Federal Reserve Press Conference Video, Economic Projections, FOMC Statement (4/27/2011)

I embedded the full Federal Reserve press conference video with Fed chairman, Ben Bernanke, after the jump. I also linked to the Q&A transcript and 4/27/2011 FOMC statement. First, check out the Fed's projections on inflation, GDP growth and unemployment from 2011-2013. As you can see from the table below, the Fed lowered their GDP and unemployment projections, and raised inflation projections, since the January FOMC Minutes release.



Big Option Activity In Industrials ETF (June $40 XLI Calls) - Charts

XLI near 2007 high (freestockcharts)
XLI, the industrial sector ETF, is in play. I saw this on my ISE widget first (98,181 calls and 3,033 puts were opened by customers on the International Securities Exchange as of 1:30 PM EST 4/28/2011). As of 2:30pm, 108,395 June $40 calls traded with 288 contracts open. The call option was last trading at $0.37 (+0.13).

XLI ISE Put/Call Ratio (ISE)
The ETF is trading at $38.47. Technically speaking, the calls could be betting on a confirmed breakout above $38 and a trend line continuation. When looking at the monthly chart, I see that the 2007 high was $42. If XLI tests $42 by June 17, 2011, the trader will make a killing if it was 100% long exposure. Who knows. It could be part of a net short position or a large hedge. Look at the trend line from the March 2009 low. XLI better not break that!

For more information on this trade read "Industrials Call Trades Jump Before Caterpillar Report" at Bloomberg.com. See more snapshots below.

Richard Koo: Fiscal Stimulus Required To Keep U.S. From Following Japan (Deflation) Until Private Sector Recovers

Richard Koo (BloombergTV)
Richard Koo, chief economist at the Nomura Research Institute in Tokyo, was interviewed on Bloomberg TV yesterday (4/26/2011). He thinks Federal Reserve policies (0% rates; QE2) are not doing much for the U.S. economy, but says the economy needs government stimulus to keep GDP from collapsing. If fiscal stimulus is pulled before the private sector recovers due to political pressure, Mr. Koo believes there is a risk that the U.S. could follow the same path as Japan (deflation). Watch the Bloomberg video after the jump. The text below is not from an official transcript.

"When the private sector is deleveraging and government deleverages too, the whole thing collapses. That's what happened during the great depression. We made the same mistake in Japan in 1997 and 2001, and I see Europeans making the same mistake right now. And if the U.S. congress makes a move towards fiscal consolidation, the U.S. will be making the same mistake next year; and I don't want to see that happen."

Spot Silver in USD/oz Lost 9% Last Night (49.30-44.72), Bounced Back - Chart

Last night (4/25), Spot Silver in USD/oz hit an intraday high of $49.30 and an intraday low of $44.72 (-9.2%). It has since bounced back to $45.59. SLV's run looked exhausted on the chart and needed downside protection (imho), at least in the short term. Yesterday I saw an interesting SLV put spread that traded in October out-of-the-money. There are a few events coming up that could increase silver volatility: Bernanke's press conference on Wednesday, the debt limit vote and end of QE2. Inflation reads, margin hikes and China FX reserve diversification could also affect silver trading. In the next few days I'll go over SLV in more detail with charts, recent option trades, implied volatility, articles and embedded videos. Watch the price of spot silver live below courtesy of Kitco (refresh browser).

SILVER SPOT USD/OZ (source: Kitco.com)

[Most Recent Quotes from www.kitco.com]

Jeremy Grantham: "Days of Abundant Resources and Falling Prices Are Over Forever"

GMO Commodity Index (Source: GMO April 2011 Letter)
Jeremy Grantham's April 2011 Quarterly Letter is available at gmo.com. Here is the summary.
"Time to Wake Up:  Days of Abundant Resources and Falling Prices Are Over Forever

Jeremy Grantham

Summary of the Summary
The world is using up its natural resources at an alarming rate, and this has caused a permanent shift in their value. We all need to adjust our behavior to this new environment. It would help if we did it quickly.

Summary
  • Until about 1800, our species had no safety margin and lived, like other animals, up to the limit of the food supply, ebbing and flowing in population.
  • From about 1800 on the use of hydrocarbons allowed for an explosion in energy use, in food supply, and, through the creation of surpluses, a dramatic increase in wealth and scientific progress.
  • Since 1800, the population has surged from 800 million to 7 billion, on its way to an estimated 8 billion, at minimum.
  • The rise in population, the ten-fold increase in wealth in developed countries, and the current explosive growth in developing countries have eaten rapidly into our finite resources of hydrocarbons and metals, fertilizer, available land, and water.
  • Now, despite a massive increase in fertilizer use, the growth in crop yields per acre has declined from 3.5% in the 1960s to 1.2% today.  There is little productive new land to bring on and, as people get richer, they eat more grain-intensive meat.  Because the population continues to grow at over 1%, there is little safety margin.
  • The problems of compounding growth in the face of finite resources are not easily understood by optimistic, short-term-oriented, and relatively innumerate humans (especially the political variety).
  • The fact is that no compound growth is sustainable.  If we maintain our desperate focus on growth, we will run out of everything and crash.  We must substitute qualitative growth for quantitative growth.
  • But Mrs. Market is helping, and right now she is sending us the Mother of all price signals.  The prices of all important commodities except oil declined for 100 years until 2002, by an average of 70%.  From 2002 until now, this entire decline was erased by a bigger price surge than occurred during World War II.
  • Statistically, most commodities are now so far away from their former downward trend that it makes it very probable that the old trend has changed – that there is in fact a Paradigm Shift – perhaps the most important economic event since the Industrial Revolution.
  • Climate change is associated with weather instability, but the last year was exceptionally bad.  Near term it will surely get less bad.
  • Excellent long-term investment opportunities in resources and resource efficiency are compromised by the high chance of an improvement in weather next year and by the possibility that China may stumble.
  • From now on, price pressure and shortages of resources will be a permanent feature of our lives.  This will increasingly slow down the growth rate of the developed and developing world and put a severe burden on poor countries.
  • We all need to develop serious resource plans, particularly energy policies.  There is little time to waste."

