Monday, March 23, 2009

Speculation driving CPO prices up & UMNO Rally.

Speculation is driving the price of crude palm oil (CPO), which can be used for biofuels higher, as the price of crude oil is now hovering above US$50 per barrel.

Crude oil, according to Bloomberg, is set for a fifth week of advances. CPO rose RM45 to settle at RM2,030 per tonne Monday.

CPO prices have gone up despite expectations that palm oil exports could be lower in the first 20 days of March compared to the same period in February.

This has come about due to a farmers’ strike in Argentina that is threatening soybean exports and the delay by India of a previously announced removal of a 20% import duty on soybean oil.

A palm oil trader told that CPO price at RM2,100 was just speculative trading due to the rise in the price of crude oil.

U.S. Treasury Announces $1 Trillion Toxic-Debt Plan

By Rebecca Christie and Brendan Murray
The U.S. Treasury announced a plan aimed at financing as much as $1 trillion in purchases of distressed assets to help a financial system that is “still working against recovery.”

The Public-Private Investment Program will use $75 billion to $100 billion from the $700 billion Troubled Asset Relief Program enacted last year, giving the government “purchasing power” of $500 billion, the Treasury said today in a statement in Washington. The program may double “over time,” it said.

Treasury Secretary Timothy Geithner is deploying an array of tactics to remove the devalued loans and securities from banks’ balance sheets so they can start lending again and help resuscitate the economy. Because the program depends on private investors stepping up, it may be weeks or months before it’s clear whether the approach will work.

“You will start to see this buying up the assets” shortly after private asset managers are chosen by May, Austan Goolsbee, a member of the White House Council of Economic Advisers, said in an interview with Bloomberg Television.

Today’s provides more details on an initial strategy laid out by Geithner last month, which caused a slump in stocks because it lacked an explanation of how the effort would work.

Futures on the Standard & Poor’s 500 Stock Index rose 2.2 percent to 780.60 as of 8:58 a.m. in New York. The S&P 500 has slumped 12 percent since Geithner’s Feb. 10 outline of the Obama administration’s plans. Yields on benchmark 10-year Treasury notes were little changed at 2.63 percent.

The Treasury, Federal Reserve and Federal Deposit Insurance Corp. will provide capital and financing for private investors to buy illiquid loans and securities held by banks, according to today’s statement.

“This approach is superior to the alternatives of either hoping for banks to gradually work these assets off their books or of the government purchasing the assets directly,” the Treasury statement said. “Simply hoping for banks to work legacy assets off over time risks prolonging a financial crisis, as in the case of the Japanese experience.”

Half of the Treasury’s funds will go to a “Legacy Loans Program” that will be overseen by the FDIC. The Treasury would provide half of the capital going to purchase a pool of loans from banks, with private fund managers putting up the rest. The FDIC will then guarantee financing for the investors, up to a maximum of six times the capital, or equity, provided.


The FDIC, which has extensive experience disposing of devalued loans from taking over failed banks, will hold auctions for the pools of loans, which will be controlled and managed by the private investors with oversight by the FDIC.

A “broad array of investors are expected to participate in the Legacy Loans Program,” the Treasury said, encouraging insurance companies, pension funds and even individual investors to join in.

The second half of the Treasury’s contribution will go to the “Legacy Securities Program.” The objective of the initiative is to generate prices for securities backed by mortgages that are no longer traded because investors have little confidence about the underlying value of the home loans.

Under this program, the Fed will expand an existing facility that provides financing for investor purchases of asset-backed securities. The Term Asset-Backed Securities Loan Program will be broadened to take on assets such as residential and commercial mortgage-backed securities that were originally rated AAA and sold by private banks.

Asset Managers

The Treasury will also approve as many as five asset managers “with a demonstrated track record of purchasing legacy assets” that will buy the securities.

The managers will be given time to raise private capital and receive matching funds from the Treasury. They will also be able to get “senior debt” from the Treasury of 50 percent to as much as 100 percent of the fund’s capital.

