Ishrc � Discussion Threads

[simon gordon] 16/10/2008 15:31

I've moved over to a new thread:



I'll be posting interesting articles and if anyone wants to talk macro and bonds - please pop over.

Good fortune!

[simon gordon] 15/10/2008 13:04

Coming to Britain soon:

'Irish Finance Minister Brian Lenihan said he plans to raise income tax for the first time in a quarter century and slash public spending as the economic slump opens a hole in the public finances.'

[simon gordon] 14/10/2008 21:07

Oct. 14 (Bloomberg) -- Nouriel Roubini, the professor who predicted the financial crisis in 2006, said the U.S. will suffer its worst recession in 40 years, causing the rally in the stock market to ``sputter.''

``There are significant downside risks still to the market and the economy,'' Roubini, 50, a New York University professor of economics, said in an interview with Bloomberg Television. ``We're going to be surprised by the severity of the recession and the severity of the financial losses.''

The economist said the recession will last 18 to 24 months, driving unemployment to 9 percent, and already depressed home prices will fall another 15 percent. The U.S. government will need to double its purchase of bank stakes and force lenders to eliminate dividends to save them from bankruptcy, Roubini added. Treasury Secretary Henry Paulson said today he plans to use $250 billion of taxpayer funds to purchase equity in thousands of financial firms to halt a credit freeze that threatened to drive companies into bankruptcy and eliminate jobs.

``This will be the first round of recapitalization of the banks,'' Roubini said. ``The government has to decide to intervene much more directly in the provision of credit and the management of these companies.''

U.S. stocks rallied the most in seven decades yesterday on the government plan to buy stakes in banks and a Federal Reserve- led push to flood the global financial system with dollars. The Standard & Poor's 500 Index rose 12 percent. It gained as much as 4.1 percent and fell up to 3.1 percent today.

`Really Tanking'

``The stock market is going to stop rallying soon enough when they see the economy is really tanking,'' Roubini added.

The U.S. unemployment rate stood at a five-year high of 6.1 percent last month. Home prices in 20 U.S. metropolitan areas fell 16 percent in July from a year earlier, the most since records began in 2001, according to the S&P/Case-Shiller home- price index. Bank seizures may push home prices down further, scaring away buyers in coming months, after U.S. foreclosures rose at the fastest rate in almost three decades in the second quarter, according to the Mortgage Bankers Association.

Roubini said total credit losses resulting from the meltdown of the subprime mortgage market will be ``closer to $3 trillion,'' up from his previous estimate of $1 trillion to $2 trillion. The International Monetary Fund estimated $1.4 trillion on Oct. 7. Financial firms have so far reported $637 billion in losses, according to data compiled by Bloomberg.

[borderbill] 13/10/2008 14:12

I have been too busy opening up other bank accounts and buying gilts to invest SLXX as I suggested a few days ago and was grateful to insipiens for reminding me how much SLXX is bank debt. However this must be about the time now and I shall take the plunge.

[simon gordon] 12/10/2008 20:13

I'm coming to the conclusion that the one-way trade is to short the pound and buy Yen, Swissie, Euro and Dollar.

YEN
12/10/08 = 172
1995 = 131

SWISSIE
12/10/08 = 1.93
1995 = 1.75

EURO
12/10/08 = 1.26
1995 = 1.16

DOLLAR
12/10/08 = 1.70
1995 = 1.05

Now all these currencies have faults:

YEN - economic depression since 1990.
SWISSIE - home to UBS and CS who are both taking big writedowns.
EURO - could fracture in current crisis.
DOLLAR - country is almost bankrupt.

Now as bad as they all look the Pound is in the worst shape of them all.

Upside potential:

YEN = 24%.
SWISSIE = 10%.
EURO = 8%.
DOLLAR = 38%.

[simon gordon] 11/10/2008 15:32

The Great Unwind

Wringing Enormous Debt Out of the Financial System

By Satyajit Das 10/10/08

In "The Arabian Nights," the beautiful princess Scheherazade buys one day of life at a time by recounting fantastic fables that entrance the king, who has condemned her to die. Investors and traders are currently telling each other fairy tales to buy one day at a time to stave off the inevitable.

