Archive for the ‘Greed & Fear’ Category

George Soros on European Fiscal & Banking Crisis and EU Summit on June 28-29, 2012

Monday, June 25th, 2012

Here I present key take-aways from George Soros’ in depth Bloomberg interview on the current European fiscal and banking crisis, Angela Merkel, the Spanish bailout, and Greece leaving the Eurozone.

The video is also below:

Banking & Fiscal Issues

  • “There is an interrelated problem of the banking system and the excessive risk premium on sovereign debt – they are Siamese twins, tied together and you have to tackle both.”
  • Soros summarizes the forthcoming Eurozone Summit ‘fiasco’ as fatal if the fiscal disagreements are not resolved in 3 days.
  • There is no union without a transfer.
  • Europe needs banking union.
    • Germany will only succumb if Italy and Spain really push it to the edge (Germany can live in the present situation; the others cannot)
    • Europe needs a fiscal means of strengthening growth through Treasury type entity
      • What is needed is a European fiscal authority that will be composed of the finance ministers, but would be in charge of the various rescue mechanisms, the European Stability Mechanism, and would combine issuing treasury bills.
        • Those treasury bills would yield 1% or less and that would be the relief that those countries need in order to finance their debt.
        • Bill would be sold on a competitive basis.
        • Right now there are something like over €700bn euros are kept on deposit at the European Central Bank earning a 0.25% because the interbank market has broken down, so then you have €700bn of capital that would be very happy to earn 0.75% instead of 0.25%, and the treasury bills by being truly riskless and guaranteed by the entire community, would yield in current conditions less than 1%.
        • Governments should start a European unemployment scheme, paid on a European level instead of national level.
        • Soros’ solutions, however, are unlikely to prove tenable in the short-term as he notes “Merkel has emerged as a strong leader”, but “unfortunately, she has been leading Europe in the wrong direction”.
          • “Euro bonds are not possible because Germany would not consider euro bonds until there is a political union, and it should come at the end of the process not at the beginning.
          • This would be a temporary measure, limited both in time and in size, and thereby it could be authorized according to the German constitution as long as the Bundestag approves it, so it could be legal under the German constitution and under the existing treaties.
          • The political will by Germany to put it into effect and that would create a level playing field so that Italy and Spain could actually refinance debt on reasonable terms.

Scenario Discussion

  • LTRO would be less effective now
  • At 6%, 7% of Italy’s GDP goes towards paying interest, which is completely unsustainable
  • Spain may need a full bailout if summit is not successful
    • Financial markets have the ability to push countries into default
    • Because Spain cannot print money itself
    • Even if we manage to avoid, let’s say an ‘accident’ similar to what you had in 2008 with the bankruptcy of Lehman Brothers, the euro system that would emerge would actually perpetuate the divergence between creditors and debtors and would create a Europe which is very different from open society.
    • It would transform it into a hierarchical system where the division between creditors and debtors would become permanent…It would lead to Germany being in permanent domination.
      • It would become like a German empire, and the periphery would become permanently depressed areas.

On Greece

  • Greece will leave the Eurozone
    • It’s very hard to see how Greece can actually meet the conditions that have been set for Greece, and the Germans are determined not to modify those conditions seriously, so medium term risk
    • Greece leaving the euro zone is now a real expectation, and this is what is necessary to strengthen the rest of the euro zone, since Greece can’t print money
    • By printing money, a country can devalue the currency and people can lose money by buying devalued debt, but there is no danger of default.
      • The fact that the individual members don’t now control the right to print money has created this situation.
      • A European country that could actually default. and that is the risk that the financial markets price into the market and that is why say Italian ten-year bonds yield 6% whereas British 10-year bonds yield only 1.25%.
  • That difference is due to the fact that these countries have surrendered their right to print their own money and they can be pushed into default by speculation in the financial markets.

On Angela Merkel

  • Angela Merkel has been leading Europe in the wrong direction. I think she is acting in good faith and that is what makes the whole situation so tragic and that is a big problem that we have in financial markets generally – she is supporting a false idea, a false ideology, a false interpretation which is reinforced by reality.
  • In other words, Merkel’s method works for a while until it stops working, and that is what is called a financial bubble
    • Financial bubbles look very good while they are being formed and everyone believes in it and then it turns out to be unsustainable…
    • The European Union could turn out to have been a bubble of this kind unless we realize there is this problem and we solve it and the solution is there.
    • I think everybody can see it, all we need to do is act on it, and put on a united front, and I think that if the rest of  Europe is united, I think that Germany will actually recognize it and adjust to it.

On Investing

  • Stay in cash
  • German yields are too low
  • If summit turns out well, purchase industrial shares, but avoid everything else (consumer, banks)

Conclusion: We are facing conditions reminiscent to the 1930s because of policy mistakes, forgetting what we should have learned from John Maynard Keynes.

