China's economy is putting on brakes

By David Pierson 

China's economy expanded in the third quarter at its slowest pace in two years, a sign that Beijing's inflation-fighting efforts are reining in growth. 
The country's gross domestic product grew 9.1% compared with the same period last year, China's National Bureau of Statistics said Tuesday. 
That was down from 9.5% in the previous three months and 9.7% in the first quarter

Third-quarter growth was slightly below economists' forecasts. The government has been tightening bank credit to tame inflation and deflate a worrisome housing bubble. Policymakers say China needs slower and more sustainable growth after record amounts of lending in 2009 and 2010 sparked an explosion of debt and rising prices. 

The government now faces the risk of tightening the economy too much and triggering a so-called hard landing. 
Worsening economic conditions in Europe and the U.S. make that task even harder because of the threat of declining demand for Chinese exports. 

"Growth has come in lower than market expectations, but we remain of the opinion that the Chinese economy continues to chug toward a soft landing," analysts at IHS Global Insight wrote Tuesday. 
Investors have already shown diminishing faith in shares of Chinese firms. The Hang Seng China Enterprises Index of Chinese stocks has been one of the worst-performing benchmark indexes, sinking 20% for the year before recovering slightly this week. The MSCI China Index has lost about 25% in the last 12 months. 

A Bloomberg poll of investors, analysts and traders released last month found that 59% of respondents thought China's economic growth would expand less than 5% annually by 2016. 
That doesn't mean demand by the Chinese for imported commodities, consumer goods and automobiles will collapse, said analysts at GaveKal Dragonomics, a research firm in China. 
The firm projected this week that China's economic output was on track to reach $7 trillion this year. That's more than double the $3 trillion of five years ago. 
"So every percentage point of GDP growth now has much more real impact," the firm noted. "In fact, China's economy is so large now that it is now creating more new domestic demand, in raw dollar terms, than it did when headline GDP growth was in double digits. Even a slowdown to 7.5% next year would still probably mean China is adding more new domestic demand than the Eurozone or the U.S." 
-- 
david.pierson@latimes.com

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Quantitative Easing: The Euro, Gold and Other Commodities

by Diego Martinez Burzaco

Five months ago, everybody was talking about what could happen with the euro due to the fragile economic situation in PIIGS (Portugal, Italy, Ireland, Greece and Spain) economies. High public deficits and debt levels were the most important things to consider. Greece took rude economic measures to assure economic bailout from IMF. Markets started considering the possibility of the end of euro zone. Many analysts said that euro could disappear as a common currency.
However, five months later, euro has hit its highest value against dollar in ten months. What has happened in the middle of the crisis? Two words: Quantitative Easing. Are all the problems mentioned above resolved? NO, but markets are focused in US economy at this time. Could the FED resolve the whole global crisis with more quantitative easing? I don’t think so.

A stronger euro has many bad impacts in European economies. The loss of competitiveness is evident. Exports have become more expensive and that means less work for European people. Fewer people working means less consumption and that turns into less fiscal income for governments.

In my opinion, there’s a bubble around the euro. European Central Bank should take new measures such as The Federal Reserve to avoid economic recession. That will be quantitative easing too. So the euro must return to lower levels. The range $ 1.43 / $ 1.45 is a good one to have a short position on the euro.

Let’s talk about commodities. Is there a bubble too? It could be, but there are more fundamental reasons to justify last rally. Strong demand from emerging economies, China principally explains great part of agricultural and metals uptrend. Climate problems should limit agricultural grains also, affecting the supply as demand keeps growing.

What about precious metals? Gold has its biggest rally reaching new high records. Silver is at its 30 years high. Investors are anticipating FED’s quantitative easing (QE) and inflation pressures in the future. But, what will happen when QE implementation take place? Maybe markets are discounting that and now it’s time to get some profits and wait for the next move.

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Investors turn to 'catastrophe bonds' as hedge against uncertain market

Monday, October 10, 2011

By Tim Devaney, The Washington Times 

Oct. 10--So-called "catastrophe bonds," a backup plan designed to protect insurers from the costs of Mother Nature's worst visitations, are getting new attention from investors following the recent wave of earthquakes, floods, tropical storms and other natural disasters. 
Investors, turned off by the turmoil in the financial markets, are instead taking their chances and betting against natural disasters like earthquakes and hurricanes. Most of the time, they get good returns on their money. If a catastrophe strikes, though, they can lose everything. 
Ironically, catastrophe bonds, or "cat bonds," are considered a relatively safe gamble compared to the volatile financial markets of late. For investors seeking shelter from the wild swings on Wall Street, the U.S. debt downgrade and the euro crisis savaging Europe, catastrophe bonds represent a move to diversify into a market facing completely unrelated risks. 