The worldwide economic drama and tumult are not symptoms of the disease but the cure. The "disease" is the excessive debt and leverage in the financial system - especially in the United States, Britain, Spain and Australia. The "cure" is the reduction of the level of debt - the great "de-leveraging."

In 1931, Treasury Sec. Andrew Mellon explained this process to President Herbert Hoover: "Liquidate labor, liquidate stocks, liquidate the farmers, liquidate real estate. Purge the rottenness out of the system. High costs of living and high living will come down. ... Enterprising people will pick up the wrecks from less competent people."

The first phase of this cure is reduction of debt throughout the financial system. So far, overall losses to financial institutions are $400 billion to $600 billion, and that may well go higher. This requires cutting balance sheets - assuming banks are levered around 10 to 1 - of around $4 trillion to $6 trillion in in lending and asset sales.

For example, the bankruptcy of Lehman Bros. meant about $600 billion of debt was eliminated. This inflicted losses on holders of Lehman debt, and that flows through the chain of capital. The destruction of Lehman Bros.' capital (around $20 billion) also permanently diminishes the capacity for further credit creation in the future.

The second phase of the cure is the higher cost and lower availability of credit. This forces corporations to sell assets, reduce investment and raise equity - for example, as General Electric has done. It also forces consumers to cut debt by reducing consumption or selling assets.

Reducing investment and consumption lowers economic activity. That puts stress on corporations and individuals that may result defaults that trigger losses in the financial system, which further reduces lending. De-leveraging continues until overall debt levels reach a sustainable level, set by lower asset prices and available cash flows.

This process of destruction echoes W.B. Yeats' words: "All changed, changed utterly: A terrible beauty is born."

Within the financial sector, de-leveraging is well advanced. In the real economy, however, it is still in the early stages. Fairy tales in financial markets focus on the "superhuman" abilities of regulators and governments to avoid this de-leveraging.

Central banks and governments, accepting an increasing range of collateral, have aggressively supplied liquidity to the money markets. Central banks may soon accept items akin to baseball cards - maybe, for example, Lehman, Bear Stearns and Fortis memorabilia, like mugs and tote bags.

Central banks are acting as "buyers of last resort" rather than "lenders of last resort." They are providing cheap funding. The loans will have to be rolled over, as the banks cannot repay them. They will only be repaid from the underlying cash flows of the assets counted as collateral.

Government and central banks have also "bailed out" a number of financial institutions using a variety of strategies. Lower interest rates and increased government spending have been used to reduce the effects of the financial crisis.

The U.S. government's $700-billion bailout package is the latest magic potion. It is puzzling why this initiative is seen as the "silver bullet" that can "fix" the problems.

A look at the Troubled Asset Relief Program, or TARP, reveals confusion about what problem it is addressing. The plan to purchase up to $700 billion in "troubled" assets is not dissimilar to existing support provisions. If assets are correctly valued on the books of the banks, then purchase at fair value only provides funding to the bank. The difference is that the risk of the securities is now transferred to the government - but so is any potential recovery in price.

There are different views about how much the government should pay. Under one approach, the government would pay a "hold-to-maturity" price that may be, perhaps significantly, higher than the "market" price, or the value on the bank's book. This would give the bank liquidity as well as capital.

The alternative approach would be to pay "market" values. This would provide liquidity to the banks but no capital. It could even trigger additional losses where the assets are carried at higher values - creating incentives against participation.

There is also a small problem in that nobody has a clear idea what these securities are worth.

Purchases of troubled assets are also conditional on (correctly) protecting the taxpayers against losses. This requires banks to provide the government with equity, or equity-like interests, in exchange for participating in the program.

Alternatively, the institutions selling the assets will need contingent arrangements to minimize the risk of loss to the taxpayer. Commentators have gone into rhapsodies about the ability of the taxpayer to "profit" from the program. This creates potential conflicts for financial institutions, whose fiduciary duties require maximization of returns for shareholders.

It is not clear what securities will be eligible for purchase and who will be allowed to participate. Amusingly, the recent short-selling ban on financial institution stocks saw a curious array of companies claim that they were financial institutions! Gaming the system will be practically difficult to control.