Fantastic Michael Burry UCLA Commencement Speech on U.S. & European Financial Crises

Sunday, June 24th, 2012

Below you can view an excellent speech by Dr. Michael Burry, who at one point shorted over $8 billion of subprime mortgage backed securities before the U.S. credit crisis. Dr. Burry openly shares his experiences on divorce, luck, finance, and the future of college graduates at UCLA. As an alumnus of UCLA, Dr. Burry shows that passion, curiosity, foresight, and “working smart” rather than “working hard” can be handsomely rewarded. Michael Burry’s hedge fund, Scion Capital ultimately recorded returns of 489.34% (net of fees and expenses) between its November 1, 2000 inception and June 2008. The S&P 500 returned just over two percent over the same period. Other than Dr. Burry’s subprime short, I am not sure of his performance from 2000 through 2005. Enjoy.

[youtube]http://www.youtube.com/watch?v=1CLhqjOzoyE&feature=share[/youtube]

Burry left work as a Stanford Hospital neurology resident to become a full-time investor and start his own hedge fund. He had already developed a reputation as an investor by demonstrating astounding success in “value investing,” which he wrote about on a message board beginning in 1996. He was so successful with his stock picks that he attracted the interest of such companies as Vanguard, White Mountains Insurance Group and such prominent investors as Joel Greenblatt.
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After shutting down his web site in November 2000, Burry started Scion Capital, funded by a small inheritance and loans from his family. The company was named after The Scions of Shannara, a favorite childhood book. Burry quickly earned extraordinary profits for his investors. According to Lewis, “in his first full year, 2001, the S&P 500 fell 11.88 percent. Scion was up 55 percent. The next year, the S&P 500 fell again, by 22.1 percent, and yet Scion was up again: 16 percent. The next year, 2003, the stock market finally turned around and rose 28.69 percent, but Mike Burry beat it again—his investments rose by 50 percent. By the end of 2004, Mike Burry was managing $600 million and turning money away.”
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In 2005, he veered from value investing to focus on the subprime market. Through his analysis of mortgage lending practices in 2003 and 2004, he correctly forecast a bubble would collapse as early as 2007. Burry’s research on the runaway values of residential real estate convinced him that subprime mortgages, especially those with “teaser” rates, and the bonds based on these mortgages would begin losing value when the original rates reset, often in as little as two years after initiation. This conclusion led Burry to short the market by persuading Goldman Sachs to sell him credit default swaps against subprime deals he saw as vulnerable. This analysis proved correct, and Burry profited accordingly. Ironically Burry’s since said, “I don’t go out looking for good shorts. I’m spending my time looking for good longs. I shorted mortgages because I had to. Every bit of logic I had led me to this trade and I had to do it”.
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Though he suffered an investor revolt before his predictions came true, he earned a personal profit of $100 million and a profit for his remaining investors of more than $700 million. Scion Capital ultimately recorded returns of 489.34 percent (net of fees and expenses) between its November 1, 2000 inception and June 2008. The S&P 500 returned just over two percent over the same period.
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According to his website, he liquidated his credit default swap short positions by April 2008 and did not benefit from the taxpayer-funded bailouts of 2008 and 2009.[13] He subsequently liquidated his company to focus on his personal investment portfolio.
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In a April 3, 2010, op-ed for the New York Times, Burry argued that anyone who studied the financial markets carefully in 2003, 2004, and 2005 could have recognized the growing risk in the subprime markets. He faulted federal regulators for failing to listen to warnings from outside a closed circle of advisors.
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In April 2011, he suggests: (1) Open a bank account in Canada, (2) there are opportunities in small cap stocks, and (3) blue chips may be less attractive than their price-earnings suggests.

Burry left work as a Stanford Hospital neurology resident to become a full-time investor and start his own hedge fund. He had already developed a reputation as an investor by demonstrating astounding success in “value investing,” which he wrote about on a message board beginning in 1996. He was so successful with his stock picks that he attracted the interest of such companies as Vanguard, White Mountains Insurance Group and such prominent investors as Joel Greenblatt.After shutting down his web site in November 2000, Burry started Scion Capital, funded by a small inheritance and loans from his family. The company was named after The Scions of Shannara, a favorite childhood book.


Burry quickly earned extraordinary profits for his investors. According to Lewis, “in his first full year, 2001, the S&P 500 fell 11.88 percent. Scion was up 55 percent. The next year, the S&P 500 fell again, by 22.1 percent, and yet Scion was up again: 16 percent. The next year, 2003, the stock market finally turned around and rose 28.69 percent, but Mike Burry beat it again—his investments rose by 50 percent. By the end of 2004, Mike Burry was managing $600 million and turning money away.” In 2005, he veered from value investing to focus on the subprime market. Through his analysis of mortgage lending practices in 2003 and 2004, he correctly forecast a bubble would collapse as early as 2007.

