How Treasury Auctions Work

09:15 am : Though typically overlooked, participants will take note of a $24 billion 7-year Treasury Note auction, which is scheduled for this afternoon (1:00 PM ET). Given the weak showing in Wednesday’s 5-year Note auction, participants speculate that investors’ risk appetite may be changing.

Last night’s Frontline interview with Paul O’Neill:

Can the United States government go bankrupt?

Not in the classical sense, but we could get ourselves into a position where people won’t take our paper anymore. And that’s a really desperate position to be in when we’ve killed the idea of good faith and credit of the United States. That could destroy our society as we’ve known it.

Can’t we just turn the printing press on?

Nope, because at some point people will prefer to have broken pieces of glass than federal money. … Look at the German economy in 1923. People got paid twice a day in Germany in 1923, because if they waited to spend the money that they were paid at lunchtime at dinnertime, the money wouldn’t be worth anything.

And so people were actually willing to pay all of their money, a wheelbarrow full of money, for a broken piece of shiny glass, because the broken glass was worth more than a wheelbarrow full of money. We don’t want to get there, but semi-modern societies have gotten there.

You imagine we could get there?

No, because I think we’re smarter than that, and I don’t think we’ll let it come to that. But the answer to your question is, if we don’t do something, we could get there, yeah.

The United States has a AAA rating, just shines in the night. Could we lose that?

Eighteen months ago Citigroup had a AAA rating. Could they get there?

A bank isn’t the United States government.

No, I know, but you’re asking a very radical question: Could the federal government lose its AAA rating? And the answer is yes. We dare not let that happen, but the answer is yes.

If we keep going in a straight line, the answer will be yes?

Yeah. I don’t know how we dodge the bullet if we don’t change where we’re going. …

U.S. One-Month Bill Rate Negative for First Time Since December (Bloomberg):

Treasury 10-year yields have risen for the last five days as the U.S. sells a record $98 billion in securities this week to revive the economy. The note pared earlier losses after a government report today showed the world’s largest economy shrank the most since 1980.

For the time being, fears of supply have pushed up longer- term yields despite the Fed’s buyback program. The 10-year yield has retraced more than half of last week’s 47 basis point decline when the Fed said it would buy Treasuries.

The Treasury is selling $98 billion in notes this week as part of President Barack Obama’s efforts to boost government spending to revive economic growth. Debt sales will almost triple this year to a record $2.5 trillion, Goldman Sachs Group Inc. forecast. The firm is one of the 16 primary dealers required to bid at government auctions.

UK government bond auction comes up short:

Britain experienced its first incomplete auction of government bonds in almost seven years on Wednesday, potentially dealing another blow to Prime Minister Gordon Brown’s plans to resuscitate the faltering economy.

The bank has been buying bonds from banks to provide liquidity to the financial system.

Brown was further undermined on Tuesday by King, who warned that Britain may not be able to afford new expensive stimulus plans, noting that the country’s budget deficit is expected to swell dramatically due to the economic crisis.

Shore Capital analyst Tim Morgan said the government’s overall cash requirement, including the money needed to redeem previous gilt issues, could hit 240 billion pounds.

Morgan said that Britain was running a risk of a “debt vortex” in which markets lose confidence in the ability of the UK taxpayer to meet future obligations.

“It is by no means clear that this required sum can be realised, less still that it can be raised in sterling and at current low interest rates,” he said. “The only sure way to avert debt vortex risk would be to unveil major cuts in future public spending.”

My speech to Gordon Brown goes viral:

“Every British child is born owing around 20,000 pounds. Servicing the interest on that debt is going to cost more than educating the child.”

Last night’s Frontline interview with David Walker:

Let’s start with public debt. … Give me a sense of just how bad this is.

The national debt, as we speak, is about $10.5 trillion. But the real problem is not that number. … The number that we need to be focusing on is the total federal financial hole; that’s the total liabilities in unfunded promises for Social Security and Medicare. As of the end of 2007, which is the latest set of financials that we have right now, it was $53 trillion. That’s $455,000 per household. Median household income in America is less than $50,000 a year.

