Buying Nabi Biopharmaceuticals for below cash

Nabi Shares Plunge After Smoke-Cessation Drug Shown Ineffective in Study. The initial Phase III study for NicVAX is a double-blinded, placebo-controlled study comprised of approximately 1,000 patients. Both the company and investors are caught by surprise. Its sold off to 1.55, as I am writing now. It represents an unique opportunity to get paid to own an option on NicVAX.

Nabi has 108M cash and marketable securities on their balance sheet and about 35M in present value from remaining milestones and royalties from Fresenius Medical Care AG. At 1.55 per share, Nabi stock is traded at about 45% of the cash value. Nabi spend 5M per quarter on R&D and the majority of the spending is on NicVax. I don't expect Nabi to invest more capital on NicVax, unless there is significant chance of success. Raafat Fahim, President and Chief Executive said in the statement "the board of directors is actively evaluating any and all appropriate strategic alternative actions to preserve shareholder value, while management is working to further control the operational expenses of the company."

Daily Clueless Musings 7/15

The European stress test 2.0 is nothing but a joke. Moody's predicted 26 failures, Eurostat gives us 8. EBA says 5 Spanish, 2 Greek, 1 Austrian Bank fail as of April 30. The so called "stress" scenario does not consider a default by Greece or other peripherals. It is not even close to the probability of default implied by the CDS market. Market cannot wait to sell the short lived rally in Euro. Eurodollar front contracts are also under heavy selling pressure after the release. Yield spreads between the European peripherals and German bonds widened again. Market is not as naive as the European politician hoped to be. The under-stressed stress test won't buy any confidence for the EU banks. According to a report by JPMorgan published on Wednesday, US prime money market funds reduced their exposure to European banks by 11.6 percent to a total of $675 billion at the end of June. Herman Van Rompuy ,President of the European Council, tweeted that a meeting of the Euro area Heads of State or Government will be held on Thursday, 21 July, at 12.00 in Brussels. Maybe a soft default of Greek bonds will be announced? The timing is also perfect. It happens to be just a day before the US debt ceiling legislative deadline. The overhang of debt ceiling issue in the US and the weakness of USD helped buffering the credit shocks.But the time left for EU/ECB to act is running out.

Things are not rosy at all in the States as well. The University of Michigan sentiment index fell 7.7 points to 63.8 in July ,the lowest level since March 2009, despite lower gas prices. Although core CPI came in at 0.25% month over month, higher than expectation, the median one-year inflation expectation fell from 3.8% to 3.4%. The five year inflation expectation fell from 3.0% to 2.8%, approaching the 2.7% level pre-QE2, when deflation rather than inflation was the topic of the time. As long as the inflation expectation remains low and stable, it helps the Fed doves insisting inflation to be "transitory" (AKA the BoE "Bury your head in the sand" way), which may be paving the road to QE3. The weak Manufacturing IP also helps tipping the balance to more easing. Industrial production increased 0.2% in June but May (from 0.1% to -0.1%) and April (0.0% to -0.1%) were both revised down. The key manufacturing production was flat in June and the growth for May was revised down from 0.4% to 0.1%.

More updates on Hanny

Hanny just announced that they sold all the ITCP convertible notes to Charles Chan for 311.8M (5% above their book value). It is a positive news, as Hanny continue to disengage itself from Charles Chan. Now the only link between them is the 50% stake in the ITCP China. Also after the sale, Hanny will have about 1.6 hkd per share (part of the cash will be used for real estate development.)

If you are Hanny's shareholder like me, please contact me. We should put more pressure on the company to return those access cash to shareholders

Daily Clueless Musings 7/08--Nonfarm payroll

After a strong ADP number and retail sales yesterday, hope is high for today's Nonfarm payroll. Everything about the June employment report was a major disappointment. There is nothing positive in this report. Nonfarm employment increased a pathetic 18k, after a downward-revised 25k increase in May. Bulls can no long blame the earthquake, flood and storm. Japanese PMI bounced nicely in June, however manufacturing employment rose by just 6k, after declining 2k in May. The average workweek fell a tenth to 34.3 hours and average hourly earnings declined 0.04%. The declining consumer income does not bode well for spending. The unemployment rate increased 0.1 to 9.2% in spite of the participation rate falling to 64.1%. Futures jumped higher, as market was caught by surprise. Vols were soft. Gamma options are lower after the number, but bounce back slightly as futures continue to move. It is interesting to see how the CPI and PPI print next week. Although the headline inflation might be lower due to lower gas prices, core might continue to trend higher, merely as function of easy year over year comparison. Eurodollar futures rallied toward their highs and 2 year dropped to 38 basis points. Stocks were surprisingly resilient, they ended higher than the pre-ADP level.

Daily Clueless Musings 7/06

The ISM nonmanufacturing index declined from 54.6 to 53.3 in June. The new orders index declined 3.2 points in June but still came in at a decent level of 53.6. The employment is up 0.1 points to 54.1. Although the data start to beat the lowered expectation, global PMI (ex Japan) continue to decline. 9 out of 14 available country level PMI declined in Jun. Euro area wide service PMI declined to 53.7, the lowest since last October. Futures rallied again after Monday's move, as people rushed to covered their short position which they put on before the EU/IMF approving the 12 Billion Euro to Greece. Front contracts are sold off again, as people now realized no problem can be solved by throwing 12 billion Euro to the insolvent Greece. European banks are meeting to sweeten Greek terms and German Financial Minister insisted that private investors must play central role in Greek aid and saw “many arguments for alternatives” to French plan. CDS on many European Sovereign debt all widened today. Moody's released a list of 26 banks (out of 91banks) that will fail the second European stress test. Market has been trying to sell fronts to trade/hedge the credit risk, however fixing has barely moved yet. BBA announced that it would change calculation method for dollar Libor on August 1, removing highest and lowest 5 rates (instead of 4). The move will reduce the volatility in LIBOR fixing by removing one more low quality banks.

