SPECIAL FX FOR WIZARDS

China’s Very Mysterious Data

2012-01-27T16:20:00.000+01:00

A quick observation.

I could not help noticing that China’s imports from Japan fell 16.2pc in December. Imports from Taiwan fell 6.2pc. The Shanghai Container Freight Index fell 1.4pc to a record low of 919.44 in November, after sliding relentlessly for several months. It has picked up slightly since.

The Baltic Dry Index measuring freight rates for ores, grains, and bulk goods, has fallen 44pc over the last year. Kasper Moller from Maersk in Beijing said weak Chinese demand for iron ore was the key culprit.

Cautionary warning. The BDI index also reflects the shipping glut, so it is not a pure indicator. However, rail, road, river and air freight volume for the whole of China fell to 31780m tons in November (latest data), from 32340m tons in October. Not a big fall, but still negative. (National Bureau of Statistics of China.)

Chinese electricity use was flat in over the Autumn, with a sharp fall in the (year-on-year) growth rates from 8.9pc in September, to 8pc in October, and 7.7pc in December. Residential investment has been contracting on a monthly basis, and of course property prices are now falling in all but two of China’s 70 largest cities. So how did China pull off an economic growth rate of 8.9pc in the fourth quarter?

Beats me.

I strongly suspect that the trade and power data reveal the true state of China’s economy. There clearly was a pick up in early January but I stick to my view that China has inflated its credit bubble beyond the limits of safety – an increase of 100pc of GDP in five years, or twice US credit growth from 2002-2007 – and that Beijing cannot continue to gain much traction with this sort of artificial stimulus.

Indeed, the extra boost to GDP from each extra yuan of credit has collapsed, according to Fitch Ratings. A final point. There is a widespread misunderstanding that China’s households can easily come to the rescue by cranking up spending because they have the world’s highest savings rate, and consumption is just 36pc of GDP.

Prof Michael Pettis from Beijing University puts that one to rest. The Chinese do not have a much higher personal savings rate than other East Asians. The reason why consumption is so low is that wages are low, the worker share of GDP is low, and the whole economy is massively deformed and tilted towards excess investment.

This is deeply structural. It cannot be changed with a flick of the fingers, and contains the seeds of its own destruction. China is a marvellous country. I wish them the best. But they have not found the secret formula for perpetual uber-growth.

No such formula exists.

By Ambrose Evans-Pritchard

Banks Hoarding ECB Cash to Double Company Defaults: Euro Credit

2012-01-27T14:08:00.000+01:00

Corporate defaults may almost double in Europe as companies struggle to refinance debt and banks hoard cash borrowed from the European Central Bank or use it to buy government bonds.

Europe’s default rate may soar to 8.4 percent or more, from 4.8 percent at the end of 2011 as the recession bites and company financing dries up, according to Standard & Poor’s. Petroplus Holdings AG became the latest victim of the tough stance banks are adopting when the region’s biggest independent oil refiner said this week it will file for insolvency after losing access to $2.1 billion of credit lines.

“It’s very challenging for anyone to raise money from lenders right now,” said Andrew Cleland-Bogle, a Frankfurt- based director at corporate finance specialist DC Advisory Partners. “Combine that with increased bank capital requirements and you can see that although banks are getting money they’re very selective when it comes to lending it. 2012 is going to be a very, very tough year.”

Speculative-grade companies have to refinance about 230 billion euros ($300 billion) through 2015, according to S&P. At the same time, banks and loan funds that provided the initial funding are scrambling for capital or reaching the end of their reinvestment periods and may be unwilling to extend loans.

Banks are using the 489 billion euros they borrowed at 1 percent from the ECB under its three-year longer-term refinancing operation to scoop up government bonds yielding more than 2.5 percentage points extra instead of lending the money to companies.

Italian Yields

Italian bonds due in three years, the maturity of the ECB loans, now yield 4.37 percent, down from 7.36 percent at the end of November. The country’s 10-year bonds have declined to 6.11 percent from 7.02 percent. Spanish three-year notes now yield 3.04 percent, down from 5.51 percent in November, while yields on 10-year bonds have fallen to 5.29 percent from 6.23 percent.

Spanish and Italian banks clearly used the funds to take advantage of “the massive gap between the cost of these funds and the yield on the government bonds” of their home countries, according to John Rathbone, head of J.C. Rathbone Associates, a London-based risk management consulting firm.

Borrowing Stigma

More than 500 lenders borrowed from the ECB at the December tender. With the stigma of turning to the central bank now gone, Huw van Steenis, an analyst at Morgan Stanley in London says lenders may borrow anything from 150 billion euros to more than 400 billion euros at the second tender next month.

Some of the money borrowed is being deposited at the ECB. The 30-day moving average of deposits there -- a figure that smoothes out variations caused by regulatory requirements -- is at a record 411 billion euros, according to the central bank.

The ECB cash failed to help Zug, Switzerland-based Petroplus. After breaching loan conditions in September, the company negotiated waivers in return for $6.3 million in fees and a 50 basis-point increase in interest margin, in a process known as amend and extend. That came after a similar agreement in July, which cost the company $2.6 million in consent fees.

Lenders’ attitudes toward amend and extend are now hardening, said David Bryan, partner at London-based turnaround firm Bryan, Mansell & Tilley LLP.

‘Zombie Companies’

“There are a lot of zombie companies that are trapped by their debts and have no way out,” Bryan said. “The recovery isn’t really happening and there’s a high probability we’re going into a double-dip recession. For all that the banks kicked the can down the road once, the realization is dawning that they can’t just do that again.”

Companies bought by leveraged buyout firms during the boom years in the middle of the last decade are particularly vulnerable to the dearth of funding because their debt levels are higher than investors are willing to accept, said Edward Eyerman, head of leveraged finance at Fitch Ratings in London. And because banks and collateralized debt obligations are also leveraged, the problem is amplified, he said.

“For companies that have five times leverage, are in cyclical industries, exposed to anemic economies and have near- term maturities, it’s questionable how much equity value is underneath the debt,” Eyerman said. “When these highly leveraged borrowers get into trouble, the focus on what’s the right capital structure for a company within its industry to perform effectively competes with the demands of banks and CLOs to preserve the senior debt.”

‘Mild Recession’

S&P’s base case for defaults is for a 6.1 percent rate in 2012, up from 4.8 percent at the end of 2011, with a “mild recession” in the first half, according to Paul Watters, the firm’s head of corporate credit research in London. S&P estimates there’s a 40 percent chance of a “deeper recession materializing” as the sovereign crisis worsens, he said.

Average relative yields on bonds in euros rated in the B category have held wider than 10 percentage points since Nov. 23 and are now 10.32 percentage points, Bank of America Merrill Lynch’s Euro High Yield, B Rated index shows. Spreads on issues rated CCC+ and lower are wider than 22 percentage points on average, index data show.

About half of the 676 junk-rated companies followed by S&P are graded in the lower part of the B category or below, according to Watters.

Lower-rated borrowers that have a large part of their business in the nations hardest hit by the sovereign debt crisis, and which haven’t refinanced loans coming due this year and next, will “face particular difficulties,” he said.

Stress Tests

The European Banking Authority, which found a 115 billion- euro capital shortfall in its most recent stress tests on lenders, has given banks until June to find the cash or face nationalization.

Struggling to raise the money, lenders are choosing to reduce risk-weighted assets instead. European banks, which currently have total assets of about 26.5 trillion euros, will probably reduce their balance sheets by 5.1 trillion euros in the next three to five years, according to Alberto Gallo, a strategist at Royal Bank of Scotland Group Plc in London.

“Given the large shortfall in equity capital and persistent sovereign risk, we think it will be difficult for European banks to start transferring their liquidity to the broader economy,” Gallo said.

To contact the reporter on this story: John Glover in London at johnglover@bloomberg.net

Equity Markets on Life Support, Stay Hedged: Hermitage CEO

2012-01-26T10:38:00.000+01:00

Loose monetary policy in both the U.S. and Europe has kept global equity markets on “life support,” says Bill Browder, CEO of London-based hedge fund Hermitage Capital. He believes current policies are unsustainable and investors should avoid long equity positions and remain fully hedged.

“I don’t trust where this world is going. I don’t want to be long equities in this world…(this time last year) We put on a fully hedged portfolio, which meant that every long position we had was matched by a short position…it saved me 20-30 percent,” Browder told CNBC on the sidelines of the World Economic Forum in Davos.

The European Central Bank’s recent move to pump half a trillion euros into the banking sector and the Federal Reserve’s decision to keep interest rates near zero through 2014, indicate that central bankers believe there is an “emergency” on, he said.

“Everybody has kept interest rates at zero percent when they should probably be at five or six percent. The world’s on life support right now,” he said. Browder says the improvement in recent economic data out of the United States is a result of the Federal Reserve’s policies and not a reflection of improving economic fundamentals.

“When they unplug that life support, do you want to own something that has an artificial value? I say to myself I’m very happy to be entirely hedged,” Browder said. While recent measures from central banks are helping prop up developed economies, Browder says there could come a time where the “the life support machine” will cause more problems than fixing it.

“It is no mystery that when you print money it causes inflation and it’s also no mystery that the inflation statistics we see right now are different to the ones we actually experience as consumers.”

Pedro Schwartz talks to Alasdair Macleod about Italy, Spain and the European debt crisis

2012-01-26T10:21:00.000+01:00

In this video Pedro Schwartz, professor of Economics at Madrid’s San Pablo University, and Alasdair Macleod of the GoldMoney Foundation talk about the debt crisis in Europe, with special emphasis on Italy and Spain. Schwartz says he witnessed many crises in Spain, but also how they were overcome. If the newly elected government does the right thing then the Spanish economy and society could function again, he states. While he has no faith that they will do the right thing, he thinks that circumstances might force them to be more responsible.

Macleod and Schwartz agree that it would be healthier in the long run if the European Central Bank did not monetise government debt, and forced governments to make painful decisions. Schwartz thinks that insolvent countries should be allowed to leave the euro for a while with the option of reentering again later. During that period local currencies – the drachma in the case of Greece – should be used as parallel currencies in co-existence with the euro, as currently practiced in some Latin American countries. Greek bondholders should take losses for making bad investments.

Macleod states, that the problem with financing Europe’s debt is basically that the central bank can’t support sovereign debt by printing money. Schwartz brings up the possibility of severe cuts in state expenditures to create budget surpluses. As opposed to Italy, for Spain the problem is not so much the public debt, but rather the private debt. However the private debt will become public debt, if it’s too large for the banking system to handle independently – as seen in other countries since 2007. Spanish banks are in deep trouble because of their real estate exposure and it will take a lot of time to write down bad loans.

Schwartz talks about the connection between savings and investment, a point that is often overlooked in his view. There is no opposition between savings and consumption, as savings will eventually be used for consumption. Schwartz says that a change in mentality has to come about with regards to savings, especially when it comes to the issue of retirement. People will have to save more from much earlier in order to have a comfortable retirement.

Talking about labour laws, Schwartz states unemployment in Spain is leading to tragic social consequences. He points out that the official youth unemployment rate in Spain stands at 46% – the highest level in Europe. Our fractional reserve banking system requires a lender of last resort because the leveraging and multiplication of the base money supply puts normal checking accounts at risk. However the bailing out of bankrupt companies and countries is a different story. America’s current dollar policy will not spur growth, but will instead lead to more imbalances, and as a political consequence, contribute significantly to the further decline of the west.