What’s clear is that, while the numbers aren’t final yet for the year ended Sept. 30, 2008, for the first time in the history of the United States, the federal financial hole exceeded the total net worth of all Americans. … So we could confiscate every dime of the net worth of every American household — including Warren Buffett, Bill Gates and every other billionaire — and we wouldn’t fill the hole.

And guess what? The hole is getting deeper more rapidly than our net worth is going up. In fact, net worth has been going down because of decline in home values and because of decline in the markets. So we’re in a deep hole, and we’d better start figuring out a way that we’re going to climb out.

Conclusion

The sobering reality is even if the U.S. manages to avoid a serious depression the looming unfunded anvil of Medicare and Social Security entitlements hangs over the country.  This may keep some of you up at night, but this is not a problem that lacks solutions.  If it is not dealt with before it becomes another managed crisis then it’s a massive problem.  What is clear is the U.S. has mastered the art of instant gratification while ignoring future threats to stability. What Americans seem to have forgotten is we own the country. This is our money and our future. No child should be born a debt slave. And no one deserves to be a slave at the expense of their education.

What do solar stocks have to do with market manipulation? The following contains a brief overview of some of the factors that influence the price/volume trends we’ve been writing about. We also explore a reason you won’t get this info on CNBC. At SEMICON West, which is one the largest trade shows on the planet, there was not a single US solar wafer or thin film manufacturing company on property. This is a stark lack of showing when 1,121 other companies representing the entire industry were there.

Who Was There?
So where was SunPower. Is it possible they were told/threatened not to come? The other missing big US solar names were FSLR ENER EMC ESLR HOKU WFR and AKNS. Not a single booth representing the United States to do business in. Some of them had a few employees walking around, but no floor space. Here is a list of every PV company exhibiting a product: Photovoltaic Exhibitors at SEMICON West 2008

AMAT was there, but they don’t work on the stuff you dig out of the ground. They make machines. This lack of US attendance is startling when 79% of SEMICON West visitors are involved in product selection and purchasing, and 32% of them were there to talk solar.

What is Holding Solar Back?
This begs the question. Why is solar depressed in the US, and why isn’t Wall Street promoting these companies? There hasn’t been a growth story like this to get excited about for decades. Apparently, it’s politically safer to get excited about ethanol which is a net energy loser and kills people. That is if statistics on starvation linked ethanol deaths ever do surface.

From The Times UK

The rush towards biofuels is threatening world food production and the lives of billions of people, the Government’s Chief Scientific Adviser said yesterday.

“It’s very hard to imagine how we can see the world growing enough crops to produce renewable energy and at the same time meet the enormous demand for food.”

Josette Sheeran, executive director of the World Food Programme, told the European Parliament in Brussels yesterday: “The shift to biofuels production has diverted lands out of the food chain. Food prices such as palm oil in Africa are now set at fuel prices. It may be a bonanza for farmers – I hope it is true – but in the short term, the world’s poorest are hit hard.”

The amount of energy used to commercially produce food is insane. From the mining of potash, to the diesel to plow, then ship, then package, then distribute it. So one of the politically viable solutions therefore is to increase this ratio! The saying goes, “What’s good for Big Oil…”

Who Owns the World? [numbers updated Jan 2009]
This issue is huge and will give us years of information to chew through. However, here is a really fascinating aspect of one of the roadblocks to cheap unlimited energy, Washington, D.C. industry lobbying.

$114,058,794 Electric Utilities are the #3 spender for 2008
$ 94,531,539 Oil & Gas are the #4 spender for 2008

Last year GE spent $15,038,000 in Washington. Over the last 10 years they spent $178M furthering their agenda on Capitol Hill, which makes them the largest single corporate lobbying entity. Guess why wind is so politically popular compared to overseas solar manufacturing! By the way, that’s a GE turbine in that thing. One theory aligns the United States and the military-industrial complex with the attitude of, “We own the world.” GE used to say, “We bring good things to life.” Close enough for government work. If they can’t own it what are the chances of seeing it grow and develop? Think about their nightmare of a home owner going to Home Depot to buy a Do-It-Yourself Home Solar kit.