Daily Clueless Musings 6/28..Final count down to the Greek austerity plan vote

Risky assets continue to rally before Greece voting on their austerity plan. Market priced in a high probability that the vote will pass, although the protests shown on CNBC reminds everyone that passing the austerity plan has nothing to do with executing it, as Greece already failed to do so on the austerity plan they passed just a year ago. EU/ECB still does not have a clear plan to solve the Greek insolvency, but they learned to just toss an idea around the market and then stick to it, if market seems to be happy. As market rallied after French banks agreed to roll over their debt. Reuters reported that German banks agree in principle to adopt the same plan, although it still does not prevent private investors holding out of the soft restructure. Market again ignored bad economic data from US. The consumer confidence declined 3.2 points in June to 58.5, reaching its lowest level since last November. The labor market differential reported in the Conference Board data widened from -37.8 to -38.6 in June. The 5 year auction is a horrible 3.5 bps tail off the market. The bid To Cover coming at 2.59 a plunge from May's 3.20, and the lowest since June 2010. Indirect interest evaporated once again, tumbling from 47.1% to just 37.6%. As QE2 is about to end, dealers can no longer flip their treasuries to Fed for a quick buck. The real demand for US treasuries may not be as strong as the previous auctions had shown. The demand is likely to be much weaker, if Europe is not in the middle of credit/currency crisis. Futures traded lower on the second day in a row. The downward movement is pretty violent. There was no more buying the dip trade, as we saw in previous selloffs. Gamma options are relatively weaker than the vega options, as market is sure that the can will be kicked down the road.

Daily Clueless Musings 6/27

Stocks rallied before Greece voting for the austerity plan. Fronts bounced back slightly, but they are still pricing significant liquidity risk. Wednesday's vote is the first step for Greece to obtain the 12 billion EUR money they need to meet their debt payment through Aug. If they fail to pass the vote, a default is going to be imminent. EU sources told Reuters that they have ruled out several options for Greece should the austerity vote fail. Real consumption in the US fell 0.1% in May and the change in spending for April was revised down from +0.1% to -0.1%, while spending in +0.3% yoy, as consumer continues to deleverage. Real consumption growth for 2Q is only tracking about 0.8% gain yoy. Ironically the savings rate is high, when the real interest rate is in the negative territory. The core PCE deflator increased 0.257% in May which was its strongest monthly increase since October 2009; the index has risen 2.2% annualized over past three month and up 1.2% yoy. The first 2 year auction after FOMC was a nearly 1 bp tail. Market needs to wait until the Jackson Hole for the much hoped (or tweeted) interest rate cap. There were not many option flows. Front vols were slightly lower. Paper took off some of their libor crisis trade, they bought back N1 96C vs N1 92-5P>. They also sold U1 92-5 P>.

Update on Hanny Holdings

Hanny just announced the sale of 49% equity interest in the Guangzhou Jixiang, which controls 100% interest in the Yuexiu Project. Hanny paid 1064M for the project. Prosperous global, a local real estate developer, paid 746.7M HKD for the 49% interest. So the deal is a positive for Hanny. It not only confirmed the value of Hanny's real estate holdings but also reduces the future capital investment. Prosperous global has developed several commercial real estate projects in Guangzhou. So the deal will also give Hanny more local connections and expertise to ensure the success of this project.

Daily Clueless Musings 6/22 FOMC

The Fed has lowered (yet again) it's GDP growth and job recovery forecast. However the Committee anticipates the recovery will "pick up in coming quarters." The slowdown was thought to reflect factors that are "in part" temporary, particularly the rise in energy prices and the Japanese supply chain disruptions. When asked during the press conference what does the “in part” imply, Bernanke expressed relatively low conviction, saying “We don't have a precise read on why this slower pace of growth is persisting” . Near term core PCE is revised higher by 0.2%. QE 3 is the hidden theme today. Market has been hoping for some hints on the possibility of QE3. Both Eurodollar futures and risky assets traded higher in the morning. Bill Gross tweeted and talked on CNBC on the idea that QE3 is likely to take the form of short term interest rate cap. Although Bernanke did not shut the door on QE3, he current condition does not warrant new round of asset purchasing, as the Securities purchases were intended, in part, to end risk of deflation ( Ben gave some lengthy explanation on how the current condition is different from last year). At the same time, his remarks hinted that the FOMC has in fact discussed easing options, which include: 1) securities purchases, which could be structured in various ways; 2) a cut in the interest rate on excess reserves; 3) guidance on how long the Fed will wait to sell securities; and 4) or “a fixed date to define extended period”. Market disappointed. Stocks traded lower and futures broke after Bernanke concluded his press conference.

Daily Clueless Musings 6/15--The Greek Show

The Greece situation feels like slow motion of Lehman Brother 2.0. Apparently when EU/ECB/IMF kicked the Greek debt can down, it was not far enough. Everyone thought one year of time would be enough for Greece, European banks and ECB to come up with a solution for the debt issue. They were wrong. Politicians have a tendency of avoiding answering hard questions as long as possible. Just like preparing for exams in college, only the last few days count. Now as the deadline for Greek debt rollover approaches, the situation is as complicated if not more as it was a year ago. ECB, German and Greece are locked in a prisoner's dilemma. The obvious and sensible solution may be derailed by the conflicts of interests between the parties. The consequence of the more unpredictable than the market perceives. Front contracts were under selling pressure again, although libor fixing continues to come in. Stocks market were lower as well and vix was bid, but they are not nearly at a level implying massive risk to the economic recovery. Euro were down more than 250 pips, but it is still significantly above the 1.20 level we saw when the Greek debt crisis first broke out. The economic data in the US was shadowed by the news on Greek debt crisis. The headline and core CPI increased 0.17% and 0.29% respectively in May. Both were larger than expected. Apparel price rose 1.2%, the largest increase in more than two years, which may suggest the labor and raw martial inflation in the emerging economies are finally showing up at consumer level. The annualized core CPI is very close to hit the lower boundary of Fed inflation target range. The Empire State manufacturing survey weakened significantly in June, with the headline falling 19.7 points to -7.8. The details are more worrisome. he ISM-weighted composite for the June Empire State survey dropped from 58.1 to 49.7.The workweek also posted its largest decline on record, plunging 25.7 points in June to -2.0, and employment fell from 24.7 to 10.2. Vols were bid on the rally. As paper were buying downside options in the U1 and Z1. However assuming central banks have learned their lessons from Lehman Brother's debacle, it is unlikely to see the liquidity issues in the market even if Greece defaults. The price Volatility of safe asset may actually decreases, as the increased supply of liquidity and decreased supply of safe assets.

