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Archive for the ‘Gold’ Category

Keiser report No.19

If you want to really know what is going on then look at this video
covered in the video is Gold, IMF, UK deficit, George Soros, and many more stories

Is the Irish government involved in these kind of financial tools and were there advised by Goldman sacks?

Can they categorically state on the floor of the Dail that they have no exposure to any of these kinds of toxic synthetic financial tools?

Can they categorically state that none of the Irish financial instustions have any of these derivatives on their books and if they so state then why are they looking for traders in these kinds of derivatives at NAMA

see link http://thepressnet.com/2010/01/16/irish-banks-derivative-trading-losses/

It is my belief that not only are the banks up to their tonsils in these derivatives and are hiding huge losses, the Government are actively concealing such losses from the General public.

we may even be in the same situation as Greece ,because the government will not come out and deny that they have not used the services of Goldman Sacks in the setting up of such derivatives.

Quarterly Market Brief & Stock Pick

source www.wealthbuilder.ie

Quarterly Market Brief & Stock Pick

The American stock market is still working through a consolidation phase following the magnificent run up since March of last year. The Dow transports have presented us with a new Dow buy signal but so far the Industrials have unconfirmed. The Dow 30 needs to break the 10,700 range convincingly before I will advise student clients to re-enter the market through their virtual portfolios.



The reason for this is clear. There are a number of major issues playing on the market and accordingly risk is high. In particular persistent unemployment, rising inflation, anticipated year end interest rate hikes and the planned end of quantitative easing are all still being priced into the competitive mix. I want evidence that this risk has been adequately discounted. Once we start moving to higher highs on both Dow 20 and Dow 30 we know that this process is over. Until that occurs the markets will probably be range bound as they have been since October – December 2009. If the confirmation signal is mixed it may prove problematic for valuations.

In general the QQQQ’s, the ETF for the NASDAQ, have been doing particularly well with AAPL breaking to new all time highs. This movement augurs well for technology moving forward, provided of course that the overall market returns to its former bull trend.

The dollar continues to grow in strength but this has more to do with a weakening Euro than any powerful fundamental growth in the American economy. In other words the issue is not who is the strongest but who is the least weak. As long as this is the case it will play havoc with Gold and Silver valuations and I continue to advise clients to avoid these metals in their virtual trading.

April is earnings season and I am looking forward with great relish to see how valuations in the market hold up. A lot will soon be told and how Wall Street reacts will give great insight on how to successfully play the rest of 2010. So keep your seat belts fastened and your minds focused.

Stock Pick

McDonald’s Corporation: MCD

Stock Fundamentals:

Dividend Yield:        3.5%

Financial Strength:    A++

Return on Capital:    21%

Return on Shr. Equity:    30.5%

Earnings Growth:    10%


McDonald’s Corporation finished 2009 in superb fashion and is one of my favourite choices for students learning the pension strategy.

Robust comparable store sales, margin expansion, and favourable currency movements were behind much of the earnings per share advance.

The momentum will probably continue into much of 2010. Although the economic recovery is taking shape, consumers are still looking to save money, especially in the face of high unemployment. Consequently, McDonald’s value and convenience have enabled it increase market share.

The company’s short and long term prospects look solid, Its dividend is secure and financial strength impeccable.

(Pension Strategy)

Note:    Since last March our pension portfolio mix is up a whopping 55%, including dividends, year on year. When one considers that this is our most conservative portfolio in terms of risk you soon realise the power of the recent stock market bull run. While we do not expect a similar performance this year from the pension portfolio over the last decade this strategy has proven itself to be ideal for those seeking an average 10-15% annual return with minimal risk and minor time allocation.

It may be the right direction

 

Markets nosedived on Thursday when Barack Obama set out broad new measures on financial regulation. The most significant of them is banning deposit-taking banks from proprietary trading that is “unrelated to serving customers”. This activity has generated politically incendiary profits for banks and bonuses for bankers.

The timing was political: the president spoke on the day that Goldman Sachs announced fourth-quarter earnings of $4.95bn. Those of a more populist nature than Mr Obama – both on the left and on the right – will say that he comes late to the game.

The Recession is not over.  

Economists may see the recession as being over, but the man on the street does not. Roughly 60% of the public believes the recession still has a way to go, a NBC/Wall Street Journal poll reported last October. Even those who have not suffered know someone—a friend, a neighbor, a family member—who is being hurt. Two in three say the rally in the stock market has not changed their views.

The uptrend is broken.
— The uptrend in the S&P 500 Index was broken this week.  There is a lot of backpedaling in Washington, which was all too ready to claim success as the market was rising, but asked us to ignore the last two day decline.

The uptrend, which was technically “on the edge” since early December, has finally lost what is called trend support.  Look for much lower prices ahead.


Obama’s proposals strengthened Treasuries.

