Posts Tagged ‘Tf’
Tuesday, August 21st, 2012
by Peter Tchir, TF Market Advisors
Is it a New EU?
Of the major players coming into June 2011, almost none are left. Attrition and elections have taken care of most of the major players. In fact, you could make a case that Merkel is really the only major player still in the same position.
I think this is important particularly for the ECB. Draghi has now had time to establish himself in his role, and get comfortable with the people at the ECB, the various central banks, and the politicians. He entered the role with a bang – a rate cut, more symbolic than anything, at this first meeting and then began the LTRO’s.
Since then, his efforts to get Spanish and Italian bond yields down have been thwarted by the markets and a deteriorating economic situation. He wants yields low and looks like he is prepared to stretch his powers to fulfill the mandate of “transmission of economic policies”.
How far is he willing to stretch? How much can he do based on that “transmission” mandate? That is the question and we need to get answers, but more and more, it looks like he is prepared to be aggressive. It may not be a completely new EU, but it has changed a lot in a year, and the ECB does look to be a new ECB.
Nein to Nein!
Germany looks more and more isolated in their refusal to play nice and even there it is becoming clear that not everyone is against the idea of money printing and aggressive actions. On top of that, Germany is “only” 25% of the EU economy. It is the single largest economy, but France, Spain, and Italy combined are much larger. Germany plays an important role, but it cannot make decisions unilaterally. Germany could in theory walk away from the EU, but the German “elites” more than anyone seem committed to trying to hold the Eurozone together. They are stubborn and have a deep seated fear of somehow once again being the ones that cause Europe to splinter.
Their voice, while important, is diminishing, and for many of them, they are looking for ways to save face as they backtrack from 2 years of causing problems. Assuming Nein means Nein is likely to be wrong in this case.
The Immediate Problems that the ECB CAN Address
Currency exit and forced redenomination has to be taken off the front pages of the newspapers. I have not seen a single paper that walks through how redenomination would work in practice. There are 100′s that talk about an event, and then a future where the currency adjustment “restores equilibrium” or some such nonsense, but they gloss over how you get to that stage. The reality is that you don’t. Not easily and possibly never. The uncertainty created will cause business to die. To die quickly and violently as no one will want any part of cross border commerce while currencies and laws are in a state of flux. This isn’t just for the weak countries. Germany will see problems as well as they face political backlash from the rest of Europe and from a strong currency. A lack of energy resources makes this reversion to old currencies and devaluation even more problematic.
While currency redenomination risk remains on the front burner, business will be slow to engage in big new projects and the risk of bank runs remains high.
Any policy that provides funds direct from the ECB to weak countries, such as the plan floated this weekend, would immediately reduce the risk of redenomination. The ECB would become the center of a tangled web, so intricate and complete it would be hard to visualize how to untangle. So the ECB CAN take redenomination risk of the table.
Budget problems in Spain and Italy need to be fixed. The ECB cannot do much to fix the overall budgets of Spain and Italy, but it CAN help. Both countries have seen cost of new money increase dramatically and are paying rates far above the ECB’s target rate for banks. That adds to the annual budget deficit as that higher interest rate cost affects current year payments. It takes time for these higher rates to influence the overall cost, but we are well over a year into the crisis and if Spain and Italy had been able to refinance all that debt 2% cheaper, it would be having an impact. The circular nature of this is vicious as well. The more Spain and Italy have to pay to refinance debt, the bigger their current deficits, and the lower their credit quality, causing rates to go higher. This is the “transmission” element the ECB is focusing on. The ECB wants (in fact needs) Spain and Italy to have low rates, and needs to find a way to get them. It will reduce current deficits and future projected deficits.
An ECB plan to support countries would take away roll risk, so not only would the countries that need money the most, be able to get it at rates in line with overall policy, but they could spend less time on how to raise money in the bond market, and more time on how to fix their economies and budgets. So the ECB program can help the budgets, it will take time, but it is real, and will also allow countries to focus on things other than bond auctions.
Constraints in both Will and Way
Throughout the crisis there have been concerns about whether the EU had the will or the way to fix the problem. Much of the conversation revolves around the “way” they can fix it. Do they have the tools? Do the treaties allow them to do what is necessary? The reality is that the “way” argument was to hide the fact that Europe didn’t have the “will” to fix things.
