FT: Myth of BRICs. Yes.

The story at home

• Business, governments looking to issue debt while rates are still low; US bond market had its second busiest day on record. At the end, it's a belief that the market will recover and interest rates will rise
• Dollar moving lower (non-farm payroll data), 1.45 to the euro
• *Earnings Season!* Alcoa reported today, earned 0.01; expected 0.06
• Intel, JP Morgan report Thurs, Fri. Expecting earnings growth of 184% y/y
• Consumer discretionary not expected to rebound as significantly

Myth of BRICs (FT: Tasker, Peter 11-Jan)

• emerging market IPOs have been at double cash value of developed market IPOs
• NO CORRELATION between GDP growth and stock market returns. Countries with high growth potential are not good investment opportunities unless valuations are low
• Macro: emerging markets have under utilized savings and human resources; no motivation to raise returns on existing capital when you have easy access to additional capital
• China bubble: apartment prices 15-20x salary; 50% GDP is fixed-asset investment
• Shanghai index has halved; still too rich

Figuring out the macroeconomics

• Arnold's last budget needs 6.9bn from the fed for a 19.9bn deficit; previously printed 3bn of IOUs (15-Jul-09), at 3.75% - specifies 8.5bn of cuts; no new taxes
• New UK law: 50% tax on earnings over £150,000; companies are accelerating the payment of dividends
• Chinese exports rose (17.7%) for the first time in 14 months; brings new pressure to appreciate currency (year on year comparisons inflated due to previously low numbers). After consecutively good numbers, will most likely issue an appreciation
• Fri: 85,000 jobs lost; Eurozone hit 10% unemployment; S&P ended up 0.3%
• Dec Fed: moderate growth, tame inflation; contrasted to more bullish private sector. Most worried about commercial real estate, reluctance of companies to start hiring
• Fed has already purchased 1,700bn bonds; 10-yr treasury up to 3.9 from 3.2 as a reflection of Fed stopping purchasing; For 2010, the market will need to find a place for 2,000bn of new issuance
• Most likely won't end in March; if the Fed has to buy more it will make the eventual unraveling more troublesome

• US Yield curve is the steepest ever. Gap between 10 Yr and 2 Yr 286 points. Usually a signal to go long equity
• Fed signaled not expecting changes for 2010; suggesting low growth, continued unemployment
• Think about the bond dynamics - massive purchase of short term securities

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

Dubai goes bust

• Dubai World's restructuring and "debt standstill" on $22bn debt, including $4bn due Dec 14th. (definition: Mechanism by which a country agrees to cease payments on its debts until a restructuring agreement has been negotiated with its creditors) sends markets into turmoil: little information plus low volumes due to holidays compounded the situation.
• Dubai World: one of the emirate's biggest and best known companies
• Nakheel: most trouble subsidiary - asked to extend maturity from Dec to May 2010
• Investors feel misled about implicit state guarantee; typical of the way things work: top-down and in a vacuum
• Perspective: put 40bn in context of 1,000bn of toxic assets in the US and Europe
• 2nd order effect: preparing for a fire sale of prime property in London and NYC