China Has 64 Million Vacant Apartments, Shanghai Property Index Near Inflection Point, Andy Xie On Inflation

10y Shanghai Property Index (000006.SS) - Yahoo Finance
If you missed it, SBS Dateline Australia did a story on China's property market last month (March 20, 2011). It was mainly about China's ghost cities, vacant malls and 60 million vacant apartments. Is this considered GDP growth to nowhere? Watch the segment below or at sbs.com.au.

Even though China is a command economy, at some point there has to be a real estate correction. Right? At the moment, the Chinese government is most concerned about its economy overheating and inflation. China's central bank is trying to fade inflationary pressures and real estate speculation by increasing bank reserve ratios, downpayment requirements, interest rates and letting the Yuan rise [Reads: "China’s Stocks Cap Weekly Decline on Inflation; Yuan Advances" (Bloomberg), "Yuan forwards touch 3-year high on inflationary pressure" (Financial Post), "China's March housing inflation slows, tightening in place" (Reuters), "China Increases Down-Payment Requirement for Second Homes" (WSJ)]. By the way, what is up with these "shark loan" auctions?
4y Shanghai Properties Index

Andy Xie, an independent economist and former Asia-Pacific economist at Morgan Stanley, thinks the PBOC is behind the curve on inflation and that China is headed towards stagflation. From his recent article in Caixin Online:

"at this point, China’s monetary-policy makers are too far behind the curve. Inflation is entering crisis territory, as consumer prices for many products and services rise at double-digit rates. Signs of panic have appeared along with hoarding which, when it spreads, could trigger a social crisis."
Mr. Xie thinks the PBOC should raise rates by 300 basis points!

"To change course, policy tightening must shift away from credit rationing and toward market mechanisms. Moreover, the interest rate must be lifted out of the negative column: It should be raised at least three percentage points to allay public fears. These changes are needed as soon as possible."

Recently, inflationary pressures, due to rising fuel costs and port fees, caused truckers in China to go on strike. Read: "Truckers In China Protest Rising Fuel Costs (Oil, Gasoline Price Charts)" and "Strike reinforces China’s fear of inflation" (FT.com, 4/24/2011). Also check out this post at Also Sprach Analyst: "China Is Ageing, And The Rich Are Fleeing". *ASA just tweeted this, "Hong Kong assets have ‘peaked’: analyst" (MarketWatch).

S&P Revises US Sovereign Debt Outlook to Negative, AAA/A-1+ Rating Affirmed (Text, Related Indicators and Articles)

NYSE (Source: Wikimedia)
If you haven't read this by now, Standard & Poor's revised their outlook on U.S. sovereign debt (Treasuries) to "negative", and they "believe there is at least a one-in-three likelihood that we could lower our long-term rating on the U.S. within two years". Below is the full media release via StandardandPoors.

U.S. Indicators to watch:

US Dollar Trade Weighted Index (St. Louis Fed); Spot Dollar Index - DXY (Bloomberg); U.S. Treasury Yields (St. Louis Fed); Spot Gold - XAU/USD (ino.com) and the US Treasury 5Y Credit Default Swap in Euros - ZCTO CDS EUR 5Y (Bloomberg). I couldn't find 10Y CDS online anywhere.

Related articles, blog posts and counterpoints:

“But S&P are intelligent men.” (UBS note) - Stone Street Advisors; Credit Suisse: America Is Not Broke (Household Net Worth/Government Debt; Household Net Worth + Government debt/GDP) Charts - Pragmatic Capitalism; China Proposes To Cut Two Thirds Of Its $3 Trillion In USD Holdings - Zero Hedge.

'AAA/A-1+' Rating On United States of America Affirmed; Outlook Revised To Negative

Publication date: 18-Apr-2011 09:01:33 EST

  • We have affirmed our 'AAA/A-1+' sovereign credit ratings on the United States of America.
  • The economy of the U.S. is flexible and highly diversified, the country's effective monetary policies have supported output growth while containing inflationary pressures, and a consistent global preference for the U.S. dollar over all other currencies gives the country unique external liquidity.
  • Because the U.S. has, relative to its 'AAA' peers, what we consider to be very large budget deficits and rising government indebtedness and the path to addressing these is not clear to us, we have revised our outlook on the long-term rating to negative from stable.
  • We believe there is a material risk that U.S. policymakers might not reach an agreement on how to address medium- and long-term budgetary challenges by 2013; if an agreement is not reached and meaningful implementation is not begun by then, this would in our view render the U.S. fiscal profile meaningfully weaker than that of peer 'AAA' sovereigns.

Truckers In China Protest Rising Fuel Costs (Oil, Gasoline Price Charts)

Have you seen the charts of oil and gasoline recently? Protests do not surprise me.

*China moves to defuse Shanghai trucker protests (AP)
*Update: Shanghai offers fee cuts to defuse drivers' strike at port (Reuters)
Chinese Trucks Idle as Protests Continue (Wall Street Journal)
Chinese Truck Drivers Block Road Over Gas Prices (NPR)
Third day of Shanghai strike threatens China exports (Reuters)
Q+A-What is behind the Shanghai truckers strike? (Reuters)
Fuel price strike rattles Beijing (Financial Times)
First Person Account From Inside The China Protests (Zero Hedge)
Truck drivers go on strike at Shanghai ports (AFP)
Related: High crude prices threaten China's oil price controls (WantChinaTimes)
Related: Oil Price Rise Fueled by Investment Funds (VOANews)
Related: Obama blames oil speculators for rising prices! (Reuters)
Related: Oil prices to ease in H2 as disruption fears wane (MoneyControl)
Related: Goldman Sachs tells investors to take profits from oil, cotton and copper (Telegraph)


NYMEX Unleaded Gasoline (StockCharts.com)


West Texas Intermediate Crude Oil (StockCharts.com)


Brent Crude Oil (CMEGroup.com)

Buffett's Letter on Muni Insurance; Berkshire Insured Detroit Revenue Bonds After FGIC

BHAC/FGIC Collaboration (MSRB)
After a post I did a few days ago on Detroit's 2011-12 budget, I found out that Berkshire Hathaway's AAA rated subsidiary, Berkshire Hathaway Assurance Corporation, insured $767 million Detroit revenue bonds on a second-to-pay basis. These bonds were re-marketed and converted into fixed rates in 2008. Berkshire insured $385 million Detroit water revenue bonds (official statement at msrb.org) and $382 million Detroit sewage disposal revenue bonds, but only if bond insurer FGIC failed to pay. Principal and interest payments are backed "solely" by net revenues of pledged assets (water and sewage funds), not by taxes like general obligation bonds.

