Wednesday, February 28, 2007

Market update

International share markets continue to head lower as yesterday's selloff in Chinese markets spread to markets across the globe.

Shares in US and Latin American markets have rebounded slightly, while markets in Eastern Europe, Turkey, Russia, and Asia continue their slides.

Many of the markets seeing pronounced drops in this week's global corrections are the very ones that, just last week, made a series of almost synchronized new highs. Japan, Australia, South Korea, and Malaysia are just some of the markets where stocks are retreating after making recent new highs.

Meanwhile, famed investor, Jim Rogers is speaking to Bloomberg about his view of the correction in Chinese share markets. Click to see the video for Jim's point of view.

Things have certainly been frothy lately in almost all the financial markets. Is the party over or will the madness continue?

Tuesday, February 27, 2007

Shanghai slump & the midday report

A large drop in the high-flying Shanghai Composite index has prompted investors to sell shares on Wall Street and in international markets today, as investors bail out of US and emerging market stocks.

The drop in Chinese shares was also enough to bring worries of a possible US recession and international conflict over Iran to the fore. FT.com reports:

Wall Street stocks fell sharply in early trading as a slump in China’s main stock index encouraged investors to sell riskier assets.

The biggest drop for the Shanghai Composite in a decade prompted a broad sell-off in US stocks that hit most severely at the materials, financials and consumer discretionary sectors.

Disappointing US economic data and news of falling house prices added to the markets’ anxiety and dragged the Dow Jones Industrial Average briefly into negative territory for the year.

“There are multiple catalysts driving this market lower, not least China,” said Arthur Hogan, chief market analyst at Jefferies & Co.

“There is plenty to be concerned about in a market that hasn’t taken a breather in a while. It looks like a well-contained sell-off.”

Video from FT's "Daily View" provides added commentary on the day's action.

Bloomberg weighed in on the recent correction with their report, "Emerging-Market Stocks Slide Following Plunge in Chinese Shares".

As the title suggests, Bloomberg's report on the fallout from China's market turmoil was largely focused on the impact to international and emerging-market shares. The full spectrum of opinions are offered regarding the importance of this correction; some are firmly in the "healthy correction" camp, while others are undecided.

Marc Faber, who for months now has been wary of the action in all asset and financial markets, is now shunning the emerging market shares.

``I wouldn't buy'' in emerging markets, said Marc Faber, a Hong Kong-based investor who manages about $300 million and who predicted the U.S. stock market crash in 1987. ``Something has changed in the financial market: It's the time to sell rallies rather than buy dips.''

The rout has also led to a bit of a shake up in the emerging-market debt and currency markets.

Emerging-market bonds and currencies fell as a tumble in Chinese stocks curbed investor demand for riskier assets.

The average spread for emerging-market bonds over U.S. Treasuries rose to the highest since Jan. 9 after China's main stock market index sank 9.2 percent, the biggest drop in a decade. Brazil's real, Turkey's lira and the South African rand led a slump in developing-nation currencies.

``It started off with China and then with U.S. stocks, which is leading to risk-averse behavior,'' said Matias Silvani, who helps manage $4.7 billion of emerging-market debt at JPMorgan Asset Management in New York. ``In times like these, correlation across markets increases.''

Emerging-market bond yield spreads surged 8 basis points to 1.8 percentage points at 11:49 a.m. in New York, leaving them up 16 basis points from a record low of 1.64 points on Feb. 22, according to JPMorgan Chase & Co.'s EMBI Plus index. A basis point is 0.01 percentage point.

Risk appetites are being quickly reexamined. Stay tuned for more.

Monday, February 26, 2007

Sprucing up the joint

You may have noticed some new links and additions to the blog's sidebar layout. I've decided to add a few things to help make browsing and acquiring information more enjoyable and convenient for Finance Trends readers.

Hence the new links, with everything from futures quotes and charts, to added news and commentary sites. You might also create your own virtual stock portfolios at Yahoo! Finance, or jump on over to Project Gutenberg to search for classic, out-of-print books online.

There's also a new section devoted to blogs, highlighting some of the sites I've been looking at more regularly, and find especially interesting and informative. For more finance and market related blogs, have a glance at the Inveslogic and Stockblogs directories.

I hope you'll find something you like in these new links.

Added Note: If there is something you feel we've left out, and would like to see it added to our link list, please let us know. If it's especially useful, we might add it to our link list later on (time and space permitting) or highlight the feature in a separate post.

Thanks, and enjoy.

Saturday, February 24, 2007

Sam Zell talks real estate, EOP buyout

Real estate mogul and Equity Office Properties co-founder, Sam Zell sat down with Bloomberg TV's Brian Sullivan to discuss the recent buyout of EOP by private-equity firm Blackstone, as well as some of Zell's other interests outside commercial real estate.

In this 21 minute interview segment, Zell answers questions about the outlook for commercial and residential real estate, his views on recent home financing practices, and his varied interests outside of US real estate, like waste management and waste-to-energy firm Covanta.

