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Five ways to profit from the weaker dollar - MarketWatchBetting on the weaker buck
Foreign stocks, bonds, currencies -- even Coca-Cola -- are plays on weak dollar
By Laura Mandaro, MarketWatch
SAN FRANCISCO (MarketWatch) -- These days it seems like global investors can't get rid of their U.S. dollars fast enough.
Some timely investing strategies attempt to profit from this distaste. Foreign stocks, bonds and currencies, along with commodities, tend to rise when the dollar declines.
What M&A activity says about the bull market
An uptick in deal flow probably says more about the credit markets than equities, argues Barrons.com's Bob O'Brien.
Even many true-blue American companies, such as Coca-Cola Co. , can take advantage of a falling greenback because so much of their sales come from overseas.
All of these assets can get an easy boost from currency translation. When the dollar falls, another currency rises.
Commodities generally gain when the dollar loses because they are priced in dollars. Buyers of these commodities must spend more dollars to own an ounce of gold or a barrel of oil when the greenback is worth less.
And a U.S. company that sells goods in pesos, for example, gets a bonus when it translates those earnings or its share price into dollars.
Dollar daze
These trends have been in place since March. That's when a surge in demand for stocks and currencies in countries seen as coming faster out of recession -- such as Brazil -- triggered a slide in the greenback.
Many analysts say it will be tough for the dollar to rebound much while the Federal Reserve keeps interest rates near zero percent and extends its special cash programs --two conditions that make the dollar attractive as a currency to borrow rather than buy. See related story on dollar carry trade.
DXY 76.81, -0.09, -0.11%
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The dollar index , which measures the U.S. dollar against a basket of its rivals, has fallen 14% since early March, when it had been trading near three-year highs.
The losses are even steeper against currencies from countries that export a lot of commodities, and which are expected to benefit from a coming wave of infrastructure building.
Since early March, the greenback has lost about 30% against the South African rand, 26% against the Australian dollar and 23% against the Brazilian real.
Meanwhile, emerging markets stocks -- as measured by an exchange-traded fund that tracks the MSCI Emerging Markets index -- have surged 81%. Oil futures have doubled from their February lows.
"The market is focused on emerging markets leading the world out of recession now, which is not helping the dollar," said Richard Batty, global investment strategist at Standard Life Investments, which manages about $200 billion in assets.
Here are five ways to take advantage of further drops in the U.S. dollar:
1. Currencies. Exchange-traded funds from Rydex Investments, WisdomTree Investments, Invesco PowerShares and others provide direct exposure to foreign currencies relative to the U.S. dollar. See related story on currency ETFs.
Interest in currencies has increased over the past year after asset classes that were supposed to perform independently, such as stocks, corporate bonds and real estate, crashed together, said Anthony Welch, a portfolio manager at Sarasota Capital Strategies, a wealth manager in Florida.
With foreign exchange trading, "It's always one currency versus another. There's always something going up," said Welch, who helped start The Currency Fund in May to capitalize on this burgeoning interest.
Other mutual funds focused on currencies include Franklin Templeton Hard Currency Fund , Merk Hard Currency Fund and Rydex Weakening Dollar 2X Strategy Fund.
2. Global bonds. Corporate and sovereign debt, which retail investors can access through mutual funds, are denominated in currencies that may be rising against the U.S. dollar. Investors have also been benefiting from higher yields on this debt.
For the past five years, global bonds as tracked by the Barclays Capital Global Aggregate bond index returned 6.11% on an annualized basis.
That compares with a 5.03% annualized return for its U.S. counterpart. The S&P 500 returned less than 1% per year, annualized, over that time.
Robert Siewert, who oversees some of Philadelphia-based Glenmede Investment and Wealth Management's $17 billion in assets, said he prefers to use mutual funds to spread the risk of a foreign issuer's default and to gain access to local research on the debt. Returns from the three global bond mutual funds Glenmede is using have ranged between 13% to 18% so far this year, Siewert said.
There's wide variety among the strategies fund managers can take in a global bond portfolio: Some focus on government debt; others also buy corporates; some include U.S. debt. This year, emerging market bonds have been a bright spot.
3. Foreign stocks. The weak U.S. dollar has boosted U.S. investors' returns on their overseas investments. It's provided added juice to emerging-markets stocks that are making big gains in their local markets and helped developed markets outside the U.S. outperform the S&P 500. See related story.
The MSCI EAFE index, as of Sept. 24, was up 26% in U.S. dollar terms this year. But in local currencies, the index of developed countries' markets had only risen 18%. The difference came from the fall in the dollar.
4. U.S. multinationals. American companies that generate substantial sales outside of the U.S. are often the choice of stock investors who are leery of overseas investments but want the currency advantage, said Paul Hickey, co-founder of Bespoke Investment Group in Harrison, N.Y.
Earlier this month, his firm looked at the S&P 500 companies that book more than 50% of their revenues outside the U.S. -- a group that tends to do better when the dollar falls.
Among those internationally oriented companies, shares of several had hit new multi-month highs.
These include more obvious international plays, such as General Electric Co. , 3M Co. and Caterpillar, Inc. , along with less well-known health and technology providers such as Xilinx Inc. , Waters Corp. and Teradyne Inc. .
APA 91.98, +0.46, +0.50%
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Energy firms Halliburton Co. and Apache Corp. have also rallied.
"What you generally get is a lot of technology, industrials and energy companies. What you don't tend to have is consumer discretionary and financials," Hickey said.
But some brand-name U.S. consumer companies, such as H.J. Heinz Co. and Coke, also made Bespoke's list. They both make more than half of their revenues outside the U.S.
5. Commodity-linked stocks and funds. A big part of the recent rally in oil, gold and other commodities is the falling dollar, analysts say.
