Offshore Oil Dispute in South China Sea Has Enormous Global Implications - Guest Post

South China Sea (Wikimedia)
Guest post by OilPrice.com

Offshore Oil Dispute in South China Sea Has Enormous Global Implications

The world's unceasing quest for new oil deposits has combined with offshore technology to impel many countries to investigate their offshore resources in their "exclusive economic zone," (EEZ) defined by the 1982 United Nations Convention on the Law of the Sea Part V, Article 55 as extending 200 nautical miles from a nation's coastline.

Difficulties arise in congested maritime areas where overlapping claims create friction, and one of the most contested areas in the world today are the waters surrounding the Spratly islands of the South China Sea.

The Spratly islands consist of more than 750 islands, islets, atolls and cays and their EEZ real estate is variously claimed by China, the Philippines, Taiwan, Vietnam, Malaysia and Brunei. While there are no native islanders, about 45 islands of the archipelago are now occupied by Vietnamese, Chinese, Taiwanese, Malaysian and Filipino forces, all determined to assert their nations' claims of sovereignty. Given the potential resources, the possibility of confrontation is significant and is already occurring.

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)

The Fukushima cloud's (green, not silver) lining; China's JA Solar (JASO) - Guest Post

Guest post courtesy of OilPrice.com (I'll be watching $JASO)

Img source: GreenTechMedia
The Fukushima cloud's (green, not silver) lining

The ongoing tragedy of Japan's Daichi Fukshima nuclear complex will prove to be a boon for renewable energy in Japan, and astute investors should begin carefully to follow Tokyo's new priorities.

Before the March 11 twin disasters of a massive earthquake followed by a devastating tsunami, about 30 percent of Japan's electricity was generated by nuclear power, and Tokyo had ambitious plans to raise its market share to 50 percent over the next two decades, with renewable accounting for 20 percent, Japanese Prime Minister Naoto Kan told journalists earlier last month.

That optimistic policy is now in tatters, and Kan added, "However (following Fukushima), we now have to go back to the drawing board and conduct a fundamental review of the nation's basic energy policy."

Kan is now touting the government's "Sunrise Project," which has been moribund for the last seven years. The goal of the Sunrise Project is to reduce the cost of solar power over the decade to a third of current levels and to one-sixth by 2030 as an incentive for more people to install it.

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."


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

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)