A Risk-Meh Morning (Tchir)

Thursday, June 14th, 2012

by Peter Tchir, TF Mar­ket Advisors

Credit Mar­kets Mixed: Spi­taly vs Cor­po­rates

The first thing most peo­ple are notic­ing today is the weak­ness in Span­ish and Ital­ian bond yields. Span­ish and Ital­ian CDS are both wider as well. There is a lot of talk about what it means to hit 7% on 10 year bond yields. For Por­tu­gal, Ire­land, and Greece that was more or less a trig­ger of worse to come. Ire­land actu­ally crossed 7% again in May hav­ing been below that since Jan­u­ary. Since it spiked above 7% on the 15^th it has been sta­ble. Italy, last year’s poster child, went above 7% are returned below mul­ti­ple times. Yes, 7% does make a nice head­line, and it is the pre-fee return a hedge fund has to make before the investor starts earn­ing more than the fund, but it is far from clear that it is the point of no return for bond­hold­ers, espe­cially after the EU and ECB appar­ently learned their les­son last year.

It is def­i­nitely a big con­cern, and yet MAIN and XOVER are both basi­cally unchanged this morn­ing, and IG18 and HY18 are both tighter. I’m not sure what the expla­na­tion is. IG and HY prob­a­bly got over­sold into the close, but it is far from obvi­ous why MAIN and XOVER would be so calm in the face of ris­ing yields in Spain and Italy.

Other “Risk-On” Assets Mixed As Well

Euro­pean stocks are down on aver­age, but Span­ish stocks are up. It is just a strange sig­nal to see weak­ness in sov­er­eign debt yet for the stocks to do well.

Greek bank stocks have been up solidly, though why any­thing would be left for exist­ing share­hold­ers no mat­ter who wins the elec­tion is beyond me.

JPM was up solidly yes­ter­day, and XLF was almost unchanged, yet the broader mar­ket sold off hard into the close, which again seemed to break with the idea of finan­cials being a leader.

Oil is down, but gold is up, though I have been los­ing track now of whether gold is a risk-on or risk-off asset.

Even the Euro is some­how bet­ter today, which is in line with U.S. stock futures but not mov­ing as you would expect given the mess in Spain and Italy.

Weak Data vs Pol­icy Inter­ven­tion

Noth­ing has changed in this respect. The global eco­nomic data con­tin­ues to come in weak and is not sup­port­ive at these lev­els. Small pol­icy steps have been taken and the threat of more pol­icy action is sup­port­ive of the mar­ket here.

Is “whale trade” done trend­ing?

Mr. Dimon’s tes­ti­mony seemed to go about as well as one could hope. They tone wasn’t as acri­mo­nious as peo­ple feared and with only a cou­ple weeks left in the quar­ter the esti­mate of a “solidly prof­itable” quar­ter is prob­a­bly pretty accu­rate. By the end of the tes­ti­mony, many pun­dits were ask­ing what the point was? Exactly, there was no real point. This is a pri­vate com­pany that had a trade that mor­phed into some­thing big and wrong, but it still prof­itable and never put any “tax­payer” money at risk.

If the scape­goat­ing is over, and the trade is under con­trol (and I believe it is), then this should be a chance for JPM to start a recover back to at least the lev­els of when the made the announce­ment. In a nor­mal world, I would expect it to drag other risk assets with it.

Bailouts, Sub­or­di­na­tion, and SMP

There remains a lot of con­fu­sion about what is going on in Europe. Asides from the con­fu­sion over how “sub­or­di­nated” Span­ish bond investors will or won’t be, there is even greater con­fu­sion about how the bailout is funded. Yes­ter­day we explained how Italy isn’t bor­row­ing at 6% to lend at 3%. We also once again look at the errors in how peo­ple are look­ing at subordination.