"The dance between the dollar and commodities is becoming wearisome to watch," wrote Mike O'Rourke, chief markets strategist at New York institutional brokerage BTIG earlier this week.
William Van Keulen, an investment manager at Carnick & Co. in Colorado Springs, Colo., says buying mining stocks such as Southern Peru Copper Corp. and commodities is part of a three-pronged strategy designed to benefit from the weaker dollar.
Gold "is a protection against your currency falling," he said.
For all these strategies, it helps to be nimble. The dollar's decline could easily reverse.
A move away from stocks and into some safety assets, such as U.S. Treasurys, actually helped lift the U.S. dollar index for the week. See Currencies.
"The dollar can work under two scenarios: If it's leading the world out of recession or risk aversion remains high," said Standard Life's Batty.
Batty's asset-allocation team looks for the dollar to rebound, in fact, because they expect the U.S. economy, helped by huge monetary and fiscal stimulus, to emerge stronger from recession than Europe and Japan.
"In between," he said, "it's problematic for the dollar -- the market is not sure if the U.S. leading the other dev
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FT.com / Investor's notebook - View of the Day: Baltic fall reflects China demandView of the Day: Baltic fall reflects China demand
By James Lord
Published: September 24 2009 17:03 | Last updated: September 24 2009 17:03
The recent sharp fall in the Baltic Dry Index is in part due to an increase in shipping capacity, but primarily reflects waning demand for commodities – especially in China, says James Lord at Capital Economics.
The BDI, which has almost halved since the start of June, reflects the cost of hiring a bulk cargo ship and as such is often seen as an indicator of the health of the global economy.
“But we think the BDI’s drop is due to conditions specific to the shipping industry and to China’s reduced commodity stockpiling,” Mr Lord says.
He notes that orders for new ships rose sharply during the boom years for the global economy – and as it takes up to two years to build these craft, many have only recently become available for lease.
“However, the supply of new ships began to rise in January – well before the recent correction in shipping costs,” he says. “We therefore believe the main driver of the recent BDI decline has been falling Chinese stockpiling of commodities.”
Mr Lord says the global upswing may continue to underpin commodity prices for a while even though Chinese demand has tapered off. “However, commodity markets have already priced in a strong recovery. We expect global growth to slow in the second half of 2010 – and as such we see commodity prices falling next year.
“Indeed, the recent fall in the BDI may be an early warning sign.”
Copyright The Financial Times Limited 2009.
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King Says British Banks Got Within Hours of Collapse (Update2) - Bloomberg.comSept. 24 (Bloomberg) -- Bank of England Governor Mervyn King said two British banks got within hours of a liquidity shortfall on Oct. 6, 2008, and the day after as the U.K. financial system came to the brink of collapse.
“Two of our major banks which had had difficulty in obtaining funding could raise money only for one week then only for one day, and then on that Monday and Tuesday it was not possible even for those two banks really to be confident they could get to the end of the day,” the BBC cited King as saying in an interview to be broadcast later today.
King was referring to Royal Bank of Scotland Group Plc and HBOS Plc, the BBC said. Prime Minister Gordon Brown’s government pledged to invest about 50 billion ($82 billion) pounds in the banking system on Oct. 8, 2008, to save it from meltdown in the aftermath of Lehman Brothers Holdings Inc.’s bankruptcy declared that September.
“It was, it is, probably the worst situation, as I say, we faced in peacetime,” Chancellor of the Exchequer Alistair Darling said, according to a press release from the BBC.
The BBC corrected its original release to say that RBS was one of the two banks in trouble, and not Lloyds TSB Group Plc. In the wake of Lehman’s collapse, Lloyds TSB took over HBOS Plc, the nation’s biggest mortgage lender, to form Lloyds Banking Group Plc. An RBS spokesman declined to comment on the story.
The television program, The Love of Money, is the third in a series looking back on the financial crisis. It will be broadcast on BBC Two today at 9 p.m. in the U.K.
Great Depression
Edward Lazear, chairman of George W. Bush’s Council of Economic Advisers at the time, told the program: “We literally thought that we were on the verge of the Great Depression, and looking back I think we probably were.”
King said that allowing the banks to fail would have brought the economy to a halt, the BBC said.
“Individuals would not have had access to the money in that bank,” he was cited as saying. “Their deposits would have been frozen. The accounts would have not been there for salaries to be paid in to, so many people would not have been paid their salary.
“In turn, they wouldn’t have been able to pay bills to businesses so the businesses would have found that their flow of payments would have come to an end,” King said, according to the BBC.
Emergency Meeting
U.K. business minister Shriti Vadera called a meeting of senior bankers on Oct. 7, 2008, to advise the government on the bailout plan.
“We really only knew by probably about 7 o’clock at night that we, that everyone, was going to get through the next day,” David Soanes, a managing director at UBS AG in London, was quoted as saying in the program.
On Oct. 2, 2008, the Irish government guaranteed all deposits and borrowings at six of its biggest banks to assure customers they could withdraw their money and avoid a bank run. The decision rattled other European governments because it encouraged depositors to move their holdings to Ireland.
Irish Finance Minister Brian Lenihan told the BBC that there was no other choice because of the risk of panic.
“We were anxious to avoid that at all costs,” Lenihan was quoted as saying. “The policy options available to us were to immediately nationalize an institution. If we immediately nationalized that institution the risk was that it could lead to a systemic collapse of all the other institutions.”
French Finance Minister Christine Lagarde said the decision was “a bit of a shock,” the BBC said. Darling told the program that “the lesson that you draw here is you can’t do these things on your own.”
To contact the reporter on this story: Brian Swint in London at bswint@bloomberg.net.
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FT.com / Investor's notebook - View of the Day: This is not a currency crisisThis is not a currency crisis
By John Normand
Published: September 22 2009 17:35 | Last updated: September 22 2009 17:35
The latest sell-off in the dollar has prompted renewed talk of reserve diversification – but this is not the stuff a currency crisis is made of, says John Normand, global head of FX strategy at JPMorgan.