At that time the large muni bond insurers, Ambac, MBIA and FGIC, were being downgraded as losses mounted on toxic credits they insured (MBS). As a result, Buffett wanted to leverage his AAA rating and grab share in the muni insurance market. Issuers wanted Berkshire's guarantee because it lowered interest payments. Berkshire eventually "pulled out of municipal bond insurance" when he thought he wasn't being compensated for the risk (GuruFocus). Read Buffett's 2008 investment letter below for more details. It is interesting that Financial Guaranty Insurance Co.'s parent company, FGIC Corp., filed for bankruptcy in August 2010 and its insurance company had its muni bond insurance reinsured by a division of MBIA in early 2009. Counterparties squared.

"The majority of FGIC Co.-insured bonds were reinsured in January 2009 by National Public Finance Guarantee Corp., the investment-grade, muni-only insurer owned by MBIA Inc." (Bond Buyer)

From Bloomberg on May 1, 2008 on the Detroit bond deal:

"May 1 (Bloomberg) -- Detroit sold about $383 million of bonds carrying insurance from Berkshire Hathaway Assurance Corp., marking the first foray by Warren Buffett's four-month- old guarantor into the primary market for U.S. municipal debt."

"Detroit sold Berkshire-backed bonds at yields ranging from 2 percent on debt due in July to 4.75 percent on bonds set to mature in 2027. The largest single series of bonds -- $136 million of debt paying a 5.75 percent rate and due in 2031 -- were priced to yield 4.67 percent, 13 basis points less than Municipal Market Advisors' index of top-rated debt at similar maturities. A basis point is 0.01 percentage point."

More information from The Bond Buyer (4/30/2008):

"As the finance team crafted the transaction, they met with several monoline bond insurers with the hope of leaving the FGIC policy in place and bringing in a secondary insurer for additional protection. Officials considered Financial Security Assurance - which insures a remaining piece of the water and sewer bonds - but the insurer backed off because of its heavy coverage of much of the city's outstanding debt.

Only Berkshire Hathaway was interested in acting as a secondary insurer with FGIC, according to a source. "They didn't have the same idea about FGIC being in place on the bonds as the other insurers had," he said. "The Berkshire insurance really gilds the lily [on the bonds]." It will mark the first time that BHAC will act as insurer on a primary market transaction, officials said."

Credit ratings in the news:
Fitch Drops $4.6 Billion of Detroit Water and Sewer Bonds (BondBuyer, April 1, 2011)
Detroit Water and Sewer Revenue Bonds Are Downgraded by Moody’s (BusinessWeek, December 20, 2010)

Since Berkshire Hathaway was directly involved in analyzing municipal credits before the market and economy collapsed in 2008, Warren Buffett is probably a decent source for analyzing municipal credit risk. In Buffett's 2008 letter, he warned about the potential risks involved in insuring muni credits. Read the full portion about tax-exempt bond insurance after the jump.

"Insuring tax-exempts, therefore, has the look today of a dangerous business – one with similarities, in fact, to the insuring of natural catastrophes. In both cases, a string of loss-free years can be followed by a devastating experience that more than wipes out all earlier profits. We will try, therefore, to proceed carefully in this business, eschewing many classes of bonds that other monolines regularly embrace."

Video: Facebook Townhall With President Obama, Mark Zuckerberg (4/20/2011)

Watch the video after the jump courtesy of facebookguests on Livestream. Parts 1 and 2 are archived below. Zuckerberg just asked him about the debt.

St. Joe (JOE) May $24 Call Volume; BlackRock, Fidelity Magellan Own a Huge Chunk of Shares

JOE May 24 Call (CBOE.com)
St. Joe (JOE:NYSE) saw 1,120 May $24 call options trade with 131 open yesterday. It looks like 653 calls traded on the International Securities Exchange (ISE) at 0.91 and the rest traded on the AMEX. JOE has been trading in a sideways channel for 3 years now and is now testing the 200 day moving average. With institutions and mutual funds loading up on the company, you have to wonder if there will be a major short squeeze or a deal led by Fairholme's Bruce Berkowitz, even though the company is only worth $7-10 per share! David Einhorn, hedge fund manager at Greenlight Capital, is, or was, short $JOE shares and released a detailed research report explaining why. On February 8, 2011, St. Joe announced that it was "exploring financial and strategic alternatives to enhance shareholder value".
JOE 3yr chart - Stockcharts.com
"The Board intends to consider the full range of available options including a revised business plan, operating partnerships, joint ventures, strategic alliances, asset sales, strategic acquisitions and a merger or sale of the Company. The Board of Directors has retained Morgan Stanley & Co. Incorporated to assist it in the evaluation of these alternatives." (source)

Look at all of these institutions loading up. Joe Ownership via SEC.gov: Fidelity Magellan (FMAGX) disclosed that it owned 7.4% of the company in a March 31, 2011 13G filing (Fidelity owned 11.4% in total), BlackRock owned 17.69% of JOE in total (13G filing), Fairholme Fund (FAIRX) owned 28.86% (13D filing), T-Rowe owned 11.2% (13G filing) and the Janus Contrarian Fund owned 8.8% of JOE (13D filing). Janus Capital Management owned 13.2% of JOE in total.

