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.

  • 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.