“Quantifying reserve diversification is financial alchemy – often attempted and never successful,” he says. “But there is decent circumstantial evidence that this process has accelerated since June.”
Mr Normand notes that global foreign exchange reserves are growing at $100bn a month, while official purchases of US assets are running near $50bn. “This sort of divergence is unusual in an environment where rate spreads between the US and the rest of the world are stable,” he says.
Mr Normand points out that official investors are still sizeable net buyers of US assets, even if the dollar share of total reserve recycling appears to be declining.
“We could pander to the dollar-crisis camp and claim that this divergence marks the beginning of the end for the dollar and US asset markets where foreign ownership dominates, but that course would be too easy,” he says. “It would also be wrong.
“The dollar crisis scenario still looks low-probability for the next three to six months since the US manages to attract a high absolute level of official financing, even though the US’s relative share of global reserves may be declining.”
Copyright The Financial Times Limited 2009. You may share using our article tools. Please don't cut articles from FT.com and redistribute by email or post to the web.
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using options as tools for hedging, 4 techniques available to anybodyusing options as tools for hedging, 4 techniques available to anybody
September 17, 2009 – Comments (10)
I am of the opinion that in many, although not in all, of the stocks that I hold that it is a good time to take some gains.
However, for one basic reason I am not want to sell them right now and that reason is taxes. Its a 20% difference in tax rate for me if I sell now (have not held even 1 share for 12 months) -vs- january, february, march, and april (some shares bought after that but not all that many).
Could I find an investment that would make more than 20% between now and then and thus make a better return by selling, paying up to the tax man, and then re-investing in this other thing? Of course, but... is it likely that I will successfully find that +20% investment? Maybe... but it isn't guaranteed, and as such at times hedging may be desireable.
Another reason to desire a hedge on a long position would be that you believe the market is going to correct, and stocks you own are going to go lower with it, but you still believe that in time the names you hold can move higher. A hedge can temper the short-term pain or even provideprofts you can re-invest after such a correction takes place, if it does take place.
There are several paths we could take to hedge our bets with options and these are the focus of this blog.
First, some background: there are two kinds of options. A call, and a put.
A call is a contract between you and someone else where one party agrees to give the other the right to buy a share from them by a certain time for a certain price in exchange for a premium. For an example, right now you can buy a January 2011 $45 call for ASH for about 10 bucks. If you buy this call, you pay someone else (maybe me) 10 bucks. You then get the right to buy 1 share of ASH from me for $45 anytime before january 2011. In this case you would profit if ASH went to $56 or higher, because you paid $10 and would pay me $45 for the share, and thus would have $55 into your share, and selling for $56 would yield $1 of profit. If ASH went to $70 your profit would be $15.
You would buy a call if you thought a stock is going to go up. You would short a call if you thought that the stock is going to go down, stay flat, etc.
A put is the opposite. A put gives its buyer the right to sell a share to someone for a given price upuntil a given date. You can buy a $40 put for ASH right now for jan 2011 for about 8 bucks. So you would pay $8, and you would then get the right to sell 1 share of ASH anytime between now and jan 2011 for $40. So by buying the put you are essentially guaranteeing that you can sell the share for $32 anytime between now and jan 2011 (you sell for $40, you paid $8 for the put, netting $32).
Option contracts are sold in lots of 100. So each time you make such a move you are working in lots of 100 shares, you can't buy a contract for 80 shares.
The farther into the future the expiration date is, the higher the premium (cost) of the options are. That $45 call for ASH costs just 30 cents for September 2009 (3 days). For january 2010 it costs about $4.50, and for jan 2011 it costs $10.
From time to time these contracts are executed before their expiration date, but this is rare. On several occasions I have sold covered calls that were in the money and had someone forget to call the shares. Without exxageration, I have kept 100 WYNN shares, several thousand XL shares, and several thousand TCK shares due to such mistakes. As those happened in April... I'd say i've benefitted from someone elses carelessness.
Option 1: buying a put. If I own a share of ASH and I'm satisfied with the gains (from a cost avg of $6 something to $44, pretty satisfied) I could buy a put. I bought all of my shares of ASH between january 2009 and March of 2009. To get to the 12 month i-can-sell-now-and-pay-capital-gains-taxes I could buy a put for April 2010. This gives me the right to sell the shares for $XX at a time when I can pay capital gains.
I buy a put for $45 (close to todays price) and it costs about $7.50. I would then lock in a selling price of net $37.50 anytime between now and april 2010.
If ASH goes to 60 here, I net $52.50. If it goes to $70 I net $62.50. If it goes to 20 I net $37.50. If it goes to$45 i net $37.50. Basically, $37.50 becomes my low and my upside is unlimited.
If ASH corrects temporarily to, say, $30, my put would become worth more, probably about $16 or $17, and I could then sell it for a profit, ... and then experience all the future upside in ASH from $30. My point is you don't have to hold these things to expiration, you can trade them.
Option 2: selling a call. If you own shares of a stock and sell a call against that stock (short the call) that is called a "covered call", you're covered because you own the shares which eliminates any risk of losing money from this transation...
So, I own a share of ASH and i'm satisfied with the gains. I decide to hedge by selling a covered call, say a Jan 2011 $45 call. I take in $10 in premium, and I can do whatever I want with that $10 immediately.
Now my position in ASH looks like this: if ASH goes to $70 I net $55. if ASH goes to $11,080 I net $55. My upside is limited to the strike price + the cash I took in from the call. If ASH goes to $45 I net $55. if ASH goes to $30 I net $40 because I took in the $10 of premium.
My upside is limited here, but I keep the $10 no matter what. I can reinvest it (so I win no matter how limited my upside is if I put it into an investment that does better than my upside loss in ASH) and so forth. If the shares don't move up or down at all I eventually make $10.
