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Known Knowns: Taking Stock of Recent Data Points in Oil

Position: We are long oil via the etf, USO

“There are known knowns. These are things we know that we know. There are known unknowns. That is to say, there are things that we know we don't know. But there are also unknown unknowns. There are things we don't know we don't know.” –Donald Rumsfeld


Oil opened down sharply this morning on the back of newly released projections for global oil demand from the International Energy Administration.  The IEA cut its world demand for oil by 1MM barrels a day, down to 84.5MM barrels, which is down 2.8% y-o-y.  The bulk of this decline comes from the OECD, which the IEA predicts will see a 760K barrel decline in demand y-o-y to the 45.2MM barrel level, which is down 4.9% from 2008.  The non-OECD, or emerging economies, are projected to use 38.3MM barrels per day, down 0.1% y-o-y.


Obviously, IEA projections should be considered a lagging indicator as the economic information that underscores their projections is well known.  That said, given the rapid rise in the price of oil over the last four weeks, and the positive increase year-to-date, the commodity is obviously vulnerable to bad news.


These newly revised projections from the IEA coincide with some recent negative data points in the U.S. relating to the oil market.  First, in its “This Week in Energy” update the Department of Energy stated:


“Consider just gasoline and distillate, which together represent over 70 percent of refinery output from crude oil. Energy Information Administration weekly data indicate that for the first quarter, demand for these two products fell more than 3 percent in total, (with gasoline declining 1.5 percent and distillate demand falling 6.7 percent). Distillate demand, which is mainly driven by heavy-duty trucking, has been hit hard by the slowing economy.”


In the same report, the DOE reported days supply nationally of petroleum products, and for the second week in a row it came in at 25.4 days, which was more inventory than expected and an increase of 14.9% y-o-y.  This inventory build is not surprising given the aforementioned decline in demand, but will be concerning if we do not see the drawdown in gasoline this summer in the driving season.


The data points above are coincident with a front page article on the Wall Street Journal today, entitled: “Oil Industry Braces for Drop in U.S. Thirst For Gasoline.”  The basic premise of the article is that demand for gasoline in the U.S. may have peaked due to a combination of more fuel efficient cars, increased use of ethanol based fuels, and less overall commuting by Americans.   In the article, Scott Nauman, Exxon’s head of energy forecasting, predicted that “U.S. fuel demand to keep cars, SUVs and pickups moving will shrink 22% between now and 2030.”  This is meaningful since “transportation” in the U.S. accounts for 2/3s of all oil use.


While the data points above are new, the question is whether they are actually incremental, or as Rumsfeld said, are these datapoints “known knowns.” The Oil market has shaken off negative fundamental data points consistently year-to-date and is now trading off the lows of the day despite the lowered expectations for global demand from IEA this morning.


Obviously, the question we must ask ourselves—to once again borrow from Rumsfeld—what are the unknown unknowns that may be currently sustaining oil prices well above prior lows? Is it massive money supply growth globally? Heightened geopolitical risk implications? The likelihood is that there are a number of drivers, most of which will only be known after the fact.


In the aforementioned Wall Street Journal article, China is also noted as a region of long term growth of oil demand.  Longer term, the Client (as we like to call China) may in fact be the dominant factor.  While headlines and articles about Chinese energy demand were rampant during the heady days of $140 per barrel oil, they are now largely non-existent, even though the long term demand implications from China have not changed. 


Currently, there are 250MM registered cars in the United States, which equates to cars per capita of ~0.83.  China may never get close to that number, but at a current population of ~1.3BN people and only ~57MM registered vehicles on the road, or 0.04 per capita, the Client obviously has a long run way of growing energy demand, in just the transportation segment.  Ultimately, as always, price rules.  As of now oil is largely looking past short term bearish data points and seems to be, once again, endorsing the longer term bullish case, even though this investment case is absent from the headlines.


Daryl G. Jones
Managing Director

Squeezy The Shark: SP500 Levels, Refreshed...

Today is one of those days where there is a whole lot of nothing to do. My Partner, Rebecca Runkle, labeled it “The Calm Before The Storm” in her Technology note this morning, and that is exactly what this feels like.