In fairness, the final form of the bailout plan is not yet settled and may provide greater clarity. But the bailout could merely transfer the problem onto the U.S. government and taxpayer balance sheet.

Government support for financial institutions in this crisis is already approaching 6 percent of gross domestic product - compared to less than 4 percent in the savings and loan crisis. This could ultimately place increasing pressure on the U.S. sovereign debt rating and undermine Washington's ability to finance its requirements from foreign creditors.

Government and central bank initiatives to date have been ineffective. Money markets remain dysfunctional and inter-bank lending rates have reached record levels relative to government rates. But the failures are unsurprising.

At the height of the boom, banks used various techniques to increase the velocity of money. Now, as the system de-leverages, the velocity of money has sharply decreased.

Money being supplied to the banks is not being lent through. Banks are parking the money in short-dated government securities, in anticipation of their own funding requirements. Around $2 trillion to $3 trillion of assets are returning to bank balance sheets from the "shadow" banking system that can no longer finance itself.

In addition, banks have large amounts of maturing debt - estimates suggest $1.5 trillion by the end of 2008 - that they must fund. Fear of bank failure, especially after the Lehman bankruptcy, and shortages of capital also limit the banks' ability to lend.

Ultimately, nothing can prevent the de-leveraging of the financial system now in progress. At best, actions can smooth the transition and reduce disruption of the economy.

The risk is that well-intentioned steps would prevent the required adjustments from taking place, delay recognition of big problems and discourage action that must be taken by financial institutions, corporations and consumers.

The extent of de-leveraging is substantial and likely to take time. For all asset prices must adjust significantly. The key issues are availability of capital and liquidity. The perceived abundance of liquidity was, in reality, an illusion. As the system de-leverages, it seems clear that available capital is more limited than previously estimated.

Central bank reserves and sovereign wealth funds are often cited as evidence of the amount of available capital. These reserves are invested in U.S. Treasury bonds, GSE paper and AAA rated asset-backed securities. It will be difficult to convert them into the home currencies of investors without large losses.

Government and central bank actions, meanwhile, need to be focused on managing the transition to a lower debt world. Actions should be directed to three areas.

First, banks must be forced to write off bad loans without delay - even if this means breaching minimum solvency capital requirements. Second, bank capital needs must be addressed by forced mergers and restructuring, new equity issues and even nationalization or liquidation. Third, central banks need to guarantee (for a fee) all major bank transactions, enabling normal transactions between banks and other parties in the financial markets to resume.

On Wednesday, Oct. 8, Britain announced a program that addressed some of the above issues. However, coordinated global action is needed so that people do not merely move money from one country to another to take advantage of superior government protection.

A global conference along the lines of Bretton Woods, under a respected chairman - Paul Volcker is the obvious choice – should be convened. It could bring together all major players - including vital creditor nations, like China, Japan, Russia -– to develop a framework for the major economic reforms in areas like currency policy and fiscal disciplines, to work toward resolving the crisis.

A principal objective could be ensuring supply of funding for the U.S. in the transition period. Recent comments by China about Washington's responsibility for the crisis and its resolution miss the point. As China's Premier Wen Jiabao observed the U.S. financial may "affect the whole world." All creditors have much to lose if the de-leveraging process becomes disorderly.

Like a giant forest fire, the de-leveraging process cannot be extinguished. Thoughtful actions can create firebreaks that limit damage to the U.S. economy and the international financial system until the fire burns itself out.

"The Arabian Nights" had a happy ending. The king, after 1,001 night of enchantment and three sons, pardons the beautiful Scheherazade - who becomes his queen. Despite the fairy tales that investors are now putting their faith in, the de-leveraging at the heart of the current financial crisis may not have such a happy ending.

Satyajit Das is a risk consultant and author of "Traders, Guns & Money: Knowns and Unknowns in the Dazzling World of Derivatives."

[simon gordon] 11/10/2008 15:02

Telegraph - 10/10/08:

Just three months after surging above $2.10 to the pound, the past few weeks have seen the pound plummet as recession looms and the public finances deteriorate in the face of the Government's £500 billion bail-out package for Britain's banks.