Daily Clueless Musings 6/14

It is the first time Eurodollar futures closed lower in two consecutive trading session. Economic data finally deliver better than expectation, as growth expectations got beaten down enough. May retail sales fall by only 0.2% and rose 0.3% ex-auto sales. The May reading of the Producer Price Index was +0.2% for both the headline and the core. Excluding light vehicles, which does not provide good guidance for CPI, the core PPI rose 0.3% in May, which was the strongest monthly increase in almost a year. Inflation in emerging economies continue to come at higher number than expected. May inflation accelerates to 9.1% yoy in India and 5.5% in China. Emerging economies have been an exporter of dis-inflation in the past decades, as they export cheap labor to developed economies, like US. It seems to be reaching a tipping point. Bruce Rockowitz, president of Li & Fung the largest consumer goods sourcing company, warned "prices of mainland-made goods will increase by five percent annually over the next five years." Consumer prices are depressed in the US due to soft labor market. Just like a compressed spring, inflation is likely to show its teeth as soon as labor market recovers. Tomorrow's core CPI is expected to increase 1.4% year over year, only 0.1% below Fed's target range and 100 basis points higher than 2 year treasury yield. The number only may seem OK to some, but this is achieve with unemployment rate standing at 9.1%. Futures traded lower before the CPI number. paper got more aggressive on buying put options to put bearish position. They about H2 and 0N puts as well as calendar puts spreads betting on curve steepening. Vols are firm, as futures broke, but there was seller of green gamma. They sold 10k green U straddles as vols were bid.

Daily Clueless Musings 6/9

This breathless rally finally paused for a day with the help of rumors about Greek austerity plan and a worse than expected 30 year auction. Initial claims edged up to 427k. After a large swing in the data late in April that was caused in part by some temporary distorting factors, claims have stabilized around 425k, signaling some deterioration in the labor market relative to earlier in the year. Unlike Bernanke's burying your head in the sand strategy to inflation, upside inflation risks prompted "strong vigilance" from the ECB, setting the stage for a July rate increase, which also add pressure on Eurodollar futures. The release of Q1 Fund of flow showed some interesting factors. Debt of the domestic nonfinancial sectors inched forward at only a 2.3% annual pace last quarter, the third slowest quarter in over half a century. Nonfinancial corporations bought back shares at a $332 billion annual rate. As the debt owed by state and local governments contracted at a 2.9% rate, the fastest pace of decline since 1996, there is a lack of balance sheet expansion to absorb fresh savings in the private sector, which can partially explain the negative real rates environment. Vols were firm as futures traded lower. Front whites were under selling pressure. Paper bought green u call spread in the morning.

Daily Clueless Musings 6/8

Eurodollar futures continue to rally, after Bernanke's dovish speech yesterday. Slowing economic activity and weak labor market are not news. Bernanke also "explained" to the market that Fed's zero rate policy is not causing rising commodity and weakening dollar (thus, maybe, he implies that raising rates is not going to be the right response to solve those issues, when they come.). He seems to be concerned about the potential fiscal drag from both state and federal level, as he spent two paragraph discussing how the fiscal drag will slow down the recovery. We should expect more "stimulus" from Fed, if there is larger than expected cut on government spending. Mr. Bernanke also suggested that, rather than buy more assets, the Fed is more likely to respond to the slowdown by holding on to the assets that it has for a longer period. Holing the bloated balance sheet at Fed steady and keeping interest rate at zero (or negative real interest rate) for extended period is likely going to the unofficial QE3. Ironically, although Bernanke again denied more quantitative easing/ asset purchasing program, the number of key word "QE3" hits on Google search made new high after his speech. Eurodollar futures have no way to go but up, although they have already priced in very low probability of rate hiking before mid 2012. Volatility is low, as Fed once again assures the market Fed tightening monetary policy is further than more options will expire. Longs rushed to accumulate more futures before the 10 year auction, which unsurprisingly turned out to be strong. Yield on 2 year closed at 38 basis points, only 4 basis points higher than the all time low. Speculators are blamed for higher oil prices. Do we really think the real money investors are chasing 38bps yield for 2 years, when core CPI prints 102 bps higher? paper continue to acquire long delta exposure by selling vols. They sold green H 80 put to buy 81-2 call spread 8 times.

Daily Clueless Musings 6/02

Eurodollar futures retraced back from yesterday's rally before tomorrow's NFP. The expectation is low. Any number that is close to the expected 170K will likely make futures break. However the economic data today showed no sign of improvement. Initial claims was 422k. The level of claims stubbornly remains above 400k level. Unit Labor Costs were revised down three tenths to +0.7%, which eases the pressure on core CPI inflation but implying continued softness in labor market. Both will put pressure on nominal GDP growth. Factory orders fell 1.2% in April and shipments were down 0.2% during the month. Durables are down 3.6% in April and related shipments down 1.3%. However the data could be disrupted by the Japan earthquake, as transportation products led the declines in both durable goods orders and shipments. Moody's said US government's rating may be cut if no progress on debt limit. No one in the world believes debt ceiling will not be lifted. So stock market reacted by bidding up the stock prices. Eurodollar futures broke on the news. It seems that market believe the more pressure rating agencies put on the congress to raise the ceiling, the more likely for the ceiling to be raised without too much deficit reduction. Slower expansion of US government’s balance sheet is probably the last thing the market wants in the middle of this slow recovery. As US private sector needs to de-lever, there needs to be an expanding balance sheet to absorb the savings. As emerging markets like the BRICs are putting brakes on their economy, Japanese are facing the uncertainty after the natural disaster and Europe is swamped in the debt crisis/ austerity measures, US government becomes the most important source to absorbing savings from private sector. Expansionary fiscal policy is very bearish for fixed income and bullish for the recovery. It seems to be the first time in a while we do not see people rush to buy futures on the dip. The expectation is too low for tomorrow's number, the tail risk tilts toward downside. Vols were firm, as futures break. There were some straddle buying. Paper has not put on big bearish trade.

