While investors are starting to wake up to the incredible opportunity in precious metals mining stocks, the sub-category of rare earth metals remains largely unknown.
Both "light" and "heavy" rare earth elements represent a family of minerals found in consumer products such as TV displays and cell phones, as well as environmental applications such as hybrid engines and wind turbines Rare earths are also instrumental to medical equipment such as X-ray machines and MRI machines
U.S. military technologies such as guided bombs and night vision rely heavily upon rare earth elements currently supplied by China. Securing an independent U.S. supply could take up to 15 years, according to a new report by the U.S. Government Accountability Office (GAO).
New rare earth mines in the U.S., Australia, Canada and South Africa won't commence operations until at least 2014, based on industry estimates. The GAO report listed rare earth deposits in states that include California, Idaho, Montana, Wyoming, Colorado, Missouri and Utah.
Of particular concern is that many U.S. deposits lack the "heavy" rare earth elements critical for much of today's technological innovations. In addition, Chinese corporations are using their vast dollar holdings to buy mining companies that hold various U.S. deposits.
China has set quotas limiting rare earth exports and added on export taxes, despite supplying as much as 97% of the world's rare earth oxides. Over the last 7 years, China has reduced the quantity of rare earths for export by 40%. Even more troubling is Beijing's official plan through 2015, in which it warns that its own industrial demand might force it to stop exporting entirely.
There are very few publicly traded miners of rare earth metals, although investment in building capacity is growing rapidly. One such company of note is Avalon Rare Metals, Inc. (TSX:AVL)(OTCQX:AVARF).
Avalon is a mineral exploration and development company focused on rare metal deposits in Canada, including a wholly owned project known as Nechalacho, which is emerging as one of the largest undeveloped rare earth elements resources in the world. Nechalacho is particulary well endowed with the more valuable heavy rare earth elements, which are critical to environmental and high-tech applications.
Avalon presently owns 4 other rare metals and minerals projects in Canada including a lithium project in Ontario, an inactive calcium/feldspar project in Ontario and a tin-indium-gallium-germanium mine in Nova Scotia. None of these are expected to be operational any time soon, however.
The Nechalacho deposit now ranks as the second largest rare earth element deposit in the world, after the giant light deposits of Bayan Obo in China, yet the full extent of the Nechalacho deposit is still undefined. Especially important is the fact that Nechalacho has the highest proportion of heavy metals of any major known deposit, giving it a higher value per ton.
The Bayan Obo deposit in China is believed to contain 56.9 million tons, but with a proportion of heavy metals of only 2%. By comparison, Nechalacho has a much smaller resource base of 2.5 million tons, but contains a bountiful 22% of the more valuable elements. Thus, in the heavy category, Nechalacho has nearly half the resources of the giant Chinese mine.
The 2 largest other deposits in the world lie in Kvanefeld, Greenland with 2.15 million tons (14% heavy) and Mountain Pass, U.S. with 1.84 million tons (0.98% heavy).
Avalon has 77 million shares and closed yesterday at $2.43, giving it a market capitalization of less than $200 million. The company has no debt, but a relatively small cash balance of $10 million. The stock is reasonably liquid.
As a disclosure item, I have a position in Avalon and expect to for the forseeable future. While this is a higher-risk investment, it is well worth looking into and possibly adding to one's porfolio of mining companies.
Marko's Take
Some links we like and hope you'll check out: http://www.lemetropolecafe.com/, http://www.aegeancapital.com/, http://marketviews.tv/, http://www.shadowstats.com/, and, of course, our so informative and entertaining You Tube channel at http://www.youtube.com/markostaketv.
Wednesday, June 16, 2010
Tuesday, June 15, 2010
Euro-Zone Sovereign Debt Continues To Stumble
Moody's, that venerable credit rating agency, just acknowledged what the entire financial universe has known for months: Greece is not an investment grade credit! Really? Even Standard & Poors figured that out nearly two months ago.
In making the 4-step downgrade to Ba1 from A3, Moody’s cited risks to economic growth from the austerity measures tied to a €110 billion ($134.5 billion) aid package from the European Union (EU) and the International Monetary Fund (IMF). Obviously, the Moody's analysts must be regular readers of Marko's Take.
Greece has cut spending, raised taxes and trimmed public-sector wages and benefits to reduce the deficit, which ballooned to 13.6% of Gross Domestic Product (GDP) last year, more than four times the EU maximum. The government pledged to trim the shortfall to 8.1% of GDP this year and bring it back under the 3% EU limit by 2014.
Spain's problems, which are far less severe than those of Greece, is struggling to raise financing for debt maturities of €16.2 billion by July.
Spain disclosed yesterday that the European financial crisis is taking a toll on the country's banks, with foreign banks refusing to lend to some, while Germany said the EU stands ready to help if Madrid needs a Greek-style rescue.
With the 4th largest economy in the EU, Spain is coping with 20% unemployment and an 11.2% budget deficit. Spain has among the lowest sovereign debt ratios in the Euro-Zone, at less than 60% of GDP.
Despite growing investor concerns amid a tougher credit environment, Madrid was able to place €5.2 billion at its 12- and 18-month bill auctions, but investors demanded a big yield premium.
Spanish 10-year bond yields rose nearly a quarter of a point yesterday, to 4.67%, while financial sector shares also came under pressure, down nearly 1% as they underperformed the broader market.
The demands on Germany and France, the EU's most healthy countries, continued to exert political problems.
German chancellor Angela Merkel's center-right coalition government may be close to collapse, stung by a string of disagreements and intense infighting over austerity cuts, policy reform and the departure of senior conservatives. With elections coming up in the next few weeks, German voters appear inclined to make wholesale changes.
