Old Trader's  Instablog

In all fairness, its probably incorrect to label the current crisis in Dubai a "black swan", since by definition, a "black swan" is an unforeseeable event, or at least, the archetypical "million to one" long shot, and given the various rickety houses of cards that exist globally, it should come as no big surprise that at least one should collapse.

Actually, my biggest fear is what havoc might be wreaked to the other "houses".  Some of the weaker ones exist in Eastern Europe (Latvia springs to mind, as a leading candidate), and I think it won't take much for things to get out of hand fairly quickly.

No doubt, some will point out that the Middle East is a fairly small market, and so as long as the oil keeps flowing, any small hiccups won't be problematic. To those folks, I'd like to point out that, at the time of the Asian crisis, the Asian markets were a backwater, as well.

Although the situation in Dubai is taking center stage, it should also be noted that the Japanese are seriously considering asking for central bank intervention on behalf of the yen, and Vietnam has devalued the dong.

For a while, its seemed the "line in the sand" for dollar vs. the Euro was $1.50. Numerous efforts to break through that level were rebuffed, but that's no longer the case. I don't trade FX, but like many, I'm sure, I "pay attention" because the dollar's value can make a very meaningful impact on one's portfolio, and its returns. The other currency pairing I pay close attention to is the Canadian dollar/USD because of my holding in PVX.

I've been trading in and out of GG, as its been running in a fairly well-defined sideways channel, and I'm currently essentially out of the position, but with an order in to buy back in towards the lower part of the channel. Despite not holding any appreciable amount of gold, or gold miners, I feel I'm fairly well protected against a continuing slide in the dollar by virtue of exposure to oil, via PVX, as well as a big chunk in global sovereign debt, which is "spiced up" a bit with some emerging market fixed income.

Euro exposure is handled by my stake in FTE, and Enel Spa. JNJ, as a multinational helps things, too.

More »

Another "thumbs down" for the dollar was registered today, when Mauritania joined India in picking up some gold for their central bank, according to the Bloomberg TV news crawl. So far, I haven't been able to unearth details as to quantity, price paid, or what percentage of their holdings are in gold.

In other gold-related news, yesterday's FT had an article pointing out that production is in a secular decline. Although a bounce in the dollar would cause a minor correction in gold's price, it appears that longer term trend is bullish. Fwiw, I'd stay away from the South African miners, except as possible short term trades, as they're notoriously high cost producers, due to the extreme depth of their mines. Additionally, the electrical grid there is very fragile, and power-outages occur fairly regularly, which causes mine shutdowns.

type="text/css">

 It appears that the age of financial engineering and invention is not yet behind us, as this latest tidbit from the UK shows. The latest effort to fatten the capital base of large banks comes from Lloyds Banking Group's issuance of a modified form of convertible debt known as "contingent core Tier-1 capital", aka CoCo, for short. Existing debt will be rolled over, or converted to the tune of $12.3 billion, a sum roughly 25% greater than originally planned, due to demand. The wrinkle with this particular issue is that it automatically converts to equity if the bank's equity cushion falls below 5%. The Federal Reserve has voiced approval of this concept, and will be watching intently, no doubt.

 

Now, convertible debt is nothing new, being a much used tool, often in the VC sector, where later stage funding is sought. The benefit to the issuer is that typically, the rate on such debt is that it prices below what would be expected for straight debt. The benefit to the purchaser is a participation in any upside in the share price, while providing a "floor" on the downside, as the debt is higher up the capital ladder than equity. In the case of CoCos, however, the conversion decision is taken out of the hands of the purchaser, since it appears that it would happen automatically under adverse circumstances.

 

I can see the attraction of such a security to banking regulators, as it looks to the private sector to provide capital support to distressed financial institutions, rather than raiding the public purse, as has been occurring in the recent past.

 

From Lloyd’s side, the only advantage that I can discern is that it keeps government at bay, and away from mucking about in the day to day running of business, (along with adding to the capital cushion).

 

From the investors’ side, the only benefit that I’m seeing is that this form of debt is pricing at 4% higher than the current debt it replaces (arguably placing it in the “junk” category from the get-go), which MAY, or may NOT provide a sufficient cushion for the risk being assumed.