Daily Clueless Musings 6/01

The ADP employment report estimated that merely 38k private-sector jobs were added in May. This was the softest reading for the ADP report since QE2 started. ADP had a pretty good track record predicting NFP in the recent month. ADP reported that 175k jobs per month were added between October and April, while the BLS reported that 185k over the same time period. Today's number bodes ill for the NFP. However given the recent volatility in labor market to the impact of natural disasters, NFP could be significantly different from the ADP guesstimate, because ADP employment report incorporates data during the week prior to the BLS’s payroll survey week. The average initial jobless claims for the weeks covered by ADP report is 24k higher than those surveyed by BLS. PMI are softer across the world. China reported a reading of 52 in May, down 0.9 from April. The Euro area manufacturing output PMI is estimated to have fallen 4.9-pts to 55.2 in May. US PMI was at 53.5% in May, sharply down from 60.4% in April. The new order, production and back order indexes are all down at a faster pace than the inventory, implying more future softness. Greek debt was once again downgraded to Caa1 from B1. Again, at this point the question is not whether Greece is going to default but when it will default and who will take the loss. Eurodollar futures rallied and vols are smashed. However the front contracts seem to have priced in worse possible scenario and unable to rally on the surprisingly bad number. Paper continue to put on bullish trades on green futures. Small green calls got cheaper even as futures rallied more than 10 ticks, as paper bought call green 1x2s.

Daily Clueless Musings 5/31

It is the last trading of the spectacular May rally in Eurodallors. What else can we expect but another rally. Europe brought the market Greek bailout 2.0 just in time before US market opened after a long weekend. The details are not announced yet. The basic plan is that in exchange for the 32 billion new money, Greek will fund the gap through expected privatization receipts, rollover of debt mostly by Greek banks and issuance of bills. What a “brilliant” plan! Stocks rallied all over the world and Eurodollar futures traded lower overnight. Insolvency can be solved through selling productive assets or internally transfer liability (Greek banks extend credit to the government), maybe we should rewrite the bankruptcy law. The can could be kicked down the road once again, the question who and when are going to recognize the loss remain to be answered. Greece's problem is lack of a money printing press to force creditor to take loss. US tells us merely a money printing press will not guarantee economy recovery. Today's data again confirmed slowing economic activity since Q1. The headline Chicago PMI data tanked in May, showing the slowest rate of monthly growth since November 2009. Growth in backlog orders almost entirely evaporated while inventories surged, which will put more pressure on the future manufacturing activity. The only thing that did not slow is the input price for raw material, which printed 78.6. Soon, stagflation is going to be the most used word in my summary. The Conference Board’s measure of consumer confidence dropped 5.2 points in May to 60.8. The labor market differential widened from -37.3 to -38.3 in May. This bodes ill for the coming NFP this Friday. Vols came in again. Paper continue to put on bearish trades on the EDU1 together with bullish trades on the back contracts. Paper bought U1 p> and sold Q1 97c as a package. They also bought 0U 92-5 C1x2, which further crashed the mid curve call skew. Although mid curve vol path has been performance in line with the steep skew slope as futures slowly grind higher, market seems to be under pricing jump risk in the future at this point. The market is complacent. As the short risk trade (long Eurodollar futures and shorting volatility) has work well for so long, the risk for marginal profit is absurdly high, and yet no one (at least those who are still riding the trade) seem to concern.

Daily Clueless Musings 5/26

The second print of Q1 real GDP growth still shows the economy expanding at a paltry 1.8% annual rate. The much anticipated upward revision did not come, even after yesterday’s upward revised March inventory building and core capital good shipments of durable goods. The number is due to a weaker-than-expected print on consumer spending. More disappointingly, the consumer income is revised down more than the spending, which led to a drop in savings rate from 5.7% to 5.1%. A weaker than expected job market is not doing any help to US consumers. The jobless claims data disappointed, rising 10k to 424k, the seventh straight week claims have stayed above 400k. In the euro land, things are not getting any better. The head of the Eurogroup Jean-Claude Juncker highlighted that the IMF will only release the next tranche of its funding for Greece if the source of Greece's financing needs over the next twelve months is clear. The timing is pretty interesting. At the time of the last review, three months ago, it was assumed that Greece would be able to reaccess capital markets next year. Even the most optimistic people will not believe it is the case anymore. This could be intended to put pressure on Greece and EU/ECB to come up with a resolution. Both GDP and the claims are worse than expected, futures regained strength to continue this run up, after couple days of consolidation. Vols are lower again. Market seems to be less concerned about a credit crisis, even EDU1 participated the rally. Paper started to put on some bearish trades to fate the rally. They bought M2 88-91 P> and sold 96C.

Daily Clueless Musings 5/19

Guess how the Eurodollar futures traded after yesterday's break? The day after the 6 breaks that we had in the past 30 trading days, 100% of the time futures bounced back. The day after Fed released its blue print for exit strategy, the rally continues. The market has been modeling the movement of financial instruments after random motions on the belief in efficient market. While, if this is true, the 6 down days out of 30 trading days in EDM2 would imply a 3.3 standard deviation event, which should happen every 160 years. Information flow does not fully justify the move. Initial claims declined 29k to 409k. The first time in a while, the number came better than expectation. The data also suggest the weakness in the prior weeks appears to be due to distorting factors including temporary auto plant shutdowns and Easter in the seasonal factors. Existing-home sales is a little weak. It fell 0.8% to a seasonally adjusted annual rate of 5.05 million in April from a downwardly revised 5.09 million in March. But a weak housing market is not much of a news any more. The yield on 10 year treasury dipped below the headline CPI the first time in this cycle, even though Fed does not believe inflation is sufficiently high in this economy. Even assuming inflation stays at current level (although even Fed thinks the risk of inflation is tilted toward the upside), the only way for a buyer to make profit is to find another sucker, who is willing to pay higher price. Do people still remember the reasoning when they bought luxury condo in Sun belt or no-cash flow tech names in 2000? This is exactly the recipe for a bubble. As longer the trend holds up, the easier for people to justify paying a higher price. It is interesting to see how the current uptrend ends. There is no ceiling price on stocks or houses, but there is one for interest rate. 0M straddle traded 12 today. Vols are very low, even though the implied to realized ratio does not seem to be cheap. Fed successfully and proudly created a low volatility rate environment, which appears to be desired. The problem is that most of the market participants are short term oriented in nature. They are evaluated by their quarterly or even monthly PnL. In order to survive in such market, they are forced to follow the trend and take on enormous leverage and exposure to tail risk to squeeze out the last drop of premium (think about the nearly negligible carry priced in front Eurodollar contracts or the premium in the 3 week mid curve straddle.). Besides some N1 92 puts buying, there is no big downside play by the paper in the option world. The music will go on, until it ends.

