by Addison Wiggin & Ian Mathias
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Markets rally… The soothing words that set off a global shopping spree
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An enormous bet placed on the downfall of the S&P 500… the anonymous options play that has insiders shaking in their boots
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Wheat punches through another record high… an argument for continued high prices from the Maniac Trader
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Chinese pollution: Not only worse than you think, but hurting your health as well…
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BoJ board member lashes out… but against what? Japanese policy or Greenspan ideals?
We’re not too keen on conspiracy theories. But two things ran across our desk this morning that gave us pause.
First, an unnamed collection of investors just placed a $900 million bet that the S&P 500 will plummet between 35-59% in the next month. In trader speak: Anonymous parties agreed to buy and sell 120,000 SPY September call options using deep-in the-money strikes ranging from 60-95.
“If you’re not options savvy,” writes Keith Fitz-Gerald, a contributing editor to Money Morning , “don’t worry. SPY — also referred to as a “spider” in trader parlance — is an exchange-traded fund (ETF) that mimics the performance of the stock market’s closely watched Standard & Poor’s 500 index (INX). These strike prices equate to a SPY trading between 600-950, or roughly 35.81-59.46% below where it was Monday.
And then we heard the blogosphere is abuzz with rumors this morning that the U.S. government is planning a major propaganda campaign for a war against Iran to commence in September. From a blog called “Informed Comment Global Affairs”:
“They [the source’s institution] have ‘instructions’ (yes, that was the word used) from the Office of the Vice President to roll out a campaign for war with Iran in the week after Labor Day; it will be coordinated with the American Enterprise Institute, The Wall Street Journal, The Weekly Standard, Commentary, Fox and the usual suspects. It will be heavy sustained assault on the airwaves, designed to knock public sentiment into a position from which a war can be maintained. Evidently, they don’t think they’ll ever get majority support for this — they want something like 35-40% support, which in their book is ‘plenty.’”
These SPY plays expire Sept. 21… hmmn….
What’s one to think? Well, it’s really easy to make these kinds of associations on the Internet. But that’s also what makes following the markets with so much information available at one time such a hoot.
“Naturally,” says Fitz-Gerald, “the silence around this trade has put the conspiracy theorists on edge and set the blogosphere aflame. Most of the theories are outrageous, but there are a couple that — quite frankly — aren’t so farfetched and even make some sense. But I have to stress, once again, that nobody who’s actually a party to either end of this transaction has been identified or is talking, which makes this all the more noteworthy — and maybe even a little spooky.”
Most likely, some big fund owns a boatload of SPY shares to offset their riskier bets. That fund’s manager just blew a big speculative play… maybe betting on natural gas rising and getting burned once hurricane Dean didn’t affect prices. So this poor fellow needs millions in cash, right now, to cover his busted nat. gas position. He can’t go to the bank, or sell shares, because the world would know he blew it… the fund would crash and his Wall Street career would be over.
What does he do? He writes covered calls on 120,000 SPY shares and sells them insanely deep in the money. People buy ‘em up, almost instantly profiting, all the while the market doesn’t notice because the underlying value of SPY isn’t affected. Sure, as the seller of SPY options, he and the fund take a big loss, but it’s better than losing their shirt on a speculation, and way better now that investors and the media are kept in the dark. The proceeds from selling those calls go back into the nat. gas plays, losses are more spread out, and all is well in Squanderville.
Or we’ll see the second great depression by September 21. Interesting stuff, either way.
Markets around the world rallied yesterday and overnight — just about everybody’s up today.
Major U.S. indexes bought back Tuesday’s losses with over 2% gains yesterday. Asia too fought back from a rough start this week. Hong Kong’s market pushed up 2%. Chinese and Japanese indexes rallied about 1%.
Germany’s DAX was the only major global market to register a loss yesterday — a measly -0.04%.
Phew. At least the subprime mess is contained and we can get back to buying stocks with abandon.
Wait…what’s this?
“It would be far too premature to judge this crisis over,” said former Treasury Secretary Larry Summers yesterday. According to Larry, the subprime mess and subsequent credit crisis still has room to fester. The United States may be heading into recession, he continued: “The risks of recession are now greater than they’ve been anytime since the period in the aftermath of Sept. 11.”
Darn.
At least we have the Fed to save us. They are “monitoring the situation,” Ben Bernanke said in a letter to Sen. Charles Schumer released yesterday, “and is prepared to act as needed to mitigate the adverse effects on the economy arising from the disruptions in financial markets.”
Sweet.
“I’ve got to hand it to Bank of Japan board member Mizuno for stepping out and doing an Aaron Neville,” reports Chuck Butler this morning “You know… ‘Tell It Like It Is… Don’t be ashamed to let your conscience be your guide… Yeah!’”
“Recent turmoil in the financial markets,” Mizuno said, “proves that keeping [Japanese] rates that aren’t in line with economic fundamentals could lead to risks of destabilizing [global] financial markets,” which, according to Chuck, is a pretty bold statement for BoJ standards.
“This could have been Mizuno saying that the low interest rates in Japan may have contributed to the global market jitters stemming from U.S. credit problems,” Chuck opines. Or if Mizuno was really feeling bold, it could have been a little mudslinging at Greenspan… whose rate decisions got us here in the first place.
“Either way,” says Chuck, “the guy is bang on with his comments, which is strange for a Bank of Japan board member. They usually don’t ‘stir the pot’ without being asked to fall on a sword.”
Carry traders had their brokers on speed dial in expectation of a rate hike, but it never came. The BoJ chose to leave its interest rates alone during its meeting this morning.
