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

I will sell anyone insurance on sovereign debt

• Cadbury signals it is open to a 17$bn bid by Hershey
• Signals of an impending asset bubble: inflation (cost of goods rising), caused by a rise of base commodities due to near-zero interest rate speculation: focus on consumer price indexes
• Abraaj Capital (Largest PE in ME): sellers are become more realistic about valuations, ready to start buying
• European government subsidies for 'green' manufacturing expected to give the area a significant boost
• Coca-Cola looking to triple bottling in China to serve rising middle class
• Marked increase in sovereign CDS volume for industrialized nations. US: 10bn, Japan 15bn, Russia $101bn

Central Banks seeking exits

• Bernake speaks on dollar: Fed expects to keep rates 'near zero for an extended period', as there is low resource utilization and low expectations for inflation; traders question if he will move beyond talk
• Japan GDP at 4.8%, stronger than expected, fueled by domestic demand
• UK: 6th largest economy by nominal GDP (2.6tn). 61 million people. London (7.5m).
• GM: $8.1bn outstanding, will pay back 1.2bn ahead of schedule. In fresh losses after emerging from bankruptcy
• Eurozone companies having trouble, as the high euro has decreased sales, compared to countries not on the euro (UK, Switzerland)
• Baltic Dry Index: cost of moving grain, steel, etc by sea. Can't be seen as a reliable indicator, as significant capacity was added in the boom, and new capacity remains underutilized now in the recovery, distorting costs
• Japan: weak JGB (Japan Government Bonds) auctions; looking to raise new debt, high yen makes economy uncompetitive, debt/GDP ~ 2, rapidly aging population decreases tax revenues and requires more pension payouts from the state: uh-oh.
• Foreign ownership of treasuries: 33%, JCB: 7%
• Since the LIBOR market is liquid again, central banks are looking to unwind 'monetary loosening' policies.
• Jean-Claude Trichet: European Central Bank president: December will be the last auction of 1-year notes (introduced for crisis); one-month, one-week still common. Free money for too long will promote asset bubbles.
• Federal reserve has stopped buying treasuries; Bank of England unlikely to extend 200bn pound quantitative easing
• spread between 3-mo libor and overnight: down to 20 bps, levels at before Lehman

Staggered maturities of high yield debt

• Congress proposing legislation which would end the Fed's supervisory role and limit it's ability to be an unlimited lender of last resort. Large bailouts would have to be deliberated, but critics say not letting the organization work fast enough would be a disaster
• Record levels of corporate financing activity are more than making up for sluggish M&A, syndicated lending. Gains made by flow business (contrasted to proprietary trading). Largest in Europe: DB, Credit Suisse, Barclays Capital. US: Goldman, JP Morgan
• OTC derivatives market on the upswing: rate and FX derivatives: investors positioning themselves for an uncertain economic outcome
• NYSE average daily volume: 3.5 billion shares
• 2,700bn commercial mortgages due in the next five years (peak 2011)
• 1,500bn leveraged finance debt (peak 2014)
• In contrast to previous credit cycles: speculative grade debt maturities are staggered: lenders have more time to work though exposures, but system will take a longer time to clear out