Tuesday, June 21, 2011

Bill Gross: College is a Waste (College Tuition Inflation, Student Debt and No Jobs)

In his most recent note, Bill Gross, manager of the largest bond fund in the world at PIMCO, said college is a waste and needs to restructured in order to create jobs again. Read the full note here.

"​A mind is a precious thing to waste, so why are millions of America’s students wasting theirs by going to college? All of us who have been there know an undergraduate education is primarily a four year vacation interrupted by periodic bouts of cramming or Google plagiarizing, but at least it used to serve a purpose. It weeded out underachievers and proved at a minimum that you could pass an SAT test. For those who made it to the good schools, it proved that your parents had enough money to either bribe administrators or hire SAT tutors to increase your score by 500 points. And a degree represented that the graduate could “party hearty” for long stretches of time and establish social networking skills that would prove invaluable later on at office cocktail parties or interactively via Facebook. College was great as long as the jobs were there.

So is college tuition (higher education) in a bubble? Here are facts Gross provided. The chart above compares college tuition, home prices and the CPI.

EUR/USD Chart Testing 50DMA Before Greek Confidence Vote

EUR/USD broke above resistance in the vertex and is still riding the uptrend line. It is now testing the 50 day moving average. Catalysts ahead include the Fed meeting and Greece confidence vote. Continue to watch that trend line and floor support (Nov 2010 high). If tested again and breached, I think it presents a decent short opportunity (in my opinion). A chart with EUR/USD updated is after jump, as well as a hyperlink to the layout with trend lines. You can also watch the EUR/USD quote live on the FreeStockCharts.com widget on the sidebar.



Obama Impersonator at Republican Leadership Conference (Reggie Brown)

While waiting on Greece's confidence vote, watch some political comedy that occurred over the weekend. Reggie Brown, a comedian and Obama impersonator, performed at the Republican Leadership Conference in New Orleans on Saturday and was eventually kicked off stage, haha. He started taking shots at Republicans and they cut off his mic during a joke on Michele Bachmann. From the Washington Post:
“Had I been in the room I would have pulled him sooner,” Charlie Davis, executive director of the RLC told The Fix. “We have zero tolerance for racially insensitive jokes. As soon as I realized what was going on, I rushed backstage and had him pulled."
He does a good impersonation. Watch the CSPAN video after the jump.

Sarah Hewin: Greek Banks More Exposed To Sovereign Debt Crisis (CNBCTV18)

Sarah Hewin (Source: Youtube)
If you want detailed information on the Greek sovereign debt crisis, Sarah Hewin, Head of Research at Standard Chartered Bank in Europe, explained everything on CNBCTV18 yesterday. Read the full transcript or watch the video after the jump. I also provided links to breaking news on the situation. Ahead of the confidence vote, the Greek 2-year government bond yields 28.098% (went from 28.81% to 28.09% this morning) and EUR/USD is trading higher at 1.43433. Good luck Greece!
Greece 2-year Gov Bond Yield (Bloomberg)
"The question is how voluntary a voluntary rollover can be is an interesting one. I think that there is a certain amount of behind the scenes coercion which is going on for large banks, particularly state owned banks in Europe to rollover debt as it falls due. Now, the main thing is that there should not be seen to be any coercion because if that’s the case then the ratings agencies have said that they will class Greek debt as in default, and if that’s the case then the European Central Bank has said that they will no longer accept Greek debt as collateral. So the definitions are quite important. 
The main difference really is that in a truly voluntary situation you frankly don’t know how much debt is going to be rolled over. So it’s a bit of a shot in the dark as to how much you can rely upon the private sector to refinance that debt as it falls due. The overall exposure to Greece, again an interesting question, we have got various parts of the global economy which has exposure to Greece but of course the main holders of Greek debt are the Greek banks themselves, the European banks hold probably 80% of foreign banking exposure to Greece and amongst those European banks its France and Germany that have the major holdings, has major holding in euro size. But if you look at what their holdings are as a share, as a percent of the banking sector assets is relatively small amount. The Greek banks are much more exposed on that measure."

Monday, June 20, 2011

Aviation Biofuels About to Take Off (Camelina) - Guest Post

Camelina and Algae Fuels via U.S. Navy
Guest post by OilPrice.com

Aviation Biofuels About to Take Off

An extraordinary convergence of recent events seems poised shortly to make aviation biofuels the belle of the investor's ball.

The first is that on 8 June the follows the international standards certifying body ASTM International announcing its approval of its BIO SPK Fuel Standard, to be made official later in the year, of the use of hydrotreated renewable jet (HRJ) Jet A-1 fuel in commercial aviation. The potential financial implications are massive, as together the airline industry and the U.S. military use more than 42.25 million gallons (1.5 million barrels) of jet fuel a day.

One of the leading contenders for ramping up production of Jet A-1 HRJ is camelina, which has undergone extensive testing by both civilian airlines and the U.S. military. Camelina HRJ qualifies as a "drop-in" fuel, which can simply be mixed with regular Jet A-1 in a 50-50 ratio, allowing jet engines to function without any modifications.

In March 2010 Biomass Advisors released their 116-page study, Camelina Aviation Biofuels Market Opportunity and Renewable Energy Strategy Report, projecting that by 2025 one billion gallons of camelina biofuel would be produced for the aviation and biodiesel sectors, creating 25,000 new jobs and producing over $5.5 billion in new revenues and $3.5 billion in new agricultural income for U.S. and Canadian farmers. Biofuels Digest is projecting that global advanced biofuels capacity will reach 4.003 billion gallons by 2015, based on company announcements to date, with capacity reaching 718 million gallons in 2011, 1.522 billion by 2012, 2.685 billion by 2013, and 3.579 billion gallons by 2014.

Fuel and oil comprise 25 percent of civilian airlines' operating costs. When the price of jet fuel rises one cent, it increases the global cost of aviation $195 million.

Italy, Spain, Greece, Portugal, Ireland Spreads to German Bunds (Quotes)

10Y Portuguese-German Yield Spread (Bloomberg)
Bloomberg.com has charts and quotes of Eurozone government bond yield spreads to German bunds as a sovereign credit risk indicator. Germany is considered the safest sovereign credit in the Eurozone; so if a country's bond yield increases against German bunds, then credit risk is rising. Unfortunately I could only find 10-year spreads on Bloomberg's website (UPDATE: The 5Y Italian-German Bund spread works, you can try to tweak the other quotes). Apparently 5-year spreads are more important to watch. You can also watch the government bond yield itself and the credit default swap to monitor credit risk. Look at the snapshot of Portugal-Germany during the past year!