Treasuries headed for a third weekly gain as speculation that President Barack Obama’s bank- regulation plans will crimp economic growth weakened equities and added to demand for fixed-income securities.  The yield on the 10-year note reached its lowest in a month after the Obama administration yesterday proposed to limit the size and trading activities of financial institutions as a way to prevent another systemic meltdown. The Treasury is scheduled to sell $118 billion in notes next week.

Gold’s decline ready to resume?

Gold may decline as a rebounding dollar curbs demand for the metal as an alternative investment, a survey showed.

Twelve of 17 traders, investors and analysts surveyed by Bloomberg, or 71 percent, said bullion would fall next week. Four forecast higher prices and one was neutral. Gold for delivery in February was down 2.9 percent for this week at $1,097.70 an ounce at noon in New York yesterday.

The Nikkei turns south.

— Japanese stocks slumped the most since November after the U.S. proposed to reduce risk-taking at banks and concern mounted that China will raise interest rates to curb inflation. The Nikkei 225 fell 2.6 percent to close at 10,590.55 in Tokyo, almost erasing this year’s gain. The broader Topix index slid 1.6 percent to 940.94, with six times as many stocks declining as advancing. Both gauges lost the most since Nov. 27.

Shanghai isn’t immune to troubles, either.

Investors pulled $348 million from China equity funds last week, the biggest outflow in 18 weeks, on concern China’s moves to cool its economy will slow growth, according to EPFR Global.     Chinese stocks fell since the government this month started tightening monetary policy to curb record loan growth and prevent bubbles in the nation’s property and stock markets.  Technically, the Shanghai Index violated a potential Head and Shoulders formation, which calls for a large decline.  The bubble may be popped.

The dollar is showing bullish tendencies.

The dollar is poised for an upside breakout.  The “line in the sand” in red is a technical pattern called a neckline of an inverted Head and Shoulders pattern.  Tuesday’s election in Massachusetts is considered a change in the outlook of Washington to “dollar friendly.”    In the past, Washington talked a good talk, but their actions were quite destructive to the dollar.  The outlook may have reversed.

A safety net hides the risk of bank failure.

 — There is a fascinating phenomenon that occurs in the banking system when capital is running short.  At least, this was the case before the government decided to be the ultimate financial backup for the entire banking structure of our country.  Places like Washington Mutual or Countrywide were offering stellar rates on various savings vehicles only days before their demise.  How can this be?  Well for one, banks are allowed to chase public capital and realize that the public will put money into a bank so long as the FDIC backs up the bank.  Unfortunately, if the bank fails the FDIC only covers your principal, not interest.

The chart shows Gasoline prices dropping faster than at the pump.

 The Energy Information Agency weekly report suggests, “The U.S. average price for regular gasoline dropped a penny to $2.74 per gallon, $0.89 higher than the average a year ago. On a regional basis, price changes were mixed. The East Coast price of $2.75 per gallon moved up less than a penny, while the price in the Rocky Mountains jumped up four cents to $2.62 per gallon. The price on the Gulf Coast was essentially unchanged at $2.62 per gallon. Prices in the Midwest and on the West Coast dropped, moving down over a penny on the West Coast to $2.95 per gallon and dropping nearly five cents to $2.68 per gallon in the Midwest.”

Frigid weather keeps NatGas prices high.

The Energy Information Agency’s Natural Gas Weekly Update reports, “As the extreme cold left much of the lower 48 States this week, natural gas demand for space heating and as a fuel for electric power plants fell precipitously. Compared with the prior report week, U.S. natural gas average daily demand decreased about 25 percent from 106 Bcf to 79 Bcf, according to Bentek Energy LLC. Lower demand led to widespread declines in prices that were generally less than 5 percent.”

Joseph Stiglitz: ‘We’re More Strict With Our Poor Than With Our Banks’

During the economic turmoil of the last few years, Nobel Prize-winning economist and Columbia University professor “ersatz capitalism” in America. He has also repeatedly called for a second round of fiscal stimulus to support struggling Americans.  Read full article here.
Joseph Stiglitz has been one of the most strident and incisive critics of the historic bailout of the banking sector.

Never one to mince words, Stiglitz, who served as the Chief Economist at the World Bank and on President Clinton’s Council of Economic Advisers, has said the meltdown has resulted in a kind of

Is The U.S. Economy Being Tanked By Mistake or By Intent?

Should American bankers be let off the hook because they self-declare, before an investigational panel, that the failure of their newly invented risk swaps and other highly leveraged investment schemes was simply due to “mistakes”? Not malfeasance – just every-day mistakes? Bankers just fell asleep at the helm at a critical juncture in American history. Is that what we are being led to believe?