All the while, the most important move today is the US Dollar breaking down through what I have as intermediate TREND line support. With the USD Index down -1.1% on its lows for the day, the SP500 is threatening to go green on the day. REFLATION remains a powerful force – one that remains somewhat misunderstood.


With today’s recovery from the opening lows, we have ourselves higher lows – this is, of course, another bullish indicator. I see no upside resistance until the dotted red line in the chart below at 868.


There is a very short term momentum line that is baking itself into this short squeeze cake at 830 SPX (dotted green line), and underneath that remains Squeezy The Shark, who is challenging anyone in the short selling community to press shorts on the way down to 821.


Keith R. McCullough
Chief Executive Officer

Squeezy The Shark: SP500 Levels, Refreshed...  - SPX


Gushing Chinese Credit...

Credit is flowing rapidly in China as Beijing gets growth back on track, creating positive momentum…


Media interviews of Wen Jiabao reportedly conducted in Thailand prior to the cancellation of the ASEAN summit this weekend outlined the bullish case for the Chinese economy, with the premier confidently cataloguing signs that expanding credit and stimulus projects have started to fuel a rebound in industrial demand. At +38% YTD, Chinese stocks shot to new 2009 highs on the “news”.


Increased credit liquidity flowing from the People’s Bank of China (PBC) has been a critical foundation for Beijing’s recovery plan. All signs indicate that this loosening has had a rapid and massive impact with PBC new loans increasing by 1.89 trillion Yuan in March and Friday’s M2 release showing an increase of 25.43% Y/Y for the same period.


PBC leaders now find themselves balancing the political pressures to help fuel a rebound in growth with a practical need to avoid any further increase in non-performing loans.  This tightrope is underscored in the awkward language of the PBC’s press release this week in which they pledged to continue to “implement moderately loose monetary policy and maintain the continuity and stability of policy”.


Officially, non performing loans accounted of under 2.5% of the total on the books of the major commercial banks in Q4 of last year, but as we noted in our note on April 3rd (“Ticking Time Bomb?”) the rising use of “special mention” classification for troubled loans and the restructuring of the Asset Management Corporations have muddied the picture so much that it is impossible to ascertain what the true percentage of loans that are non performing is.


The critical factor in preventing a bubble as credit expands and works through the system will be regulation –which has been an Achilles heel for the Chinese financial system. Up to now, reform of the financial system has been carried out cautiously and gradually as the desperate need for better controls for smaller banks has been balanced against political measures designed to protect more fragile institutions and to prevent competition. As such, although the banking system has evolved and made progress there are substantial bank vulnerabilities that remain. Even after the reforms instituted after bad loans reached nearly 20% of those on the books at commercial banks in 2004, the Chinese financial system still lacks the fundamental ability to efficiently allocate credit through the economy, making this sudden flow of credit a source of great risk. 


In the near term we are confident that the stimulus provided to the Chinese economy by this massive liquidity event will have the desired effect and drive rebounding internal demand. On the horizon however, we will be carefully watching developments in the opaque banking sector there for any signs of trouble.


Andrew Barber


Gushing Chinese Credit...  - leck1

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Japanese Yen: We're Negative...

Summary investment conclusion


We are negative on the yen from a quantitative perspective with current Yen trade convictions include a sell TRADE level of 101.75 and a Sell TREND level of 106.88 with no anticipated support above 98.21.


From a fundamental perspective, Japan policy makers, as we outline below, really have no choice but to aggressively implement a weak Yen policy.




Media reports this morning predicted that the third stimulus program, which will be unveiled on Friday by Prime Minister Taro Aso, will total more than 15.4 trillion Yen as Aso and his LDP colleagues respond to the continuing downward slide in the Japanese economy and their plummeting approval ratings. With September elections looming, the public reception of the stimulus will be critical as it moves to the opposition controlled upper house for approval (it took nearly four months to pass the previous plan). The Japanese politicians face a problem common to their counterparts across the globe, not implementing a large enough stimulus package, fast enough to arrest a substantial economic contraction driven by concurrent external and internal factors of a magnitude not seen since the Great Depression.