The bail-out package has also raised the ire of Merkel's French counterpart, Nicolas Sarkozy, who has accused the Germans of creating an atmosphere that will thwart growth in Europe at a time when it should be stimulated. Relations between the two politicians are at an all-time low.
Ireland was also able to sell €1.5 billion of new debt, but at much higher yields than in previous auctions. The average yield on the 2016 bond rose to 4.521% from 3.663% at the last comparable auction in April. The 2018 bond had a yield of 5.088%, up from 4.55% last August.
The credit window is still open for European sovereign debtors but could slam shut at any time. If, and when it does, the toll on the world financial system will be particulary acute as governments will be forced to make substantially greater cuts to bolster investor confidence. Marko's Take? Avoid these issuers and focus on the only winner in this entire financial crisis: Gold.
Marko's Take
Some sites we really like and hope that you visit: http://www.lemetropolecafe.com/, http://aegeancapital.com/,
http://marketviews.tv/, and, of course, our ever-so-informative and entertaining You Tube channel at http://www.youtube.com/markostaketv.
In making the 4-step downgrade to Ba1 from A3, Moody’s cited risks to economic growth from the austerity measures tied to a €110 billion ($134.5 billion) aid package from the European Union (EU) and the International Monetary Fund (IMF). Obviously, the Moody's analysts must be regular readers of Marko's Take.
Greece has cut spending, raised taxes and trimmed public-sector wages and benefits to reduce the deficit, which ballooned to 13.6% of Gross Domestic Product (GDP) last year, more than four times the EU maximum. The government pledged to trim the shortfall to 8.1% of GDP this year and bring it back under the 3% EU limit by 2014.
Spain's problems, which are far less severe than those of Greece, is struggling to raise financing for debt maturities of €16.2 billion by July.
Spain disclosed yesterday that the European financial crisis is taking a toll on the country's banks, with foreign banks refusing to lend to some, while Germany said the EU stands ready to help if Madrid needs a Greek-style rescue.
With the 4th largest economy in the EU, Spain is coping with 20% unemployment and an 11.2% budget deficit. Spain has among the lowest sovereign debt ratios in the Euro-Zone, at less than 60% of GDP.
Despite growing investor concerns amid a tougher credit environment, Madrid was able to place €5.2 billion at its 12- and 18-month bill auctions, but investors demanded a big yield premium.
Spanish 10-year bond yields rose nearly a quarter of a point yesterday, to 4.67%, while financial sector shares also came under pressure, down nearly 1% as they underperformed the broader market.
The demands on Germany and France, the EU's most healthy countries, continued to exert political problems.
German chancellor Angela Merkel's center-right coalition government may be close to collapse, stung by a string of disagreements and intense infighting over austerity cuts, policy reform and the departure of senior conservatives. With elections coming up in the next few weeks, German voters appear inclined to make wholesale changes.
The bail-out package has also raised the ire of Merkel's French counterpart, Nicolas Sarkozy, who has accused the Germans of creating an atmosphere that will thwart growth in Europe at a time when it should be stimulated. Relations between the two politicians are at an all-time low.
Ireland was also able to sell €1.5 billion of new debt, but at much higher yields than in previous auctions. The average yield on the 2016 bond rose to 4.521% from 3.663% at the last comparable auction in April. The 2018 bond had a yield of 5.088%, up from 4.55% last August.
The credit window is still open for European sovereign debtors but could slam shut at any time. If, and when it does, the toll on the world financial system will be particulary acute as governments will be forced to make substantially greater cuts to bolster investor confidence. Marko's Take? Avoid these issuers and focus on the only winner in this entire financial crisis: Gold.
Marko's Take
Some sites we really like and hope that you visit: http://www.lemetropolecafe.com/, http://aegeancapital.com/,
http://marketviews.tv/, and, of course, our ever-so-informative and entertaining You Tube channel at http://www.youtube.com/markostaketv.
Monday, June 14, 2010
Euro-Zone Trapped In Vicious Cycle
What should a country do that has WAY too much debt and WAY too little economic growth? If it spends money it doesn't have to generate economic stimulus, it worsens its deficit and adds to the risk of default. If it embarks on austerity, thereby reducing spending, it imperils economic growth, which worsens its deficit and adds to the risk of default. Talk about being between "Ba-Rock and a hard place"!
The increasingly struggling Euro-Zone nations and the U.S. have taken diametrically different paths to addressing their economic and financial problems. After the passage of the huge International Monetary Fund (IMF) led rescue, European Union (EU) nations are each passing significant budget cuts to bring their gaping budget deficits under control.
The United States is taking the opposite approach. With policy makers fearing a re-newed slip into the second dip of this "Double-Dip Hyper-inflationary Depression", the Obama Administration is putting the final touches on a new $200 billion stimulus package. In addition, because of the desperate situation of so many municipalities, another $50 billion is being considered to save the jobs of teachers, police and firemen, whose jobs are being cut to balance city and state budgets.
In Europe, austerity is being reluctantly accepted by Greece, Italy, Portugal, Spain, Ireland, Germany, Great Britain, Hungary, Romania, the Netherlands and Iceland, as well as others. The only major exception has been France. In each case, austerity comes at the cost of future economic growth. The reduced presence of government will trim about 0.5-1.0% off from future economic growth, but satisfies the conditions laid out by the IMF. This identical approach, imposed on Argentina in 2001, failed miserably.
The United States is desperate to jump-start the employment situation, which has yet to show much signs of reversing, unless of course, we as a nation, decide that having an army of census workers is a good use of limited government funds. After having spent some $2 trillion on various bailouts and stimulus, all we have to show for it are roughly 400,000 new civil servants, a budget deficit of $1.5 trillion and rising, more than 8 million jobs lost in the last two years and rising personal backruptcies.