*Update: Unfortunately Bloomberg.com took these charts down, but the spreads are still available on a daily basis (the links redirect to their government bond center). You can still view charts of government bond yields.

*Update #2: You can view charts of these spreads (risk premiums) at countryeconomy.com.

First the PIIGS:
10 Year Greek - German Bund Spread (.GRGER10:IND)
10 Year Italian - German Bund Spead (.ITAGER10:IND)
5 Year Italian - German Bund Spread (.ITAGER5)
10 Year Portuguese - German Bund Spread (.PORGER10:IND)
10 Year Ireland - German Bund Spread (.IRGERSP:IND)
10 Year Spanish - German Bund Spread (.SPAINGER10:IND) (works)

France, Belgium and the UK:
10 Year French - German Bund Spread (.FRAGER10:IND)
10 Year Belgium - German Bund Spread (.BELGER10:IND)
10 Year U.K. Gilt - German Bund Spread (.UKGER10:IND)

Related Post on June 24, 2011: 10 Year Italian-German Bund Yield Spread Makes New High; Watching Spain (Chart)

For more bond quotes and charts at Bloomberg.com visit this post at tickerforum.org. Market participants can now trade 10-year Sovereign Yield Spread Futures. Here is the press release and video via CME Group. I embedded the video after the jump.

"CME Group Announces the Introduction of Sovereign Yield Spread Futures to Help Manage Risk Exposure Between Government Bond Markets

LONDON, April 21, 2011 /PRNewswire/ -- CME Group, the world's leading and most diverse derivatives marketplace, has announced today that it will introduce cash-settled Sovereign Yield Spread futures beginning May 22 for a trade date of May 23. The six countries represented in the initial launch phase include France (OAT), Germany (Bund), Italy (BTP), Netherlands (DSL), United Kingdom (Treasury Gilts), and United States (Treasury Notes). These products are listed by and subject to the rules of CME, and further diversifies CME Group’s Interest Rates product portfolio.

Moody's: Italy's Aa2 Ratings On Review For Possible Downgrade (10-year Bond Yields 4.81%)

Italy 10-Year Government Bond Yield
(Source: Bloomberg.com)
From Moody's Investors Service on Friday June 17, 2011. To your right is Italy's 10-year government bond yield.
"Moody's places Italy's Aa2 ratings on review for possible downgrade

Frankfurt am Main, June 17, 2011 -- Moody's Investors Service has today placed Italy's Aa2 local and foreign currency government bond ratings on review for possible downgrade, while affirming its short-term ratings at Prime-1.

The main drivers that prompted the rating review are:

(1) Economic growth challenges due to macroeconomic structural weaknesses and a likely rise in interest rates over time;

(2) Implementation risks surrounding the fiscal consolidation plans that are required to reduce Italy's stock of debt and keep it at affordable levels; and

(3) Risks posed by changing funding conditions for European sovereigns with high levels of debt.

Moody's review will evaluate the weight of these growing risks in light of the country's high rating but also relative to some credit-strengthening trends that have been observed in recent years and are expected over the coming years, such as improved fiscal governance, lower budget deficits and a modest economic recovery.

RATIONALE FOR REVIEW

First, the Italian economy faces growth challenges in an environment characterized by long-term structural impediments to growth and potentially rising interest rates. Structural economic weaknesses -- mainly low productivity and important labour and product market rigidities -- have been a major impediment to growth in the last decade and continue to hinder the economy's recovery from the severe recession it experienced in 2009. Italy has so far only recovered a fraction of the nearly seven percentage points in GDP that it lost during the global crisis, despite low interest rates, which are likely to rise in the medium term. Growth prospects for the Italian economy in the coming years will be a crucial factor that will determine the government's revenues and the achievement of fiscal consolidation targets.

Sunday, June 19, 2011

EUR/USD Inside Vertex Waiting For Eurozone Catalyst (Trends, Channels To Watch)

EUR/USD (FreeStockCharts.com) - shorter term
I'm watching the EURUSD vertex point. Putting the action into words, The Euro in U.S. Dollars is testing the high from November 2010, as well as uptrend support from January 2011. The green circle shows where it would trade if EURUSD successfully broke above the November high with support from the rising trend. However, it is still in a wide descending channel. If EURUSD breaks below the uptrend line from January, EURUSD would trade inside of a longer term symmetrical triangle using the uptrend line from June 2010 as support.

EURUSD is trading below the 50 day moving average (blue line) and above the 200 day moving average (red line). I wouldn't be surprised if the Dollar rallied further here (EUR/USD moved lower) and market pulled back as a result, but the debt ceiling debate, end of QE2 and U.S. economic slow down will all affect Treasury yields and the U.S Dollar going forward. The sovereign debt crisis in Europe, as well as contagion risks, are affecting the Euro. For more information and catalysts that lie ahead read these articles below. I also embedded a video with Greek Prime Minister George Papandreou addressing parliament (via Al Jazeera).

Europe Fails to Agree on Greek Aid Payout (Bloomberg)
Europe delays decision on emergency loans to Greece (Reuters)
EU’s Juncker Says Progress Made on New Greek Aid Package (Bloomberg) ?
Euro zone finance ministers' statement on Greece (Reuters
)
Official Statement By An Insolvent Europe On An Insolvent Greece (Zero Hedge)

Japan says G7 finance leaders discussed Greek crisis (Reuters)
Greek Default Would Spell ‘Havoc’ for Banks (Bloomberg)
Related: Italy’s Bond Ratings May Be Downgraded by Moody’s Amid ‘Growth Challenges’ (Bloomberg)
Pimco head says EU must change course on Greek aid (Reuters)
"Europe risks wasting more money for nothing if it keeps pumping billions into the ailing Greek economy, the head of Pimco, the world's largest bond fund, said in an interview published on Sunday."
If All Else Fails, Lower Your Standards (Irwin Seltzer - Wall Street Journal)

*EUR/USD (FreeStockCharts.com) - longer term*

Soros: China Risks Hard Landing (Shanghai, Hang Seng, FXI, EWH Charts - 6/19/2011)

via Flickr (JamesReaFotos)
George Soros warned about China's economy at a conference in Oslo, according to Bloomberg.

"China has missed its opportunity to stem inflation and may now risk a hard landing, billionaire investor George Soros said."

"The world’s second-largest economy is in a “bit of a bubble,” Soros, 80, said today at a conference in Oslo. There are some signs that China is “losing control,” he said."

"China’s formula for steering its economy is “running out of steam,” Soros said, adding the country is seeing the beginnings of wage-price inflation."