Recent Background: Equities & the Yen


The relationship between the Yen and Japanese equities is uniquely interdependent due to the overlapping importance of export industries and the heavily concentrated equity exposure of the Japanese banking system. As such, the relationship is a two way street, with the yen showing a greater sensitivity to domestic equity market valuation than any other major economy’s currency.


Japanese Yen: We're Negative...  - f1


In January Finance Minister Kaoru Yosano announced that the government would inject liquidity into three regional banks to the tune of 121 billion ¥ and the option of direct purchases in the equity markets to arrest the fall in the Nikkei 225, which had tumbled to a 26 year low. This announcement came on the heels of  a proposed 100 billion ¥ preferred share purchase in three banks announced in December as part of a program to inject as much as 12 trillion ¥ into domestic banks in an effort to provide liquidity to the banks with the objective that they will extend credit to prevent corporate bankruptcies. In The wake of these announcement the equity markets continues to slide in the face of strengthening Yen.


It was only the initial announcement of the third stimulus program in March, combined with an increase in the BOJ program of Purchasing Treasury bonds, which reversed the equity markets slide. Since the second week of March the Nikkei had rebounded by more than 25% and the yen simultaneously weakened as this “shadow quantitative easing” helped inspire greater confidence in future export prospects and asset allocation eased upwards pressure on the Currency in turn.


Conclusion: Only One Path Out


The new stimulus program is heavily weighted towards inducements for increased domestic consumption. The prospects of reversing the savings trend and inducing the consumers back into market in the face of rising unemployment do not look promising. The Economic and Social Research Institute’s (ERSI) consumer confidence index continued its modest upward trend in February, rising to 26.7, incrementally higher than January’s 26.4 index but still hovering near the survey’s lowest reading on record, of 26.2 in December. Surveyed households, asked to provide their outlook, six months forward, of the four categories in the survey; overall livelihood, income growth, employment, and willingness to buy durable goods, registered levels showing that perceptions of income growth and employment continued to decrease for the month. With registered auto sales declining 32.4% Y/Y for March, the stimulus plan provisions for hybrid rebates seems particularly anemic –with prospects of making up the difference in domestic sales unlikely, let alone the drop off in external demand.


Prospects for the other major source of Japanese economic activity, exports, continue to look grim in the face of decimated North American and European demand. On an absolute Yen basis February exports, while a marginal improvement over January, still registered at levels lower than any pre 2009 figures since August 1996. Industrial production contracted by 37.66% Y/Y in February following months of extreme contraction in output as well as shipments and capacity utilization.


Japanese Yen: We're Negative...  - f2


The the modest uptick in machinery orders for February reported by the cabinet office today: up 1.37% M/M and -30.21% Y/Y ( a sequential improvement over January), seem to be an unconvincing sign of a bottom in production prior to confirmation by March export data.


Even is the stimulus program to be announced on Friday does accomplish increased in internal conumption, the heavy weighting towrads tax incentives and other government reveues rather than direct monetary injectiosn leaves a strong perception that the cupboard, at last, is bare. Japanese government leaders are now operating with the fact that any ability to implement more fiscal stimulus is restricted by a debt burden now estimated by the OECD at approximately 197.3% of GDP for 2010. A large and growing fiscal deficit, coupled with large sovereign debt obligations and credit agencies reeling from the ongoing perception of their ineptness, leaves us with the conclusion that the impact of increases debt levels going forward on Japan’s sovereign credit rating must be .


Taking all of this into account, the only logical policy left open to the Japanese government appears to be the pursuit of a weaker Yen despite all negative consequences.




As tactical investors, we balance our fundamental view with a quantitaive approach to near term market positions. Our current Yen trade convictions include a sell TRADE level of 101.75 and a Sell TREND level of 106.88 with no anticpated support above 98.21.


Andrew Barber


Japanese Yen: We're Negative...  - f3

Where There’s Smoke… Notes for the Week Ending Friday, April 10, 2009

Breaking the Buck

Reeling and Writhing, of course, to begin with, and then the different branches of arithmetic -- Ambition, Distraction, Uglification, and Derision.