Burry’s research on the runaway values of residential real estate convinced him that subprime mortgages, especially those with “teaser” rates, and the bonds based on these mortgages would begin losing value when the original rates reset, often in as little as two years after initiation. This conclusion led Burry to short the market by persuading Goldman Sachs to sell him credit default swaps against subprime deals he saw as vulnerable. This analysis proved correct, and Burry profited accordingly. Ironically Burry’s since said, “I don’t go out looking for good shorts. I’m spending my time looking for good longs. I shorted mortgages because I had to. Every bit of logic I had led me to this trade and I had to do it”. Though he suffered an investor revolt before his predictions came true, he earned a personal profit of $100 million and a profit for his remaining investors of more than $700 million. Scion Capital ultimately recorded returns of 489.34 percent (net of fees and expenses) between its November 1, 2000 inception and June 2008.

The S&P 500 returned just over two percent over the same period. According to his website, he liquidated his credit default swap short positions by April 2008 and did not benefit from the taxpayer-funded bailouts of 2008 and 2009. He subsequently liquidated his company to focus on his personal investment portfolio. In a April 3, 2010, op-ed for the New York Times, Burry argued that anyone who studied the financial markets carefully in 2003, 2004, and 2005 could have recognized the growing risk in the subprime markets. He faulted federal regulators for failing to listen to warnings from outside a closed circle of advisors. In April 2011, he suggests: (1) Open a bank account in Canada, (2) there are opportunities in small cap stocks, and (3) blue chips may be less attractive than their price-earnings suggests.

Italian 10 year Yield Rises Above 7.4%, Country Theoretically Unable to Fund Itself at These Levels (Bankrupt), Prime Minister Offers to Resign

Wednesday, November 9th, 2011

November 9, 2011: After Italian Prime Minister Berlusconi offered to resign yesterday, the credit markets almost sighed in relief. But today, markets were punched in the jugular as LCH.Clearnet increased margin requirements on Italian bonds. Margins were raised because 10 year credit spread exceeded 450 bps, the same point at which Clearnet raised margins on the bonds of other peripheral countries in Europe.
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The pressure is certainly on the ECB and Italy now to find a solution to this debt crisis, as Italy is too large to be bailout out. Yesterday, known for his sex scandals and political corruption, Prime Minister Berlusconi was pressured to leave his post because Italian yields were creeping above 6.5%. According to the Times, “In the end, it was not the sex scandals, the corruption trials against him or even a loss of popular consensus that appeared to end Mr. Berlusconi’s 17 years as a dominant figure in Italian political life. It was, instead, the pressure of the markets — which drove Italy’s borrowing costs to record highs — and the European Union, which could not risk his dragging down the euro and with it the world economy. On Wednesday, yields on 10-year Italian government bonds — the price demanded by investors to loan Italy money — edged above 7 percent, the highest level since the adoption of the euro 10 years ago and close to levels that have required other euro zone countries to seek bailouts.”
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Currently, the Italian 10 year yield has exceeded 7.4%, and the 2 year note has risen more than 10 year rate. At this point, Italy is theoretically unable to fund itself and could theoretically be bankrupt. The margin call on bonds due between seven and 10 years was raised by five percentage points to 11.65%, for bonds due between 10 years and 15 years it was raised by five percentage points to 11.80%, while for bonds that mature in 15 years and 30 years the margin call was raised by five percentage points to 20%. The changes come into effect Nov. 9 and will have an impact on margin calls from Nov. 10, the French arm of LCH.Clearnet said.

Chinese Debtors Offer Fingers to Loan Sharks

Monday, November 7th, 2011

November 7, 2011: Loan sharks have been a problem in the Western World for centuries. From traditional Vegas sharks to payday lenders, the poor have been subject to atrocities by creditors for years, despite government intervention. The situation today is no better for China’s small entrepreneurs. Many businessmen have been forced into bankruptcy recently as local credit has been tightening. Not able to withstand public humiliation, some choose suicide, while others find themselves under the burden of creditors and “tattooed thugs.”

According to a recent Businessweek article, Zhong Mong, a Chinese pharmacy owner, offered his fingers to a group of private lenders because if they repossessed one of his stores, it would be impossible to pay back another 130 small local creditors, many of whom are local friends and neighbors. Zhong had borrowed 30 million yuan or $4.7 million at rates as high as 7% per month to expand his franchise!

Similar to the U.S., small and medium sized businesses account for 80% of jobs in greater China, but these businesses always find it difficult to obtain local bank financing. Other forms of financing are often much more expensive, leading to complications and often default. Since April, at least 90 CEOs have fled Zhong’s city of Wenzhou for the same reason. The 400,000 businesses in the city are facing higher costs because of inflation and soaring black market interest rates because of the sudden credit squeeze. Imagine how fast a business must grow to pay Zhong’s 7% monthly interest…


Black market interest rates have doubled this year, growing faster than local profits. Informal lending has given rise to real estate developers driving prices ever higher, leading to more inflation. Similar problems have also surfaced in the industrial province of Guangdong, to the South.