Shanghai Stock Index ($SSEC) 1-year Chart

Soros also talked about Europe and Africa. Below I put up charts of the Shanghai Stock Composite Index ($SSEC), Hang Seng Index ($HSI), FXI (iShares FTSE China 25 Index ETF) and EWH (HongKong iShares). They all look like they are rolling over and/or piercing near term support levels. EWH, and probably the others, couldn't break above the 2008 high so I bet it retraces a bit. A breakout above 2008 resistance would signal long-term upside in my opinion. In the near term, these charts need to break out of downtrends and confirms support levels. Jim Chanos, who warned about Enron before it collapsed, has been bearish on China for a while. (Jim Chanos: China's Economic Growth Path Is Unsustainable (CNBC) 5/6/2011).

Friday, June 17, 2011

JOE (St. Joe Co.) Tests Symmetrical Triangle! - Chart

If JOE breaks down, $13 looks like a decent support level from 1998-1999. Thoughts? David Einhorn and Whitney Tilson value JOE between $7 and $13 (see previous posts for CNBC videos and links to reports).

St. Joe Company ($JOE) - Source: FreeStockCharts.com

Recent posts on $JOE:

St. Joe is Whitney Tilson's Largest Short Position, Berkowitz Wants $JOE As Largest Position (May 24, 2011)

David Einhorn is Still Short St. Joe and Moody's, Buys Yahoo (Greenlight Q1 Letter) (May 11, 2011)

St. Joe (JOE) May $24 Call Volume; BlackRock, Fidelity Magellan Own a Huge Chunk of Shares (April 20, 2011)

SEC Conducts Inquiry Into St. Joe's Land Impairment Practices (JOE) (January 12, 2011)

Einhorn's Presentation On Why He's Short St. Joe Vs. Bruce Berkowitz Who Owns 30% (December 20, 2010)

*I am not long or short this stock

Nuclear Twilight in Europe (Germany) - Guest Post

Nuclear Power Plants in Germany
(via Wikimedia Commons)
Guest post by OilPrice.com (image added)

Nuclear Twilight in Europe

It is becoming evident to many that the March nuclear catastrophe at Japan's six reactor Daichi Fukushima complex has dealt a huge, possibly fatal, blow to the nuclear industry's hopes of a revival.

A year ago even global warming enthusiasts reluctantly embraced nuclear power as a carbon-free energy generating system, and the industry was ramping up for glory days as a result.

The triple whammy against nuclear power beginning with the 1979 partial meltdown at Three Mile Island, followed by 1986's Chernobyl disaster and now Fukushima, effectively present a "three strikes and you're out" call against civilian nuclear energy power generation for the foreseeable future.

That said, with the trillions of dollars already invested in 436 nuclear power plants (NNP) worldwide, according to the International Atomic energy Agency (IAEA), the industry has begun to push back, and "ground zero" is emerging as Europe, not Japan, with the lawyers circling.

In the wake of Fukushima, German Chancellor Angela Merkel announced on 30 May that Germany, the world's fourth-largest economy and Europe's biggest, would shut down all of its 17 would abandon nuclear energy completely between 2015 and 2022, an extraordinary commitment, given that Germany's 17 NPPS Germany produce about 28 percent of the country's electricity.

If Berlin's announcement sent nuclear power proponents seating, worse was to follow, as Switzerland is examining a proposal to phase out the country's five nuclear plants by 2034.

Thursday, June 16, 2011

EUR/USD Levels To Watch, LIBORs, Europe Debt Crisis Updates (6/16/2011)

EUR/USD could test the 200dma and 1.5 year uptrend line. The October 2010 peak looks like resistance again. The Eurozone sovereign debt crisis still hasn't been resolved, and since banks own this debt there are worries over contagion risk. Greece's 5Y credit default swap just hit a new high (1,769.175 bps USD). This could help, via Reuters: "IMF expected to pay next Greek tranche: eurozone sources". Below is some DV proprietary chart art and links to relevant articles. Watch LIBORs and the U.S. 2-year swap spread to see if interbank dollar funding risks are being repriced. Read more at Bloomberg"Europe Faces ‘Lehman Moment’ as Greece Unravels: Euro Credit".


Source: FreeStockCharts.com  (click for larger view)

1-Month, 3-Month LIBOR (London Interbank Offered Rate)
Direct Source: StockCharts.com

Related articles:

Hedge Funds Ramp Up Extreme Bets Against Euro
"According to a Deutsche Bank note to a client, one "U.S. house" bought a very large amount of one-month euro/dollar put options with a $1.40 strike price on Tuesday and Wednesday. At Bank of America, brokers saw someone buy a $1 billion put option with a strike price of $1.30 and an end-of-year maturity date." (WSJ)

Euro Declines to Three-Week Low on Concern Europe Debt Crisis Is Worsening (Bloomberg)

Euro-Dollar Puts Reach Highest in Year on Greece’s Sovereign-Debt Turmoil (Bloomberg)

Greek Bank Threat is Main Stability Risk: ECB (Bloomberg)

European stocks falter on debt contagion woes (Reuters)

Greece, Ireland, Portugal Lead Sovereign Credit-Default Swaps to Records (Bloomberg)

Greek Government Fall Would Be Big Step To Disorderly Default -Fitch Analyst (WSJ)

Treasuries Advance on Europe Concerns, Two-Year Yields Fall to 2011 Low (Bloomberg)

Japan’s Bonds Rise as Greece Political Turmoil Boosts Demand for Safety (Bloomberg)

Rise in dollar funding pressures spooks traders (Reuters)

ECB Constancio: Restructuring Could Increase Contagion Risk (iMarketNews)

Interest Rate Swap Spreads Widen Most Since November; Moody's Warns French Banks (Bloomberg)

Guggenheim's Minerd Interview on Global Markets, Greece's Debt Problems (Bloomberg Video)

FX Concepts's Conklin on Euro, Dollar Outlook (Bloomberg Video)

Wednesday, June 15, 2011

John Burbank: Asset Prices Down 10, 15, 20 Percent Will Bring QE3 Speculation

John Burbank, managing member and chief investment officer at hedge fund Passport Capital, spoke at the Committee for a Responsible Federal Budget Annual Conference yesterday (read Bernanke's keynote here) on the debt ceiling and end of QE2. I transcribed what he said below. He covered how he's investing around the Fed which I thought was important.
"There are so many variables. August seems like a long time away if you're in the market everyday. We should have a European default by then and we should understand the rate we're growing in the U.S. I think the 10 year (Treasury) is really telling you that there's low growth and a deflationary outlook, and that QE2 is ending. The markets have responded far more to what Bernanke is doing and likely to do than anything else I'd say because investing in inflation is exactly opposite to investing in deflation. Pretty much you have to turn your portfolio upside down and do the opposite. So, I think the investors and business people don't have clarity and there are so many different variables.