Michael Burry's Vanderbilt University Lecture (Video)

Source: Youtube via Vanderbilt
Dr. Michael Burry, who made billions of dollars shorting tranches of subprime mortgage backed securities via credit default swaps (before John Paulson's big short), gave a lecture at Vanderbilt University on 4/5/2011. In June of 2005, Burry used Deutsche Bank to buy his first credit default swap contract (a credit derivative that insures against losses on subprime MBS tranches). In early 2010, Dr. Burry was featured in Michael Lewis's book "The Big Short" and was on 60 Minutes. He also dissed the Federal Reserve, Ben Bernanke and Alan Greenspan in a New York Times oped last year ("I Saw the Crisis Coming. Why Didn’t the Fed?"). He remains very critical of the Federal Reserve and regulators since they failed to foresee the financial crisis (and shut down the financial crack houses before they became a systemic risk). If you can't watch the video, the blog Distressed Debt Investing transcribed the speech. Remember, Michael Burry was a former neurology resident, turned value investor, who was the first hedge fund manager (and credit trader at a big bank?) to buy credit default swaps. Burry placed his first CDS trade six months before the ABX indices were created (1/2006), which Paulson & Co printed money on. I'm listening to his FCIC interview right now and will transcribe the key points. It is hilarious. The mortgage-securitization-CDS engine remains, to this day, the biggest financial joke I have ever seen.

Detroit's 2011-2012 Budget, $200M Savings Needed (Mayor Dave Bing)

Detroit, Michigan - Source: Wikimedia
I'm following the financial situation in Detroit, as I have been for a while now. Not only is the City of Detroit a distressed municipality, there is also the possibility that the State of Michigan could intervene if there's a financial emergency. I linked to the the budget documents, FY 2010 Comprehensive Annual Financial Report and articles after the jump. I'm trying to find yields and recent trades on Detroit muni bonds through TRACE/MSRB databases on finra.gov. This is from Mayor Dave Bing's budget address:

"Good morning Honorable City Council. My budget presentation today marks the next step on the City of Detroitʼs path back to financial stability. We face challenges unlike any the city has ever seen, challenges that demand bold action and a business approach that this administration is prepared to take. We do not have the luxury of waiting for someone else to solve our problems.

Mayor Dave Bing
• We must find savings of $200 million in this fiscal year to present a balanced budget.

• If we do nothing, our deficit which today stands at $155 million will grow to approximately $1.2 billion by Fiscal Year 2015.

• Pension and medical costs are rising at an uncontrollable and unsustainable rate. From 2008 through 2011, the City of Detroit cut $40 million from service delivery to offset the rising cost of benefits.

• Without action, benefit costs will consume a larger and larger portion of our operating funds, potentially growing to 50% by 2015.

• Since 2000, revenue is down from $1.1 billion to $753 million. Our population is down more than 200,000 according to the recent U.S. Census report.

H&R Block (HRB) Sees Put Spreads in October, January (Chart Analysis)

HRB Oct 17 Puts (Yahoo Finance)
Interesting option activity occurred in H&R Block's (HRB) out-of-the-money put options in October 2011 and January 2012. I got the alert from CBOE on Twitter. I follow their feed (@CBOE).
"H&R Block- $HRB January 12.50 and Jan 17 puts active on 36K contracts into April 18 tax deadline" (source)

It was also featured on CrimsonMind.com's Unusual Option Activity Feed in detail:
"9,000 Oct 17 puts were purchased for $1.73, 9,000 Jan 12 puts were sold for $0.66, 7,500 Jan 15 puts were purchased for an average premium of $1.425 and 7,500 Jan 10 puts were sold for $0.35. Total of 33557 puts traded compared to the 10 day average volume of 3030." (courtesy of CrimsonMind.com)

HRB Jan 15-12.5-10
The trades look like put spreads. Find more information on the trades at WSJ and the blog Sea Change of Opportunity, which said 500k shares were bought at $17.60.

$HRB capitulated in October of last year (2010) when news dropped that HSBC wouldn't fund "refund anticipation notes" anymore due to new IRS rules. On April 7, 2011, HRB warned that the loss of clients would lower EPS by $0.05. From Reuters:
HRB (FreeStockCharts.com)
"H&R Block Inc said it would take a charge in the fourth quarter, as it lost some clients due to its inability to offer refund anticipation loans, sending its shares down 2 percent in extended trade.

The top U.S. tax preparer will incur a charge of about 5 cents a share in the quarter ending April 30."
The stock is trading inside of a 3-year descending channel which started in 2008. Since the "RAL" scare in October, HRB is up 80% off of its low. You can see the two near-term trend lines HRB must hold in order to test descending channel resistance ($18.50-19.30). The yellow circle shows where the put spreads would profit, whether as a hedge against shares or a play on downside volatility. HRB implied volatility is at 35 and historical volatility is at 24.65 on the ISE. I don't know the exact nature of these trades if they were based solely on implied volatility. Please comment if you do. Interesting trades.


More analysis (free)

Oppenheimer Discusses H&R Block (HRB) - Benzinga

Early Dip Puts Market on Notice 04-14-2011 - Xpound Blog via Benzinga

The Returns Have Already Been Filed On H&R Block by Steve Alexander - iStockAnalyst

H&R Block: The Panic's Over - Seeking Alpha

Macro, Sovereign and Sector Upgrades/Downgrades (Ending 4/15/2011)

Analyst calls - week ending 4/15/2011

*Goldman's Jan Hatzius downgraded real GDP growth to 1.75% from 2.5% (Zero Hedge)

*Goldman's Latest EURUSD Outlook (Zero Hedge)

Moody's cut Ireland's credit rating to Baa3, 1 notch above junk (AP)

Fitch affirms Ireland rating at BBB-plus (MarketWatch)

Goldman Sachs says underweight commodities (Zero Hedge)

Goldman Sachs Cuts View Of Financial Stocks (Dow Jones Newswire)

Citi's US Dollar warning, debt ceiling risks (Zero Hedge)

Goldman Sachs Expects ‘Substantial Pullback’ in Oil Market; Sees $105 Brent Crude (Bloomberg)

Joe LaVorgna (Deutsche Bank) Cuts Q2 GDP Ahead Of Everyone (Zero Hedge)

Moody's downgrades China property sector (Reuters)

Moody’s cuts China’s property outlook (MarketWatch)

Btw, Beijing March New House Prices Plunge 26.7% M/M: Press (MarketNews)

Fitch downgrades China's yuan debt outlook to negative (ChinaPost)

How Would Raising Debt Ceiling Impact U.S. Bond Market? (PBS Video featuring Jamie Dimon, Nouriel Roubini, Nomura Strategists and Ben Bernanke)

Investment Manager Outlooks

"Deja Vu All Over Again" - Jeff Gundlach's (DoubleLine Capital) Latest Set Of Contrarian Observations (report at Zero Hedge)

[Video] Bond Guru (Jeff Gundlach) Bets Against PIMCO's Bill Gross (and Conventional Wisdom) on What Happens After QE2 Ends (Trader Mark at International Business Times)

*John Paulson Cautious On U.S. Real Estate (GuruFocus) he was interviewed by Les Echos in France

Update on Bullish Sentiment Indicators (AAII, Investors Intelligence)

Elliott Wave International has an article out titled Bullish Sentiment: Turning into a Stampede?, which addresses current market psychology and sentiment extremes. Hat tip to Business Insider and Mish.