Over time if the stock goes sideways, the premium will melt away and you can buy it back at a profit. If the stock goes down the premium will melt away and you can buy it back at a profit. And so forth.
Option 3: a collar. You collar a stockby selling a covered call, and then using the premium to buy a put. You spend $0 on this transaction (or very little anyway, or you may profit very little, depending on what strike prices you choose).
Take a share of ASH again. say I decide that ASH might go up a little bit more, but i'm willing to risk it going down a little bit as well. I could sell an jan 2011 $50 call, which would get me $8 or so of premium. I could then take that $8 of premium and buy a jan 2011 $40 put with it.
I now never get less than $40 for my share, but never more than $50, I have essentially range-bound the stock. This is a slightly bullish, but just slightly, hedge.
Option 4: a synthetic short. I am long ASH, say I've decided thats it, I'm happy with the gains, I just want to lock it right exactly here. I can do that!
To make a short position with options you simply buy a put and sell a call at the same strike price. You are now, with some potential for negative or sometimes positive arbitrage due to bid/ask spreads and relative prices on puts and calls, short the stock. It goes up $1, you lose $1, it goes down $10, you make $10 on these options positions.
So in this case I'd buy an april 2010 put at $45 for about $7.40, I sell an april 2010 $45 call for about $6.30, and I have locked my net sale price for ASH at $43.90 ($45 less the difference in options costs). It costs me $1.10 per share to do so, I wind up about 8 cents ahead of the current price.
So... basically... lets take a look at how we might want to use each of these options, I'll pick some examples from my real life portfolio.
I am long XL capital. It pays a now-modest (huge at the time I was buying XL) dividend of about 2.5%, it may well raise that dividend in the future. It is also trading under book value (insurers historically trade at a small premium to book value) and further it probably is looking at additional mark-ups to its book value in coming quarters, it has a forward p/e of 7.8 (that is hardly rich) and frankly I think in the fullness of time XL goes higher from here. I'm comfortable holding it. I think in the fullness of time XL trades to 1-1.2 of tangible book and a p/e of 10. I think XL goes to 22-25 bucks.
However, I also think that the market is primed for a pullback, and if financials get hit XL gets pounded along with them because its not the largest cap and when someone buys FAZ or SKF XL gets shorted in the process. This makes XL volatile as all get-up and always ripe for a big drop in share price.
So i think XL goes higher but as my position in it is huge (nearly 10% of my total portfolio) i'd like some shelter in case it tumbles down. Its run up to $18 now, I have a few options
1. I could buy a jan 2010 put for about $1.10 at $15.00. If XL tanks to $15 in the next month or 2 that will wind up worth probably only 2 bucks, as every day that goes by some time premium ticks out of the options. But, if XL tanks soon to $15 the value of that will swell to probably about 3 bucks. If XL tanks soon to $12 it'll be worth probably about 4 bucks, etc. (the farther "in the money" an option is th eless time premium it exhibits.
I don't really like buying puts as the best way to hedge as A) time is not on your side. Every day that goes by your asset (the put) becomes less valuable all other things equal. And B) they don't really protect you completely unless you buy one thats already well in the money, and thats expensive.
But doing this would buy you 4 months of more or less secure vacation I guess...??
2. I could sell a jan 2011 covered call at $25. This brings in about $2.20. Time is on my side now, and if XL stays flat I win. If XL goes to $22 soon, the value of that call will swell to probably $3-$3.50. So I'll gain $4 in the share, but lose $1ish, which tempers my on paper gains. If XL then 6 months from now drifts down to $20 again, the value of that call will probably fall to $2 or so again and so forth.
I like this move because I get large upside (40%) + the call premium (meaning net 50+% upside), I get cash in my hand which I can do whatever with, and if the stock dips the cost of buying that put back will drop quickly and I will profit that way if I wish (or i can just let it ride).
If XL really tanks, like say to $5, ... I am not very protected at all... just by $2.20. But XL isn't going out of business and I think its going to do well in the future, and as I'm willing to hold XL i'm not concerned about a disastrous outcome, ... so i'm ok without the big downside protection.
This is a semi-bullish hedge. I'm leaving big upside, don't have completedownside protection, but could profit from the hedge if XL prices stabilize or drop.
3. I could collar XL. Sell the $25 (about the high side of where I think its going so no big deal if it gets there and the shares get called) and then buy the $12.50 put. No downside below $12.50 upside to $25. I can now walk away and just let time run its course, or I could...
imagine XL then dips to $15. The value of that $12.50 put, which I own, will swell and I can sell it at a profit. The value of that $25 call will drop, and I can buy it back at a profit.
So if i'm really sure XL is going to correct, I can do this and benefit more from a pullback than if I just sell the covered call. My upside is lower (because I bought the put).
This hedge isn't really bearish or bullish, but sort of neutral.
4. I could take out a synthetic short. If XL tanks to $12 I make $6 per hedged share essentially staying at $18. I could then cover, re-invest the profits, and experience upside in the futurre (after covering).
this is a bearish hedge. you're betting that more upside isn't in the cars and that at some future date the share will be lower than today.
5. I could sell an in-the-money or at-the-money long term covered call. This brings in alot of premium and provides better downside protection. I could sell a $17.50 call for jan 2011, bring in about $4.50 or about 25% of todays share price, invest that however I wish, still have some slight upside, but have 2x as much downside protection as the $25 call.
recently I've sold covered calls as described above against ASH (alot of them), XL (some), GNW (some) at prices I calculated to about roughly where I think the upper end of fair value for those stocks is, typically with 25-50% upside left from here. I'm bigtime under water on the ASH calls even though none of them are in the money, such is life.