  - “Alice in Wonderland”


Andrew Donohue, Director of the SEC Division of Investment Management, addressed the Practising Law Institute this month.  Points of interest from his talk include the statistic that “The mutual fund industry…” with over 8000 funds, “is one that approximately 92 million investors have entrusted over 9 trillion dollars to.”  Donohue acknowledged the broad diversity of strategies and objectives, yet found it “surprising” that the divergences of performance have been so wide within sectors.


“For example, in the bond fund area, while the average high yield bond fund lost 26 percent on average, the range of performance was plus 7 percent to minus 78 percent. Similarly, with national tax-exempt bond funds, while the average fund lost almost 7 percent, the range in performance was from plus 6 percent to minus 49 percent.”


Sounds like the return from a mutual fund might be no more reliable than what you have been getting from your stockbroker, or from (gasp!) Jim Cramer.  “What”, asks Donohue, “is the value proposition in taking on the risk for this variance in performance?”




Interviewed in this Sunday’s New York Times Business section (“He Doesn’t Let Money Managers Off The Hook”), John C. Bogle – founder of the Vanguard Group and the Yoda of the managed funds industry – raises the issue of just how irresponsibly the mutual funds industry has discharged its fiduciary duty to the – did you read that number? – ninety-two million investors who collectively have entrusted them with over nine trillion dollars.  America, these are seriously big numbers.


The SEC has so far escaped criticism in the area of proxy voting, but that may change.  Donohue may not be aware of how large a mess has been swept under his Division’s carpet.  But he lifted the corner of the rug in his PLI address, so he is now Fair Game.


Hedge fund and mutual fund managers devote many pages of their compliance manuals to the procedures for proxy voting, and an entire industry has grown up to handle the proxy process for professional investors.  There is a small subset of managers who engage directly with the managements of companies in which they invest.  They are called “activist” managers, and there is something gamey, rough-and-tumble and perhaps not quite White Shoe associated with the moniker.  They hire lawyers and say nasty things at shareholder meetings and launch proxy fights.  Many managers state simply that they simply divest themselves of holdings in companies whose managements they are not prepared to back.


In fact, as reported in the Financial Times (6 April, “Mutual Fund Votes Helped To Boost Pay”) mutual fund managers have been major contributors to excessive executive pay in public companies.  According to the FT piece, “AllianceBernstein, Barclays Global Investors, Ameriprise, and Bank of America’s Columbia Management were the most consistent backers of management proposals to increase executive pay…”  The article reports that “In 2008, the 26 mutual fund groups included in the study voted in favour of management compensation proposals 84 percent of the time…”  One should not require the benefit of 20/20 hindsight to observe that this is an unconscionable record in an abysmal year.


If you are “professional” investor, and you do not engage with the management of the companies in your portfolio, then in what does your professionalism consist?  Are the thousands of managers running the thousands of mutual funds nothing more than a legion of Educated Guessers armed with such fearsome weapons from the arsenal of Modern Portfolio Theory as the Capital Asset Pricing Model and the Dividend Discount Model?  Indeed, they have led their investors lemming-like in a charge across the Efficient Frontier and into a never-never land of smoke and mirrors wealth. 


The President of the United States steps up as Mutual Fund manager-In-Chief and fires the CEO of a company in which he has taken a major stake with his clients’ money.  Should we demand any less from those Harvard MBAs and MIT PhDs to whom we have entrusted our trillions?


Donohue next said “the review of the money market fund model and its regulatory regime is one of our top priorities in the Division of Investment Management this year.”  Noting that there is some $4 trillion invested in money market funds, Donohue said the standard money market model has come under stress in the past 18 months, and investor protection concerns warranted a fresh look. 


Using a graphic real-life example, Donohue questioned whether the notion of a $1 net asset value (NAV) should be reviewed and suggested that a $10 NAV or a floating NAV may address some of the problems associated with the current model. Donohue showed how, under current rules, an investor may be paying one dollar a share for shares whose actual NAV is $.9960 – taking an immediate unrecorded loss on their investment.


