Iron Ore

Think this doesn't make for inflationary pressure in China? The Financial Times reports "Steel Prices to Rocket Under New Contract." The iron ore companies have succeeded in eliminating the system of yearly contracted prices. Instead, prices will be set quarterly according to a spot price. This agreement is a result of bargaining power by the mining companies due to China's demand for raw materials.

I believe that this price increase will continue to fuel the inflation pressure which has started to build in China. What remains to be seen is how the Chinese authorities will respond to further overheating. Thus far, they have clearly followed a policy of easy money. Asset bubbles have been the result. However, generalized price inflation might not be as acceptable to the government as asset bubbles are.

Politics of the Greek (Bail)Out

The FT is reporting that there is agreement on the structure of a bailout for Greece. The Germans are insisting that the bailout be undertaken only if absolutely necessary. The French have agreed to IMF (read U.S.) involvement as long as the IMF is only extends one-third of the bailout loans. If they are ever given. I don't think the IMF was consulted.

There really is not much agreed on. What we can surmise is that the Germans wanted the IMF to do the bailing out. Since the French did not. So the Germans are posturing when they say they want a mechanism for kicking Greece out of the Euro. They really want a bailout, but they don't want to pay for it. Enter the IMF. The French want a bailout, but they don't want U.S. involvement. Why? The French want a cheaper Euro to improve the balance of trade.

But there's always a wrench in the agreement: "Any decision by the eurozone countries to lend money to Greece would have to be unanimous."

I'm still waiting for the Euro to bounce on the bailout news, or at least to stabilize.

I'm also getting tired of holding SKF, now that I have AGO as well. I'm also thinking about shorting ITB or KBH.

Market Analogy and Trade!

From David Rosenberg:

One can only marvel at how the U.S. market managed to bounce back in the last hour of trade yesterday — the intraday move in the Dow exceeded 70 points. Yet, once again, volume faltered on the major exchanges. This remains one weird market, and reminds us of the story of the pig farmer — one sells a pig to the other for a dollar only to then have it sold back to him for $1.25 and then sold back to the other farmer for $1.75 and so on and so forth. It’s two pig farmers selling the same pig back and forth and driving the price higher in the interim — until of course, the price dynamics shift into reverse.

Maybe it's not so weird after all. Anyway, time to trade.

And I just had a thought that tempts me to double down on the bonds. Now that the Fed's stopped buying Agency bonds, anyone still in them should be running to Treasuries. But then again, China's been trading out of agencies for months.... It's not like any industry professionals can't see that spreads over Treasuries aren't the lowest in history.

Trade: short 10% position in AGO @ $21.44

Waiting Game

I feel pretty calm about the market right now. I've moved up to 70% invested in the options account, and am just looking for bargains now. My trigger finger on ULE is getting a little itchy, as I can see traders taking massive bets against the Pound. The bets are 8 to 1 bearish. So I'm looking for some less travelled paths. My short exposure at 50% is rather moderate for the current market feel. I don't really want to increase my short equity exposure above , so I'm leaning toward sticking with my current positions. However, I am tempted to rotate into more volatile, specific instruments. One thought is to close SKF (ultrashort financials) and short AGO. I just checked Schwab, and I can short it. With the continued pressure on municipality, city, and state finances, I think AGO's ability to pay out on claims it never expected will come into question. I would like to play this with a put option, because I have no feel for timing, but at 60, the implied volatility is stratospheric. In fact, I may just short AGO as an added position tomorrow.

Option Watchlist

With the VIX in the teens for the first time in 6 months, I am looking at options.

Here are the implied volatilities of the options on my watchlist:

AGO Jan11 12.5 put = 64.
15 put = 60.6
ANF Jan11 35 put = 41
DIG Sept10 27 put = 52.5
IAG Jan11 20 call = 50
IAG Jan12 25 call = 49.6
KBH Jan11 10 put = 55.1
SPY Dec10 80 put = 29.9
SPY Dec10 90 put = 27
SPY Dec12 60 put = 30.2
SPY Dec12 85 put = 24.8
USO Jan12 30 put = 34.2

Now I'm going to wait and see if they drop down.

Trade!

I bought another put on EWA (MSCI Australia index) at a very cheap price. EWA is at $23.54.

Buy Oct. $23 EWA put @ $2.00.

I've been using the implied volatility as a measure of how expensive options are. The IV is the only subjective measure, and therefore gives a benchmark for tracking investor sentiment over time.

While I unfortunately bought the Jul 19 EWA puts at an implied volatility of almost 30, this one came in at 17.8. You can't get much cheaper than that.

Stupid Reporters

Earlier this week, the FT had a story about how Icelanders were "confused" about the referendum to cave in to British pressure to pay for the losses of the private bank, Icesave. Unfortunately, I'm not a paid subscriber to FT, so I can't link to one of the stupidest and worst examples of reporting in recent history. The reporter who wrote this one should be demoted to stories about Brittany Spears.

In a stunning display of absolute non-confusion, 98% of Icelanders voted "NO" on the deal Parliament worked out with Britain and Holland earlier this year to saddle the people of Iceland with the debt of a bankrupt private bank.

If there was ever proof that reporters are more confused than the rest of us, this is it.

Trade!

Just bought 5% position in ULE (Ultra Euro) @ $27.05.

Everyone and their mother knows about Greece's budget woes. People who couldn't find Greece on a globe wax poetic about how Greece hid debt off balance sheet through complex swaps with Goldman Sachs. Hedge fund managers hold "Secret" dinners to discuss shorting the Euro. Papandreou crieds for help daily. Angela Merkel scowls and denies bailout rumors daily. It's a little too staged. The fundamentals say the euro is way oversold. Short interest on the Euro is near record highs, and is just now starting to wane. This means the big boys are looking to exit.

Why trade today? Because my scenario of a back-door bailout is looking clearer. The first step was taken today. Greece auctioned off $10 billion in bonds at 6.3%. The issue was five times oversubscribed, which means that the institutional money understands what's going on. This should give the Euro a nice kick in the pants.

Trade

Closed EUO @ $20.81, -6%. Just bad timing here. I shorted it about 8 months too soon. Now I'll wait for Greece's next bond auction to go well. I expect the Germans to do a back-door bailout with their state-owned banks. They'll have to support the first auction to calm the market. But since I'm still bearish on the Euro long term, I'll wait for a technical buying opportunity. I want to see the price drop below the 50-day moving average.