I sold an in the money covered call on every share of WYNN when it hit like $62. I think i got $17or so for the $60 call for jan 2011. So my upside is limited to $77, as WYNN moved up even morme since then I may opt for making my position a collar by buying a put... If WYNN hits $50 say next march that call will probably be worth about 7-8 bucks. I may then cover if I think WYNN will go higher, or I may not.
I am not bullish on WYNN here one bit. I took a similar tact on LVS and may even sort of double-down on the hedges by selling som enaked calls against it as well (i own a mob of LVS so all my calls are covered now). By doubling down on the LVSshort-calls, I am risking alot of LVS goes far higher from here. But I am fairly confident that LVS now discounts a very good outcome from future operations and i'm not too worried about going short a few $35 calls...
I collared a few stocks and so on and so on.
My hedges right now do not provide me with locked-in gains on my portfolio overall. But they do provide me with considerable downside protection (probably about 20% total but thats a WAG and the exact figure would be time consuming to estimate).
Hope that helps somebody. :)
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FT.com / FTfm / Columnists - Look beyond the shipping forewarningsLook beyond the shipping forewarnings
By John Dizard
Published: September 20 2009 09:07 | Last updated: September 20 2009 09:07
Shipping operators have, historically, had two alternating assumptions about their world: 1) we’re all going to be multi-billionaires; 2) we’re all going to die horribly.
The institutional and retail investors who have financed much of their expansion in recent years have their own less-than-fully-rational investment philosophy: whatever the Baltic Dry Index has done between yesterday and today tells us what will happen to our stocks over the foreseeable investment horizon.
A somewhat less febrile, more analytic approach works better for the investor. That goes not only for how you time investments in shipping, but how to make sense of the market indicators, such as that Baltic Index.
The Index is calculated by the eponymous London exchange, which canvasses shipbrokers to find out the shipping rates for three categories of dry-cargo ships along 26 routes around the world.
It reflects demand for transport of such commodities as iron ore, coal, and grains along those routes, as well as the supply of ships to carry them.
In the months before the Lehman crash, it had started to turn down from its high above 11,700, finally plunging by 94 per cent between May and December of last year. Then it headed up again, presaging the other risk markets’ recovery.
Lately, ominously, it has declined to just under 2,400 from its summer high of 4,290. Does this mean that we, along with the shipowners, are going to die horribly after all?
Pankaj Khanna, the chief operating officer of DryShips Inc, the largest publicly traded participant in these markets, says: “I would look at something like the BDI’s three-month moving average, rather than the daily or weekly numbers, which are distorted by port congestion or the Chinese building steel inventory. Personally, I don’t look at the BDI; I look at component indices and component routes.”
Just as 170,000 tonne Capesize dry cargo ships can take over a mile to come to a stop, so the supply of new vessels takes a while to slow after demand withers.
However, the choking off of bank financing has supported the economics of the existing fleet. Originally, more than 70m tonnes of new dry cargo ships were scheduled for delivery in 2009.
With only some 22m tonnes delivered now, only 40m tonnes at the most will be supplied this year, offset by some 10m tonnes of scrapping. Next year, Mr Khanna believes, over half the outstanding dry cargo order book will be cancelled.
For now, he is optimistic about the other force tugging on the BDI level, and DryShips’ profits: demand. For all those routes and sizes, as you might have guessed, this year has been about Chinese imports of iron and coal.
Was it all just a speculative build-up of inventories? “The coal and iron were all turned into steel, and that led to inventory build-up. So steel prices went up to $600 a tonne, then back down to $500, where they are now recovering and stabilising. In another month or two the Chinese will be back in the market. The final demand for the steel products is still there, thanks to their stimulus plan, which will have an effect for another six to 12 months.”
This coincides with my sense of how long this recovery spurt will last in the US. First half of next year good, second . . . not so good. Mr Khanna doesn’t see a strong recovery in shipping, or ship financing, arriving until 2011 and later.
DryShips’ contracting is consistent with this outlook. It is de-risking the business model. Almost all its dry cargo capacity is contracted through the end of next year, with some slack in capacity for 2011 that could take advantage of a recovery in spot rates.
Over the longer term, DryShips is making an ever bigger commitment to huge semi-submersible oil rigs designed to exploit reserves in very deep waters. That’s the energy cycle, which seems more certain than the shipping cycle.
But is there a way to invest, rather than gamble, on the value of ships?
Babis Ziogas thinks so. I’ve been speaking with him for years about the shipping market. A Greek shipping investor with a graduate degree from the Ocean Engineering Department of MIT, he has an interesting ship valuation methodology.
“It’s a filter model,” he explains over the phone from Athens, “and it’s about investment decision making rather than macroeconomics.”
Simplifying, he says: “You take newbuilding prices and prices for ships on the secondary market, and compare the inflation-adjusted, depreciated value of those to the newbuilds.”
This contrasts with even most sophisticated investors, who attempt to discount the revenue stream based on chartering rates.
“This doesn’t have the risk element inside it, including credit risk.”
What does the model tell him now?
“There is not yet a bottom in secondhand ship prices, or in newbuilding. But I am raising money now, because I think the first half of 2010 will be a good time to buy.” By the way, he sold most of the ships his company had owned back in 2007. “Prices lost any connection to the value of underlying assets.”
So don’t jump at every wiggle in the Baltic Dry Index. Think longer term.
johndizard@hotmail.com
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Gold Rally Spurs a Boom in Funds - WSJ.comGold Rally Spurs a Boom in Funds
ETF or ETN. Long or Short. It's All There
Investors worried about inflation and the headwinds facing the global economy have been stuffing cash into gold exchange-traded funds.
SPDR Gold Shares (trading symbol: GLD), an ETF that holds more gold than many nations have in their reserves, has seen assets climb toward $35 billion, just shy of a record set in June.
And with the metal's price again flitting around $1,000 an ounce, investment managers are launching gold ETFs to capitalize on the rally.