Wenzhou is home to 9 million Chinese and produces 90% of China’s eyeglasses and lighters. Many residents of Wenzhou take out bank loans at 1% per month and lend out money at 2%+ per month, pocketing the difference. China’s official lending rate is only 6.56%, compared to rates between 20-40% that small businesses are charged here.

Local suicides have prompted Premier Wen to visit the city and pledge to raise bonds to help finance smaller businesses, even if NPLs are higher. Unfortunately for Zhong, it may be too late. He will probably lose his business and will be hired as a paid manager. He and his wife will probably have nothing left.

Intralinks (IL) Falls 7.5%+ on No News, Possible Insider Trading Alert!

Tuesday, June 7th, 2011

After trading flat for days, Intralinks just lost over 7.5% on no news.  For those of you who aren’t familiar with the name, “IntraLinks, formerly TA Indigo Holding Corporation, is a global provider of software-as-a-service (SaaS) solutions for securely managing content, exchanging critical business information and collaborating within and among organizations.”  The company serves financial institutions host data rooms, etc.  Now the company performed well in 2010, missed guidance slightly this spring, and traded down 30%.  Over the past two weeks, it performed well enough to stay in a band around $20.00/share.

Through the last four down days, IL’s stock moved with the market, staying about $20, then gave up almost 10% of its value during the first half of the trading day.  The last time I saw a move like this on no relevant news was for Interoil Corp. in 2007, right before an insider trading investigation (which was eventually resolved, and the stock performed well):

InterOil has ‘undiscovered resources’ and calling a field ‘world class’ isn’t the same thing as actually knowing how much of a natural resource exists there. InterOil is capitalizing on the confusion between undiscovered resources (which are unknown quantities) and discovered resources. And the victims are the investors who falsely believe that InterOil has known quantities of natural gas, when in fact they do not.

Sam Antar, says InterOil’s stock is boosted by a manipulation scheme involving InterOil, John Thomas Financial, and Clarion Finanz AG:

I believe that InterOil with the assistance of Clarion Finanz concealed John Thomas Financial’s involvement in helping it raise $95 million through a private placement of convertible debt securities. Clarion Finanz acted as a buffer between InterOil and John Thomas Financial to help InterOil hide John Thomas Financial’s role in raising funds. Afterwards, InterOil filed false and misleading reports with the Securities and Exchange Commission in an effort to conceal John Thomas Financial’s role in helping the company raise $95 million in convertible debt.

Courtesy of Lawrence Delevigne

Bank Stocks Beware: Bernanke & Fed Support Increasing Capital Requirements

Tuesday, June 7th, 2011

U.S. bank indices fell 2% yesterday after fears that capital requirements would increase as much as 7%.  Bank of America (NYSE: BAC), fell below $11.00, the lowest since last year.  The discussion came about after the Basel Committee on Banking revealed how levered large financial institutions still were, and tried to reconcile levels with future recession risks.  A 7% equity capital raise for most banks would be catastrophic and dilute equity by 50%+, but a 3% raise seems manageable in a functioning economy.  The problem is that the U.S. economy is on life support, and that life support is called Quantitative Easing 2.  Once this support fades on June 30th, how will U.S. banks (at their already low valuations due to real estate risk and put backs) raise new equity capital?  A replay of 2009?  You be the judge.

According to Bloomberg, “The Fed supports a proposal at the Basel Committee on Banking Supervision that calls for a maximum capital surcharge of three percentage points on the largest global banks, according to a person familiar with the discussions.

International central bankers and supervisors meeting in Basel, Switzerland, have decided that banks need to hold more capital to avoid future taxpayer-funded bailouts. Financial stock indexes fell in Europe and the U.S. yesterday as traders interpreted June 3 remarks by Fed Governor Daniel Tarullo as leaving the door open to surcharges of as much as seven percentage points.

“A seven percentage-point surcharge for the largest banks would be a disaster,” said a senior analyst at Barclays Capital Inc. in NY. “It will certainly restrict lending and curb economic growth if true.”

Basel regulators agreed last year to raise the minimum common equity requirement for banks to 4.5 percent from 2 percent, with an added buffer of 2.5 percent for a total of 7 percent of assets weighted for risk.

Basel members are also proposing that so-called global systemically important financial institutions, or global SIFIs, hold an additional capital buffer equivalent to as much as three percentage points, a stance Fed officials haven’t opposed, the person said.

Bank Indexes Fall

The Bloomberg Europe Banks and Financial Services Index fell 1.45 percent yesterday, while the Standard & Poor’s 500 Index declined 1.1 percent. The KBW Bank Index, which tracks shares of Citigroup Inc., Bank of America Corp., Wells Fargo. and 21 other companies, fell 2.1 percent.

In a June 3 speech, Tarullo presented a theoretical calculation with the global SIFI buffer as high as seven percentage points.

“The enhanced capital requirement implied by this methodology can range between about 20% to more than 100% over the Basel III requirements, depending on choices made among plausible assumptions,” he said in the text of his remarks at the Peter G. Peterson Institute for International Economics in Washington.

