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Assembled in the USA from 100% Chinese parts.

History

31st October 2008

12:57am: I've voted.
In fact, I voted Monday.

Can you tell I can't wait to have this campaign over? I know, my voting won't make it end any quicker. But still.
4:33am: There has been no lack of interesting financial news lately...
...but I've been busy dealing with life. Nothing particularly earth-shattering, just the usual busy.

That said, I'm going to ditch a few things from the queue and just punch out some brief excerpts. Sorry both for being Posty McPosty Pants this morning, and for not giving much detail.
4:41am: Porsche, the market manipulator with a small auto business on the side.


From http://www.economist.com/finance/displaystory.cfm?story_id=12523898:
After languishing below €200 last year, it [VW's share price] jumped to more than €1,005 at one point on October 28th, briefly making VW the world’s most valuable company. Porsche may have made paper gains of €30 billion-40 billion in what one analyst described as “one of the most brilliantly conceived wealth transfers ever.”

The greatest damage is to the reputation of Germany’s capital markets, where regulators are now belatedly investigating what went on. Allowing acquirers to build large secret stakes in bid targets does nothing for confidence.
4:55am: http://www.forbes.com/opinions/2008/10/30/baldry-baltic-index-oped-cx_sl_1031lee.html:
Long story short: The Baltic Dry shows how much people are willing to pay to ship certain raw materials. You can track it at Bloomberg or by going to the exchange's own Web site.

It can be enormously jumpy. The supply of shipping vessels is very, very inelastic--it takes at least two years and tons of bucks to build a ship--so even the tiniest shifts in the demand curve will generate great changes in prices. And there lots of possibilities for demand disturbances--like swings in commodity prices, changes in the weather and variations in the price of bunker fuel which can move operating costs.

OK, so what's happening now? No surprises here. The Baltic Dry Index had a strong run-up between 2005 to the end of 2007. This year, it reached a high of $11,793 in May, but it's been pretty much tanking ever since. It's now under $900--having lost over 90% of its value.
Some people are taking this as a sign that international trade is in some trouble. From http://www.theglobeandmail.com/servlet/story/LAC.20081031.RIMF31/TPStory/Business:
The stories about stagnation in global trade had been circulating quietly for a while: exporters having trouble finding financing to ship their goods from emerging markets; bankers refusing to recognize the letters of credit that exporters have traditionally used; ships having to slash their freight rates to attract business.

The whispers crescendoed to a dull roar last week. A Thai shipping executive told a Singapore audience that credit was frozen. Moody's Economy.com and a report from Maersk Broker said goods were piling up at ports, pending financing.

Richard Kelly, senior economist at Toronto-Dominion Bank, keeps hearing stories about raw materials sitting on ships in Asian ports.

Global trade, he fears, is stalling - not because demand, which has slowed but still exists, isn't there, but because a lack of confidence among creditors is preventing the goods from moving.
I'm not so sure, myself, as the last time I talked to puffydrake, he said things weren't as bad as the reports might suggest. But another chat with him is long overdue anyway.
5:14am: From http://seekingalpha.com/article/102886-negative-gasoline-crack-spread-unsustainable:
The US refining industry is currently experiencing a very rare event, a negative prompt month futures gasoline crack spread.

The chart below reflects the value of this spread dating back to 1990. Over nearly three decades, this spread has bottomed in the $1.00-2.50 range. Recently this spread has been forced into negative territory off the back of 1) position liquidation driven by the global credit crisis and 2) demand destruction driven by weakening economic conditions and lack of supply following the 2008 hurricane season.

This spread is calculated utilizing the NYMEX prompt month futures markets. Therefore, the chart above represents gasoline delivered at NY harbor vs. WTI crude oil delivered at Cushing, OK. Despite the location basis, the chart provides information which is quite useful in understanding the cash flow of refining businesses.

Generally speaking, US refiners are getting hammered by the gasoline crack spread. Expect to hear stories of refiners reducing gasoline production (to the most efficient point on their cost curve) and extended shutdowns for maintenance.
From http://ftalphaville.ft.com/blog/2008/10/30/17645/the-negative-crack-spread/:
The spread, which is the difference in price between WTI Nymex front-month futures and Nymex Rbob (gasoline) futures - the so-called refining margin - has gone negative. And it’s been negative since October 3.

