Posts Tagged ‘US government debt’

CDS And A U.S. Default: What’s The Point?

CDS And A U.S. Default: What’s The Point?

Courtesy of Tom Lindmark at But Then What

John Carney has a really smart post over at Clusterstock regarding the pricing of credit default swaps for Campbell Soup, JPMorgan and the US government. In case you haven’t been following all of this, the cost to insure credit risk on Campbell Soup and this country are essentially the same while the cost to insure JPMorgan risk is approximately three times as much.

Bloomberg makes an argument that this makes no sense since Morgan is essentially a GSE. In the event of failure, strike that word failure, in the event of a problem with Morgan we can all count on the government coming once more to the barricades. True, but as Carney points out this misses some important elements of risk:

Let’s run through some risks that Reilly seems to be overlooking when it comes to JP Morgan’s debt.

We know that the government isn’t going to let JP Morgan go bankrupt. But we definitely do not know what form future bailouts will take. Maybe creditors will be protected in a future bailout. Maybe they won’t. Keep in mind that in the recent bailouts of the auto sector forced bondholders to take deep haircuts.

We also know that the failure of JP Morgan would almost certainly mean that the financial system was in great distress. In that case, anyone who sold insurance on JP Morgan would likewise probably be distressed, making paying off the insurance more costly. It seems what’s happening here is that sellers of swaps are smartly taking into account this risk.

That kind of risk doesn’t apply to isolated failures due to corruption or embezzling. If Campbell’s went down, the credit markets wouldn’t suddenly freeze up. Those who sold the credit default swaps wouldn’t necessarily have trouble getting the liquidity they need to fund the obligations.

Overlooking these kinds of risks is a problem for Reilly’s argument. It’s hard enough to establish you know how to price risk better than the market. And it’s pretty much impossible when you over look important risks.

I particularly like the way John gets to the real point about letting the markets sort the risks out, but I still don’t quite understand the concept of writing CDS on US government debt.

It seems to me this is a pointless…
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China cuts holding of U.S. Treasury securities

China cuts holding of U.S. Treasury securities

China - national geographic photoCourtesy of Edward Harrison at Credit Writedowns

The conventional wisdom is that the US is beholden to foreign agents as they hold much of the US government debt.  In this view, if these agents sell their securities, interest rates in America should increase as demand for US public debt evaporates.

Now comes evidence that China is indeed selling.  The BBC reports.

China reduced its holdings of US government debt by the largest margin in nearly nine years in June, according to data from the US Treasury.

China holds more US government debt than any other country and cut its holdings of US securities by more that 3% in June, said the BBC’s Chris Hogg…

The sales were made as the US treasury secretary was visiting Beijing to try to reassure the Chinese that their investment in his country’s government debt is safe…

In 2008, the Chinese increased their holdings in US debt by 52% over 12 months.

"China has said it would like to establish an alternative to the US dollar as the world’s favoured currency for foreign exchange reserves," said our correspondent.

"So far there is no evidence that there is a suitable alternative. But these figures suggest they are exploring ways to diversify their investments where they can."

But, as you have probably noticed, interest rates have not increased appreciably.  What gives?  Two ideas:

  1. The Chinese aren’t selling because there aren’t enough alternatives.  Just yesterday, there was a Bloomberg article indicating the Chinese are still very much interested in buying US public debt. They may even being moving out on the long-end of the curve.
  2. The premise that interest rates will increase is false.  If the US economy slows, this automatically decreases the current account deficit, meaning the US becomes less dependent on foreign sources to buy Treasury securities.  Increased private sector savings suggests more domestic sources of Treasury funding are now available.

On the whole, I would expect interest rates to rise as government budget deficits increase.  However, I have just presented you two reasons why this might not be so.

 


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Zero Hedge

$100 Oil Is A Distinct Possibility

Courtesy of ZeroHedge. View original post here.

Authored by Nick Cunningham via Oilprice.com,

An oil price spike is starting to look increasingly possible, with a rerun of 2008 not entirely out of the question, according to a new report.

The outages from...



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ValueWalk

Kase Learning Shorting Conference: Limited-Time Offer

By Jacob Wolinsky. Originally published at ValueWalk.

Shorting Conference: Limited-time offer for my newsletter subscribers!

We had an incredibly positive response to our inaugural Kase Learning Shorting Conference back in May. Many attendees capitalized on some of the fantastic actionable short ideas presented that day.

On Monday, December 3, we’ll be hosting our second Shorting Conference at the NY Athletic Club. We’re also going to be livestreaming the entire day if you cannot attend in person.

...



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Phil's Favorites

10 Years and 10 Lessons from the Financial Crisis

 

10 Years and 10 Lessons from the Financial Crisis

Courtesy of Cullen Roche, Pragmatic Capitalism 

10 years. It feels like yesterday. Then again, sometimes when I look at the economic data it feels like it never even happened. Whether you feel like the crisis is a distant memory or still lingering I think we can all agree that these kinds of big events serve as important lessons for understanding how we will navigate the future. So, 10 years later, here are 10 big lessons I take away from the financial crisis:

  1. Fear wins in the short-term and loses in the long-term. This is probably the number one lesson from the crisis. Human beings have been making tremendous progress for thousands of years. The fina...


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Kimble Charting Solutions

Canadian Dollar Attempting Bullish Breakout

Courtesy of Chris Kimble.

CLICK ON CHART TO ENLARGE

Since 2011, the Canadian Dollar has been hit hard, losing nearly a third of its value, while creating a series of lower highs and lower lows.