The question is, who's going to fix this? Is it Congress? Or is it Bernanke? Or is it the markets? Which is going to happen first. And the question is, is it going to be inflation or is it going to be deflation? Right? A lot of people compare investing to playing poker, and I say it's like we're watching the last table of the World Series of Poker because I don't know how to invest without watching what Fed does, Congress does, Beijing does. The biggest players who essentially set prices. That's the problem, we have no clarity. So the debt ceiling is just one of many different variables that we need to understand as investors"

"I think the biggest thing is QE2 is ending and many investors assume QE3's magically right around the corner. If it's not, asset prices are going to fall. They are going to fall 10, 15, 20% and then the market can start speculating on QE3."

[Question by Steve Liesman: Were you fumbling with your Blackberry hitting the sell button while Lindsey was talking?]

"Oh, Ive already been hitting the sell button most of this year so."

"The problem with the markets is people assume liquidity and the utility of the very near term is far more powerful than the certainty of the long term. So if Bernake is in the market buying Treasurys, the 10 year goes up to 4%. But then growth starts faltering and you start discounting the end (of QE2), and here the 10 year goes to 3%"

Full segment featuring John Burbank: http://www.c-spanvideo.org/program/BudgetAnnu/start/3294/stop/11530

Bernanke's Keynote at Federal Budget Conference (Full Text, 6/14/2011)

Source: CSPAN
Watch the full video at cspan.org. The conference included Rep. Paul Ryan, Sen. Michael Bennet, Alan Simpson, Lawrence Lindsey, Neel Kashkari (PIMCO, Interim U.S. Assistant Secretary of the Treasury for Financial Stability/ set up TARP during the financial crisis), Michael Pond (interest rate strategist at Barclays Capital), Diane Swonk (Mesirow Financial), John Burbank (Passport Capital), Carlo Cottarelli (IMF), Steve Rattner, Norm Ornstein (American Enterprise Institute), Rudolph Penner (former director of Congressional Budget Office), Marne Obernauer (Beverage Distributors Company) and many more. It is getting serious folks.
Chairman Ben S. Bernanke
At the Annual Conference of the Committee for a Responsible Federal Budget, Washington, D.C.
June 14, 2011

Fiscal Sustainability

I am pleased to speak to a group that has such a distinguished record of identifying crucial issues related to the federal budget and working toward bipartisan solutions to our nation's fiscal problems. Today I will briefly discuss the fiscal challenges the nation faces and the importance of meeting those challenges for our collective economic future. I will then conclude with some thoughts on the way forward.

Fiscal Policy Challenges
At about 9 percent of gross domestic product (GDP), the federal budget deficit has widened appreciably since the onset of the recent recession in December 2007. The exceptional increase in the deficit has mostly reflected the automatic cyclical response of revenues and spending to a weak economy as well as the fiscal actions taken to ease the recession and aid the recovery. As the economy continues to expand and stimulus policies are phased out, the budget deficit should narrow over the next few years.

Unfortunately, even after economic conditions have returned to normal, the nation faces a sizable structural budget gap. Both the Congressional Budget Office and the Committee for a Responsible Federal Budget project that the budget deficit will be almost 5 percent of GDP in fiscal year 2015, assuming that current budget policies are extended and the economy is then close to full employment.1 Of even greater concern is that longer-run projections that extrapolate current policies and make plausible assumptions about the future evolution of the economy show the structural budget gap increasing significantly further over time. For example, under the alternative fiscal scenario developed by the Congressional Budget Office, which assumes most current policies are extended, the deficit is projected to be about 6-1/2 percent of GDP in 2020 and almost 13 percent of GDP in 2030. The ratio of outstanding federal debt to GDP, expected to be about 69 percent at the end of this fiscal year, would under that scenario rise to 87 percent in 2020 and 146 percent in 2030.2 One reason the debt is projected to increase so quickly is that the larger the debt outstanding, the greater the budgetary cost of making the required interest payments. This dynamic is clearly unsustainable.

Tuesday, June 14, 2011

S&P Downgrades Greece to CCC, Watch Greek Stock Indexes (10Y Bond Yield at 17.13%; 5Y CDS 1,590)

Standard and Poor's downgraded Greece to 'CCC' from 'B' today. Greece's 10-year government bond yield rose to 17.13% this morning and its 5Y credit default swap made a new high at 1,590 basis points. See charts below and an excerpt from the S&P report after the jump (and links to more yields).

I think Greek stocks will be interesting to watch going forward as Greece and other Eurozone members deal with their sovereign debt issues. $ATG (Greece General Shares) broke below 2000 and 2009 support and the next support level is between 865-900 (in 1996-1997). Watch it trade in its new channel up against downtrend resistance. There is also a Dow Jones Greece Index ($GRDOW) which looks similar. I'd like to see that above 2003 resistance.

Unfortunately there isn't an ETF trading in the U.S, but I found out there is one on the Xetra Exchange quoted in Euros (Lyxor ETF MSCI Greece - see chart #3). Are there option chains online anywhere I can watch on this ETF, or others.

$ATG (Greece (Athens) General Share (StockCharts)

$GRDOW (Dow Jones Greece Stock Index) - StockCharts.com

Monday, June 13, 2011

ECRI: Slowdown In U.S. Economy, Global Industrial Growth Underway Using Long Leading Indicators

Lakshman Achuthan, co-founder of the Economic Cycle Research Institute (ECRI), told WSJ TV today that ECRI's long leading indicators were predicting a cyclical economic slowdown in U.S. that could last a couple of quarters.
"Now when we look this summer, the first call is a slowdown in global industrial growth (manufacturing sector). Looking at U.S. specific cycle indicators, we see in the wake of that call for a global industrial slowdown, we see a slowdown in the broad U.S. economy (services, construction etc)."

Watch the full interview below. ECRI has free excel data and charts available at their website which includes the U.S. Future Inflation Gauge, U.S. Leading Home Price Index, U.S. Weekly Leading Index (and growth), U.S. Coincident Index and U.S. Lagging Index.

Robert Shiller: Home Price Slide Could Last 20 Years, 10 to 25 Percent Decline Wouldn't Surprise Him

Robert Shiller, Yale Economist and co-founder of the S&P Case-Shiller Home Price Index (which recently confirmed a double dip in housing), told Reuters at the S&P Housing Summit that he wouldn't be surprised if home prices fell 10 to 25%, and the slide could last for 20 years. He said, "I'm a little pessimistic. We've been in a five year decline already, since the peak in 2006, and I don't see evidence that we're coming out of it."  I embedded the Reuters video after the jump. Shiller also said the U.S. economy faces the risk of a double-dip recession and a potential Japanese scenario.