Daily Clueless Musings 5/18

Finally we have some actions in the market today. Front eurodollar contracts were under heavy selling pressure before the release of FOMC minutes. Inflation and exit strategy were the two main themes of the minutes. The minutes said that “Many participants had become more concerned about the upside risks to the inflation outlook.” , however on economic activity the minutes said that “Although most participants continued to see the risks to their outlooks for economic growth as being broadly balanced, a number now judged those risks to be tilted to the downside.” As commodity prices have come down and industrial activities have cooled down since the April meeting, Fed likely has tilted toward more accommodative policy. Ironically, as Fed seems to be slightly accommodative than the market had expected, stocks and commodities all traded higher after the minutes and yield curve steepened. More importantly, the minutes also laid out details of their exit strategy. The sequence will probably be: 1) End of QE2 at the end of June, 2) stop reinvestment payments of principal on agency securities. Therefore the size of the balance sheet will the first signal of the tightening cycle 3) removing "exceptionally low levels for the federal funds rate for an extended period" 4) Rate hike is like to come two meetings after. 5) sales of securities will come after rate hikes. Futures finally have a down day today. It is not because the expectation for next rate hikes is not pushed forward. Futures just price in too much certainty. Although FOMC provided the market more details on their exist strategy, the expected monetary policy is contingent on assumptions of inflation and economic activities. The effect of ending QE2 and fiscal policy are way more uncertain than what the current market has priced in. Vols remained very cheap on this down tick. There are not much options flows, even as futures made a significant turn today. Paper has not yet put on big bearish trades or take off their bullish trades. It is interesting to see how the market will reaction, if the sell off follow through.

Daily Clueless Musings 5/16

US officially hit the debt ceiling today. Mr. Gross, the largest domestic bond buyer, again bashed US treasuries on CNBC. TIC data showed in March foreign accounts increased their holdings of long-term US securities by $24.0 billion, $9 billion less than forecast. China, the largest Foreign US treasury holder, reduced their holdings for the 5th consecutive month in a row. They reduced their holding by 9.2 billion, and the largest one month decline since November 2010. And, yet, once again, futures traded higher, as treasuries rallied. The Empire State manufacturing survey’s headline reading declined from 21.7 to 11.9 in May. As the first glance, manufacturing activity slowed more than expectation, which seems to push futures higher. But the key components, which are included in ISM manufacturing survey, are better than the headline number. ISM-weighted composite index for the survey increased from 57.1 to 58.1. The price paid index, which advanced 12 points to 69.9, the highest since mid 2008. The index for the number of employee also increased to 24.7. It is difficult to justify lower rates when inflation is strong and job is expanding. Paper continue to put up bullish trades. They sold 0N 91 calls to buy 2u 82-6 c1x2. Upside gamma continue to get crushed as futures traded higher. Mid curve gamma options are particularly cheap. 0M straddles traded 13+. Market is pricing the future uncertainty with a incredibly narrow margin of error. As Vladimir Nabokov once said "Complacency is a state of mind that exists only in retrospective: it has to be shattered before being ascertained".

Daily Clueless Musings 5/13

CPI had another firm increase last month. Headline number rose 0.42% on the back of higher food and energy prices. The core CPI increased 0.19% and has risen at a 2.1% annual rate over the last three months, already above Fed's target range and trending higher. Ironically, the ongoing double dip in the housing market "helped" lowering the core CPI. Tenants' and owners'' equivalent rent increased a modest 0.07% last month and have generally decelerated since last Fall. The Five-year-ahead inflation expectations in the Michigan consumer confidence report also rose from 2..9% to 3%. Europe GDP report printed even stronger at 3.3%q/q saar, boosted by strong performances of the core countries. The strong number will cause ECB to raise rates faster. However Euro was sold off in the middle of the day, as market was concerned about bad headline news on Greek credit over the coming weekend. As risky assets are sold off again, Eurodollar back contracts rallied in a panic mode. Futures seem to habitually trade up in response to any panic sell in risky assets. On the other hand, as the volatility in risky assets increases, there is tremendous amount of cash parked in short duration security. As a result, volatility in the short duration is artificially low, which helped to attract more cash in a positive feedback loop. However the margin for error is extremely. Vols are very low and still remain above realized volatility. However the low volatility environment in the short duration securities could prove to be illusionary. Just as the ever appreciating housing prices in the previous cycle, the longer market remain artificially stable, the more complacent people will become. The more complacent people get, the more volatile the market is going to be ,when things turn.

Daily Clueless Musings 5/10

Futures finally had its first down day in a while. Import Price Index is 2.2% higher than last month and up 11.1% year on year, lead by higher imported food prices, which is up 20%, the biggest jump since 1977. It is not much of a surprise given the declining dollar in April. CPI and PPI later this week will give a better picture of inflation. The recent bust of commodity bubble will not show up in the April data, but it is going to ease the pressure on headline number. Lower energy and food prices are stimulative to consumer demand, which might create some upward pressure to core inflation. It seems likely that commodity prices will stabilize at a lower price level. China reported a widening trade surplus in April, due to lower than expected imports. The volume of all the imported major raw materials are down from last year, which is consistent with the recent slowdown of Chinese economy. Dollar looked still very weak. Even as Euro is dragged down by the sovereign credit problems, dollar index still cannot break the 75 level. Stocks decoupled from another risky assets and continue to rally on thin volume. Despite the reverse of the recent upward trend, vols remained very cheap. Paper are still putting on bullish option trades. They bought 0N 91-2 Call 1 by 2 and 0z 91-3 call 1 by 2, which kept the upside gamma very cheap, even as futures traded lower.

Daily Clueless Musings 5/09

Greece did not exit EU over the last weekend as some had speculated. Rating agencies took the opportunity and tried to jump in front of the curve. All the big three rating agencies warned multiple downgrades of Greek debt. It is pretty clear that the Greeks are not happy that everyone else (the Irish and the Portuguese) are getting a better deal in the bail outs. European officials are engaging in a fig leaf operation to extend maturities without inflicting net present value losses on its creditors. It is amazing how the stock market behaved so fearlessly today. Stocks were up and vix was lower. Fixed incomes are higher today. Weaker euro helped US dollar to firm up from oversold level, which helped US dollar based interest rates. The front end performed strongly on the uptick relatively the back end of the curve, as the flight to safety trade resumes. The long end of the curve seems to be losing its safe asset status, as market is more confident on Fed on hold than inflation and deficit risk.