"Keep that in mind as you read this recent market sentiment news from CNBC (4/6) about the latest Investors Intelligence survey:

"The number of investors with a bearish outlook plunged by more than a third in one week according to a widely followed investor survey released Wednesday, the largest amount of bears to throw in the towel in this poll since 2003."

The bears in that survey dropped from 23.1 percent to 15.7 percent in just one week. Apparently, the market's two-year rally has survey respondents feeling more optimistic -- not more cautious.

Many other groups also feel exceptionally bullish. The latest Elliott Wave Theorist reports that a "bullish consensus" has also crystallized among a wide range of investors and financial professionals:

Individual investors (AAII poll)—most bullish in six years
Newsletter advisors (I.I. poll 20-week average)—most bullish in seven years
Futures traders (trade-futures.com poll)—most bullish in four years
Mutual fund managers (% cash)—most bullish ever
Hedge fund managers (BoAML survey)—most bullish ever
Economists (news-org polls)—unanimously bullish
Top global strategists (three national year-ahead panels)—unanimously bullish
Even most 'bears' on the economy are bullish on stocks because of inflation!" 
(continue reading at ElliottWave.com)

Karl Denninger, author of the Market-Ticker blog, responded to this and said there were higher bullish AAII readings in December (2010) and January, which coincided with a higher market. He's right (look at the table), but I wonder what he thinks of the "Investors Intelligence Bull/Bear Ratio" chart that dates back to April 2007. Bullishness is at or above the 2007 highs, and the market peaked in October 2007. Robert Prechter, founder of Elliott Wave International, mentioned these sentiment comparisons on The Ticker (Yahoo Finance) in late February.

$UUP June Call Options Active, US Dollar Trending Down (UUP, $USD, UUP/SPY Technicals - 4/13/2011)

Chart 1: DXY0 (U.S. Dollar Index) - FreeStockCharts.com
First off, UUP June 2011 $21 call options were active yesterday. 38,231 calls traded with 8,333 contracts open. It closed at 0.68. This morning open interest rose to 34,555. Here is more information: "Some UUP option traders expect dollar rebound" (CNBC). This activity could insuring short UUP exposure or speculating on a Dollar (UUP) rally by June expiration (6/17/2011).

The US Dollar Index (DXY) is clearly trending down. DXY (74.88) broke through a symmetrical triangle in March and is looking for support. The first support level is 74.23 or the 2009 low. If that level fails, 70.70 will be in play or the 2008 low. You can also see the yellow downtrend line DXY must break.

$UUP, the US Dollar Index ETF, broke through the 2009 and 2010 lows in mid-March. UUP needs to break above $22 resistance and take out that downtrend line to save the Dollar. It is interesting that DXY broke the symmetrical triangle right when UUP broke the lows.

The third chart is UUP/SPY(US Dollar ETF/S&P 500 ETF). The ratio is at 0.1634, which is right below May 2008 support (0.167). It will soon test the downtrend line from early 2009 and perhaps re-test 0.167 resistance. If UUP/SPY breaks above ceiling resistance and the downtrend line, it could either mean there is a flight out of risky assets (Dollar up/S&P down), or the market falls faster than the Dollar. The next few months will be interesting; QE2 is ending and the debt ceiling is in play.

The Next Housing Shock (60 Minutes Video, 4/3/2011)

Two weeks ago, 60 Minutes did a special on the ongoing foreclosure crisis, which was driven by mortgage document fraud during the housing bubble.

Mark Mobius, George Soros on India's Economy, Equities, Copper (Videos)

MarkMobius (Twitter)
Mark Mobius, executive chairman of the Templeton Emerging Market Group, and George Soros, founder of Soros Fund Management, were featured on India's ET Now (The Economic Times) a few days ago. Watch the videos after the jump. As expected, Mr. Mobius said he is bullish on emerging markets and inflation hedges, and favors India's natural resources, copper, equities (which adjust to inflation), Indian small-cap stocks, information technology and banks. "The trend will continue to be up for commodities, in Dollar terms", he said.

When asked to give his big global prediction, Mr. Mobius said, "volatility will increase" and "the perception of emerging markets is changing to become more positive; it's becoming an important asset class for investors, and that's a sea change. Ten years ago it was considered to be a very risky arena." He made sure to mention that corrective mechanisms still exist (regarding Central Banks tightening).
George Soros via Wikimedia

George Soros mentioned how the developing world is doing exceptionally well compared to the developed world ("which is sinking"), and India is one of the beneficiaries. "India is actually unusual because its growth is mainly domestically generated, so it is less exposed to the global situation; less exposed but still exposed."

"(India) is not growing as fast as China, but perhaps it is not as exposed to overheating as China is; so India is relatively very well situated"

Put a Music Store In Your Basement (Borders Liquidation Pic)

I went inside a Borders being liquidated and look what I found.