Then there are the utility companies that burn coal. What country owns the largest coal reserves in the world? Even kids know this stuff. Yes, it’s the United States. Here is another wild energy dichotomy. Compare the explosive 2008 bull market in coal stocks to solar stocks. Keep in mind coal is not a growth sector.

Companies like ANR had a PE of 52 at the peak of the coal trade. The math doesn’t quite add up. Especially when you consider the coal industry is primarily mining in the same areas they used 150 years ago. Can a 150 year old industry be a growth industry? Don’t mistake demand for growth.

So how is Big Oil going to charge the public for unlimited energy unless they own it?

From The New York Times on Duke Energy’s CEO Jim Rogers

Solar is currently too expensive to make economic sense, according to Rogers, because the cost to put panels on a roof is greater than what a household would save on electricity. But what if Duke bought panels en masse, driving the price down, and installed them itself — free?

“So we have 500,000 solar units on the roofs of our customers,” he said. “We install them, we maintain them and we dispatch them, just like it was a power plant!” He did some quick math: he could get maybe 1,000 megawatts out of that system, enough to permanently shutter one of the company’s older power plants. He shot me a toothy grin.

Even in this era of green evangelism, Rogers is a genuine anomaly. As the head of Duke Energy, with its dozens of coal-burning electric plants scattered around the Midwest and the Carolinas, he represents one of the country’s biggest sources of greenhouse gases.

What they call “green evangelism” is still a system of control with a monthly debt obligation, also known as ownership. They own you.

Do Solar Companies Talk?
This attitude of US corporate ownership was confirmed at SEMICON West. A high profile executive of a large solar company was offended when asked a seemingly innocuous question. He is of Chinese ancestry and was asked if he felt Wall Street has an agenda against Chinese companies.

Anyone who watches CNBC (owned by GE) can see this behavior. However, the trigger words “East/West” were used. This immediately caused a stunning emotional reactionary response. He made it clear that they are not a Chinese company, but an international corporation legally no different than US corporations. The exec was gracious and diplomatic in resolving his anger, but the answer was more than obvious. Yes, there is major US financial leverage being used against international solar companies and they are frustrated by it.

Grow Baby Grow!
Recent estimates project the global solar photovoltaic (PV) market to grow from US$13 billion, to over $40 billion in 2012, when electricity produced by PV technology will reach grid parity in many parts of the world. The chip makers were doing 17% growth in the boom years.

So there were companies like Intel doing 17%. Today companies like LDK Solar are doing 50% year-over-year growth. LDK had the prime spot at SEMICON West. They were right in front at the main entrance with a HUGE overhead picture of the new factory site.

A comparison could be made between LDK and Intel of the early 90′s. That will have to be another article, but LDK on their own merits is growing at an incredible pace. Not just growing, but immediately accretive and profitable. They are ramping to be the world’s largest solar company by every metric. Their mid-2009 capacity is projected at 2.3GW. This should put them in the number three spot.

A brilliant investor who runs Fund My Mutual Fund broke down the recent fundamentals:

Sources:
SEMICON West 2008 Highlights
http://www.opensecrets.org/lobby/top.php?showYear=2008&indexType=s

Semiconductor Growth Is Slowing
by Dan Bloom
July 12, 2006

Rush for biofuels threatens starvation on a global scale
TimesOnline
March 7, 2008

A Green Coal Baron?
by Clive Thompson
June 22, 2008
http://a330.g.akamai.net/7/330/2540/20080725161031/www.semiconductor.net/articles/blog/1590000359/20080717/AMATSolar1.jpg

http://investor.ldksolar.com/phoenix.zhtml?c=196973&p=irol-newsArticle&ID=1240475&highlight=

Here is a quick update on LDK’s recent price and volume action:

LDK Daily Chart

Last week we were interested to see if LDK could break the wedge and hold. It has done that and is now entering price territory the stock hasn’t seen since December of 2007. The yellow resistance line corresponds with the last swing high in May. At today’s gap open price tested back to this level then rallied. Volume has been increasing which is bullish and on-balance volume also has trended up showing new money coming into the stock.

