Mish's Global Economic Trend Analysis

ElBaradei Unifies Opposition, Criticizes Obama; Business Grinds to a Halt; Ports Shut Down, Food Prices Soar; Shortages of Food, Water, Fuel
Party Time in Davos
U.S. to Evacuate Americans From Egypt
Oil ETF Call Trades Soar to Record, Crude Futures Back Near Highs; What Will Next Week Bring?

ElBaradei Unifies Opposition, Criticizes Obama; Business Grinds to a Halt; Ports Shut Down, Food Prices Soar; Shortages of Food, Water, Fuel

Posted: 30 Jan 2011 08:46 PM PST

Business in Egypt has ground to a halt. Food and consumer goods stack up in ports. Gas stations have not had deliveries for days and supplies dwindle. Simple economic theory suggests prices will soar and they have.

After an initial lukewarm reception when he first returned to Egypt, Nobel laureate and opposition leader Mohamed ElBaradei has picked up some much-needed support from the Muslim Brotherhood. That support creates a somewhat united secular-religious opposition to Egyptian President Hosni Mubarak.

An emboldened ElBaradei is now openly critical of the Obama administration. "It's better for President Obama not to appear that he is the last one to say to President Mubarak, it's time for you to go," Dr. ElBaradei said.

ElBaradei Begins to Unify Opposition

The New York Times reports Opposition Rallies to ElBaradei as Military Reinforces in Cairo

Egypt's powerful Muslim Brotherhood and the secular opposition banded together Sunday around a prominent government critic to negotiate for forces seeking the fall of President Hosni Mubarak, as the army struggled to hold a capital seized by fears of chaos and buoyed by euphoria that three decades of Mr. Mubarak's rule may be coming to an end.

The announcement that the critic, Mohamed ElBaradei, would represent a loosely unified opposition reconfigured the struggle between Mr. Mubarak's government and a six-day-old uprising bent on driving him and his party from power.

"Today we are proud of Egyptians," Dr. ElBaradei told throngs who surged toward him in a square festooned with banners calling for Mr. Mubarak's fall. "We have restored our rights, restored our freedom, and what we have begun cannot be reversed."

Dr. ElBaradei declared it a "new era," and as night fell there were few in Egypt who seemed to disagree.

"It's better for President Obama not to appear that he is the last one to say to President Mubarak, it's time for you to go," Dr. ElBaradei said.

Ports Shut Down, Food Prices Soar, Business Grinds to a Halt

The internet is shut down, so are cell phones, and so are ports. Goods stack up at docks, and supplies of fuel are at critical levels. After six days of riots, the Political Crisis Now Has Serious Economic Repercussions.

For four days now, containers arriving on ships have been stacking up at Egypt's largest port, shipping company employees and truck drivers here said. With distribution networks barely functioning and the Internet down since Thursday night, much of business in Egypt has nearly ground to a halt.

"A big part of the production system is government-run, and this is frozen, including many of the bakeries making the subsidized bread," said Hoda Youssef, an economist at the Arab Forum for Alternatives, an independent think tank and a lecturer at Cairo University. "Here in the short term — today, tomorrow, the coming few days — we might have a serious problem with shortages of food, water and fuel," Ms. Youssef said.

"We did not get any new gas for the last two days," said Mustafa Ahmad Hamadi, the owner of an Alexandria Mobil station, adding that he usually received about 2,600 gallons a day and now has only about 1,300 gallons left. He said that he had owned the station for 12 years, but has "never seen a situation like this before."

"When I called the company, they told me there is no more distribution at this point and they don't know when they can deliver again," he said, as cars lined up for his remaining fuel and arguments broke out among customers despite employees' efforts to keep them in line.

A taxi driver with two women waiting in the back seat said he had been to 12 gas stations since Saturday, and this was the only one with gas. "I am really worried," said the driver, Muhammad Youssri Said, 29. "This car is the income for me and my family. No taxi, no money, no food."

Potential Runs on Banks

Banks are now shut down as is the stock market. However, Egypt's Banks Risk Deposit Run when they do open.

Egypt's banks may risk a surge in customer withdrawals when they open for business, placing them among companies worst hit by the nationwide uprising against President Hosni Mubarak.

"A run on the banks would be the biggest concern, which is possible in the current situation," Robert McKinnon, chief investment officer at ASAS Capital in Dubai, said in a telephone interview. Authorities are likely to keep the financial system closed to avert the risk, he said.

Egypt's banks and markets stayed shut yesterday after six days of clashes in the most populous Arab country that left as many as 150 people dead.

Asked about the risk of a bank run, Mohamed Barakat, chairman of state-run Banque Misr and head of the country's banking association, said in a telephone interview that Egyptian lenders are "very liquid," with average loan-to-deposit ratios of 53 percent.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
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Party Time in Davos

Posted: 30 Jan 2011 05:22 PM PST

Egypt is flying apart, China and India are both overheating, and there has been no financial reform that will accomplish anything; nonetheless, it's party time in Davos.

