Con-tango

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June 29, 2006
In Economy, Views
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Liquidity ramblings

Let me start by suggesting that you read what Morgan Stanley’s economists have to say. It’s a rare occassion when they get together to discuss the prospects of the economy, so I encourage you not to miss this opportunity to read (part I and part II of) their debate.

With a very broad brush, we may describe the discussion as focussing on the effects of shrinking global liquidity. Joachim Fells sets the tone by positing the following remarks:

With less liquidity available to chase asset prices higher, a correction in asset prices seemed like a logical response.
Note that both the 1994 bond market crash and the popping of the equity
bubble in 2000 were preceded by sharp contractions in excess liquidity. The contraction in 1994 was of course due to the Fed’s tightening operation in that year and caused a major bond market crash. And the contraction of 2000 reflected global monetary tightening and preceded the bursting of the equity bubble.

Richard Berner highlights the chilling similarities of the pre downturn markers of ’94 to our actual situation,

Call me old-fashioned but I think the common thread between 1994 and
today is the Fed’s and other central banks’ efforts to pre-empt
inflation in the context of upside surprises to growth. At the start of 1994, no trader I spoke to thought that rates could go up by 100bp, much less 300bp. Growth kept surprising to the upside through the end of the year. The dollar sank, core intermediate PPI prices accelerated sharply, core CPI inflation rose by 50bp, and University of Michigan inflation expectations were rising.
Sound familiar? In my view it’s the shift in market expectations from a
Fed that simply normalizes rates to one that could actually hurt you
that triggered the mini global margin call.

June 20, 2006
In Views
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A new competitor for ethanol?

Biobutanol is the name of a new biofuel that BP and Dupont are presenting today as an alternative to ethanol with a 30% more punch. The following is an excerpt from Forbes’ Kerry Dolan’s recollection:

DuPont and BP (nyse: BP–news–people )
have been working on the new fuel since 2003. The two companies plan to
introduce the first generation of biobutanol in the U.K. by the end of
2007. And they hope to roll out an improved second-generation
biobutanol by 2010. DuPont and BP aim to make the fuel competitive with
gasoline, even when oil is priced as low as $30 to $40 a barrel. In the
U.K., the partnership will produce the new fuel by extracting
fermentable sugar from sugar beets and converting that into a fuel,
similar to the way ethanol is produced.

Currently, biofuels
account for just 2% of all fuel consumption. But biofuels could account
for 30% of all fuel consumption by 2020, some sources predict. Dupont
and BP estimate the global market for biofuels could reach 87 billion
gallons by 2020, up from just under 11 billion gallons today.

June 15, 2006
In Views
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Verasun soars on debut

According to Anuj Gangahar from the FT:

Shares in VeraSun opened for trading nearly 22 per cent above the offer price at $28. The stock closed at $30 in New York.
The company and stockholders had sold 18.25m shares at $23 each through the IPO, according to the company, exceeding the $21 to $22 range forecast in an earlier regulatory filing.