Sterling fell below $1.68 at one point, its lowest level since November 2003, before recovering slightly to end the day at $1.7020, down more than two cents on the day. The speed of the decline has caught many by surprise with the pound suffering its worst week against the US greenback for eight years.

In times of global turmoil, investors have traditionally moved towards the perceived safety of US government bonds, which helps propel the dollar higher.

Currency experts said the escalating row between Britain and Iceland over who should compensate British savers who had money in Icelandic banks was also contributing to a lack of confidence about the UK economy, which is already suffering a large current account deficit and housing recession.

"The Iceland crisis is fuelling the fear and lack of confidence" that investors are already feeling about Britain, said Tim Clayton, chief strategist at Investica.

The pound has also fallen against other world currencies, reaching a seven-year low against the yen, as economists bet that the UK has now entered what will prove to be a deep and prolonged recession that will force the Bank of England to slash interest rates to as low as 2.5pc, making the UK a far less attractive place for overseas investors.

"I think Britain and London's overwhelming exposure to the financial markets even makes the euro seem to be a little more of a safe haven in this environment and that's why the pound is getting hit hardest of all the major currencies," said Stephen Gallo, head of market analysis at Schneider Foreign Exchange.

Ironically, the success of the City of London in developing itself as the world's financial capital means the British economy depends on it far more than other countries do on their financial markets.

A falling pound does have some benefits. It makes UK stocks cheaper for foreign investors, as well as helping British businesses which export abroad by making their goods relatively less expensive. However, it also increases the cost of imports, potentially pushing up the cost of inflation.

"The market is very risk-driven and that hurts the pound, which is a risk asset," said Geoffrey Yu, currency strategist at UBS, the second-biggest foreign-exchange trading bank. "The UK economy will face troubles ahead and no one is denying that it is going to enter a recession. The pound will probably continue to be weak against the dollar."

The National Institute for Economic and Social Research said this week that Britain entered a recession in the third quarter. The economy shrank 0.2 percent in the three months through September, the first contraction for a calendar quarter since 1992, the institute said.

[simon gordon] 11/10/2008 09:35

Chart by Hornblower:

[simon gordon] 08/10/2008 21:19

FT - 8/10/08:

A shift from bumbling to sensible policy
Gillian Tett

During much of the past year, British financial authorities have looked like Bertie Wooster-style, bumbling amateurs in the face of the banking meltdown. Now, finally – albeit belatedly – they have got something right.

Alistair Darling, chancellor of the exchequer, on Wednesday announced that the government would spend up to £400bn underpinning the banks. The only thing more startling than those dazzling zeroes is that Mr Darling is now overseeing a policy package that is arguably more sensible than anything else emanating from the western world.

For this package suggests that British mandarins have finally learnt to draw sensible lessons from the past, most notably from the 1990s crises in Japan and Sweden. More striking still, these moves could also provide pointers for how the US authorities could improve their own policies.

There are at least three reasons to cheer. The first is that the UK government has acknowledged something the Americans remain reluctant to admit: that when a banking crisis is this bad, it makes more sense to recapitalise banks by buying preference shares than by purchasing their duff assets.

That does not necessarily mean that a "Tarp" – the scheme the US is creating to purchase toxic debt – is a bad idea. On the contrary, if the Tarp creates a liquid market for mortgage debt and removes rot from bank books, then all financial players will benefit – including those in London. This puts the British authorities in an unusually favourable position in formulating their own policies.

However, the problem with the Tarp is that the toxic assets are so fiendishly complex that they cannot be easily valued or traded. Even in good times, it can take a computer several days to price complex collateralised debt obligations. That creates daunting logistical obstacles for a Tarp, which could delay or blur the balance sheet benefits.

Putting money directly into the banks, by contrast, is a fast and transparent way to help them. Moreover, it worked relatively well when it was employed by Japan and Sweden a decade ago, in tandem with various initiatives to purchase toxic assets. Better still, while both Sweden and Japan badly underestimated the scale of their crisis when it started, once they finally produced a hefty bail-out plan, they eventually recouped most of their investment.

