Shipping

The Baltic Dry Index is an index that tracks shipping costs and, in the short term, is a good approximation for trade volumes, seeing that shipping supply is relatively fixed in the short run. Is this a first time of trade at least picking up again after having deviated soooo much from the trend and now reverting? I'm aware that there's no shortage of wanting to find signs of recovery, i'm just finding it interesting.

After looking a little bit I find a comment from one of the independent research houses to whom we subscribe on just that topic. Trusted Sources says:

"The recent rise in freight rates for dry bulk commodities has sparked misplaced optimism that Asian demand is picking up and that global trade is rebounding. The higher rates are due only to a limited recovery in iron ore shipments from Australia and Brazil to China and therefore do not signal a broad return to robust consumption. Freight rates, which are down more than 90 per cent from their highs last year, will not see a sustained recovery until the oversupply in the shipping market is absorbed or dissipates via contract cancellations or outright scrapping.

As our trusted source notes, the market has yet to hit bottom and dry bulk fundamentals do not point to a recovery in freight rates this year. The turmoil in the shipping market – with firms going bankrupt, broken chartering arrangements, newbuilding order cancellations and delays – means that, at least over the next year, freight rates will be less an indicator of underlying commodity demand than a reflection of the continuing shakeout in the industry."

That'll be the day....

Wow!

Reuters: US AND UK "AAA" RATINGS "BEING TESTED" BECAUSE OF SHOCK TO GROWTH -MOODY'S

My friend Priya seemed really alarmed by this... due mostly to a misunderstanding where she thought this was for corporates. Which led to the following fun exchange:

me:
"I'm not sure how much impact a downgrade of treasuries would have on the
corp CDS market. A little for sure but... I don't think much else. And
Treasuries are held mostly by sovereigns (as reserves), I think, and I
don't think they care particularly what moody thinks. Plus, as the
Chinese have pointed out, you don't have much else of an option. What're
you going to hold, sterling? Bund auction failed yesterday so that
doesn't seem too smart to hold either.

Imagine US treasuries got downgraded? I mean, makes sense but..."

Pri:
"the chinese are in for deep trouble!"

me:
"Well yes and no. I mean... they can afford to just keep holding those Treasuries till maturity so they're not _actually_ losing money. In the meantime, as Treasuries trade down they'll "lose" reserves (b/c the T-bills they hold trade as less) but as we move closer to maturity those same T-bills will trade back to par. And I don't think they care _that_ much whether they 'lose' a few billion b/c of what essentially just amounts to mark-to-market accounting. Unless, that is, the US is insolvent in 30 years and can't pay anyone back and also not get new debt, hahaha, errrr...."

Fwd: Landon Lowdown: Bernanke drops a bombshell

I got this this morning:

----- Original Message -----

from Ken Landon, J.P.Morgan Strategy, NY (Feb 10)

This did not come across Reuters or Bloomberg, but Fed Chairman Bernanke just stated during Congressional questioning that any firm that participates in TALF will be held to all the restrictions imposed on TARP recipients, including compensation limits. He said that firms will be audited to make sure that they comply with heightened restrictions.

This will be another confidence killer.

Kenneth Landon, Feb 10, 2009


This is a bit of an illustration how financial mkt ppl think about these things a little differently from many other ppl I know. Most ppl would probably say "yes, if you participate in TALF (a gov't lending facility that is supposed to shore up the asset backed securities market) you should take restrictions" whereas this guy seems to think that "dude, if you put on all kinds of restrictions for companies and we can't see ex-ante what they are... people aren't going to value a stock like that. B/c for example the gov't could just at some point come and restrict your dividend that you're supposed to get as a shareholder." (which is what they did... and there may be other things like that that they come in to do later.) I, for one, however, am not really concerned with equity markets but rather with recovery of the underlying economy. Equity markets will follow or anticipate this... they will reflect it in some way sooner or later. So in that way I really don't think Bernanke dropped a bombshell.

ahead of the second round of bailouts

Ahead of the second rounds of bailout Tim Geithner has this to say (according to Bloomberg): "Treasury Secretary Timothy Geithner said the U.S. financial system is badly damaged and needs more government help to avoid a collapse that could devastate an already battered economy."

As far as I remember that's exactly the same point Paulson and Bernanke made. It's true -- 350 billion haven't done anything so far apparently. The question then is why it would help now. To be fair, we don't know what the counterfactual is. Maybe we'd already be in default as a nation and in shambles as an economy without it. Will be interesting to see what Geithner has to say at 11.

Interesting...