“Wheat is up another 20 cents this morning… that’s a two-day record rally.” says our Maniac Trader Kevin Kerr. Wheat has been shooting up all year long, and is currently at an all-time high of $7.60 a bushel. Since the start of 2007, wheat’s up 51%, and according to Kevin, it still has room to grow [sic].
“Wheat is actually becoming a victim of its own success,” says Kevin. “It seems like there just wasn’t a lot of forethought or planning on the government’s part… It just told farmers, ‘Grow wheat and we’ll pay you’ without a serious plan to combat an increase in transportation, storage and other rising cots.”
“In essence, record wheat prices are now the result of another infrastructure problem. The agricultural pipeline is full and not able to handle the increased volume. Crops are perishable and time is money. With land rates, fuel costs and wages rising, every additional cost takes a bit out of an already shrinking profit pie.” Read: Secret Logic of the Commodities Market
Kevin, by the way, is about to leave for an Eastern European exploration tour. He’ll be traveling to Estonia, speaking at various trading conferences, and touring a few “ultra-precious” metals facilities. At the very least, you’ll get a chance to see a few photos of Kevin in full body lead suits and spaceman gloves. Stay tuned…
The Gulf Cooperation Council and the European Union are expected to sign a free trade agreement within the next two months, reports Stratfor.com. If the agreement is finalized, look for even more money to flow into places like Dubai and more GCC exports heading into Europe.
Global talent pools are already beginning to shift in preparation. For example, the Association of International Management, one of the world’s most prestigious executive recruiting consultancies, just announced this morning that it’ll be moving its headquarters to Dubai.
Crazytown…
Dubai is where it’s at… for now. Such rapid growth tends to make us a bit nervous, but there’s no denying that economic swagger is slowly shifting out of the U.S. and into less-restrictive, businesses-oriented communities like Dubai. Will it last?
“At the current pace,” reports a stunned Christopher Hancock, “in 25 years, China will emit twice as much carbon dioxide as all of the OECD countries combined.”
Here’s why you should care: “Much of that pollution is filled with mercury,” says Chris. “In fact, some estimate China will spew 600 tons of mercury into the air this year.” Much of that poison will find its way into North America, where an estimated 33% of all mercury pollution is caused by foreign air. As a result, pregnant or nursing women are discouraged to eat fish from over 30% of all the U.S.’s lakes and rivers.
Chris has been researching companies that are working on solutions to the enviro-disaster that is China. He’ll be publishing his findings in the next edition of the Free Market Investor.
“Have I missed something?” asks a reader, “or have my engineering analytical abilities gone astray? Over the last few weeks, I hear the following from ‘experts’: ‘The Fed, and Greenspan, has CAUSED this credit mess we are in by lowering interest rates for a long time period and giving away excessive easy money and credit.’
“Now what I hear from my financial TV channels is, ‘We need to lower interest rates to solve this problem.’ Would someone please explain how giving away more money solves a problem caused by giving away more money?”
The 5 responds: Oh man, we wish we could explain it. When we interviewed former Treasury Secretary Robert Rubin for the film we’re making about this very subject, we asked: “What do you say to people when they say… ‘Economics and politics are really complicated, I don’t understand it’?”
Rubin responded: “I say to them, ‘It’s really not that complicated. You know the old adage ‘There is no free lunch’? Well…it’s really that simple. There is no free lunch.”
Yet that’s exactly what the people on your financial TV channels are demanding. They’ve made some really bad lending decisions. Subprime loans have been “securitized” — bundled up — and sold as AAA investments. Now that the core is rotten, they’re screaming to have their tuchases bailed out.
In a major way, that’s what all of our work here in The 5, The Daily Reckoning, our books (including Bill’s new one ) and at Agora Financial is all about. The danger is… if the crotte really hits the fan, some demagogue is going to come out of the woodwork and promise to solve all the U.S.’s problems — economic and political — by invading Iran… or China. Heaven help us then, eh?
“I have unfortunately been in and out of Venezuela for over 12 years, and it is a country that only gets worse and, in my opinion, has no chance in hell of ever getting better,” writes a reader.
“You have to understand the Venezuelan people who have grown up being fed a diet of propaganda (over 30-some years) telling them to be proud that they have one of the world’s largest oil deposits. It has made them ignorant, lazy, arrogant and very selfish (yeah, I know not very politically correct, but, unfortunately, the sad truth).
“The Venezuelans by nature never have invested and never will invest in their own country. Miami banks are full of rich Venezuelans who keep accounts in the hundreds of thousands of dollars earning 3-4%. I have personally seen Venezuelans park $100,000 in checking accounts earning 1-2%!
“Most readers do not realize that Venezuela has a currency control in place, so even if you cash dollars upon arrival in an official change office, if you don’t spend all your crap money while you’re there, you have toilet paper to use when you leave.
“The reason for the currency control (which other administrations had off and on before Chavez), is partially to punish the rich, whom he wants to force an exodus on from his socialist paradise. The other reason is that he and his cronies can make major money by keeping the bolivar overvalued at the official rate and sell these official dollars at 2,000 bolivares to friends while everyone else pays 4,000. It takes no imagination to see how a car dealer who can buy dollars for half the price of his competition can make money and will support Chavez!
“Think about it…does Venezuela have a shortage of dollars exporting all that oil? Of course not!
“I don’t blame Chavez for what he’s doing. I blame the spoilt Venezuelans who were stupid enough to elect a former coup d’etat leader who said he was reformed and pro democracy. They did this believing his lies about improving life quality.”
The 5 responds: Believe it or not, this is the abridged version of this reader’s comments. We’ve pasted the full monty on our blog… check it out, and leave your own thoughts, here.
Best Regards,
Addison Wiggin
The 5. Min Forecast
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