Oh well, it’s just 18 million American homes that now lay empty in the wake of unprecedented foreclosures, and the bankers have collected obscene bonuses for reckless lending of their depositors'(and taxpayers’) money. It’s like the captain and crew of a ship saying, not to worry, twenty-percent of the passengers were lost overboard, but this was due to unavoidable mistakes, and then being rewarded with bonuses when they reach port.

for more information follow link http://www.financialsense.com/fsu/editorials/cherniawski/2010/0122.html
source :by Anthony Cherniawski, The Practical Investor, LLC | Janury 22, 2010

Irish Banks Derivative trading losses

I believe that the banks Allied Irish Bank, Bank of Ireland and Anglo Irish Bank are all hopelessly exposed to huge losses as a result of Derivative trading

They should be asked to come clean and give categorical assurances on their Derivative Trading

Apart from the huge losses on their propriety /mortgages business.ie (subprime desaster),  there is another enormous source of losses from the same banks and that is their trading in the “BOND MARKET” again I believe that they have huge exposure here as well

These Banks have lent approximately 400 billion Euros and all of it borrowed from foreign banks, these funds would have had to have  “Hedging ” or have an insurance taken out ,in case of default !

So what kind of insurance did they get then if not Derivatives?

Derivatives typically have a large notional value. As such, there is the danger that their use could result in losses that the investor would be unable to compensate for. The possibility that this could lead to a chain reaction ensuing in an economic crisis, has been pointed out by famed investor Warren Buffett in Berkshire Hathaway‘s 2002 annual report. Buffett called them ‘financial weapons of mass destruction.’ The problem with derivatives is that they control an increasingly larger notional amount of assets and this may lead to distortions in the real capital and equities markets. Investors begin to look at the derivatives markets to make a decision to buy or sell securities and so what was originally meant to be a market to transfer risk now becomes a leading indicator.

These Derivatives were traded like confetti at a wedding and have about the same value now !

 If a bank goes bust, deals are just canceled and the residual amount is transferred to the legal department. Everyone can live with that. The burden is transferred from the agent (trading floor) to the principal (the shareholders). Because risk cannot be hedged properly by market professionals, it needs to be taken over by a succession of outsiders. If outsiders are not willing to play anymore (Derivative traders) or go bust, (AIG) then risk concentrates again inside the market, where it cannot be hedged and goes Bust.

So derivatives are only as safe as their underlying  risk is liquid and delta-hedgeable.

Brian Cowen was the Finance Minister who oversaw all this gambling activity at the major Irish banks and should be made accountable for the Total Destruction of the Irish financial industry 

Brian Lenihian  is colluding with the Greens to hide the catastrophic nature of the major Banks debts! Indeed I go so far as to say they may be kept in the dark as to the combined total losses which I estimate at Anglo Irish Bank to be somewhere north of 120 Billion Euros alone!

If I am wrong, then prove me wrong, by showing us the figures of Anglo Irish Bank .

Open the books let us see for ourselves

Don’t let anyone tell you that Anglo was nor dealing in Bonds or Derivative Products,

  I call on the Minister of Finance to come out on to the Dail floor and tell the Nation that the Irish Banks have no exposure to these Derivative Markets.

 But before you do I have a question for you!

Why was there this amendment made to the NAMA Legislation?

Page 15 of the draft NAMA legislation says that the definition of a “credit facility” includes instruments such as”a hedging or derivative facility.”  Section 56, starting on page 46, then defines eligible assets for purchase by NAMA as a range of different types of “credit facilities” as well as “any other class of bank asset (Derivatives) the acquisition of which, in the opinion of the Minister, is necessary for the purposes of this Act.”

Why is the National Treasury Management Agency actively looking to recruit a Derivatives Valuation Service Provider to NAMA?

And before you deny that look below!

Title: Appointment of a Derivatives Valuation Service Provider to NAMA
Published by: National Treasury Management Agency
Publication Date: 19/08/2009
Application Deadline:  
Notice Deadline Date: 08/09/2009
Notice Deadline Time: 16:00
Notice Type: Contract Notice
Has Documents: Yes
Abstract: On the direction of the Minister for Finance, the NTMA is seeking to appoint a Derivatives Valuation Service Provider to provide valuation services (the “Services”) in respect of derivatives positions which will be transferred to NAMA. It is envisaged that one firm will be appointed to conduct the valuation of derivative positions transferring from all of the participating institutions. The Service Provider appointed will be expected to: A. Interact closely with participating institutions in order to extract key data items agreed with NAMA and required in order to carry out the valuation of derivatives. B. Determine derivatives’ valuations based on market-accepted methodologies and market rates. Valuations will incorporate adjustments which will be based on the creditworthiness of the derivatives’ counterparties and which will be specified in guidelines agreed by NAMA with the service provider.

C. The Service Provider will be required to work closely with an Audit Co-ordinator appointed by NTMA. The Audit Co-ordinator will collate valuation data and conduct audits of valuations provided by the Service Provider.

D. The Service Provider will be expected to provide a certificate to NAMA on completion of all valuations which confirms that the valuation of derivatives has been carried out on the basis of a market-accepted methodology and assumptions provided by NAMA and represents a fair assessment of the market value of such derivatives.
CPV: 66000000.