Now it looks like Europe might have the “will” to fix things. That Europe is finally willing to engage in a wholesale effort to support the periphery. If Europe is willing to do that, they can find ways. EFSF, while lacking in many respects, isn’t insignificant. The ECB, while constrained by its mandate, seems to have some flexibility, especially if they decide they want to push the envelope. A lack of will has been a bigger impediment to success than a lack of way, so this psychological change is important.
It is also useful to point out that so far the term “bailout” has been applied very loosely. Germany, for example has delivered very little cash to any of the countries. It has guaranteed debt that was used for the countries or supported IMF and ECB efforts to funnel money to the countries, but very little German cash has found its way to the countries as part of “bailouts”. On top of that, all nations that have received “bailout” money have continued to pay that money back. There has not been a single default on any money lent as part of the “bailouts” so Germany is actually profiting from this so far (ignoring the cheap rates they are also benefitting from).
The image of German’s dumping money on these nations just isn’t correct. So far, Germany has acted more like Rumpelstiltskin and demanded a high price for their loan, rather than as some sort of charity act that the term “bailout” implies.
Even though I believe the will is now much stronger, and there is a way, they will be careful not to be “reckless” and will embark on programs that are easier to sell internally.
What Trades Should do Well?
I like Spanish and Italian bonds, but only with maturities of less than 5 years. I think that the ECB will focus on the primary market and the short end of the curve. I think they will make money available in the 2 year range. It is long enough to offer real support, but short enough that the political opposition will be lower. I don’t exactly agree with the theory that 2 year risk is so much less than 5 year or 10 year in the case of Spain or Italy, but politicians tend to. Politicians often have a simplistic view and will take comfort in that the next 2 years are “foreseeable” and 5 years and out isn’t. It’s not true, since they can’t seem to anticipate anything 3 months out, but that is what they believe. They can be convinced to lend short term rather than long term.
I would go out as much as 5 years because any such program will be in place for awhile so even if loans are only for 2 years, there will be a window during which they are available. That will support the 5 year point. The 5 year point is also aided by bad CDS shorts and is in the comfort zone of banks.
The threat of subordination will keep the curve extremely steep. Even if the program were to be “senior unsecured” and pari passu with other debt, there would be doubt in the minds of investors. There should be concern that if things don’t work out, that non public holders would once again (like Greece) bear the brunt of the initial restructuring. So the curve should be steep as it prices in risk that any program goes away AND that bonds not part of the program would be subordinated. The ECB needs to ensure that countries have access to cheap money, but they don’t need to support the secondary market, and they don’t need to lend to countries for long term (it would be good if they did, but it isn’t necessary for the ECB’s objectives to get accomplished).
Spanish and Italian stocks, Bank stocks, and bank CDS. The best analogy I can think of is that this is like an earthquake and the “damage” will be greatest around the epicenter. So if the ECB launches on a new program, the epicenter of the earthquakes will be in Italy and Spain. The closer to the center the more benefit. Italian and Spanish banks are sitting right on the fault line and will benefit the most from this action. Companies in these countries should also see a rebound. Banks outside these countries will benefit more than companies. In many ways, the rest of the world has decoupled from the problems (DAX is up 20% YTD), but banks have been held back more than other companies because of how interconnected the global banking system is. This would extend as far as U.S. banks.
Credit Default Swaps. I continue to believe that CDS can go tighter. It will be led by bank CDS, but will be helped along as shorts capitulate. CDS has become the last bastion of “cheap shorts”. Too many investors are short, some whose primary knowledge of CDS came from reading “The Big Short”. I continue to see a lack of interest in bank hedging, and if “real money” ever decides to stop chasing the same silly bonds to the same silly yields and sells CDS instead, the gap will be ferocious. CDS spreads aren’t at the tights of the year yet, and have been stubborn these past few days (tighter, but grudgingly so). High yield bond and leveraged loans should continue to do well, but at this stage, high quality, BB type paper should be traded with a rate hedge.
Short German, French, and EFSF bonds. As the realization that your bunds aren’t about to get converted into Deutschemarks any time soon hits, these will look expensive. As EFSF is called upon to use up its remaining capacity, the supply will add to pressure to this particular entity, above and beyond the pressure on German and French yields. While I would be uncomfortable owning 10 year bonds in Spain and Italy, getting short 10 year bonds in Germany, France, and EFSF seems fine. The subordination argument that makes 10 year scary on the one side doesn’t directly translate to making it appealing on the other.