"After falling to $700 in early November 2008, the price of gold is now retesting the $1,000 level," said Standard & Poor's global-investment-policy committee last week. "Should prices break strongly above the $1000-an-ounce area, we think prices could rise to the $1,200- to $1,500-ounce [range] over the next nine to 12 months."
Gold closed last week at $1,004, and closed Monday at $999.90.
A New Vehicle
U.S. investors got a new gold-tracking ETF last week amid the hoopla over prices cracking the key psychological barrier of $1,000.
ETF Securities Ltd. launched the ETFS Physical Swiss Gold Shares (SGOL) on the NYSE Arca exchange. Shares represent a 10th of an ounce of gold bars stored in Zurich.
The new ETF has a similar structure and fees to SPDR Gold Shares, its well-entrenched competitor that is sponsored by the World Gold Council. The key difference is that SPDR Gold Shares has its bullion stored in London.
"Investors have been asking us for a long time to develop a product that stores its gold in Switzerland," ETF Securities said. The ETF gives investors "a new way to invest in the gold market and an efficient way to geographically diversify their gold holdings," it added.
ETFS Physical Swiss Gold Shares has an expense ratio of 0.39%, compared with 0.4% for SPDR Gold Shares. Investors also have to pay broker commissions to buy and sell ETFs.
There are several exchange-traded funds and notes that provide exposure to precious metals. The iShares Comex Gold Trust (IAU) is another example of a gold ETF that holds the metal, but some other products are tied to futures contracts.
Commodity ETFs that use the derivatives markets have faced heat from regulators amid concern that they are fueling speculation in commodities. Low-cost, liquid ETFs have opened up commodities and other traditionally difficult-to-reach markets to mainstream investors. However, some say this increased access is contributing to market volatility.
Is GLD a Game Changer?
SDPR Gold Shares "changes the dynamics of the gold price, both to the upside and downside," said Vitaliy Katsenelson, director of research at Investment Management Associates Inc.
"If gold keeps climbing, the ease of buying will drive gold prices higher than in SPDR Gold Shares' absence," Mr. Katsenelson said. "In the event of a significant selloff, there are not enough natural buyers of physical gold. It is a bit like a roach motel -- easy to get in, hard to get out."
State Street Corp., the marketing agent for SPDR Gold Shares, disagreed with the characterization. The ETF "is listed and traded on the NYSE Arca which allows for a continuous two-way market for buyers and sellers of SPDR Gold Shares, much like any other listed equity," the company said.
Even with gold again around $1,000 an ounce, the SPDR Gold Shares fund, has traded above $100 a share only once, on St. Patrick's Day in 2008. On Monday, the five-year-old fund closed at $97.96.
Other Avenues
Investors looking for exposure to gold prices have several choices among ETFs and ETNs, including leveraged offerings and bearish funds that let investors bet against the precious metal.
The list includes E-TRACS UBS Bloomberg CMCI Gold ETN (UBG), PowerShares DB Gold Fund (DGL), PowerShares DB Gold Double Long ETN (DGP), ProShares Ultra Gold (UGL), PowerShares DB Gold Double Short ETN (DZZ), PowerShares DB Gold Short ETN (DGZ) and ProShares UltraShort Gold (GLL).
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Wall Street’s Math Wizards Forgot a Few Variables - DealBook Blog - NYTimes.comIn the aftermath of the great meltdown of 2008, Wall Street’s quants have been cast as the financial engineers of profit-driven innovation run amok. They, after all, invented the exotic securities that proved so troublesome.
But the real failure, according to finance experts and economists, was in the quants’ mathematical models of risk that suggested the arcane stuff was safe, The New York Times’s Steve Lohr writes.
The risk models proved myopic, they say, because they were too simple-minded. They focused mainly on figures like the expected returns and the default risk of financial instruments. What they didn’t sufficiently take into account was human behavior, specifically the potential for widespread panic. When lots of investors got too scared to buy or sell, markets seized up and the models failed.
That failure suggests new frontiers for financial engineering and risk management, including trying to model the mechanics of panic and the patterns of human behavior.
“What wasn’t recognized was the importance of a different species of risk — liquidity risk,” Stephen Figlewski, a professor of finance at the Leonard N. Stern School of Business at New York University, told The Times. “When trust in counterparties is lost, and markets freeze up so there are no prices,” he said, it “really showed how different the real world was from our models.”
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China, Bernanke, and the price of gold - Telegraph BlogsChina, Bernanke, and the price of gold
By Ambrose Evans-Pritchard Economics Last updated: September 7th, 2009
55 Comments Comment on this article
China has issued what amounts to the “Beijing Put” on gold. You can make a lot of money, but you really can’t lose.
I happened to see quite a bit of Cheng Siwei at the Ambrosetti Workshop, a gathering of politicians and global strategists at Lake Como, including a dinner at Villa d’Este last night at which he listened very attentively as a number of American guests tore President Obama’s economic and health policy to shreds.
Mr Cheng was until recently Vice-Chairman of the Communist Party’s Standing Committee, and is now a sort of economic ambassador for China around the world — a charming man, by the way, who left Hong Kong for mainland China in 1950 at the age of 16, as young idealist eager to serve the revolution. Sixty years later, he calls himself simply “a survivior”.
What he said about US monetary policy and gold – this bit on the record – would appear to validate the long-held belief of gold bugs that China has fundamentally lost confidence in the US dollar and is going to shift to a partial gold standard through reserve accumulation.
He played down other metals such as copper, saying that they could not double as a proxy currency or store of wealth.
“Gold is definitely an alternative, but when we buy, the price goes up. We have to do it carefully so as not stimulate the market,” he said.
In other words, China is buying the dips, and will continue to do so as a systematic policy. His comment captures exactly what observation of gold price action suggests is happening. Every time it looks as if the bullion market is going to buckle, some big force steps in from the unknown.
