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Stimulus, Strikes, and Stability? - Go Long Volatility

April 29, 2010 – Comments (0) | RELATED TICKERS: SDS , GLD , GDX

This looks like an absolute no brainer.

We are at the top of the stimulus, 70% of the money will have been spent by September. Stimulus programs are fading out all over the world (except maybe China).

On the other hand, Spain, Portugal, and Greece have all been downgraded and face further market pressures on their debt this year. According to NakedCapitalism, Greece is going to face the most stringent economic constraints ever placed on a sovereign nation to receive their IMF alottment. That will just delay the problem for six months to a year. Once they blow through the first set of conditions, the market will be bigger questions to address.

I don't care if the IMF (a.k.a. US) and it's european friends bailout all of these PIIGS. They won't do it until it is the final option. That guarantees volatility before we get there.

Long VXX at 20.06.

Deleveraging is in effect and it is ugly.   [more]



Short the runt PIIGS

April 22, 2010 – Comments (3) | RELATED TICKERS: NBG.DL , PTGCY , EEM

This will be a drawn out process. But we can be sure that Greece will default in some form or fashion (i.e. restructuring, Eurozone bailout, IMF intervention). In the meantime, let's enjoy the instability and make some money shorting the national champions of the most at risk PIIGS.

A few of the facts:

*There is a run on the banks going on in Greece already, official or unofficial. Over 25% of deposits have already left the domestic banks.
* Only six people in Greece claimed income higher than 1m euros in 2008 (pervasive tax evasion)
* Greece has spent over 50 of the last 200 years in default (subprime, always)
* Greece has not had fiscal discipline in the last 10 years, why will that change in a major recession?

As for the short of Portugal Telecom and the national electric company (EDFPY.PK), the performance of the telecom and energy industries are tied to the economic health of the country.  If Portugal is forced into greater fiscal austerity, greater contraction is highly likely for this economic region. 

Short NBG at $3.10 entered on 4/22
Short PT at 11.00 (limit order)
Short EDFPY.PK at $37 entered on 4/22   [more]



Goldman made sausage...

April 16, 2010 – Comments (3) | RELATED TICKERS: GS , JPM , SKF

This is what everybody knew that finally was acknowledged by the gov't.  [more]



Going to school with Sallie Mae

April 15, 2010 – Comments (1) | RELATED TICKERS: SLM , JSM , FMCC

Moral hazard is alive and well, why not make some money off of it? A great candidate is Sallie Mae.

Recent policy changes by the Federal government banned the private origination of Federal student loans, Sallie Mae's most profitable activity.

As a result, Sallie Mae has contended that it will need to layoff over 10% of it's workforce as it retools to be one of the four designated Federal student loan servicers.   There will be an unknown revenue, hit at least in the short term, also.

This rebalance in revenue streams pales in comparison to the current liquidity issues facing Sallie Mae. In 2010 and 2011 Sallie Mae is facing a rollover of $11B in debt with only $6B in cash and a hostile credit market. In March Sallie Mae completed a new 1.5B 10-year offering at a horrific 8% fixed. Although this is horrific at first glance in comparison to their current lending rates (5.5% - 6%), since Federal loans often float with interest rates, a rate increase could make this offering cheap in comparison to the discount rate.

Although the author believes Sallie Mae will ultimately provide the same returns as a preferred mortgage servicer, this is not the sum of the investment thesis.  Bottom line, the author believes that the Federal Goverment will do whatever it takes to make sure Sallie Mae can rollover their debt. It is not in the interest of the Federal Government to have another major lender fall due to a lack of liquidity, especially one originally chartered by the Federal Government itself.  Since Lehman, any further disruption of the credit markets has been the minimum criteria for applying moral hazard.  This time should be no exception.

So what do we do? Buy Sallie Mae senior unsecured exchange traded debt (NYSE:JSM) yielding close to 8.3% ($18 price / $25 par) maturing 12/15/2043. Buy at the limit price - $17.50.   [more]



Oil: Another China play

February 25, 2010 – Comments (1) | RELATED TICKERS: USO , DUG , SCO

Some said it was the USD holding up the oil price. Now the USD is pre-crisis levels vs. other major currencies and the price of oil has not fallen.

As it turns out, China imports are a large catalyst in demand for crude oil.

“China’s growing reliance on seaborne crude oil imports will set the tone of the tanker market for the coming decade,” Poten said in a report to clients, quoted by Bloomberg. “China’s expanding middle class, strategic stockpiling and complex refining capacity ensure that it will continue to be a large ship, crude oil story.”

What is strange is that overall world demand is down, but since China is buying, prices are up. This is somewhat understandable because 50% of the oil futures contracts traded are for speculation. So it is a self feeding machine.

In any case, based on this information I will be looking for an acceptable exit point for my SCO position. I cannot invest with 80% confidence when I see I am fighting the Chinese stimulus investment in oil consumption. I will need to wait to see lending decline prior to taking such a position again.

"China’s crude oil imports may reach an all-time high this year as an economic recovery spurs demand for fuels, data from China National Petroleum Corp. showed on Feb. 4. The Chinese economy, which expanded at the fastest pace in the fourth quarter since 2007, will grow four times faster than the U.S. in 2010, the United Nations said in December.

Chinese charterers accounted for about 30 percent of VLCC spot fixture activity this year, up from below 5 percent a decade earlier, Poten said."  [more]

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