A second point of cheer is that the British now also seem ready to take other steps to get credit and money markets moving again. The most eye-catching element of this revolves around injections into the money markets. However, what is equally important is a pledge that debt issued by banks will be protected from default.

That may sound arcane. However, it is crucial. Until last month, European and US investors assumed that bonds issued by large banks were safe, since they had been protected in previous decades. But the manner of Lehman Brothers' collapse shattered that belief in a manner that sparked a catastrophic chain of fear. The Federal Reserve's apparent failure to anticipate that shock represents one of its biggest single policy mistakes. Wednesday's announcement suggests the UK authorities have no intention of repeating this disastrous error. So much the better.

However, the third reason for cheer lies not in arcane finance – but sociology. Right now many voters are understandably furious with bankers. No wonder. When the banking crisis hit Japan a decade ago, bankers bowed to show their public remorse; this time, however, barely a single western banker has even said "sorry".

Now, there is no guarantee that the British government can assuage this anger; but on Wednesday it did at least promise to impose more "discipline" on bankers. That may turn out to be mere window dressing; but it is more than anything offered by Washington so far.

Of course, none of this guarantees the UK can now end its banking woes, let alone avoid a recession. Unlike the Japanese and Swedish crises, this one is international. As a result, the fortunes of British finance now depend on more than UK policymaking alone.

But, with a bit of international co-ordination – and a hefty dose of luck – London does now have a chance of stabilising its banking system. The tragedy is that it took so much incompetence and denial – on both sides of the Atlantic – to arrive at this point. If nothing else, the next generation of bankers and financial bureaucrats should be compelled to start their careers by spending time studying financial history books.

[ptolemy] 08/10/2008 16:33

Simon,
Thanks for your response. Bondscape only available via profession service so, do you know where I can find reliable online bid and offer prices (not just yesterday's close or mid prices)? TIA

EDIT: Found it. No need to reply

[simon gordon] 08/10/2008 15:28

Carl Mortished - 8/10/08:

Why globalisation will yield to regional fiefdoms

While we watch the grotesque drama of the global banking system slashing its own wrists, the real economy has just arrived at outpatients with headaches. There is tummy upset in the West, while a mysterious rash has broken out in the East.

In China, steelmakers are in deep trouble, the Olympics are over and the building sector, inflated by huge injections of public money, is subsiding. The symptoms of too much capacity and too little demand are beginning to show up in disputes with iron ore suppliers and sudden export surges to the United States as the Chinese resources industry chases dwindling demand for metal in Western markets.

The price of steel is tumbling worldwide as construction markets sag and motor manufacturers cut volume targets. ArcelorMittal, the world's biggest steelmaker, has cut back production from Kazakhstan and Ukraine, big steel exporters, by up to 20 per cent. In London, the price of steel billets on the London Metal Exchange, a gauge of the temperature in the Asian and Mediterranean construction markets, has fallen by 60 per cent since July. Corus, the Anglo-Dutch steelmaker recently acquired by Tata, of India, gave warning this week that European markets were soggy.

In the past China might have muddled through a period of soggy markets, grabbing market share from rustbucket American and European steelmakers. They could shift product at prices that barely cover costs while blustering their way through the protests and anti-dumping litigation. China had the edge on costs with a combination of cheap labour, cheap raw materials and cheap transport. It could always rely on steel consumers to help to fight its corner: Motown liked cheap steel, just as the rest of America liked $10 T-shirts, inexpensive laptops, toys and furniture.

The world has changed - the global mining oligopoly has pushed through swingeing iron ore price increases, tripling the price of ore, and coking coal has surged as well. Fuel and transport costs have taken their toll and China can no longer assume that it is competitive. In the case of heavyweight, low-added-value building materials, it is a moot question whether China can ever again be a competitive and profitable exporter.

