Disastrous Friendly Fire Event in Pakistan Could Grind the U.S. Afghan Campaign to a Halt - Guest Post

Guest post by John C.K. Daly of Oilprice.com

NATO recently literally shot itself in the foot, imperiling the resupply of International Assistance Forces (ISAF) in Afghanistan by shooting up two Pakistani border posts in a "hot pursuit' raid.

Given that roughly 100 fuel tanker trucks along with 200 other trucks loaded with NATO supplies cross into Afghanistan each day from Pakistan, Pakistan's closure of the border has ominous long-term consequences for the logistical resupply of ISAF forces, even as Pentagon officials downplay the issue and scramble for alternative resupply routes.

Pakistan, long angry about ISAF/NATO cross border raids, has apparently reached the end of its tether. Following the 26 November NATO aerial assault on two border posts in Mohmand Agency in Pakistan's turbulent NorthWest Frontier Province, Islamabad promptly sealed its border with Afghanistan to NATO supplies after the allied strikes killed 24 Pakistani soldiers.

VIX Futures In Contango, Upside Protection Purchased (Call Spreads) - Charts

S&P 500 vs. VIX (stockcharts.com)
Index futures are up 1.3% this morning. The BLS releases U.S. employment data at 8:30 (EST). The S&P is testing the 200 day moving average resistance level and the VIX is at 200DMA support (or just above it). Yesterday, on the Option Monster Volatility Sonar Report, Jamie Tyrrell, of Group One Trading, reported that the VIX futures curve is in contango (front month prices < back month, see chart below) and customers bought VIX December call spreads, or upside volatility protection, to hedge against negative market catalysts. He said on 11/30 a customer bought 55,000 December 45-60 call spreads for $0.32, and on 12/1 a customer bought 10,000 December 32.5-42.5 call spreads for $0.95. VIX Cash and the December VIX Future closed at 27.41 and 27.90. The VIX, or Volatility Index, is calculated using S&P 500 options prices. I added the Optionmonster video after the jump.

During the week, coordinated actions by central banks to lower the cost of Dollar liquidity, and China's move to lower its Reserve Requirement Ratio (RRR), put a nice bid under asset markets. We'll see how the markets react to the employment report. Monitor ECB (European Central Bank), Federal Reserve and Congressional news closely this month. Here are articles to read:

*Merkel urges euro fiscal union to tackle debt crisis (BBC)
*ECB opens door to action, Sarkozy seeks (Reuters)
*European Central Bank head hints at more action if euro countries curb spending (Washington Post
*Central Bank Chief Hints at Stepping Up Euro Support (NY Times
*Fed Officials See No New Move (WSJ)
*Barclays' Maki: Extend Payroll Tax Cuts or Expect QE3 (Newsday)
*House GOP Bill Renews Jobless Benefit (Time)

David Rosenberg, chief economist and strategist at Gluskin Sheff, and Komal Sri-Kumar, chief global strategist at TCW, think more shoes could drop in the months ahead before the Eurozone sovereign debt and banking crisis gets resolved. Will sovereign debt haircuts, bank recaps and nationalizations be the catalysts for a nice capitulation event? Watch them discuss the Eurozone crisis on Bloomberg TV at Business Insider.

Here's a chart of the VIX futures curve using CBOE quotes. Click the charts for a larger view.

China to Embrace Fracking In an Effort to Ramp up Energy Production - Guest Post

Guest post by John C.K. Daly of Oilprice.com

China to Embrace Fracking In an Effort to Ramp up Energy Production

China is leaving no shale deposit unturned in its effort to develop indigenous energy resources.

On 24 November China's Ministry of Land and Resources geological exploration department head Peng Qiming said during a press conference that China's combined oil and natural gas output, 280 million tons in 2010, is projected to rise to 360 million tons of oil equivalent by 2015, a 23 percent increase in four years and will rise to 450 million tons by 2030, a 62 percent increase over 2010 production, impressive rises in production by any yardstick.

And Beijing authorities in their drive are embracing a controversial natural gas production technique that is coming under increasing government scrutiny in both the United States and Britain - hydraulic fracturing, or 'fracking." China has started drilling to meet an ambitious annual production target of 80 billion cubic meters by 2020 by which time the government is seeking to meet a target of generating 10 percent of its energy needs from natural gas and 15 percent from renewable sources and launched a national shale gas research center in August 2010.

Central Banks Coordinate to Lower Cost of Dollar Liquidity, S&P Spikes 4.3%

Source: Flickr (Ken_Mayer)
Coordinated moves by central banks to ease liquidity concerns in the financial system caused the S&P to rise 4.33% to 1246.96 yesterday. For more information read the Fed's release and this Reuters article: "Q+A: Why everyone cares about dollar liquidity swaps". Banks are directly exposed to the sovereign debt crisis in Europe, and I'm sure the bank credit rating downgrades recently had something to do with this coordinated move. Read this Reuters article: "S&P downgrades hit bank funding, counterparty cost". Bank of America (BAC) almost breached $5 on Tuesday before it was downgraded by S&P after the close. It smells a little bit like 2008, no? Below is the Federal Reserve's press release, which includes links to the other central bank releases and an FAQ on foreign currency liquidity swaps.