The above indicates that it’s currently not at all profitable for refineries to be running crudes into gasoline. More worrying, the heating oil crack has also been narrowing this month, meaning there’s fewer profits in producing middle distillates too. Middle-distillate demand (which goes into making diesel) had been the one saving grace for the products market, with refineries depending on the crack to make good on their p&ls. Many analysts even noted how the shift away from gasoline and towards distillates (presumably as US drivers switched to diesel-run cars) was leading to a situation where gasoline was after a point effectively becoming a by-product.

With these sorts of shoddy fundamentals, it now like many refineries will be forced to shut down units.

So whatever the WTI price of crude does, the negative crack spread is worth remembering. Until it goes away stocks will likely continue to build - a bearish signal for oil.
7:09am: China's not immune, no.
From http://piaohaoreport.sampasite.com/china-financial-markets/blog/CITIC-and-risk-management-practi.htm:
[E]ven though Chinese banks probably have little exposure to the sub-prime mess or to complex derivatives, it is not those instruments per se that created the crisis, but rather excess risk–taking encouraged by excessively loose money....These instruments were only the way in which banks took on excessive risk, they were not the cause of the excessive risk. Japanese banks in 1990 weren’t brought down by US sub-prime mortgages or toxic derivatives, but rather by old-fashioned loans, and it is useless to think that these former are the only risk to a banking system.

It has been very difficult to get a firm grasp on exactly what is going on in Chinese companies and banks as far as risk management goes. My working assumption is that they have very little risk management experience, very weak rules on disclosure, and a perverse set of incentives. That suggests to me that when faced with the same set of pressures faced by the leading Western corporations and financial institutions – i.e. ferocious liquidity growth and a previous environment of high rewards for excess risk taking – they are even more likely to have made some very risky bets.

Their lack of transparency has kept us from knowing exactly what is happening, but lack of transparency protected US and European banks for only so long before that very lack of transparency became the problem itself. The few glimpses we can get into risk management among Chinese institutions do not give me much comfort. If there is an economic slowdown, prepare to be surprised by all the garbage that comes out.
12:39pm: One of the most humbling things I saw in the British Library...
...was one of Jane Austen's notebooks. As a teenager she could put words together better than I ever will.

Damn.
2:41pm: Artificial markets: the bailout isn’t working
From http://ftalphaville.ft.com/blog/2008/10/31/17683/artificial-markets-the-bailout-isnt-working/:
Or at least, it’s not working in the way that it’s being made out to.

If the objective - or rather, objectives - of the world’s governments through their suite of emergency financial measures is to sustainably normalise markets and stabilise the world economy, then they are palpably failing.

What the bailouts are doing is bailing out: at an incredible rate. The headline result of that is a normalisation, but of course, it’s artificial. The real test of the success of the bailout would be working out what would happen if you took it away again.

[Note: examples--with detail and very large numbers--omitted in the interests of brevity]

Here’s a part philosophical, part-hypothetical and part-sincere conclusion:

The problem with all of the current liquidity measures - in the US and abroad - is the same as that with the Fed’s other lending facilities: those like the TAF or the PDCF, which have been in operation for over a year. The facilities do not restore confidence, they simply nurture dependence.

To wit: the Fed isn’t de-risking the market, it is merely undercutting the risk appetite of all the market’s other participants, and in doing so only further damaging the likelihood of them participating again.
11:23pm: My Mac's OS is now behaving as badly as Windows.
On a daily basis nowadays, the browser I'm using chews up so much memory that it freezes the machine. Or, that's at least the obvious cause. Sometimes it merely freezes the internet connection, so that no application can access the internet.

I think SystemUIserver is implicated in this, but I can't be sure. At any rate, Force Quit in Activity Monitor does nothing. And that's when Activity Monitor responds at all. Sending a kill -9 to the process in question from the terminal window also does nothing.

I'm reduced to power-cycling the machine, in the best old-fashioned Windows 95 way. This is bad enough, but sometimes this causes the icons in the title bar to get trashed, and I have to go through and reset them all.

Needless to say, I am not particularly impressed at the stability of this system.
Current Mood: irritated
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