This effect is exacerbated by professionals who understand the money market funds’ regulatory structure.  The rules permit a 50 basis point (one half of one percent) fluctuation in NAV before the fund has to declare a NAV change.  In Donohue’s example, the big players withdraw 25% of the cash in a money market fund in a single day.  It is all paid out at the stated NAV of one dollar, when the actual NAV is $.9960.  The resulting imbalance, after the 25% drawdown, leaves the NAV at $99.47.  Under the current rules – did you guess right? – the fund must now Break the Buck and state its NAV at 99 cents. 


Fifty basis point tolerance.  Above half a cent, round up to the dollar.  Below half a cent, round down to $.99.  Thanks for playing.


For most retail investors, the real news is that money market funds are not banks.  They are investments, and they entail risk.  This is why the regulatory agencies require individuals who recommend money markets to investors be Series 7 Registered Representatives.  As with so much else that has emerged in the recent collapse of the global financial system, the big surprise came at the margin, with the once-in-a-century meltdown.  Your dollar is not guaranteed to stay at a dollar.  Who would have thought?  So in Whom do we trust? 


Donohue mentioned the idea of having money market funds state NAV at ten dollars per share.  Keeping the half-cent tolerance, this would make fluctuations in share value much smaller.  In the world of equities we call this a Reverse Split, and it ends badly.  Call us simple stock jockeys, but Donohue’s trial balloon looks to us like simple inflation.  It says that there is so much money in the system that we can no longer denominate our dollars in dollars.  Welcome to the Weimar Fund, where NAV is stated in wheelbarrows full of hundreds.


While we recognize the desire to address this situation, merely applying an orders-of-magnitude upwards ratcheting still leaves the fundamental issue unaddressed: investors always thought their money market fund dollars were going to be worth a dollar.  Moving the NAV marker up tenfold seems to buy time, without creating fundamental change.


Another matter Donohue touched on was leveraged ETFs that are marketed to investors as professional-style tools for capitalizing on moves in market sectors.  Anyone who bothers to apply basic arithmetic will quickly spot the risks, but most people, guided by their investment professionals, do not bother to add, subtract, multiply and divide before they invest.


A fund that promises 200% of the upside of a market index will use leverage to obtain that return.  When the sector goes down, the leverage exacerbates the downward move of the fund, which then must work orders of magnitude harder to recover.  It’s simple arithmetic.  A 25% down move requires a 33% upwards move to recover back to even.  Down 50% requires up 100%.  And so on.  When your investment is leveraged – and driven by the compounding factor of daily pricing – one quickly gets so far behind that, even with the indexes charging ahead, recovery is well nigh impossible.  Donohue referenced an instance of an index being up fifty percent, while the accelerator fund that tracked it, because of negative returns during the fund’s early stages, was down 21% during that same period.


In a snip of a story that, apparently, no one thinks is related, the SEC Division of Trading and Markets has permitted Legg Mason to stop sending monthly account statements to customers whose “only” transactions were reinvestment of dividends in money market funds underwritten by Legg Mason itself.  The reasoning is that, since the specifics of the funds are available on the internet, it is no longer necessary to send out a piece of paper.


Do we mistrust Legg Mason? Not in the slightest, though we have a less sanguine opinion of the SEC.  The bias towards Disclosure By Availability, and away from making the investor engage, feeds into the continued domination of the markets by those who create and sell product, and away from beefed-up protection for those who consume product.


Until investors are forced to face the reality of the marketplace, regulators will remain ineffective.  Who benefits from the write-up of money fund assets?  Is it the investor?  Or is it the fund managers, who will not have to adjust the way they manage risk?  It looks to us like the regulators’ approach to increased risk in the marketplace is to give market operators more latitude, when what they should really be doing is giving investors more education.  The simple solution?  Make any broker who wishes to sell products to investors take an investor-safety course.  Better yet, make the customers take it.


Motive, Means And Opportunity
European insurance companies…

- Sir Alan Greenspan

Lloyd Blankfein, CEO of Goldman Sachs, held the floor on the global stage last week for the very best possible reason: because he could.  For all the cynicism – those who believe he was giving mere lip service to corporate responsibility – it is clear that Goldman has top-drawer risk management.   One need not be a die-hard cynic to recognize that true risk management consists, not in making risks vanish, but in getting someone else to take them on.


