Tag: news

Having discussed the advantages and disadvantages of the crypto-currency and noted the extreme volatility of the last few weeks, it seemed only a matter of time before some ambitious entrepreneur tried to monetize the volatility. What better way to “manage the risk” of your virtual currency horde than buying (or selling) options (in a more levered way). Predictious, the Dublin-based prediction market, this week unveiled Bitcoin Option Spreads enabling both long- and short-positions to be constructed on the already extremely volatile ‘asset’. Regulatory clamp-down in 3..2..1…

 

The basic mechanism is the same as every option spread market – a fixed payoff for getting the “bet” correct, in this case 10.

In the case below, the bet was that Bitcoin will (or will not) close at $1400 on Wednesday January 1st at 12:00am,

if you believe it will (close at or above $1400) you “buy” the contract at 3.49 (and should you be proven correct you are paid 10 – thus gaining 6.51, similar to buying a call option)…

if you believe it will not reach $1400, you “sell” the contract at 0.55 (and should you be proven correct you pocket the 0.55 and pay out 0.00 – just like writing a call option)

 

Quite a skew has developed already…

As Predictious notes,

Predictious is now bringing this to the next level by offering a new type of derivative contract: option spreads on the price of Bitcoin. In the past couple of weeks, Bitcoin has been extremely volatile, and it is important for traders to be able to reduce risk, and hedge their Bitcoin position. They can now do so in an easy and cost efficient way by using option spreads.

 

Option spreads are very versatile, while still offering limited risks. A bullish investor can use a vertical spread to benefit from Bitcoin gains, while limiting risks if the price crashes.

 

On the other hand, bearish investors can use them to short Bitcoin. Predictious is currently one of the most reliable way to do so. Since losses are limited with option spreads, investors are not exposed to counterparty risks, like they would be when trading futures on competing services.

 

Aside from Bitcoin traders, miners can also use spreads on the Bitcoin difficulty to reduce risks associated with investing in mining hardware.

 

…

 

To date, Predictious users have deposited over $300,000 in Bitcoin on the website.

 

“Traders are obviously very interested in Bitcoin derivatives, but the number of businesses accepting payments in Bitcoin has surged in the past few months”, said Flavien Charlon, Founder of Pixode, “those businesses have expenses in US Dollar, or Euro, and need to hedge their Bitcoin position. The type of derivatives we are offering will be very useful to them as well”.

 

The bottom-line is that while we can see the ‘use’ of such a market to enabling some lower cost hedging of any wealth one might have gathered in Bitcoin, we suspect – just as in the case of many other assets – that the underlying asset will see its volatility rise as the derivative (and levered) markets becomes the tail that wags the dog.

via Zero Hedge http://feedproxy.google.com/~r/zerohedge/feed/~3/n4ZW-GD7ivA/story01.htm Tyler Durden

Overnight, China reported its biggest trade surplus in almost five years, when November net exports hit $33.8 billion, up from $31.1 billion in October, and 50% above the $21.2 billion consensus estimate. This was driven by a surge in exports which rose by 12.7% (more than the 7% expected), while imports rose by a slightly disappointing (5.3% vs Exp. 7.0%). Of course, when it comes to Chinese trade data, the numbers are so notoriously manipulated that even the big banks threw up on them as recently as last year forcing China to admit everything was more or less made up. Regardless, the ongoing influx of US Dollars means that the Chinese FX reserves of $3.66 trillion in Q3 will swell even more. The bigger question is what will China do with the surplus: will it buy more Treasurys – something it hasn’t done in over a year – or invest in alternative commodities.

Such as gold.

According to Hong Kong customs data, in the month of October (with the usual one month delay), China imported 148 total tons of gold in a month in which the price of gold, once again plunged. Curiously, unlike momentum chasers of paper ETF promises to get gold delivery, China continues to BTFD in gold, and the 148 tons of import in the past month was the second highest monthly import ever through Hong Kong, second only to the 224 tons imported in March of 2013. Compared to a year ago, when the price of gold was over 30% higher, China has imported over 200% more than the 48 tons it bought through Hong Kong a year ago. At least someone is grateful for plunging gold prices.