Daily Clueless Musings 4/18

Today is pretty crazy. The well known secret in Europe is Greek debt is unsustainable and some form of default is inevitable. WSJ reported IMF Believes Greece Should Consider Debt Restructuring By 2012 this weekend. Greek officials continued to deny that restructuring was an option. It is like hiding fire in the pants. We all know whose pants will be on fire. Greek officials must wish they had the money printing press that US has. US Treasuries traded higher, after S&P change the outlook on US debt to negative, which implies 1/3 of probability of downgrading in 2 years. Rating agency has repeatedly lagged market in pricing credit risk. It seems to be the case again. Real yields has been on the rise since Obama extended Bush tax cuts. Market seems to perceive today's downgrading might push government to cut back on fiscal stimulus and take more austerity measures this year, instead of kicking the can down the road. Just like UK did their austerity measure last year, this is likely to slow down the current recovery. Fed might be forced to be more accommodative to compensate the cut back of fiscal stimulus. Or like UK, Fed is going to be squeezed by higher inflation and slow growth. And therefore dollar was strong today, as people unwind their carry trade position in risky assets. Yield curve is flatter in the front, as market is pricing a slower recovery without fiscal simulus.

Deep value investment: Hanny Holdings (275.hk)

Hanny Holdings (HK: 275) is one of the classic special situation investment opportunities, with potential return >300%. It trades around its cash value on the balance sheet and 20% of its book value. Its balance sheet is pretty solid, if not pristine. It has two significant real estate investments in mainland China, which are carried around or maybe under the market value. It runs two small non-core business (river sand mining and water supply) which generate some small positive cash flow. If you strip out the net cash position, at today’s price you are essentially getting two real estate assets in China for free.

The deep discount to the Net asset value rooted from Hanny’s history as part of holding companies control by Charles Chan, and further exaggerated by distorted supply/demand balance. Charles Chan used to be right hand man of Li Kan Shim, the richest man in Hongkong. Chan eventually made his fortune by buying and selling publicly traded companies. Those companies cross hold shares and bonds. The common stocks of these company already traded at heavy discount (~50%) to net asset value reflecting the lack of clarity of these inter-company holdings. Since last year, Allan Yap, Chairman of Hanny, decided to split Hanny off the Charles Chan network. ITC group, the majority shareholder controlled by Charles Chan, dividend out all the Hanny shares to its shareholders. Allan Yap subsequently bought out Charles Chan’s entire stake in Hanny’s, 250M shares at the price is around 30 cents. Allan Yap also then contributed another 61M in the current round of equity raising. In all, he paid around 125M for 21% of the company. Hanny also sold out its stake in ITC property, another company within Charles Chan’ empire, and redeemed the ITC property’s convertible bonds, which Hanny used to buy 50% interest in a real estate project in Guangzhou from ITC property. After these transactions, Hanny will no longer have direct connection with Charles Chan, except for the 50% JV in ITC property.

The stock price is further depressed by two subsequent events. As price of an illiquid asset in a less efficient market is set primary by supply/demand balance. Before the split off, ITC holdings held 240M shares and converted its Hanny convertible bonds to 463M shares. ITC then distributed 701M Hanny shares to its share holders as stock dividend (every 10 ITC shares receive 9.3 shares of Hanny holdings), which representing roughly 43% of the share outstanding and more than 50% of the float. Hanny’s share declined more than 50% from the time of announcement to the distribution of the Hanny shares. The shares continued to be under severe selling pressure, after distribution, as ITC shareholders paid essential nothing for Hanny share (ITC share traded roughly at the same price after the stock dividend as before the distribution.). As more than 50% float are held by people who passively got long the share at close to zero cost. The continuing declining in the price of Hanny create more selling pressure, as people are rushing to lock in their big paper profit into cash. Hanny decided to raise new equity to fund the new real estate development project in China. They executed a 1:10 reverse split and then issued 8 new shares for every existing shares at 0.30 a piece. At the time the stock (pre plit) was around 0.35, so shareholder have to pay 68 cents cash for every dollar of the Hanny shares they held. Also from a portfolio management stand point, no one likes to have an illiquid position to unwillingly increase 70%. This not surprisingly created another wave of selloff. The stocks were down 40% in couple weeks. The majority of the selling came from smaller retail investors, who often do not have the liquidity to fund the equity raising. In summary, the unique situation of undervaluation in Hanny’s common share is a result of uneconomic sellers, whose decision to sell bears little consideration of price/value relationship. I think once the supply/demand balance reaches new equilibrium , share price should gradually reflects the true economic value of the company.

At today’s price, the company trades at less than 500M. Hanny had 342M cash as of Sept.2010, it subsequently sold its investment property for 283M (an office room and 4 parking spot in the BoA tower in HK carried at 242M on its book) and its marketable securities (shares of ITC property) for 78M and it received 300M for new share issuance. I estimate it should have around 876M in cash. On the liability side, It has 133M bank borrowing (48M of which is due within a year) and 678M convertible bonds. 342M of the convert was held by ITC holdings, which redeemed all the converts into new shares. Hanny will issue 300M new convert to retire the remaining maturing bonds. Hanny has more than 500M net cash after the equity raising, higher than its market cap. So you are getting all the other hard assets on Hanny’s book for free.

The major assets on Hanny’s book are real estate projects in GuangZhou’s Yuexiu district. The real estate market in Guangzhou is much less bubblish than other ist tier cities like Shanghai or Beijing. The two projects are in Yuexue district in Guangzhou, which is one of the top commercial locations in the city. The per sq meter price is less than ½ of the prices in similar locations in other top tier cities. In 2009 and 2010, Hanny acquired a retail/luxury condo project from BestSmooth in two sequential transaction. The lot is in the Yuexiu distriction of Guangzhou (between ZhongShanWu road Jixiang road). The size of the lot is 7974 sq meter and is zoned for commercial and residential use (thus it is not subject to the new housing regulation in China). It paid 604M for 60% interest in the project and then paid 460M for the remaining 40% in 2010. Best Smooth acquired the land 10 years and subsequently ran out of cash during the development. The foundation of the building was built, but the project was on hold for nearly 10 years. Hanny obtained building permit last year (number# 〔2010〕2298). It will build a 9 story shopping mall and 26 story luxury condo with a 5 story underground structure connected to subway station. The total area is 123.7K squre meter (93.7K above ground+29k under the ground.) Management expect to invest another 540M to complete the project. They will start the pre-sale in the 4th quarter. The secondary market around that area is between 10k-20k Yuan per sq meter for residential apartment and the retail space is 25-35k Yuan per sq meter. Hanny’s building should be in the higher end of this range, as its retail space is directly connected to subway station (more traffic) and residential units are targeting higher end customers. Hanny acquired 50% interest in real estate project in the same area (literally across the street to the first project and connected with each other through subway station.) Hanny acquired the interest from ITC property with the cash from redemption of 386M ITC property convertible bonds and 94M additional cash.The acquired asset is valued at 1248M on ITC property’s book at the date of acquisition.

