Announcement

I am pleased to inform my readers that effective Sep 27 2009, my BLOG will be officially relocated to a new home: http://toniiordache.ro

Looking forward to seeing you there!

US Taxpayer – The Universal Savior

In the post-Depression economics, Tim Geithner – US Treasury Secretary, has initiated a plan to inject $2.5 trillion of Public-Private Investment Fund (PPIF) into US banks to get rid of the toxic assets. On one side, nationalizing top-tier banks may be politically acceptable in places like Norway, Sweden, Chile, Iceland, Ireland and even Japan and the UK, but it is still inconceivable in New York and Washington. On the other side, American taxpayers are saturated with huge Wall Street bailouts and overpaid bankers. Consequently, taxpayers would never approve another open-ended injection of public capital into banks. Since the enactment of the Troubled Assets Relief Program (TARP) in October 2008, more than 360 US banks have received at least $353 billion of funds from the Treasury. This includes:

Upside Down Meritocracy

There are many appalling things I have learned to tolerate over the years except one: the lack of common sense. You can correct uncivilized manners, you can control vulgar speech, you can put a stop to violence but you can never treat stupidity. Few days ago I have read in the papers something utterly outrageous. According to Gheorghe Pogea – the Romanian finance minister, “in 2015, the public sector employees’ average salary will be in excess of RON 3,400, while the private sector employees will earn 31% less, averaging around RON 2,350”. He then added that “the 25% gap between the public employees (currently earning around RON 2,200) and the private employees (currently earning around RON 1,760) will become 30% in the coming years”. Let’s all move a step back, take a deep breath and start dissecting this common sense atrocity.

The Next Big Thing

On Sep 11th 2009, US administration has decided to impose excessive import duties of 35% on Chinese passenger and light truck tires, as a result of a surge of Chinese tire exports that have dented the US tire industry. Just two days after, the Chinese ministry of commerce responded that the Chinese officials were investigating US automotive and poultry product imports following complaints from local industries that some of these products are being dumped in the Chinese market or are benefiting from subsidies, seriously affecting domestic industries. Who will end-up hurt more severely from this mounting trade dispute?

Magic Crystal Ball

One of the weirdest questions we hear these days is: “where can I buy the alarm clock that is going to wake me up when the recession is over?” Though there is no one-formula-fits-all type economic indicator that can accurately forecast the movement of the economy as the business cycle enters different phases, I would bring up for discussion an interesting composite index released in US by the Conference Board: the Leading Economic Indicator (LEI). The index increased 0.7% in June versus a revised 1.3% gain in May and a 1.2% jump in April. The June increase puts the year-to-year decline at 1.18%. The trough for the year-to-year change appears to have occurred in December 2008 (-3.98%).

Inflation vs. Deflation

Traders, economists, strategists, central bankers are all exposed to a new dilemma: is the US economy experiencing an inflationary or a deflationary pressure? On one side, under a global turmoil environment where most economies are shrinking considerably, prices tend to fall and subsequently the aggregate demand for goods and services subsides. On the other side, due to unprecedented central banks’ expansionary money supply policies many analysts expect a rapid increase in the level of prices. The solution to the problem still represents a challenge for many investors since the near-term investment strategy is very much correlated with the tendency of the price index.

The Rising Phoenix

Before jumping into the credit spread pool, I reckon it is worthwhile spending a little time crystallizing few concepts. It is universally perceived that the US treasury bonds constitute to this day the baseline for the credit space, and they have been labeled as riskless securities. Credit rating agencies (e.g., Moody’s, Standard & Poor’s) are those institutions that evaluate the credit worthiness of corporations, municipalities and governments around the world. The rating scale starts with the AAA rating – the highest credit worthiness, lowest risk and lowest probability of default, and continues with AA, A, BBB and so on and so forth. As the credit goes down on the rating scale, the default risk – the risk associated with a debtor’s capacity of meeting payments towards its creditors, increases non-linearly.

Fundamental FX Triad

As we recall, the US dollar reached relative highs in March after its 24% rise from the 2008 lows. While the recent sell-off has been across the board, losses against commodity currencies have been pilling-up. The Australian and New Zealand dollars are each up more than 20%, and the Canadian dollar has gained 16%. There have been two distinct waves to the dollar’s recent weakness. Initially, the dollar sell-off was driven by investors looking for signs of global economic recovery. As confidence increased, investors rushed into buying risky assets, and abandoned safe-haven U.S. government bonds and the dollar. Then, toward the end of May, investors became worried about the potential for a downgrade of the U.S. sovereign-debt rating and sold-off the dollar again. Let’s address few fundamental aspects within the FX space.

Options Trading 101

Speculation is certainly not for everyone, but trading is definitely not a snobbish occupation of an exclusive club of Ivy League graduates. There are many things to be said about trading. However, two points are paramount in becoming a successful trader: a rock-solid discipline and a timely acceptance of the losses.
In a nutshell, investors could have either a bullish or a bearish sentiment. That practically translates in the expectations that the markets will rise or fall within a pre-defined time-horizon. Under a quick classification, any financial instrument could be either a spot product or a derivative product. For instance, when you buy 100 shares of Apple [AAPL] you create a long position in that stock. For every dollar that AAPL share goes up in value you make a $100 in profit. Your profit & loss (P&L) account goes up or down linearly with the underlying product. However, when you trade futures or options products, the relationship does not work anymore. An option is a derivative, as it derives its value from an underlying asset. As the price of the underlying asset, such as a stock or commodity, moves in the marketplace, the price of the option changes in harmony.

The Square Root Recession

The most important question you will hear nowadays is “How quickly will we recover?” The answer to this question can be found by analyzing the shape of the current recession. Economists tend to refer to the following four shapes: V-shaped, U-shaped, W-shaped and L-shaped recessions.
V-shaped recessions are recessions that begin with a steep fall but then quickly find a bottom, turn back around and move immediately higher. These are the best-case scenarios, and they happened in 1990-1991 and 2001 recessions. U-shaped recessions are recessions that begin with a slightly slower decline but then remain at the bottom for an extended period of time before turning around and moving higher again. The recession from 1971 through 1978 when both unemployment and inflation were high for years – is considered a U-shaped recession.