Thus, on the occasion of his knighthood, Alan Greenspan was able to smile serenely as he told his hosts that the European insurers had taken the beating on the implosion of derivatives, synthetic securities, and plain old common stocks that had come in the wake of the “dotcom” bust.


Thus, on the eve of floating a public offering that will finance their paying back the TARP funds (you didn’t think they were going to use their own money?) Blankfein has one of the few legitimate claims to the title of Last Man Standing.


We recommend that all our readers replay Blankfein’s speech.  Forget the big pink banner (no, fellow journalists, Blankfein was not “upstaged” by the giant pink banner reading “we want our $$$ back”).  The philosophical takeaway fits with what we perceive as President Obama’s view on market regulation.  By retooling compensation across the board, Blankfein is suggesting a significant duration shift in Wall Street’s outlook.  The change from instant gratification, to long-term greed, is likely a very healthy notion, and certainly one whose time has come.  It used to be the way of the world, until technology partnered up with greed and allowed local petty thieves to morph into Robber Barons.


The Obama Administration appears to be pushing for longer-term perspective in the marketplace, and the regulatory structures they are putting forward are part of this outlook.  SEC Chairman Schapiro’s proposed reforms are generational changes, in that they will not truly take hold until much of the existing Old Guard has been flushed out of the system.  We think the industry is also being pressured to change its outlook.  Goldman Sachs is driven by the profit motive, while regulatory agencies are driven largely by the desire of vast armies of ineffectual employees to keep their jobs and pensions.  We take it as no coincidence that Blankfein’s perspective dovetails with much that emanates from the new Administration. 


Look to Wall Street to take the lead with major changes in the marketplace.  It is the only player that can, and it has every reason to do so.  Where Goldman Sachs leads, the SEC will, perforce, follow.


iShared, iSaw, iConquered
The hurrieder I go, the behinder I get.


We admit to being conspiracy theorists, and we like very few things as well as a juicy story that connects the dots and emerges with a sinister global cabal. 


Our latest offering is a two-way cabal: it has a major market player perpetrating an apparent fraud on the world markets, and the fraudster itself stands to be dealt a crippling blow by a counter-fraud that lurks like a depth charge in its path.


Barclays Plc has given the markets two things they have been hungering for: a Really Big Loan from a Really Big Bank, as well as a Really Big Profit Number for a Really Big Company.


This week, Barclays announced that CVC is the winner of the bid for its iShares operation.  The purchase is being funded with one billion dollars in equity, and a $3.1 billion loan, issued by none other than Barclays itself.  This will be a relatively simple transaction.  From a logistical point of view, Barclays will simply convert the loan into a revenue number.  In anticipation of the profit it stands to book, Barclays shares rose significantly in last week’s trading.


The details – where the devil is said to lurk – include half a billion dollars to be paid later, based on a projected high level of profitability of the operation for its new owners.  (We think the wording is “if, and only if…”)  Also, for some reason that is perceived as boosting the credibility of the deal, Barclays has undertaken to hold the loan on its own books.  Some have speculated that the loan might be difficult to syndicate, while others – more cynical? – posit the reason is that Barclays will have to make some rather ugly concessions, as the iShares business is not as profitable for its new owners as it was for the Bank.  We add to this the notion that, as the business starts to unravel under the stewardship of CVC, no one wants to see a troubled $3.1 billion loan spawn an untraceable daisy chain of CDS betting against it.

But wait.  What’s this? 

Chinese company LIMMT Economic and Trade Company Ltd., was sanctioned in 2006 by the U.S. Department of the Treasury for providing material support for Iran’s missile program.  Now Manhattan District Attorney Robert Morgenthau has announced a 118-count indictment against the company, alleging the LIMMT sent and received dozens of illegal payments through U.S. banks in the two years after the OFAC sanctions were imposed. 


These payments, made through alias accounts and shell companies, were facilitated by some of the biggest names in global banking.  Prominent among them are Lloyds TSB Bank Plc, Credit Suisse, and Barclays.  These banks were themselves said to have illegally – and possibly knowingly – structured payments from Iran in such a way that the US counterparty banks could not tell their true point of origin. 


