Relative to nominal treasuries, TIPS were a raging buy at the beginning of 2009 (I bought some then for income clients) Since then the ratio has begun to close in on its apparant long term average around 2.50 (eyeball average)
Note how steady the implied breakeven rate has been since ~2003 excepting the crisis of late 2008 - early 2009. With the current great debate raging between the inflationists and deflationists it is interesting to now how much this indicator has not moved, and is actually returning to a long run average.
edit: I have a followup post to end date etf's here
Finally. This is an ETF I've personally asked ETF complexes to create. My prayers have finally been answered. Ishares has come out with the first end date ETF series.
A quick explanation: Until Ishares created the end date ETF's, all bond funds were perpetual. If you purchased an etf with a target maturity the fund would always be purchasing and selling bonds within the target maturity band, credity quality criteria, etc. If interest rates went up or down your fund value would go up and down accordingly but you'd never be sure how much your ETF would be worth in X number of years.
The end date ETF is different, the ETF is designed to expire at a specific date in the future. From a financial planning perspective this is huge. Now you can build a 'bond ladder' with just a few purchases. With an end date ETF as the the expiration date approaches the volatility will decline as the duration decreases.
Buying muni bonds has always been a pain with huge spreads and taking lots of time to execute. With the end date ETF's making adjustments will be very easy and quick and if you need to make minor changes in the future the spreads will be much tighter than buying and selling individual bonds.
One caveat, I would not buy them now. The premium to NAV is huge right now at more than 1.5% The funds are also very small and the spreads are pretty wide. Once the premium to NAV falls to fair value I will be a buyer of these funds for my clients and myself.
I can see why they created end date ETF's for the muni bond complex first as it is the most illiquid of the bond sectors. Hopefully they will be very successful and Ishares goes on to create end date ETF's for corporate, treasury, and TIP bonds.
The betting site intrade.com shows Scott Brown leading in the special election for the vacant Senate seat in Massachusetts. (The image is a static picture and does not show the current odds, click on the link above to get a current number)
While there has been much talk regarding this being the '60th Senate vote that will stop health care' I believe more attention should be paid to the House. Health care passed by the slimmist of margins in the House and Mr. Brown's strong showing in a very Blue State most likely has quite a number of Democratic House members quaking in fear.
It does not matter if Brown wins now, even a close defeat may be enough to scare some House members into not voting for the health care bill.
Politics is not my strong suite and I'll try to avoid discussing it as much as possible. This event just struck me as interesting due to the predictions markets opinion and the ramifications of one Senate vote. Please no hate mail regarding one party being better than another. I prefer neither party and hold my nose when I vote.
The tightening has begun in China, just a few days after my previous post on bubbling lending growth in China.
Jan 11, 2010: China raises reserve ratio by 0.5%. (WSJ) This may not seem like a big idea, but by reducing the percentage of deposits available for lending you automatically slows down the pace of lending growth. The more I think about this, the more I prefer it to just raising short term interest rates (which they also did a few days ago as well) which can hamper currency exchange rates and encourage carry trade lending. Considering China's relatively undeveloped financial markets this method works better than if it was tried in America.
We'll see if this is just public posturing to put people on notice or really a reduction in the growth of lending shortly. Watch this space. I'll keep you informed.
A major strike at Codelco's mine lasted but a few days before the large bonus offered by management was accepted (Reuters, 2010 Jan 6)
Vale is restaring the Sudbury smelter which produces nickel and some copper. I don't have stats on how much copper it produces each day but the mine has been out of production since July. It sounds like this strike will last a while and Vale is willing to bring in replacement workers. (Reuters, 2010 Jan 7)
Note, from my research I believe the Vale / Sudbury mine is the ONLY copper mine out of action due to a strike.
All other major copper mines in the world appear to be running. If you know of any that are not I'd appreciate an email.
Longer term, the Antamina mine recently won approval for expansion (BHP, 2010 Jan 5)
On the demand side it is always difficult to know precisely, but copper inventories continue to rise. The first quarter of the year is seasonally a strong time for copper prices. I'll post more on the dynamics as I see it soon(tm)
One item which is becoming a pet peeve of mine is the practice of writing articles making predictions with no underlying factual data to buttress their conclusions. If you are going to predict something, at least tell me why!
A current hot topic is China and whether it is in a bubble. And if in a bubble, what kind? Well, here's some juicy data and anecdotal evidence for you to chew on.
If you notice, lending in China skyrocketed last year. As of November 30, 2009, total loans outstanding are up nearly 35% year over year. That is a huge increase in the rate of growth.
I would put to you that all that money sloshing around did not just end up in solidly performing loans made with proper underwriting standards with the full expectation they will be paid back.
Sharp eyed readers may notice the decline in lending growth from October 07 to the nadir of November 08 coincides with the dramatic decline in the Chinese equity markets almost perfectly. Once the lending spigots were turned back on the Chinese markets reversed course and charged back up again.
I have previously mentioned my suspicions that some of that lending deluge has also made its way into the commodity markets as pure speculation, but I'll leave that to a later entry.
The hedge fund manager Jim Chanos has also noticed this excess credit creation. Around time point 4:15 he starts to discuss China and their excessive lending.
When will this bubble pop? Can't tell you that. Keeping the pace of lending up at 35+% yoy may be a challenge for the Chinese government this year as the banks are running out of spare capital. There's already a lot of talk and some action trying to tamp down the speculative fires in property prices. Where and when this all goes poof is subject to speculation. If it ends in 2010 it will punch a serious hole in the current world-recovery-buy-commodities-and-all-risky-assets theme. Its a dangerous game to play right now as prices can go parabolic before they go splat but I'm watching and waiting.
Sit back and get your popcorn. The show will be very interesting to watch in 2010.
Negotiation is an art and sometimes the battle is won or lost before discussions even begin. The recent Copenhagen negotations on climate matters provides an excellent example.
.. But I saw Obama fighting desperately to salvage a deal, and the Chinese delegate saying "no", over and over again . . . . . . What I saw was profoundly shocking. The Chinese premier, Wen Jinbao, did not deign to attend the meetings personally, instead sending a second-tier official in the country's foreign ministry to sit opposite Obama himself. The diplomatic snub was obvious and brutal, as was the practical implication: several times during the session, the world's most powerful heads of state were forced to wait around as the Chinese delegate went off to make telephone calls to his "superiors". . .
. . . So how did China manage to pull off this coup? First, it was in an extremely strong negotiating position. China didn't need a deal. . . .
. . . This does not mean China is not serious about global warming. It is strong in both the wind and solar industries. But China's growth, and growing global political and economic dominance, is based largely on cheap coal. China knows it is becoming an uncontested superpower; indeed its newfound muscular confidence was on striking display in Copenhagen. Its coal-based economy doubles every decade, and its power increases commensurately. Its leadership will not alter this magic formula unless they absolutely have to. . .
The bit in red is the most critical. The Chinese didn't need a deal but they knew President Obama and other western leaders were desperate for one and they knew this.
Always have a BATNA -- A Best Alternative To a Negotiated Agreement (I forgot where I read this, if you know, please let me know, I need to re read the book) . If you cannot conceive of an alternative to the deal or contract you will negotiate poorly. Your opponent will most likely sense your situation as well and push you harder. If you aren't willing to walk away from a deal your probabilities of not getting a good deal go up dramatically.
Energy costs are a very important factor in numerous industries and the Chinese know this. Why in their minds should they negotiate away this advantage? The Chinese suceeded in making President Obama and leaders of the rest of the Western world look foolish which will color future negotiations. A very successful trip for the Chinese.