This interview was recorded on November 15 2011 in Madrid.

Gold Proves Safest as Goldman Forecasts Record: Riskless Return

2012-01-26T10:11:00.000+01:00

Jan. 25 (Bloomberg) -- Gold provided the best returns of all commodities in the past five years when adjusted for volatility, and Goldman Sachs Group Inc. says the rally will continue as options traders signal no change in the metal’s relatively low risk.

The BLOOMBERG RISKLESS RETURN RANKING shows the Standard & Poor’s GSCI Gold Total Return Index produced a 6.5 percent risk- adjusted return in the five years ended yesterday, the highest among 24 commodities tracked by S&P, data compiled by Bloomberg show. Silver, the next-best performer, yielded a risk-adjusted gain of 3.1 percent, while a total-return index for all raw materials slipped 0.2 percent.

Bullion, which has seen 11 years of gains as investors sought a haven amid two bear markets in stocks and a sovereign debt crisis, also posted the safest return in the past 12 months, even as it fell from a record high to a five-month low in the second half of last year and gold investors led by John Paulson suffered losses. Goldman Sachs forecasts gold will reach a record this year, and a gauge of future price swings is near a five-month low.

“Economic problems increased globally, and gold emerged as a safe-haven investment,” Walter ‘Bucky’ Hellwig, who helps manage $17 billion of assets at BB&T Wealth Management in Birmingham, Alabama. “Monetary easing by China and quantitative easing in Europe and the U.S. will help it remain a store of value.”

The risk-adjusted return is calculated by dividing total return by volatility, or the degree of daily price-swing variation, giving a measure of income per unit of risk. The returns are not annualized.

Longest Rally

A higher volatility means the price of an asset can swing dramatically in a short period of time, increasing the potential for unexpected losses compared with a security whose price moves at a steady rate.

Gold’s longest rally since at least 1920 in London has attracted investors worldwide seeking protection from some of the most violent market swings in stock markets on record. The Dow Jones Industrial Average posted four consecutive days of 400-point swings last year, the longest streak since data began in 1896. The S&P 500’s average daily price move since its 2011 high in April was 1.8 percentage points, compared with an average of 1.1 percentage points in the five years before Lehman Brothers Holdings Inc. collapsed in September 2008.

Goldman’s Forecast

The risks that spurred market volatility last year will keep swaying asset prices and the global economy, Nouriel Roubini, the economist who predicted the 2008 financial crisis, said in a talk at Bloomberg’s headquarters in New York on Jan. 19. Rising commodity prices, uncertainty in the Middle East, the spreading European debt crisis, increased frequency of “extreme weather events” and U.S. fiscal issues are “persistent” problems, he said.

That’s good news for havens such as gold. Goldman Sachs said in a Jan. 13 report that futures will advance to $1,940 an ounce in 12 months. Morgan Stanley forecasts the metal will climb to a record average $2,175 in 2013, analysts Peter Richardson and Joel Crane said in a Jan. 17 report.

Futures for February delivery jumped 2.1 percent to settle at $1,700.10 today on the Comex in New York. That’s the highest closing price since Dec. 9.

Traders anticipate that gold will gain at a steadier pace again, after last year’s correction. The metal’s three-month implied volatility, a gauge for future price swings, touched 19.04 yesterday, the lowest since early August. The most widely held options contracts give holders the right buy at $2,000 by June, data from the Comex exchange show. The ratio of puts per call for the SPDR Gold Trust, the biggest bullion ETF, is near the lowest since October 2008.

Beating Gasoline

“People are still very under-invested in gold, and so there is a huge scope of that increasing,” said Jochen Hitzfeld, the analyst at UniCredit SpA in Munich who was the most accurate precious-metals forecaster tracked by Bloomberg in the past two years.

Gold returned 1.1 percent in the 12 months through Jan. 24 when adjusted for price swings, compared with a 0.8 percent gain in unleaded gasoline, the second-best performer. Stocks, as measured by the S&P 500, returned 0.2 percent over 12 months risk-adjusted and 0.1 percent over five years.

Gold hasn’t been shielded completely from market swings after investors accumulated more than 2,355 metric tons in exchange-traded funds backed by bullion, an amount valued at more than $126 billion, data compiled by Bloomberg show. Holdings have more than doubled in the past four years and climbed to an all-time high of 2,393 tons on Dec. 13.

‘Not Immune’

Futures, which rose to a record of $1,923.70 in September on the Comex, slumped 11 percent the same month and retreated to a five-month low of $1,523.90 on Dec. 29 as investors sold the metal to cover losses in other markets. The risk-adjusted return in the fourth quarter was minus 0.1 percent, while crude oil, the best performer in the three months ended Dec. 31, returned 0.8 percent.

“Gold has become a mainstream alternative investment, so rather than a store of value, it’s become a reflection of flows,” said Michael Shaoul, chairman of New York-based Marketfield Asset Management, which manages $1.3 billion. “It is not immune to volatility.”

Paulson, the hedge-fund manager who suffered the worst year of his career in 2011, lost 20 percent last month in his gold fund, which can buy derivatives and other gold-related securities, according to an investor update, a copy of which was obtained by Bloomberg News.

‘Tempt Fate’

Most investors are sticking with the metal. David Einhorn’s Greenlight Capital Inc. said in a Jan. 17 letter to investors that the fund continues to hold gold and gold-mining equities because of concern that global fiscal and monetary policies “tempt fate.”

George Soros, 81, the billionaire founder of Soros Fund Management LLC, increased his stake in SPDR Gold Trust, an exchange-traded fund tracking the metal, to 48,350 shares as of Sept. 30 from 42,800 and added options, according to Securities and Exchange Commission filings. Soros, who called gold the “ultimate asset bubble” in 2010, reinvested in gold shares after selling 99 percent of his holding in the first quarter of last year.

Since the start of this year, gold has been among the top five commodities after adjusting for volatility, while zinc was the best.

Central-Bank Buying

Central banks around the world added 157 tons to their holdings in the six months through November, World Gold Council data show.

China overtook India in the third quarter as the largest gold-jewelry market, according to the World Gold Council. The country’s consumption will continue to grow this year, according to Albert Cheng, the Far East managing director at the council. Mainland China imported a record 102.8 metric tons in November from Hong Kong, trade data on Jan. 11 showed.

“Everybody is conditioned to think of returns in a winner fashion,” said Stanley Crouch, who helps oversee $2 billion as chief investment officer at New York-based Aegis Capital Corp. “During times of crisis, volatility really spooks people, especially if it is in gold, as people look at it as a store of value. However, I believe we have put in a bottom for gold so we will see gold continue to climb.”

To contact the reporter on this story: Debarati Roy in New York at droy5@bloomberg.net

Greece Is Facing Downgrade To 'Selective Default': S&P

2012-01-25T15:43:00.000+01:00

Standard &Poor's will likely downgrade Greece's ratings to "selective default" when the country concludes its debt restructuring, but that will not necessarily destroy the credibility of the European Union, an official with the ratings agency said on Tuesday.

"It's not a given that Greece's default would have a domino effect in the euro zone," John Chambers, the chairman of S&P's sovereign rating committee, said in an event organized by Blooomberg Link.

Greece was clinging on Tuesday to hope of a last-minute bond swap deal to avoid a messy default after euro zone officials sent talks back to square one by rejecting a final offer from the country's private bondholders.

Athens is desperate for a deal within days to ensure funds from a 130 billion euro rescue plan drawn up by European partners and the International Monetary Fund arrive before 14.5 billion euros bond redemptions fall due in March.

After weeks of haggling with creditors in Athens, euro zone finance ministers in Brussels on Monday dealt a sharp setback to those hopes by rejecting creditors' demand for a 4 percent coupon, or interest rate, on new, longer-dated bonds in exchange for existing debt.

Private sector creditors now have the upper hand in deciding whether Athens will be forced into a hard default that could sow chaos across the global financial system and push other weak euro zone members closer to a default.

Greece's top official at the Brussels meeting remained stoic, saying the country had the euro zone's support to complete the debt swap talks in the "coming days".

"In reality, we are now entering the final stretch," , Finance Minister Evangelos Venizelos said in a statement. "I believe everyone has now realized that Greece must be supported in its effort, which is of vital importance not only for us but for the euro zone as a whole and the global economy."

IMF Positive

Asked if there was still hope of a deal, IMF chief Christine Lagarde said she remained positive.

"I'm determined to be positive," she told Deutschlandradio Kultur. "Political leaders have the instruments and possible measures in order to manage this situation and bring the euro zone back on to a sustainable path."

Conservative leader Antonis Samaras, head of one of three parties backing Greece's technocrat prime minister, told Reuters he expected the talks to be wrapped up by March 5 at the latest and said the country must head to polls as soon as the EU/IMF bailout is finalized. He set April 8 as the deadline for elections.

With weeks of talks yielding little progress and growing concern that Greece's fast-deteriorating economic prospects mean it will need more aid from partners either way, European policymakers appeared to be more willing to consider the previously taboo option of an involuntary debt swap.

A "voluntary" swap where both sides agree to the terms of the deal is required to prevent insurance against a Greek debt default from being paid out.

"There has been a slight change in mood, but no change in the policy lines pursued," a senior euro zone source told Reuters when asked about the mood among policymakers on Greece.

A second euro zone source confirmed the perception of a shift but cautioned: "We are still in Plan A mode".

A source close to the talks said creditors would go towards an involuntary debt swap if there was no agreement by the end of the week — raising the risk of a messy default.

The bond swap is meant to cut 100 billion euros from Greece's debt burden of over 350 billion, in a bid to ultimately slash its debt from around 160 percent of GDP to a more manageable 120 percent of GDP by 2020.

By: Reuters

Bullion Thoughts - 25/1/2012

2012-01-25T10:14:00.000+01:00

Good morning,

Interesting to see the influence that Asia, in particular China has upon the market. In the two days of Chinese New Year’s holiday, we have seen the two lowest volume trading days for months, with the exception of Christmas. Ranges have been narrow as well. Gold has ranged twenty dollars and silver a dollar since Monday’s opening. The sort of ranges we were seeing in a couple of hours not so long ago. Basically what this tells me is what I have been saying for a while. Genuine investment/fund business is very light on the ground. The only people involved at the moment are the bullion dealers, day trader specs and of course, our friends the algos. The latter taking advantage of the lack of liquidity to ramp the market up and down a couple of dollars at a time in the afternoons in the space of seconds/minutes. So, for the time being, do the same. Day trade the market and stick to the ranges, gold 60/80 and silver 31.75/32.75. Obviously as always keep an eye out for European/Iranian headlines, but on the whole I am not looking for much to happen. Overall, I still like the market long term.

Economic figures out today include, MBA Mortgage Applications in the US at midday London time, the Housing Price Index and Pending Home Sales at 15:00 and EIA Crude Stocks at 15:30. More importantly, the Fed’s Interest Rate decision comes out at 19:15, and although there should be no surprises there, this is the first time the FOMC will be giving interest rate forecasts, which will be worth watching closely. We also have the delightful spectacle of politicians, business leaders etc. all enjoying themselves in the delightful Swiss town of Davos. Austerity, my posterior!! So listen out for what comes out of there as well. I have no doubt that there will be plenty of waffle coming out of the meeting, some of which may be of interest. Personally, less talk, less lobster and Mouton Rothschild and a little more action would be what I would like to see. Probably not much chance of that though!!