Well Boys I can save you the trouble,

There is no way in hell that anybody can put a valuation on these toxic papers /contracts .

With the collapse of the AIG the effective market no longer exists

To prove my point

When Lehman Brothers declared bankruptcy, it triggered the transfer of large sums in the CDS market to insure buyers of Lehman credit default risk protection against all losses from that event. The sellers of these contracts received the Lehman debt and in return they were obligated to pay the contract buyers (the insured parties) enough money to make the buyers “whole” i.e. to give them their full investment in the bonds back as if they had never bought the Lehman bonds.

The auction for Lehman’s debt occurred on Friday afternoon and the final auction price was $8.62. This means that for each $100 initial par value, the debt is only worth $8.62. The sellers of Lehman CDSs (Derivative contracts) were obligated to pay the insured counterparties 91.375% of the bonds’ face value and, in return, they received the bonds.

Who had to foot the bill for Lehman CDSs (Derivative contracts) Why AIG of course!

There was a 92% loss on the stated value of the Lehman contracts and I would suspect that there in now no value on all other outstanding contracts .Why ,because there isn’t enough money printed all over the world to pay for all the contracts that have being entered into .

The perceived values of these Derivatives were based on “thrust” and not real true values!

  

What are Derivates????

Here is a short introduction I manages to find /compile for those of you that are interested in this the mother of all financial scams.

The current difficulties we are witnessing in the financial markets, is just one leg of a 3 legged stool that has come off .The next leg that is about to fall off is the Derivatives leg

and this is

Derivatives are contracts whose value is “derived” from the price of something else, typically, ‘cash market investments’ such as stocks, bonds, money market instruments or commodities.

An equity derivative, for example, might give you the right to buy a particular share at a stated price up to a given date. And in these circumstances the value of that right will be directly related to the price of the “underlying” share: if the share price moves up, then the right to buy at a fixed price becomes more valuable; if it moves down, the right to buy at a fixed price becomes less valuable.

1.

This is but one example of a particular kind of derivative contract. However, the close relationship between the value of a derivative contract and the value of the underlying asset is a common feature of all derivatives.

There are many different types of derivative contract, based on lot of different financial instruments; share prices, foreign exchange, interest rates, the difference between two different prices, or even derivatives of derivatives. The possible combinations of products are almost limitless. What then are derivatives used for?

Derivatives have two main uses: hedging and trading.

Suppose you have a position in a cash market which you want to maintain for whatever reason – it may be difficult to sell, or perhaps it forms part of your long term portfolio. However, you anticipate an adverse movement in its price. With a derivatives hedge it is possible to protect these assets from the fall in value you fear. Let’s see how.

As we have already said, the value of a derivative contract is related to the value of the underlying asset it relates to. Because of this, with derivatives, it is possible to establish a position (with the same exposure in terms of the value of the contract), which will fluctuate in value almost in parallel with an equivalent underlying position.

It is also possible with derivative contracts to go either long or short; in other words you can take an opposite position to the position you have in a particular underlying asset (or portfolio).

Hedging involves taking a temporary position in a derivatives contract(s), which is equal and opposite to your cash market position in order to protect the cash position against loss due to price fluctuations. As the price moves, loss is made on the underlying, whilst profit is made on the derivative position, the two canceling each other out.

Protecting assets which you hold from a fall in value by selling an equivalent number of derivative contracts, is known as a short hedge.

 2.

A long hedge, on the other hand, involves buying derivatives as a temporary substitute for buying the underlying at some future point. This is to lock in a buying price. In other words, you are protecting yourself against an increase in the underlying price between now and when you buy in the future.

Cash and derivatives markets move together more or less in parallel, but not always at the same time, or to the same extent. This introduces a certain amount of what is called hedge inefficiency, which may need to be adjusted. At other times, an imperfect hedge might be knowingly established, which leaves a small exposure to the underlying market depending on the risk appetite of the individual.

Trading

Derivatives trading, as opposed to hedging, means buying and selling a derivatives instrument in its own right, without, that is, a transaction in the underlying. For instance, a trader can get exposure to the US government bond market by buying and selling US government bond futures without ever dealing in the actual bonds themselves.

The aim when trading derivative contracts is profit, not protection.

The risks associated with derivatives are very different to those incurred in the cash markets. When buying a share for example – a long position – your maximum possible loss is the amount you originally paid for it.

Derivatives, on the other hand, exhibit a lot of different risk profiles. Some provide limited risk and unlimited upside potential.

For example, the risk of loss with a derivative contract which confers a right to buy a particular asset at a particular price is limited to the amount you have paid to hold that right. However, profit potential is unlimited.

Others display risk characteristics in which while your potential gain is limited, your losses are potentially unlimited. 