Dozens of illegal transactions were allegedly processed through Bank of New York Mellon, JP Morgan Chase, Wachovia, American Express, and Citigroup.  Our experience in the world of anti money laundering compliance is enough to tell us that US domestic entities have the right to rely on other financial institutions, if those counterparties are, themselves, subject to a recognized AML regime.  Thus, while we suspect the story is far from over, the U.S. banks have so far not been charged with wrongdoing.  Bloomberg.com (7 April, “Chinese Firm Indicted For Misusing Banks, Aiding Iran”), quoted Morgenthau as saying “Our banks have high standards and sophisticated systems to stop these transactions, but this conduct was specifically designed to defeat their systems.”


Morgenthau achieved a $350 million settlement with Lloyds TSB Bank, announced in January.  Credit Suisse and Barclays have both said they are cooperating with Morgenthau’s probe.


And if they don’t?


We wonder what part this deceit played in the US’ recent attack on Swiss bank secrecy.  We think the US Government would consider it wholly appropriate to strong-arm the government of Switzerland to open up its banking sector to scrutiny, once the Iran / China connection came to light.


We have been watching developments in the ETF markets, and we still believe there will be a regulatory comeuppance for their issuers.  The Senate has not finished with efforts to rein in speculation in the commodities markets, where much of the ETFs are based, and legislative attempts to place similar restrictions on the equities markets may be in the offing.  Remember, SEC Investment Company Division Head Donohue just spoke to the PLI about the broad disparity in ETF performance.  Could he be testing the waters for new regulation?  Have you ever known a regulator to show up on the rubber chicken circuit for anything else?


Last week, we theorized that the iShares transaction might be a way for the US to exert pressure on Luxembourg to prevent tax fraud, bringing them in from the cold.  This week, the picture gets bigger, better, and more connected. 


Barclays may simply be raising a bundle of cash the best way it knows how, in anticipation of writing a very large check to Mr. Morgenthau.  But there is a rub – indeed, more than one.


First, there is always the likelihood that the deal collapses on its own.  We detect a note of panic in the fine print surrounding how, and on what basis, Barclays actually gets its money and is able to get rid of the gigantic loan it has self-guaranteed.


Failing that, we are left with the following scenario: a major global bank which defrauded the US banking system has put up $3 billion of its own money in a self-guaranteed loan to a private firm in a country suspected of being a haven for tax fraud.  The bank has done this in order to book a quick profit – which it can report, but not spend, as it is still far from being actual money – in hopes that it will not have to dig deeper into its own pocket to bail out the buyer when serious regulatory problems blow up in their face.


Just speculating, folks.  But remember: you read it here.


Moshe Silver

Chief Compliance Officer


State of Emergency: Thailand...

The eighth largest economy in Asia is teetering on the brink of anarchy, again…

The Baht swooned in trading overnight as Thai royal army units reportedly fired hundreds of live rounds into crowds of pro- Thaskin protesters in Bangkok streets, falling to levels below .0281 per USD earlier today -a decline of more than 2.6% YTD.  


For the Abhisit administration the past five days have been a series of humiliations.  Over the weekend the ASEAN summit was canceled due to the protests –including a special meeting that was to be led by Chinese premier Wen Jiabao to discuss the Yuan denominated swap program which has already been implemented in Hong Kong and is slated to begin for ASEAN members to help prop up regional liquidity.  Meanwhile, comments from Moody’s analysts indicate that the deteriorating political situation may lead to a downgrade on sovereign debt ratings in the near future.


For Thailand’s major trading partners, the potential for interruption of production and transportation is more pronounced than productivity lapses during protests last year due to the more volatile profile of the current unrest. Official news agencies have reported that the military is securing ports, airports and rail stations to prevent disruptions; we will provide updates if we secure any information regarding specific productivity impediments.

State of Emergency: Thailand...  - cheche1


We do not have an investment opinion on the Thai markets currently, but would encourage any subscribers that have exposure there to contact us with specific questions.



Andrew Barber

State of Emergency: Thailand...  - che2