Every day, it seems like events in some far corner of the world come back to haunt the markets. Many of us here inthe U.S. may not pay attention to these events, but we should. I talked about Iceland a while back, and how thatcountry’s currency, stock, and banking crises would have repercussions here in the U.S.And boy did they ever. Now, we have fresh crises rearing their heads in both Hungary and Argentina.
In Hungary, the currency (called the forint) has been plunging for weekson end as global investors pare risk and withdraw funds from higher-risk emerging markets. The forint is trading at 214against the dollar, a huge decline from the 143 level back in July (In other words, 1 U.S. dollar buys many moreforints than it did a few months ago). The Magyar Nemzeti Bank, Hungary’s central bank, has responded by jacking up thenation’s benchmark rate to 11.5% — an increase of three percentage points. Higher rates are designed to stem theflight of capital.
Meanwhile, in Argentina, the country is planning to seize$29 billion of private pension funds. This caused bond yields in the country to surge, and the Merval stock index toplunge 11% (It is down more than 51% on the year). The government last raided pension fund investments to service itsdebt in 2001 — and then defaulted in a move that sent shockwaves through the global capital markets.
While some credit indicators are improving (LIBOR, swap rates, and so on), these eventsare reminders that we’re still in a crisis atmosphere worldwide. Money is fleeing higher-risk economies and flowinginto the dollar as a result.
One last thing: If you didn’t see the latest Mortgage Bankers Association figures on home loan applications, you shouldcheck them out. The MBA’s combined index (refis + purchases) plunged 17% to 408.1 in the week of October 17, the lowestlevel since December 2000. The purchase index came in at 279.3, the worst since October 2001.
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Question, Mike, on puts. How safe are equity and index/ETF linked puts, from counterparty risk, etc.? The fine print of the Option prospectus is not all that reassuring, about clearing firms’ insolvency impact, etc. In such times
as these, are you still recommending puts? Thanks.