How long will it be before some nation tries that tried and true approach of starting a military war? It worked to bring the world out of the "Great Depression", perhaps it can work again. Sadly, the world is running out of peaceful options.
A better solution is the combination of both approaches. The austerity programs in Europe target the overblown government sectors and trade unions, who have enjoyed an un-deserved free ride for decades. No nation can have a large part of its citizenry living off a diminishing pool of productive workers. Ultimately, the productive ones will balk at the higher taxes imposed on them combined with the use of funds to support those that are living on the dole. A recipe for class war?
Government spending needs to be targeted at areas that produce Gross Domestic Product (GDP) and employment NOT on transfer payments to people who are not motivated to add to society. The biggest reason for problems with budgets is runaway entitlement spending on those who receive from others yet produce nothing. In exchange for any govenment handouts, the recipients need to do something to earn their keep such as repairing our nation's crumbling infrastucture or performing community service. Subsidizing sloth. or dependenc, merely generates much more of it.
Countries can simultaneously reduce spending and get more out of less if they prioritize it correctly. We need to be cognizant of how much GDP each dollar of spending creates, and emphasize those activities. If spending merely transfesr money from the productive to the un-productive, it should be phased out over time, and ultimately, entirely eliminated.
The choice of policies does NOT have to be either/or. Unfortunately, it is highly doubtful that government will ever get smart about spending OUR money.
Marko's Take
Some links we like and hope that you visit: http://www.lemetropolecafe.com/, http://www.aegeancapital.com/, http://marketviews.tv/, http://www.goldpennystocks.com/, and, of course, our incredibly informative and entertaining You Tube channel at http://www.youtube.com/markostaketv.
The increasingly struggling Euro-Zone nations and the U.S. have taken diametrically different paths to addressing their economic and financial problems. After the passage of the huge International Monetary Fund (IMF) led rescue, European Union (EU) nations are each passing significant budget cuts to bring their gaping budget deficits under control.
The United States is taking the opposite approach. With policy makers fearing a re-newed slip into the second dip of this "Double-Dip Hyper-inflationary Depression", the Obama Administration is putting the final touches on a new $200 billion stimulus package. In addition, because of the desperate situation of so many municipalities, another $50 billion is being considered to save the jobs of teachers, police and firemen, whose jobs are being cut to balance city and state budgets.
In Europe, austerity is being reluctantly accepted by Greece, Italy, Portugal, Spain, Ireland, Germany, Great Britain, Hungary, Romania, the Netherlands and Iceland, as well as others. The only major exception has been France. In each case, austerity comes at the cost of future economic growth. The reduced presence of government will trim about 0.5-1.0% off from future economic growth, but satisfies the conditions laid out by the IMF. This identical approach, imposed on Argentina in 2001, failed miserably.
The United States is desperate to jump-start the employment situation, which has yet to show much signs of reversing, unless of course, we as a nation, decide that having an army of census workers is a good use of limited government funds. After having spent some $2 trillion on various bailouts and stimulus, all we have to show for it are roughly 400,000 new civil servants, a budget deficit of $1.5 trillion and rising, more than 8 million jobs lost in the last two years and rising personal backruptcies.
How long will it be before some nation tries that tried and true approach of starting a military war? It worked to bring the world out of the "Great Depression", perhaps it can work again. Sadly, the world is running out of peaceful options.
A better solution is the combination of both approaches. The austerity programs in Europe target the overblown government sectors and trade unions, who have enjoyed an un-deserved free ride for decades. No nation can have a large part of its citizenry living off a diminishing pool of productive workers. Ultimately, the productive ones will balk at the higher taxes imposed on them combined with the use of funds to support those that are living on the dole. A recipe for class war?
Government spending needs to be targeted at areas that produce Gross Domestic Product (GDP) and employment NOT on transfer payments to people who are not motivated to add to society. The biggest reason for problems with budgets is runaway entitlement spending on those who receive from others yet produce nothing. In exchange for any govenment handouts, the recipients need to do something to earn their keep such as repairing our nation's crumbling infrastucture or performing community service. Subsidizing sloth. or dependenc, merely generates much more of it.
Countries can simultaneously reduce spending and get more out of less if they prioritize it correctly. We need to be cognizant of how much GDP each dollar of spending creates, and emphasize those activities. If spending merely transfesr money from the productive to the un-productive, it should be phased out over time, and ultimately, entirely eliminated.
The choice of policies does NOT have to be either/or. Unfortunately, it is highly doubtful that government will ever get smart about spending OUR money.
Marko's Take
Some links we like and hope that you visit: http://www.lemetropolecafe.com/, http://www.aegeancapital.com/, http://marketviews.tv/, http://www.goldpennystocks.com/, and, of course, our incredibly informative and entertaining You Tube channel at http://www.youtube.com/markostaketv.
Saturday, June 12, 2010
Showdown With Iran Looms Closer
Last Wednesday, the U.N. Security Council approved a resolution for a fourth round of sanctions against Iran, which includes prohibiting Tehran from buying heavy weapons, tightening financial transactions with Iranian banks and new cargo inspections.
The main thrust of the sanctions is against military purchases, trade and financial transactions carried out by the Islamic Revolutionary Guards Corps, which controls the nuclear program and has taken a more central role in running the country and the economy.
It also authorizes nations to conduct maritime inspections of vessels suspected of transporting prohibited items for Iran and adds 40 entities to a list of people and groups subject to travel restrictions and financial sanctions.
The resolution followed five months of strenuous negotiations between the United States, Britain, France, Germany, China and Russia. With 12 votes in favor, it received the poorest support in the 15-nation council of the four Iran sanctions resolutions adopted since 2006. Turkey and Brazil voted no, while Lebanon abstained.