There are some non-core assets on Hanny’s book (river sand mining and water supply). As a total, they generates some positive cash flow over the years, and Hanny has stated publicly that they are looking for opportunities to exit these business to focus on real estate development in mainland China. To be conservative to my valuation, I will just assign zero value to these assets.

This invest does not require a rising Chinese property market, since you are paying virtually nothing for the two real estate asset which worth more than 2.5B in the current market. There is very little leverage on the wholly owned project. Hanny has sufficient cash to fund the project. The balance sheet of the 50% JV with ITC property is less clear. I will just assume they paid a fair price for the stake. The downside of this investment is well protected, as the price is less than both net cash and liquidation value of the company, even assuming a real estate market crash in China.

As the Hanny re-establish itself as an independent real estate developer and the supply/demand of its common shares restore its equilibrium, I expect Hanny to be trading at a similar discount (~50%) to net asset value like other small cap real estate developers traded in Hongkong, which should imply 1.2 HKD per share valuation or 300% higher than the current price. Furthermore as Hanny start to pre-sale in the 4th quarter of this year, they will have chance to market to asset to the market value and start to generate cash flows.

Daily Clueless Musings 3/17

Japan engineers laid one of the most valuable power cables last night. An external grid power cable was connected to the No.2 unit. Even though power will not be on until at least tonight and no one is sure the cooling unit is still working, global financial markets are cheering anyway. Commodities and stocks were higher and treasuries were sold off. Besides the unresolved crisis in Japan, situation in middle east is worsening. Oil was up almost $4 during the middle of the day, as UN is about to vote on military on Libya. Inflation is everywhere. US Feb CPI is up 0.5% and core is up 0.2%.The trend of higher energy and food prices carried over into February. In the core number, Owners’ equivalent rent, which has been a drag on the core number, accelerated to 0.14% in Feb, while it only increased 0.10% during prior four months. Household inflation expectations rose to 4% in the Bank of England's 1Q survey. On the bright side, Philadelphia Fed manufacturing survey’s impressive run continued into March. The headline index jumped from 35.9 to 43.4 during the month, reaching its highest level since the 1980s. Eurodollar Futures traded lower due to the lack of bad news from Japan. Vols are lower today, but remain at high level. Paper sold 0z call spread, which they bought from lower prices. Given the uncertainty in the world and $100 plus oil, vols are likely to remain high and futures continue to trade volatile.

Daily Clueless Musings 3/1

Bernanke's Humphrey Hawkins testimony is unsurprisingly boring. Traders who paid up for theta yesterday must hate themselves now. Ben's remarks at the Humphrey-Hawkins testimony are not much different from those he made on other occasions in recent weeks. He noted that the pass-through from commodity prices to broader price indexes has been "quite low in recent decades." Therefore, "the most likely outcome is that the recent rise in commodity prices will lead to, at most, a temporary and relatively modest increase in US consumer price inflation--an outlook consistent with the projections of both FOMC participants and most private forecasters." The central banks from China, Brazil, India, UK and most the other countries all wish Ben's statement is remotely true. Chairman’s statement sends a very dovish signal to the market, so Oil traded higher. Ironically, gas is a cost input on a lot of the consumption activities in the US. Higher gas price does help to suppress retailers' pricing power, thus lower inflation pressure, maybe. Bravo! Ben, great job!

Daily Clueless Musings 2/28

We are heading into a data heavy week. ADP, Humphrey Hawkins and nonfarm payroll are all expected this week. The January reading of Personal Income is better than expected, up 1%. While spending rose less than expected. So are US consumers finally saving? The reality should be read as government largesse boosted personal income but failed to stimulate consumption. Reduced employee contributions for government social insurance, which reflected provisions of the Tax Relief, Unemployment Insurance Reauthorization and Job Creation Act of 2010, boosted personal income in January by reducing the employee social security contribution rates. Excluding these two special factors, disposable income only increased 0.1 percent in January. Chicago ISM jumped to its highest reading since 1988. Cost inflation continues. Energy, steel and cotton are all on the rise. Interest rate came in and yield curve flattened before Humphrey Hawkins. The text of Bernanke's remarks may have nothing new from last FOMC (slightly better economy, weak job market and low inflation), though at least the Q&A may be a little more interesting.I think Ben will be asked tough questions regarding rising commodity prices and Fed’s playbook of dealing with it. Market is expecting a rather dovish Fed. Dollar also lost its ground against other major currencies, even when newly elected Irish government is trying to renegotiate the "bailout". Volatility is relatively firm before the Humphrey Hawkins and Nonfarm payroll and vol path generally under performed the skew.

Daily Clueless Musings 2/25

Fourth quarter GDP real growth was revised down from 3.2%saar to 2.8% in the BEA’s second estimate of the 4Q10 data. The major reason for the downward revision is government consumption, which was from -0.6% to -1.5%. Lower spending level were mostly on state and local government level. It is just a pre-show for a fiscal drag in 2011. The slower fiscal spending is coming. The coming budget crisis in many states will pressure the spending at lower level governments. On the federal level, Obama is likely to make concessions to the republican proposed budget cut. Oil price stabilized as Saudi raised oil output as Libyan exports disrupted. Market took a break from the panic mode. "Buy the dip" spirit is still live and strong for equity traders. Yield curve did not move too much from yesterday's settlement even as GDP number is a disappointment. Consumer confidence is still strong. The final February reading of consumer sentiment from the U of Michigan was better than expected up more than two points from the preliminary report to 77.5, the highest mark since January 2008. It is interesting that the record high consumer confidence does not translate into the sales number for big retailers like Wal-mart, Target, Kohl's and the likes. As long as the job market remains soft, the spending of less wealthy consumers will be depressed. The inflated asset prices only stimulates the impulsive spending of the wealthy. Those spending is going to disappears as soon as stock market corrects. As Fed is pouring liquidity into the punch bowl, market acts like any drunk person, whose perception of risk is often detached from the real world. Both consumer and fiscal might become a drag to the expected recovery in 2011.