Investors long-suspected that it was China. We later discovered that Beijing had in fact doubled its gold reserves to 1054 tonnes. Fait accompli first. Announcement long after.
Standing back, you can see that the steady rise in gold over the last eight years to $994 an ounce last week – outperforming US equities fourfold, even with reinvested dividends – has roughly tracked the emergence of China as a superpower in foreign reserve holdings (now $2 trillion).
As I have written in today’s paper, Mr Cheng (and Beijing) takes a dim view of Ben Bernanke’s monetary experiments at the Federal Reserve.
“If they keep printing money to buy bonds it will lead to inflation, and after a year or two the dollar will fall hard. Most of our foreign reserves are in US bonds and this is very difficult to change, so we will diversify incremental reserves into euros, yen, and other currencies,” he said.
This line of argument is by now well-known. Less understood is how much trouble the Fed’s QE policies are causing in China itself, where they have vicariously set off a speculative boom on the Shanghai exchange and in property. Mr Cheng said mid-level house prices are now ten times incomes.
“If we raise interest rates, we will be flooded with hot money. We have to wait for them. If they raise, we raise.”
“Credit in China is too loose. We have a bubble in the housing market and in stocks so we have to be very careful, because this could fall down.”
Of course, China cold end this problem by letting the yuan rise to its proper value, but China too is trapped. Wafer-thin profit margins on exports mean that vast chunks of Chinese industry would go bust if the yuan rose enough to close the trade surplus. China’s exports were down 23pc in July from a year before even at the current exchange rate, and exports make up 40pc of GDP. “We have lost 20m jobs in this crisis,” he said.
China’s mercantilist export strategy has led the country into a cul-de-sac. China must continue to run its trade surplus. It must accumulate hundreds of billions more in reserves. Ergo, it must buy a great deal more gold.
Where is the gold going to come from?
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Gmail - The Elements of Deflation - John Mauldin's Weekly E-Letter - pguenechea@gmail.comBut one last thought, as I have had a lot of questions on gold recently. "Isn't gold telling us that inflation is coming back?" The answer is no. Since the early '80s the correlation between gold and inflation has dropped to zero. Gold has had very little to say in the last 30 years about inflation.
But what it may be saying is that paper currencies are a problem. Gold is going up not only in dollar terms, but in euros, pounds, yen, and more. My view is that gold should be seen as a neutral currency. The dollar is the worst currency in the world, except for all the others. Is it possible the Fed will not respond and print more money next year? Sure. And the dollar could rise as deflation kicks in. The only time we saw the purchasing power of the dollar rise in a sustained manner was during deflation, in the last century.
The race is not always to the swiftest or the fight to the strongest, but that's the way to bet. And right now, my bet is the Fed will print money to fight a double-dip recession and deflation. And gold would be one way to play that bet.
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Stiglitz Says U.S. Economic Recovery May Not Be ‘Sustainable’ - Bloomberg.comStiglitz Says U.S. Economic Recovery May Not Be ‘Sustainable’
By Michael McKee
Sept. 4 (Bloomberg) -- The U.S. economy faces a “significant chance” of contracting again after emerging from its worst recession since the 1930s, Nobel Prize-winning economist Joseph Stiglitz said.
“It’s not clear that the U.S. is recovering in a sustainable way,” Stiglitz, a Columbia University professor, told reporters yesterday in New York.
Economists and policy makers are expressing concern about the strength of a projected economic recovery, with Treasury Secretary Timothy Geithner saying two days ago that it’s too soon to remove government measures aimed at boosting growth.
Stiglitz said he sees two scenarios for the world’s largest economy in coming months. One is a period of “malaise,” in which consumption lags and private investment is slow to accelerate. The other is a rebound fueled by government stimulus that’s followed by an abrupt downturn -- an occurrence that economists call a “W-shaped’ recovery.
“There’s a significant chance of a W, but I don’t think it’s inevitable,” he said. The economy “could just bounce along the bottom.”
Stiglitz said it’s difficult to predict the economy’s trajectory because “we really are in a different world.” He said the crisis of the past year was made worse by lax regulation that allowed some financial firms to grow so large that the system couldn’t handle a failure of any of them.
Big Banks
“These institutions are not only too big to fail, they are too big to be managed,” he said.
Finance ministers and central bankers from the Group of 20 nations meet in London Sept. 4-5 to lay the groundwork for a summit in Pittsburgh later this month, where leaders will consider measures to overhaul supervision of the financial system.
The U.S. Treasury Department, in a statement yesterday, said it wants a global agreement requiring banks to increase their capital cushions to be reached by the end of next year.
Stiglitz, 66, said that while $787 billion in federal government stimulus is propelling growth this quarter, there’s no guarantee the economy will maintain its momentum. On whether the U.S. needs another injection of stimulus, Stiglitz said it’s best to “wait and see.”
“We did have a very big stimulus, and that stimulus has added to economic growth and will be adding in the current quarter,” he said. “But the question going forward in 2011 is the stimulus is coming off, and that’s a negative.”
Lehman’s Collapse
A U.S. government bailout of Lehman Brothers Holdings Inc., which filed for bankruptcy a year ago, wouldn’t have prevented the global economy from sliding into a recession, Stiglitz said.
“Whether Lehman Brothers had or had not been bailed out, the global economy was headed for difficulties, a fact that seems increasingly evident as the world sputters in its recovery,” he said.
U.S. GDP shrank at a 1 percent annual rate from April to June, following a 6.4 percent pace of contraction in the first three months of the year.
The drop was the fourth in a row, the longest contraction since quarterly records began in 1947. The world’s largest economy has shrunk 3.9 percent since last year’s second quarter, making this the deepest recession since the Great Depression.