For example, if you sell a derivative contract which confers the right to buy a particular asset at a particular price, your profit is limited to the amount you receive for conferring that right, but, because you have to deliver that asset to the counterpart at expiry of the contract, your potential loss is unlimited.

Because of the wide range of risk profiles which derivative contracts exhibit, it is vital that you have a clear understanding of the risk/return characteristics of any derivative strategy before you execute it.

Leverage

Apart from the structure of the instrument itself, the source of a lot of the risk associated with derivative contracts stems from the fact that they are leveraged contracts.

Derivative products are said to be ‘leveraged’ because only a proportion of their total market exposure needs to be paid to open and maintain a position. This percentage of the total is called a ‘margin’ in futures markets; and a ‘premium’ in options markets. In this context, ‘leverage’ is the word used in all English-speaking derivative markets.

Because of leverage your market exposure with derivative contracts can be several times the cash you have placed on deposit as “margin” for the trade, or paid in the form of a premium.

Leverage, of course, can work both in your favor and against you. A derivative which gives you a market exposure of 10 times the funds placed on deposit is excellent if prices are moving in your favor, but not so good if they are moving against you, as losses will mount up very rapidly.

 3.

In other words, with leveraged positions, losses are magnified as well as gains.

Follow link to see advertisement

http://www.e-tenders.gov.ie/search/show/search_view.aspx?ID=AUG125404

What is the Bond Market??

 Bond marke

From Wikipedia,

 
 
 
 
 
 
 

The bond market (also known as the debt, credit, or fixed income market) is a financial market where participants buy and sell debt securities, usually in the form of bonds. As of 2006, the size of the international bond market is an estimated $45 trillion, of which the size of the outstanding U.S. bond market debt was $25.2 trillion.

Nearly all of the $923 billion average daily trading volume (as of early 2007) in the U.S. bond market takes place between broker-dealers and large institutions in a decentralized, over-the-counter (OTC) market. However, a small number of bonds, primarily corporate, are listed on exchanges.

References to the “bond market” usually refer to the government bond market, because of its size, liquidity, lack of credit risk and, therefore, sensitivity to interest rates. Because of the inverse relationship between bond valuation and interest rates, the bond market is often used to indicate changes in interest rates or the shape of the yield curve.

 

Market structure

Bond markets in most countries remain decentralized and lack common exchanges like stock, future and commodity markets. This has occurred, in part, because no two bond issues are exactly alike, and the number of different securities outstanding is far larger.

However, the New York Stock Exchange (NYSE) is the largest centralized bond market, representing mostly corporate bonds. The NYSE migrated from the Automated Bond System (ABS) to the NYSE Bonds trading system in April 2007 and expects the number of traded issues to increase from 1000 to 6000.[1]

 Types of bond markets

The Securities Industry and Financial Markets Association classifies the broader bond market into five specific bond markets.

Bond market participants

Bond market participants are similar to participants in most financial markets and are essentially either buyers (debt issuer) of funds or sellers (institution) of funds and often both.

Participants include:

Because of the specificity of individual bond issues, and the lack of liquidity in many smaller issues, the majority of outstanding bonds are held by institutions like pension funds, banks and mutual funds. In the United States, approximately 10% of the market is currently held by private individuals.

Bond market volatility

For market participants who own a bond, collect the coupon and hold it to maturity, market volatility is irrelevant; principal and interest are received according to a pre-determined schedule.

But participants who buy and sell bonds before maturity are exposed to many risks, most importantly changes in interest rates. When interest rates increase, the value of existing bonds fall, since new issues pay a higher yield. Likewise, when interest rates decrease, the value of existing bonds rise, since new issues pay a lower yield. This is the fundamental concept of bond market volatility: changes in bond prices are inverse to changes in interest rates. Fluctuating interest rates are part of a country’s monetary policy and bond market volatility is a response to expected monetary policy and economic changes.

Economists’ views of economic indicators versus actual released data contribute to market volatility. A tight consensus is generally reflected in bond prices and there is little price movement in the market after the release of “in-line” data. If the economic release differs from the consensus view the market usually undergoes rapid price movement as participants interpret the data. Uncertainty (as measured by a wide consensus) generally brings more volatility before and after an economic release. Economic releases vary in importance and impact depending on where the economy is in the business cycle.

Bond investments

Investment companies allow individual investors the ability to participate in the bond markets through bond funds, closed-end funds and unit-investment trusts. In 2006 total bond fund net inflows increased 97% from $30.8 billion in 2005 to $60.8 billion in 2006.[2] Exchange-traded funds (ETFs) are another alternative to trading or investing directly in a bond issue. These securities allow individual investors the ability to overcome large initial and incremental trading sizes.