I was especially interested to hear, towards the end of the interview, Zell's thoughts on risk.

As he talked about balancing risk and reward, he said something that reminded me of Warren Buffett's stance on accepting risk in Berkshire Hathaway's insurance business; said Zell, "There's almost no risk I'm not willing to take, as long as the reward is comensurate.".

More liquidity, more art

A recent Bloomberg article focuses on the "flood" of art fairs hitting New York this weekend.

New money, and slightly-aged money (think Martha Stewart and the Hermes crowd) are out in force, working their way between the aisles of fashionable sales events, the Art Show and the Armory Show.

From, "Art Fairs Flood Manhattan With Pollocks, Richters, Bargains":

``People have seen art go up so much in the last 24 months,'' said dealer David Nash of New York's Mitchell-Innes & Nash gallery, who has booths at both the Art and Armory shows. ``People don't feel they are risking anything. They feel they are missing out if they don't buy.''

Nash said he sold an Impressionist painting for more than $1 million last week to a new collector flush with a Goldman Sachs bonus.

``There's a lot of liquidity and even more complacency,'' said money manager and collector David Dechman, who added he was at the opening to socialize, not necessarily to buy. ``That makes people feel comfortable going shopping.''

There seems to be no shortage of people walking around the leading financial centers with a large sum of money burning a hole in their pockets.

For more on this, see the "search blog" features for the term, "art".

Friday, February 23, 2007

New highs by the score

If you were watching the markets this week and last, you might have noticed a definite theme unfolding, even from a distance. Simply put, the number of new highs being set in financial markets across the board is almost staggering.

We saw new, synchronized highs in the Dow Transports, Industrials, and Utilities averages last week, prompting some to warn of danger ahead.

We have reports of new highs in margin debt, with a record $285.6 billion set in January on the New York Stock Exchange. Margin debt increased 24.2 percent in 2006, while the Dow gained 16.3 percent, according to the Sacbee.com article.

The Nasdaq reached a six-year high Thursday, helped along by a rally in chip stocks. It marked the Nasdaq Composite Index's highest close since February of 2001.

Looking across the globe, we witnessed new highs in Australian share markets, with the ASX 200 and the All Ordinaries index both ending the week at new highs.

The Nikkei closed at a seven-year high, finishing over the 18,000 mark for the first time since 2000.

In South Africa, the JSE closed at a record high Friday for the sixth time in the last eight trading sessions.

Stock markets in Malaysia (KLCI), South Korea (Kospi), and Singapore (Straits Times Index) all managed to make new highs on Friday.

Whew. After all that, I won't even dwell on the new highs recorded in the commodity markets this week. But if you want to review, check out corn, tin, nickel, uranium, lead...

I'm getting tired here.

Emerging market debt soars

The Financial Times reports that trading volumes of emerging market debt has soared to a record high of $6,500bn ($6.5 trillion dollars), according to a recent industry study.

From Joanna Chung's FT article, "Emerging Market Debt Trade Soars":

"The emerging markets investor base has evolved from one of highly active, short-term traders into one comprising more stable, buy-and-hold investors," said Joyce Chang, global head of emerging markets research, foreign exchange and commodities at JPMorgan, adding that non-traditional emerging market investors now accounted for more than half of sovereign debt volume at her company compared with a 10 per cent share in 1998.

These developments come at a time when emerging market governments are increasingly borrowing in their own currencies, rather than the dollar or the euro.

At the same time, yields in local currency debt markets have become relatively more attractive than yields in hard currency markets.

This is partly because strong demand has pushed up prices on dollar-denominated debt and compressed their yields. At the same time, the supply of external debt is shrinking.

Investors still feel the need to go somewhere, anywhere, for yield. See, "Chasing EMBI: The Hunt for High Yield", for more on this trend.

Thursday, February 22, 2007

Examining BRIC and "psuedo" ETFs

An interesting article, written by Michael Dawson and entitled, "Building a Better BRIC-Trap", examines the BRIC (Brazil, Russia, India, China) investment theme and offers advice on how to construct your own BRIC-focused investment portfolios.

Here's the meat of Dawson's approach explained:

Individual investors no longer have to wait on Wall Street’s products. Low cost brokers and basket trading have made it financially feasible and practical to create your own “pseudo-ETF.” Read my article on low cost basket trading for more details.

Currently, I am using two pseudo-ETFs to invest in the BRIC theme. The first is composed of stocks that provide raw materials and supplies necessary for the industrialization of the BRIC economies. The second is simply an equal-weighted basket of EWZ, TRF, IFN and FXI. I prefer this approach versus the Claymore, since I can control the allocations. So, if you only want broad exposure use the Wall Street products or a variation similar to mine.

That being said, I am in the process of reconstructing the second method. I believe in the long run more upside will be realized by addressing specific problems facing the BRIC countries as opposed to the broad-brush approach. So, the second ETF will be composed of stocks that address two major problems facing the BRICs – pollution management and logistics/transportation. I will address logistics and transportation in a subsequent article.

