August 12, 2010 -From a Western financial professional’s perspective, South Korea has traditionally been overlooked. The most familiar big three finance hubs in the East were forged in Singapore, Hong Kong, and Tokyo. However, Korea is redefining itself as a major marketplace for a specific breed of financial product, for better or worse, broadly labeled “derivatives”. For those having flash backs to calculus at the thought of the word, don’t fret… you’re actually on the right track. Here we’ll give a crash course on derivatives and their place in financial markets, inspect their recent appearance in emerging markets, and theorize as to the effect they will have on Korea’s global financial presence and the economy as a whole.

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Money Thrown at the Problem

Let’s review the facts, because it will have been two full years since Lehman in September and I think we all (myself included) need a bit of a reality check:

U.S. Treasury

- TARP = $700 billion USD to bail out the U.S. banking system through direct liquidity injections in U.S. banks

- 2009 Government Stimulus = $787 billion USD; Subsidized government and private sector jobs, subsidized state and local services, 14% invested in infrastructure.

- Unemployment Benefit Extensions = $120 billion USD; Eight (8) consecutive extensions of pay to unemployed.

U.S. Federal Reserve

- Total Long Term Treasury Debt Purchases = $753 billion USD; Fed bought 10+ year Treasury notes at auction to support demand for U.S. debt, taking rising pressure off of mortgage rates.

- Total Fannie & Freddie MBS Purchases (08/04/2010)  = $1.12 trillion USD; GSE Mortgage securitization  groups now state owned, as Fed swallows mortgages unfit to remain on GSE balance sheets.

- Federal Funds Rate target at 0.13%; historically unprecedented quantitative easing, which has allowed mortgage rates to ease below 5% on 30-yr fixed products.

When we add up the cash that has been dedicated to the sustainability of our financial market, and thus our economy, we see the following capital commitments:

Treasury = $1.6 trillion

The Fed = $1.87 trillion

America’s Future

It’s clear that if the Fed continues QE and the Treasury continues backing stimulus, the government will end up owning far more once private industries and the population will become dependent on anticompetitive subsidy rationing for survival. It’s been announced recently that over 4o million U.S. citizens are now on Food Stamps.

The other route suggests an imminent recession. Should the Fed and Treasury go the “austerity” path, as Europe has chosen with the leadership of Germany’s cost cutting plan, the most likely outcome would be a recession and repricing of all assets to actual market values.

The recession hurts more in the short term, but guarantees more robust long term growth, while the socialist-esque spending route will land us in an economic environment akin to somewhere in Western Europe.

Of course the Fed is attempting to eat the cake and have it too, by a little slight of hand trick where they announced a reverse repo of MBS on their balance sheet, once abducted from Fannie and Freddie, where they will take money out of the financial system by reselling MBS contracts into the market. However, we don’t know which MBS packages are being sold and which aren’t. Do you see Benny Boy selling bad debt back onto the market? We can assume that the fed is in essence serving as a purifier of bad debt, where they buy the toxic material sort out the rare gems, and sell the good stuff back to the private banks.

FOMC Tuesday

The Street is hesitantly expecting Bernanke to announce some kind of further quantitative easing, which would look something like a resumption to the old MBS purchase program from the GSE’s, which was ended in March. For the Fed to end a QE program in March and resume it in August is more than a bit frightening to this analyst. The Street, of course, is cheering the potential assistance.

If the FOMC Fed announcement tomorrow (Tuesday) includes specific promises of further QE we’ll see a short term rally. IF the FOMC continues to talk abut the economy’s “worse than anticipated” performance, but fails to outline any specific plan to stimulate through monetary policy, we will see as sell-off. In our view, any rally would be stopped cold at 1150 on the S&P 500, as a massive head and shoulders pattern comes to fruition.

Happy Hunting

August 5, 2010 -Korea is a land of limited space and high population. It’s borders surround just under one-hundred-thousand square kilometers, making the land mass a bit larger than the U.S. state of Indiana, with a population of approximately 48,000,000; over seven times that of Indiana. It’s safe to say that the result of these basic observations has for years been a high demand for real estate in Korea. This week we’ll discuss the state of the South Korea real estate market by investigating the Korean “Jeonse” (key money) lease process, deciphering broader implications of economic downturns on the industry, and looking for answers to the looming supply of unfilled apartment skyscrapers in years to come.