In a question-and-answer period with C. Fred Bergsten, the Peterson Institute’s director, Tarullo agreed that the capital requirement, with the global SIFI buffer, could be 8.5 percent to 14 percent under this scenario. A common equity requirement of 10 percent is closer to what investors are assuming.

‘Across the Board’

“I think 3 percent is where everyone expected it to come out,” Simon Gleeson a financial services lawyer at Clifford Chance LLP, said in a telephone interview. “If it is 3 percent across the board then it will be interesting to see what happens to the smallest SIFI and the largest non-SIFI” on a competitive basis, he said.

U.S. Treasury Secretary Geithner, in remarks yesterday before the International Monetary Conference in Atlanta, said there is a “strong case” for a surcharge on the largest banks. Fed Chairman Bernanke is scheduled to discuss the U.S. economic outlook at the conference today.

“In the US, we will require the largest U.S. firms to hold an additional surcharge of common equity,” Geithner said. “We believe that a simple common equity surcharge should be applied internationally.”

Distort Markets

Financial industry executives are concerned that rising capital requirements will hurt the economy, which is already struggling with an unemployment rate stuck at around 9 percent.

Higher capital charges “will have ramifications on what people pay for credit, what banks hold on balance sheets,” JPMorgan Chase & Co. chairman and chief executive officer Jamie Dimon told investors at a June 2 Sanford C. Bernstein & Co. conference in New York.

The Global Financial Markets Association, a trade group whose board includes executives from GS and Morgan Stanley, said the surcharge may apply to 15 to 26 global banks, according to a May 25 memo sent to board members by chief executive officer Tim Ryan.

Dino Kos, managing director at New York research firm Hamiltonian Associates, said the discussion about new capital requirements comes at a time when banks face stiff headwinds. Credit demand is weak, and non-interest income from fees and trading is also under pressure.

Best Result

U.S. banks reported net income of $29 billion in the first quarter, the best result since the second quarter of 2007, before subprime mortgage defaults began to spread through the global financial system, according to the Federal Deposit Insurance Corp.’s Quarterly Banking Profile.

Still, the higher profits resulted from lower loan-loss provisions, the FDIC said. Net operating revenue fell 3.2 percent from a year earlier, only the second time in 27 years of data the industry reported a year-over-year decline in quarterly net operating revenue, the FDIC said.

“You can see why banks are howling,” said Kos, former executive vice president at the New York Fed. Higher capital charges come on top of proposals to tighten liquidity rules and limit interchange fees, while the “Volcker Rule” restricts trading activities. Taken together these imply lower returns on equity, he said.

“How can you justify current compensation levels if returns on equity are much lower than in the past?” Kos said.

Video: Libyan Jet Shot Down by Rebel Artillery, Brent Crude Oil Futures Unchanged

Saturday, March 19th, 2011

The video below (LA Blog Only) shows Rebel artillery taking out a Libyan fighter, after the ceasefire was announced and crude fell $2.00 on Friday.  It is not surprisingly that Qaddafi did not honor the ceasefire after killing thousands of his own people in the weeks prior to the incident.  According to UN Ambassador Susan Rice, “Qaddafi’s attacks on Benghazi will not be tolerated by the Western community.”

A warplane was today shot down outside the opposition stronghold of Benghazi, as international leaders including David Cameron gathered in Paris to make final preparations to impose a no-fly zone over Libya.

The jet was observed over the city for some time before reportedly going down in flames, amid the sound of artillery and gunfire.

[youtube]http://www.youtube.com/watch?v=XvwISqREkaU[/youtube]


But Libyan authorities insisted that their forces were holding to a ceasefire announced yesterday and repeated an invitation for international observers to enter the country today to monitor it.

Deputy foreign minister Khaled Kaim told BBC Radio 4′s Today programme: “The ceasefire is real, credible and solid. We are willing to receive observers as soon as possible, even today.”

Rebel sources claim that military assaults by forces loyal to Muammar Gaddafi on cities including Benghazi, Misrata and Ajdabiya continued even after the ceasefire announcement.

US ambassador to the UN Susan Rice last night said the Libyan leader was already in violation of the United Nations Security Council resolution 1973, passed on Thursday, which called for an immediate end to hostilities and authorised “all necessary measures” short of foreign occupation to protect civilians.

Ms Rice told CNN that Gaddafi would face “swift and sure consequences including military action” if he ignores demands for a ceasefire.

Mr Cameron was today meeting US Secretary of State Hillary Clinton, French President Nicolas Sarkozy, UN Secretary General Ban Ki-moon and representatives of Arab states in Paris for talks on the implementation of the resolution.

RAF fighter jets were deploying to the Mediterranean to join the international effort to protect Libya’s people from aerial assault by Gaddafi’s forces.

Neither the Ministry of Defence nor Downing Street would last night confirm whether any RAF planes had set off on their mission, codenamed Operation Ellamy, or where they would be based in the Mediterranean.