On a net basis, October was also the second busiest month for Chinese gold imports, soaring to a near record 131.2 tons, second only to March’s 136.2 tons, and represents the sixth consecutive month in which China has imported more than 100 tons of gold net of exports.

These numbers of course exclude gold procured in China using other means, such as imports via other venues, as well as internally produced gold.

In total, China’s gross YTD imports now amount to just over 1260 tons, while the net gold imports from Hong Kong are a record 982 tons.

Finally, putting the total number of imports in perspective since our September 2011 post in which we noted that it was now China’s explicit strategy to hoard gold, China has imported a whopping 2380 tons of gold in the past 26 months. Throughout this period the PBOC has never updated its new official holdings number. However, one thing is clear: the more the price of (paper?) gold drops, the more the Chinese purchases of physical gold become. And yes, that is 26 consecutive months of positive (and increasing) gold imports.

via Zero Hedge http://feedproxy.google.com/~r/zerohedge/feed/~3/c3kcuBQLOhY/story01.htm Tyler Durden

Submitted by F.F. Wiley of Cyniconomics

Summary

• To gauge the likelihood of a December taper, we should think through the changes that might occur in the first paragraph of the FOMC’s statement, which is always a brief assessment of the state of the economy.
• While the committee will surely tweak its language on account of last week’s strong jobs data, we’ll see downgrades in other parts of its assessment, which should include a reference to weaker business investment growth and possibly a renewed warning about rising mortgage rates.
• The committee should also be concerned about holiday spending after seeing rapid inventory accumulation in Q3 GDP and other indicators.
• Inventory and spending concerns may not be recognized in the statement, but they’ll add to the case to let the dust settle on the fourth quarter before changing existing policies.
• We expect the tapering decision to be deferred to the next meeting once again.

Thinking like the Fed

To know your enemy, you must become your enemy  -Sun Tzu

In war, poker, chess and many other endeavors, wise old hands will advise you to think like your opponent. We’ll try a related idea here by seeing if we can think like the members of the Federal Open Market Committee (FOMC). Specifically, we’ll pretend to write part of the statement for the FOMC’s December 17/18 meeting.

We’ll work through the four or five sentences in the statement’s first paragraph that sum up the committee’s thoughts on recent developments. When the FOMC makes a policy change, it’s always linked to these four or five sentences. Here’s what they said in the last statement (for the meeting on October 29/30):

Indicators of labor market conditions have shown some further improvement, but the unemployment rate remains elevated. Available data suggest that household spending and business fixed investment advanced, while the recovery in the housing sector slowed somewhat in recent months. Fiscal policy is restraining economic growth. Apart from fluctuations due to changes in energy prices, inflation has been running below the Committee’s longer-run objective, but longer-term inflation expectations have remained stable.

As you may know, there are at least five pieces to this section: employment, household spending, business investment, housing and inflation. In addition, sometimes factors outside the big five become important enough to make a special appearance. For example, every one of the last six statements included a sentence on fiscal restraint.

We’ll look at each area in up to four steps: old language, new information, comparison and new language. Here are the questions we’re trying to answer:

• Old language: What did the last two statements say? (We’re including the September 18-19 statement because of the surprising decision not to “taper” the Fed’s monthly security purchases and the fact that it was described as a “close call.”)
• New information: What have we learned since the September non-taper?
• Comparison: In view of the new information, how does today’s economy compare to the September 18-19 economy?
• New language: What will December’s statement say?

Once we’ve covered each area, beginning with employment below, we’ll explain why our answers tell us to expect another non-taper.

Employment

Old language (October): “Indicators of labor market conditions have shown some further improvement, but the unemployment rate remains elevated.”

Old language (September): “Some indicators of labor market conditions have shown further improvement in recent months, but the unemployment rate remains elevated.”

