Dear CIGAs,

The end of November, the leaves are gone, the trees are bare and the markets become thinner into the holiday season of December. Now we may accept that 2+2=5 but we are not Decembrists. The markets will be wild and probably somewhat anarchical so we advise caution as we enter this, the season of joy. The carry trade will continue in all its glory but as we experienced last week there will chaos and missteps aplenty. Credit stressed markets have "a nasty habit of disappearing overnight." The Dubai story has shown us once again that the global financial markets are not close to being resolved and that makes the ubiquitous carry trade all the more difficult to analyze and profit from.

Tonight we await the Aussie central bank and its interest rate decision. Aussie credit markets are predicting a 25 basis point increase and who are we to argue. If the Bank stays pat the Aussie will sell off, but it should be bought on the crosses as the RBA is the only central bank that is truly ahead of the curve. If the Aussies don’t raise rates all the spinmeisters will be saying it is due to the Dubai situation but we don’t buy it. The most significant reason will probably be that the bank is concerned about currency strength but that will be a tepid answer as they raised when the Aussie dollar was here last time. So the end result is that on any real weakness the Aussie $ should be a buy.

Two other stories that concerned the markets today were the threat of Japanese intervention to halt the rise in the YEN and the Greek debt situation turning more dire. It has been several years since the BOJ has intervened but the recent Yen strength is making some traders nervous. It should be noted that the finance ministry calls the shots on currency policy and the BOJ acts on its behalf. Finance Minister Fujii has been back and forth on this issue lately so some analysts think he is being led by National Strategy Minister Naoto Kan. This is a name that bears watching. We doubt the Japanese will rock the markets with all that is going on but we will certainly be attentive to any hint of intervention. If we controlled the financial situation in Japan we would most probably push a lot of Yen into the system by purchasing NIKKEI stocks, as it would give us a double bang for our buck. The Japanese equity markets have been the worst performer of all the major markets this year so it could use a boost to help the pensioners. It would also add a great deal of liquidity to a deflationary environment – the ultimate quantitative ease. The last time the NIKKEI was trading at these levels was in July and the eur/yen cross was 129.50ish and where are we now on the cross with the NIKKEI at the same level – HMMMM curiouser and curiouser.

Now we get to the Greek debt situation. The fiscal situation in Greece is rapidly deteriorating and this is causing their national bonds to trade much higher than the benchmark bunds. To alleviate this immediate stress the Greek government is trying to sell 25 billion Euros of bonds to the Chinese banks. Now it is known that the Chinese are underweight the Euro as they have not been comfortable with the unstable polity called the European Union. This type of deal would enhance their position and also aid the Greeks immediately. It will also be seen as a way to back off the Europeans on yuan appreciation and maybe curtail the protectionist tendencies of Europe. It would also give them some added return in a Euro denominated instrument. This would be a short term benefit to the Euro and instil some confidence in the short term. The U.S. treasuries have been outperforming the bunds recently but this development could signal a sea change that we need to be attentive to. This would not be an end of the stress in the European economy but it may be a start to relieving some of the pain being inflicted on the peripheral European countries. Politically astute for the Chinese, while giving some relief from the dollar while receiving a higher rate of interest on Euro denominated debt.

Yra Harris