Mr Cameron yesterday said that Typhoons and Tornados, together with surveillance and air-to-air refuelling craft, would be ready to leave within hours.

France’s ambassador to the UN, Gerard Araud told the BBC that today’s summit would be “a good moment to send the last signal” to Gaddafi.

“I guess that after this summit, in the coming hours we will go to launch the military intervention,” said Mr Araud.

In a joint statement last night, Britain, the US and France – supported by a number of unnamed Arab states – spelt out exactly what was expected from the long-serving Libyan tyrant.

“All attacks against civilians must stop. Gaddafi must stop his troops from advancing on Benghazi, pull back his troops from Ajdabiya, Misrata and Zawiyah, and re-establish water, electricity and gas supplies to all areas,” said the statement.

“Humanitarian assistance must be allowed to reach the people of Libya.”

And the allies warned: “These terms are not negotiable. If Gaddafi does not comply with the resolution, the international community will impose consequences, and this resolution will be enforced through military action.”

Speaking in the White House after conferring with congressional leaders yesterday, US President Barack Obama stressed that Britain, France and the Arab League would take a “leadership role” in enforcing the no-fly zone and said that there would be no use of US ground troops in Libya.

While he did not say what forces the US would be committing to the operation, he suggested some American military assets would be deployed in an “enabling” role in support of the Europeans.
“We will provide the unique capabilities that we can bring to bear to stop the violence against civilians, including enabling our European allies and Arab partners to effectively enforce a no-fly zone,” he said.

Mr Cameron insisted Libya would not be “another Iraq” and there would be “no foreign occupation”.

“The central purpose of all this is clear: to end the violence, protect civilians and allow the people of Libya to determine their own future, free from the brutality inflicted by the Gaddafi regime,” he told the Scottish Conservative conference in Perth.

Britain was committing itself to military action “at a level that matches our resources, in alliance with other countries, with the full authority of the United Nations Security Council and in accordance with international law”.

“We will provide the unique capabilities that we can bring to bear to stop the violence against civilians, including enabling our European allies and Arab partners to effectively enforce a no-fly zone,” he said.

But Libyan authorities insisted that their forces were holding to a ceasefire announced yesterday and repeated an invitation for international observers to enter the country today to monitor it.

Deputy foreign minister Khaled Kaim told BBC Radio 4′s Today programme: “The ceasefire is real, credible and solid. We are willing to receive observers as soon as possible, even today.”

Rebel sources claim that military assaults by forces loyal to Muammar Gaddafi on cities including Benghazi, Misrata and Ajdabiya continued even after the ceasefire announcement.

US ambassador to the UN Susan Rice last night said the Libyan leader was already in violation of the United Nations Security Council resolution 1973, passed on Thursday, which called for an immediate end to hostilities and authorised “all necessary measures” short of foreign occupation to protect civilians.

Ms Rice told CNN that Gaddafi would face “swift and sure consequences including military action” if he ignores demands for a ceasefire.

Mr Cameron was today meeting US Secretary of State Hillary Clinton, French President Nicolas Sarkozy, UN Secretary General Ban Ki-moon and representatives of Arab states in Paris for talks on the implementation of the resolution.

RAF fighter jets were deploying to the Mediterranean to join the international effort to protect Libya’s people from aerial assault by Gaddafi’s forces.

Neither the Ministry of Defence nor Downing Street would last night confirm whether any RAF planes had set off on their mission, codenamed Operation Ellamy, or where they would be based in the Mediterranean.

Mr Cameron yesterday said that Typhoons and Tornados, together with surveillance and air-to-air refuelling craft, would be ready to leave within hours.

France’s ambassador to the UN, Gerard Araud told the BBC that today’s summit would be “a good moment to send the last signal” to Gaddafi.

“I guess that after this summit, in the coming hours we will go to launch the military intervention,” said Mr Araud.

In a joint statement last night, Britain, the US and France – supported by a number of unnamed Arab states – spelt out exactly what was expected from the long-serving Libyan tyrant.

“All attacks against civilians must stop. Gaddafi must stop his troops from advancing on Benghazi, pull back his troops from Ajdabiya, Misrata and Zawiyah, and re-establish water, electricity and gas supplies to all areas,” said the statement.

“Humanitarian assistance must be allowed to reach the people of Libya.”

And the allies warned: “These terms are not negotiable. If Gaddafi does not comply with the resolution, the international community will impose consequences, and this resolution will be enforced through military action.”

Speaking in the White House after conferring with congressional leaders yesterday, US President Barack Obama stressed that Britain, France and the Arab League would take a “leadership role” in enforcing the no-fly zone and said that there would be no use of US ground troops in Libya.

While he did not say what forces the US would be committing to the operation, he suggested some American military assets would be deployed in an “enabling” role in support of the Europeans.

Mr Cameron insisted Libya would not be “another Iraq” and there would be “no foreign occupation”.