New information:

• Non-farm payroll gains averaged 193K in the last three months (September through November), which is well above the three month averages at either of the last two meetings (148K as of September and 143K as of October). The recent figures included two consecutive gains of over 200K: 200K exactly in October and 203K in November. In addition, the August print was revised upward twice, from 169K to 193K to 238K.
• The household survey tells a different story. The labor force expanded in September while 133K jobs were added, nudging the unemployment rate from 7.3% as of September’s meeting to 7.2% as of October’s meeting. That was a “good” drop in the unemployment rate because it coincided with a growing labor force. Since then, only 83K jobs were added while the labor force shrank by 265K (combining October and November to smooth out government shutdown distortions). Without the labor force shrinkage, the unemployment rate would have held steady at 7.2%. With the shrinkage, it fell to 7.0%. That was a “bad” drop in the unemployment rate because it had nothing to do with new jobs.
• Employment components of the ISM indices were mixed. The manufacturing index’s employment component reached a 1½ year high in November, while the same component of the non-manufacturing index fell to a 6-month low.

Comparison: Nonfarm payrolls strengthened considerably, but these gains aren’t corroborated by the household survey.

New language: The committee is likely to either restore September’s “shown further improvement” (dropping the qualifier “some” from October’s statement) or upgrade the language even more by mentioning an increased pace of hiring. On the other hand, the household survey’s disturbing trends may warrant an extra qualifier. The part about the unemployment rate remaining “elevated” will appear for the 18th consecutive time.

Household spending

Old language (last 8 meetings): “Household spending advanced.”

New information:

• The Q3 GDP report showed household spending growth slipping to 1.4% from a 2.0% trend over the past few years (Q1 2011 through Q2 2013). This is the lowest quarterly print since 2009.
• Spending growth appeared to pick up slightly in October, however, based on Friday’s report showing a 0.3% monthly gain in real personal consumption.
• Preliminary holiday spending reports are tepid at best.
• Monthly car sales averaged 15.6K units in the data released after September’s meeting (for September through November), which is down 1.9% from the monthly average of 15.9K in the prior three months.

Comparison: While the data looks weaker than it did at September’s meeting, the holiday season is the most important piece and still uncertain.

New language: There’s a small chance that they’ll downgrade the language to say that the rate of spending growth has slowed. For this to happen, the D
ecember 12 retail sales report would need to be weak. Otherwise, expect to see “household spending advanced” once again.

Business investment

Old language (last 7 meetings): “Business fixed investment advanced.”

New information:

• The Q3 GDP report showed business equipment spending falling slightly (-0.04%). This is only the second negative print since 2009.
• Not only was the third quarter weak, but fourth quarter equipment spending also got off to a poor start. October’s figure for non-defense durable goods ex-aircraft spending, which is used in GDP calculations, was 1.1% below the third quarter average.
• Business spending on structures grew at a 13.7% annual rate in Q3, down from the 17.6% Q2 print but still strong. This is the smallest and most volatile piece of business fixed investment, though, as shown by the year-to-date 2013 data, which includes a drop of 25.7% (annualized) in Q1.
• Like equipment spending, spending on structures is also off to a weak start in the fourth quarter. October’s figure for nonresidential construction spending was 1.1% below the third quarter average.

Comparison: Recent data paints a much weaker picture than at September’s meeting, when the only weak spot was a single month’s data (for July) from the durable goods report.

New language: Expect the new wording to be similar to “growth in business fixed investment has slowed,” which was the language used in December 2012 after the last drop in business equipment spending.

Housing

Old language (October): “The recovery in the housing sector slowed somewhat in recent months.”

Old language (September): “The housing sector has been strengthening but mortgage rates have risen further.”

