Posted on 11/20/2002 5:32:48 PM PST by rohry
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Market WrapUp for the Week Week in Graphs Storm Watch Geopolitical News Energy Precious Metals Raw Materials Wednesday, November 20, 2002 Either, Or, but not Both Yields Are Rising Things are Going Up Companies that have overloaded themselves with debt have been tapping the bond market to raise cash instead of the equity markets. Qwest Communications today offered to pay investors twice as much interest to compensate them for swapping their old bonds for new bonds with new debt that is worth half as much as the old bonds. Even IBM is tapping the bond markets with a new $2 billion dollar offering. The bond business is one of the few areas on the Street where new offerings are bringing in money for investment bankers. What happens to the bond market is critical for not only debt-laden corporations, but also debt-strapped consumers taking on more debt to maintain living expenses. Debt levels keep rising each month as consumers supplement income with additional credit. With a falling dollar, a falling bond market, rising commodity prices and a negative stock market, this year the choice for policyholders is obvious: prop up the bond market because it is more critical to the economy. The Fed Chairman yesterday intimated that if they take the fed funds rate down to zero, they still have plenty of ammunition left. This "ammunition" is called monetization. The Fed chief said the Fed could start buying bonds all along the yield curve in an effort to pump up the money supply to control interest rates. The one caveat to this strategy is that you have to have willing lenders and borrowers. The limits to the Fed pumping the money supply have been the dearth in capital spending by business. This limitation also applies to consumers unless the Fed plans on offering homebuyers zero-percent loans with no money down and no payments for a year. Looking at this market today, stocks exploded to the upside on speculation that the profit picture has turned around. Hewlett-Packard reported profits that quadrupled from a year ago as a result of aggressive cost cutting. The company has laid off 17,900 workers. Analog Devices reported higher than expected earnings as net income rose to $34.8 million versus $24.2 million a year ago. The stock is down 37% this year as result of weak demand for PCs and telecommunications gear. Wall Street, which was downgrading the chip sector last week, was more bullish on the sector this week. Wall Street analysts also upgraded the financial sector. J.P. Morgan, the largest owner of derivatives rallied $1.77 to $23.72. Wall Street firms believe that Morgan is setting itself up for a spectacular turn around in profits next year. The stock is down 35% this year. Déjà vu The Somewhat Hidden Story Yesterdays Nyquist column was about a possible attack against the U.S. that has been planned for some time by Iraq and al-Qaeda. According to former congressional Task Force expert on terrorism Joseph Bodansky, Saddam Hussein and bin Laden have been planning an attack on the U.S. in an effort to provoke a conflict in the Middle East. The attacks on 9-11, according to Bodansky, were the warm up for bigger attacks to follow an attack on Iraq. It may be no coincidence that bin Laden shows up last week and makes new threats against the U.S. that will end up killing more Americans. The intelligence agencies have identified the voice on last weeks tape as bin Laden, so what he says should be taken seriously. This isnt a man that says things just to get his picture in the papers. As I wrote on Monday, there is now a circle of threats that is taking place. The U.S. is threatening Baghdad for good reason. In Bodansky's book, Bin Laden: the man who declared War On America, the moves made recently by Iraq and al-Qaeda may be designed to create a catalyst, a crisis situation that pits the U.S. against Iraq, Iraq against Israel, and al-Qaeda against the U.S. Recently on the BBC, Iraqs Deputy Prime Minister Tariq Aziz indicated the coming war would be devastating for Israel and the U.S. Bodansky believes that spectacular attacks coming from al-Qaeda are in the works and are timed to take place in the event of war with Iraq. As Jeff Nyquist points out in his article, bin Ladens message was one of justification, as if it was necessary to justify the horrible deeds that might be coming against the U.S. In Bodanskys new book, The High Cost of Peace he says that China, North Korea, and Iran are all working together against the United States. The goal is to evict the U.S. out of Asia and the Persian Gulf. The threats now coming from al-Qaeda state, Now it is your turn. You will be killed just as you kill, and will be bombed just as you bomb. The state of alert across the globe has never been higher. Police reinforcements have been strengthened in Germany, England and here in the U.S. According to Interpol, al-Qaeda is planning simultaneous attacks on there major continents. The intelligence networks know that something big is in the air. The nation's energy network is especially vulnerable. The Washington Times points out