Adding to the pressure on the administration is an unprecedented wave of populist anger over the rescue thus far, following the revelation that employees of American International Group Inc. got $165 million in bonuses after the insurer received taxpayer funds.

On March 19, the House voted 328-93 to impose a 90 percent tax on employee bonuses paid by companies such as AIG and Fannie Mae that received more than $5 billion in taxpayer assistance. The Senate is considering similar legislation.

Congressional Concern

The backlash on Capitol Hill means private firms may think twice about taking part in Geithner’s public-private partnership, even though government financing will limit their risk and increase the potential of earning profits, David Kotok, chairman and chief investment officer of Cumberland Advisors Inc., in Vineland, New Jersey, said before today’s release.

Goolsbee expressed confidence that private investors will step up.

“The private sector will compete to be partners with the government,” Goolsbee predicted. “I don’t believe they should expect to be treated the same way as a deadbeat type of institution like AIG or Fannie Mae. Those couple of businesses are only in existence because the government has bailed them out.”

Sunday, March 22, 2009

Why the USD may not fall much more

Much of the financial media is hurriedly writing the obituary of the USD, with some declaring its reserve currency status as dead. In reality, though, the Fed has simply followed the lead of the BOE, BOJ, and SNB, all of which have already embarked on QE. For what it's worth, relative to GDP, the BOJ is pursuing an even larger program of government debt purchases than the Fed. And yet the USD weakened against these currencies. The relative value argument suggests that if all these countries are printing money to roughly the same extent, their relative exchange rates should not be severely affected. What of those currencies that have not embraced QE? Here the relative value argument might have some merit, except that those that have not yet done QE, namely the ECB, are likely to head down that road soon. Bundesbank Pres. Weber today said as much when he noted that interest rate cuts alone will not end the financial crisis, implicitly referring to 'unconventional easing', which is ECB-speak for QE. There appears to be a philosophical opposition within the ECB to cutting rates below 1%, suggesting their next rate cut to 1.00% on April 2 may be accompanied by a QE announcement.

On the relative growth outlook basis, the potential stimulatory effects of QE on the US housing sector and consumption in general point to an earlier US recovery than otherwise might happen. In comparison, the outlook for Europe, Japan and the UK continues to deteriorate. On the interest rate front, the Fed's QE easing announcement saw the yield differential to other government benchmark bonds move about 50 bps against the USD, equivalent to a surprise 50 bp rate cut, for example. Such a move in yield differentials roughly translates to about 4.5/5.5% move in currency values, which is how much the USD fell this week. But those yield differentials have already begun to narrow back in favor of the USD, and if markets begin pricing in QE in the Eurozone, the differential will narrow further in favor of the USD.

Lastly, the sharp drop in the USD sent commodity prices soaring. Extreme USD weakness can lead to runaway commodity prices, as we experienced in the 1H 2008. The net result of that was a sharp drop in personal consumption, which tipped the US into recession by 4Q 2008. Policymakers have hopefully learned that lesson, though you can never be sure. What I'm suggesting here is that the Treasury and Fed, having thrown everything they can at the current crisis, are very likely to intervene to prevent the USD from weakening significantly further. It would be pointless to provide so much economic stimulus only to have a falling USD drive up commodity prices and have food and energy inflation erase any boost to non-basic personal consumption. In addition, the ECB certainly does not want to see the EUR appreciate significantly, while the UK has lauded a weaker GBP, as have Australia and NZ with their currencies. And Japan never minds a weaker JPY. As such, a strong case exists for coordinated G7 intervention to support the USD. The trouble with intervention is that events usually have to reach an extreme before intervention happens, but I'm optimistic a new age of global coordination and policy pro-activeness may see a response sooner than later.

On balance, then, I do not expect to see the current USD slump continue and I remain exceptionally cautious on the commodity rally. The global recession is ongoing and commodity demand has not miraculously detached from the global outlook. In fact, the Baltic Dry Bulk index, a proxy for global trade, has fallen for the last seven sessions in a row, suggesting newfound pessimism on the global outlook, not the other way around.