Bond indices

Main article: Bond market index

A number of bond indices exist for the purposes of managing portfolios and measuring performance, similar to the S&P 500 or Russell Indexes for stocks. The most common American benchmarks are the Lehman Aggregate, Citigroup BIG and Merrill Lynch Domestic Master. Most indices are parts of families of broader indices that can be used to measure global bond portfolios, or may be further subdivided by maturity and/or sector for managing specialized portfol

Bond market
   
Bond · Debenture · Fixed income
   
Types of bonds by issuer Agency bond · Corporate bond (Senior debt, Subordinated debt) · Distressed debt · Emerging market debt · Government bond · Municipal bond · Sovereign bond
   
Types of bonds by payout Accrual bond · Auction rate security · Callable bond · Commercial paper · Convertible bond · Exchangeable bond · Fixed rate bond · Floating rate note · High-yield debt · Inflation-indexed bond · Inverse floating rate note · Perpetual bond · Puttable bond · Reverse convertible · Zero-coupon bond
   
Securitized Products Asset-backed security · Collateralized debt obligation · Collateralized mortgage obligation · Commercial mortgage-backed security · Mortgage-backed security
   
Derivatives Bond option · Credit derivative · Credit default swap · CLN
   
Pricing Accrued interest · Bond valuation · Clean price · Coupon · Day count convention · Dirty price · Maturity · Par value
   
Yield analysis Nominal yield · Current yield · Yield to maturity · Yield curve · Bond duration  · Bond convexity  · TED spread
   
Credit and spread analysis Credit analysis · Credit risk · Credit spread · Yield spread · Z-spread · Option adjusted spread
   
Interest rate models Short rate models · Rendleman-Bartter · Vasicek · Ho-Lee · Hull-White · Cox-Ingersoll-Ross · Chen · Heath-Jarrow-Morton · Black-Derman-Toy · Brace-Gatarek-Musiela
   
Organizations Commercial Mortgage Securities Association (CMSA) · International Capital Market Association (ICMA) · Securities Industry and Financial Markets Association (SIFMA)

Retrieved from “http://en.wikipedia.org/wiki/Bond_market

     See also Link

(http://www.investinginbonds.com/)

The Derivatives bubble

 

 


 

Derivatives have grew into a massive bubble, some USD
1,144 Trillion
by 2007. The new derivatives bubble was fuelled by five key economic and political trends:

  1. Sarbanes-Oxley increased corporate disclosures and government oversight
  2. Federal Reserve’s cheap money policies created the subprime-housing boom
  3. War budgets burdened the U.S. Treasury and future entitlements programs
  4. Trade deficits with China and others destroyed the value of the U.S. dollar
  5. Oil and commodity rich nations demanding equity payments rather than debt

In short, despite Buffett’s clear warnings,”
in my view, however, derivatives are financial weapons of mass destruction, carrying dangers that, while now latent, are potentially lethal.”

That warning was in Buffett’s 2002 letter to Berkshire shareholders. He saw a future that many others chose to ignore. On Buffett’s mind also was His acquisition of General Re four years earlier, about the time the Long-Term Capital Management hedge fund almost killed the global monetary system. How? This is crucial: LTCM nearly killed the system with a relatively small $5 billion trading loss. Peanuts compared with the hundreds of billions of dollars of subprime-credit write-offs now making Wall Street’s big shots look like amateurs. Buffett tried to sell off Gen Re’s derivatives group. No buyers. Unwinding it was costly, but led to his warning that derivatives are a “financial weapon of mass destruction.”


A massive new derivatives bubble is driving the domestic and global economies, a bubble that continues growing today parallel with the subprime-credit meltdown triggering a bear-recession. In five years comes from the most recent survey by the Bank of International Settlements, the world’s clearinghouse for central banks in Basel, Switzerland. The BIS is like the cashier’s window at a racetrack or casino, where you’d place a bet or cash in chips, except on a massive scale: BIS is where the U.S. settles trade imbalances with Saudi Arabia for all that oil we guzzle and gives China IOUs for the tainted drugs and lead-based toys we buy.

To grasp how significant this bubble is let’s look at these numbers

U.S. annual gross domestic product is about $15 trillion

  • U.S. money supply is also about $15 trillion
  • Current proposed U.S. federal budget is $3 trillion
    • U.S. government’s maximum legal debt is $9 trillion
    • U.S. mutual fund companies manage about $12 trillion
    • World’s GDPs for all nations is approximately $50 trillion
    • Unfunded Social Security and Medicare benefits $50 trillion to $65 trillion
    • Total value of the world’s real estate is estimated at about $75 trillion
    • Total value of world’s stock and bond markets is more than $100 trillion
    • BIS valuation of world’s derivatives back in 2002 was about $100 trillion
    • BIS 2007 valuation of the world’s derivatives is now a whopping $516 trillion

Moreover, the folks at http://www.bis.org/statistics/derstats.htm
BIS tell me their estimate of $516 trillion only includes “transactions in which a major private dealer (bank) is involved on at least one side of the transaction,” but doesn’t include private deals between two “non-reporting entities.” They did, however, add that their reporting central banks estimate that the coverage of the survey is around 95% on average.