 

Sources: The Economist
              Breaking Views
              Dealbook

 

 

I'm certainly not alone, here on Seeking Alpha, in criticizing the measures that have been enacted to revive our economy, and the way they're being implemented. Over the months, I've read a great many of the articles written addressing the topic, as well as the comments that follow. One of the things that has struck me, is that every so often, a comment will be posted suggesting that, while the critical comments are long on,... well...criticism, little has been written in the way of concrete proposals that might provide a way forward. The people who've pointed that out are quite correct. Its very easy to sit at a computer and fire off broadsides of criticism; easier still if one is doing it under a pseudonym, without offering some constructive input. In the spirit of providing more than yet another diatribe against this program, or the way that one is being handled, I'd like to throw three specific ideas out that deal with the unemployment situation, arguably the largest single problem currently facing the US economy.

1) Its practically written in stone that SMEs (small/medium enterprises) are the largest drivers of job creation in the US economy. Yet the bulk of the stimulus provided thus far has gone to large and mega-sized firms. I suspect the main reason is that its a lot easier to garner headlines if it can be argued that a given proposal kept an auto plant from shutting down, or prevented further job cuts at a steel maker. The fact that some fraction of that sum might have meant that "Acme Tool and Die" hired 2 more machinists, and "Ajax Plumbing and Heating Supply" hired 3 warehouse workers, another delivery driver, and another clerical worker is NOT going to make the 10 pm network news.

What if the government was to offer either a tax credit, or a withholding waiver for low/middle income hires by SMEs? Keep in mind that the definitions of "small" and "medium" vary widely from industry to industry. A proposal like this could be "fine-tuned", if so desired, to target either specific industries, job classifications, or state/regional areas, or any combination thereof.  I recognize that such a plan, it implemented, would have an adverse effect on government revenues, but the short term pain might well be worth it. I recently ran across an article that mentioned that in Sweden, the "forbearance" of withholding is treated like a loan, in that there's a fixed time limit, as well as a modest interest payment, which would provide another avenue to recoup tax revenue losses, down the road.

2) Keeping in line with the premise that SMEs are a, if not the key, driver of jobs, is a suggestion that the SBA's (Small Business Administration) mandate by expanded. I would like to suggest it would be worthwhile to take a serious look at bringing back the direct loan program. Once upon a time, it was possible to get a direct loan from the SBA, rather than a SBA "guaranteed" loan from a bank. Even then, the preferred format was to go for the guaranteed loan, but there was a process in place for getting money directly from the government. I'm not certain why, but that process was eliminated quite a few years ago. The problem with the guaranteed loan process, is that the paperwork needed to process and administer such a loan is basically the same whether the loan amount is $5000, $15,000, $50, 000, or $150,000, so there's effectively a floor on the amount a lender is willing to lend. If, for whatever reason, the SBA would decide to not reinstitute the direct loan program, perhaps some sort of "processing/servicing fee" could be given to the private lenders to make such loans more attractive to them.
 
3) My final suggestion deals less directly with unemployment, and involves the infrastructure stimulus program that was passed. There's no question that the US is in SERIOUS need of an infrastructure "make-over", and during the debate over the bill, much was made of "shovel ready" projects that would effectively "jumpstart" the economy. Unfortunately, the final bill included "Made in the US" restrictions. Leaving aside the broad macro ramifications of protectionism, there were some more immediately deleterious effects that resulted from that restriction. Back on June 1st, I wrote an article on the possibility of a trade war in which I mentioned the experience of a small Texas town that had a "shovel ready" water/sewage project that was in limbo, because of the "Made In The US" provisions. It seems that the valves needed for this project are ONLY made in Canada. Edward Harrison, a well regarded and prolific contributor to SA made the same point in an article that appeared on Nov. 8th, except in that instance, it was a town in California. I don't know for certain, but wouldn't be surprised if the Canadian company was the same in both cases. After all, how many mfgs. of brass valves suitable for municipal water projects can there be in Canada?

My suggestion, in this regard, is that the bill be amended to include NAFTA members. This would mend fences with both of our neighbors, allow any such projects as mentioned above to proceed, while still making sure the stimulus gets spent close to "home". The thought also crossed my mind that such an amendment might have some small positive effect in stemming illegal immigration, given that the primary reason for such immigration from Mexico is economic. Arguably, any "spill-over" effect south of the border might persuade some potential illegals to stay at home.

I understand that these are broad stroke suggestions, and as they say, "The devil is in the details...".