Friday saw a number of significant short-term reversal patterns in many of the USD pairs. EUR/USD made a potential double top at 1.3730/40; GBP/USD made a similar double top at 1.4590/00; USD/JPY held key trend line support and the 100-day moving average at 93.40/50; USD/CHF made a possible double bottom at 1.1150/60. From the Ichimoku charts, the USD index tested below the bottom of its Ichimoku cloud, only to close above and bounce on Friday. EUR/USD made the equivalent test above its cloud, and even managed to close above it on Thursday, only to drop back into the cloud on Friday, a potential rejection signal. Having argued that the USD was set to weaken on improving risk sentiment since late February, I'm now prepared to reverse and look to use current extreme USD weakness to position for a rebound in the buck.

The Fed adopts QE and the USD gets hurt

The Fed surprised markets by announcing another massive expansion of its balance sheet in process known as quantitative easing (QE), which is frequently referred to as 'printing money.' In addition to prior asset-purchase programs, the Fed announced plans to buy an additional $750 bio of GSE mortgage-backed assets, between $100-200 bio in other government agency back debt, and $300 bio in US Treasuries, for a total of up to $1.25 trillion. Certainly the amounts are staggering and indeed the moves will result in a significant expansion of the money supply.

Why did the Fed do this now and what are the aims of the plan? Many market analysts, myself included, expected the Fed to wait for the implementation of the TALF (Term Asset-backed securities Lending Facility), which is designed to restore consumer lending (e.g. car loans and credit cards), before deciding whether to embark on QE. So the timing of the Fed move was initially interpreted as a sign that the economy is much worse off than thought; as conspiracy theorists would say: 'The Fed knows something we don't.' More likely, the Fed decided that delay posed a greater risk and that bold action now may forestall even worse deterioration in the economy. In tandem with Treasury efforts to stabilize the banking sector, the Fed is aiming to drive down consumer lending interest rates, having exhausted traditional interest rate cuts.

Buying US Treasuries sends Treasury prices higher/yields lower, dropping the interest rate used to set all manner of consumer and business lending, from mortgages and credit cards, to working capital loans. The expectation is that lower lending rates will support consumer spending, particularly when it comes to mortgage refinancing. The move is intended to help stabilize the housing sector by allowing troubled homeowners to refinance at more affordable rates, breaking the cycle of defaults and foreclosures, leading to lower home prices, which lead to more defaults and foreclosures. More solvent homeowners may also take advantage of lower rates to refinance, generating monthly savings that may translate into higher personal spending. In short, the hope is that lower borrowing costs will generate higher consumption.

The reality is a tad more complicated. Just because banks and financial firms may be more willing to lend and borrowing costs may fall does not mean that consumer borrowing demand will materialize. Many homeowners are underwater or otherwise unable to refinance, and many households are still retrenching from prior excessive debt levels. But the Fed/Treasury efforts are addressing the only two elements of the credit equation which they can directly influence: the cost and availability of credit. The demand side of the equation will depend on how consumers respond, which remains uncertain. In short, the Fed's QE amounts to a massive effort at providing an environment supportive of future consumption, which provides more than a glimmer of hope of arresting the current downturn.

The effects on the USD have been decidedly negative, at least in the short run. As I'll suggest shortly, though, QE need not be a death knell for the greenback. The USD was sold on the proposition that a massive increase in the money supply lessens the value of every dollar out there. That supply-demand logic works in the case of hard commodities, but does not look as solid in currencies, which are relative-value instruments. When you sell USD, you're buying some other currency, and at the moment alternatives to the USD are not especially appealing. Also, part of the extreme USD decline stems from the 'surprise' element of the announcement. While the Fed had telegraphed it may undertake Treasury buying after its December meeting, the timing still caught many off-guard, as I suggested above. In cases of surprise information flows hitting the market, excessive reactions are the norm. Once cooler heads prevail and the information is better digested, the initial reaction is frequently reversed. However, the risk in the current situation is that many institutional investors were caught flat-footed and are still overly long USD, potentially leading to a more drawn out USD selling phase.