlberg Kravis Roberts) merged with their public fund listed in Amsterdam, may be soon listed in the US
• Topix: Tokyo stock Price Index, based on float rather than market
• TRADE: Correlation(developed, emerging, commodity, currency) - how can we sell correlation? Betting that a correlation (crisis) won't happen soon
• Spending surged on consumer durables as a result of a cash for clukers program
• IMF: Countries with large trade surplus (China) need to spend in order to sustain growth and accept the appreciation of their currencies
• recovery spread trade: long emerging markets, short developed
• Ben Bernanke: financial institutions should pay higher premiums so being 'to big to fail' is less profitable - Glass-Steagall: bank holding company can't hold other financial companies - repealed by Gramm-Leach-Bliley 1999 - going back to separation (commercial, investment banking)
• Small businesses: 50% workforce, 38% GDP