After vehemently opposing sanctions, Russia appears to be taking a tougher line with Iran. Officials said yesterday that Moscow would comply strictly with the new UN sanctions and signalled that a deal to supply Iran with air-defense missiles was now off.
Predictably, Iranian President Mahmoud Ahmadinejad said Israel was "doomed" and singled out U.S. President Barack Obama for derision, blaming Washington for orchestrating the sanctions.
The Obama Administration has hailed the sanctions as a key diplomatic victory despite having its proposals watered down in order to gain Chinese support and only garnering 12 votes. Domestically, however, the administration is reportedly working with Congress to ease restrictions. According to the L.A. Times, administration officials have begun negotiations with congressional leaders, who are working on versions of House and Senate bills that would punish companies that sell refined petroleum products to Iran or help the country's oil industry.
Unlike the U.N. measures, congressional action would pertain only to U.S. policies and agencies and would not be binding on other countries. Other countries and groups of nations are also considering additional measures.
For its part, Tehran has completely dismissed the sanctions. For months, President Mahmoud Ahmadinejad has warned that Iran would respond aggressively, even militarily against U.S. and Isaeali interests in the region. Any military action by Iran would undoubtedly be targeted at disrupting oil supplies through the Straits of Hormuz, an outcome the world hopes desperately to avoid.
Saudi Arabia, no friend of Israel, views Iran as the bigger threat. Sources in the Gulf say that Riyadh has agreed to allow Israel to use a narrow corridor of its airspace in the north of the country to shorten the distance for a potential bombing run on Iran.
Sources in Saudi Arabia say it is common knowledge within defense circles in the kingdom that an arrangement is in place if Israel decides to launch a raid. Despite the tension between the two governments, they share a mutual loathing of the regime in Tehran and a common fear of Iran’s nuclear ambitions.
The 4 main targets for any raid on Iran would be the uranium enrichment facilities at Natanz and Qom, the gas storage development at Isfahan and the heavy-water reactor at Arak. Secondary targets include the lightwater reactor at Bushehr, which could produce weapons-grade plutonium when complete.
Israeli officials refused to comment on details for a possible raid on Iran, which Prime Minister Binyamin Netanyahu, categorically refuses to rule out. Asked about the possibility of a Saudi flight path for Israeli bombers, Aharaon Zeevi Farkash, who headed military intelligence until 2006 and has been involved in war games simulating a strike on Iran, said: “I know that Saudi Arabia is even more afraid than Israel of an Iranian nuclear capacity.”
It looks like "show time" in the Middle East is at hand. In the last several years, Tehran has built an impressive aresenal of advanced Russian-made weapons which make Iran no pushover, even with a massive military presence by the U.S. across the border in Iraq, as well as the potent military capability of Israel.
Should any military action ensue, its economic effects may be life-changing for the entire planet. Disrupting oil flow will not be that difficult, with severe repercussions for the world. For investors, companies engaged in the production of energy outside of the Middle East ought to be huge beneficiaries. In addition, the uncertainty caused by any altercation ought to be explosively bullish for Gold.
Marko's Take
If you're looking for some great investing information at a reasonable price, we would like to suggest that you check out the following sites: http://www.lemetropolecafe.com/, http://www.aegeancapital.com/, http://www.marketviews.tv/, http://www.goldpennystocks.com/, and, of course, our FREE and, oh so informative You Tube channel at http://www.youtube.com/markostaketv.
The main thrust of the sanctions is against military purchases, trade and financial transactions carried out by the Islamic Revolutionary Guards Corps, which controls the nuclear program and has taken a more central role in running the country and the economy.
It also authorizes nations to conduct maritime inspections of vessels suspected of transporting prohibited items for Iran and adds 40 entities to a list of people and groups subject to travel restrictions and financial sanctions.
The resolution followed five months of strenuous negotiations between the United States, Britain, France, Germany, China and Russia. With 12 votes in favor, it received the poorest support in the 15-nation council of the four Iran sanctions resolutions adopted since 2006. Turkey and Brazil voted no, while Lebanon abstained.
After vehemently opposing sanctions, Russia appears to be taking a tougher line with Iran. Officials said yesterday that Moscow would comply strictly with the new UN sanctions and signalled that a deal to supply Iran with air-defense missiles was now off.
Predictably, Iranian President Mahmoud Ahmadinejad said Israel was "doomed" and singled out U.S. President Barack Obama for derision, blaming Washington for orchestrating the sanctions.
The Obama Administration has hailed the sanctions as a key diplomatic victory despite having its proposals watered down in order to gain Chinese support and only garnering 12 votes. Domestically, however, the administration is reportedly working with Congress to ease restrictions. According to the L.A. Times, administration officials have begun negotiations with congressional leaders, who are working on versions of House and Senate bills that would punish companies that sell refined petroleum products to Iran or help the country's oil industry.
Unlike the U.N. measures, congressional action would pertain only to U.S. policies and agencies and would not be binding on other countries. Other countries and groups of nations are also considering additional measures.
For its part, Tehran has completely dismissed the sanctions. For months, President Mahmoud Ahmadinejad has warned that Iran would respond aggressively, even militarily against U.S. and Isaeali interests in the region. Any military action by Iran would undoubtedly be targeted at disrupting oil supplies through the Straits of Hormuz, an outcome the world hopes desperately to avoid.
Saudi Arabia, no friend of Israel, views Iran as the bigger threat. Sources in the Gulf say that Riyadh has agreed to allow Israel to use a narrow corridor of its airspace in the north of the country to shorten the distance for a potential bombing run on Iran.
Sources in Saudi Arabia say it is common knowledge within defense circles in the kingdom that an arrangement is in place if Israel decides to launch a raid. Despite the tension between the two governments, they share a mutual loathing of the regime in Tehran and a common fear of Iran’s nuclear ambitions.