See the article for more on Dawson's approach and his picks for an infrastructure/logistics focused BRIC "ETF".

Commodities

In his recent article, "Commodity Opportunity Roundup", Commodities Trends editor George Kleinman provides a brief survey of what's happening in some of the individual commodity markets.

He opens his overview with an interesting call on the corn market.

Kleinman begins, "For reasons I’ve reiterated for nearly a year now (ethanol and exports), I expect to see July corn trading with a “five” in front of it before it goes off the board."

Due to a recent bullish closing pattern, Kleinman says the momentum is with the bullish trend.

Also included are a brief overview of the sugar, cotton and nickel futures.

Check out his piece as a tool for staying in touch with the futures market, and have a look at some of his past articles as well. You might find something of value here (and remember to treat these articles as educational tools, not as direct investment advice from on high).

Tuesday, February 20, 2007

Let's catch up

In the interests of catching up to the new week following the President's Day holiday, here are some items of interest to help us get back in the swing of things. Enjoy!

(1). The Oil Drum pointed us to the following story from the Telegraph.co.uk, "Cheap solar power poised to undercut oil and gas by half".

The crux of the article: new materials are making solar power cheaper than ever on a per watt basis. Utilities are now concerned that an increasing number of people will use solar power instead of their fossil fuel derived electricity during peak hours. Oh, the horror!

(2). I can't say that I'm an ardent reader of Jim Jubak's investment articles at MSN Money, but the topic of his most recent article seems very interesting.

In, "How long can China pollute for free?", Jubak examines the costs of water and air pollution that arise from China's relentless push for economic growth. While countries such as England and the US took a very long time to embrace environmental responsibility as a cost of doing business, China might be pressured to clean up their act in a much smaller timeframe.

An excerpt from that article:

"Polluting the air or water, releasing toxic amounts of mercury, using so much water that a river runs dry -- these are all what economists call externalities. The costs of these externalities aren't paid by the producers of the pollution but are passed along to third parties -- the general public, in most cases -- in the form of increased illness or higher death rates, and they remain external to the country's GDP accounts.

However, today's externality has a way of becoming tomorrow's on-the-books cost. Just ask any U.S., European or Japanese company about what it costs them to clean up their wastewater, scrub their emissions and safely dispose of their toxic waste today. Those were once externalities -- companies used to simply dump their waste into the air, water and ground. Now disposal is part of the cost of doing business.

That will happen in China, too, someday. Today, however, Chinese companies have a sizable cost advantage over their rivals in the developed world because many of the environmental costs of doing business in the United States, Europe and Japan are still externalities in China. Polluting the air, water and ground at no cost to the company's bottom line makes it easy to undercut the prices charged by companies that don't have a right to pollute for free."

There is definitely an element of "crying foul" in a lot of these articles and news stories on China. I'm seeing a very consistent undercurrent of "unfair advantage" accusations being leveled at China in the media's recent coverage of the country.

Having heard all the reports of China's terrible pollution problems (and other associated growing pains), I'm inclined to agree with the assertion that these alarming trends need to be checked and hopefully, reversed. However, I can't help wondering lately how much of this news is delivered as part of an "info-war" against an up and coming economic superpower.

If it's not complaints about the environmental fallout of their industrial growth, then it's an attack on their currency exchange rate or unfair trade policies, at least in the US press.

I do hope that people will put some of these problems into the proper context (in terms of our own histories and difficulties dealing with these issues) and direct more attention towards helping China and other industrializing nations deal with these problems. If we've really "been there and seen that", then we should have a lot of expertise to lend.

(3). More on emerging-market risks (and opportunities) from Bloomberg in this recent story on political instability and share prices in Thailand.

What, not adventurous enough to suit your needs? Then see, "Vietnam, Zambia Overtake BRIC Stocks as `Frontier' Markets Soar".

(4). The commodity bull market is in full effect. Dig this headline from Bloomberg: "Corn Farms Replace Manhattan Lofts, London Flats as Hottest Real Estate".

Here are the opening paragraphs from that article:

"Farmland from Iowa to Argentina is rising faster in price than apartments in Manhattan and London for the first time in 30 years.

Demand for corn used in ethanol increased the value of crop land 16 percent in Indiana and 35 percent in Idaho in 2006, government figures show. The price of a Soho loft appreciated only 12 percent, while a pied-a-terre in Islington near London's financial district gained 11 percent, according to realtors.

Farmland returns ``will take a quantum leap over the next 18 months,'' after corn prices surged to a 10-year high in February, said Murray Wise, the 58-year-old chairman and chief executive officer of Westchester Group Inc. in Champaign, Illinois, who oversees $460 million of land investments."

Hmmm, farmland in Argentina is up, eh? Do I not recall a certain investment strategist recently recommending Argentinian farmland as an investment while the Bloomberg TV anchor openly laughed off his suggestion?