Reads: Bill Gross, Chris Wood, Soros, Hussman, Dalio, SPX Valuation, USD, Canada, Real Estate, MCDX

High powered link fest for 4/11/2011

CLSA's Chris Wood on a U.S. sovereign debt crisis - Business Insider

Bill Gross Is Now Short US Debt, Hikes Cash To $73 Billion, An All Time Record - Zero Hedge

What Is Low Volume Telling Us? - Barron's

The Post-Crash: Wall Street Won - New York Magazine

JPMorgan Accused of Breaking Its Duty to Clients - New York Times at Yahoo Finance

Charles Plosser and the 50% Contraction in the Fed's Balance Sheet by John Hussman. Investors Intelligence Bull/Bear Sentiment, the Federal Reserve's balance sheet is leveraged 50/1, equities ("overvalued, overbought, overbullish, rising yields" syndrome"), bonds, silver and gold. - HussmanFunds.com

Is the Market Overvalued? (Yale's Robert Shiller vs. BofA Merrill Lynch strategist, David Bianco) - Wall Street Journal (h/t valuewalk)

Chart of MCDX 5Y (credit risk in muni bond market) tightened since January - Markit

US State and Local Government Finances: from Recession to Austerity (pdf) - BNP Paribas (h/t Dutch Book)

Signs point to a severe housing correction in Canada - The Globe and Mail. It looks at price/income, price/rents, etc. Would U.S. banks take a hit?

"So much for the ‘conservative’ Canadian consumer: Another look at Canada’s credit bubble" (mortgage debt/GDP, household debt/GDP) - Financial Insights (3/30/2011)

Side note, read: CMHC (Canada Mortgage and Housing Corporation) - Canada's Breaking Point - americaCanada (June 2009). Mortgage securitization in Canada (MBS) is insured by the CMHC (the Government).

Tata chief warns of India unrest over $39b Telecoms corruption scandal - Financial Times

Facing Default, Publisher Lee Enterprises Sells 'Junk' to Foil Distressed Investors - Wall Street Journal

Best Currency Forecasters See Dollar Weakness as QE2 End Looms - Bloomberg

U.S. Treasuries 'Ponzi scheme': ex-PBOC official - MarketWatch (h/t Zero Hedge)

China Inflation ‘Somewhat Out of Control,’ George Soros Says - Bloomberg (Bretton Woods Conference)

Greece Named as Riskiest Sovereign Debt for the Second Quarter in Succession (CMA)

I thought you might be interested in CMA's Q1 report on sovereign debt credit risk (credit default swaps):

Sovereign CDS (CMA Datavision)
"Embargoed until 8am GMT Thursday 7th April 2011

Greece named as riskiest sovereign debt for the second quarter in succession

CMA today published its Sovereign Debt Credit Risk Report for the first quarter in 2011, click here to read.

No change at the top
The report found no change in the six riskiest sovereign debts, with Greece retaining its position as the world’s most risky for the second quarter in succession, with a 58% chance of a debt restructuring occurring within five years. Despite a rally in January, Greece widened to reach a high of 1100bp following downgrades by Moody’s in early March. Egypt and Lebanon have replaced Spain and Hungary in the top 10, with unrest in the Middle East making it a testing quarter for the region. Scandinavian countries again dominate the least risky sovereign debts. The Netherlands is a new entry at five, and Chile has ousted Australia from the top 10, a result of the lower market recovery assumption for emerging markets. The best performers of the quarter all came from Western Europe.

Sharp rises in the Middle East and North Africa flatten out
It was an eventful quarter for the Middle East and North Africa, with sharp rises in CDS prices occurring in Egypt, Tunisia, Saudi Arabia, Morocco, Bahrain and Israel at the end of January, triggered by the Egyptian people’s call for democratic elections. Except for Bahrain, the initial rise was followed by a relatively stable period in March, albeit at higher levels from the start of the quarter, perhaps signalling that markets believe that the unrest will not affect the economies in the longer term.

Japan shows resilience
Japan CDS showed remarkable resilience first to a downgrade by Standard and Poors to AA- at the end of January in the face of concerns over the $12trillion debt, and then to the devastating earthquake where the cost of protection initially jumped 40bp. Despite these events, the CDS ended only 27bp wider on the quarter at 99bp."

Jeff Gundlach on High Yield Bonds, Ginnie Maes, Treasuries (CNBC, 3/9/2011)

Jeffrey Gundlach on CNBC
This video is old, but still relevant. Jeffrey Gundlach, CEO of DoubleLine Capital, which manages about $9 billion (check out DBLTX, the DoubleLine Total Return Bond Fund), gave his views on high yield bonds, Ginnie Mae securities and Treasuries on CNBC on 3/9/2011. He released a research report in January and was featured in Barron's ("The King of Bonds") in February. According to his website, Gundlach will appear on CNBC's Strategy Session on April 14. My next post will feature the deflation and muni bond segments.

Gundlach on high yield bond volatility, spreads to Treasuries and Ginnie Maes (not from an official transcript):
"The problem with high yield bonds is that their volatility is so high and they are priced for the reality of low defaults. For the last 12 months defaults on high yield bonds are under 1%; they were back in double digits just 2 years ago.."
"People compare high yield to Treasuries and they say Treasury bonds yield about 2%, and they use the whole basket of Treasuries; and then they say high yield to no losses, the way they quote it, yields about 6.75%. So it's a spread of almost 5 points; and they say, hey, that's historically average, so what's wrong with that? I point out that the volatility of high yield bonds is a lot more like the 20-year Treasury. It has a standard deviation persistently of 12. The Treasuries that they are comparing it to have a standard deviation persistently of 5. So you really can't compare high yield to the total basket of Treasuries, you need to compare it to the long Treasuries... The actual spread is only about 225 basis points, which is about as low as it's been in history"

Rep. Paul Ryan Plans $6.2 Trillion Spending Cut (Budget PDF, CNBC)

I embedded the House Budget Committee's Fiscal Year 2012 Budget Resolution, Rep. Paul Ryan's appearance on CNBC, and a 3-minute video showing a visualization of the House Republican's budget. The budget plans to cut "$6.2 trillion in government spending over the next decade compared to the President’s budget, and $5.8 trillion relative to the current-policy baseline." It targets Medicare, Medicaid, corporate welfare (Fannie Mae, Freddie Mac, energy and farm subsidies), the tax code and new health care law. I linked to articles, counterpoints and President Obama's Budget for Fiscal Year 2012 below. Thoughts?

Moody's Downgrades Portugal to Baa1, Bonds, EUR/USD Fall (Charts)

Portugal 10y Bond 8.76% (Bloomberg)
From Moody's Investors Service:

"London, 05 April 2011 -- Moody's Investors Service has today downgraded Portugal's long-term government bond ratings by one notch to Baa1 from A3 and placed the rating on review for possible downgrade. Concurrently, Moody's placed the government's (P)Prime-2 short-term debt rating on review for possible downgrade.