Stiglitz won the Nobel Prize in economics in 2001 for showing that markets are inefficient when all parties in a transaction don’t have equal access to critical information, which is most of the time.
Unused Capacity
With so much excess capacity, the American economy faces a short-term threat of disinflation and possibly deflation, Stiglitz said. Wages may even decline, given recent high productivity and the likelihood of an extended period of high unemployment, he said.
Longer term, he said the Fed’s aggressive monetary policy will mean inflation becomes the greater threat. “With the magnitude of the deficits and the balance sheet of the Fed having been blown up, it’s understandable why there are anxieties about inflation,” he said.
While the Fed says it has the tools to deal with it, there are still concerns, Stiglitz said. Because monetary policy takes six to 18 months to have its full effect, the central bank will have to begin withdrawing monetary stimulus on the basis of forecasts.
The Fed’s record on its economic forecasts isn’t enough to reassure investors and, as a result, the U.S. currency may suffer, he said.
Dollar ‘Weakness’
“Whether or not they’re able to do it, the uncertainty today about whether they can do it can contribute to the weakness of the dollar,” Stiglitz said. “That’s one of the reasons there is increasing interest around the world in discussing alternatives to the dollar system.”
Stiglitz, who is a member of a United Nations commission that will study the global financial system and currency regimes, said “the logic is compelling” for a new global currency.
The current system creates instability, weakens global confidence, and is fundamentally unfair to developing countries that are in essence lending the U.S. trillions of dollars and bearing the risk, he said.
“In most quarters, there is a feeling we should move away from the dollar system. The question is do we do it in an orderly way, or a chaotic way,” Stiglitz said. “The size of the deficit and the size of the balance sheet of the Fed have just increased the anxiety and the desire that something be done.”
While some think it would hurt the U.S. to no longer be able to borrow cheaply in dollars, “that era is over,” he said. “We’re moving to a more multi-polar world.”
Between the fall of the Berlin Wall and the collapse of Lehman Brothers was “the short period of American triumphalism, where we dominated the global scene. That period is over,” Stiglitz said.
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FT Alphaville » Blog Archive » What’s driving paper gold?What’s driving paper gold?
Posted by Izabella Kaminska on Sep 03 12:54.
Gold madness is under way, and no one — as far as we can tell — has a good explanation as to why:
Gold - FT
Here are some observations and views we’ve come across:
* MF Global noted a potential knock-on effect from the soon-to-be closed DB double long crude oil fund, as money is reinvested into gold.
* MF Global, however, also said the best explanation they had heard was of possible buying by a central bank.
* We noted, gold lease rates (LIBOR-GOFO) are still negative. On September 2 the lease rate came in at -0.03419 and on September 3 it came in at -0.04116.
* Dennis Gartman of the Gartman Letter — who is not a goldbug — last week alerted readers to some important technical resistance factors in euro-and sterling-denominated gold.
* We noted the IMF’s $250bn SDR injection took place last Friday, meaning there’s an extra $250bn worth of paper that can be exchanged into freely available dollars, yens, euros and sterling by central banks around the world. Would they use the money to beef up their gold reserves?
* Barcap put out a technical note on Wednesday saying gold was on the verge of resuming its bull trend. As they wrote:
Historically, the time is ripe for a sustained advance, as recent bull trends have occurred in odd numbered years, with the breakouts occurring during September. Indeed, September is the strongest month of the year from a seasonal perspective. With price action unfolding in terms very similar to 2005 and 2007, we look for higher gold over the next several quarters in both dollar and euro terms.(Click to enlarge)
Barcap on gold technicals
And then there’s what Dennis Gartman had to say on Thursday, which strikes us as particularly noteworthy (our emphasis):THE DOLLAR IS WEAK and although it is not violently so, it is weak relative to nearly all of its major and minor trading partners, and it is particularly so relative to gold. Indeed, perhaps the most important comment we can make relative to the forex market… and relative to nearly all capital markets generally… this morning is that there is growing disdain for currencies generally and there is growing enamourment of gold as the most important ‘currency” of all. We are not Gold Bugs here at TGL. That is rather obvious, for on balance we’ve long subscribed to the Keynesian notion that gold is indeed a “barbarous relic.” We’ve been disdainful of the Gold Bugs during our entire career, seeing most of them as gun-toting, canned-food hoarding, doomsday-awaiting crotchety old geezers with little good to say about society generally, and much bad. However, with the advent of the spending, entitlement and tax programs being put forth by the current Administration, and with the same sorts of tax/spend programs being embraced so fully abroad, gold’s become the third reservable currency after the US dollar and the EUR, and it is swiftly on its way to becoming the 2nd.The tectonic plates of the global economy shifted rather vividly yesterday when gold soared to the upside and did so not just in terms of the US dollar, but in terms of every currency everywhere. It was as if the flood gates had spilled open and a torrent of buying of gold along with a torrent of selling of dollars, of sterling, of EURs, of Yen, of rupees, of rubles and of Renminbi hit the market.Perhaps this was, as some have tried to explain it away, a result of the less-than-liquid market conditions that prevail as the summer is ending and as the dealing rooms around the world are manned by less-than-full compliments of senior traders. We have argued this case ourselves, having warned our readers/clients and friends around the world of being too active and taking too large positions at this time of the year, preferring to await the return of liquidity that should mark next week’s activity. But that having been said, we cannot discount the seriousness… the violence… the material nature of the moves in favour of gold yesterday across the forex spectrum.Something more than mere illiquidity was and is at work in the gold market, and despite our antipathy toward this “barbarous relic,” attention really must be paid.And that’s the interesting thing: gold has suddenly soared not just in terms of the US dollar, but in terms of every currency everywhere. As the FT’s commodities correspondent noted to us, that comes despite a lack of physical demand.
In which case, perhaps it can be down to that special-drawing-right liquidity injection after all. The SDR wasn’t called paper gold for nothing.
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