That strategist is Marc Faber and that video clip is here.

(5). "Fed's Inflation Analysis Ranks With Zimbabwe's: Caroline Baum".

I'm starting to see why Richard Russell holds Caroline Baum's work in such high regard.

As far as we're concerned, you're up to date. Let us know if you have a good story or news item to share.

Sunday, February 18, 2007

Jukebox

Tonight's jukebox is a blast back to the mid-1980's with a live in studio performance by New Order for BBC Radio 1.

There are some very noticeable flubs in their performance (I think Bernard may have been feeling a little "rushed"), but the songs are amazing and it's like being an eyewitness to a studio rehearsal.

An excellent video snapshot of one of the most inventive modern pop groups doing their thing. Enjoy, and thanks Adz!

New Order, live 1984: "Sooner Than You Think", "Age of Consent", "Blue Monday", "In a Lonely Place", "Temptation".

Friday, February 16, 2007

Links for a Friday

Notable news and readings on variety of subjects. We've got credit and derivatives, thoughts on value investing, pop culture & history, and more. Peruse away!

FT's Gillian Tett on turmoil in the credit markets and the rising cost of insuring against default in US subprime mortgages. See also: Saskia Scholtes' commentary on the ABX index and its reflection of credit risk in the subprime bond market.

The question of whether or not Ecuador would default on its debt payment was answered on Wednesday when the country's economic minister said the payments would be approved. That decision surprised many in the market, causing "sharp movements" in prices as "hedge funds and speculative accounts" made up most of the activity in that market. The most dramatic moves were seen in the credit default swaps (CDS) market, according to FT.com.

Property derivatives market gets a major boost in the form of price transparency, as CB Richard Ellis-GFI launches a new online price tracking service for these formerly opaque instruments. See David Oakley's, "Tracking property derivatives prices".

From the LewRockwell.com blog: Daniel McArthy examines the dumbing down and mischaracterization of a historical period in the HBO series, "Rome".

The Pleasure of Finding Things Out. Paul Kedrosky of the Infectious Greed blog has posted this interesting video of scientist Richard Feynman talking a bit about his work and his philosophy towards life, observation, and learning.

Michael Steinhardt is bearish on US stocks. The former star hedge-fund manager (who, interestingly, now serves as chairman of an asset management that offers exchange-traded funds) is also wary of "leveraged investments", such as commodities and real-estate. Thanks to The Kirk Report for highlighting this Bloomberg article.

ControlledGreed.com highlights the career of Canadian value investor Frank Chou, whose flagship fund has achieved compounded returns of around 16% a year for 24 years, according to a 2006 profile in MoneySense magazine. The most recent news: that Chou is not finding many bargains in this market.

A Q&A on value investing and personal growth with famed investor, Warren Buffet. Thanks to Barry at The Big Picture for this link.

And for those who missed it a couple of days ago, BusinessWeek's 1987 profile of Microsoft founder Bill Gates, "The Billion Dollar Whiz Kid".

Thursday, February 15, 2007

Russia's Great-Power Strategy

Geopolitics for a Thursday. With all the talk about Vladimir Putin's recent speech in Munich, in which the Russian President criticized the US' current role as an overly meddlesome world power, many observers have been trying to understand the importance of Putin's words and Russia's ambitions.

John Mauldin gives us Stratfor strategist, George Friedman's view in his latest "Outside The Box" e-letter. Here is an excerpt from Friedman's analysis, "Russia's Great Power Strategy":

At Munich, Putin launched a systematic attack on the role the United States is playing in the world. He said: "One state, the United States, has overstepped its national borders in every way ... This is nourishing an arms race with the desire of countries to get nuclear weapons." In other words, the United States has gone beyond its legitimate reach and is therefore responsible for attempts by other countries -- an obvious reference to Iran -- to acquire nuclear weapons.

The essay also goes on to analyze Russia's interests in the Middle East and the lever of control the country is seen to have over the United States due to its heavy involvement in that region.

Have a look.

Wednesday, February 14, 2007

Bill Gates & Microsoft in 1987

I was checking out the new article archives feature on the Google News page a couple of weeks ago.

If you haven't noticed this feature and would like to try it out, just head over the Google News page (link provided at the top of our "links" section) and look underneath the main search toolbar for "News archive search".

Anyway, I think the first search term I entered into the archive search was "Microsoft".

Here's one of the search results that I found interesting: a 1987 BusinessWeek feature on Bill Gates and Microsoft entitled, "The Billion Dollar Whiz Kid".

Rare example of the article subject living up to the hype, huh?

Enjoy the article and check out the Google News search feature for yourself. Most of the articles seem to be behind a pay wall, but there are some nice examples of free content from the past.

Monday, February 12, 2007

Taking another look at the CRB index

I've mentioned before that I feel it's essential for us, as investors and market observers, to learn more about the makeup of the various commodity indexes (see, "Double Down on Commodities?").