Moody's rating action was driven primarily by increased political, budgetary and economic uncertainty, which increase the risk that the government will be unable to achieve the ambitious deficit reduction targets set out in the update of its Stability and Growth Programme for 2011-2014 and put its finances on a sustainable trajectory."
(read full release at Moodys.com)

EUR/USD (freestockcharts.com)
Baa1 is three notches above junk (Ba1). As a result of the downgrade, yields on Portugal's 2-Year government bonds and 10-Year government bonds spiked to 8.971% and 8.766%, respectively (chart above). Greek government bonds still have higher yields.

EUR/USD is at 1.4164, down 0.41% since early Monday (1.4223, see chart). It was testing the 3 year downtrend. EUR/USD is also near the uptrend from early January, an important near-term support level.

Further reading:

Portugal Banks Threaten to Shun Sovereign Bonds: Report (Reuters)

Moody's cuts Portugal, says bailout needed urgently (Reuters)

Portugal Rating Cut to Baa1 From A3 by Moody’s on Bailout View (Bloomberg)

Portuguese Government Bonds Decline for 11th Day After Moody’s Cuts Rating (Bloomberg)

Portugal Hit With Downgrade (New York Times)

European Stocks Lower On Portugal Downgrade (Dow Jones Newswire)

Bernanke Speech on Clearinghouses, OTC Derivatives, Financial Reform (4/4/2011)

Fed Chairman Ben Bernanke ("The Bernank") gave a speech at the Federal Reserve Bank of Atlanta's Financial Markets Conference yesterday. It involved clearinghouses, OTC derivatives and financial reform. "Tonight I would like to discuss post-crisis reform as it relates to a prominent part of our financial market infrastructure--namely, clearinghouses for payments, securities, and derivatives transactions." In case you didn't already know, bank balance sheets leveraged with worthless subprime debt securities (built on fraud), OTC credit derivatives, "uncertain counterparty credit risk" (debt insurers) and failures made by credit rating agencies and bank regulators, all caused the financial system to collapse in 2008. Listen to John Paulson's interview with the FCIC for the full run down.

This is selected text; read the full speech at FederalReserve.gov
"Clearinghouses and Financial Reform
Broadly speaking, the recent financial reform legislation bears on the future structure and role of clearinghouses in two different ways. First, it aims to increase the resilience of these critical institutions against severe financial shocks, the issue that I have emphasized thus far. Second, it also encourages the greater development and use of clearinghouses to address weaknesses identified in other parts of the financial system. Of course, increased reliance on clearinghouses to address problems in other parts of the system increases further the need to ensure the safety of clearinghouses themselves. As Mark Twain's character Pudd'nhead Wilson once opined, if you put all your eggs in one basket, you better watch that basket.

The theme of expanded use of clearinghouses as a tool to address other problems in the system is perhaps best illustrated by the derivatives provisions of the Dodd-Frank Act. Prior to the crisis, some of the same economic forces that had led to the development of clearinghouses for other instruments were already pushing industry participants toward greater use of clearinghouses for OTC derivatives transactions. For example, as one response to the growth of the market for interest rate swaps in the early 1990s, a clearinghouse was created in London in 1999 that, by the onset of the financial crisis, was handling a major portion of interdealer activity in those swaps. Also, in the years leading up to the crisis, the Federal Reserve Bank of New York initiated joint efforts with other regulators and market participants to improve clearing arrangements for credit default swaps. However, for several reasons, the willingness of market participants to move all derivatives transactions to clearinghouses was limited. Notably, many believed that the standardization of derivatives contracts that is needed for multilateral clearing imposed too high a cost on end users with needs for customized arrangements. Market participants also were concerned that the establishment of clearinghouse guarantees might require implicit subsidies from clearinghouse members with stronger credit to those with weaker credit.

These calculations, however, were substantially changed by the galvanizing events of 2008, notably the development of large and uncertain counterparty credit risks in many bilateral derivatives agreements. On the heels of the crisis, the Group of Twenty countries endorsed a policy of mandatory central clearing for standardized OTC derivatives. The aim was to reduce systemic risk in the financial system more broadly as well as to improve the transparency of the OTC derivatives markets. In the United States, title 7 of the Dodd-Frank Act incorporated a mandatory clearing policy for standardized derivatives. Other major countries are following suit. In the spirit of keeping a close eye on the basket, as dependence on clearinghouses grows, private-sector participants and regulators will need to review risk-management and member-default procedures for financial market utilities to ensure that they meet high standards of safety."

Muni, Corporate Bond Index Yields, Spreads, Nikkei VIX, Hang Seng VIX (Links)

The St. Louis Fed added BofA/Merrill Lynch Corporate Bond Indexes (US Corporate Master and High Yield Master II) and Bond Buyer GO 20 Municipal Bond Indexes to its FRED databases:

Corporate bond effective yields (BofA/ML)
Corporate bond option-adjusted spreads (BofA/ML)
Corporate bond yields (Moody's) -already in the database
Municipal bond yields (Bond Buyer)

I found the NIKKEI Volatility Index on Bloomberg.com (VNKY.IND). I couldn't find it during the Japanese crisis. Here is a chart; look at the spike.

NIKKEI Volatility Index (Source: Bloomberg)

There is now a volatility index for the Hang Seng Index in Hong Kong using CBOE VIX methodology.

EUR/USD (1.42) Testing Long-Term Downtrend From July 2008 Again (Charts, Articles)

Technical Update: EUR/USD (1.4223) is testing its long-term downtrend again, which started in July 2008. The pair is currently above the 200-week moving average. The second chart is more short-term; you can see the trend line EUR/USD must hold to prevent a near-term breakdown. It is also testing the exhaustive high made on November 4, 2010 (1.4282). Read the articles below for more analysis.