Did you know there used to be two S&P/Case-Shiller Home Price ETFs that traded? (DMM and UMM) There was no market for them so they shut down. From MacroMarkets (co-founded by Robert Shiller): "MacroShares Major Metro Housing allow investors to express a bullish or bearish view on the movement of the S&P/Case-Shiller Composite-10 Home Price Index."

S&P, FX, Natural Gas, Roubini, Jim Rogers, Tepper, Albert Edwards, Gary Shilling Updates

Frankfurt Exchange (Source: Flickr/orb_cz)
Important Linkfest!
  • Charts That Matter Next Week (With Focus On S&P 500 H&S Formation) - Zero Hedge, 6/12/2011 (Podcast and report)
  • Rogers Short on U.S. Techs, Bonds, an American Bank, Emerging Markets, Long Currencies and Commodities ("the next recession will be worse than 2008") - Reuters Insider, 6/10/2011
  • Revisiting The "Ice Age" - SocGen's Albert Edwards Charts America's Descent Into Japan, And The Market's Descent To S&P 400 - Zero Hedge, 6/11/2011
  • Tepper's Take on QE3 - CNBC Video, 6/10/2011

    His email to CNBC: "Basically Bernanke said no QE3. If SPX is down a couple hundred points and financial conditions tightened maybe they would reconsider.  There is no logic to QE3 now and the only result might be more food and energy inflation. We're in a difficult investing environment. Short and sweet."

    Here is an interesting story related to Appaloosa's involvement in Washington Mutual's bankruptcy with trust preferred securities - Hipster Battles Funds - WSJ (retail investors ftw)
  • Investors Can Profit From 'Inevitable" Financial Crisis: Mobius (Templeton Asset Management) - CNBC - 6/7/2011

Saturday, June 11, 2011

Skyworks Retraces 2009-2011 Bull Move, Market Following (SWKS, RFMD, SOXX, AAPL, SPY, DIA Performance)

Source: Skyworks June Presentation
Since the bull market began in early 2009, I continued to watch smartphone semiconductor company Skyworks Solutions (SWKS) as a signal for continued market appreciation (1, 2). The iPhone and iPad use Skyworks semiconductors, or specifically the Skyworks power amplifier module SKY77340 (or now SKY77344?). Skyworks broke out of an eight year sideways channel in 2009 and continued to rally inside of a steep rising wedge that had a $32 target. SWKS eventually hit a high of $37.5 in February 2011. The tide then turned and SWKS started to retrace that huge move; as did its main competitor RF Micro Devices (RFMD). It broke below the rising wedge and is now down 35% from the peak with shares currently trading at $24. As you can see the market is now following suit.

This chart shows the performance of SWKS against RFMD, SOXX (iShares PHLX SOX Semiconductor Sector Index Fund), AAPL (Apple), SPY (S&P 500 ETF) and DIA (Dow Index ETF). I provided more chart analysis after the jump along with the Skyworks June 2011 presentation (embedded pdf), its growth forecast, snapshots of Q2 results (balance sheet/income statement against 2010) and recent analyst notes from Oppenheimer and Sterne Agee.

SWKS, RFMD, AAPL, SOXX, SPY, DIA (source: StockCharts.com)

Wednesday, June 8, 2011

FX Concepts' John Taylor Says Cycle Has Turned, Global Equities Headed Lower (EUR/JPY, EUR/USD)

Source: CNBC
John Taylor, chairman and CEO of $8+ billion hedge fund FX Concepts, told Bloomberg TV on June 6 that the "cycle has turned" and "global equities are on the brink of a downtrend that will last until the end of the year". Why? The U.S. and Europe are slowing down, QE2 is ending (w/ no QE3 in sight, yet) and the market will start pricing in the fiscal stimulus coming off in 2012. He thinks 2012 "is going to be a terrible year" and that the U.S could be in a recession.

The classic "risk off" trades seem to be in play again with a few wild cards. Taylor said "it is bullish for the Yen, bullish for the Dollar, bearish for commodities and bearish for the equity market." He's trying to time a U.S. Dollar reversal (EUR/USD short), but in the meantime he's short the Euro against the Japanese Yen (EUR/JPY). When mixing together the Dollar, no QE3 and an economic slowdown, Taylor said, "when the economy is really bad that means that the banks slow down lending and there's a shortage of Dollars in the world. And I don't think QE3 is coming back; that's really the wild card here is QE3 now. If the Fed comes out and makes some statements and says no we're not going to do QE3 right away, the Dollar will get very strong". What about carry trades?

S&P 500 ETF (StockCharts.com)
On CNBC on June 2, Taylor mentioned that "the more trouble we have with the debt ceiling, the stronger the bond market and Dollar will be.  It means we're going to do something, and when we do something obviously that's going to really drive the Dollar up. Because Europe can't do anything; Europe is falling apart...."

Taylor is also bearish on U.S. equities. He believes $1,000 is a "respectable" level on the S&P. SPY (S&P 500 ETF) broke the bull market uptrend from March 2009. The next support levels are $124.5 (200 day moving average) or $120 (pre-flash crash high, April 2010 support) if it keeps drifting lower. The S&P could re-test some resistance levels at some point ("Oppenheimer Technician Carter Worth Says It's Time to Buy" - CNBC 6/7/2011). Hopefully you've been hedged in some way or short during the past month. It is interesting that the VIX hasn't been moving much; read "The VIX Has Completely Changed Character" at Investing With Options. Watch the Bloomberg and CNBC videos after the jump.

Sun VIX Spikes, Watch Solar Flare Prominence Eruption 6/7/2011

Source: NASA
In space volatility news, the sun's VIX (solar x-ray flux) is spiking. The Space and Heliospheric Observatory said, "the Sun on June 7, 2011, starting at about 06:41 UT unleashed one of the most spectacular prominence eruptions ever observed, in fact, one could call it a "prominence explosion." Watch the videos after the jump, you won't regret it. More from NASA:
"The Sun unleashed an M-2 (medium-sized) solar flare, an S1-class (minor) radiation storm and a spectacular coronal mass ejection (CME) on June 7, 2011 from sunspot complex 1226-1227. The large cloud of particles mushroomed up and fell back down looking as if it covered an area of almost half the solar surface."
According to NASA/Marshall Solar Physics, the sunspot cycle is supposed to peak out in 2013:
"The current prediction for Sunspot Cycle 24 gives a smoothed sunspot number maximum of about 69 in June of 2013. We are currently over two and a half years into Cycle 24."
Any new updates from Charles Nenner? On my previous post on 11/30/2010, Nenner said the next crisis would hit in 2013 when the sunspot cycled peaked, and predicted Dow 5,000.