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July 15, 2010 -Surprising the world now twice in six months by leading rather than following the G20 nations, South Korea has spearheaded dual mandates which have put the central Bank of Korea (BOK) on the offensive. Clearly Korea hasn’t forgotten the woes of 1998 and 2008, when the KRW dropped precipitously and twice scarred the investment portfolios of international players. It is now certain that currency protection is the name of the game in Seoul. This week we’ll identify how Korea’s monetary policy stacks up against its rival “Asian tigers”, and determine where Korea may find itself tomorrow as a result of today’s environment.

Download the full report below then share your thoughts. What do you agree with? Disagree with? Make us support our opinions!

The following is a response to the below linked article

“Ignorance is Liberal Bliss“

Dear Friend,

I apologize for taking some time to respond to your email concerning the article in the American Spectator, but I will say I wanted to wait until I had time to read the full article and respond to it in breadth.

First, I like the title a lot, “ignorance is liberal bliss”… It’s definitely witty. I know that you might expect for me to have taken a clear stance defending Barry, but I promise you I am very critical of Obama, Tiny Tim, and Benny Boy on a regular basis in my analysis of the U.S. economy. However, I also don’t fit into the camp that lambastes liberals for their ignorant or economically unintelligent platforms.

I’m the guy that hates the game, not the players. My article title might read, “Ignorance is Political Bliss (Referring to the Ignorance of the Constituents & Representatives if Any Are to Remain in Office)”. I think that this is the stance of most young people these days, but unlike most I have reasons for my stance. Perhaps the slogan of the juniors in my demographic, should read “Ignorance, Youth, Unemployment and Engaged to be Married is Bliss”… That seems to be the route many of my peers are championing.

Before raising my flag and claiming ground here, I’d like to bring up this quote again (I really like it):

“In relation to social questions, the concept of an interdependent system has two important implications: that things are the way they are for some powerful reason or reasons, which have to be understood if effective social solutions are to be devised; and that any social solutions so devised and applied will have repercussions elsewhere, which will have to be faced and which ought to be taken into account.”

Basically, my takeaway from this is that (a) things are the way they are for a reason, and (b) when we screw around with those things, we’re likely to change stuff we didn’t want to in the process of reaching our goal. Furthermore, that other stuff (externalities) can be really frustrating and many times cause equal or greater damage than intended good. Now I realize the past +/- 15 months have been choppy, and that we are likely to re-enter a global recession. I think that the basic laws of physics are equally inherent in financial markets and global economies than any other field. The truth of our current global predicament is very simple and even more scary… THERE’S NO QUICK FIX! This is something that isn’t even proposed behind closed door meetings with cabinets, administrations, and capital hill interns… It’s the death sentence to any politician.

I will concede that on average liberals can come off looking economically dumber than conservatives because they try to manipulate their spending plans mixed with smoke and mirror tax raising schemes. Nancy Pelosi aught to be shot between you and me… I’m fine with Mrs. Clinton jet setting around the world and doing photo ops, but I would sigh in relief if she were absent from the U.S. political spectrum. Barny Frank is clinically retarded… I’ve watched the tapes of Frank proposing all of the regulations that were enacted at Fannie and Freddie where they adopted higher caps on the percentage of Sub Prime ARM mortgages, which led to their decline. Then I also watched as he criticized the leaders of Fan and Fred for their devious management practices and poor risk awareness. So YES there are liberals who are more than guilty of Economic Retardation who still serve in office and probably will for years to come.