Also, keep in mind that while the $516Trillion “notional” value (maximum in case of a meltdown) of the deals is a good measure of the market’s size, the 2007 BIS study notes that the $11 trillion “gross market values provides a more accurate measure of the scale of financial risk transfer taking place in derivatives markets.”


The fact is, derivatives have become the world’s biggest “black market,” exceeding the illicit traffic in stuff like arms, drugs, alcohol, gambling, cigarettes, stolen art and pirated movies. Why? Because like all black markets, derivatives are a perfect way of getting rich while avoiding taxes and government regulations. And in today’s slowdown, plus a volatile global market, Wall Street knows derivatives remain a lucrative business.

Recently Pimco’s bond fund king Bill Gross said “What we are witnessing is essentially the breakdown of our modern-day banking system, a complex of leveraged lending so hard to understand that Federal Reserve Chairman Ben Bernanke required a face-to-face refresher course from hedge fund managers in mid-August.” In short, not only Warren Buffett, but Bond King Bill Gross, our Fed Chairman Ben Bernanke, the Treasury Secretary Henry Paulson and the rest of America’s leaders can’t “figure out” the world’s USD .1,144 Trillion $ derivatives.(see below)

BIS is primarily a records-keeper, a toothless tiger that merely collects data giving a legitimacy and false sense of security to this chaotic “shadow banking system” that has become the world’s biggest “black market?”

Here are some of the types of derivatives that are out there.

Have you ever heard of them?

Chances are your local bank manager hasn’t either!

But I bet his Head office has a few slick traders that are trading these on a Daly bases and I’m

Pretty sure that they must be in it up to their necks!

  • Foreign exchange contracts
  • Listed credit derivatives
  • OTC ( over the counter)
  • Forwards and forex swaps
  •  Currency swaps
  • Options on Interest rate contracts
  • Forward rate agreements
  • Interest rate swaps
  • Options on
    Equity-linked contracts
  • Forwards and swaps
  • Options on Gold & Other commodities
  • Credit default swaps
  • Single-name instruments
  • Multi-name instruments
  • Unallocated instruments
  • CDS (credit default swaps)
    CDSs are derivatives whose cost is determined using financial models and by arbitrage relationships with other credit market instruments such as loans and bonds from the same ‘Reference Entity’ to which the CDS contract refers

     

  • ABS (asset-backed securities)
  • MBS (mortgage-backed securities)
  • OTC derivatives
  • Futures

    To name but a few!

  •  According to various distinguished sources including the Bank for International Settlements (BIS) in Basel, Switzerland — the central bankers’ bank — the amount of outstanding derivatives worldwide as of December 2007 crossed USD 1.144 Quadrillion, ie, USD 1,144 Trillion. The main categories of the USD 1.144 Quadrillion derivatives market were the following:

  • 1. Listed credit derivatives stood at USD 548 trillion;

    2. The Over-The-Counter (OTC) derivatives stood in notional or face value at USD 596 trillion and included:

    a. Interest Rate Derivatives at about USD 393+ trillion;

    b. Credit Default Swaps at about USD 58+ trillion;

    c. Foreign Exchange Derivatives at about USD 56+ trillion;

    d. Commodity Derivatives at about USD 9 trillion;

    e. Equity Linked Derivatives at about USD 8.5 trillion; and

    f. Unallocated Derivatives at about USD 71+ trillion.

 

For a more indebt information on the latest actual derivative figures please follow this link

It makes very interesting reading

Link  http://www.bis.org/statistics/derstats.htm

Source http://www.elliottwavetechnology.com

Tom Foremski at http://www.siliconvalleywatcher.com/mt/archives/2008/10/the_size_of_der.php

Russian-Roulette

 

Let’s consider a well publicized recent sale of Russian gold bullion to itself:

I noticed this article to-day by Rob Kirby

And it is a very worrying development indeed!


Russia sells gold to itself

December 14, 2009 3:47pm by Emma Saunders

The Russian central bank data table appended below is the World Gold Council. It states that Russia possesses 607 [actually, now officially 640 tonnes with the addition of the recent 30-ish tonne purchase from itself] metric tonnes of gold bullion.
will spend $1bn next week, buying 30 metric tons of gold from Gokhran, the state repository. Gokhran had planned to sell 20-50 MT on the open market, but cancelled after news of the sale leaked. The sale would have helped plug Russia’s budget deficit, and, apparently, purchase some diamonds from state-run miner Alrosa….

Does this not strike you as being odd?

In case you missed it, Russia announced that they are selling gold to THEMSELVES!?!?

The source of the gold

The revelation that Russia is “selling gold to itself” and lack of acknowledgment that Gokhran exists – is a MAJOR omission by the World Gold Council in their aggregate gold bullion data.


++Additionally, the World Gold Council also reports that as of October 2009, gold exchange-traded funds held 1,750 tonnes of gold for private and institutional investors.