For anyone who'd like to know more about the ins and outs of the construction of these leading indexes, with specific emphasis on the CRB, see Adam Hamilton's excellent recent article on the, "Continuous Commodity CRB".

Hamilton writes that many investors and onlookers have been misled into a bearish stance on commodities because of the recent correction in the CRB index. After all, a technical breakdown in the price chart of a leading index, such as the one that occured last summer in the CRB, is bound to be interpreted as bearish indicator.

However, changes in that index led Hamilton to believe that the price movements in the overall average did not actually constitute a bearish secular signal for commodities, but in fact were merely reflecting the recent poor performance of the new, oil-heavy index.

When prices are rising fast, bullish theories abound to explain them. Remember all the New Era bullish theories surrounding the NASDAQ in late 1999 and early 2000? And when prices are falling fast, bearish theories gain traction and prominence. If the CRB had been strong rather than weak over the last six months, almost none of the bearish theories so popular today would even exist. Prices drive explanations.

Well, believe it or not, the CRB actually really was strong over the last six months! All the bearish theories based on the cratering CRB are founded on nothing more than an illusion. Every single bearish theory you've heard lately that draws strength and credibility from the falling CRB is simply not valid. An epic misunderstanding, or deception depending on your perspective, has just taken place. The CRB is not as it seems.

Read on for the full explanation of how today's CRB differs from those that have come before it.

I've really enjoyed looking over Hamilton's articles in the past. His public articles for Zeal Intelligence (many of which are archived over at Safehaven.com) are an excellent source of information on investing and commodities, and I think we'll learn a lot from these most recent articles on the weighting and configuration of the commodity indexes.

Sunday, February 11, 2007

Sunday reading

We haven't talked about real estate and property prices much lately, but I think that the following essay will be of interest to anyone who holds even a passing interest in the recent property boom and bust cycle.

In, "A Brief, Superficial, and Arbitrary History of Property-Price Collapses", Fred Sheehan discusses the manner by which the most recent national housing boom (bubble?) was consistently mischaracterized by economists, academics, and local and national interests.

Is now "a great time to buy and sell a house", as the National Association of Realtors trumpeted in a recent ad campaign?

Sheehan deftly responds to this claim and considers the possible fallout arising from the current boom, with a few historical comparisons along the way.

I think he accomplishes quite a lot in this brief, to-the-point missive (link to this PDF file courtesy of Gloomboomdoom.com). Have a look.

Friday, February 09, 2007

Oil back above $60

Crude oil is back above the $60 a barrel mark, as traders react on supply worries following an explosion at a California oil field owned by Occidental Petroleum. Bloomberg reports:

Crude oil rose above $60 a barrel for the first time in five weeks after an explosion shut down a California field owned by Occidental Petroleum Corp., the fourth- biggest U.S. oil company.

Occidental said about 120,000 barrels of oil and gas liquids a day has been lost after a fire at its Elk Hills site. It is the seventh-largest field on the U.S. mainland. Nigeria, Africa's biggest oil producer, will comply with production cuts set by the Organization of Petroleum Exporting Countries and has no plan to increase that limit, a spokesman said.

``The reaction to the closure of the oil field in California underlines the supply worries out there,'' said Michael Fitzpatrick, vice president for energy risk management at Fimat USA in New York. ``The field only produces 120,000 barrels of liquids a day. It really isn't going to have a noticeable impact of stocks.''

Crude oil for March delivery rose 69 cents, or 1.2 percent, to $60.40 a barrel at 1:12 p.m. on the New York Mercantile Exchange. Futures touched $60.61, the highest intraday price since Jan. 3. Prices are 2.3 percent higher this week and 3.5 percent lower than a year ago.

To the $35 a barrel, talking-head optimists: Sorry guys, but crude oil seems to be working its way higher the past few weeks after bottoming out below the $50 mark. Supply constraints are finally penetrating the minds of market participants and observers.

``There have been a number of stories that demonstrate that oil supplies aren't to be taken for granted,'' said Tim Evans, an energy analyst at Citigroup Global Markets Inc. in New York. ``The Occidental field was shut down yesterday, the Hibernia field in Canada is also shut, there are problems with the Cantarell field and Norwegian production is declining.''

Think we'll see a return to $75-$80 oil in the next six months?

Thursday, February 08, 2007

Chasing EMBI: the hunt for high yield

Not too long ago, in the comments section of our site, one of our dear readers suggested a discussion topic for an upcoming post. The proposed idea: that, "the high-yield market is really the new investment grade market".

Well baby, you asked for it; you got it. We aim to please, after all. What follows are a few bits of insight and analysis into this trend towards high-risk, high-yield investment in the corporate junk-bond market and the world of emerging market debt.

First off, a word about the current investment climate. The main idea behind this post topic is that investment yields and perceptions of risk are low, pretty much across the globe wherever you look. As we see it, real returns on US government bonds are basically flat to negative if you factor in the expenses of taxes and the current rate of inflation (when judged more honestly than by the government's measures).