Still there’s a boatload of Republicans, mainly Congressmen, whose political platforms could also use a bit of waterboarding. The Republican strategy has worked very well so far, despite failing to block healthcare, which basically aims to block anything proposed by Obama or the Left and stay as far out of the spotlight as possible while doing so. Republicans come out to play whenever there’s a batch of CEO’s in industries uncommon among their constituents and give ‘em a good lickin, but otherwise they are keeping their heads down and voting “no” to every bill. We’ll see if it works in the midterm elections…

Okay, now I hate to live in the past, but this quote SCREAMS President Bush…

“Another important reason for the left’s disregard for economic understanding is their almost exclusive focus on intentions rather than results.”

Coming from the guy who started a war in Iraq using incomplete evidence and leveraging the emotional fear of his country to band behind the effort. We’ve spent nearly a trillion bucks on Iraq, and during that period Bush lowered taxes. First time in modern history that’s happened I believe. Now Bush was a feisty one, always liking to add hybrid minorities to his cabinet with conservative souls (i.e. Condy), but he did appoint Bernanke (The Jew From South Carolina). And his Treasury Secretary started this spending fiasco with 600 Billion USD TARP Fund.

I understand WHY an economist with a conservative agenda would publish an article like this, because it’s an easy target. Obama’s in office and the National Debt is around 60% of GDP in the U.S., looking to reach 80% by 2035, and should we keep the Bush tax cuts we would reach 185% GDP by 2035 according to the Financial Times (http://www.ft.com/cms/s/0/1e99df8c-8499-11df-9cbb-00144feabdc0.html).

Furthermore, U.S. States are all on the brink of bankruptcy. California, which is indeed a very liberal state, but has been managed by the Governator for the applicable past years, and is still in a state of disrepair.

So my response is, “Yes for liberals [and conservatives] economic ignorance is bliss [in Washington].” I like what maybe 5% of politicians have to say and the rest is just noise. I really like a lot of what representatives from both of our states, Graham and McConnell, stand for, but am ashamed that they refuse to step outside party lines to pass effective legislature. The entire system is so damn ineffective.

The moral of the story, which transcends the article in question, is that in economic recessions “career” politicians spend money. Conservatives spent money on TARP and liberals finished up with a stimulus. But I can guarantee that McCain would have enacted a stimulus plan. Sure tax cuts proposed by Mccain are by definition more efficient, but they’re equally unsustainable, because we DO have deficit issues and the Bush tax cuts are IMPOSSIBLE to be made permanent, unless we pull out of the middle east and stop spending so much on Defense. Thus the same end game… the same results…

It’s not just W though, it’s Clinton, Big Bush, the whole damn modern era that became founded on money made out of nothing and calling it the free market. We as a country have refused to believe that the charade will end. It’s been going on for so long that we forgot what an honest wage felt like. Greed and Excess are the name of the game, and until we shut up and take our medicine to start fresh, we’ll continue in the boom bust cycle.

We would be right smack dab where we are at this moment under either political party, because the damage was already done when liberals took the reigns. I agree with the underlying argument of the article, that we should not mess with the free market economy. But we did. And this time it was Hank Paulson that started the merry go round that liberals now ride. No one is innocent and the potential devastation that waits around the bend will be merciless and unrelenting, because the global economy is refusing to concede defeat.

The market is fair, most people are ignorant, and politicians are snakes.

I hope this satisfies your query,

Rob

• SDS     +6.51%
• DTO    +1.00%
• VXX    +9.72%

Remember these positions all represent net short market trades and are to be used only within an acceptable range of risk. These vehicles are all very volatile, so we highly recommend readers to subscribe to our “Complete DS Analysis” feed in the right sidebar and our DS SHOUTBOX trading notebook feed @http://twitter.com/ds_shoutbox. The DS SHOUTBOX will give readers notifications of any trades made after the close of each trading day, while real time trade alerts are only available to private clients.

If you are interested in becoming a private client, feel free to email our Lead Trader and Analyst Robert Eberenz at Robert.eberenz.iii@gmail.com.

The War On Credit

In 1940 America the War had been felt only in reminiscent ripples, by “tweets” on telegraph receivers and two week old newspapers.  Pearl harbor still stood strong and broad on O’ahu’s South Face, while mothers and wives hung close to those on which they’d grown to depend.