Good luck today,

Goldfinger

European Stocks Decline as Greek Debt-Relief Talks Reach Impasse

2012-01-24T20:35:00.000+01:00

European (SXXP) stocks declined from a five-month high as the region’s finance ministers failed to agree on a debt-swap deal for Greece and called for a greater contribution from bondholders.

Banks tumbled. Societe Generale SA and Credit Agricole SA (ACA) retreated at least 4.1 percent after Standard & Poor’s cut the banks’ credit ratings. Siemens AG (SIE), Europe’s largest engineering company, dropped 1.2 percent after saying that achieving its goals for the year has become harder. Petroplus Holdings AG plunged to its lowest price ever after planning to file for insolvency.

The Stoxx Europe 600 Index fell 0.4 percent to 256.04 at the close in London. The gauge has still risen 4.7 percent so far this year as reports added to optimism that the global economy is strengthening.

“It seems as if we are far from an agreement,” said Yves Maillot, the Paris-based head of investments at Robeco Gestions SA, which oversees $6.8 billion. “The problem of solvency of countries remains, along with the question of Greece. The market situation is fragile. Market sentiment has been more positive recently, with investors factoring in the European Central Bank’s easing for banks.”

The region’s finance ministers, meeting in Brussels yesterday, balked at putting up more public money for Greece, calling on bondholders to provide greater debt relief in order to point the way out of the two-year-old debt crisis.

Aid Package

Euro-area governments stood by an October offer of 130 billion euros ($170 billion) for a second Greek aid package. Officials want to fill a deeper-than-expected hole in the nation’s finances by saddling investors with a lower interest rate on exchanged bonds.

Meanwhile, Greek Finance Minister Evangelos Venizelos said the Greek government intends to wrap up debt-swap talks with private investors by Feb. 1.

A report today showed that a combined measure of European (SXXP) services and manufacturing output unexpectedly expanded in January, led by Germany, the region’s largest economy.

A euro-area composite index based on a survey of purchasing managers in both industries jumped to 50.4, a five-month high, from 48.3 in December, London-based Markit Economics said in an initial estimate today. Economists forecast a reading of 48.5, according to the median of 17 estimates in a Bloomberg News survey. Fifty is the dividing line between expansion and contraction.

National benchmark indexes fell in 14 of the 18 western European markets. France’s CAC 40 lost 0.5 percent, as did the U.K.’s FTSE 100. Germany’s DAX retreated 0.3 percent.

Bank Shares

A gauge of banking shares fell 1 percent. Societe Generale (GLE) retreated 5.4 percent to 21.57 euros. Credit Agricole lost 4.1 percent to 5 euros.

Societe Generale, France’s second-largest lender, and Credit Agricole had their ratings downgraded to A from A+, with a stable outlook, S&P said yesterday.

“The downgrade of some of these banks follows the downgrade of France,” S&P wrote.

Siemens declined 1.3 percent to 77.39 euros. The company said achieving its full-year goals has become harder to reach after profitability at its four divisions slipped as the debt crisis weighs on the economy.

Net income from continuing operations in the fiscal first quarter fell 27 percent to 1.36 billion euros ($1.77 billion), the company said. That missed the average estimate of 1.47 billion euros in a Bloomberg survey of analysts. New orders also dropped, Siemens said.

Petroplus Insolvency

Petroplus sank 84 percent to 24 centimes, its biggest decline and the lowest price since it issued shares to the public in November 2006. The company said it plans to file for insolvency in Switzerland and other jurisdictions. The Swiss refiner that has been trying to avoid bankruptcy had about $1 billion in credit lines suspended last month, preventing it from supplying its plants with crude.

Royal KPN NV (KPN), the biggest Dutch telephone company, fell 7.2 percent to 7.93 euros. The company said 2012 profit and cash flow will be lower. The company reported fourth-quarter earnings before interest, taxes, depreciation, and amortization of 1.32 billion euros, compared with the average analyst estimate of 1.36 billion euros. The company also said there will be no share buyback in 2012.

STMicroelectronics NV (STM) slid 5.8 percent to 5.30 euros. Europe’s largest semiconductor maker predicted that first- quarter revenue will fall as much as 10 percent from the previous three months because of lower sales at its wireless business.

Worst Performance

Chemring Group Plc (CHG) tumbled 14 percent to 386.5 pence for its biggest drop in two months and the worst performance today in the Stoxx 600. The maker of missile avoidance systems for fighter jets reported a 30 percent decline in full-year pretax profit to 90.8 million pounds. Analysts at JPMorgan Chase & Co. cut their 2012 earnings-per-share estimate for the company by 15 percent to 54.3 pence, citing a “more cautious” outlook for growth and margins.

SBM Offshore NV (SBMO), the world’s biggest supplier of floating oil-and-gas platforms, declined 12 percent to 13.10 euros, the most since November 2008, after saying its Yme project in Norway faces “increased challenges,” and that its chief financial officer will step down.

To contact the reporter on this story: Adria Cimino in Paris at acimino1@bloomberg.net.

MARKET IMPLICATIONS OF EMU BREAK-UP

2012-01-24T15:41:00.002+01:00

"The Capital Market Analyst" division of "Capital Economics" has published the Q1 report, wherein the market implications of an EMU breakup are examined.

Risky asset markets have generally made a bright start to 2012. But our central scenario envisages a break-up of EMU this year initially involving Greece’s departure, an outcome that would presumably dampen investors’ optimism. Our forecasts assume stock markets in and around the euro-zone will be particularly badly affected, but we also expect US equity prices to fall. With the exception of precious metals, we anticipate the prices of most commodities will come under downward pressure, aided by a further strengthening of the dollar against the euro. Finally, we think falling inflation and safe-haven demand will drive the 10-year Treasury yield down to 1.5%.

The full report is avalable here, on a registration basis.

Insch Quantrend Ltd.

AN UNSOLICITED BOOK REVIEW

2012-01-23T12:17:00.004+01:00

You may be familiar with a new book that has been published on the subject of Hedge Funds: The Hedge Fund Mirage: The Illusion of Big Money and Why It's Too Good to Be True, by Simon Lack.

The book appears to court attention and has received a considerable amount of it.

Christopher Cruden, CEO of Insch Capital Management AG, has written an “Unsolicited Book Review”, wishing to present a more balanced view of the HF industry. The review has already attracted positive comments from journalists and AIMA.

We reproduce the review in its entirety.

Enjoy,

Insch Quantrend Ltd.

An Unsolicited Book Review

Where to begin with the recent book, The Hedge Fund Mirage, by Simon Lack?

The first clue is in the Press Release:

“While hedge funds did well in the 1990s, since 2002, they have failed to outperform a traditional 60/40 portfolio of stocks and bonds. They are down 8.5% for the year; the overall U.S. Stock Market is down about 2% for the year.”

Good stuff there for the Journos to get giddy over but more sober investors may justifiably ask: “Why are comparisons drawn using 2002?” (If you genuinely don’t know the reason and can’t figure it out, then ask Nanny to put you back in the pram and take you home.) Mysteriously, 1998 is also another favorite start date of Mr. Lack.

And why, suddenly, are we being asked to compare a “traditional” 60/40 portfolio of stocks and bonds? Could it be because stocks (as measured by the more favorable S&P500) have returned an annual average of -1.29% p.a. since 2000? That’s a total RoR of -14.41%. (Is “returned” the right word?) Using 1998 or 2002 is of (im)measurable help to the author in sensationalizing his premise.

Since 1998, displayed graphically, stock market performance reminds a physical market for Christmas trees. For this reason any assessment of performance depends almost entirely on the choice of timeframe.

And, the 60/40 comparison is quite simply required because stocks don’t measure up by themselves. He needs to add bonds, to support his premise and sell books.

Oh, and apparently, if investors had put all their money in treasury bills, they would have done twice as well as HF’s. Leaving aside the fact that his math is wrong, I would like to know if that’s what he was advising JPM clients to do for the 23 years he was there. When did JPM find out about it?

Here is an even more startling piece of investment news:

If investors had put all their money on the winning horse in the Grand National every year since [fill in the blank] they would have done even better than any financial asset.

Astoundingly helpful, right?

Unfortunately, the Press Release was a forewarning of things to come: The book contains highly selective numbers and time-periods that are just a teensy-weensy bit misleading but highly likely to elicit a headline. - In other words, the sort of thing we are more used to see from the “traditional” asset management community.

Here are the actual numbers on stock markets. Let’s see how they compare with Mr. Lack’s chosen HF Index:

2011 Index Return

Index Name	2011 Index Return	2011 HFR Index Return*	Performance Difference
S&P 500	0.003%	-4.83%	-4.833%
FTSE 100	-5.55%	-4.83%	0.72%
MSCI World Index	-7.62%	-4.83%	2.79%
SMI	-7.77%	-4.83%	2.94%
Euro Stoxx 600 (USD)	-14.03%	-4.83%	9.20%
DAX	-14.69%	-4.83%	9.86%
CAC	-16.95%	-4.83%	12.11%
MSCI Asia Pacific Index	-17.31%	-4.83%	12.48%
NKY 225	-17.34%	-4.83%	12.51%
FTSE MIB Index	-25.20%	-4.83%	20.37%

* HFRI Fund Weighted Composite Index (Source: Hedge Fund Returns Inc.)

2000 – 2011 Index Return

Index Name	2000 -2011 Index Return	2000-2011 HFR Index Return*	Performance Difference
MSCI Asia Pacific Index	-9.99%	95.12%	105.11%
S&P 500	-14.41%	95.12%	109.53%
DAX	-15.23%	95.12%	110.35%
MSCI World Index	-16.77%	95.12%	111.89%
Euro Stoxx 600 (USD)	-16.80%	95.12%	111.92%
FTSE 100	-19.59%	95.12%	114.71%
SMI	-21.58%	95.12%	116.70%
CAC	-47.00%	95.12%	142.12%
NKY 225	-55.34%	95.12%	150.46%
FTSE MIB Index	-64.58%	95.12%	159.70%

* HFRI Fund Weighted Composite Index (Source: Hedge Fund Returns Inc.)

Ahem, quite. Still think the HF 2011 return of -4.83% was a bad year? Wanna swap?

In the interest of balance and to contextualize this, using an admittedly small but representative sample of the traditional asset management industry, let’s take a look at the six largest listed managers on the LSE. In particular, their OEICS funds.

The qualifying funds cover all the IMA sectors for fixed income and stocks and have an AUM of approx £41.3 billion ($64.1 billion). This figure makes the sample 256 times larger than the average HF. The average traditional fund in the sample is 2.6 times larger than the average hedge fund.

Over the last five years, the average annual return of these OEIC funds has been 1.94% (equally weighted). The total return has been 11.50% (equally weighted). Investors who paid the average “sales charge” of 4.79% would have received an average annual return of 1.21% and total return of 6.18% for the whole five year period.

The average annual return of HFs was 2.65% and the total return 13.95% (HFRI Fund Composite index) over the same period. This is more than twice the OEIC average.

Fully 67% of the OEIC funds failed to match HFs returns.

The OEIC funds have an average fee of 1.44% p.a.. The amount that the traditional asset managers have extracted in management fees has been £596.3 million ($925 million). Add the average of 4.79% sales charge and the figure coughed up by investors comes to £2,557.5 million ($3,968 million).

This number - the fees and charges paid out of investor’s capital for under-performance - is greater than 99% of hedge funds even have under management.