The 4 main targets for any raid on Iran would be the uranium enrichment facilities at Natanz and Qom, the gas storage development at Isfahan and the heavy-water reactor at Arak. Secondary targets include the lightwater reactor at Bushehr, which could produce weapons-grade plutonium when complete.
Israeli officials refused to comment on details for a possible raid on Iran, which Prime Minister Binyamin Netanyahu, categorically refuses to rule out. Asked about the possibility of a Saudi flight path for Israeli bombers, Aharaon Zeevi Farkash, who headed military intelligence until 2006 and has been involved in war games simulating a strike on Iran, said: “I know that Saudi Arabia is even more afraid than Israel of an Iranian nuclear capacity.”
It looks like "show time" in the Middle East is at hand. In the last several years, Tehran has built an impressive aresenal of advanced Russian-made weapons which make Iran no pushover, even with a massive military presence by the U.S. across the border in Iraq, as well as the potent military capability of Israel.
Should any military action ensue, its economic effects may be life-changing for the entire planet. Disrupting oil flow will not be that difficult, with severe repercussions for the world. For investors, companies engaged in the production of energy outside of the Middle East ought to be huge beneficiaries. In addition, the uncertainty caused by any altercation ought to be explosively bullish for Gold.
Marko's Take
If you're looking for some great investing information at a reasonable price, we would like to suggest that you check out the following sites: http://www.lemetropolecafe.com/, http://www.aegeancapital.com/, http://www.marketviews.tv/, http://www.goldpennystocks.com/, and, of course, our FREE and, oh so informative You Tube channel at http://www.youtube.com/markostaketv.
Friday, June 11, 2010
U.S.-Sino Trade Frictions Intensify
Chinese trade figures released yesterday showed exports exploding by 48.5% in May over the year before, way ahead of estimates. China recorded a huge $19.5 billion surplus, which was dramatically higher than the $1.7 billion recorded in April and the slight deficit in March.
Imports rose 48.3% over the same month last year. After taking into account calendar adjustments for the number of working days, China said that exports had risen 45.3% in May from a year earlier and were up 10.9% from April.
In direct trade with the U.S., China's surplus expanded to $19.31 billion in April from $16.90 billion in March, stoking political pressure on Beijing to accelerate appreciation of the Renminbi. China has been very reluctant to heed U.S. pressure despite seeming to send signals that it would agree to adjustments in its currency since the beginning of 2010.
Domestically, the Commerce Department said the U.S. deficit in international trade of goods and services increased 0.6% to $40.29 billion from a revised $40.05 billion the month before. Exports fell by $813 million, while higher oil prices helped to drive imports up by $1.61 billion.
Trade has been one of the few strengths in the U.S. economy during the recent recession, but has now become a drag on the recovery as imports have outpaced exports. The recently ballooning deficit subtracted 0.66% from Gross Domestic Product (GDP) during the first quarter.
The Treasury has been pursuing diplomacy with Beijing to allow the Renminbi to appreciate, but Treasury Secretary Tim Geithner told Congress yesterday that he had no idea when that might happen. Geithner, confident that a change in Chinese policy was imminent last March, now has signalled that he shared much of Congress's frustration and suggested that China needed to be aware that the U.S. was close to legislation.
Charles Schumer, a senior Democratic senator, vowed to press ahead with legislation to punish China if Beijing did not increase the value of the Renminbi.
The Renminbi has been pegged to the Dollar for nearly two years but has appreciated nearly 20% against the Euro since last November. Given the importance of the European market to China, the Renminbi’s sharp appreciation relative to the Euro provides China with an opportunity to begin the process of allowing its currency to fluctuate within a wider band.
The de-facto rule was that the rate of appreciation would not exceed 6-7% a year. As pressure has built over the past two years, market participants have been speculating that the needed adjustment is much larger than a gradual appreciation of 6 to 7%. Still, Beijing remains adamantly against any major or sudden adjustments and reluctant to embark once again on a gradual appreciation.
In times of extreme financial distress, such as The Great Depression, free trade becomes one of the first casualties. While it is virtually universally recognized that trade barriers help no one except for the industries protected, they become more politically popular as workers fear that "unfairly" priced imports will cost them their jobs. China is especially sensitive to the repercussions of high unemployment domestically, which will only get worse if exports suffer. Thus, a resolution to this issue is neither likely to be immediate nor sufficient to address growing U.S. outrage.
Marko's Take
Some great sites we like: http://www.lemetropolecafe.com/, http://www.shadowstats.com/, http://www.aegeancapital.com/, http://marketviews.tv/, http://www.goldpennystocks.com/, and http://www.youtube.com/markostaketv.
Imports rose 48.3% over the same month last year. After taking into account calendar adjustments for the number of working days, China said that exports had risen 45.3% in May from a year earlier and were up 10.9% from April.
In direct trade with the U.S., China's surplus expanded to $19.31 billion in April from $16.90 billion in March, stoking political pressure on Beijing to accelerate appreciation of the Renminbi. China has been very reluctant to heed U.S. pressure despite seeming to send signals that it would agree to adjustments in its currency since the beginning of 2010.
Domestically, the Commerce Department said the U.S. deficit in international trade of goods and services increased 0.6% to $40.29 billion from a revised $40.05 billion the month before. Exports fell by $813 million, while higher oil prices helped to drive imports up by $1.61 billion.
Trade has been one of the few strengths in the U.S. economy during the recent recession, but has now become a drag on the recovery as imports have outpaced exports. The recently ballooning deficit subtracted 0.66% from Gross Domestic Product (GDP) during the first quarter.