You can sense China's pain in the disputes erupting between steelmakers and their suppliers. Indian iron ore producers complain that Chinese buyers are demanding price discounts and refusing to lift cargoes. The Chinese have suspended imports of iron ore from Vale, the Brazilian miner, in protest against the latter's attempt to impose a second price increase. Add rising Chinese wages to the equation and China's competitive edge looks rusty, indeed. A decade of restructurings, bankruptcies and mergers has transformed the American and European steel industries into much leaner, profitable producers, some of which have become cogs in the machines of rival Indian metal merchants. Worse still, the US is no longer a ravenous market, looking for cheap metal. The construction industry is comatose and Detroit is flatlining - the auto industry has joined the living dead, forced to make huge cuts in capacity that may have devastating effects on suppliers.

Xu Lejiang, the head of Baosteel, recently predicted a contraction in China's steel output, a recognition that it was internal markets that would drive the Chinese industry in future and post-Olympics. That would mean more modest rates of growth. The interesting question is to what extent the loss of competitiveness is part of a wider structural change in world markets.

Within the world of logistics, the signals that moderate traffic from Asia are turning amber and, in some cases, red. DHL, the air freight and logistics operator, is hearing a new message from its Asian customers: where manufacturers were once concerned only about speed and efficient transport from Shanghai and Shenzhen to Los Angeles, London and Frankfurt, the present priority is proximity to markets.

According to Scott Price, chief executive of DHL in Europe, the global supply chain is in turmoil. Where manufacturers previously would think nothing of shipping finished goods from China to the United States and Europe, they are now looking for shorter supply chains. DHL is faced with upheaval as its clients rip apart a logistics and supply chain crafted over the past decade that was based on low-cost transport.

Mr Price reckons that the world is moving from globalisation to regionalisation. In a recent business review with high-tech companies, the customers said that rather than supply out of Asia, they were looking at assembly in Europe.

Foxconn, a Taiwanese electronics company that makes Nokia and Acer brand handsets and laptops, caused uproar this year when rumours circulated in the Czech Republic that a large PC plant was to be relocated in Hungary. In fact, Foxconn has been enlarging its footprint outside Asia, having bought assembly plants in Mexico and Hungary from Sanmina-SCI. It is shifting production out of the hotspots on China's eastern seaboard to remote provinces in northern China, while expanding assembly on the edge of European and North American consumer markets.

For DHL, that means less intercontinental freight as companies change the way in which they do business. It means product assembly close to consumer markets and the need to create new logistics hubs. According to Mr Price, the largest air freight lane last year was from China to Mexico: "Four to five years ago, nobody would have questioned their assumptions about oil. Now the price of oil forms the basis of big decisions about where to locate a factory."

The price of oil is tumbling and it could fall farther, but it is too late to prevent a fundamental shift in the pattern of global trade towards regional fiefdoms. The cost of producing oil beyond the massive reservoirs of Arabia has reached levels that are two or three times the long-term average price of $20 a barrel that was considered the norm in the 1990s. Production of iron ore is in the control of a de facto cartel and if Opec is not in control of the oil price, non-Opec producers have lost the means to challenge Opec with alternative supplies. If the oil price does collapse, it will be a short-lived respite before a renewed and more vicious upward spiral.

We are moving to a world of greater protectionism, where resources are jealously guarded. It will be a world where the cost of materials and fuel is no longer taken for granted and forms as large a part of strategic planning as the cost of labour. For several decades it was fashionable to say the world was getting smaller.

Now, the distance between us and our trading partners appears to be widening.

[simon gordon] 07/10/2008 19:47

I bought Citi, AXA, Halifax and GE.

This was the first time I'd bought corporates. I got prices on a list I liked then bought the ones with the tightest spreads.

For instance the GE 2037 on bondscape was 53/55 but the actual quote was 53/62.

The Halifax 2014 had the tightest spread and on Bondscape it is constant.

It seems to be pretty random and not a very nice way to buy something.

As to HBOA - I am 99.9% sure that Lloyds will go through with the deal, it would be a catastrophe if they walked - that is unthinkable. We'd be like Iceland... The Prefs do look good value but at the moment its a white knuckle ride.

I read today that a couple of respected economists expect interest rates will be cut to Zero. So, I think locking in yield is the only logical thing to do right now. Let's hope Darling & Brown backstop it tonight.