that intelligence agencies have detected surveillance by terrorist suspects at three oil facilities in Philadelphia, Corpus Christ, and Valdez Alaska. Last week U.S. Security officials said that U.S. oil refineries and oil loading port terminals are all vulnerable to attack. The FBIs national Infrastructure Protection Center has stated that al-Qaeda is looking at targeting U.S. economically. Vulnerable Pipeline U.S. oil and gas production is concentrated in three states-Alaska, Texas, and California. This is where a lot of oil and natural gas is produced and where the U.S. has a lot of refineries. In addition to refineries, the pipeline grid transports the bulk of energy. Pipelines are easy targets because of the length of the pipeline network. A drunken hunter who shot at the Alyeska pipeline in Alaska, shut it down for two days. Pipelines, loading ports, and most especially, refineries are now prime targets for al-Qaeda. A refinery costs billions and takes years to build. They operate 24 hours a day, employing up to 1000-2000 people. If attacked or destroyed, they would have the poetical for a great loss of life due to their explosions or the release of gas. As Neal Adams in his new book Oil and Terrorism has pointed out, attacking the countrys energy infrastructure would cause irreparable harm to our economy. It would be similar to a medieval siege. If a group intent on attack hits one major choke point plus a few easy U.S. targets, our lives will change quickly and dramatically for the worse with no hope of recovery in the ear future. As Adams points out, a disruption of our energy infrastructure is equivalent to a siege. When oil is used as a weapon:
We are addicted to oil in the U.S., consuming over 25 percent of the worlds oil. Fuel conservation is poor, energy stockpiles are inadequate, and as a result of environmentalism, the U.S. is self-restricted from increasing its own oil supplies. Lastly, we dont have systems in place to handle emergencies. The Strategic Petroleum Reserve (SPR) currently has about 53 days of supply. It takes 15 days to activate the reserve in the case of emergency. If oil supplies were disrupted here in the U.S., the withdrawal rate from the SPR is maxed at 4.1 million barrels a day. The potential shortfall between what the U.S. uses and imports a day could run as high as 1.9 million bopd. Any disruption of the worlds key oil choke points listed below, when coordinated with an attack on any other supplies of energy here in the U.S., would cause economic devastation here in the U.S. and elsewhere in the western world. This is what al-Qaeda may have in mind all along. The key choke points around the globe are listed in yesterdays WrapUp. They are once again the Strait of Hormuz, Suez Canal, the Bosporus Straits, and the Malacca Straits. In the U.S. key choke points is the Alyeska Pipeline in Alaska. The Panama Canal is also important to the U.S. "At Dawn We Slept" I wrote in Rogue Wave/Rogue Trader to unexpected events that are most likely to take the markets by surprise are a derivative mishap and a asymmetrical event. The recent events over the last week coming from bin-Laden, the FBI, Iraq and various intelligence networks tell me that the unexpected can now be expected. As if to remind us of this danger after Mr. Greenspan's speech yesterday warning of a possible derivative mishap today Fed Vice Chairman Roger Ferguson Jr. alluded to these potential risks. As quoted from his speech below: "However, some have raised concerns about the potential effects of the new risk-management techniques on the stability of the financial system as a whole. In effect, they argue that even if individual firms manage their risks prudently and effectively, the aggregate effect of their activities may be to make the financial system less stable. As I shall make clear, I believe the potential for the new instruments and techniques to produce instability has been overestimated. Nonetheless, the arguments deserve careful consideration, not only by policymakers but by financial industry professionals as well. If the arguments were correct, the new instruments and techniques would likely provide less protection than the firms using them assume. Dynamic Hedging of Mortgages One common strategy for hedging the interest rate risk of a mortgage-backed security is to short other fixed-income instruments, such as ten-year Treasury notes or interest rate swaps. But unlike most other fixed-income securities, mortgage-backed securities carry prepayment risk, which causes a change in the level of interest rates to change the amount of Treasuries or swaps one needs to short for an effective hedge. Specifically, when interest rates fall, prepayments increase, and as a result, the amount of ten-year Treasuries needed for the hedge falls. Thus, to reduce a short position in ten-year Treasuries, the hedger must buy ten-year Treasuries when their price is rising. This is the point where concern emerges that financial engineering may lead to higher market volatility. Such "dynamic" hedgers of mortgage-backed-securities have adopted a strategy that requires them to buy bonds when the price of bonds is