Daily Clueless Musings 2/24

Economic data were mixed today. The weekly report on Initial Jobless Claims is back to the cycle low. Job number continue to show unpredictable fluctuations, given the severe weather conditions in the recent weeks. The January reading of New Home Sales was well under the forecast at 284k units annualized, as the California’s (home buyer tax credit) party ends. The January reading of Durable Goods Orders is in line with expectation, but Orders ex-transportation are -3.6%, much lower than the 0.5% expected. Rail traffic continue to show strong gains year over year, which bodes well the new round of inventory building. Across the pond, Euro area Jan inflation printed 2.4% gain year over year. Expectation for rate hikes rose and Euro gained against US dollar. News from middle east over shadow the economic news. Oil, S&P and Eurodollar back futures traded with a very high correlation. As rumors about Qaddafi is either dead or flee to Zimbabwe circulates the market, oil broke 2 bucks and yield curve steepened. Spot volatility seems to be very cheap, especially given the expectations for BoE and ECB rate hike this year are high.

Daily Clueless Musings 2/19

HP blamed weak US consumer for its terrible earning. Both home depot and Lowe’s guided lower than streets expectation. It seems that the mass retailers did not do as well as the high end ones in the last quarter. The former is more correlated with labor market, while the later draw their pay check from stock market. Good job, Ben! On the bright side, January reading of Existing Home Sales was higher than expected. Outside the states, the unrest in middle east shows no signs of easing. There is rumor about anti-manarchy protests being planned for tomorrow in Saudi Arabia. Oil traded higher and skew flipped to the call skew aggressively. The potential disruption of oil supply and higher oil prices led to higher demand for hedging and speculative buying.Fixed income traded well even after a slightly disappointing 5 year treasury auction. But the back end of the yield curve steepened as soon as stock bounce back from its lows. Vols were sold off before the back contracts traded lower. While gold and silver are trading close to their all time highs and the real hedgers bid up call options on oil futures, stocks and yield curve continue refusing to price in geo-political risk.

Daily Clueless Musings

The tension in middle east is rising. There are also small protests in several major cities in China. Although the development is not surprising at all to people who follow the situation, the market has been, as we discussed before, underpriced the potential risk on US economy. After gold and silver made their highs for the last several days, US stock market finally broke and red-green futures finally flattened on the rally. Time will tell if the market is going to turn a blind eye to the situation and buy on the dip again, as they did after the protest in Egypt broke out. But for now, market still does not fully price the potential risk. Stocks are still sitting comfortably above the lows it made after the Egypt protest. Volatility in oil futures actually traded lower on the day. And the steepness of the Eurodollar curve is still sitting in the back reds and front greens. Market seems to be discounting the fact that $100 oil is going to be a tax on discretionary consumption of the majority of the consumers. Wal-Mart reported a terrible earning today, which painted a dark picture of the low end consumer. Gallup's consumer daily spending number also shows a strong pay check cycle. Ironically the February reading of Consumer Confidence is 70.4, 5 points higher than expectation. Maybe only people with a sizable stock portfolio are doing those surveys. The recent pickup in economic activity is largely led by better than expected consumption in 4th quarter of 2010. A weaker US consumer will certainly push the recover further. If oil stays at the current level, the steepest part of the yield curve should be pushed further out toward the backend.

Random thoughts on QE

The second round of Quantitative easing, a fancy name for Fed buying treasuries, is half way through. From the last FOMC minutes, Fed seems to be "satisfied" with the result of QEII so far. It is hard to understand how Fed could be happy with QE II. After 167 billion freshly minted dollars and 69 billion from principal payments on agency debt and MBS are invested in treasuries, yield curve is at its steepest since the great recession started. US economy is not generating anywhere close to the 110k-125k nonfarm jobs that are needed to just keep up with the population growth. Inflation is already showing up at producer level. Inflation is seen in those areas that Fed does not want to see. Cost of living is higher on higher food and energy cost. While disinlfation is seen in the areas which Fed is trying to inflation, such as housing and labor cost. Owner's equivalent rent has been one of the major components that has kept CPI lower. But it has no impact on consumer's cash flow. Fed insisted the low resource utilization rate and sluggish labor market should keep CPI at depressed level, as 70% of the cost of goods are labors. That seems to be right. But it is hard for me to understand how buying US treasuries can turn this vicious cycle around. Company won't hire more people, when there are ample capacity sitting around and they can not pass on higher raw material cost to consumers. Fed maybe is turning a deaf ear to many major US companies last quater's earning. Kraft, Pepsi, P&G and the likes are all reporting lower margin and higher raw material cost. Fed's money printing is going to squeeze the margin of US corporations. Fed can ignore higher PPI and headline CPI for as long as they want, but do they really believe companies will hire more people when they are not able to pass on higher cost?

The only major accomplishment by the QEII is higher equity prices. Fed is trying to cure the hangover by giving the drunk more drinks. Fed cheered that consumer was very strong in the last holiday season. Ironically, it coincided with the first expansion of consumer credit card balance first time after the recession started. Maybe people is borrowing against their paper profit in stock market. It is funny that we got into this recession because inflated housing price cause by the Fed's ultra easy monetary policy, which is used by Fed to pull the economy out of tech bubble, which was again caused by artificially low Fed fund rates help US to recover from the housing bubble in 90s. It seems like the only cure fed has for this alcoholic (or low-rateholic) economy is to have more drinks, so it can pass out and don't have to worry anything before wake up in hangover again. No wonder the Fed fund rate since Paul Volker has been making lower lows during every economic downturn. It was only a matter of time that Fed funds would hit the mighty zero boundary. Now there are QE I and QEII and possibly QEIII, which are designed to mimic a negative interest rate, so savers are punished and spending and leveraging are rewarded.

I don't know how it will end. The bull/bear cycle of interest rate often lasts generation long. People often missed the turn of market and only recognized it long after it happened, as the market tend to anchor its expectation for a "reasonable" range of treasury yield to the recent history. There is only strong meaning reverting mentality among the fix income investors. Market was chasing 2% treasury yield in the 40s after world war II, while 12% in early 80s found no takers. The current bull market for bond has lasted for almost 30 years. Maybe this is going to a starting point of a new bear market for treasuries.