Interesting. I just got a Bloomberg message from my sales coverage at Goldman and he suggests the following: "SPX Index Vol Idea: If you think the SPX will remain range-bound, think about putting on an iron fly. Selling SPX June09 850 straddle vs. buying a June09 800/900 strangle is a great trade. It profits if the SPX stays range-bound between 800-900. The risk-reward is attractive, with a potential payout of ~$44 and a max loss of ~$6."



Kinda fun to think about, seeing that I just said that that was my belief on Friday. Wonder if I should put my money where my mouth is and put some $$$ behind that. Now I'd just have to figure out how to put that trade on in my little E*Trade account, haha.

Question about Turkey and IMF note

I sent this to the EMEA economist at Merrill in response to a little ditty he put out today on Turkey and the IMF. It's sortof in the same line of my frustration with that channels and relative effects are never quantified in this business nor are they made explicit.


"Turker,

I read your note about what would happen if the IMF deal were to fail in Turkey, and I don't know if I completely understand your reasoning. In your last paragraph you say that no IMF deal means lower growth and a weaker TRY. While I agree with the latter I am not sure how your arguments imply the former.

You say that no IMF deal could be perceived as an unwillingness to clamp down on easy fiscal policy. But isn't, especially in a downturn, easier fiscal policy stimulative for growth? Additionally, the lower TRY would support the (admittedly small) export sector. The one channel through which I could see easier fiscal policy constricting growth is via (as you mention) higher rates crowding out investment. However, a) you argue in the previous paragraph that even as Treasury has borrowed strongly yields have refused to rise too much and retail investors as well as banks are still eager to move into bonds. Do you see this changing dramatically? and b) what do you think are the relative effects on growth of looser fiscal policy? Presumably even if 1-to-1 crowding out were to take place there would be no impact on growth, at least not in the short run (as private investment decisions would likely spur growth in the LT and government spending may take the form of consumption.) I'd be interested in your opinion.

Cheers,

Holger"

I'll keep you updated on what he says.

short-term

it really seems as if a whole lot of coverage on TV is extremely short term and not particularly useful. Just now they had a little snippet on CNBC where they said "S&P up 5% this week -- NASDAQ soars 7% this week." While that's true I have no idea how this is supposed to be useful. S&P was flat last week and the week before and was down essentially 5% the week before that and flat the week before that. In face, if you look at the graph, the S&P has been range-trading since beginning of December (range between 800 and 900, which admittedly is a 12.5% range. Ha, and right about now someone on CNBC talks aboutthis being a "bear market rally." I don't see this as a rally, I see this as the up and down and up and down along a flat line.

I stand by my earlier sophisticated technical analysis (see here, same graph as above). The S&P has been range-trading since December and barring major developments will probably continue to do so. It's only if it breaks out above 900 or below 800 that I will revise this view (from a technical perspective.) This, btw, is the theme we call "break-out or crap-out" internally.

Notes from Mexico conference

I attended part of the Mexican Housing Day here in New York this morning, mostly because the first two presenters would give background on the macroeconomic situation of the country. The first presenter was Finance Minister Agustin Carstens who gave a very good overview. Here are some notes I sent to my PMs.

Carstens first highlighted some negatives before illustrating reasons for optimism.


The Bad News:

- There has been a distinct downward revision in growth expectations after the Lehman collapse. - IMF forecasts shrinking trade levels for the first time in Mexico.
- Export growth collapses from 9% growth in Aug 2007 to -9% contraction in Dec 2008 – a severe downturn.
- Commodity prices are weak bringing down earnings.

The Good News:
- The downward growth revision in Mexico and other EM has not been as severe as in developed economies.
- The banking system is healthy and lending in Mexico is still expanding (although at a slower pace than over the past few years)
- Despite weak commodity prices, public finances remain strong: the budget is nearly balanced
- Debt as a % of GDP is decreasing
- Mexico has done a lot of work to shift its debt profile towards a longer horizon
- The good public finances have allowed Mexico to be proactive and, unlike in other crises, use countercyclic fiscal policy. These policies, although not as large as in the US, are commensurate with the stimuli other countries have enacted and he estimates the impact on GDP to be about 1 percentage point
- Inflation is under control and continues to come down, leaving room for easier monetary policy.


To me the most important points to me seemed to be that

a) the government this time is much better positioned to deal with a downturn than in other crises and has already demonstrated the will and the power to implement fiscal stimulus through the enactment of various programs.

b) The banking sector is not as vulnerable than in the US or Europe and continues to lend so we’re not seeing the same choking effect on companies via a freezing of credit markets.

All in all a pretty favorable assessment corroborating my view even though we would have to look into details to determine how much better Mexico is positioned than other countries.