If there is a sensational financial scandal, it is not with HFs.

No doubt Mr. Lack, a Hedge Fund "insider", accumulated some fascinating views and brilliant insights during his stellar career at JPM. Perhaps, one day, he will put them in a book.

Curiously, as a career long HF “outsider”, I am in basic agreement with what is said in the non-attention seeking parts of this book…Personally, I hold no candle for the HF industry (especially the big names, as has been made abundantly clear in the past) or the detestable Fund of Fund industry (as has been made even clearer), but there is very little that is new in this book and even less that bears real, informed scrutiny. There are some reasonable chapters in the book (nothing new or particularly brilliant) and there are a couple that seem to deliberately court a copy-selling headline. And that’s a pity.

If you already believe - or want to believe - that HFs are crooked and offer a bad deal, then parts of this book will be of enormous help in confirming your views and providing you with all the ammo you need to be even more boring at the next dinner party.

For example, one of his primary arguments is that the bigger HFs have lost more than they have made for investors and that investors would have been better off investing with smaller managers.

This is hardly an original thought or discovery and it certainly pre-dates Boyson in 2008. (Even my own humble efforts identified this. See my attached AIMA article from June 2002.)

Obviously, if a manager has $1mil and makes a 10% return, he has made $100,000. When / if that manager gets to $100,000,000 and loses 10%, he has lost $10,000,000.

If a $10 stock goes up 10% it has made investors $1. If a $100 stock goes down to $90 it has lost investors what percent? Investors buy or sell a NAV or share price. Their returns are based on what they paid versus what they receive on disposal.

The math is not hard, people.

The comparison with a HF's NAV and a stock exchange listed company’s share price is perfectly valid in this regard. The only point to be made is that losses are larger in size and more prevalent in traditional markets.

HF Managers, inevitably and obviously, are aware of this (many, it may surprise you to learn, are quite numerate) and change their focus to being a "manager of fees" rather than taking the same risks as they did previously. Who wouldn’t? They are, at heart, businesses. To some, this may not be a particularly attractive capitalist tendency but please don’t feign surprise. (Those of a sensitive or nervous disposition will find Redemption Forms towards the rear of the Prospectus.)

And how about the costs / fees / expenses argument? Basically, HFs take a management fee and a performance fee. There are other costs too: Brokers, Administrators, Auditors, Custodians, Lawyers, Compliance Consultants and an assorted rag-bag of other "service providers" (parasites?).

Why all these extra costs? Well, basically, because (we are told) investors demand all of these things. It’s a funny old world but these people don’t work for free. So investors have to pick up the tab. Fancy that.

Have you ever tried to figure out what the overhead costs and expenses are of the average S&P500 company? Is it more, or less than 2/20%? (At a guess, I'd say it's more. Much, more.) In any case, whatever it is, shareholders pick up the tab.

Lack’s headline-grabbing observation is that the “costs” of HF’s have, due to drawdown, exceeded investor returns. On that basis, should we call for the employees of publically traded companies to return their salaries if their share price falls? And how about traditional asset managers returning their fees? (See here factual information regarding these fees.)

Would you rather invest in a business with lower costs than any of the businesses in the S&P500? Of course you would. HFs are such companies. And you are free to do so. Or not, if you choose.

If you really insist on lower costs, open a managed account with a bank or broker you trust (!) and give an LPOA to a manager who will (infrequently) trade deep and liquid bi-directional markets at low cost. Not a fund of any kind.

Why don’t HF's offer Managed Accounts? Because investors (we are told) like funds better. Because the so-called Fund of Fund industry likes funds better. Because the regulators like funds better. (UCITS anyone?) - By the way, Bernie Madoff could never have done what he did, in the way he did or in the size he did, with a managed account structure. The fund structure made it possible and more likely.

If you genuinely Lack (sic) the ability to open a managed account, go and buy a stock mutual fund and amuse yourself by keeping score of how often your manager beats his (carefully selected) benchmark. Despite what you might have heard, it's not a free world.

Another old-saw that these kind of books drag out is the "Survivor Bias" of the Hedge Fund industry indices. This is hardly a new discovery and hardly an original premise. - All the more reason to present it fairly.

Can anyone think of another index with survivorship bias? How about the best known and biggest Big Daddy of all of them: The S&P500... Or for that matter, any other stock market index.

Are Enron and WorldCom still in the S&P500? Is Lehman? Could that be because of survivor bias? Take a close look here and get back to me.

Then of course, there is the "fraud / miss-management" allegation. Hmmmm.... An interesting one this and, yes, there have been frauds. Is this also true of stocks? How about the aforementioned Enron and WorldCom? Anyone out there who took up the RBS rights issue in 2008?

How much money has been lost by hedge fund frauds and miss-management compared to the money lost in stock market fraud and miss-management? (Not the common-or-garden "pump and dump" variety, I mean the ones that were actually once components of, say, the FTSE100 or the S&P500?) Anyone know if it’s a bigger or a smaller number? Anyone like to take a guess?

Curiously, there is one thing that Mr. Lack seems not to dwell on: The reason (in my view at least), that HF's have been so disappointing from the performance perspective is primarily due to the make-up of the HF industry itself. Because of the financial crisis, and the resultant sackings and lay-offs, many asset managers have sought to transport their obvious genius into the HF industry.

With baited breath, we await the next influx of new trading "talent" into the market. (As Lack points out, it pays better.) Whether or not the wallets of investors can withstand another onslaught of genius remains to be seen. (Apropos of nothing, Mr. Lack founded his Hedge Fund after the financial crisis in 2009.)

In my opinion, the next periodic phenomena of migration will not be a “good thing” and may even be a very "dangerous thing" for two main reasons.

The first reason is that the asset managers generally tend to do the same thing the same way. Never mind the capacity of global stock markets: Is the entire galaxy big enough to accommodate yet another market neutral / arbitrage / convertible / absolute / long/short / short/long / macro strategy? I think not. Their strategies are all waaaaaay too stock-centric and come at a time of declining stock market participation. Already the correlation between stock markets and HF indices is at an all-time high. (Now, why would that be?)

Far too many HF strategies have ceased being Alternative.

In the final analysis, the biggest, most damming criticism of HFs is that they have become too much like traditional asset management in terms of people, strategies, markets and… (wait for it…) … inevitably, performance. Who out there didn’t already know that? (Bernstein identified this years ago.)

The second reason is that (again, in my opinion at least) most of these people are not fundamentally suited, in temperament, background, culture or technique to be HF managers. There is an old saying: “Markets tend to take on the personalities of their participants. If the participants are biased or easily spooked, so too will be the market.” If true, steer clear of stock markets and HF managers who trade in them. Stock-centric HF's are, themselves, a crowded trade in an environment of declining liquidity.

Whether intentional or not, in headline form, this book perpetuates the notion that HFs are, in some way, “naughty” or outside the law. They are not. There is absolutely nothing morally, legally, technically or spiritually wrong with moderately leveraged, bi-directional investment using the most cost-efficient and liquid instruments. - That being the case, those who agree would be far better advised to look at the CTA and Managed Futures industry than the miss-named and lumpen Hedge Fund industry.

Basically, what Lack says is almost true and well said but something is lacking in the book? What Lack lacks is any (exhibited) ability to compare like with like. I suppose a "level playing field" comparison would not sell many books - especially through a vanity publisher like Wiley but, hey, does that matter? Personally, for $34.95 list price, I think it does.

If, on the other hand, the real purpose of the book was so that the author could promote and publicize SL Advisors and their 3 month long track record (CEO Mr. S. Lack), and what appear to be some back-tested simulations of stock-centric strategies, well that would be a pity.

Oh, dear… “The publicity has steadily mounted, with TV appearances in London followed by New York and with reviews expected shortly in the mainstream financial press (most recently the Financial Times)” he writes breathlessly…

This book will be devoured by the Traditional Asset Management industry. It confirms EVERYTHING they KNEW about HF's. They will send it to all their sales people and all their best clients. - Just until they are able to launch their own range of Hedge Funds. (Remember, as Lack points out, it pays better.)

When they do, just as with this book, caveat emptor...

Christopher L. Cruden

Insch Capital Management AG

Zug, Switzerland

Bullion Thoughts - 23/1/2012

2012-01-23T11:21:00.000+01:00

Good morning,

Well, another week unfolds ahead of us and silver seems to have stolen the spotlight for the time being. The white metal made spectacular gains on Friday, after breaking through resistance and various MA levels. ETF holdings had risen sharply the day before and this prompted buying as well. Silver moved from around 30.50 where it had been languishing for a while to a high of 32.20 on Friday evening, before making fresh highs overnight in Asia of 32.50. Gold lagged behind although also gained, just managing a new high for the year overnight at 1673.00.

Volumes on gold are extremely light, with various Asian markets closed for the New Year. So where do we go from here? Metals have opened quietly in Europe and are one again tracking stocks this morning, although they do seem to have somewhat ignored the Euro’s 60 point gain in the last hour. Overall, the market feels supported as I said last week, but there is still a lack of genuine investment business around and as such, the rallies keep petering out. However, this is giving us the opportunity to buy dips and for the time being, I still hold with that. Silver may be slightly overdone here, but never underestimate silver’s ability to shock and for that reason, I’m not going to stand in its way for the time being!!

The Greek debt talks continue today, with most observers expecting a fairly positive outcome, but with the EU Finance Ministers also meeting today, there will no doubt be ample opportunity for market moving headlines. There are no economic figures out today of any significance, so look to buy dips in the market, but watch the news.

Good luck,

Goldfinger

Bullion Thoughts - 20/1/2012

2012-01-20T09:56:00.000+01:00

Good morning,

I’m glad I said I didn’t trust the market yesterday, as it once again demonstrated how fickle it can be. We broke the high of the year so far in gold and traded up to 1670.50, people getting long and looking for a test of the 75/80 resistance. That was as good as it got as disappointed longs bailed out on the lack of follow through and algos and day traders took advantage of the thin conditions and pushed the market down to a low of 1649. So, simply put, we are still in the range and as such, trade accordingly. Gold support still at 40/45 and resistance as stated above. Silver broke higher as well and although it came back during the day it has performed much better and is pretty much back near the highs now. Support there now at 30.45/50 and resistance up at 30.95/31.00. I still favour buying dips and with most news fairly positive at the moment, this should see the market supported.

Chinese New Year is this weekend and means that China will effectively be closed for the next week. This in turn will limit the physical buying we have seen most nights in Asia, but there is plenty of demand elsewhere, so I don’t think this will have much effect on the market. I do however think that people are getting a little carried away with their beliefs that the worst is behind us and that all is looking rosy in the garden. There are still a lot of problems out there, especially in the Eurozone and as such, I will be keeping a very wary eye on the headlines.

The only figures of any note out today are US Existing Home Sales at 15:00 London time, so I would expect a quietish day again and keep trading within the ranges until they break either way.

Good luck and have a good weekend,

Goldfinger

Nomura's Janjuah on U.S. Stocks, Economy

2012-01-19T17:30:00.000+01:00

Jan. 19 (Bloomberg) -- Bob Janjuah, global head of tactical asset allocation at Nomura International Plc, talks about the outlook for the U.S. economy and equity markets. He speaks with Erik Schatzker on Bloomberg Television's "InsideTrack." (Source: Bloomberg)

Debt deal will not end Greece’s problems

2012-01-19T13:23:00.000+01:00

Media reports suggest that Greece may be on the brink of agreeing a debt restructuring deal with private sector creditors. But while this might reduce the chance of a near-term disorderly default, concerns about Greece’s solvency will remain.