“The central purpose of all this is clear: to end the violence, protect civilians and allow the people of Libya to determine their own future, free from the brutality inflicted by the Gaddafi regime,” he told the Scottish Conservative conference in Perth.

Britain was committing itself to military action “at a level that matches our resources, in alliance with other countries, with the full authority of the United Nations Security Council and in accordance with international law”.

Japanese Market Plummets 20% in 2 Days on Radiation Threat

Tuesday, March 15th, 2011

The Nikkei slid 14% last night (3/15/11), and recovered 3% to end net 11% down for the day after the Japanese government banned brokerages from selling.  This was after a 6% down day on 3/14 and a poor prior week.  Both the TOPIX and the Nikkei are now down more than 20% for the year on the risk that nuclear radiation will pose a threat to Tokyo.  Traders in Tokyo and Hong Kong said hedge fund selling of Nikkei futures, especially the Singapore-listed contracts , was behind the deepest drop in Japanese shares. Cash volumes on the Tokyo Stock Exchange hit a record for a second day running.

These equity sales were triggered by the explosion of a fourth nuclear reactor 130 miles away from the city, leaking lethal amounts of radiation.

An explosion and fire at the Fukushima Daiichi nuclear plant at 6: 10 am local time prompted officials within a 30-kilometer radius to stay indoors.  This was the message released (translated):

“Please do not go outside. Please stay indoors. Please close windows and make your homes airtight. Don’t turn on ventilators. Please hang your laundry indoors,” Chief Cabinet Secretary Edano said to the residents in the danger zone. “These are figures that potentially affect health. There is no mistake about that.”

According to the Associated Press, about 140,000 people were impacted by the warning.

Soon after the explosion, heightened levels of radiation were detected in Tokyo, 175 miles away.  Radiation levels in Tokyo were 23 times the normal level in the city.

According to ABC News, “The Japanese government formally has asked the U.S. Nuclear Regulatory Commission for help in stabilizing its troubled nuclear reactors in the wake of the country’s massive earthquake and tsunami.  The NRC sent two boiling water reactor experts to Japan as part of a team of aid workers to help in the recovery efforts.”

With this explosion at Fukushima, since the roof did not fall off the rod casing, the pressure is trapped within the vessel around the core, which will allow radi0active material to seep out.  The real risk here is the risk of a meltdown, which could affect the health of millions in Japan and nearby nations.  The fuel rods in all three of the reactors at the Fukushima plant appear to be melting.

The Japanese government reacted hours ago by adding $98 million in liquidity to the market, but this did not alleviate the stress in the market as U.S. 10 year yields jumped and DAX fell 4.5% in Europe. Hong Kong’s Hang Seng Index tumbled 2.9%, China’s Shanghai Composite lost 1.4%, Australia’s S&P/ASX 200 shed 2.1%, Taiwan’s Taiex skidded 3.4% and South Korea’s Kospi fell 2.4%. India’s Sensex shed 0.9% in afternoon trading.  Brent crude fell more than 2.2% to below $112, while U.S. crude dropped to almost $98 a barrel.

$364 billion in Japanese wealth was just evaporated in a matter of 4 hours.   Relying on the Japanese private insurance system is now out of the question.

The document below (LA Blog) shows an overview of the earthquake insurance system in Japan, which certainly cannot cover this mess.

NIRO Japan Eqarthquake

Saudi Day of Rage – Fri., March 11th

Thursday, March 10th, 2011

We have seen riots in Tunisia, Algeria, Egypt, Libya, Bahrain…and now Saudi Arabia?  All of these countries have fallen victim to internal unrest because of both their lack of basic freedoms, and wealth disparity between the rich and the poor.  All of the countries above are known to be wealthy oil nations, but more than 20% of the youth in each are unemployed.  Grain prices in these areas have more than tripled, and food inflation is causing unrest.  Shiites in Saudi Arabia have also claimed discrimination, as almost all senior businessmen and officials are Sunni Muslims, despite qualifications and experience.  This has helped drive Brent crude prices to as high as $118, crippling both emerging and developing economies.  Some are calling for a “day of rage” on March 11th, while others claim it will be delayed…

According to CNN, protesters in Saudi Arabia called for a “day of rage” Friday, though longtime observers of the kingdom remained skeptical that it would make a major impact. ”I don’t think any protests that happen tomorrow will be destabilizing to the country,” said Christopher Boucek, a Saudi expert with the Carnegie Endowment for International Peace.

Prominent blogger Ahmed Al-Omran said the Saudi government remains unresponsive to the streets. ”I don’t think they’re really in touch with the people,” he said. Still, he said, Friday’s planned protests could set the tone in Saudi Arabia for the next few months.

The Saudi government prohibits all kinds of public demonstrations. But more than 100 Shiite demonstrators defied that ban and rallied Wednesday in the eastern city of Qatif, calling on authorities to release Shiite prisoners. A sprinkling of women were among the protesters, said Ibrahim Al-Mugaiteeb, president of the Human Rights First Society. Police kept a watchful eye but did not intervene, he said. Earlier, Saudi authorities had authorized its security forces to “take all measures against anyone who tries to break the law and cause disorder.”