Not so dissimilar from those days, we now face threats that only quietly whisper their motives from Asia and Europe. Constructed by years of fiscal white lies and monetary insanity, the body bags have yet to be filled. Municipal governments in China still depend on increasing real estate values, while European banks holding large debts of failing Southeastern states still stand. The United States Economy has “recovered faster than anyone could have imagined” and the S&P 500 at one time had nearly doubled from it’s lows. But still the whispers; 10 year U.S. Treasuries nearing 3% yields, LIBOR trending higher, market technicals showing a shift towards negative confidence, and this weeks economic data hanging in the balance…

Quintessential Indicators

This week is a pivotal moment for the global economy for many reasons, not the least of which are the developing technicals of the S&P 500 (SPX).  Take a look at the QUINTESSENTIAL CHART, THE MEANING OF LIFE, THE TRUTH OF YOUR VERY EXISTANCE below…

Economic Data

In economic news this week we have an immense block of information set to hit the street. Monday we saw that incomes rose by 0.4% in May and consumer spending turned higher by 0.2%. The consumer spending portion was an upside surprise, but it was mostly in the auto sector which tends to be volatile.

Tuesday we’ll get consumer confidence which is expected to stay constant at 63.3, while Wednesday will focus on Chicago PMI, the EIA Petroleum Report, and MBA Mortgage Applications. We’ll be watching the PMI for signs from Midwest manufacturers and the EIA report for signs of further dry storage supply increases. EIA may be fighting tropical depression Alex over traction in the Crude Oil space.

Look for a volatile morning session on Thursday as the Initial Claims , ISM Manufacturing, Construction Spending, and Pending Home Sales reports cross tickers. ISM is expected to drop to 67.0 in the June reading and Construction Spending projected to fall from a 2.7% gain to 0.5% loss in May. Initial claims will be closely watched for signals on the heels of the ADP report from Wednesday; all in preparation for the May Employment situation report on Friday. Also due on the final day of trading this week, will be the Factory Orders report at 10:00 am, which should set the tone for the final hours of trading ahead of the weekend.

Remember it’s all about the S&P 500 (SPX) until we say so! Stay vigilant and nimble. We see this market on the edge of further downward momentum. There is a battle just over the horizon and bombs may well fall when we least expect it. To those prepared and those forewarned…

“Good night and good luck.”

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June 24, 2010 -The moment that Europe and the U.S. have been lobbying for over the past nine months finally arrived, as China ended the rule based exchange rate “peg” of the Renminbi, or Chinese Yuan, to the U.S. Dollar. While the immediate implications of a floating Yuan are positive for Asia as a whole, the mid-term reprocussions of a stronger Renminbi may tell a starkly different tale. We’ll explain what a floating Yuan means to Korea investors. We will also preview and review several market moving reports, helping to give subscribers a better grasp of current economic health and prospects for growth here in the ROK…

Download the full report below then share your thoughts. What do you agree with? Disagree with? Make us support our opinions!

It’s no secret that the entire China Renminbi “de-peg” issue, as defined by the U.S. White House, Obama, and “Tiny Tim” Geithner, was a complete sideshow to draw attention from domestic financial policy that has carved a handsome crevasse into the foundation of our country, formerly referred to with common adjectives such as “strong”, “unwavering”, and “solvent”. The currency was pegged to our currency and if it were un-pegged it would effectively levy a major tax on all of the American families who have traded down from Whole Foods to Wall Mart as we learn to live on fewer incomes and more humiliating job titles. Why is that Rob? Well sports fans the equation is simple: Cheaper goods = Chinese goods. The single and solitary reason that President Obama and Treasury Secretary Geithner had any stance on the issue, was due to European pressure to hard-line China into a gentle revaluation to make German goods more able to compete. And now that the Euro is nearing 1 to 1 parity with the USD, it seems that all is well in Whoville…

Well not quite, because now that no one cares China has played it’s middle child syndrome role to a “t” and obeyed the oldest son’s sustained pleas. Sure the Yuan will revalue, but apparently it will be capped around +1.5% in 2010, and still managed by central China. So is a managed float really a float? Well is a bear Catholic? Not really… in fact they don’t really belong in the same sentence. Exactly.