Investors have had to look farther afield for higher returns in recent years. This applies to alpha-seeking hedge fund managers as well as retail investors and retirees. We've seen more people shrugging off risk in the current environment, with individual investors seeking returns in junk-bond funds and emerging market bonds, while the professional investors juice their performance with carry-trades, leverage and a trip to the frontier markets.

For those still operating on the notion that compressed yields and risk spreads have arised out of a "savings glut", may we instead point you towards the root cause of this supposed phenomenon. Namely, the expansion of money and credit on a wildly unprecedented, global scale. In other words, the "savings glut" might be more accurately characterized as a "liquidity glut".

This mass of global liquidity sloshing about the globe is a large part of the reason why so much money and attention has been directed towards these high risk arenas. Competition in the search for yield is intense. As Financial Times columnist John Dizard recently put it:

The rapid tightening in risk spreads over the past few weeks has left portfolio managers in a bad way. There just isn’t much discernable value out there. Now they’re picking through the rubbish piles of junk bonds looking for scraps of yield they can take back to their hungry clients. If their situation gets any more pathetic, they’ll have to recruit Bono to raise their year-end bonuses.

FT reporter Joanna Chung echoes these sentiments in her more recent report, "EM bond spreads at record lows". As her article details, spreads of emerging market bonds (as measured by the JP Morgan EMBI+ index) continue to narrow against US treasuries.

An excerpt from that piece:

Risk premiums on emerging market bonds on Tuesday were close to record lows as hopes of a credit rating upgrade for Brazil spurred another round of buying.

As bond prices rose, the risk premium on emerging market bonds, as measured by JPMorgan’s EMBI+ index, a market barometer, touched an intraday low of just 164 basis points over US Treasuries during trading. The lowest close for the index – 165bp over US Treasuries – was reached on Friday.

The article goes on to report that an eventual, hoped-for upgrade of Brazil's credit rating is seen as "an overall positive for emerging markets", and that despite recent jitters, demand for emerging market debt remains strong. If anything, risk spreads are expected to narrow further.

...risk premiums are expected to continue heading lower this year. Yield-hungry investors are pouring money into emerging market assets at a time when the supply of sovereign paper is on the decline. Financially stronger governments are issuing less debt while buying back old bonds. And investors are scooping up bonds of emerging market companies and banks instead, among the fastest growing segments in emerging markets.

The trend of increased complacency towards risk in the hunt for yield did not begin strictly with the junk bond and emerging-nation debt markets. In fact, we can go back to 2005 to see evidence of this behavior among investors bidding for the newly reintroduced 50 year bonds that were issued by leading Western governments.

Are purchasers of ultra-long maturity bonds being compensated with extra yield for investing longer and taking the inflation risk? Not quite, it seems. As the Times article pointed out, due to high demand for long-term bonds, the UK yield curve is currently inverted and offers less reward for investing longer.[4]

Despite this, pension funds seeking to avoid shortfalls and appease regulators are not the only buyers in the market. Hedge funds and insurers were said to account for a notable chunk of demand in the French treasury’s 50-year auction. [5] Although the French bonds were “priced to yield just 4.21 percent – only three basis points above the yield on France’s 30-year debt”, the issuance was oversubscribed. [6]

The situation is not so different for corporate issues as one skeptical investment manager has noted. “That the BBB-rated Telecom Italia was able to raise almost 600 million [pounds] for 50 years - and at a coupon of just 5.25% - illustrates how little the market is demanding for risk at present”. [7]

Turning back to the issue of high demand for emerging market and junk bonds, Martin Hutchinson, writing for the Prudent Bear website, makes the following points of caution regarding the current state of the high-yield and emerging debt markets:

This is the ugly secret about B rated bonds: if monetary conditions remain easy, then increased investor appetite allows potential defaulters to refinance instead of defaulting, which in turn keeps default rates low and increases investor appetite. This has particularly been the case in the last few years, when hedge funds have been able to raise almost unlimited capital from foolish institutional investors, leverage themselves to the hilt, possibly in yen, from foolish banks and then invest the gigantic proceeds in junk bonds, for their modest additional yield above U.S. Treasuries.

Provided the junk bond market doesn’t crash, so refinancing of all but the worst rubbish is still readily available, hedge funds can in any given year achieve with almost complete certainty a satisfactory return, at least 20% of which will flow to the hedge fund managers personally. Thus the normal corrective mechanism of rising default rates ceases to work, and the market spirals towards bond-market nirvana. Essentially the safety valve on the engine of speculative financing has been jammed shut.

This is even more the case internationally. The only thing that ever causes countries to default is a refusal by the bond markets to finance their deficits. Since in an easy money period, with generally declining spreads, the bond market is open to all borrowers, no defaults ever occur. That’s why there has not been a sovereign default since Argentina went in December 2001. The IMF and World Bank and the Bush administration can hold conference after conference congratulating themselves on their superb management of the international financial system, which has caused the world to be free from “crises” for half a decade.