One analyst with not enough clearance to party had a different message, so did Bloomberg columnist Simon Johnson. Otherwise it was party on dudes.

Please consider Lonely Analyst Warns of 2015 Bank Crisis Amid 'Upbeat' Davos

As politicians, executives and financiers networked at parties and panels last week in Davos, Switzerland, Barrie Wilkinson was in a nearby hotel, warning that a 2015 financial catastrophe may be looming.

"The fundamentals haven't been addressed at all," Wilkinson, a London-based partner at consulting firm Oliver Wyman, said in an interview at the Hotel Morosani Schweizerhof. "The things that caused the previous crisis -- loose monetary policy and trade imbalances -- they're actually bigger now than they were then."

In the caste system of the World Economic Forum's annual event in the Swiss ski resort, Wilkinson was at a bottom rung, with an identification badge that denied him access to most sessions and soirees. His message clashed with the optimistic tone of many at the center of the meeting, who were eager to emphasize the progress made after two years of hand-wringing in the wake of the 2008 financial crisis.

"The systemic reforms that have been accomplished are significant," Canadian Finance Minister Jim Flaherty said as he left a private meeting with finance company chief executive officers on Jan. 29. "We need to communicate better that financial institutions globally are operating on a very different basis today, that they are operating with higher capital and are better regulated."

'An Avoidable History'

Wilkinson's report, titled "The Financial Crisis of 2015: An Avoidable History," isn't so sanguine. The 24-page study describes how banks, unwilling to accept the lower returns on equity, or ROEs, that result from higher capital requirements, may fuel a new bubble by chasing high returns in commodities or emerging markets. Regulators, by focusing their restraints on banks, may drive risk-taking into unregulated funds that also pose danger to the system.

The report urges bank executives and shareholders to accept that returns of the past are unsustainable and that they need to do a better job of monitoring risks, especially in areas that produce unusually high profits.

"Banks need to be less leveraged," said Wilkinson, who has an engineering degree from the University of Cambridge and has worked at Oliver Wyman since 1993, according to his LinkedIn page. "The true test for me of whether they've deleveraged is if the industrywide ROEs come down. If they don't, I'm very suspicious that there are hidden risks in the system."

Bloomberg Columnist Terrified

"I came into this dinner somewhat pessimistic and worried about the assignment we are here to discuss," Simon Johnson, a professor at the Massachusetts Institute of Technology's Sloan School of Management and a Bloomberg News columnist, said halfway through the evening. "I am now terrified. There is an incipient sovereign crisis here mixed in with the bank crisis."

It's Party Time

So much for pessimism, let's consider some party goers.

Financiers at Davos this year weren't talking much about future returns on equity or potential bubbles. Instead they were holding parties and meeting clients. JPMorgan Chase & Co. CEO Jamie Dimon, 54, hosted guests including Bank of Canada Governor Mark Carney and Dell Inc. founder Michael Dell, 45, at a reception one night. He was out late the next night with hedge- fund manager Louis Bacon, 54, and other guests at a party hosted by Google Inc.

"In Davos, there's a lot of optimism here, and I'm quite surprised by it, especially from corporate CEOs," said Tarun Jotwani, CEO of Europe, the Middle East and Africa and global head of fixed income at Nomura. "It is against a backdrop of potentially the biggest macroeconomic public-finance mismatches that I've ever seen in my career."

U.S. Treasury Secretary Timothy F. Geithner, Bundesbank President Axel Weber and Spain's finance minister, Elena Salgado, also spoke to a private gathering of some of the world's top investors, including hedge-fund and private equity fund managers, according to two people who attended the meeting. The officials sought to assure the money managers that their policies would lead to growth and prevent a crisis in Europe.

"There was a very positive mood about what had been done so far," said Howard Davies, a board member of New York- based Morgan Stanley and London-based insurance company Prudential Plc.

Put me in the party pooper column with Barrie Wilkinson and Simon Johnson.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
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U.S. to Evacuate Americans From Egypt

Posted: 30 Jan 2011 09:50 AM PST

Many US citizens have been trapped in Egypt hoping to get to any other country for connecting flights. Unfortunately, flights out of Egypt have ground to a halt. In response, the New York Times reports U.S. to Evacuate Americans

The Egyptian military reinforced parts of the capital on Sunday with tanks, jets and helicopters as tens of thousands of protesters flooded central Cairo for the sixth day, defying yet again government orders of a nationwide curfew.

In a stunning collapse of authority, most police have withdrawn from major cities, and soldiers fired shots into the air in an effort to control the crowds, seized by growing fears of lawlessness and buoyed by euphoria that three decades of President Hosni Mubarak's rule may be coming to an end.