rising. Conversely, they must sell bonds when the price of bonds is falling. Put another way, they will always be reinforcing the current direction of the market and never "leaning against the wind." Clearly, if these hedging-related transactions are large relative to the underlying market, the hedging strategy could make significant demands on market liquidity and lead to higher market volatility. The interest rate risk inherent in home mortgages is still present in mortgage-backed securities. The risk is simply transferred from the originator of the mortgages to an investor, who is presumably more willing and able to manage the risk. Nevertheless, even for the most able, managing the risk is a significant challenge. Herding Credit Derivatives In theory, the risk transfer associated with a bank's purchase of credit protection for its loan book should be effective. Instead of suffering a loss when a borrower defaults, the bank now suffers a loss only when both a borrower and its credit derivative counterparty default. The risk of simultaneous default is certainly much lower than the risk of a single default. Credit derivatives, while making markets more complete, are not a panacea and must be used wisely. Most credit derivatives require the counterparty to make a payment to the bank when a credit loss or default occurs. For this type of credit derivative, traditional credit risk may reappear as counterparty credit risk, that is, the risk that the bank's counterparty will not fulfill its agreement to compensate the bank in case of a credit loss. The price of a credit derivative should take into consideration the credit risk posed by the seller of the protection and the appropriate default correlation, though default correlations are difficult to estimate precisely. But some credit derivatives, such as credit-linked notes, are prefunded--the counterparty pays the principal up front and the repayment it receives at maturity is contingent on a credit event not occurring. Banks selling these funded credit derivatives have no counterparty credit risk at all. Conclusion The Fed has alerted us to the problem, but believes the potential for risk is very low. Why, then, are they making so many speeches making reference to it? Overseas Markets Japanese stocks advanced, lifting the Topix index from its lowest in almost two decades. Exporters such as Honda Motor Co. and Sony Corp. climbed after the yen fell against the dollar in New York trading. The Topix rose 1.7% to 830.82 and the Nikkei 225 Stock Average gained 1.1% to 8459.62. Bond Market |
This kind of target for terrorism would be annoying, but not anything so serious as WTC911.
To the tree huggers it would be worse! All that enviromental damage would be a world disaster! /sarcasm ends here
Jobless Program Will Not Be Extended
Maybe they will be hiring all those unemployed HPQ workers for the new Dept. of Homeland Secruity.
Richard W.
As leader gathered in the mediaeval city of cathedral spires, Bush used the centerpiece address of his five-day European trip to press them to "take up global responsibilities or choose to live in isolation from the challenges of our time."
While he did not directly accuse Europe's leaders of indifference toward Saddam, Bush's sternly worded appeal for action against terrorists and like-minded regimes was clearly aimed at the likes of Germany, which opposes military action in Iraq, and France, which forced the United States to water down a U.N. resolution to disarm Saddam. . . .The Bush administration has quietly contacted 50 countries, including Canada, Britain and Germany, to solicit contributions of troops and war material in the event Bush decides to use force, a senior administration official said Wednesday.
Complete article here:
Bush: NATO Should Be Firm on Iraq
Richard W.
I have an opinion, but not enought tinfoil in which to wrap it.
And he takes the business of protecting this nation damn serious IMHO
If you had ever seen, or worse lived in places like Gary, IN or Pittsburgh, PA in the 50,s and 60's, you might not be saying that. Only places I know where the air actually had texture and color to it. Anyway, regulations are only part of the manufacturing problem. The other part is cheap labor and we don't have it. Americans are funny that way. They want cheap goods and services that are produced here which is inconsistent with our high standard of living.
Richard W.
The ME without war and insability is like a day without sunshine. If it wasn't for their oil, I doubt that we'd care much about them. Iran is one of the bigger sponsors of terrorism but we aren't going after them because Saddam has more oil reserves and much easier to paint and give a face to an "evil doer". This war is a lock. UN inspections are a sham -- a dance for the sheep to believe that Saddam isn't complying. I just wish that they'd say it clear and simple right up front that way I wouldn't be so disappointed in GW's dishonesty.
Richard W.
The little inconvience used to literally kill people, shorten life spans and strip the paint right off cars. You want to go back to that?
Richard W.
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