In reality the lack of crises is nothing whatever to do with good management, but is simply a function of excess liquidity.

Thanks to John Rubino at DollarCollapse.com for recently highlighting the above quoted passage.

Given all this knowledge, we have to ask the question: what might happen to throw a wrench in the works and send these trends into reverse? In other words, what will happen to halt the pursuit of returns at a time when most investors are (arguably) oblivious to risk?

Could it be the unexpected arrival of a credit crunch that will have investors bailing out of high risk investments and running for cover? As Barry Ritholtz pointed out on his Big Picture blog, Merrill Lynch has offered just such a forecast.

Even if, as Merrill's report suggests, European and Asian central banks are expected to tighten monetary conditions through higher interest rates, this may not result in truly tight conditions if money and credit continue to be issued through other channels. However, it could be enough to scare many investors into thinking that the central banks will have succeeded in their task, especially if inflation rates remain underreported across the globe. Be sure to look for signposts on the road ahead.

We'll leave it there for now. If anyone is interested in learning more about these trends, please feel free to review the source articles mentioned here, and if you have some insights to share, provide us with your feedback.

Wednesday, February 07, 2007

Real cost of corn ethanol?

Have a look at this article by Ronald Cooke on the true costs associated with corn ethanol production.

In, "What Is the Real Cost of Corn Ethanol?", Cooke weighs the perceived benefits of corn ethanol use against the tally of its direct and indirect costs.

Will corn ethanol result in grain shortages and higher food prices? Does its production and use in automobiles result in a reduction of greenhouse gas emissions? Can we really reduce our reliance on foreign oil with this homegrown energy scheme?

Read the article and hear Cooke's arguments for yourself. While you're at it, keep in mind all the things we've been told about corn ethanol in advertisements and news media.

Consider the importance of the return on energy metrics laid out by Robert Rapier in his recent essay for the Oil Drum.

Especially keep in mind the following assertion made by ADM Chairman G. Allen Andreas in a May 2006 Reuters article:

"I think any knowledgeable person in today's world would recognize the fact that the reason we've got malnutrition and hunger is not because we're turning food into fuel," said ADM Chairman G. Allen Andreas in response to a question from an analyst on a conference call following the company's quarterly earnings report on Tuesday.

"We've got hundreds of millions of acres of land in Brazil that are suitable for arable development into farmland that still have not been cultivated without any infringement on the environment," Andreas added. "There's plenty of capacity to make food."

See, there are hundred of millions of acres of land in Brazil suitable for farmland development. All we have to is convert some more of that pesky jungle floor and savannah into soybean and corn fields.

Aren't you glad we have people like that directing energy policy in this country?

Tuesday, February 06, 2007

Red Kite is talk of the town

An interesting article from FT.com centers on well known hedge fund, Red Kite, and its influence over the metals markets.

The fund, and its leading investment managers, have been the subject of some talk lately as market participants are wondering how badly it has been hit by recent declines in copper and zinc.

Excerpt from FT's article, "Red Kite buffeted by heavy winds":

On Friday, the copper price dropped about four per cent and zinc prices fell more than nine per cent. Much of this fall was attributed to fears of heavy losses suffered by Red Kite, which has offices in London and New York. Ever since Amaranth and MotherRock imploded last year on taking the wrong bets in the US natural gas markets, commodity markets have been waiting for the next fund blow-up.

Red Kite was reported by the Wall Street Journal to have lost 20 per cent from the start of the year until January 24. That compares with a six per cent loss suffered over the whole of last month by the basket of base metals on the London Metal Exchange.

Red Kite refused to comment but one investor in the hedge fund, who did not want to be named, said: "There is no surprise that they (Red Kite) lost money last month; everybody did because metal prices fell heavily. There may be a bit of schadenfreude towards Red Kite because they were one of the best performers last year," the investor said.

Lot of info in this piece, with a nice bit of personal color and hedge fund history added. Two of the funds mentioned in this piece, Red Kite and Dwight Anderson's Ospraie, were also highlighted here in last fall's post on commodity-focused hedge funds.

The Single Best Investment

Be sure to check out Financial Sense Newshour's recent interview with author and investor Lowell Miller, who discusses the investment philosophy behind his latest book, "The Single Best Investment: Creating Wealth with Dividend Growth".

Lots of useful insights for the individual investor, especially those looking to produce stable income and capital growth for retirement. You'll hear a lot of (un)common sense discussion related to protecting your money from the ravages of inflation as well.

Very important points to consider, but exactly the ones that are often overlooked or distorted in a lot of the mainstream financial media's portrayal of these issues.

See the link above to take you to the interview.

Mark Mobius Q&A: Emerging markets

Mark Mobius, Franklin Templeton's famous globe-trotting investment manager, has participated in a recent Q&A session on emerging markets investing over at FT.com.