The Treasury has been pursuing diplomacy with Beijing to allow the Renminbi to appreciate, but Treasury Secretary Tim Geithner told Congress yesterday that he had no idea when that might happen. Geithner, confident that a change in Chinese policy was imminent last March, now has signalled that he shared much of Congress's frustration and suggested that China needed to be aware that the U.S. was close to legislation.
Charles Schumer, a senior Democratic senator, vowed to press ahead with legislation to punish China if Beijing did not increase the value of the Renminbi.
The Renminbi has been pegged to the Dollar for nearly two years but has appreciated nearly 20% against the Euro since last November. Given the importance of the European market to China, the Renminbi’s sharp appreciation relative to the Euro provides China with an opportunity to begin the process of allowing its currency to fluctuate within a wider band.
The de-facto rule was that the rate of appreciation would not exceed 6-7% a year. As pressure has built over the past two years, market participants have been speculating that the needed adjustment is much larger than a gradual appreciation of 6 to 7%. Still, Beijing remains adamantly against any major or sudden adjustments and reluctant to embark once again on a gradual appreciation.
In times of extreme financial distress, such as The Great Depression, free trade becomes one of the first casualties. While it is virtually universally recognized that trade barriers help no one except for the industries protected, they become more politically popular as workers fear that "unfairly" priced imports will cost them their jobs. China is especially sensitive to the repercussions of high unemployment domestically, which will only get worse if exports suffer. Thus, a resolution to this issue is neither likely to be immediate nor sufficient to address growing U.S. outrage.
Marko's Take
Some great sites we like: http://www.lemetropolecafe.com/, http://www.shadowstats.com/, http://www.aegeancapital.com/, http://marketviews.tv/, http://www.goldpennystocks.com/, and http://www.youtube.com/markostaketv.
Thursday, June 10, 2010
Hedge Funds Fail To Prevent Large Losses In May
While many, if not most, hedge funds don't actually "hedge", they do promote themselves as un-correlated to the market, thereby theoretically providing investors with less risk. Unfortunately, their performance during market meltdowns demonstrates quite the opposite.
Nearly every market correction or bear market has been accompanied by overall poor returns and often complete wipe-outs of these believed-to-be elite vehicles. Is this asking too much? Possibly, but since most funds charge premium fees, shouldn't investors expect premium performance? Especially during the most volatile and difficult periods?
The month of May, which included a 1,000 point intra-day loss for the Dow Jones Industrial Average, was a perfect test case. Volatility, which had been subdued for a year, suddenly exploded. If there was any time for a hedge fund to strut its stuff, it was last month. How'd they do?
Terribly! May was the worst month for hedge funds since November 2008, according to Hedge Fund Research Inc. (HFR). Virtually every strategy was down. Larger funds managed by SAC Capital, Paulson & Co. and Third Point Management lost between 2.3% and 5.6% in the month, say people familiar with the funds. Their mistakes ranged from concentrated bets on consumer companies to financial-company wagers.
Louis Bacon, who founded Moore Global Investment, had scored annual gains of about 20% on average over the past two decades. His largest fund endured losses of 9.2% in May, way underperforming the average decline of 2.3%, according to HFR's index.
The average hedge fund was up 1.3% for 2010 through May, compared with a 6.4% decline for the big Moore fund.
Eurekahedge, a Singapore-based fund tracker, publishes a series of indices on a monthly basis, measuring the returns of hedge funds by region and investment strategy. Its indices showed hedge funds focusing on Asia (excluding Japan) lost an average of 4.86% during the month of May, pushing total returns for 2010 to minus 3.15%.
Barclay's index of hedge fund returns for May, which encompasses more than 1,300 funds, showed a loss of nearly 3%, nearly wiping out all returns for 2010. The Credit Suisse/Tremont Index revealed a drop of 2.26%.
But money still poured into hedge funds for a second consecutive quarter, making the industry reach $1.66 trillion of assets under management, up from $1.60 trillion in the last quarter of last year, HFR reported. The hedge fund industry reached a record $1.8 trillion under management at the peak of the market in 2007, but the figure is now lower following client withdrawals and the credit and equity losses suffered during the credit crunch.
While hedge funds advertise themselves as sophisticated investors, they are still prone to huge losses which can easily become complete wipe-outs. This is the result of the use of massive leverage in combination with risky trades. Since they make their compensation by taking a portion of gains, but don't always cough up money when they lose, hedge funds are incentivized to roll the dice. Heads I win, tails you lose.
Everyone who still has assets in my fund, please step forward. You, not so fast!
Of course, if they screw up, they are the first to accept responsibility (sarcasm intentional). Goldman Sachs (GS) was sued for $1 billion by Basis Yield Alpha Fund (Master), an Australian hedge fund, claiming that the bank made “misleading statements” in connection with Timberwolf, a complicated mortgage security the bank underwrote in 2007.
A spokesman for GS said: “The lawsuit is a misguided attempt by Basis, a hedge fund that was one of the world’s most experienced CDO investors, to shift its investment losses to Goldman Sachs." Loathe as I am to agree with "Government Sachs", they have a point. How does an entity claiming expertise in CDO's get taken advantage of to the tune of a total loss? Goldman did NOT force them to over-leverage.
A spokesman for GS went further: “At the time of the Timberwolf transaction, Basis specifically stated that it would not place any reliance on Goldman Sachs. Basis is now trying to recoup its losses based on false allegations that it was misled about aspects of the transaction and market conditions.”
Sorry Basis, you can't have it both ways. You either know what you're doing, or you don't. You can't claim to be an expert, sign a "big boy" letter attesting to that and then claim to have been duped.
Of course, if the trade had worked out for you, and GS lost money, you'd have no problem with the "misleading statements". Or, would you give it back to Goldman? Point made.
If you're invested in hedge funds, caveat emptor.