New information:

• The Q3 GDP report showed residential construction expanding at a 13% annual rate, the fifth consecutive quarter of double-digit annualized growth.
• The NAHB Housing Market Index has fallen to 54 from 58 prior to September’s meeting and 55 prior to October’s meeting. The November release is due on December 17.
• Housing permits averaged 978K in the last three months (August through October), bouncing back from a three month average of 933K as of each of the last two meetings. Almost all of the fluctuation has been in multi-family units.
• Although the preliminary new home sales release for October was strong at 444K, the last three months averaged only 392K. This is lower than the three month averages at either of the last two meetings (429K as of September and 422K as of October).
• The NAR’s Pending Home Sales Index has fallen for five consecutive months.
• 30-year mortgage rates climbed to 4.46% this week, up from 4.10% in the week of October’s meeting and nearly back to the 4.50% of the week of September’s meeting.
• Housing starts data is conspicuously absent due to the government shutdown, with data for September, October and November due to be released for the first time on December 18.

Comparison: Permits recovered since the last two meetings, but new home sales were disappointing apart from October’s reading. The Housing Market Index and Pending Home Sales Index also weakened. Mortgage rates are rising once again, which will surely get the committee’s attention.

New language: Expect a newly worded housing sentence that retains the cautionary tone of the recent statements. If mortgages rates remain above 4.5%, they’ll probably restore September’s qualifier about rising rates. If rates continue to rise AND the mid-December releases (NAHB index, starts and permits) are weak, the new language should be a clear downgrade from the last two statements.

Fiscal restraint

Old language (last 5 meetings): “Fiscal policy is restraining economic growth.”

New information: The effects of fiscal measures enacted early this year (the tax hike and sequester) will gradually diminish. While new measures could be agreed at any time as budget negotiations continue, fiscal drag isn’t likely to be as severe as it was in the 2013 fiscal year.

New language: The old language could and probably should be softened this month. They could add a qualifier to indicate that the effects are diminishing or eliminate the sentence altogether (less likely).

Inflation

Old language (October and September): “Apart from fluctuations due to changes in energy prices, inflation has been running below the Committee’s longer-run objective, but longer-term inflation expectations have remained stable.”

New information: Core PCE inflation (the FOMC’s preferred measure) fell from 1.2% as of September’s meeting to 1.1% currently.

New language: Same as the old language.

Bottom line

The statement will be upgraded in parts but with a few downgrades mixed in. Overall, it’ll be less sanguine than you might expect if you’ve only been scanning headlines and watching financial television. It’ll reflect disappointing data in areas that haven’t received as much attention as, say, the nonfarm payrolls report, which caused many pundits to forecast a December taper. These more disappointing areas include business investment, mortgage rates and the shrinking labor force.

Based on the balance of upgrades and downgrades, some FOMC members will surely caution against an overreaction to a few months of 200,000+ (barely!) nonfarm payroll gains. They’ll also consider the huge inventory build shown in this year’s GDP reports, which may not be mentioned in the statement but should be part of the discussion. Not only do rising inventories help to explain the consensus outlook for weak Q4 GDP growth, but they also present risks for 2014.

What’s more, it’s hard to judge the fourth quarter without the full picture on holiday spending, which isn’t yet available. The importance of holiday spending makes mid-December an awkward time to form conclusions about the economy’s direction, and that’s especially true this year due to the government shutdown and late Thanksgiving. Some FOMC members will want to wait for the dust to settle on the fourth quarter before making policy changes.

Taken together, these factors suggest another non-taper in December .  If we’re right, the spotlight on January’s meeting – which already features Ben Bernanke’s exit, Janet Yellen’s new role and a new set of voters – will be even brighter.

Note:  The conclusions above describe our assessment of how the Fed will approach its December decision, not our own recommendation.  We’ve offered our own policy perspectives in many other articles, such as h
ere.

via Zero Hedge http://feedproxy.google.com/~r/zerohedge/feed/~3/YtBgRpqwsZ4/story01.htm Tyler Durden

While the heads of many investors are spinning these days – because of the record levels of the markets on the one hand, and the explosive evolution of bitcoins on the other hand – they are losing sight of the most important development in monetary history. A woman is about to take the lead of the most powerful central bank in the world. For many market watchers, this development can be considered a blessing for the financial markets. Finally some peace in the financial household!