EUR/USD (weekly log charts - courtesy FXStreet.com)




Analysis on the web:

*ECB Dual Strategy Will Cause Problems: Ulrich Leuchtmann, CommerzBank Head of Research (CNBC Video)

*ECB Rates and Federal Reserve Policy (ForexYard)

*Forex: EUR/USD failed at 3-year downtrend - Commerzbank (FXStreet.com)

*ECB set to raise interest rates for the first time - BHF Bank (FXStreet.com)

*EUR/USD ended higher despite fairly strong payrolls - KBC Market Research (FXStreet.com)

*Euro Declines Versus Dollar on Concern Rate Increases May Damage Periphery (Bloomberg)

*Trichet Seen Burying Ailing Nations With Rate Rise on Inflation (Bloomberg)

*EURUSD: A Double Top Taking Shape? - Ilya Spivak (Daily FX)

*Euro is Guaranteed Trend and Momentum with the ECB Rate Decision - John Kicklighter (Daily FX)

Greece Has Highest Default Probability, 5Y CDS Spread at 1028, 2-Year Bonds Yield 15.79% (Charts)

Greece 5Y CDS - Bloomberg.com
I haven't blogged about Greece in a while so here is a checkup on Greek CDS and government bond yields. According to CMA Datavision's Sovereign Risk Monitor, Greece has the highest default probability percentage at 57.42%, with a 1028 mid-spread (in basis points). You can check out Greece's CDS quote and chart (Greece CDS USD SR 5Y:CGGB1U5) at Bloomberg.com. It is testing resistance.

Greece 10Y Bond Yield - Bloomberg
Greece Government Bond Yields are also testing their highs. 10-Year GGBs yield 12.74%, 5-Year GGBs yield 14.36% and 2-Year GGBs yield 15.79%, as of April 1. According to FT.com, 10-Year Greek Government Bonds trade at a 9.58 spread to German Bunds and a 9.51 spread to 10-Year Treasuries. Is it time again for Eurozone volatility? What about the Euro. I'm watching the EUR/USD downtrend line on the 5-Year chart, as well as the short term uptrend line (see Daily FX link).

Greece in the News:

Sovereign CDS sector eyes day of reckoning (Financial News, 4/4/2011)

Germany Press: IMF Pushes For Restructuring Of Greece's Debt (Automated Trader, 4/3/2011)

EURUSD: A Double Top Taking Shape? (Daily FX, 4/3/2011)

Greek FinMin rules out debt restructuring (Reuters, 4/2/2011)

Papaconstantinou Says Still Chance for Bond Sales in 2011 (Bloomberg, 4/1/2011)

Portugal, Greece Downgraded by S&P on Restructuring Concerns (Bloomberg, 3/29/2011)

George Soros Speech on Reflexivity at INET Conference (4/9/2010)

INETeconomics (Youtube)
On April 9, 2010, George Soros gave a speech (Anatomy of a Crisis: The Living History of the Last 30 years) at an Institute for New Economic Thinking (INET) conference at King's College in Cambridge, UK. He explained his theory of reflexivity and how it relates to economic behavior and financial markets. Below I provided quotes from the speech transcript. Watch the full video after the jump courtesy of INET.

Rational expectations and the Efficient Market Hypothesis failed:

"Anyhow, rational expectations theory was pretty conclusively falsified by the crash of 2008 which caught most participants and most regulators unawares. The crash of 2008 also falsified the Efficient Market Hypothesis because it was generated by internal developments within the financial markets, not by external shocks, as the hypothesis postulates.

The failure of these theories brings the entire edifice of economic theory into question. Can economic phenomena be predicted by universally valid laws? I contend that they can’t be, because the phenomena studied have a fundamentally different structure from natural phenomena."



Theory of Reflexivity:

"In human affairs thinking serves two functions: a cognitive one and a causal one. The two functions interfere with each other: the independent variable of one function is the dependent variable of the other. And when the two functions operate simultaneously, neither function has a truly independent variable. I call this interference reflexivity.

Watch 'Inside Job' by Charles Ferguson, Full Video (Must See!)

Inside Job, a documentary film directed by Charles Ferguson on the 2008 global financial meltdown, is now available to watch online for free. I embedded it below via archive.org (with embed code). Hat tip to Zero Hedge and Open Culture. I saw Inside Job when it was in theaters; it is a must see if you care about the economy and financial markets.

The DVD is available on Amazon. Charles Ferguson won an Oscar for Best Documentary Feature at the 2011 Academy Awards. Watch his acceptance speech here. He was also interviewed by Charlie Rose, Deal Book (Andrew Ross Sorkin), PBS (Tavis Smiley), INET (Institute for New Economic Thinking) and France24 (2010 Cannes Film Festival).*Update: The video was down the last time I checked. Perhaps it is still at archive.org in a different location. I still recommend you see the movie.

David Sokol Resigns From Berkshire (CNBC Interview, Buffett's Letter, Lubrizol Trades LZ)

David Sokol on CNBC 3/30/2011
David Sokol, former Chairman and CEO of NetJets, and Chairman of MidAmerican Energy and John Mansville, all owned by Berkshire Hathaway/BRK, resigned unexpectedly on March 28, 2011. His resignation letter came as a "total surprise" to Warren Buffett (read Buffett's response below). Many people thought Sokol would be Buffett's successor; but he told CNBC yesterday that resigning "has been on his mind for two-and-a-half years" in order to start a "mini-Berkshire".

This is where it gets interesting. In early January, Sokol bought 96,060 shares of Lubrizol (NYSE:LZ) for $104 per share (roughly $10 million), two months before Buffett bought the company for $9.7 billion or $135 per share! This has to be the takeout trade of the year so far.

Lubrizol/LZ - Stockcharts.com
During the CNBC interview (watch below), Sokol mentioned that he bought Lubrizol for his personal family account, as he thought it was an attractive undervalued investment. He recommended Lubrizol to Buffett as a potential opportunity for Berkshire and disclosed that he bought LZ shares. He didn't think Buffett was interested in the company, or would have acted as quickly.

Call options could have been betting on a deal. According to Livevol, LZ April call options traded 7 times normal volume on March 9. Was that Buffett levering up or someone in the know? I provided links below for more analysis on what happened. In any event, Sokol timed his $LZ investment pretty well (+30% non-annualized). Here are quotes from the CNBC transcript: