Thursday, January 13, 2011

JPMorgan’s Dimon: More Cities Will Go Bankrupt

JPMorgan Chase & Co. Chief Executive Officer Jamie Dimon said he expects more U.S. municipalities to declare bankruptcy and urged caution when investing in the $2.9 trillion public-debt market.

“There have been six or seven municipal bankruptcies already,” Dimon, 54, said yesterday at his company’s annual healthcare conference in San Francisco. “I think unfortunately you will see more.”

Cities including Detroit and Harrisburg, Pennsylvania, have raised the prospect of bankruptcy. Still, the number of filings has declined. Five municipal entities sought protection in 2010 compared with 10 in 2009, according to data compiled by James Spiotto, head of the bankruptcy practice at Chapman & Cutler, a Chicago law firm. The biggest last year was a South Carolina toll road with more than $300 million in debt, he said.

U.S. states will contend with about $140 billion in deficits in the next fiscal year, the Center on Budget and Policy Priorities, a Washington research group, said in a report issued Dec. 16. Edmund “Ted” Kelly, CEO of Liberty Mutual Holding Co., said yesterday that his firm had reduced holdings of municipal debt in Connecticut, California and Illinois. (more)

VIX Volatility Still on Hold

A funny thing happened on the way to a January volatility spike. Absolutely nothing.

In the chart above the brown line is the 30-day SPDR S&P 500 (NYSE: SPY) implied volatility (IV) versus 20-day historic volatility (blue). The CBOE Volatility Index (VIX) more or less tracks 30 day IV here, printing modestly higher because it gives greater weight to out-of-the-money (OTM) puts than this IV number does. At least we assume that’s the case, the IV formula is proprietary.

The IV sits around 15, which of course sounds quite low. Remember the rule of 16? If you divide any volatility reading by 16, it tells you the percentage range we expect to see in the underlying each day. So a 16 volatility implies that on an average day we will see a 1% range in the SPY*. That’s all of 1.30 points, not much when you consider it can gap that much fairly simply.

Look at that graph again. A volatility of 15 does not look so cheap when you compare it to historical volatility of about six. That’s the pace SPY itself has moved over the past 20 trading days. Clearly if you net sold SPY options 20 days ago and simply traded stock against it you would have done quite well.

But alas, that only tells you how it would have worked; it speaks nothing of going forward. And VIX itself does not even tell the full story. VIX futures expect the VIX itself to shoot higher. For example, April VIX trades at 23. Even factoring in that 23 VIX overstates implied volatility for at-the-money (ATM) options, suggesting that the market expects actual volatility in SPY/SPX to more than triple over the next three or so months. That’s enormous optimism (for options) or enormous pessimism (for stocks). (more)

Goldman: S&P 500 to Gain 18 Percent in ‘Decent’ Year for Bonds

Goldman Sachs Group Inc., Wall Street’s most profitable investment bank, predicts the Standard & Poor’s 500 Index will rally 18 percent to 1,500 by the end of December and Treasurys will have a “decent” year.

“We have a very out-of-consensus view for how much the economy can grow before this growth generates higher inflation and interest rates,” Jan Hatzius, the company’s New York-based chief U.S. economist, wrote in a report he distributed by e-mail today. “If we’re right, the likely implication is a decent environment for the Treasury bond market and a very good environment for the equity market.”

The S&P 500 has climbed 12 percent over the past year, rising to the highest level since Lehman Brothers Holdings Inc.’s bankruptcy in September 2008 as Fed Chairman Ben S. Bernanke pumps $600 billion into the economy and President Barack Obama extends tax cuts. An advance to 1,500 would result in a 19 percent gain for the year. The index has only risen that much twice in the past decade, gaining 23 percent in 2009 and 26 percent in 2003.

U.S. three-month bill rates will average 0.2 percent in 2011 and 0.3 percent in 2012, the report said, compared with 0.14 percent today. Ten-year Treasury yields will rise to 3.75 percent by Dec. 31 from 3.35 percent now, according to Goldman, which is one of the 18 primary dealers that are authorized to trade directly with the Federal Reserve. (more)

McAlvany Weekly Commentary

European Disaster Sets the Tone for Early 2011

A Look At This Week’s Show:
- Gold Market: Linear behavior now, exponential behavior later
- Euro Crisis: Issing’s misgivings and the ECB’s bond market intervention
- Social Change: Can you adapt and thrive?

How To Find Bottoms For The SP500, Dow, Nasdaq & Russell 2000

It was a great first week in the market for 2011. Volume picked up as traders slowly return from holidays focusing on the markets again. Looking forward volume should continue to expand because there will be more traders in front of their terminals excited to see what type of money they can make in 2011.

Let's jump into what happened last week. On Friday the market generated a short term trading signals to go long SP500, Dow, Nasdaq or Russell 2k. This trade seemed to fall on a perfect day because if we look back over last year's weird trading characteristics typically if you were to buy on a Friday and hold a position until Monday it would have netted you a profit. Well on Friday the market had a very nice intraday pullback to a level which there was strong support so we bought in with a small position.

Let's jump into the charts for a visual of what I am talking about�

SPY - Daily Chart & Moving Averages

This chart shows the big picture. Currently we are in a strong uptrend and looking to buy significant pullbacks to key levels of support, and that is exactly what we had last week.

The market pulled back to a level which has support: (more)

Bob Chapman on Radio Liberty 01-10-11

Bob Chapman wrote in the International Forecaster of the 8th Jan 2011 about the problems caused by the FED which is the root of most problems :"...Many professionals are looking for answers as to why the US economy and finances are in the state they are in. We have been pointing out for ten years that the Fed is the problem, but those who realize this are afraid to speak the truth. They won’t have their jobs long if they do speak out. Low or zero interest rates may have helped government and big business, but it has not helped small business and the unemployed. Are we to believe that the Fed had nothing to do with the real estate collapse? Of course they did – they planned and executed it. The zero interest rate policy still in place has created more grievous damage than any other aspect of economic causes...."

Housing Market Slips Into Depression Territory

As the economy revs back to life, with signs of hiring on the horizon, the housing market is being left behind like Macaulay Culkin in “Home Alone.”

Macaulay Culkin
Macaulay Culkin

In the past few years, we’ve all been careful to choose our words carefully, not calling it a recession until it fit the technical definition and avoiding any inappropriate use of the “D” word — Depression.

Things were bad but the broader economy never reached Depression territory. The housing market, on the other hand, just crossed that threshold.

Home values have fallen 26 percent since their peak in June 2006, worse than the 25.9-percent decline seen during the Depression years between 1928 and 1933, Zillow reported.

November marked the 53rd consecutive month (4 ½ years) that home values have fallen. (more)

Highly Anticipated USDA Report Calls For More Big Gains In Agriculture Prices

If you were wise enough to invest in farmland, like Marc Faber, you've made a very good decision as prices look likely to continue to rise, according to the U.S. Department of Agriculture.

The result is that farmers will now be increasing farmland to grow crops like wheat, soy beans, and corn.

Already, wheat acreage is rising, with winter planting coming in higher than expected. The demand for soy beans has yet to be caught up with, and with projections for next years harvest down 15%. Corn supplies left unsold are at their lowest levels in 4 years.

The breakdown on prices, from the U.S. Department of Agriculture report, with current futures charts: read the report here

Facebook: Two toxic bubbles in one

Goldman Sachs' US$2 billion deal for Facebook, valuing the social networking site at $50 billion, combines the worst elements of the 1997-2000 and 2004-07 bubbles.

It sets a grossly excessive valuation on an Internet company with modest revenues and prospects. It also involves an investment bank structuring a complex deal to maximize its own fees, while driving a truck through two major elements of financial services regulation.

Add a third element, that it places a company controlling personal information on 500 million users in close business partnership with a Russian billionaire with a criminal record and you can see the deal is truly groundbreaking. It should also raise important red flags about current market conditions.

General market opinion is that the US stock market is not currently overvalued because it has not broken through its 2007 highs. I would argue that US fiscal and monetary policies are unsustainable, making the foundations of the economy far more fragile than in 2007. (more)

Fed prints another $600bn to keep US recovery on track

The latest round of quantitative easing (QE) comes on top of the $1.7 trillion already completed and is intended "to promote a stronger pace of recovery", the Fed said. It is changing tack, however, buying US government bonds instead of corporate debt and mortgage-backed securities. Existing QE will be rolled over, but also recycled into treasuries.

By the end of June, the Fed expects to have bought $850bn to $900bn of treasuries – roughly $110bn a month, $75bn of which will be additional QE. The Fed also kept inerest rates at 0pc to 0.25pc, where they have been since December 2008.

Yields on 10-year US government bonds dipped 0.06 percentage points to 2.53pc as the markets digested the news, which was largely as expected. Lower yields feed back into the economy by reducing borrowing rates for companies and households, thereby stimulating investment and spending.

The dollar fell against most currencies due to QE, raising fears of a retaliatotry strike by the Bank of Japan on Friday. (more)