[ptolemy] 07/10/2008 19:10

Not the right thread, I know, but I'll respond to your HBOA comment. Does it look brittle or does it look a bargain? It's easy to get scared in these markets but look at it logically. HBOS looks brittle, but perhaps because there's a renegotiation coming. Lloyds looks quite solid, because perhaps they know there's a renegoitation coming. Both of which benefit HBOA.

By the way somewhere I saw you write you were buying Citi, HSBC and AMEX bonds. Could you tell me how you do this? My brokers quote me ridiculously wide spreads or won't deal at all on such binds. TIA

[simon gordon] 07/10/2008 17:12

The HBOA investment is looking brittle.

Darling & Brown are dithering whilst confidence drains and anxiety mounts over what the Government intends to do to help British banks.

RBS shares and business could totally collapse if there is not an announcement by 8am, showing State backing. The RBS balance sheet is 1.8 trillion.

I think this is the scariest time for British banks since the Credit Crunch began - our leaders must get it right tonight. This is a national emergency. Maybe they should let Peter Mandelson be PM for 24 hours!

[simon gordon] 07/10/2008 08:23

Alphaville - 6/10/08:

from the credit guys at Morgan Stanley

NH:
they are really bullish

NH:
Credit Strategy
Supercycle Unwind: Taking a
Bullish Stance

NH:
Outright bullish on European credit markets: We
are outright bullish on European credit markets for
the first time since the bear market started over 16
months ago. We are more bullish, in fact, than at
any time since mid-October 2002.

NH:
Long investment grade: We are now bullish on
European investment grade credit, with a preference
for large-cap financials and non-cyclicals, which
together account for the majority of the broad IG
market. We also recently upgraded high yield to
Equal-weight from Underweight

NH:
Debt supercycle unwind at work: The peak of the
current credit cycle also represented the peak of a
debt supercycle, only the third such major peak in
the last 100 years. We believe that the current
supercycle unwind will represent a middle ground
between the extremes of unfettered debt deflation
and widespread socialisation of credit risk

NH:
Socialisation makes a comeback: Markets today
are pricing too high a likelihood of sustained debt
deflation, whereas there is already clear evidence
that many governments will use selective
socialisation of credit risk in order to cushion the
supercycle unwind. We believe that this is the right
course of action, and it is bullish for the creditors of
large, investment grade issuers.

NH:
A complex fundamental backdrop: Higher-quality
credit is cheap primarily due to the deleveraging of
financial institutions combined with the post-Lehman
counterparty panic. The recent moves to support
both European and US banks therefore represent a
turning point for the key fundamental risk in this
cycle. The real economy and earnings will not
trough until 2009, in our view, and this is why we are
relatively more cautious on unsecured high yield and
mezzanine-type risk.

[jonwig] 06/10/2008 14:35

Thanks both.
So worth further investigation.

I decided JAC was one to avoid, and Iceland, well ... !

[ptolemy] 06/10/2008 14:31

Jonwig
Moneyweek seems to indicate that iShare only hold the underlying and not derivatives

JAC - two of the counterparties are Icelandic Banks (I've held ACF - also from Close Bros - which also had Northern Rock and B&B as counterparties and it was a hairy ride, in fact we'll only know next week if their disappearence has impacted the return).


Hope it helps

[simon gordon] 06/10/2008 14:16

From the iShare website:

'Transparency:

ETFs make no secret of exactly where your money is invested, publishing a list of holdings every single trading day. Compare this to traditional investment funds which typically reveal all the stocks they've invested in only on a quarterly or semi-annual basis.'

----

Jon,

I phoned iShares and they told me that they are the custodians of the actual bonds that are detailed daily. There are no derivatives involved.

[jonwig] 06/10/2008 13:25

My worry about SLXX is that they don't hold the securities in the form of the actual underlying, but in derivative form: CFDs, options, etc.
This gives an additional counterparty risk if true.

Another thing I looked at is JAC (a Nikkei precipice fund), which looks pretty cheap on a fundamental and balance-of-probabilities view. But again, one of the risks is counterparty default.

[experiment] 05/10/2008 16:49

Simon
Thank you on both counts, i.e. the pointer to the HBOA thread.