"Release Date: November 30, 2011

For release at 8:00 a.m. EST

The Bank of Canada, the Bank of England, the Bank of Japan, the European Central Bank, the Federal Reserve, and the Swiss National Bank are today announcing coordinated actions to enhance their capacity to provide liquidity support to the global financial system. The purpose of these actions is to ease strains in financial markets and thereby mitigate the effects of such strains on the supply of credit to households and businesses and so help foster economic activity.

S&P Downgrades BofA, Chris Whalen's Views ($BAC Closed At 5.08)

Yesterday, Standard & Poor's, using its new ratings criteria, downgraded 15 big banks including BAC, C, JPM, WFC, MS, GS and BK. BAC closed at $5.08 before the announcement. U.S. index futures are currently down overnight (Emini S&P -0.86%), so we'll see if BAC trades in the $4s tomorrow.


Image: FreeStockCharts.com

From S&P's research update:
"Following a review of Bank of America Corp. (BofA) under Standard & Poor's revised bank criteria (released on Nov. 9, 2011), we have lowered our issuer credit rating (ICR) on BofA to 'A-/A-2' from 'A/A-1'. We also have lowered our long-term ICR on its operating subsidiary Bank of America N.A. to 'A' from 'A+'. The short-term rating on the operating subsidiary remains 'A-1'."

"The negative outlook reflects our view that there are significant earnings headwinds and potentially material legal uncertainties, specifically within BofA's mortgage business, and our negative outlook on the U.S. sovereign."

On CNBC's Fast Money yesterday, Chris Whalen, Managing Director at Institutional Risk Analytics, said BofA should have the "courts appoint an equitable receiver" (read his 11/28 comment at IRA) and then break-up into five or six banks. He said he'd rather buy BAC's bonds than the stock, and his favorite big bank is U.S. Bancorp (USB). Watch the video after the jump.
"The question is what are the parents' cash needs? Does anybody want to put more capital into the parent company? No. No sane person would do that. See, I think, ultimately, that a lot of investors in our community who have big claims pending against this company -- we put out a comment yesterday that says we need an equitable receiver, we don't need bankruptcy, because the investors get stuffed, and there won't be any third-party claims. We need a receiver to sort this out, just the way we had with Stanford Group. No Bankruptcy. But we need to get this organized, get these claims dealt with, and then this company is fine. I would break it up. You could sell five, six banks out of Bank of America. They're the biggest IPOs in history." (via CNBC transcript)

In addition, this is the line in BAC's most recent 10Q (ending 9/30/2011) that everyone is talking about. Does it still apply?
"In addition, if at September 30, 2011, the ratings agencies had downgraded their long-term senior debt ratings for the Corporation by one incremental notch, the amount of additional collateral and termination payments contractually required by such derivative contracts and other trading agreements would have been up to approximately $5.1 billion comprised of $3.4 billion for BANA and $1.7 billion for Merrill Lynch. If the agencies had downgraded their long-term senior debt ratings for the Corporation by a second incremental notch, approximately $1.5 billion comprised of approximately $1.0 billion for BANA and $500 million for Merrill Lynch, in additional collateral and termination payments would have been required."

Google Reins in Spending on Renewable Energy Technology - Guest Post

image: techdreams.org
Guest post by James Burgess of OilPrice.com

Google Reins in Spending on Renewable Energy Technology

Back in July Larry Page became Google's new chief executive and immediately began a campaign to reign in Google's projects and focus their resources. This was due to the stiff competition they were facing in mobile computing and social networking from Apple and Facebook, and also investor sentiment towards increasing expenditure on non-core businesses.

One of the latest casualties of this "spring cleaning" was the big green initiative, RE<C (Renewable Energy Cheaper than Coal), which was an ambitious idea to make renewable energy cost competitive with coal-fired power plants. The plan was to build cheaper and more efficient heliostats, mirrors that reflect the sun's rays onto water-filled boilers in order to create steam and generate electricity in turbines.

Prechter: "The Trend Is Exhausted", Witnessed Historic Reversal In Credit Supply In 2008 (Video)

Image: Elliott Wave video
Article syndicated by Elliott Wave International

Prechter: "The Trend Is Exhausted"
Robert Prechter explains what's the real problem with today's market
November 28, 2011

By Elliott Wave International

What is the real problem with today's market? Watch this excerpt from Robert Prechter's special, video issue of the August 2011 Elliott Wave Theorist. Prechter shows you how the buildup of dollar-denominated debt has brought us to what he calls a critical market juncture.

Get even more information about current market trends and how to prepare for what's ahead with our new 14-page investing report. See details below.

Crude Oil Analysis for the Week of November 28, 2011 - Chart

Light Crude Oil Spot Price (StockCharts.com)
Note with chart: Light crude oil (WTI) hit a high of $100.74 today but closed around the low at 97.60. It is still above the 200 day moving average (95.65).