"The financial markets tanking don't increase the possibility that there's going to be an earthquake," said Judy Klugman, managing director and head of insurance-linked securities distribution at Swiss Re, a reinsurance company that issues catastrophe bonds for its client insurers. "Investors are just generally nervous about everything that's going on in the financial world. Right now, they think this is a safe haven. They don't know where else to put their money." 
The $11.5 billion cat bond market is still small compared to the global corporate bond market of $7.5 trillion, according to John Forney, managing director of public finance at Raymond James & Associates Inc. 

But demand is growing, and the catastrophe bond market has jumped 2.8 percent since Hurricane Irene made landfall in late August. 
Swiss Re is trying to increase of the size of the market so it can pay interest rates for the bonds it sells. "As you create more and more demand," Ms. Klugman said, "the spread will go down." 
The task is becoming easier for Swiss Re because demand is up, as, it appears, is the supply of disasters to pay for. 
The tab in New Orleans from Hurricane Katrina was enormous. More recently, Japan was ravaged by an earthquake, a tsunami and a nuclear meltdown, while deadly tornadoes ripped through Joplin, Mo. Earlier this year, an earthquake and Hurricane Irene surprised much of the East Coast. 
But those disasters and near-misses don't scare investors as much as the world's volatile financial markets. Ms. Klugman said investors are savvy enough to know the risks they're taking when they get into the market. So a few rumbles here and there aren't going to push them away. 
"Investors in our market get paid to take those risks," she said. "Our investors, their eyes are very wide open about the risks they take." 
Furthermore, chances are slight that cat bonds will ever be redeemed by the issuer. The "triggers" on the bonds are so specific, covering things such as location, time and degree of destruction, that they are rarely used.

For example, California could issue a catastrophe bond that covers Los Angeles from a magnitude 7.2 or greater earthquake for a period of three years. If there's a magnitude 8 earthquake in San Francisco, the bond wouldn't be redeemable. If there was a magnitude 7.1 earthquake in Los Angeles, it also wouldn't be redeemable. 
"They cover very specific areas," Ms. Klugman explained. 
For insurers, cat bonds can offer a cheaper backup option. Reinsurers serve as the backup to the backup, protecting insurers against claims so big and sudden that they can't repay their policyholders. 

The reinsurance industry, however, is less regulated than traditional insurance, said Erwann Michel-Kerjan, an industry specialist at the Wharton School of Business at theUniversity of Pennsylvania, so reinsurers have an easier time raising prices on traditional insurers. He pointed out that the price of reinsurance doubled after the major hurricanes of 2004 and 2005. It went up another 90 percent to 95 percent in Chile after the earthquake there last year. 

"After every major disaster," he said, "the price of reinsurance increased very significantly." 

Hoping to deflect some of this cost, some traditional insurers are looking to cat bonds as a new form of reinsurance. The California Earthquake Authority just completed a $150 million deal in which it has issued three-year catastrophe bonds. 
"So they were like, 'Wow, is there any way we can get a more stable price?' " Mr. Michel-Kerjan said. "And that's what cat bonds provide." 
___ 
(c)2011 The Washington Times (Washington, DC) 

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NY comptroller warns of weakness on Wall Street

Tuesday, October 11, 2011

By SAMANTHA GROSS

NEW YORK - Wall Street is again losing jobs because of global economic woes, threatening tax revenue for a city and state heavily reliant on the financial industry, New York stateComptroller Thomas DiNapoli said Tuesday. 

After adding 9,900 jobs between January 2010 and this April, the industry shed 4,100 jobs through August and could lose nearly 10,000 more by the end of 2012, DiNapoli said. That would bring the total industry loss to 32,000 positions since the economic crisis of 2008. The sector employed 166,600 people in investment banks, securities trading firms and hedge funds as of August. 
DiNapoli said New York Stock Exchange firms earned $9.3 billion in the first quarter of this year, but declined sharply in the second quarter and are likely to reach $18 billion for the year, a third less than in 2010. 
"The securities industry had a strong start to 2011, but its prospects have cooled considerably for the second half of this year," he said. "It now seems likely that profits will fall sharply, job losses will continue, and bonuses will be smaller than last year." 
New York City Mayor Michael Bloomberg said DiNapoli's numbers were on target. 

"We have a very conservative estimate of Wall Street profits," he said. "We think our estimates are probably still reasonably accurate. So I don't think it's dramatically worse than what we have in our budget, but it's certainly not better." 

Cash bonuses also declined last year. 

Securities activities drove 14 percent of state tax revenue and 7 percent of New York City's last year. DiNapoli warned that current and future collections are likely to fall short because of the weakness.

"Excessive risk-taking on Wall Street was a major factor leading to the financial crisis and the recession," he said. "Regulatory changes that reduce risk and focus attention on long-term profitability rather than short-term gains will enhance stability. Despite the weaknesses we are seeing, the securities industry remains profitable and is a key component of the economies of New York City and New York state." 

Bloomberg said the losses will definitely impact the city. 

"We do know that we're going to have a tough time here. And we're going to make sure that we preserve the vital services of the city," he said. "In the long term I couldn't be more optimistic about New York City but we're going to have some short-term pain and it's going to be real pain." 
--- 
Associated Press writer Michael Gormley in Albany, N.Y., contributed to this report

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Options Contract

Options Contract

There are two types of options: Calls and Puts.