I loved, btw, that someone else at the conference highlighted (highlit?) that once of the big advantages that Mexico has is that it is no stranger to crises, haha.

Initial jobless claims

Initial jobless claims are out this morning:

Actual: 626,000
Previous: 591,000
Consensus: 580,000

626 thousand new people went to the unemployment office over the past week. That, ladies and gentlemen, is what the recession looks like. What I don’t get is how with a previous number of 591K, the consensus was for 580K new unemployment claims. Who are these people who think there would be less unemployed this week than last?

Goldman's "skinny" (a comment they send out on most pieces of economic data) on this:

"BOTTOM LINE: Another jump in claims shows continued deterioration in the labor market (though not directly relevant to tomorrow's payroll report) while companies managed even larger gains in output per hour worked than expected from those who remained on the job."

I remember reading an op-ed or something by Krugman in 2002 or so on how the US got out of the last recession and "productivity" was sortof the key. And I remember him railing against the use of the term "productivity" when what the reality is that people are being scared into losing their job and those who don't lose it are made to work longer, harder hours. B/c it's not like some crazy total-factor-productivity-enhancing (you like that?) supernew technology came out all of a sudden that caused a spike in people's productivity. And basically it amounts to saying: "Work harder and if you don't you're gonna lose your job and you don't have any say in this. And those who don't lose their jobs need to pick up the slack." AND, obviously these situations are sticky. Just because the downturn is over doesn't mean that firms will revise down their expectations from workers.

The bad news: Looks like we have the same situation again and workers will be permanently placed under more strain again.
The good news: If it's worked (haha, npi) in the past maybe we have a way out of the recession. Maybe we won't even have to, as Obama suggests, think what we can do for our country, maybe that thinking will be done by our companies for us and all we have to do is do what they tell us to.

Compensation Caps

Obama and his Treasury Secretary Geithner announced compensation caps of $500,000 for the top five officials of companies accessing TARP funds. That makes a lot of sense to me. In grad school a big theme was that in order to work a policy initiative needs to be technically correct, implementable, and politically palatable (I think.) As it stands who knows if TARP is technically correct. In my view it almost certainly is not. But it is definitely _not_ politically palatable. I don't have better data but Bloomberg says that Goldman, Morgans Stanley, Merrill, Lehman, and Bear Stearns paid out $145 billion in bonuses from 2003 through 2007. It's obviously specious but let's just say that then on average they have paid out $145bn/5years = $30billion per year in bonuses. That means that of the $350bn in TARP money spent so far about 9% has gone to bonuses. This is extremely back of the envelope but people just don't like it when 10% of their hard-earned money is spent on bonuses for people who make pretty juicy salaries to begin with. So in my view the caps are a good idea to make TARP work -- apart from just being good taste.

Some further thoughts on these, however:

- The way the regulation is worded, as far as I'm aware, it's the top 5 people who are capped. My boss thinks that banks will get around this. He think the incentive is going to be very large for banks to say: "You know what, we've come to realize that a completely flat structure is best. From now on we are all vice-presidents here at Morgan Stanley."

- You can imagine a scenario in which a faltering bank does not take TARP b/c it would limit the top five people's pay. I mean, Goldman for example, said that they might actually give the TARP money back. There's principal agent problem, and I don't know if there are any mechanisms in place to solve it.

- As for the argument that, as Meredith Whitney of Oppenheimer said, a cap on compensation would lead to a brain drain in finance, there are three considerations:
a) I somewhat doubt that. A college grad, even one of the "best and the brightest" is not going to start at Goldman b/c maybe 20 years down the road he would become CEO and make tons and tons and tons of money. And a CEO is not going to quit the line of business b/c of the pay cap -- the opportunity cost is too high. So I really doubt that partial equilibrium analysis has much validity.
b) I somewhat doubt that the marginal revenue product of (financial) capital is very large at these levels. What I mean is that I doubt that the extra dollar (or million) spent on executive compensation gets you _that_ much better of a CEO, someone who is _that_ much better at steering the ship. The fact that the market produces this outcome is obviously an argument for this but I'd like to think this through and see if there are not other incentive structures that could produce this type of equilibrium but that also imply that it might not be efficient. Plus, I wonder how much worse the next in line guy (who would take the job and not also leave) would be.
And finally c) What would happen if all the "best and the brightest" as Whitney says were to leave the business and figure out how to make money elsewhere? First, if it hadn't been for pretty smart and really driven people who had invented structured finance as we know it we wouldn't be in this mess. And second, what are the general equilibrium effects of all the "smart" people leaving finance and going into other business, law, politics, public service... I doubt the net effects would be negative.