Posts Tagged ‘Finan’
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 15th 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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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?”
“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.”
“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.
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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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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