There are a lot of very influ­en­tial peo­ple out there neg­a­tive on the bailout. I can under­stand that, but many are bas­ing it on incor­rect infor­ma­tion (how EFSF and ESM work) or overly pes­simistic views – that Spain is the bor­rower and gets no value while sub­or­di­nat­ing every­one else. Just like in the past, peo­ple have decided to be opti­mistic and not dig into details, now peo­ple have decided to be pes­simistic and not dig into details. That didn’t work out well when peo­ple thought the orig­i­nal EFSF deal was good, it may not work out well now think­ing that the use of FROB is trivial.

On the other hand, I have heard peo­ple ask­ing about SMP today with yield hit­ting new highs. SMP will not be used by the ECB. If peo­ple are wor­ried about sub­or­di­na­tion, the worst tool is for the ECB to use SMP. The ECB spends money that doesn’t even go to the sov­er­eign, and sub­or­di­nates all hold­ers. SMP is real sub­or­di­na­tion as the bor­rower receives noth­ing, and the exist­ing hold­ers are in worse shape.

If any­thing, look for EFSF to assume the role of sec­ondary mar­ket pur­chases. That would have the ben­e­fit of tak­ing prices higher with­out the de facto sub­or­di­na­tion of remain­ing bondholders.

It is more likely that they let yields hang out up here for a bit. It really doesn’t cost the coun­tries any­thing and may be a good strat­egy to get remain­ing longs out and cre­ate a solid short base ahead of some new EFSF pro­gram or new LTRO. If the LTRO was designed to cre­ate a “carry” trade, now is much bet­ter time than in February.

We may even seen some inter­ven­tion in the pri­mary mar­kets, but I sus­pect they would wait until ESM is launched because ESM has a much eas­ier time get­ting lever­age, espe­cially if it is finally given the bank­ing license so many want it to get.

Copy­right © TF Mar­ket Advisors

Tags: Appar, Bank stocks, Being A Leader, Bly, Bond Yields, Cern, Cials, ECB, Finan, Greek Bank, Hav, Hedge Fund, Morn, Pean, Ple, Point Of No Return, Poster Child, Taly, Trig, Xlf
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Bond Parishioners Are Leaving The Euro Church

Thursday, June 14th, 2012

Via Mark Grant, author of Out of the Box,

I have been on Wall Street for thirty-eight years now. You may claim brains and bril­liance and the best invest­ment com­mit­tee this side of Alpha Cen­tauri but I can smell the napalm in the morn­ing and my nos­trils are jump­ing as if infused by pep­per gas. It was in the spring of 2010 that I con­cluded that Spain was going to get put in “time out” and I put it in black and white. Yes­ter­day as Moodys down­graded Spain by three notches to just above junk and likely today the Span­ish banks will feel the pain and as the yield on the Span­ish ten year is just under 7.00% the heat is on and the stove has been turned up to high. The Ital­ian 10 year yield is 6.25% now and finan­cial mar­kets oper­ate as a mat­ter of faith and it is obvi­ous that the parish­ioners are leav­ing the church.

A man named Pedro was walk­ing along a steep cliff one day, when he acci­den­tally got too close to the edge and fell. On the way down he grabbed a $125 bil­lion branch, which tem­porar­ily stopped his fall. He looked down and to his hor­ror saw that the canyon fell straight down for more than a thou­sand feet.

He couldn’t hang onto the branch for­ever, and there was no way for him to climb up the steep wall of the cliff. So Pedro began yelling for help, hop­ing that some­one pass­ing by would hear him and lower a rope or something.

“HELP! HELP! Is any­one up there? HELP!”

The Spaniard yelled for a long time, but no one heard him. He was about to give up when he heard a voice. “Pedro, Pedro. Can you hear me?”

“Yes, yes! I can hear you. I’m down here!”

“I can see you, Pedro. Are you all right?”

“Yes, but who are you, and where are you?

“I am Heinz, Pedro. I am from Berlin.”

“You are Ger­man? You mean, really German?”

“That’s me.”

“Heinz, please help me! I promise if, you’ll get me down from here, I’ll stop spend­ing too much money. I’ll act just like a Ger­man. I’ll be finan­cially respon­si­ble for the rest of my life.”