So sure the second largest economy in the world suddenly feels the need to float it’s currency because it runs a major current account surplus and is ending it’s stimulus fueled domestic spending; which would force it’s currency higher, or in the case of a pegged currency, keep exports competitive but cause inflation to run rampant as prices increase and wages stay stagnant. Make no mistake, China may be a middle child but they made the de-peg decision for themselves and it means nothing to the economic recovery there or anywhere in the World. Still, we’ll probably see some self proclaimed credit groping out of Washington in the near future by idiots who have no idea how to spell current account surplus, much less the name of the intern who wrote the speech they delivered on the subject. (Of course, that’s only after they zip up from railing the heads of global Petroleum giants.) This is why markets rallied early as bulls shot blanks, meant to be live rounds, over the bow of U.S.S. Permabear but ended in negative territory.

This week we’re going to see some serious pain from the housing reports on Tuesday and Wednesday where economists expect a rise to 6.2 million and a fall to 400,000 annual units in the Existing and New Home sales reports, respectively.

We’re getting towards the middle of 2010, and eventually we’re going to have to hear something from Bernanke to prep markets for the inevitable day when the U.S. economy has to sell the xbox, leave the parents’ basement, and in the words of a wise man, “get a job sir!” Many of us forget what it means for the large financial institutions that manage our cash to actually pay interest on borrowed money, but the day will soon arrive. The same folks who approved all of the crappy mortgages that you didn’t pay, because you didn’t actually make what you wrote on the application, are going to have to start paying their own rent as well. Yes, the event I’m so jovially alluding to is the Fed Funds Rate announcement from the Federal Reserve, and we’ll hear it on Wednesday.

Otherwise this week is going to be in the hands of the traders. Lucky for you, you’re reading this so you’ll have a jump on that as well. Check out the chart below for a look at the S&P 500 (SPX)… THE ONE AND ONLY QUINTESSENTIAL CHART NECESSARY FOR ANY EQUITY TRADES UNTIL WE SAY SO!

As regular readers know, we endorsed “short” positions relative to the S&P 500 and Crude Oil and a “long” call on the VIX following our proprietary trades to open said positions on Friday, May 28. As you can tell from the chart above, we called the next leg down to new six month lows correctly, but sentiment reversed and we called for investors to exit positions before the next big leg up on June 10.

I’m going back on the line now to call a true and magnanimous move lower on the S&P 500. Sentiment is waning as the truly negative effects of a floating Renminbi are becoming realized ahead of two sure to be nasty reports this week on the U.S. housing market. The MACD histogram (blue bar chart below main chart) has peaked, RSI is back above 50 and out of “oversold” territory for the first time since May 1st, and the SPX has followed a string of anemic trading sessions with a hugely volatile Monday session that ultimately ended lower.

Normally, we like to use the “simple moving average” (SMA) to chart trendlines for resistance and support of prices, but due to a drastic sentiment shift we’re more comfortable with the “exponential moving average” (EMA) trendlines, as seen in Green (200 day) and Red (50 day) above. The 200 EMA and 50 EMA have both served as resistance  and are nearing a bearish cross amid the slew of other red flags facing the U.S. equity market.

Take 5 minutes and look into SDS (UltraShort S&P 500), DTO (UltraShort Crude Oil), and VXX (Short Term VIX). We like using www.stockcharts.com to chart these vehicles and suggest our readers use it as well. It’s free and has a lot of technical indicators for your convenience. (And no we’re not even getting a cut for that plug, it’s just a solid chart service…)

Stay vigilant and keep stops tight if you want to dabble at these levels… For the record, we are most certainly dabbling in those very names as of this morning. Be sure to stay current on all of our positions and trading moves with our free Twitter service that tracks DS Lead Analyst Robert Eberenz’s trades in real time by clicking on the follow button under the DS_Shoutbox tweets in the right sidebar…

Fingers on the trigger boys!

June 17, 2010 –

Download the full report below then share your thoughts. What do you agree with? Disagree with? Make us support our opinions!