The news that the Greek Government and negotiators acting on behalf of major banks are close to agreeing a debt exchange deal involving “haircuts” of about 68% on around €200bn of bonds is encouraging. After all, in theory at least, this should allow the Greece’s second bail-out package to be finalised, ensuring that Greece’s financing needs will be fully met for the next few years.

But even if a second bail-out is put in place, the Greek crisis will still be far from over. After all, loans will be conditional on Greece tightening fiscal policy significantly more, something which will be increasingly hard to achieve. And even if the tough fiscal goals are met, the cost will be a much deeper and more prolonged recession that the EC, ECB and IMF are forecasting. If we are right, the debt to GDP ratio will probably remain well above levels that are generally perceived as sustainable.

What’s more, in order for the euro-zone to push ahead with the second bail-out they will need to be confident that the debt exchange agreement will substantially reduce Greece’s financing needs and debt burden. To achieve this, the debt deal will require close to 100% participation.

Many holders of Greek debt have not been represented at the negotiating table, so there is no way of knowing whether these creditors will agree to the deal. Note that some of these creditors probably hold credit default swaps (CDS) that will only pay out if a debt restructuring is deemed involuntary. Accordingly, they will have an incentive not to participate. Meanwhile, anecdotal evidence suggests that some investors have recently been buying Greek bonds at rock-bottom prices and plan to turn down any voluntary deal in the hope that they can subsequently negotiate more favourable terms.

Of course, there is a good chance that if the participation rate ends up being significantly lower than 100%, euro-zone policymakers will agree, albeit reluctantly, to increase the size of their own rescue package to compensate. But given the domestic hostility to bailing out Greece in some of the core euro-zone economies, policymakers might refuse to beef up the bail-out package.

If this were the case, one option would be for euro-zone policymakers to withdraw the bail-out, leaving Greece unable to repay its creditors in full. While we would not completely discount this outcome, it would certainly be a risky strategy.

After all, it would probably lead the bond yields of other southern and peripheral governments to rise. This might force Spain and Italy to request bail-outs. It could also prompt the ECB to refuse Greek government debt as collateral, with severe knock-on consequences for the Greek banking system. The ECB might be forced to accept haircuts on its bond holdings too, which could make it even more reluctant to act as a bond buyer of last resort. It might even prompt Greece to leave the euro-zone.

Perhaps the more likely outcome then is that policymakers would agree to provide the second bail-out but force hold outs to take part in the debt exchange to ensure that Greece’s financing needs for the next few years were fully covered. Forcing all bondholders to accept losses might also have some nasty side effects. But they would probably be far less severe than if the bail-out package was withdrawn.

In all then, we think that a package will be put in place to meet Greek financing needs for the next few years. But any boost to market sentiment that this provides is likely to prove temporary. Sooner or later we expect Greece to conclude that the conditions attached to the bail-out deal are simply too onerous and that its best option may be to terminate any rescue package, carry out another debt restructuring deal and abandon the single currency. Indeed, with GDP now 13% below its peak and falling fast, we think that Greece may leave the euro-zone by the end of this year. (See European Economics Focus, “How and when will the euro-zone break up?”, 28th Nov.)

Ben May
European Economist
(+44 (0)20 7808 4991, ben.may@capitaleconomics.com)

'AVE A BUTCHER'S HOOK AT THIS... YOU WON'T ADAM AND EVE IT

2012-01-19T10:57:00.000+01:00

I was recently talking to one of our traders who casually mentioned he was going to be “going sarko” on a particular financial instrument. At the risk of appearing ignorant of the new lingua franca of the trading room, I asked him what “sarko” was. He replied: “Y’know: Sarko… Sarkozy… Short”.

I thought it best not to ask what financial perversion is implied a “Van Rompuy” although I suspect a lot of unwilling bondage is involved.

Now read on...

Modern trading killing off "barrow boy" market slang

LONDON (Reuters) - "The Old Lady just bought half a yard of cable and there are plenty of bids for Bill and Ben."

Confused?

To most foreign exchange traders in London's "City" financial district that sentence would make perfect sense: "The Bank of England just bought half a billion British pounds against the U.S. dollar and there's interest to buy the Japanese yen."

A mixture of Cockney rhyming slang, market banter and expressions picked up from horse racing bookmakers makes up the basis for a financial lingua franca that may sound like nonsense to most people, but has dominated the $4 trillion a day foreign exchange (FX) market for decades up until recently.

Most often used for currencies, countries and numbers, this financial market mumbo jumbo is starting to die out on the modern trading floors of international banks.

The growth of electronic dealing over computer screens rather than telephones or in person, a new generation of university-educated traders, and the introduction of the single European currency are all seen as reasons behind slang's demise.

"These terms get batted around a little bit but not as much as they used to," said Graham Davidson, director of FX trading at National Australia Bank in London, who said dealing rooms in general are much quieter than they used to be.

"FX is much more electronic. Lots of the slang came about through banter with the voice brokers, but that doesn't really work with machines. A lot of day-to-day chit chat has faded away, it's quite sad."

Some market players say the shift in the language of the dealing rooms also highlights a wider shift in the demographic of those doing the trading.

Many traders nowadays are recruited as university graduates with top marks from Oxford, Cambridge, Harvard and M.I.T., whereas 30 years ago aspiring youngsters with few, if any, academic qualifications often started as back office clerks and worked their way up to the trading floor.

Young London lads blessed with quick wits, common sense and ability to juggle numbers were often prized above those with academic laurels and went on to make fortunes as City traders.

"They were the 'barrow boys' coming off the market stalls. It was more working class and with that came the language of the street," said one trader, who used to work alongside some dealers who also owned fruit and vegetable and flower stalls.

"In the early days of dealing rooms it was the City institutions and especially the British banks where you heard it. Now dealing rooms might be a bit more international and slang is dying off a bit."

HALF A YARD OF CABLE

Some expressions have endured despite the changed dealing room environment. "Yard," meaning billion comes from shortening the French word for billion, which is "milliard."

"Cable" - one of the most-used slang terms - means the British pound/U.S. dollar currency pair and refers to the transatlantic telegraph cable that allowed prices to be transmitted between the London and New York Exchanges.

The Bank of England gained its title from its address, making it the "Old Lady" of Threadneedle Street, while the yen is nicknamed the Bill and Ben - after a pair of puppets from a 1950s British children's TV show - simply because it rhymes.

Country nicknames tend to conform to stereotypes, some less politically correct than others, while currencies were given nicknames to help distinguish them easily.

Some traders said if countries did give up the single European currency (euro) as a result of an on-going debt crisis in Europe, some slang might re-emerge.

"We have talked about this a lot recently given the euro zone situation, and thought about what it would be like to go back to mark/Paris (deutschmark/French franc)," a London-based trader said.

"These days there are far fewer names to worry about - the euro is the euro. Whereas in years gone by you would have had to worry about what the Estonian currency was even called."

Short selection of City slang

NUMBERS:

A SPANIARD 1 From the Spanish name Juan
A PRICKLY 2 A prickly pear
A CARPET 3 UK prisoners used to be allowed carpet in their cells after 3 years
LADY GODIVA 5 Rhymes with fiver
AYRTON 10 Tenner rhymes with Ayrton Senna, the late racing car driver

BULLY 50 From the 50-point bullseye on a dartboard
A MONKEY 500 The 500-Indian rupee n ote used to have a picture of a monkey on it

CURRENCIES:

THE LOONIE CANADIAN DOLLAR A waterfowl named the loon is depicted on Canada's one-dollar coin
THE KIWI NZ DOLLAR National bird of New Zealand
THE AUSSIE AUSTRALIAN DOLLAR
THE STOKKIE SWEDISH CROWN
THE NOKKIE NORWEGIAN CROWN

(Reporting by Nia Williams, editing by Paul Casciato)

http://www.cockneyrhymingslang.co.uk/blog/post/The-Cockney-Bible.aspx

Hungary faces ruin as EU loses patience

2012-01-18T11:31:00.000+01:00

The European Commission has launched legal action against Hungary's Fidesz government for violations of European Union treaty law and erosion of democracy, marking a dramatic escalation in the war of words with the EU's enfant terrible.

Hungary's defiant premier Viktor Orbán has no hope of securing vital funding from the EU and the International Monetary Fund until the dispute is resolved, leaving him a stark choice of either bowing to EU demands or letting his country slide into bankruptcy.

Yields on Hungary's two-year debt jumped to 9.17pc on Tuesday, an unsustainable level for an economy in recession with public debt of near 80pc of GDP. Hungary's debt was cut to junk status by rating agencies last week.

Capital Economics said Hungary must repay €5.9bn (£4.9bn) in EU-IMF loans and raise external funds equal to 18pc of GDP this year, the highest in Eastern Europe. Two-thirds of household debt is in Swiss francs, leading to a lethal currency mismatch as capital flight weakens the forint.

"Hungary is playing with fire," said Lars Christensen from Danske Bank. "The EU is not bluffing. It will let Hungary go over the edge to make the point that EU countries must play by the rules. Our worry is that Hungary's government has not yet got the message."

The EU said it had sent three letters of "Formal Notice" over Hungary's assault on the independence of the judiciary, the central bank, and the data protection ombudsman – the first step in "infringement proceedings". The dispute could ultimately lead to loss of Hungary's voting rights under Article 7 of EU treaty law.

"We'll use all our powers to make sure that Hungary complies with the rules of the EU," said European Commission president Jose Manuel Barroso.

Mr Orbán said his country was the victim of "international leftists" in Brussels. A zealous anti-Communist, he insists that Hungary's Stalinist past must be ripped out at the roots.

The immediate dispute centres on three laws in Hungary's new constitution pushed through despite EU warnings. Commission officials say these are just the "tip of the iceberg". Over 300 laws have been passed since Fidesz took power in 2010, giving the party sweeping control over the country's institutional system. Amnesty International said last week that Hungary's media clamp-down breaches human rights.

The Commission is taking aim at a law forcing retirement of judges at age 62 instead of 70, widely viewed as a ploy to stack the courts with political loyalists. The new head of the judicial office has overweening powers to manage the courts, appoint judges, and allocate cases.

The central bank law allows ministers to vet the agenda of Monetary Council and take part in meetings. The governor has to swear an oath of loyalty and lacks secure tenure.

"Governments must refrain from seeking to influence their central bank," said EU economics commissioner Olli Rehn. "Certain provisions in the new constitution are in breach of these principles. This needs to be addressed before we can start formal negotiations on the requested EU/IMF financial system."

The warning is clear. Hungary will be left at the mercy of hostile markets until it bows to EU pressure.

Deputy premier Tibor Navracsics played down concerns yesterday, saying a solution could be found to concerns about the central bank and data protection. He yielded no ground on treatment on the judiciary.