Last week, about 24 protesters were detained in Qatif as they denounced “the prolonged detention” of nine Shiite prisoners held without trial for more than 14 years, Amnesty International said. Police kicked and used batons to beat three protesters in what was an apparent peaceful demonstration, Amnesty said in a statement. ”The Saudi Arabian authorities have a duty to ensure freedom of assembly and are obliged under international law to allow peaceful protests to take place,” said Philip Luther, deputy director of the human rights group’s Middle East and North Africa program. ”They must act immediately to end this outrageous restriction on the right to legitimate protest.” There was no immediate reaction from the Saudi government to the Amnesty statement.

The protests in the majority Sunni kingdom have followed similar demands across the Arab world for more freedom and democracy. Rights activists have been advocating the right to protest for months in the kingdom but they have been denied permission to assemble. Lately, grass-roots ferment mirroring the unrest across the Middle East and North Africa has emerged, with a Facebook group calling for days of rage and Shiites taking to the streets. Activists have been calling for reform and the release of people jailed without charge or trial.

Amnesty said the recent detentions came a week after a prominent Shiite cleric, Sheikh Tawfiq Jaber Ibrahim al-’Amr was arrested after a sermon calling for reforms in Saudi Arabia. He was released without charge Sunday. Most of the protesters are believed to be held in a police station in Dhahran, an eastern city. Among them are activists who have protested arrests and discrimination against the minority Shiites.

“The Saudi authorities must investigate reports of beatings of protesters by security forces. They should also ensure that those detained are either charged with recognizable offences and tried fairly or released,” Luther said. ”While in detention they must be protected from torture and other ill-treatment and given regular access to their family, lawyers and medical staff.”

The Shiite activists in “prolonged detention” have been held in connection with the deadly 1996 bombing of a U.S. military complex in Khobar in which 20 people were killed and hundreds injured. ”According to reports, they were interrogated, tortured and denied access to lawyers together with the opportunity to challenge the legality of their detention,” Amnesty said.

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Oil Should Spike Higher Following Saudi Riots and Nigerian Elections in April – Report Attached

Thursday, March 10th, 2011

The following special report on oil (LA Blog Only, leverageacademy.com/blog) discusses the oil market, providing reasons to be bullish  on the commodity given unrest in the Middle East, Nigerian elections in April, and rising domestic consumption in oil producing countries, including Venezuela, Nigeria, and Iran.  According to the article, the rise of oil prices could easily cause the next recession.   In 2010, soft commodities outperformed energy, but that will certainly change given the political headwinds abroad and continued monetary easing in the developed world.  Therefore, the Bernanke “Put,” combined with political unrest will be to blame for continued sharp price increases in the energy commodity sector.

Emerging market demand, especially in China, which now consumes nearly 10mm barrels of oil per day, will also be driving the demand side of the equation.  Money supply in China was also up 19.7% in 2010, because of the rapid credit growth the country has experienced over the past 2 years.

On the supply side, Middle Eastern youth continue to riot, causing political unrest across the globe.  In Egypt, Libya, Morocco, Saudi Arabia, Tunisia, and Bahrain, youth unemployment is over 20%, which is a severe concern, given the oil wealth of these nations.  The Iran crisis could also re-emerge as the country continues to develop nuclear weapons.  As Iran is mostly Shiite, it poses a great threat to its Sunni neighbors, including Saudi Arabia.  Major risks in the area include that the Straights of Hormuz and Malacca could be blocked in the Middle East if major riots break out.  These two passages account for 32 million barrels of crude transport per day.  The Straight of Hormuz alone carries 33% of oil transport by sea.  Furthermore, one should question how much Saudi Arabia can increase supply, as the country overstated its oil reserves by nearly 300 billion gallons in 2010.  Even if it does increase supply, how will this supply be transported to the West if passages are blocked?

There has not been one year in recent history where Nigerian elections have not posed a threat to the country’s oil supply.  Elections are often bloody, and there is no reason for the upcoming 2011 elections being held in April to be different.

To make things worse, the IEA increased its oil demand forecast by 1.6%.

On December 6th, Brent futures were traded in backwardation for the first time in two years, which means that futures with shorter maturities are more expensive than those with longer maturities (similar to an inverse yield curve).  Backwardation occurs in tight markets, whereas contango occurs when there is oversupply.

What will be the effect of these changes in the oil supply/demand equation?  Well, an increase in oil price tends to affect the economy with a time lag of at least 4-6 months.  An increase an oil price of $10 would cause GDP to fall by 25 bps and S&P earnings to fall by $3.00.

According to the IEA, 4.1% of GDP was spent on oil consumption in 2010.  A sustained price above $100 would mean that the percentage would increase to 5%.  Oil at $120 would mean a percentage increase to 6%, which would be devastating.

Special Report Oil March 2011

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