Tuesday, June 7, 2011

Ben Bernanke's U.S. Economic Outlook, Sees Growth Picking Up In Second Half (6/7/2011)

Source: Wikimedia Commons
Here it is via FederalReserve.gov. Apparently no mention of QE3 tanked the market yesterday.

Chairman Ben S. Bernanke
At the International Monetary Conference, Atlanta, Georgia

June 7, 2011

The U.S. Economic Outlook


I would like to thank the organizers for inviting me to participate once again in the International Monetary Conference. I will begin with a brief update on the outlook for the U.S. economy, then discuss recent developments in global commodity markets that are significantly affecting both the U.S. and world economies, and conclude with some thoughts on the prospects for monetary policy.

The Outlook for Growth
U.S. economic growth so far this year looks to have been somewhat slower than expected. Aggregate output increased at only 1.8 percent at an annual rate in the first quarter, and supply chain disruptions associated with the earthquake and tsunami in Japan are hampering economic activity this quarter. A number of indicators also suggest some loss of momentum in the labor market in recent weeks. We are, of course, monitoring these developments. That said, with the effects of the Japanese disaster on manufacturing output likely to dissipate in coming months, and with some moderation in gasoline prices in prospect, growth seems likely to pick up somewhat in the second half of the year. Overall, the economic recovery appears to be continuing at a moderate pace, albeit at a rate that is both uneven across sectors and frustratingly slow from the perspective of millions of unemployed and underemployed workers.

As is often the case, the ability and willingness of households to spend will be an important determinant of the pace at which the economy expands in coming quarters. A range of positive and negative forces is currently influencing both household finances and attitudes. On the positive side, household incomes have been boosted by the net improvement in job market conditions since earlier this year as well as from the reduction in payroll taxes that the Congress passed in December. Increases in household wealth--largely reflecting gains in equity values--and lower debt burdens have also increased consumers' willingness to spend. On the negative side, households are facing some significant headwinds, including increases in food and energy prices, declining home values, continued tightness in some credit markets, and still-high unemployment, all of which have taken a toll on consumer confidence.

CMA Launches Intraday CDS Data Services For Front and Middle Office Professionals

Source: Wikimedia Commons
If you are interested in credit default swaps (aka credit insurance, or credit ratings that trade in real-time), CMA has a new product out that monitors intraday CDS data. I'm waiting for the day when discount online brokerages allow retail investors (twitter hedge funds) to trade corporate credit default swaps, sovereign CDS, CDS indexes and tranches alongside institutional investors. Even just to hedge risk like equity and index options. Cut the notional amounts?
"CMA launches intraday CDS data services for front and middle office professionals

CMA today announced the launch of two new Intraday CDS data services, which deliver independent, intraday credit pricing data to front and middle office professionals on a near live basis. Accurate bid-offer prices are based on actual quotes observed in the market and unique liquidity metrics provide valuable information on the breadth and depth of the market.

Gurbinder Bansal, Head of Product Marketing at CMA, explains: “There is a definite trend towards more flexible risk management practises, with investors expecting more transparency and requiring their books to be marked same day and intraday. At the same time, credit quality is now widely recognised as a key driver of risk and therefore up-to-the minute CDS data is now critical even for investors who are not credit specialists. As far as we are aware, our intraday CDS data pricing services are the most comprehensive currently available in terms of coverage, quality and depth of data.”

The new service for the middle office, CMA Datavision Intraday CDS represents an expansion of our existing end-of-day service to help meet the growing demand for more timely and flexible risk management practices. Clients can receive full credit curves on the hour, every hour from 08:00 - 22:00 London time, spanning the London open through to the New York trading close. In addition, the data contains unique liquidity metrics, such as quote frequency and average bid-offer spreads, bringing much sought after transparency to the market. This means that clients can verify prices, create flash profit and loss and value books on-demand with the confidence that they have the most reliable and current pricing data.

The new front office service, CMA Quotevision Creditpulse serves as an entry point for traders and investment managers wanting to follow the global OTC credit market as it evolves. A close to real-time tick-by-tick feed from the institutional CDS market provides a clear, structured view of indicative quotes observed in the market. Access to such high quality, timely data gives the ability to track market sentiment and understand its impact on positions throughout the trading day.

CMA Intraday CDS data services are available directly from CMA and key channel partners."

Source: CMA Datavision

Monday, June 6, 2011

Asset Valuation Ratios, Credit Spreads and Leveraged Loan Charts via Janet Yellen (6/2/2011)

Below are charts from Federal Reserve Vice Chair Janet Yellen's speech ("Assessing Potential Financial Imbalances in an Era of Accommodative Monetary Policy") at the 2011 International Conference: Real and Financial Linkage and Monetary Policy at the Bank of Japan on 6/2/2011.

Asset Valuation Indicators (price-to-earnings ratio, price-to-rent ratio)



Corporate Bond Market (credit spreads, far-term forward spreads)



Syndicated Leveraged Loan Market (inflows into bank loan funds, secondary-market prices)



Syndicated Leveraged Loan Market (by lender type, by use)



Source: http://www.federalreserve.gov/newsevents/speech/yellen20110601a.pdf

DoubleLine's Gundlach Sees Repricing Lower in Risk Assets; ABX Dropped 20%; BAC Testing $11 Support

Source: CNBC
Jeffrey Gundlach, founder and CEO of DoubleLine Capital with $11 billion+ under management (+17% in 1-year), was on CNBC's Strategy Session on May 24 sharing his views on the market. With home prices making new lows, Gundlach said the "underlying metrics" (recovery rates) of legacy debt issued at the peak of the housing bubble (2006-2007) seem to be deteriorating, and non-performing loans in the whole loan market are not being marked-to-market or "fully reserved for." Watch CNBC video #2 for more details. In addition, Gundlach said the "many multiples of derivatives attached" to the debt is an unknown risk.
ABX.HE.AAA.07-01 via Markit

He pointed out that the market was already pricing in this risk. The ABX Index (subprime mortgage-backed securities credit default swap index) was down 20% in the last three months and Bank of America (which he says is a proxy for the ABX Index at the Ira Sohn conference) was down 26% ($15 to $11). $11 is an important support level to hold on the chart. If $BAC breaks $11 it will visit levels not seen since April and May of 2009.
$BAC - StockCharts.com

In the first video Gundlach mentioned that he wasn't a buyer or seller of 10-year Treasurys at 3.25%. He is waiting for the market to make a move as QE2 ends and uncertainties continue with the debt ceiling and potential fiscal constraint. Oh and he is bullish on natural gas and would rather hold gemstones in his sock than carry gold (via Ira Sohn Conference). Lastly, Gundlach mentioned that he "sees a repricing lower in risk assets". He has 10% of assets in cash.