Thousands of inmates poured out of four prisons and the United States said it was organizing flights to evacuate its citizens Sunday.

The American Embassy, which urged all Americans in Egypt to "consider leaving as soon as they can safely do so," underlined a deep sense of pessimism among Egypt's allies over Mr. Mubarak's fate, as the uprising against his rule entered a sixth day.

Several hours after nightfall, Mohamed ElBaradei, the Egyptian opposition figure and Nobel prize winner, arrived the square. "What we have begun, we cannot go back," he said, news agencies reported.

"It is loud and clear from everybody in Egypt that Mubarak has to leave today," he said in an interview on CNN. He said Mr. Mubarak's departure should be followed by a transition to a national unity government and "all the measures set in place for a free and fair election."

Note: The NYT headline of "U.S. to Evacuate Americans From Egypt" does not match the story. It appears, the story will follow. Here is a link to the latest New York Times Headlines.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
Click Here To Scroll Thru My Recent Post List

Oil ETF Call Trades Soar to Record, Crude Futures Back Near Highs; What Will Next Week Bring?

Posted: 30 Jan 2011 12:03 AM PST

In light of firebombings, riots, and anarchy in Egypt, coupled with social unrest in Yemen, Jordan, Algeria, and Saudi Arabia, call options of those betting on higher oil prices soared to seven times normal activity on Friday.

This weekend we saw the closing of Egyptian banks and the announced closing of Egyptian stock markets on Monday. However, it is hard to know what will happen next week.

To help understanding the possibilities, please consider this analysis of Friday's crude action.

Bloomberg reports Oil ETF Call Trades Soar to Record Amid Egypt Unrest

Trading of bullish options on an exchange-traded fund tracking crude futures soared to a record as oil surged the most since September 2009 after unrest in Egypt raised concern that protests would spread to major oil- producing parts of the Middle East.

Almost 242,000 calls to buy the U.S. Oil Fund changed hands today, seven times the four-week average and almost five times the number of puts to sell. The most-traded contracts were the February $38 calls, which rose sixfold to 48 cents. The ETF gained 4.6 percent to $37.58.

"Bullish players are binging on call options across several expiries," Caitlin Duffy, an equity-options analyst at Greenwich, Connecticut-based Interactive Brokers Group Inc., wrote in a report. "The massive upswing in demand for the contracts helped lift the fund's overall reading of options implied volatility."

Oil for March delivery increased $3.70 to settle at $89.34 a barrel on the New York Mercantile Exchange. The contract has risen 0.3 percent this week. Oil volume in electronic trading on the Nymex was 1.36 million contracts as of 3:18 p.m. in New York. That's the highest level since April 13, when volume for both electronic and floor trading reached a record 1.42 million barrels on the Nymex.

Volume totaled 1.01 million contracts yesterday, 50 percent above the average of the past three months. Open interest was 1.52 million contracts.

Crude 15 Minute Chart

click on chart for sharper image

Hedging Plays Push Crude Prices Higher

I was watching crude futures Friday morning (3:00AM Central) and the futures were essentially flat. Friday morning, however, as oil future call buying began, followed by equity call buying on OIL ETFs, oil shot up nearly $4.

What happened is options sellers (the market makers on the other side of those trades), cannot risk being naked short those oil calls and had to hedge by buying futures.

To hedge those short calls, the market makers bought crude futures. This delta hedging activity drove up the price of oil this morning as everyone plowed into the "oil might go to the moon" trade.

No one wanted to be naked short over the weekend. (In a similar fashion, I do not believe JPM is naked short silver futures either, but I wish they would come out and prove it).

If nothing happens over the weekend (which so far appears to be a disproved idea already), oil futures could easily sink next week as the trade unwinds. On the other hand, should unrest spring up in Iran or expand in Saudi Arabia crude prices could soar.

Given that a collapse of the Egyptian government seems likely, and unrest in other areas picking up, if crude prices cannot break north here, then look out below. A short or intermediate-term top is likely in.

For more on the crisis in Egypt, please see ...

Egyptian Police Disappear in Widespread Chaos, Vigilantes Defend Homes; Egypt Video With a Message "We Will Never be Silenced!"

Egypt Closes Banks, Stock Market; Protests Spread to Saudi Arabia, Jordan; Saudi King Backs Mubarak; Reflections on Misguided US Policy

Mubarak's Acts of Cowardice; Obama Calls Mubarak for 30-Minutes; Cell Service, Internet Total Shutdown; Anarchy in Cairo; How Long can Mubarak Last?

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
Click Here To Scroll Thru My Recent Post List

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Mish's Global Economic Trend Analysis

Mish's Global Economic Trend Analysis

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