Marko's Take
Please visit some of our favorite places for lots of great information to investors at a very reasonable price. We particularly like the following: http://www.lemetropolecafe.com/, http://www.aegeancapital.com/, http://marketviews.tv/, and, of course, our own You Tube channel at http://www.youtube.com/markostaketv.
Nearly every market correction or bear market has been accompanied by overall poor returns and often complete wipe-outs of these believed-to-be elite vehicles. Is this asking too much? Possibly, but since most funds charge premium fees, shouldn't investors expect premium performance? Especially during the most volatile and difficult periods?
The month of May, which included a 1,000 point intra-day loss for the Dow Jones Industrial Average, was a perfect test case. Volatility, which had been subdued for a year, suddenly exploded. If there was any time for a hedge fund to strut its stuff, it was last month. How'd they do?
Terribly! May was the worst month for hedge funds since November 2008, according to Hedge Fund Research Inc. (HFR). Virtually every strategy was down. Larger funds managed by SAC Capital, Paulson & Co. and Third Point Management lost between 2.3% and 5.6% in the month, say people familiar with the funds. Their mistakes ranged from concentrated bets on consumer companies to financial-company wagers.
Louis Bacon, who founded Moore Global Investment, had scored annual gains of about 20% on average over the past two decades. His largest fund endured losses of 9.2% in May, way underperforming the average decline of 2.3%, according to HFR's index.
The average hedge fund was up 1.3% for 2010 through May, compared with a 6.4% decline for the big Moore fund.
Eurekahedge, a Singapore-based fund tracker, publishes a series of indices on a monthly basis, measuring the returns of hedge funds by region and investment strategy. Its indices showed hedge funds focusing on Asia (excluding Japan) lost an average of 4.86% during the month of May, pushing total returns for 2010 to minus 3.15%.
Barclay's index of hedge fund returns for May, which encompasses more than 1,300 funds, showed a loss of nearly 3%, nearly wiping out all returns for 2010. The Credit Suisse/Tremont Index revealed a drop of 2.26%.
But money still poured into hedge funds for a second consecutive quarter, making the industry reach $1.66 trillion of assets under management, up from $1.60 trillion in the last quarter of last year, HFR reported. The hedge fund industry reached a record $1.8 trillion under management at the peak of the market in 2007, but the figure is now lower following client withdrawals and the credit and equity losses suffered during the credit crunch.
While hedge funds advertise themselves as sophisticated investors, they are still prone to huge losses which can easily become complete wipe-outs. This is the result of the use of massive leverage in combination with risky trades. Since they make their compensation by taking a portion of gains, but don't always cough up money when they lose, hedge funds are incentivized to roll the dice. Heads I win, tails you lose.
Everyone who still has assets in my fund, please step forward. You, not so fast!
Of course, if they screw up, they are the first to accept responsibility (sarcasm intentional). Goldman Sachs (GS) was sued for $1 billion by Basis Yield Alpha Fund (Master), an Australian hedge fund, claiming that the bank made “misleading statements” in connection with Timberwolf, a complicated mortgage security the bank underwrote in 2007.
A spokesman for GS said: “The lawsuit is a misguided attempt by Basis, a hedge fund that was one of the world’s most experienced CDO investors, to shift its investment losses to Goldman Sachs." Loathe as I am to agree with "Government Sachs", they have a point. How does an entity claiming expertise in CDO's get taken advantage of to the tune of a total loss? Goldman did NOT force them to over-leverage.
A spokesman for GS went further: “At the time of the Timberwolf transaction, Basis specifically stated that it would not place any reliance on Goldman Sachs. Basis is now trying to recoup its losses based on false allegations that it was misled about aspects of the transaction and market conditions.”
Sorry Basis, you can't have it both ways. You either know what you're doing, or you don't. You can't claim to be an expert, sign a "big boy" letter attesting to that and then claim to have been duped.
Of course, if the trade had worked out for you, and GS lost money, you'd have no problem with the "misleading statements". Or, would you give it back to Goldman? Point made.
If you're invested in hedge funds, caveat emptor.
Marko's Take
Please visit some of our favorite places for lots of great information to investors at a very reasonable price. We particularly like the following: http://www.lemetropolecafe.com/, http://www.aegeancapital.com/, http://marketviews.tv/, and, of course, our own You Tube channel at http://www.youtube.com/markostaketv.
Wednesday, June 9, 2010
Ambac: Another Triple A To Bite The Dust
As the global financial authorities wrestle with the incredible mess known as the world economy, credit rating agencies Standard & Poors, Moody's and Fitch have come increasingly under fire. Of particular interest is the sheer volume of over-rated issuers who have subsequently defaulted http://markostake.blogspot.com/2010/05/bond-rating-agencies-yield-junky.html.
Now, we're NOT talking about junk-rated paper. Investors, who made the mistake of paying attention to ratings, have been stung by buying Triple A-rated paper which then was either downgraded to junk status or defaulted, resulting in massive capital losses.
To re-iterate, the Triple A designation means that the issuer has an infinitesimal probability of default for the forseeable future. Only 4 U.S.-based corporate issuers carry that rating: Johnson & Johnson (JNJ), Microsoft (MSFT), Automatic Data Processing (ADP) and ExxonMobil (XOM). Even Uncle Sam, who owns a printing press, is in danger of losing this elite status.
ABK was itself rated Triple A until 2008. The company is now facing bankruptcy, according to a recent filing with the Securities and Exchange Commission (SEC).
Ambac (ABK), however, takes this ratings lunacy to an entirely different level. At issue is MUCH more than ABK's own $1.2 billion in outstanding debt. The company, known as a "mono-line insurer", provides credit insurance for hundreds of billions of outstanding bonds. ABK, along with rival MBIA (MBI), are the two key companies providing this "service".