After declining nearly 30% into the lows of 2016, the Canadian Dollar has been attempting to change its long-term trend as it has created a series of higher lows inside of rising channel (2).

Over the past few months, rising support has been tested several times. Currently, it is attempting to break above falling resistance at (3), inside of the rising cha...



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Insider Scoop

10 Biggest Price Target Changes For Tuesday

Courtesy of Benzinga.

  • Morgan Stanley raised NuVasive, Inc. (NASDAQ: NUVA) price target from $55 to $77. NuVasive shares closed at $68.40 on Monday.
  • Citigroup cut the price target for Lam Research Corporation (NASDAQ: LRCX) from $216 to $177. Lam Research shares closed at $154.74 on Monday.
  • Stifel Nicolaus boosted the price target on Alexion Pharmaceuticals, Inc. (NASDAQ: ALXN) from $130 to $136. Alexion Pharmaceuticals shares closed at $128.51 on Monday Monday.
  • ...


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Chart School

Weekly Market Recap Sep 23, 2018

Courtesy of Blain.

More saber rattling between China and the U.S. did little to distract the market.

On Tuesday, President Donald Trump reiterated his hard-line stance on China during a news conference with Polish President Andrzej Duda and said the U.S. had “no choice” but to levy another $267 billion in duties on China. That would come on top of announced tariffs on about $200 billion in Chinese goods announced late Monday.  China responded with tariffs of 5% to 10% on $60 billion worth of U.S. products that will take effect Sept. 24, and said it may introduce more measures if the U.S. goes ahead with higher tariffs.

This seems to be the prevailing thought process, ...



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Members' Corner

Why obvious lies still make good propaganda

 

This is very good; it's about "firehosing", a type of propaganda, and how it works.

Why obvious lies still make good propaganda

A 2016 report described Russian propaganda as:
• high in volume
• rapid, continuous and repetitive
• having no commitment to objective reality
• lacking consistency

...

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Digital Currencies

Mania to Mania

 

Mania to Mania

Courtesy of 

“Russell rarely played the stock market and had little investing experience when he put around $120,000 into bitcoin in November 2017.”

This comes from a CNN money article, Bitcoin crash: This man lost his savings when cryptocurrencies plunged. From January 2017 through the peak in early 2018, Ethereum gained 16,915%.

Any time you have something go vertical, you just know that some peopl...



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Biotech

Gene-editing technique CRISPR identifies dangerous breast cancer mutations

Reminder: Pharmboy is available to chat with Members, comments are found below each post.

 

Gene-editing technique CRISPR identifies dangerous breast cancer mutations

Breast cancer type 1 (BRCA1) is a human tumor suppressor gene, found in all humans. Its protein, also called by the synonym BRCA1, is responsible for repairing DNA. ibreakstock/Shutterstock.com

By Jay Shendure, University of Washington; Greg Findlay, ...



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Mapping The Market

Mistakes were Made. (And, Yes, by Me.)

Via Jean-Luc:

Famed investor reflecting on his mistakes:

Mistakes were Made. (And, Yes, by Me.)

One that stands out for me:

Instead of focusing on how value factors in general did in identifying attractive stocks, I rushed to proclaim price-to-sales the winner. That was, until it wasn’t. I guess there’s a reason for the proclamation “The king is dead, long live the king” when a monarchy changes hands. As we continued to update the book, price-to-sales was no longer the “best” single value factor, replaced by others, depending upon the time frames examined. I had also become a lot more sophisticated in my analysis—thanks to criticism of my earlier work—and realized that everything, including factors, moves in and out of favor, depending upon the market environment. I also realized...



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OpTrader

Swing trading portfolio - week of September 11th, 2017

Reminder: OpTrader is available to chat with Members, comments are found below each post.

 

This post is for all our live virtual trade ideas and daily comments. Please click on "comments" below to follow our live discussion. All of our current  trades are listed in the spreadsheet below, with entry price (1/2 in and All in), and exit prices (1/3 out, 2/3 out, and All out).

We also indicate our stop, which is most of the time the "5 day moving average". All trades, unless indicated, are front-month ATM options. 

Please feel free to participate in the discussion and ask any questions you might have about this virtual portfolio, by clicking on the "comments" link right below.

To learn more about the swing trading virtual portfolio (strategy, performance, FAQ, etc.), please click here ...



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Promotions

Free eBook - "My Top Strategies for 2017"

 

 

Here's a free ebook for you to check out! 

Phil has a chapter in a newly-released eBook that we think you’ll enjoy.

In My Top Strategies for 2017, Phil's chapter is Secret Santa’s Inflation Hedges for 2017.

This chapter isn’t about risk or leverage. Phil present a few smart, practical ideas you can use as a hedge against inflation as well as hedging strategies designed to assist you in staying ahead of the markets.

Some other great content in this free eBook includes:

 

·       How 2017 Will Affect Oil, the US Dollar and the European Union

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All About Trends

Mid-Day Update

Reminder: Harlan is available to chat with Members, comments are found below each post.

Click here for the full report.




To learn more, sign up for David's free newsletter and receive the free report from All About Trends - "How To Outperform 90% Of Wall Street With Just $500 A Week." Tell David PSW sent you. - Ilene...

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About Phil:

Philip R. Davis is a founder Phil's Stock World, a stock and options trading site that teaches the art of options trading to newcomers and devises advanced strategies for expert traders...

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