“Easy on the promises, Pedro. Let’s get you back up here safely; then we can talk.”

“Now, here’s what I want you to do. Lis­ten carefully.”

“I’ll do any­thing, Heinz. Just tell me what to do.”

“Okay. Let go of the branch.”
“What?”
“I said, let go of the branch. Just trust me. Let go.”

There was a long silence.

Finally Pedro yelled, “HELP! HELP! IS ANYONE ELSE UP THERE?”

With yields just off of Kelvin’s Absolute Zero some peo­ple are bet­ting on the Fed’s eas­ing or some new LTRO by the ECB but let me tell you some­thing; when you are at zero inter­est rates then injec­tions of liq­uid­ity are not going to accom­plish what they might under other cir­cum­stances. Liq­uid­ity never cures sol­vency prob­lems which is just exactly where we are now. All the talk of ring­walls, fire­walls and bul­let proof vests have not done one thing except to give the EU and the IMF fod­der for a delu­sion­ary dis­cus­sion. If the patient has can­cer then pro­tect­ing him by apply­ing sun­screen has all of the value of lend­ing some­one $5.00 to buy a Fer­rari; it is a nice ges­ture but it hardly gets the job done. The EU is mak­ing any num­ber of nice ges­tures but they are not get­ting the job done and Ger­many is just not going to per­mit them to head into are­nas that might accom­plish some­thing because Ger­many can­not and will not allow the Ger­man peo­ple to have the same stan­dard of liv­ing as the peo­ple resid­ing in Athens. There is the preva­lent school of thought that Ger­many even­tu­ally will be forced to accede and I am 180 degrees from that posi­tion; it will not hap­pen! In the end it will be Ger­many for the Ger­mans and this is a his­tory les­son that is stamped in iron across eons of our past.

There is talk of Euro­pean bank deposit insur­ance; there is no mech­a­nism in place for this, no banks have paid into any­thing and it would be months or per­haps scores of months before this could get approved even if every­one wanted to approve it which Ger­many has can­didly stated it does not. There are rum­blings about Eurobonds which Ger­many will not approve and it is noth­ing more than the weaker coun­tries ask­ing Ger­many for more money which Ger­many will not pro­vide. There are demands for the EFSF and/or the ESM to pro­vide money directly to banks but this can­not be accom­plished under either char­ter and to change them would also take months. I state again, as I have in my last sev­eral com­men­taries, that if Ger­many does not want to pay then noth­ing will be done and Ger­many, as sure as I am on my boat in the Bahamas, is not going to lower its stan­dard of liv­ing or see its bor­row­ing costs rise to a Euro­pean aver­age with­out a polit­i­cal upheaval that would top­ple Ms. Merkel’s gov­ern­ment. There should be no sur­prise that Greece and Spain and Por­tu­gal and Ire­land keep ask­ing for money and it should not shock any­one that many clever schemes have been pos­tu­lated to try to get Germany’s money and it should also not sur­prise any­one that Ger­many mouths all kinds of nice and polite phrases to object but in the end Ger­many will keep reject­ing any plot that will lessen their lifestyle. It is the plead­ing song of the beg­gars and the char­ity dona­tion of the wealthy but that is all that it is ever going to be as Ger­many is not going to roll over to pla­cate the other nations.

Don’t For­get

Sun­day is my “Big Fat Greek Election.”

Toula: “Will you please stop play­ing with your food?”

Gus: “After Sun­day we may not have any food to play with!”