By Ambrose Evans-Pritchard, International business editor

CMA Global Sovereign Credit Risk Q4 2011

2012-01-16T14:20:00.000+01:00

We find the following report on Global Sovereign Credit Risk Report for Q4 2011 published by CMA Vision, a CME Group sister company headquartered in London (www.cmavision.com)

"This paper focuses on changes in the risk profile of sovereign debt issuers, with the intention to identifying key trends and drivers of change"

This paper identified the Top 10 Most Risky Sovereign Credits and Top 10 Least Risky Sovereign Credits:

Top 10 Most Risky Sovereign Credits:

Position Q4	Country	5 Year CPD (%)	Previous Ranking
1	Greece	93.8%	1
2	Portugal	60.8%	2
3	Pakistan	50.9%	5
4	Venezuela	49.4%	3
5	Argentina	49.2%	4
6	Ireland	46.4%	7
7	Ukraine	45.5%	6
8	Egypt	36.3%	New
9	Hungary	35.3%	9
10	Italy	34.9%	8

Top 10 Least Risky Sovereign Credits:

Position Q4	Country	5 Year CPD (%)	Previous Ranking
1	Norway	3.9%	1
2	USA	4.3%	2
3	Switzerland	5.9%	4
4	Sweden	6.6%	3
5	Finland	6.7%	5
6	Australia	7.1%	8
7	Hong Kong	7.7%	6
8	New Zealand	8.2%	New Entry
9	UK	8.4%	7
10	Germany	8.7%	New Entry

This paper also offers Regional commentaries, Top 5 Best Quarterly Performances, Worst 5 Quarterly Performances and the full Global Ranking.

Please click here for the full report.

FURTHER PROOF OF THE ANGLO-SAXON CONSPIRACY AS FRANCE IS STRIPPED OF AN "A"

2012-01-15T11:04:00.000+01:00

French politicians have been busy telling the world that the loss of the “A” is unimportant. That may be true. There is always the chance that sooner or later they could be right about something.

However, the downgrade may cause some short-term embarrassment to the French people. We are mindful of their occasionally fragile sense of French honor and pride. We also respect their right to lash out and demand a similar downgrade of Britain or anyone else.

Clearly, this is a sensitive time. So, in order to help the tens of thousands of French followers of this blog avoid any embarrassment, we have removed the letter “A” from the following article.

In a further effort to be helpful, we also provide the following aide memoire:

Key Affected French Words With "A":

*gincourt
Tr*f*lg*r
W*terloo
N*poleon
Pet*in
de G*ulle
Resist*nce
Coll*bor*te
Europe*n Fin*nci*l St*bility F*cility (Subject to change)
Def*ult

Key Non-Affected French Words Without "A":
Mers-el-Kebir
Vichy
Surrender
S&P

Euro We*kens in Longest Losing Stre*k Since 2010 *s S&P Downgr*des Fr*nce

By *llison Bennett - J*n 14, 2012 6:00 *M GMT+0100

The euro slumped for * sixth week, the longest stretch of losses versus the doll*r since 2010, *s the stripping by Fr*nce’s top credit r*ting by St*nd*rd & Poor’s m*gnified concern the region’s fin*nci*l turmoil will intensify.

The sh*red currency slid for * third week versus the yen *nd fell *g*inst the m*jority of its most-tr*ded peers *fter negoti*tions between Greece *nd its creditors were put on hold. Currencies of commodity-producing countries r*llied *mid bets Chin*’s centr*l b*nk will e*se credit conditions. U.S. infl*tion rose in December, * report next week m*y show.

“The r*tings downgr*des on the f*ce, they *re b*d but m*rkets h*ve been *nticip*ting this for some time now,” Bri*n Dol*n, chief str*tegist *t FOREX.com, * unit of the online currency tr*ding firm G*in C*pit*l in Bedminster, New Jersey, s*id. “The Greek situ*tion is quite dire. If they don’t re*ch some sort of *greement by the end of next week, they m*y very likely be forced in to * h*rd def*ult.”

The euro fell 0.3 percent to $1.2680 yesterd*y in New York, from $1.2717 on J*n. 6. Its l*st six-week losing stre*k ended Feb. 19, 2010. The euro touched $1.2624 yesterd*y, the we*kest level since *ug. 25,2010.

The sh*red currency depreci*ted 0.3 percent to 97.57 yen in * third weekly loss. It re*ched 97.20 yen yesterd*y, the lowest level since December 2000. The doll*r w*s unch*nged versus the J*p*nese currency *t 76.97.

W*gers *g*inst Euro

Futures tr*ders incre*sed bets to * record high th*t the euro will decline *g*inst the doll*r. The difference between w*gers th*t the sh*red currency would f*ll versus those th*t it would rise -- so-c*lled net shorts -- surged to 155,195 in the week ended J*n. 10, *ccording to d*t* from the Commodity Futures Tr*ding Commission rele*sed yesterd*y.

The euro dropped yesterd*y *s S&P lowered the top r*tings of Fr*nce *nd *ustri* one level to **+, with neg*tive outlooks, while *ffirming the r*tings of countries th*t included Germ*ny, Belgium *nd the Netherl*nds. The comp*ny *lso downgr*ded It*ly, Portug*l, Sp*in *nd Cyprus by two steps *nd cut M*lt*, Slov*ki* *nd Sloveni* by one level.

“It’s the s*me level *s the U.S.,” French Fin*nce Minister Fr*ncois B*roin s*id on Fr*nce 2 television yesterd*y, disclosing Fr*nce’s downgr*de before S&P *nnounced it. “It’s not * c*t*strophe,” he s*id.

S&P h*d put the r*tings of 15 euro n*tions on review on Dec. 5 for possible downgr*des.

Fisc*l Comp*ct

The common currency w*s he*ded for * weekly g*in versus the greenb*ck before yesterd*y. Germ*n Ch*ncellor *ngel* Merkel discussed Europe’s debt crisis in meetings with French President Nicol*s S*rkozy, Intern*tion*l Monet*ry Fund M*n*ging Director Christine L*g*rde *nd It*li*n Prime Minister M*rio Monti.

The euro rose for two d*ys *fter Merkel s*id J*n. 9 * blueprint for closer fisc*l union *mong n*tions th*t use the currency m*y be re*dy * month e*rly. The outline of the budget*ry-discipline effort w*s negoti*ted *t * Dec. 9 summit.

The Europe*n Centr*l B*nk held its benchm*rk interest r*te *t 1 percent on J*n. 12 *fter lowering it by h*lf * percent*ge point since November. ECB President M*rio Dr*ghi s*id he s*w signs of st*biliz*tion in the economy.

The loss by Fr*nce *nd *ustri* of their *** credit r*tings m*y erode firepower of the euro-region’s b*ilout fund th*t’s needed to t*p m*rkets to fin*nce *id for Greece, Irel*nd *nd Portug*l. The Europe*n Fin*nci*l St*bility F*cility owes its *** r*ting to gu*r*ntees from the euro region’s top-r*ted n*tions.

Glob*l ‘P*nic’

“There could be p*nic *round the world on cont*gion *s sovereigns h*ve difficulty *cquiring credit,” *xel Merk, president *nd chief investment officer of Merk Investments LLC in New York, s*id yesterd*y in *n interview on Bloomberg Television. “We need cl*rity on reform process, *nd th*t c*uses uncert*inty *nd then you just get downgr*ded step by step, *nd th*t’s not * rosy outlook.”

Greece’s creditor b*nks broke off t*lks yesterd*y *fter f*iling to *gree with the n*tion’s government *bout how much money investors will lose by sw*pping their bonds, incre*sing the risk of the euro-*re*’s first sovereign def*ult. Negoti*tions h*ve “p*used for reflection,” the Institute of Intern*tion*l Fin*nce s*id in *n e-m*iled st*tement.

The euro fell 0.4 percent over the p*st week *g*inst nine developed-n*tion peers tr*cked by Bloomberg Correl*tion-Weighted Currency Indexes. The New Ze*l*nd doll*r rose 2 percent in the best perform*nce, while the Swedish kron* w*s the biggest loser with * decline of 0.9 percent.

Testing Switzerl*nd

The fr*nc rose to the strongest *g*inst the euro since September *fter Philipp Hildebr*nd quit *s he*d of the Swiss N*tion*l B*nk *nd investors tested the b*nk’s c*p of 1.20 fr*ncs per euro. * currency tr*ns*ction by his wife l*st ye*r h*d dented his credibility. The SNB s*id in * st*tement the limit*tion, imposed in September to curb the currency’s strength, “rem*ins unch*nged.”

The Swiss currency rose 0.6 percent this week to 1.2076 per euro *nd touched 1.2063, the strongest level since Sept. 20.

Commodity currencies including Br*zil’s re*l *nd New Ze*l*nd’s doll*r r*llied *mid bets the People’s B*nk of Chin* will exp*nd l*st month’s cut in b*nks’ reserve-requirement r*tio to boost the economy.

The re*l climbed 3.9 percent to 1.7863 per doll*r, the best perform*nce *g*inst the greenb*ck *mong m*jor currencies. It re*ched 1.7708, its strongest since Nov. 18. New Ze*l*nd’s currency rose 1.8 percent to 79.47 U.S. cents. Chin* is the biggest tr*de p*rtner of both Br*zil *nd *ustr*li*.

Intercontinent*lExch*nge Inc.’s Doll*r Index (DXY), which tr*cks the greenb*ck *g*inst the currencies of six m*jor U.S. tr*ding p*rtners, rose 0.3 percent to 81.460 in its third weekly g*in.

U.S. consumer prices incre*sed in December for the first time in three months, g*ining 0.1 percent *fter st*gn*ting in November, *ccording to the medi*n forec*st in * Bloomberg News survey. The government reports the d*t* on J*n. 19.

To cont*ct the reporter on this story: *llison Bennett in New York *t *bennett23@bloomberg.net

MF Global May Not Be Able to Pay Clients Back: Trustee

2012-01-13T13:03:00.000+01:00

Former customers of MF Global Holdings' collapsed brokerage were disappointed to hear on Thursday that the trustee hunting for funds missing from their accounts has no immediate plans to transfer more money to them.

More than 250 customers met in New York on Thursday with James Giddens, the trustee in charge of liquidating the brokerage and returning money to customers, for an update on the status of his investigation into what may be $1.2 billion missing from their accounts.

Giddens and his team of lawyers said they may not be able to make another mass transfer of funds above the roughly $3.8 billion they have already paid out. That figure represents about 72 percent of the total money held in customer accounts when the firm went under, leaving many customers still thousands or millions of dollars out of pocket.

"At this point we're not in a position to do another bulk transfer," said James Kobak, a attorney for the trustee. "That situation might change as we get through the claims process. It would also depend on our ability to recover additional assets."

Customers are being asked to submit claim forms for their missing funds by the end of this month. The trustee said that once he receives all claims, his $1.2 billion estimate may rise or fall. His estimate has been challenged by other agencies involved in the probe, which say the gap may be only half as big.

David Rosen, an energy broker at the New York Mercantile Exchange, said he was leaving the meeting with more questions than answers.

"The customers need to be made 100 percent whole — there's a national interest here," said Rosen, who organized fellow MF Global customers on the NYMEX trading floor exchange in the early days of the bankruptcy. "I think the trustee has done a good job so far; they've been responsive to us. But we need to make it so this can't ever happen again."

MF Global is the broker-dealer unit of MF Global Holdings, which went bankrupt on Oct. 31 after its bets on European sovereign debt became public knowledge. Chief Executive Jon Corzine, a former New Jersey governor and senator as well as an ex-Goldman Sachs chief, resigned four days after the bankruptcy.

The trustee's team said that while it would try to avoid litigation, it could eventually face a legal battle with the UK subsidiary of MF Global. More than $700 million of customer funds may be held at that subsidiary, the trustee's team said.