Guest post by OilPrice.com

Crude Oil Analysis for the Week of November 28, 2011

January Crude Oil closed lower for the second consecutive week but losses could have been worse if not for a strong comeback on Friday. The primary reason for the weakness throughout the week was concern that the European debt crisis would trigger the start of a global recession. As bearish conditions spread throughout the Euro Region, traders pressured the Euro, driving up the U.S. Dollar and lowering demand for the dollar-based crude oil market.

The soft crude oil market firmed up on Friday on the news that violence had erupted in Saudi Arabia. With unrest already taking place in Egypt and Yemen, the news that it had spread to Saudi Arabia led to speculation that an escalation of events may destabilize the country. Egypt and Yemen are small players in the oil game while Saudi Arabia is the world's biggest crude oil exporter. Increased violence in this country would drive oil prices sharply higher on the fear that supply would be reduced.

Fitch Keeps U.S. Credit Rating at AAA, Outlook Revised to Negative

Image: SolvencyIIWire
Fitch Ratings warned they would revise their outlook on U.S. debt to negative if the Committee on Deficit Reduction failed to reach an agreement. Today it happened. From the Fitch release.
"The affirmation of the U.S. 'AAA' sovereign rating reflects still strong economic and credit fundamentals. U.S. sovereign liabilities, both the dollar and Treasury securities, remain the global benchmark and accordingly the U.S. credit profile benefits from unparalleled financing flexibility and enhanced debt tolerance, even relative to other large 'AAA'-rated sovereigns. The U.S. dollar's status as the pre-eminent global reserve currency and depth of the U.S. Treasury market render financing risks minimal and underpin a low cost of fiscal funding."

"The Negative Outlook reflects Fitch's declining confidence that timely fiscal measures necessary to place U.S. public finances on a sustainable path and secure the U.S. 'AAA' sovereign rating will be forthcoming following failure of the Congressional Joint Select Committee on Deficit Reduction (JSCDR) to agree at least USD1.2 trillion of measures to cut the federal budget deficit over the next 10 years as mandated under the Budget Control Act passed in August (BCA 2011)."

Links: IMF/Italy, EFSF, Moody's on Eurozone, Ackman vs. Icahn, Fed Loans to Banks

Articles today are on Europe, Eurozone sovereign ratings, Fed loans to banks between 2007-2008, Ackman vs. Icahn beef and China property curbs. I'm seeing some 'risk-on' action this morning: E-mini S&P future +2.51% at 1,182; EUR/USD +0.51% at 1.33531; Gold spot +0.51% at 1,714.79; and oil is spiking right now +3.03% at 99.72.

IMF denies in Italy aid talks - Reuters

Euro bailout fund leveraging rules ready (EFSF): documents - Reuters

IMF Italy Loan Report 'Wide of the Mark,' BBH's Chandler Says - SF Gate

IMF readying '€600 bn rescue plan' for Italy - AFP (see above)

The eurozone really has only days to avoid collapse Wolfgang M√ľnchau - Financial Times

Germany, France examine radical push for eurozone integration - Reuters

S&P and IMF Warn Japan About Debt, JGB CDSs Rise (Charts)

Last week, JGB 5 and 10-year CDSs broke above the 10/21 highs and now look like they could test the 10/4 highs (and beyond?). What do you think, check out the charts. On Friday 11/25, JGB 5Y CDS closed at 135 basis points and JGB 10Y CDS closed at 161 bps (Bloomberg.com data). It is the cost to insure $10 million of Japanese government bonds (100 basis points = 1% per year). And on 11/25, the Japanese 10-year government bond yield completed its "biggest weekly gain since January". Watch Japanese credit data and news. Last week the IMF warned Japan about its debt load and borrowing costs, S&P warned that Japan "may be" close to a downgrade, and yesterday Bank of Japan's Shirakwa warned about the economy. Moody's downgraded Japan's credit rating to Aa3 from Aa2 in August.

JGB 5-Year CDS at Bloomberg.com

JGB 10-year CDS at Bloomberg.com

Strategist David Rosenberg On Corporate Bonds, Treasuries, More MF Globals (Video)

David Rosenberg, Chief Economist and Strategist at Gluskin Sheff, was interviewed by Consuelo Mack WealthTrack on 11/11/2011. His view, which is nothing new, is that the U.S. is in "in the throes of a modern day depression much like Japan". Why does he think this? We've experienced a ten year period of no employment growth; the stock market hasn't appreciated in 12 years; the yield on the 3-month Treasury Bill is at one basis point (0.01%, actually closed at 0.02% on Friday); we're experiencing a "secular contraction of credit, especially in the household sector" (in the U.S. and Europe); and "deleveraging cycles can last 7-10 years".

Source: StockCharts.com
On employment and the economy, Rosenberg said they both could "start contracting in the opening months of next year". On investment opportunities, Rosenberg believes "there is a possibility Treasury yields could go lower, maybe they go to 1.5% from 2%" (10-year note yield), but believes North American corporate bonds with "decent spreads", "quality balance sheets", and risk "mispriced for the economic outlook", present an attractive investment opportunity. Oh, and he thinks MF Global might be the Bear Stearns of 2011 (more to come). And the ECB's balance sheet and euro bonds ("hitched to Germany's credit rating") will decide the fate of the Eurozone. Watch the full interview below courtesy of WealthTrack.