Mobius answers readers' questions on the investment outlook in a number of countries and he also responds with comments on a few of his current favorites. Everything from investing in Pakistan to the re-nationalization of industries in Russia and Latin America is discussed in this online Q&A. Check it out.

Monday, February 05, 2007

Bush seeks $2.9 trillion budget

"We've got to spend our way to prosperity. Plus, I want to get me one of those diamond encrusted space shuttles."

The New York Times reports that President Bush has sent a proposed $2.9 trillion budget for next year over to Capitol Hill, "where it is certain to be sharply criticized by the Democrats, who control both houses but are by no means all powerful".

Yes, I'm sure it will be criticized by the Democrats. But not entirely whittled down. I mean, have you ever seen a modern era U.S. government hold back the uptrend trend in spending and government enlargement? It will never happen, for reasons aptly described by Harry Browne in the book, Why Government Doesn't Work (a book which I'm finally around to reading and I highly recommend).

Far more likely that the Democrats will flaunt their disapproval in print and on TV, settling, in the end, for a modest cut in the proposed figure. Something more reasonable: say a sum of only $2.65 trillion.

Meanwhile, the focus will shift to an argument over how to spend that money when the budget is passed. The Democrats will probably argue for a wellness and meditation center in Iraq, while House Speaker Nancy Pelosi could spark an idea (inspired, in part, by "a really cool NPR report on biofuels") for a large scale ethanol plant powered by Malaysian palm oil.

To update the old saying: A trillion here, a trillion there. Pretty soon you're talking about real money.

Saturday, February 03, 2007

Matthew Simmons on Bloomberg

The Oil Drum has posted a recent Bloomberg interview clip with Matthew Simmons to their site.

In it, Simmons (chairman of Simmons & Co. International and a prominent spokesman on the issue of "peak oil") warns that the world faces a shortage of oil supply and action must be taken immediately to mitigate the situation.

As Simmons sees it, we may have reached peak production of oil supply and we need to start dealing with the question of how to cope with shrinking production numbers. In other words, how do we respond to a world in which crude oil supplies are dropping (from say, 85 million barrels down to 70 million barrels) at a time when most people are expecting supplies to increase?

There was a bit of confusion when, during the interview, Simmons made the point that some global consumers are already paying an effective price of $300 barrel oil in finished products. The interviewer seemed to interpret this as a directional call for $300 barrel oil.

While I'm sure that Simmons would not back away from a longer term forecast of triple digit crude oil prices, I don't know that he meant to give the impression he was making a price forecast. See comments in The Oil Drum's thread topic for more on this.

Friday, February 02, 2007

Money, banking, and the Fed

Thanks to Mises.org for posting "Money, Banking, and the Federal Reserve" to Google Video.

It's like the cool educational video you never saw at summer school.

Have a look, and if you find it informative and interesting, forward this link on to a friend. See the "email post" icon at the bottom of this post.

Thursday, February 01, 2007

Hits from the Drum

Yesterday we talked about advances in solar power and the recently heightened profile of renewable energies due to increased adoption by business. Today I wanted to share some recent articles and post topics from a very interesting site, The Oil Drum, that will provide some background and insight on a wide variety of energy related topics.

Alternative energy, fossil fuel depletion, and sustainability: it's all covered here. Whatever your grasp of these issues, I can assure you that you'll find some interesting perspectives and probably learn something in the process. Just be sure not to get lost in the often long-running comment threads!

In, "Key Questions on Energy Options", Oil Drum member and contributor Robert Rapier lays out the key questions we must answer to determine whether an energy source is a good choice for our planet. Here is how Robert lays out the issue:

A question was recently posed here: What is the most important question concerning ethanol production? That got me to thinking about important questions regarding not only ethanol, but all of our energy sources. There are a number of issues that we must carefully consider for any of our potential energy sources.

In my opinion, they are:

1. Is the energy source sustainable?
2. What are the potential negative externalities of producing/using this energy source?
3. What is the EROEI?
4. Is it affordable?
5. Are there better alternatives?
6. Are there other special considerations?
7. In summary, are the advantages of the source large enough to justify any negative consequences?

Give the thread a read and see what Robert and the gang have to say about the various forms of ethanol, fossil fuels, biodiesel, biomass, wind, and solar. An informative essay.

Moving on from Rapier's discussion of suitable energy options, we find a directly related example case of disastrous energy planning in Dave Cohen's post, "Palm Oil - The Southeast Asia Report".

We've discussed the oft-neglected environmental impacts of biofuels here before. In Cohen's recent post, we learn more about the ill effects of palm oil plantation farming and the ensuing damage done to the local ecosystems and the environment.

Peak oil and farming? Yep, that's the subject of Chris Vernon's recent post to The Oil Drum: Europe. In "Agriculture Meets Peak Oil: Soil Association Conference", Vernon tells us about agriculture and food distribution in the post-fossil fuel era. Check it out.