"We are 1/8the UK subsidiary's 3/8 largest creditor," Giddens said. "Their legal position is that certain property and collateral transferred to the UK ... under UK law, those positions become unsecured. We disagree."

Similar disputes in the liquidation of Lehman Brothers Holdings' brokerage — which Giddens is also handling — are still winding their way through the court after three years.

Giddens also responded to questions from customers about whether he would try to sue or otherwise recover money from other pools of MF Global money, such as from the parent company, MF Global Holdings.

Giddens said he and his legal team do not want to litigate with the parent, and in fact the parent company may try to assert claims against the brokerage.

"They have precious few assets, and few employees," he said. "They have said they think they may be able to get a distribution as a stockholder from the brokerage. We think the evidence is certainly to the contrary."

By: Reuters

China Foreign-Exchange Reserves Drop First Time Since 1998

2012-01-13T10:21:00.000+01:00

Jan. 13 (Bloomberg) -- China’s foreign-exchange reserves dropped for the first time in more than a decade as foreign investment moderated, the trade surplus narrowed and Europe’s crisis spurred investors to sell emerging-market assets.

The holdings, the world’s biggest, fell to $3.18 trillion on Dec. 31 from $3.2 trillion Sept. 30, People’s Bank of China data released in Beijing showed today. The quarterly drop was the first since the midst of the Asian financial crisis in the second quarter of 1998, according to data compiled by Bloomberg.

The decline underscores forecasts for the central bank to ease monetary policy, and may bolster China’s resistance to appreciation in its currency. PBOC Governor Zhou Xiaochuan said in remarks published this month that a global downturn may lead to “large” capital withdrawals this year, highlighting a shift in risk from the influx of speculative funds that China had opposed during the 2009-2010 world economic rebound.

“It indicates an absence of flow pressure for the yuan to appreciate, which may lead the central bank to slow the pace of appreciation,” said Tim Condon, chief Asia economist at ING Financial Markets in Singapore. “This will also reduce the need to absorb hot money inflows, allowing the central bank to cut banks’ required reserve ratio.”

Monetary Steps
Condon, who previously worked at the World Bank, said the PBOC may lower the ratio of assets banks must hold in reserve by 2 percentage points in 2012. The bank cut the ratio for the first time since 2008 last month.

China’s foreign-exchange holdings reached a record $3.27 trillion in October and then fell in the following two months, the central bank data showed, indicating a decrease of $92.6 billion in November and December.

Much of the decline may be due to a lower value of the reserves held in currencies other than the U.S. dollar, said Cui Li, a Hong Kong-based economist at Royal Bank of Scotland Plc who previously worked at the International Monetary Fund.

While China doesn’t provide details on the distribution of its holdings, the country bought euros in 2011, with policy makers flagging support for efforts to aid Europe’s battle to resolve the sovereign-debt crisis. The euro fell 3.2 percent against the dollar in the last quarter of 2011.

Asia Crisis
The drop in holdings was the first since the throes of the Asian financial crisis in 1998, when nations from South Korea to Thailand saw reserves depleted as investors fled the region. East Asian nations later rebuilt their holdings and restructured their financial systems, helping the region lead the global economic rebound in the past three years.

Countries including South Korea, Indonesia and India used some of their reserves to support their currencies in September 2011, when European debt woes deteriorated as Greece teetered toward a potential disorderly default. The MSCI Asia Pacific Index of stocks dropped 16 percent in the second half of last year, when the Shanghai Composite Index slid 20 percent.

For China, the Europe-led damage to the global recovery has hit the nation’s exports, which rose the least in two years in December, adjusted for holiday-period distortions. For 2011, the trade surplus narrowed 14.5 percent to $155 billion, the third straight annual decline since a record $298 billion in 2008.

Capital Outflow
At the same time, capital outflow likely did contribute to a slide in China’s reserves late last year, analysts said. An estimated $34 billion may have moved out in the third quarter, driven by a mix of escalating concern over a hard landing for China’s economy, the worsening euro area crisis and speculation that the yuan may fall against the dollar, Lu Ting, an economist at Bank of America Corp. in Hong Kong, said in a Jan. 5 report.

China should use more of its reserves to make direct investments overseas, Zheng Xinli, vice president of the state- backed China Center for International Economic Exchanges, said at a forum in Beijing this week.

The nation needs about $1 trillion of its holdings for international payments purposes and should use the remainder to buy assets such as exploration rights for energy and resources, he said. China should also set up processing-trade zones overseas which could spur exports of parts and raw materials, he said.

To contact Bloomberg News staff for this story: Zheng Lifei in Beijing at lzheng32@bloomberg.ne

French Resignation to Losing AAA Shifts Focus to Size of Cut: Euro Credit

2012-01-12T19:05:00.000+01:00

After weeks of handwringing about a possible loss of France’s top credit rating, President Nicolas Sarkozy now gives a Gallic shrug.

Investors are interpreting the insouciance -- with Sarkozy saying that losing the AAA rating isn’t “insurmountable” -- to mean that France has accepted the inevitable. The question now is whether Standard & Poor’s will follow through with a threat of a two-level cut.

Sarkozy’s shift, intended to ready voters for the blow ahead of April’s presidential elections, contributed to the increase in the premium France pays over Germany to borrow for 10 years. Since Dec. 5, when S&P said that it may downgrade 15 euro nations amid a deepening regional debt crisis, the spread has widened by 32 percent to 122 basis points.

“They’re preparing the ground for something they see as inevitable,” said Nicola Marinelli, who manages $150 million at Glendevon King Asset Management in London. “The market is expecting France to be a strong AA; expecting it to be AA+. If any rating change goes lower than that the spread with Germany can widen further.”

France, Europe’s second-largest economy and the No. 2 backer of the region’s rescue fund after Germany, was singled out among the six euro-region holders of the top AAA rating by S&P as the one that risked a two-level lowering of its credit rating. The country’s downgrade would affect the rating of the European Financial Stability Fund, making the bailout of the region’s troubled economies more expensive.

‘Priced In’
That would endanger efforts to put an end to the more-than- two-year-old sovereign debt crisis as Europe slides into recession, economists said.

“The one-notch downgrade, our base scenario, is more or less priced in,” said Thomas Costerg, an economist at Standard Chartered Bank in London. “The wider consequences are not necessarily priced in. It will weaken confidence and could fuel the European debt crisis in a self-fulfilling spiral.”

French 10-year bonds yielded 3.05 percent today, about 122 basis points more than similar German securities. The spread was less than 50 points a year ago. The extra yield investors demand to hold French bonds instead of benchmark German bunds rose to as much as 204 basis points on Nov. 17, the most since 1990, as concern deepened the region’s debt crisis was spreading.

It costs 219 basis points to insure French debt for five years, more than twice as much as AAA rated U.K. and more than the cost of insuring debt issued by Indonesia or the Philippines against a default, CMA prices showed today.

Election Fever
Sarkozy, who has sought to protect his government’s creditworthiness by announcing tax increases and spending cuts, has attempted to position himself for a 2012 re-election campaign as the most credible candidate on economic matters.

After earlier painting the loss of the AAA rating as a catastrophe, he and his ministers have said they’re going to focus on growth and competitiveness rather than worry about what ratings companies might do.

Yesterday, Sarkozy said France needs to focus less on markets and ratings companies.

“Markets and ratings agencies exasperate our citizens,” he said at a reception for lawmakers in Paris. “We must take back control of our destiny.”

Budget Minister Valerie Pecresse said in an interview last week that the government “isn’t working for the rating agencies.”

‘Heightened Risk’
Sarkozy trails his main rival, Socialist Party candidate Francois Hollande, by about 14 points in voting intention for the second round of the election, according to a BVA poll for Le Parisien newspaper published Jan. 9.

Moody’s said Dec. 12 it will review the ratings of all EU countries after a summit on Dec. 9 in Brussels failed to produce “decisive policy measures” to end the region’s debt turmoil. S&P placed the ratings of 15 euro nations, including Germany, on review for possible downgrades on Dec. 5.

Fitch Ratings cut France’s credit outlook on Dec. 16 on the “heightened risk of contingent liabilities” from the euro- region crisis. 17. This week Fitch said it probably won’t downgrade France in 2012 unless the regional debt crisis intensifies.

Since the ratings companies’ announcements, markets have been roiled by frequent speculation about a French downgrade. Finance Minister Francois Baroin yesterday denied having been notified about a downgrade, calling it “false.”

Headwinds
France’s woes, like those of other euro-area countries, are compounded by an economy that’s edging toward recession as budget cuts to contain the fiscal crisis bite.

The French economy is probably already in a recession that will last through March, national statistics office Insee said last month. France has the biggest debt burden of the six top- rated euro nations, at 85 percent of gross domestic product.

A ratings cut would be “another headwind for Sarkozy’s reelection,” Standard Chartered’s Costerg said. “He first tried to raise the stakes to defend AAA and now is trying to downplay it. Why? It’s the election.”

To contact the reporters on this story: Mark Deen in Paris at markdeen@bloomberg.net;

BULLION THOUGHTS

2012-01-12T15:39:00.001+01:00

Demand for gold bullion in China continues to surge. Mainland China's imports from Hong Kong in November surged to 102,779kg/oz from 86,299kg/oz in October. This is a 20% increase from the already high number seen in October and a 483% y/y increase.

The run into Chinese Lunar New Year has again seen higher than expected Chinese demand for gold and China's voracious appetite for gold is surprising even analysts who are positive about gold.

As Chinese people's disposable incomes gain and concerns grow over inflation and equity and property markets, Chinese consumers and investors are turning to gold as a long term investment hedge.

There is informed speculation that commercial Chinese banks may have taken advantage of the recent price dip to build stocks of coins and bars and accumulate bullion.

China's demand for physical gold bullion has rocketed past India with the country now overtaking India in the third quarter as the largest gold jewelry market according to the World Gold Council.

There is also informed speculation that some of the buying was from the People's Bank of China with one analyst telling Bloomberg that “there is always the possibility that some purchases were made by the central bank.”

As stated in the past, the PBOC is gradually diversifying their huge FX reserves and likely will announce upward revision of total gold reserves again in the coming months. Whether official buying is responsible for the huge surge in gold imports from Hong Kong is more difficult to ascertain The Chinese Central Bank does not release their figures on gold purchases.

As of June, 30, 2009, they held 33.59 million ounces or 1,054 tons. This is the 5th largest holding by country but some officials are on record with regard to Chinese aspirations to hold as much gold as the Federal Reserve's 8,100 tonnes of gold reserves.

What is particularly bullish about the import data is that there is a ban on exporting gold from China so gold bullion is in strong hands in China.

Platinum group metals rose a third straight day due to concerns on supply disruption in South Africa, as the national grid warned about extremely tight power supply in January. The gold-platinum spread narrowed to just below $165 an ounce, its smallest in two weeks. The price of platinum has been lower than that of gold since September 2011, as gloomy economic outlook dampened sentiment on platinum, while gold's safe-haven appeal helped limit its price decline.

Goldfinger

ASSET GATHERERS VERSUS FUND MANAGERS

2012-01-12T13:53:00.003+01:00

Insch investors may find this study interesting: "Asset Gathering by Hedge Fund Firms", by Melvyn Teo, Professor of Finance and Director, BNP Paribas Hedge Fund Centre at the Singapore Management University.