The World Gold Council’s data keeper is GFMS Ltd. The GFMS web site makes the following claim:

GFMS is the world’s foremost precious metals consultancy, specializing in research into the global gold, silver, platinum and palladium markets.

GFMS is based in London, UK, but has representation in Australia, India, China, Germany, France, Spain and Russia, and a vast range of contacts and associates across the world.

Our research team of fifteen full-time analysts comprises qualified and experienced economists and geologists; while two consultants contribute insights on important regional markets.

Executive Chairman Philip Klapwijk and CEO Paul Walker appear regularly at international conferences and seminars, and their articles have been widely published. All analysts travel regularly and extensively to stay in touch with GFMS’ unrivalled network of contacts and sources of information around the world.

With 15 full-time analysts, two consultants and “representation” in Russia – how is that GFMS [and by extension the World Gold Council] can omit such a large hoard as stored at Gokhran and materially misreport the nature of Russian gold reserves? They didn’t even mention the existence of Gokhran in a footnote.

Gold professionals who have been inside Gokhran [Russian] State bullion depositories have provided me with personal accounts of this bullion depository. They report scenes reminiscent of the movie Gold Finger – on steroids – literally countless metric tonnes of neatly stacked gold bullion.

So, a better question might be, what else – regarding GOLD – has GFMS and the World Gold Council not reported or omitted?

Getting A Beat On Where the World’s Physical Gold Is Stored

It is generally accepted that for the entirety of mankind’s existence on this planet – the earth’s crust has yielded roughly 160 thousand metric tonnes of gold. The World Gold Council / GFMS identifies where roughly 32 thousand tonnes of that total are located.

We might add to what’s listed above, the following:

“No one knows exactly how much gold has been passed from generation to generation and is now stashed in safe deposit boxes across India. But bullion analysts estimate Indian families are sitting on about 15,000 tonnes of gold worth more than $US550 billion ($A600 billion).”

Then, if we conservatively assume that the rest of the world has as much as India stored away in safe deposit boxes – that’s another 15,000 metric tonnes.

Therefore by using reported World Gold Council / GFMS data plus some very conservative assumptions, we can approximately account for 62,000 metric tonnes of the world’s roughly 160,000 metric tonnes ever mined.

By the process of elimination and adjusting for the 62 thousand metric tonnes referenced above, there is a residual 98 thousand metric tonnes of physical gold bullion; the location of which cannot be readily identified.

The very nature of World Gold Council / GFMS data may be characterized as being static and don’t tend to change much year-over-year. This demonstrates that the owners of gold bullion DO NOT GENERALLY
TRADE THEIR PHYSICAL STASHES
– they sit on them!

The Conundrum That “IS” the London Bullion Market Association [LBMA]

The LBMA is considered to be the world’s foremost physical gold market. Here is their data on the number of ounces of gold “transferred” DAILY – by month, year-over-year – from Nov. 08 – Nov. 09:

Month Millions of Ounces Transferred / Day
Dec 08 17.5
Jan 09 18.8
Feb 09 23.8
Mar 09 22.2
Apr 09 20.5
May 09 21.9
Jun 09 20.5
Jul 09 17.7
Aug 09 16.4
Sep 09 20.6
Oct 09 20.8
Nov 09 21.5
Total 242.2

There are 22 business days per month, so the LBMA claims to have traded 151,046 metric tonnes of gold in the most recent 12 month period.

242.2
x
22 = 5,328 million physical ozs or 151,046 metric tonnes

The LBMA reports that they have “transferred” or traded 151,046 metric tonnes of gold – a commodity that when folks possess it, they are demonstrably inclined NOT TO trade it. Using another bench mark, annual global mine production is in the neighborhood of 2,500 metric tonnes. The LBMA claims to have sold last year’s global mine supply over 60 times in 12 months.

The LBMA claims to do this year-in, year-out.

This implies that ANY LBMA physical gold stocks are HIGHLY LEVERAGED through trade in paper gold

London is but one exchange where gold trades. Others include N.Y., Tokyo, Dubai, Bombay and different points in China. Don’t forget, physical ounces traded on ANY of these exchanges are additional ounces that London cannot be trading.

The reality is that every physical ounce of gold reported to be in the vaults of the LBMA and exchanges in general, is sold tens and perhaps more than a hundred times over in paper form. This paper selling suppresses what would otherwise be the freemarket gold price.

The Russians are known to be very shrewd and calculating. It makes one wonder whether the Russian announcement of a sale of gold bullion – TO THEMSELVES – might not have been a “tell” signaling their intention to not only withhold physical metal from the market and ensure that paper promises of delivery of real metal are honored.

Could it be that the Russians are really signaling that the assignment of false, arbitrary values [using futures / derivatives] to finite resources will no longer be tolerated?

If so, the real leverage is in owning physical gold bullion – not the paper promises.

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