We were anticipating profit taking near $48 (May swing high) which happened last Thursday and Friday. Today’s news further gapped the stock up. It makes us wonder if press releases are being timed to hold the new price trend, thus keeping price from testing the gaps. Last week’s trend is reflected by the blue line resting on $45.

LDK Weekly Chart

Looking at the weekly chart it will be interesting to see how LDK closes this week. As of today the candle is a perfect spinning top which points to indecision. Neither the bulls nor the bears have an upper hand. All things being equal, the vertical move is starting to look overextended and some traders are likely anticipating a retracement.

MarketClub Chart

MarketClub offers a great service, particularly for longer term swing trades. Their last buy recommendation was August 7th. If you bought on that triangle and held to the close today you’d be up 50%. Since LDK’s latest earnings release MarketClub has rated LDK +100, their strongest rating. Their proprietary trade triangles have not given a sell signal yet. Take a look and see if their product is right for you:

MarketClub BONUS, 2 FREE MONTHS! Click Here

LDK Weekly Chart

Today in the after hours trading LDK broke out from a massive wedge pattern. The initial surge tested $44 and closed near $40. Typically, longer time frame patterns behave more consistently. What makes this so compelling is how clean the trend line is with multiple instances of confirmation on solid volume. If LDK can close this week above the 8 month trend it should be very bullish for solar stocks. The fundamentals are there, but institutional money seems to be in a wait-and-see mode. Based on research and observations from SEMICON West the demand for solar anything is massive, but in many people’s minds so is the risk in this group.

LDK Daily Chart [AH activity not displayed]

From a basic technical perspective LDK needs to close above $38.50 and have volume based follow through. If it’s strong it should easily test the last swing high at $48. The swing high at $48 also coincides with a 50% Fibonacci retrace from IPO to the double top. This might be trivia, but two coincident levels from two different technical methodologies should be of note.

LDK has the cleanest pattern formation of all the solar names with many reference points on the trend line. Today’s AH volume wasn’t massive, but it was strong. Average daily volume has slipped recently from 3M to 1.5M. The last swing high was printed on a 10M vol. day. Heavy volume on Tuesday will be encouraging for confirmation of a pattern breakout.

YGE Daily Chart

Included are FSLR and YGE as reference of how they failed somewhat similar wedge patterns. Note the declining average volume in both names. The dashed purple line is on-balance volume. The failures were very close to their 50 day simple moving averages, which makes for neat and clean technical trading.

FSLR Daily Chart

So what does convertible arbitrage mean to you and me as a retail investor? It means we can get blindsided by volatility if we don’t know the driving force. Let’s use LDK Solar as an example. No opinion is being inferred on the company or management. This is simply a stock I know and can use as an example. There are hundreds of deals a year like this.

The offering came a month after LDK hit an intraday low of $19.64 off the Fed’s bailout day on March 12th. The next day LDK released news about their entire 2008 inventory being sold. The stock popped 24% that day. A couple weeks later the wheels were in motion on LDK’s convertible bond arbitrage. During the offering period the greater stock market was relatively flat. The Dow had no +/- 100 point days. This makes for an interesting look at how convertibles effect the underlying stock.

Chronology

On April 8, 2008 LDK Solar announced its intention to offer, approximately $300 million aggregate principal amount of Senior Convertible Notes due 2013. The Street already knew about this before the rest of us.

Here is the relevant price history:

April 2, 2008
LDK Solar Signs a Ten-Year Wafer Supply Agreement

April 4, 2008
LDK Solar Signs Two Additional Wafer Supply Agreements and One Polysilicon Sourcing Agreement. Notice the stock had x3 average volume, a 15% price increase, and hit the NYSE Top 10. Retail investors had no info on the convertible notes yet.