[simon gordon] 05/10/2008 16:22

Hi E,

The risk in holding SLXX is that a company defaults on the bond payments and the price falls. In a recession/depression this will happen. The key to SLXX's success will be in the quality of the bonds it holds. If you click on the iShare link you will find a list of the holdings. I think most of them are A rated.

The safest way to play bonds is in the iShare IGLT which is for government bonds. The yield is lower, 4.5% against 7% for SLXX.

The HBOA thread has some excellent posts that clearly explain how preference shares work and the risks involved.

-----

Perma bear - 31/7/08:

Falling stock markets have given investors a series of frights, causing concern about how to secure investments, writes David Kauders.

It is generally recognised that we have a bear market and its normal trajectory is a series of descending peaks and troughs, with sudden rallies allowing relief.

This bear market is only just beginning and as I set out in The Daily Telegraph on September 15, 2007, and January 28, 2008, share prices still have some way to fall.

Globalisation is now in reverse. China's boom was mostly dependent on Western consumer spending, so China's stock markets are suffering more than those in the West. But in Britain the conflict between taxation, public services and borrowing is only just being recognised, let alone solved.

The credit squeeze is deepening and in my view the easy money days are over.

Meanwhile, pension fund deficits are rising once more and there are accounting proposals for introducing a risk-free yield for valuing pension liabilities.

Forcing pension funds to hold more gilts will either stop the flow of new funds into equities or it may even cause future sales of equities. Hence, further share price falls must be expected.

Those sectors that have escaped such declines have largely done so because of links to the commodities price bubble – and all bubbles burst eventually. FTSE 5,000 and Dow 10,000 will prove major hurdles to the decline.

Once these resistance levels are taken out, the next significant pause will be at the March, 2003, stock market low of FTSE 3,281. Again, this low point must be taken out before the bottom of this phase of the bear market can be reached.

As an investor, you first have to recognise that a great bear market is in progress. Then you will need to look for a selling opportunity. The rule is simple: sell into a rally. All bear markets spend most of their time rallying or drifting, even though the major price trend is downwards.

The declines, though, are sudden and steep. The next major downward price drive, which will threaten and perhaps even take out those resistance levels, will be either in autumn or early in 2009. Obviously, it is better to sell above FTSE 5,000 than below.

No stock markets will escape this global change in the financial system, nor are there any market sectors that will continually rise against such a difficult financial background.

The income problem is deeper, because all high-yield schemes based on complex financial products are at risk. Investors should guard their capital for the time when stock markets offer real value. By my tests, based on history, value will return when price to earnings (P/E) ratios drop below 5 and dividend yields rise well above 10 per cent.

Since this side of the long-term capital market cycle involves both share price losses and dividend cuts, the historical target of a 75 per cent to 90 per cent overall price loss, reflecting the periods between 1972 and 1975 and 1929 and 1932, seems reasonable.

As the economic outlook deteriorates, the authorities will fight back with lower interest rates. The inflation scare from the first half of this year will be consigned to history when the commodities bubble bursts and rising bad debts and rising arrears on mortgages eventually bring concerns about solvency in place of the liquidity worries which started the credit crunch last summer.

Fixed interest is the only way to lock into current yields before interest rates fall. However, in a financial squeeze, any old fixed interest won't be good enough – as some companies must be expected to default on their corporate bonds.

The only way to avoid this risk is in gilts. It's time to be risk-averse and put preservation of capital and income ahead of elusive capital gains.

The Government may well fund its borrowing by selling lots of new gilts but, as in 1990 to 1992, new buyers will materialise to absorb the additional stock and prices will rise, while yields fall, despite the increased supply.

Institutional investors often buy index-linked gilts, but these are, I feel, inappropriate for the conditions. Investors should buy conventional fixed coupon issues in anticipation of lower inflation and much lower interest rates.

David Kauders is a partner at Kauders Portfolio Management, www.gilt.co.uk

[experiment] 05/10/2008 15:52

Simon/all
I'm a layman and I'd like to ask a few questions please:

1. Can you please outline the risks in investing in these corporate bonds (HBOA) or SLXX.
2. How are these funds used? In these times, is it to capitalise the banks?
3. How are the dividends of 13% for HBOA for example financed? What could negatively effect these.

regards
Experiment