Linkfest EXTRA (Ritholtz, John Paulson, Janet Tavakoli, Hugh Hendry)

"Ritholtz Hedges His Bets" ("Prompted by last week's selloff, the well-known portfolio manager and author is using ETFs to gain a little more insurance") - Barron's

"Euro Endgame" by Janet Tavakoli  - Tavakoli Structured Finance (pdf)

"Janet Tavakoli: "Greater Global Risk Now Than At Time Of LTCM" - Zero Hedge via FT

"Hugh Hendry Letter! Why He's Super-Bearish On Europe, And A Specific Commodity Company" - Cluster Stock

"Paulson's Flagship Fund Down 6% In May, Down Over 13% For The Year Following Latest Sino-Forest Debacle" - Zero Hedge

Added: "Here's What Happens When US Energy Spending Passes 9% Of GDP" - Business Insider via Gregor.us

Friday, June 3, 2011

Linkfest: Mobius, Janet Yellen, Jeff Gundlach, John Taylor, David Rosenberg, Gregor Macdonald....

Linkfest (5/25/2011 - 6/3/2011)

Assessing Potential Financial Imbalances in an Era of Accommodative Monetary Policy by Janet Yellen, Vice Chair of the Federal Reserve (she gave a speech at the "2011 International Conference: Real and Financial Linkage and Monetary Policy" at the Bank of Japan) (Federal Reserve via Zero Hedge).

John Taylor: "Next Year Is Going To Be Truly Miserable" And QE 3 Will Come. Taylor runs the currency hedge fund FX Concepts (CNBC at Zero Hedge).

Treasury Yields to Keep Falling as Growth Slows, David Rosenberg Says: Tom Keene (Bloomberg).

Housing Market Echoes Credit Crisis (ABX Index): DoubleLine CEO Jeffrey Gundlach (CNBC).

DoubleLine Capital's Jeffrey Gundlach was interviewed by Joe Weisenthal on 5/25/2011 (Business Insider).

Randall Wray (Prof. of Economics at University of Missouri - Kansas City): The Crisis Is Not Over (PragCap).

Phantom Efficiencies: US Economy Still Running Very Slow by Gregor Macdonald (Gregor.us)

Another financial crisis brewing: Mark Mobius (Economic Times) *Executive Chairman of Templeton Asset Management

Mobius Says Another Financial Crisis 'Around The Corner' (SF Gate/Bloomberg)


*Moody's downgrades Greece and warns the U.S. Government and U.S. banks of possible downgrades.
"London, 01 June 2011 -- Moody's Investors Service has today downgraded Greece's local and foreign currency bond ratings to Caa1 from B1, and assigned a negative outlook to the ratings. The rating action concludes the review for possible downgrade that the rating agency initiated on 9 May 2011." (Moody's)

"Greece has 50:50 chance of defaulting, says ratings agency Moody's: Greek government understood to have agreed to €6.4bn in austerity measures in return for next tranche of aid" (Guardian)

"New York, June 02, 2011 -- Moody's Investors Service said today that if there is no progress on increasing the statutory debt limit in coming weeks, it expects to place the US government's rating under review for possible downgrade, due to the very small but rising risk of a short-lived default. If the debt limit is raised and default avoided, the Aaa rating will be maintained. However, the rating outlook will depend on the outcome of negotiations on deficit reduction. A credible agreement on substantial deficit reduction would support a continued stable outlook; lack of such an agreement could prompt Moody's to change its outlook to negative on the Aaa rating." (Moody's)

"New York, June 02, 2011 -- Moody's Investors Service has placed the deposit, senior debt, and senior subordinated debt ratings of Bank of America Corporation (A2 senior), Citigroup Inc. (A3 senior), Wells Fargo & Company (A1 senior), and their subsidiaries on review for possible downgrade." (Moody's)

And here is some link bait.

Chinese Economic Slowdown May Lead to 75% Plunge in Commodities, S&P Says (Bloomberg)

Thursday, June 2, 2011

Howard Marks On High Yield Bond Risk ("How Quickly They Forget"), U.S. High Yield Option-Adjusted Spread

Howard Marks, chairman of $85 billion private equity firm Oaktree Capital, released a memo to clients on 5/25/2011 titled "How Quickly They Forget (pdf)". Historical data from the memo:

High Yield Bond Spread vs. Treasurys (the risk free rate, supposedly) in basis points

"Normal" - December 31, 2003 - 443 bps
Bubble peak - June 30, 2007 - 242 bps
Panic trough - December 31, 2008 - 1,773 bps

Recovered - March 31, 2010 - 666 bps
Shrinking again - April 30, 2011 - 492 bps"

Are high yield bonds starting to underprice risk? Marks thinks they have become flowers again (Warren Buffett invests in weeds).

"High yield bonds and many other investment media have once again gone from being weeds to flowers – from pariahs to market darlings – and it happened in a startlingly short period of time."

But does the credit market overshoot again like it did in 2007? Will the 10-year Treasury yield 0.76%? Or does a new recession widen credit spreads from here. If bond vigilantes cause a "thundering conflagration" in the Treasury bond market, that could force yields higher as well. That isn't happening yet. Marks made sure to note that he doesn't "believe security prices have returned to the 2006-07 peaks."

Check out the US High Yield CCC or Below Option-Adjusted Spread chart since 1997 (via St. Louis Fed FRED database). Watch for a turn. Description: "The Bank of America Merrill Lynch OASs are the calculated spreads between a computed OAS index of all bonds in a given rating category and a spot Treasury curve."


Wednesday, June 1, 2011

John Hussman on the Cyclical Bull and Secular Bear Market (5/30/2011)

John Hussman's recent weekly market comment titled Small Windows in an Unfavorable Long-Term Picture analyzes structural and cyclical bull and bear markets. Earlier in the comment Hussman mentioned "it is clear that stocks are not in a secular bull market (in the 1950-1965, or 1982-2000 sense)" and showed historical Shiller Cyclically Adjusted P/E (price/earnings) ratios. The S&P has been in a strong cyclical bull market since the March 2009 low (666), up 105% at the recent high (1370) over 2.16 years or 26 months. In early May, Thomas Lee, Chief U.S. Equity Strategist at JP Morgan, said in a Bloomberg interview that we are in a structural bull market and increased his target on the S&P to 1,475. So what are we in, a secular bull or bear market? I think the S&P pierced the 2 year uptrend today; I will chart it out in my next post. Below are quotations from John Hussman's note. Read the previous paragraph on secular bull markets.