The study finds that hedge fund firms that launch several funds tend to underperform other firms by between 3 to 5% per year after adjusting for risk. "These findings are strongest for firms offering funds that pursue many distinct strategies, invest in a variety of geographical regions, locate in a gamut of countries, and offer different base currencies. Our results allow fund investors to distinguish, ex-ante, firms that focus on delivering alpha from those that focus on gathering assets," Melvyn Teo states in the abstract.

The study further says: "To facilitate the analysis, we first merge Barclayhedge, HFR, and Lipper Tass databases. [...] The sample period extends from January 1996 to December 2010. In total, the combined database consists of 22,031 funds of which 13,778 funds stopped reporting returns at the end of our sample period."

Our conjecture is that the results of the study apply best to the BNP Paribas Asset Management business - paragon of a "launch many funds" company. The asset management activities of BNP Paribas are grouped into BNP Paribas Investment Partners.

According to Bloomberg, there are 4865 funds managed by the BNP Paribas Investment Partners – listed below. Roughly half of these funds may be liquidated.

BNP Paribas Asset Management – France, alone, has around 520 funds listed on Bloomberg.

BNP Paribas Investment Partners (According to the BNP website):

Multi-expertise investment

BNP Paribas Asset Management: The largest partner within BNPP IP, with investment teams around the world managing the major asset classes

Specialist investment partners:

Antin Infrastructure Partners: An investment manager exclusively dedicated to the infrastructure sector

BNP Paribas Clean Energy Partners: Clean Energy infrastructure

BNP Paribas Private Equity: A recognised expert in private equity

Fauchier Partners: A leading fund of hedge funds manager with a strong emphasis on capital preservation and diversification

Fischer Francis Trees & Watts: A global and regional fixed income specialist

FundQuest: A multi-management specialist

Impax Asset Management: An environmental strategies specialist

Overlay Asset Management: A leading currency management specialist

THEAM: THEAM offers a wide range of investment solutions, specialising in index, active systematic, guaranteed and liquid alternative investments

Local & regional solution providers:

Alfred Berg: A specialist provider of Nordic investment solutions

Arnhem Investment Management (Australia): A specialist manager of Australian equities

BancoEstado Fondos Mutuos: A leading Chilean asset manager specialising in domestic market investments

BMCI Gestion: A leading provider of Moroccan investment solutions

BNP Paribas Asset Management Brasil: A leading provider of Brazilian investment solutions

BNP Paribas Epargne & Retraite Entreprises : Employment saving plans and retirement investment solutions for corporates

BNP Paribas Investment Partners Discretionary Portfolio Management: BNPP IP’s dedicated private banking portfolio management arm

BNP Paribas Mutual Fund India: An expert in Indian investments

CamGestion: A leading French wealth manager

HFT Investment Management Co., Ltd: A leading Chinese investment manager

PT. BNP Paribas Investment Partners Indonesia: A pioneer in Indonesian investment solutions

Shinhan BNP Paribas AMC: A specialist provider of South Korean investment solutions

TEB Asset Management: A pioneer in the Turkish mutual fund market

TKB BNP Paribas Investment Partners: A leading provider of Russian investment management solutions

Insch Quantrend ltd, Lugano Branch

Spanish Banks Undermine Recovery With Discriminatory Home Loans: Mortgages

2012-01-12T11:23:00.000+01:00

Jan. 12 (Bloomberg) -- Spain’s banks, saddled with 329,000 foreclosed homes, are still willing to provide mortgages, as long as the borrower wants to buy one of their properties, according to a consumer-rights group. That’s no help to homeowners and developers seeking to sell.

Members of the group, Organización de Consumidores y Usuarios, or OCU, applied for mortgages at 46 bank branches in Spain in August and September to buy privately-owned homes. In every case, the lender tried to persuade the prospective borrower to purchase one of its own properties instead -- either by offering to finance 100 percent of the price or by refusing to lend for another home, spokeswoman Ileana Izverniceanu said.

“People end up buying from the banks because they have no alternative,” Izverniceanu said in an interview at her office in Madrid.

The Bank of Spain has encouraged lenders to sell real- estate assets now rather than wait for the market to recover from a four-year decline. By offering mortgages selectively, the banks may prolong the slump by discriminating against other property sellers and keeping prices artificially high, Izverniceanu said.

“Prices aren’t adjusting to reality and that’s damaging the recovery of our housing market and economy,” Izverniceanu said.

Entering Recession

Home values have fallen by about 17 percent since Spain’s residential property market peaked in the first quarter of 2008, the Ministry of Development and Public Works estimates. By contrast, Irish real-estate prices have dropped 46 percent and U.S. values have declined 32 percent from their highs.

Spain, the euro area’s fourth-largest economy, is close to entering a recession, Budget Minister Cristobal Montoro said yesterday, and Moody’s Investors Service, Fitch Ratings and Standard & Poor’s all have the nation’s credit ranking on review with “negative” outlooks as growth slows and Europe’s sovereign debt crisis deepens.

Spain will auction as much as 5 billion euros ($6.4 billion) of 2015 and 2016 securities today as Prime Minister Mariano Rajoy seeks to close the budget gap to prevent it from becoming being the fourth euro nation to seek aid.

A spokeswoman for the Spanish Banking Association didn’t respond to phone calls or an e-mail requesting a comment. Spokesmen for Banco Santander SA, Spain’s largest bank, and Banco Bilbao Vizcaya Argentaria SA, the second-biggest lender, declined to comment, asking not to be named in line with their companies’ policies.

Real Estate ‘Truth’

Lenders, which have also acquired properties from struggling and bankrupt developers to cancel debt, have as many as 900,000 finished, unfinished and foreclosed homes on their balance sheets, according to Borja Mateo, author of “The Truth about the Spanish Real Estate Market.” In the U.S., with a population almost seven times the size of Spain’s, about 2.1 million homes are in foreclosure, according to Lender Processing Services, a mortgage software and data firm based in Jacksonville, Florida.

By “crowding out” other property sellers, such as real- estate developers and private individuals, banks are causing transactions involving multiple properties to collapse, said Juan Villen, head of Idealista.com’s mortgage service.

“We just saw a chain fall through,” Villen said. “The person who wanted to buy one of the properties in the chain couldn’t get a mortgage because a bank didn’t own the home.”

On a typical day, Idealista advises about 200 people on home loans, Villen said.

Clean Up Banking

Rajoy, who took over last month after a landslide election victory, has pledged to clean up the banking industry at no cost to taxpayers. Lenders have 176 billion euros of what the Bank of Spain calls “troubled” assets linked to real estate, while struggling with rising bad loans and borrowing costs.

Governments are urging European banks to keep lending to companies and individuals while requiring them to raise an additional 114.7 billion euros of core capital by June to weather a deepening sovereign-debt crisis.

Buyers of Spanish homes were granted 44 percent fewer mortgages in October from a year earlier, the 18th straight decline, the Madrid-based National Statistics Institute said last month. The total value of those mortgages fell 41 percent.

Developers Hurt Most

Property developers have been hurt most by banks favoring loans for their own properties. Inmobiliaria Colonial SA, Metrovacesa SA, Realia Business SA and Quabit Inmobiliaria SA, Spain’s largest publicly traded real estate companies, sold just 640 homes during the first nine months of 2011, according to their latest results. That compares with 2,150 in the same period a year earlier and 4,529 at the peak of the housing boom in 2007. In total, 240,673 homes were sold in the first nine months of 2011, according to data from the Ministry of Development and Public Works.

Martinsa-Fadesa SA, a developer whose shares haven’t traded since the company filed for protection from creditors in 2008, sold 717 homes in the nine months through September.

“Often, banks close sales because they offer financing for buyers,” said Jesus Encinar, founder and chief executive officer of Idealista.com. “Some of them only offer loans to people who are purchasing their stock.”

Idealista currently advertises 46,233 bank-owned homes in Spain, up from 29,334 in November 2010. It didn’t list any in 2008.

“I’m still surprised that we don’t have many thousands more and that some banks are still asking themselves whether it’s a good idea to publish their properties on the Internet,” Encinar said.

Further Declines

Property values need to decline by an additional 15 percent to 20 percent over the next two to three years to reflect what homes are really worth, according to Fernando Acuna Ruiz, managing partner of Madrid-based mortgage broker Taurus Iberica Asset Management.

Spain’s construction industry accounted for about 18 percent of gross domestic product at the height of the boom, according to a report by management consultants McKinsey & Co. That’s now fallen to about 11 percent, data compiled by the National Statistics Institute show.

Every day in Spain, about 200 evictions take place and banks execute foreclosure orders on a further 273 homes, according to Adicae, a group that represents bank customers.

Financial institutions have foreclosed 328.720 homes since 2007, according to PAH, or, Plataforma de los Afectados por la Hipoteca, a group which campaigns against evictions of home owners. That figure will balloon to as many as 600,000 in coming years as unemployment increases, according to Taurus, which manages 35,000 foreclosed properties for 25 lenders.

Highest Jobless Rate

Spain’s jobless rate of 23 percent is the highest in the euro region and growth in the country will slow to 0.25 percent this year from 0.7 percent in 2011, according to a Bloomberg survey of economists.

Idealista’s Villen says that banks will offer their customers 100 percent mortgages and other favorable terms until they’ve offloaded their stock of foreclosed homes.

“They are simply kicking the can down the road and that shouldn’t be allowed as it may come back to haunt them,” he added.

Banks should never grant a mortgage that exceeds 80 percent of a property’s value, according to Jordi Fabregat, a professor of management and financial control at Esade, a Barcelona business school. Monthly mortgage repayments shouldn’t be more than 30 percent of an individual’s monthly income, he said during a telephone interview.

“These were two red lines that banks here happily crossed time and time again during the boom and this is what led us to our Spanish subprime.”

Bullion Thought - 12/1/2012

2012-01-12T10:11:00.000+01:00

Good morning,

A quiet Asian session overnight saw a six dollar range in gold, positively deadly in this day and age. Europe is in now and there is some early buying around and we have just made new highs for the year so far at 1647.50. Silver also had a quiet one and is beneath the years high for the moment. The market has a bullish tone to it at the moment and Asian buying remains strong, but so far we have not seen much evidence of the strong investment and fund buying from last year. I believe that until gold completely decouples itself from the stock market and the euro, this buying will stay away. After all, if the euro is due to disintegrate as many people believe, what will gold do? So far on recent evidence, it will come down, but there will come a point this year, when the relationship severs and gold returns to its safe haven status. For a long term trade, I would still be long gold, but in the short term, I cannot get overly bullish, when every negative headline out of Europe knocks the market back down again.

Gold support at 1635/40 and resistance 1650/55 and then 1675/80. Silver support at 29.50/60 and resistance at the moment at 30.30, the year’s high so far. Economic figures out today include the Bank of England interest rate decision, which will remain unchanged, but more importantly the ECB interest rate decision. This is out at 12:45 London time this afternoon and is widely expected to remain unchanged as well, but what will be closely watched is Mario Draghi’s speech afterwards scheduled to begin at 13:30 London time. It will be interesting to see how he intends to stimulate the economy, when the last round of cheap lending has only led to record deposits from the borrowing banks at the ECB itself. Not really the way to save the Euro!!! So watch this speech closely, it will definitely have an impact on the Euro and by association, the metals prices. In the US, we have Initial Jobless Claims and Retail Sales at the same time as the speech, so unless you are a real gambling man/woman, I would stay on the sidelines at that particular time!

Good luck

Goldfinger