Alas. We will need to disappoint you. Yellen was and is the right hand of Bernanke. Even more, she was at the root of some of the more unconventional measures taken by the central banker when the financial crisis hit in 2008. Lowering the short-term interest rates to almost zero percent, for example, or buying back government and real estate debt from banks, better known as ‘Quantitative Easing’. Those measures were put in place to make sure the United States’ impressive mountain of debt didn’t implode under its own pressure. The goal was to avoid a depression like the one we experienced in the 1930s, but the core of the problem – the debt burden – has not been dealt with. The problem was displaced … to the Fed’s balance sheet.

The above chart, the Fed’s monetary base, screams more than a thousand words. And although Bernanke carries the responsibility, it is mostly Janet Yellen that delivered this result. If you look closely at the chart, by the way, you will see that the Fed’s balance sheet is blowing up fast. This is the result of the new, goal-oriented QE: the Fed will only tighten its monetary policy when certain goals are met. At this point, these goals mainly include an unemployment level below 6.5% and inflation to be above 2%. As long as neither of them are reached, the Fed is not going to stop its accommodative policies. Even tempering QE (tapering), which is something that a lot of market watchers pointed out as a possibility in recent months, would not be on the agenda.

Even more, we are expecting the buyback program to pick up speed more than anything else. Not only is the Fed not attaining its current targets, but also the market is going to test Janet Yellen in 2014. Most newcomers to the job of Chairman of the Fed have to go through this. However, 2014 is going to be a more turbulent year than 2013 as well. More volatility in combination with (strong) corrections will push the leading lady of the Fed out of her comfort zone.

Although she will be new to the job, Janet Yellen will surely stand her ground. The expected reaction from the Fed’s top exec could bring a whole new dimension to the monetary policies of the Federal Reserve. Janet Yellen was not afraid to color outside the lines in her proposals already. So there is no doubt in our minds that she will continue to do so when it is necessary. And what might that look like? Well, it has been described in many studies that extreme conditions sometimes call for extreme measures. A stock market crash can be moderated by direct purchases from the Fed, for example. In the United States this is still considered as an extreme measure, but in Japan, the central bank is already applying this tactic to the financial markets for months through supporting and buying listed stocks and ETF’s.

Another measure we are reading more and more about these days is the negative deposit rate. If the Fed would implement this, banks would be forced to make their reserves work for them, and pump excess capital into society through new loans and financing. However, the banks are not excited to do this of course. They are still licking their wounds and quite comfortable in their current position – borrowing at almost zero percent and investing in risk free government bonds with an interest rate of a few percent. Yellen will probably not change a lot about this situation, however. Many people forget the shareholders of the Fed are private banks in the US, not the government as is the case in Europe.

Finally, there remains the direct injection of money into the economy by the Federal Reserve. The image of Bernanke’s helicopter, with which he has been associated for the last few years; figuratively dropping dollar bills from helicopters, referring to a statement from Milton Friedman. This means that citizens are literally being rewarded to stimulate the economy. Now they are pumping fresh dollars into the banks, but those dollars are not going anywhere (for now), which causes a delay in the economic impact. If the people, however, got the money directly, the possibility of spending and stimulating the economy increases. It wouldn’t surprise us if Yellen takes monetary policy to that level, as she has always been in favor of giving a voice to the people. This would not be a United States first, however, as former president George W. Bush gave every American family a check after the crisis.

Ultimately, Janet Yellen can be considered a champion of accommodative monetary policies aimed at avoiding another economic depression. All necessary means will justify the cause. While Bernanke is considered more as a conservative dove always trying to keep all parties satisfied, Yellen comes across as a more decisive dove that wants to shine in the monetary arena during her term. So please hold on for unconventional and new measures from the Fed. The other side of the coin, however, is that these measures will sooner or later get out of hand, with the necessary consequences for the financial markets and your capital. Please take timely precautions when it comes to reckless monetary measures and policies.

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