"The algebra of returns in secular bears, in contrast, is predictably hostile. As long as one allows for valuation levels to vary over the long-term, as they have historically, it is very difficult to escape very extended bouts of poor overall returns for stocks once valuations become as elevated as they are today. The canonical 18-year secular bear, again assuming long-term earnings growth is unaffected, produces overall annual capital gains of about (1.06)*(7/24)^(1/18)-1 = roughly zero. In general, dividend income (again, somewhere in the range of 4% over the full course of time) is the primary source of return for passive investors in a secular bear market period. Since the long contraction of valuations offsets the benefits of long-term earnings growth during secular bear periods, the cyclical bull markets tend to be shorter than average, and cyclical bear markets tend to be extended and often brutal.

Despite the "lost decade" since the extreme valuations of 2000, valuations are now presently at about the same level from which prior secular bear markets have just started. There is no basis to expect a secular bull until we observe the valuations from which they have invariably started. Meanwhile, the recent cyclical bull market from the 2009 low has already run the same duration and slightly further than the typical cyclical bull in a secular bear."

Source: http://www.hussmanfunds.com/wmc/wmc110530.htm

Tuesday, May 31, 2011

Double Dip In Housing Is Confirmed, S&P/Case-Shiller Index at Mid-2002 Levels (Data Through March 2011)

Source: S&P and Fiserv
Read the full press release at Standard and Poor's.

"National Home Prices Hit New Low in 2011 Q1 According to the S&P/Case-Shiller Home Price Indices

New York, May 31, 2011 – Data through March 2011, released today by Standard & Poor’s for its S&P/Case-Shiller Home Price Indices, the leading measure of U.S. home prices, show that the U.S. National Home Price Index declined by 4.2% in the first quarter of 2011, after having fallen 3.6% in the fourth quarter of 2010. The National Index hit a new recession low with the first quarter’s data and posted an annual decline of 5.1% versus the first quarter of 2010. Nationally, home prices are back to their mid-2002 levels." (read more)

Related: Rising Housing Rents Risk U.S. Inflation (Bloomberg)

Kyle Bass: Small Lehman Creditors Are Getting Freight Trained!

Source: CNBC
Lehman Brothers senior creditors are battling over $55-60 billion worth of recoveries in the Lehman estate. Kyle Bass of Hayman Capital (who made $500 million betting against subprime mortgages using CDS) thinks elite hedge funds (Paulson & Co. and Baupost) have an unfair advantage in this case because they have a "cozy relationship with the restructuring advisor", and the "small investor is literally getting freight trained in this process"!

Quotes from his CNBC appearance:
($34 billion of Lehman principal protected notes sold to retail investors in family offices) "don't have a collective voice on the creditors committee. When the official creditors committee was put together there wasn't a seat for them. They are one of the largest single claimants"

"What's interesting to me is as we go through the process, you realize that our country is based on this foundation of the rule of law and you invest in a company because there's a capital structure. What's happening here is the capital structure is being redrawn in the bankruptcy by the big funds with the advisors who I think have too close of a relationship."

"So the real issue here is the little guy, the small investor in this case, is literally getting freight trained in the process and they have no voice; and the banks that sold them these bonds are not looking out in their best interest because they don't want to have that difficult conversation with the people they cost a lot of money to."

*Bass said he owns European claims (Lehman Brothers International - Europe)

From Hayman Capital's recent letter to investors:
"These elite hedge funds appear to have a very cozy relationship with the restructuring advisor in this case. They have no doubt worked together in the past and have expectations to work together in the future. We can only speculate as to why they believe they are entitled to bend and possibly break the long established expectation of seniority that comes with purchasing senior bonds.">

If interested, FINRA.org reports Lehman Brothers Holdings Inc. bond trades. LEHM.HEO currently trades at 25, +31% from February 3, 2010. It traded at 10.87 on January 30, 2009.


Lehman Brothers Holdings Inc. Note (source: FINRA.org)

Friday, May 27, 2011

Fitch and Satyajit Das Explained the Credit Crash Before It Happened (2005, 2007 Reports)

Possible Effects of Overlapping Credit Markets Fitch 2005
I found a research report written by derivatives expert Satyajit Das in February 2007 titled "Credit Crash?" (Wilmott). If you want to learn about credit derivatives, this is the paper to read. The first synthetic CDO was engineered by JPMorgan in 1997, when its credit derivative team sold a BISTRO, or Broad Index Secured Offering, which allowed them to sell $10 billion of credit risk. It was done by accident to get a bonus. The report opened with a quote from Alan Greenspan on credit default swaps in 2006, who Satyajit disagreed with.
"On 18 May 2006, Greenspan (speaking at the Bond Market Association) spoke eloquently about the stabilising effect of credit default swaps (“CDS”) on the international financial system

“The CDS is probably the most important instrument in finance. … What CDS did is layoff all the risk of highly leveraged institutions – and that’s what banks are, highly leveraged – on stable American and international institutions.”

We will critically examine whether the position espoused by Greenspan is in fact true." (read more)
Near the end he provided a diagram titled "The Coming Credit Crash" which was based on this diagram from a July 18, 2005 Fitch report ("Hedge Funds: An Emerging Force in the Global Credit Markets") h/t securitzation.net.

It is amazing how fragile this market was and how CDS failed to contain it. There was even detailed data on subprime MBS deal performance.

Question: If retail investors were able to trade senior debt, leveraged loans, ABS, CMBS and credit default swaps alongside institutional investors using an online brokerage, would systemic risk have been mitigated with increased price transparency and liquidity? It is funny to me that retail investors are "accredited" enough to blow their money on penny stocks that have no underlying revenues, earnings or even capital, but not able to participate alongside hedge fund manager John Paulson in an ABX Index for pennies betting against pools of subprime mortgage-backed securities (trading insurance). Why couldn't a discount brokerage provide deal performance from data providers Lewtan, CoreLogic or Intex, like they provide S&P reports for stocks.

Look at this chart of select tranche spreads of ABX.HE indices (06-01 BBB, 06-02 BBB, 07-01 BBB, 06-01-BBB-, 06-02 BBB-, 06-03 BBB-) from this Nomura report in 2007. The report also breaks out "deal-collateral characteristics" for each series, "deal loan characteristics", "deal underwriting analytics" and "deal prepayment speeds". Were credit hedge funds and investment banks long MBS portfolios not watching this data? Or was it strictly a liquidity problem?

Source: Nomura via Securitization.net

I also stumbled upon this Bloomberg oped by Paul Wilmott on May 24, 2011 titled "Bankers Can’t Avoid Risk by Hiding It".