Issuers, who would NOT qualify for a Triple A, but would wish to carry that rating, pay a premium to the mono-line insurers to provide a guarantee to establish the soundness of their debt. In effect, ABK and MBI act as additional security to prospective investors who insist on purchasing only the very safest of bonds.
If the mono-line insurers default, their insurance becomes worthless and affects huge swaths of debt, including municipalities and mortgage-backed, collateralized obligations. If this insurance becomes unavailable, or is perceived to have no value, many prospective issuers will have to access the capital markets at a complete disadvantage. Not to mention the fact that the outstanding issues already insured will become far less liquid, resulting in extreme price pressure.
To be fair, the affairs of the operating company will be separated from that of its insurance unit, Ambac Assurance. However, a bankruptcy of a mono-line insurer would be un-precedented and, at the very least, throw its customers into disarray during what may be a highly contested process.
The big three rating agencies, whose self-serving methods have been completely exposed as fraudulent, continue to maintain that their business models are viable. What's wrong with having issuers shop for a rating that is to their satisfaction? Everything!
What investors are learning from the credit fiasco of the last 3 years is that the rating agencies provide ZERO information. In so doing, they have sown the seeds of their own demise. As investors learn to place no value on a credit rating, issuers will stop paying for these ratings and the problem will take care of itself. Any financial regulatory policy will be purely window dressing for public consumption and to curry political favor.
Washington, where WERE you? Oh, yes. Our friends at the SEC were too busy preventing the Bernie Madoff scam from duping investors. Or, preventing the investment banks from creating misleading derivatives, that led to massive financial system dislocations.
The irony of the financial meltdown is that there are so many villians, that each of them can easily point the finger at someone else. It was the investment banks' fault. It was the credit rating agencies' fault. It was the regulators' fault. It was the Senate Finance Committee's fault. It was the Federal Reserve's fault. It was George Bush's fault. On and on.
Systemic financial crises are not created without the participation of MULTIPLE parties, each of which is acting in their own interest. The only common thread is that, while all the villains cashed in, the investment world lost. America lost. The global financial community lost. At least the villians got their bonuses!
Marko's Take
Other links we like: http://www.lemetropolecafe.com/, http://www.shadowstats.com/, http://www.goldpennystocks.com/, http://harveyorgan.blogspot.com/ and http://www.youtube.com/markostaketv.
Now, we're NOT talking about junk-rated paper. Investors, who made the mistake of paying attention to ratings, have been stung by buying Triple A-rated paper which then was either downgraded to junk status or defaulted, resulting in massive capital losses.
To re-iterate, the Triple A designation means that the issuer has an infinitesimal probability of default for the forseeable future. Only 4 U.S.-based corporate issuers carry that rating: Johnson & Johnson (JNJ), Microsoft (MSFT), Automatic Data Processing (ADP) and ExxonMobil (XOM). Even Uncle Sam, who owns a printing press, is in danger of losing this elite status.
ABK was itself rated Triple A until 2008. The company is now facing bankruptcy, according to a recent filing with the Securities and Exchange Commission (SEC).
Ambac (ABK), however, takes this ratings lunacy to an entirely different level. At issue is MUCH more than ABK's own $1.2 billion in outstanding debt. The company, known as a "mono-line insurer", provides credit insurance for hundreds of billions of outstanding bonds. ABK, along with rival MBIA (MBI), are the two key companies providing this "service".
Issuers, who would NOT qualify for a Triple A, but would wish to carry that rating, pay a premium to the mono-line insurers to provide a guarantee to establish the soundness of their debt. In effect, ABK and MBI act as additional security to prospective investors who insist on purchasing only the very safest of bonds.
If the mono-line insurers default, their insurance becomes worthless and affects huge swaths of debt, including municipalities and mortgage-backed, collateralized obligations. If this insurance becomes unavailable, or is perceived to have no value, many prospective issuers will have to access the capital markets at a complete disadvantage. Not to mention the fact that the outstanding issues already insured will become far less liquid, resulting in extreme price pressure.
To be fair, the affairs of the operating company will be separated from that of its insurance unit, Ambac Assurance. However, a bankruptcy of a mono-line insurer would be un-precedented and, at the very least, throw its customers into disarray during what may be a highly contested process.
The big three rating agencies, whose self-serving methods have been completely exposed as fraudulent, continue to maintain that their business models are viable. What's wrong with having issuers shop for a rating that is to their satisfaction? Everything!
What investors are learning from the credit fiasco of the last 3 years is that the rating agencies provide ZERO information. In so doing, they have sown the seeds of their own demise. As investors learn to place no value on a credit rating, issuers will stop paying for these ratings and the problem will take care of itself. Any financial regulatory policy will be purely window dressing for public consumption and to curry political favor.
Washington, where WERE you? Oh, yes. Our friends at the SEC were too busy preventing the Bernie Madoff scam from duping investors. Or, preventing the investment banks from creating misleading derivatives, that led to massive financial system dislocations.
The irony of the financial meltdown is that there are so many villians, that each of them can easily point the finger at someone else. It was the investment banks' fault. It was the credit rating agencies' fault. It was the regulators' fault. It was the Senate Finance Committee's fault. It was the Federal Reserve's fault. It was George Bush's fault. On and on.
Systemic financial crises are not created without the participation of MULTIPLE parties, each of which is acting in their own interest. The only common thread is that, while all the villains cashed in, the investment world lost. America lost. The global financial community lost. At least the villians got their bonuses!
Marko's Take
Other links we like: http://www.lemetropolecafe.com/, http://www.shadowstats.com/, http://www.goldpennystocks.com/, http://harveyorgan.blogspot.com/ and http://www.youtube.com/markostaketv.
Subscribe to:
Posts (Atom)