WTI

• Expected dip in mortgage delinquencies: peak in 2010, then fall. 3Q2009, delinquencies were at 6.25%, 3x historical norm
• UC Rusal likely to be able to list on HK Exchange before the end of year; looking to gain additional capital to finance a massive amount of debt
• Strong demand in Asia, Opec production cuts, excess inventory in the US: WTI is trading les than Brent, Dubai crude
• First Bangladesh derivatives trade: FX options denominated in the taka against the dollar. HSBC used historical spot, forward data to construct product, given the absence of implied volatility
• Fiscal Stability Improvement Act

Commodity History Lesson

Commodity History Lesson

• Boom: 2003-08; oil less than $10/barrel in 1999, to $150 in mid-2008.
• Super Cycle: main drivers of upward trend in commodities remain in place: pent-up demand in emerging markets and supply constraints caused by a lack of investment over the past 20 years, including a rise in resource nationalism
• September: traders speculated on winter demand, but storage grew stronger due to a weak economy. Spot price ended up being significantly lower than 1-mo futures.

Nomenclature

• contango: price of a commodity where future price is higher than the spot price, or a far future price higher than a nearer future price. Represents the price of storage
• Standard in equity markets. Normal for non-perishable commodity which has a cost of carry (example: interest paid on a margin account). Perishable commodities are not in contango, since eggs delivered today are not the same eggs in 6 months
• contango: surplus; backwardation: shortage
• Oil storage trade: buy at spot, sell future, store oil for delivery, pocket the difference

Back Office Repo Dust Off

• Trade: go long financials day after Dubai announcement, as the exposure is most likely limited, and shares will regain as that information comes to light
• UAE established an emergency liquidity facility for local and foreign banks in the area; will assist in the likely debt restructuring of Dubai World
• Berezin (GS): cautionary tale of credit-financed construction booms
• Electricity in the US: "demand response" paying customers not to buy power when they need it the most. Instead of building a power plant that you only use for 50 hours out of the year, why not just pay people to not consume during those 50 hours? Equivalent to selling options.

Fed's first steps in exit strategy

• support of the financial system since 2007 has added $1tn of excess banking reserves; should the banks start lending these reserves, massive inflation
• repo: repurchase agreement - allows a borrower to use a financial security for collateral for a cash loan at a fixed rate of interest. Equivalent to a cash transaction plus a forward. Difference between the forward price and spot price is the interest on the loan.
• reverse repo: counter party view of a repo
• FOMC: add reserves to system by purchasing UST, and then after a specified time remove them
• reverse repo: Fed sells UST to deals for cash, with agreement to buy them back at a higher price, which will gradually remove reserves from dealers