Wednesday, January 20, 2010

End Date Bond ETF's -- A long time coming and a welcome addition

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.

Additional reading:
Investment News
Ishares.com end date 2017  ETF

Monday, January 18, 2010

Betting markets are predicting a win for Brown in Massachusetts -- What does this mean?


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.

Tuesday, January 12, 2010

China raises reserve ratios, increases short term interest rates

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.


ht: Calculated Risk

Monday, January 11, 2010

Copper update: supplies going up and demand is ????

Some recent news on the copper fundamentals. 

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. 

BHP's Olympic Dam slowdown due to equipment failure is due to be back up to full capacity by March 31,2010. Full capacity is estimated at ~600 / tons day. (BHP, 2009 October 8)  (BHP, 2009 November 6)  (Wikipedia)

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)

Wednesday, January 6, 2010

The smell of lending bubbles in China. Do you like butter on your popcorn?


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.

Monday, January 4, 2010

An example of how not to negotiate

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.

From the Guardian, a journalist claims the Chinese wrecked the climate deal (2009, December 22)
A few choice words from a very interesting article:

.. 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.

Philip Verleger on Oil, Natural gas, the Saudi perspecitve and more

A 30+ minute podcast of Philip Verleger interviewed on Bloomberg Radio.  (click the little play button next to the date)  A good overview of the oil, natural gas markets, the Saudis, and more.  He touches on the current use of tankers for oil storage, Exxon's purchase of  XTO, trade balances and the Chinese.

I have been following Mr. Verleger for a while and it is refreshing to hear an analyst say he was wrong.  Predicting the future prices of assets is always very tricky but he at least admits it.  He does reinforce that the inbalances causing him to predict low oil prices in 2009 are still there and do not appear to be abating.