A call gives the holder (buyer) of the options contract the right, but not the obligation to buy the underlying futures contract. People who buy calls are forecasting that the price of the underlying futures is going to go up, so they can buy low and sell high. Conversely, a put gives the holder the right but not the obligation to sell the underlying futures contract.


The price at which the underlying futures contract may be bought or sold is the exercise price, also called the strike price. Several puts or calls at different strike prices will be available for a particular underlying futures contract. For example, there may be September CME S&P 500 call options at 1410, 1420, 1430, and so on.


An options contract affords the right to buy or sell for only a limited period of time. The expiration date of an option is the last day the option can be exercised or offset.


The writer of a call incurs an obligation to sell a futures contract and the writer of a put has an obligation to buy a futures contract. In return for the rights they are granted, options buyers pay options sellers a premium.

CALL

Option Buyer

• Purchased the right to buy the underlying futures contract at the specified price on
  or before the defined date.
• Call option buyer anticipates prices to rise in the underlying futures contract.

Option Seller (writer)

• Grants the right to the buyer, therefore has the obligation to sell the futures contract at
  a predetermined price if the buyer chooses to exercise the call.
• The expectation of the call option seller is that prices will remain neutral or decline.

PUT

Option Buyer

• Purchased the right to sell the underlying futures contract at the specified on
  or before the defined date.
• Call option buyer anticipates prices to decline in the underlying futures contract.

Option Seller (writer)

• Grants the right to the buyer, therefore has the obligation to buy the futures contract at
  a predetermined price if the buyer chooses to exercise the call.
• The expectation of the call option seller is that prices will remain neutral or rise.

An options contract is a depreciating asset. It has an initial value that declines, or wastes away, as time passes. Depending upon the movement of an options price, the buyer will choose one of three alternatives for terminating an options position:

• Exercise the options contract.
• Liquidate it by selling it back on the Exchange.
• Let it expire.

While liquidation is the most common choice, a small percentage of buyers choose to exercise their options, particularly if their strategy calls for acquiring a long or short futures position at the strike price. The ability to trade in and out of positions is the great advantage of standardized options contracts.


If the futures price does not move far enough for an exercise to be worthwhile, or moves in the opposite direction, buyers can simply let their options contract expire worthless.


Because trading on the Exchange is conducted among anonymous counter parties, when an options contract is exercised, the Exchange randomly assigns an options writer to fulfill the obligation.


As in the futures market, options trading takes place in a primarily open outcry auction market on the Exchange. While the value of futures is tied to the underlying cash commodity through the delivery process, the value of an options contract is related to the underlying futures contract through the ability to exercise the option.

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Options Valuation

Options Valuation

There are four major factors affecting the price of an options contract:

The price of a futures contract relative to the options strike price:

The most important influence on an option's price is the relationship between the underlying futures price and the option's strike price. Depending upon futures prices relative to a given strike price, an options contract is said to be at-the-money, in-the-money, or out-of-the-money. An options contract is at-the-money when the strike price is the closest to the price of the underlying futures contract. See the table below for further explanation of the terms in-the-money, at-the-money, and out-of-the-money options.

Time remaining before options expiration:

The time premium is the amount buyers are willing to pay for the options contract above its intrinsic value on the chance that, at some time prior to its expiration, it will move into the money. Out-of-the-money options all carry time premium since their intrinsic value is zero, as is that of at-the-money options. The time value of an options contract shrinks as the expiration date approaches, with less and less time for a major change in market opinion, and a decreasing likelihood that the options contract will increase in value.

Volatility of underlying futures price:

Volatility measures the market's movement within a price range; the direction of the range is irrelevant. As volatility increases, so does the value of options, all else remaining equal.

Interest rates:

Interest rates have a bearing on options prices because they represent the profit or cost that could result from an alternate use of the funds used for the premium. Most of the interest rate effect will already be incorporated in the futures price through the cost of carrying the physical commodity.

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Options Basics

Options Basics

Options on futures present traders with a variety of flexible, economical trading strategies. Traders can use options alone, or in combination with futures contracts, for strategies that cover virtually any risk profile, time horizon, or cost consideration.

Options on futures provide:

• The ability to hedge cash and futures positions against an adverse price direction without giving up the benefits of favorable price movements.
• The availability of hedging protection at many different levels of cost and degrees of protection.
• A means for businesses and investors to act aggressively or conservatively on views about the direction and volatility of prices for the various futures markets.

Because the underlying instrument of an options contract is a futures contract for a specific commodity, market participants can use options to cover themselves against volatile swings in futures prices, just as futures can be used to protect against volatile moves in the prices of the underlying physical commodities.

Each options contract specifies:

• The right to buy or sell a futures contract
• The commodity and contract month of the futures contract
• The price at which the futures contract will be bought or sold
• The expiration date of the option

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