Copy­right © Mark Grant

Tags: Alpha Cen, Cial, Close To The Edge, Finan, Kets, Leav, Liance, Lion Branch, Mark Grant, Morn, Napalm, Oper, Parishioners, Pep, Ror, Spaniard, Steep Cliff, Tauri, Ter, Three Notches
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David Rosenberg Channels Felix Zulauf

Thursday, June 14th, 2012

From David Rosen­berg of Gluskin Sheff

This Felix Is No Cat

Though he does seem to be a furry ani­mal nonethe­less … I’m talk­ing about the leg­endary Felix Zulauf and his remark­able con­tri­bu­tion to the Barron’s Round­table. This is what he had to say — clear, con­cise and cogent:

There is too much debt in the indus­tri­al­ized world and the finan­cial sys­tem is vir­tu­ally bust. Rea/ dis­pos­able per­sonal income is stag­nat­ing or declin­ing. Employ­ment par­tic­i­pa­tion keeps head­ing south. This pro­duces a chain reac­tion: Weaker con­sumer demand in the West weak­ens man­u­fac­tur­ing in places like Asia, which weak­ens natural-resource pro­duc­ers such as Aus­tralia or Brazil.

As for the euro, it is a mis­con­struc­tion. As I said in Jan­u­ary, I expect the dis­in­te­gra­tion to begin in the sec­ond half of this year. That should lead the world into finan­cial and eco­nomic chaos. My two major themes into 2013 are euro dis­in­te­gra­tion and China weak­ness, due to the burst­ing of a real– estate boom.

The global econ­omy is weak­en­ing cycli­cally on top of a highly frag­ile credit sys­tem. It is an explo­sive cock­tail. The tower of debt is com­pounded by the gigan­tic over-the-counter deriv­a­tives mar­ket. In the past 10 years the notional value of deriv­a­tives world­wide has grown from $100 tril­lion to almost $800 tril­lion. The num­bers are mind-boggling. if some­thing goes wrong in the real econ­omy, it could shake the whole credit sys­tem dra­mat­i­cally. It is a dan­ger­ous situation.

The euro is not the real prob­lem but a trig­ger and com­pounder of the struc­tural prob­lems. It could only work if the euro zone entered a fis­cal and polit­i­cal union, which won’t hap­pen, as Euro­peans aren’t pre­pared to give up national sov­er­eignty. Politi­cians there­fore will go from one com­pro­mise and quick fix to the next, with the cri­sis deep­en­ing until some nations at the periph­ery won’t be able to stand the eco­nomic pain any­more. They will want their old national cur­rency back, and devalue to adjust the exter­nal accounts.

China won’t be able to save us, as it did in 2009. The Chi­nese will lower inter­est rates but their actions will be reac­tive and lag. If my the­sis is right, we must assume things will go awfully wrong in the next 12 months and the sys­tem will be at risk of col­laps­ing. Most U.S.-focused investors might not under­stand it as they see cor­po­ra­tions doing well.

The poten­tial exists for a broad-based nation­al­iza­tion of the credit sys­tem, cap­i­tal con­trols and dra­matic restric­tions on finan­cial mar­kets. Some might even be closed for some time.

We are wit­ness­ing the biggest financial-market manip­u­la­tion of all time. The author­i­ties have inter­vened more and more, and thereby cre­ated this mon­ster. They might change the rules when the game goes against their own interests.

We are in a severe credit crunch. It starts when the weak­est links in the sys­tem can’t finance their activ­i­ties. Then you have a flight to safety into Trea­suries and Ger­man bunds, com­pounded by a quasi-shortage of good col­lat­eral. That’s why bond yields have fallen so low. This isn’t an infla­tion­ary envi­ron­ment but a defla­tion­ary one.

I like to think I could have said it bet­ter, but I don’t think I could have. These are just a few excerpts but very hard-hitting stuff and a nice con­trast to a lot of the other mush out there. Fred Hickey is worth a read too in this Round­table dis­cus­sion, ditto for Marc Faber (dis­clo­sure: they are friends of mine, but don’t hold that against them!)

The full Zulauf note can be found here

Copy­right © Gluskin Sheff

Tags: Bers, Cise, Cock Tail, David Rosen, David Rosenberg, Euro Zone, Explo, Felix Zulauf, Finan, Gluskin Sheff, Ized, Lems, Nomic, Notional Value, Omy, Real Estate Boom, Rosen Berg, Tives, Tralia, Tril
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