April 3^rd,4^th, and 7^th saw gap opens to the upside. Pre-market buy orders forced LDK’s NYSE specialist to raise the open above the previous day’s close. It’s possible this was done to create a better offering price. I’m not an arbitrage attorney, so I don’t really know.

April 7, 2008
LDK Solar Files Annual Report on Form 20-F.

The stock was shorted hard from the open and sold down all day on the highest volume during the offering period. This confirms hedge funds shorting the underlying after buying the convertibles.

It looks like all the inside work was done by the 7^th, the day prior to news of the senior notes being released to the public. After this day the stock didn’t move much until another gap open on the 15^th, the closing of the period. LDK then finished April very flat with declining volume.

April 8, 2008 LDK Solar Co., Ltd. Raises Q1 2008 Revenue Outlook; Lowers Q1 2008 EPS Outlook

April 10, 2008 LDK Solar Co., Ltd. , announced today the pricing of $400 million of 4.75% Convertible Senior Notes due 2013.

The notes will pay cash interest semiannually at a rate of 4.75% per annum and in certain circumstances, will be convertible into LDK Solar’s American depositary shares, cash or a combination of cash and American depositary shares. The initial conversion rate, subject to adjustment, is 25.4534 LDK Solar American depositary shares per US$1,000 principal amount of notes, which is equal to the initial conversion price of approximately US$39.29 per American depositary share, which represents an approximate 25% premium to the closing price of $31.43 on April 9, 2008. The closing of the offering is expected to occur on April 15, 2008.

April 15, 2008 – LDK Solar Co., Ltd. announced today the closing of the offering of $400 million of 4.75% Convertible Senior Notes due 2013

What Does This Mean?

If I did my math right the bond issue converts into 10 millions shares. How’s that for a quiet addition to an initial float of 17M. The latest numbers from NASDAQ list 27,767,000 shares outstanding. Is the convertible now counted in the float?

I would love to hear from anyone who can figure out this formula:

I had a friend do the math, and fumbling with it we got Delta 0.77. Does that mean for every $1000 of notes $770 of stock was shorted?

In theory as LDK climbs above $39 it should meet resistance from short selling. As it approaches down to $39 it should see support from buying. What is curious is this level is very close to the 200 day moving average. Looking at the recent 60min bar chart one can see heavy volume candles bouncing off this level. When it comes time for the bonds to be offloaded they must sell above $39 to be accretive.

Notes of Interest

Convertible arbitrage is an important strategy in down markets. It’s seen as a lower risk method for a company to raise capital and allows investment hedging strategies. Historical data points to an increase of convertible arbitrage in bear markets.

“However, as majority of the trading activities in the convertible bond market takes place over-the-counter (OTC), there is no direct way of observing the risk and return characteristics of providing short-term liquidity to the CB market.”

“Unless they are registered, these notes may be offered or sold only in transactions that are exempt from registration under the Securities Act and the securities laws of any other jurisdiction.”

Long-term the strategy is seen as good for the market with a boost to liquidity. For the hedge funds it’s been a mixed bag of diminishing returns, but is still a very popular way of raising capital.

US convertible issues between December 1997 and December 1998 increased almost threefold from 152 to 430.

CBs accounts are 1/50^th of the equities market by valuation.

[If you can clarify any of my uncertain points I’d love to hear from you!]

Resources:

http://www.ldksolar.com/Company%20news.html

http://www.nasdaq.com/quote.dll?mode=stock&symbol=LDK&page=multi&selected=LDK

http://chipstocktrader.com/ldk.samurai.7.htm

Risk and Return in Convertible Arbitrage Strategies: Evidence from the Convertible Bond Market and Hedge Funds
Vikas Agarwal, William H. Fung, Yee Cheng Loon, and Narayan Y. Naik
January 17, 2005

The Convertible Arbitrage Strategy Analyzed

By Igor Loncarski, Jenke ter Horst, Chris Veld

October 2006