US stocks are the “dirtiest shirt” and far from the epicenter. The US has largely decoupled. We are about to start facing our own problems, and the campaign format that we will face them in, is particularly troubling. We rally because everyone in China is going to buy a iPhone despite evidence that China is having much bigger trouble than access to iPhone. US stocks will go along with the global rally, but I expect them to lag.
China. Tempting, but I’m not comfortable yet. Japan, maybe? I am working on forming a better opinion here, but suspect they will outperform the U.S. market on European action, but still underperform Europe itself.
Short, nervous, and rebalancing.
I shifted from being long to finally having gotten short on Friday. I don’t like that position right now. I will be shifting back to a more positive position. I think I will be between small short and small long, with longs continuing to focus on Spain, Italy, banks, and the credit positions mentioned above. Shorts will become more common and will be focused on U.S. markets. It is hard to be long Spain here after a 20% run from the lows, but I find that I gag less when looking at that, than other options for being long.
On the option front, I have started buying S&P September puts. I will look at increasing that position once I’m out of more of my short, but will continue to be patient as I think we will see a move higher in index values and see a drop in the cost of vol.
I will definitely be taking this morning’s fade as a chance to take off shorts and get back to a long bias.
Tags: Aggressive Actions, Attrition, Bond Yields, Central Banks, Decisions, Draghi, ECB, Economic Policies, Economic Situation, Economy, Elections, Elites, Eurozone, Fear, First Meeting, Mandate, Merkel, Money Printing, Politicians, Tf
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Friday, August 10th, 2012
by Peter Tchir, TF Market Advisors
What if Europe is actually really going to get aggressive?
What if housing has bottomed and is starting to improve?
What if the Q2 jobs data was affected by adjustments as much as Q1 and the economy wasn’t as bad as some feared?
What if Chinese stimulus works?
What if earnings rebound in Q4?
“What if” is a close relative of “Green Shoots”. The market doesn’t need actual data to support it, just needs to think it might be coming. There are a lot of shorts who are nervous about this week’s price action. We didn’t get the typical Monday pullback. Here it is Thursday and we continue to push up against the highs. That is making people question their beliefs, and wonder “what if”. And it isn’t just the bears. Many bulls are underweight and are wondering “what if” this is the real thing.
For myself, I still think 1,425 is a good target, but above 1,410 I start selling again. I think the “what if” analysis is what will push us to those targets.
Copyright © TF Market Advisors
Thursday, August 9th, 2012
by Peter Tchir, TF Market Advisors
Herding Cats and Obstinate Politicians
The mental image is so clear. Draghi, Hollande, and Obama, wiping the sweat from their brows with dust covered hands, having successfully corralled the Merkel. She’s still feisty and not happy about being in the pen, but they have managed it for now. Job well done, time for a well deserved refreshment after a long day.
It’s only then that they realize the Rajoy isn’t in the pen. They can’t believe their eyes. There is that damn Rajoy sitting on the other side of the river licking his paws preening himself. They cannot believe. They are stunned, flabbergasted, and about to go ballistic.
Seriously, after all the effort to cobble together something that they managed to convince the markets would turn into action is being derailed by the person who is most to benefit?
It is absolutely ridiculous, but it’s not as though they will just give up. They will corral Mr. Rajoy. It is inevitable and the real risk is whether Merkel is able to escape while their attention is focused on Rajoy.
So while it is concerning that Spain is not playing along, I think the pressure brought to bear will be great and Spain will accept something to keep the EU, ECB, and Obama happy.
Negativity Remains High
The markets have had a strong rally, and I am definitely seeing more bullish statements, and the media seems to be adopting a little more of a cheerleading stance than a week ago, but negativity remains high. As I wrote yesterday, I have continued to sell and am now by the smallest long position I have. I haven’t yet bought SPX 1,350 puts (I should have) but after yesterday’s sales, I have a small position. I think that is representative of many bulls. This is the underinvested bull rally, where very few, if any bulls have been aggressively positioned for the move from 1,380 to 1,400.
The perma-bears have grown angrier and louder. That makes perfect sense and doesn’t tell me much.
It is at the center that I still see a lot of bearishness. I read multiple reports today about how the ECB plan would create a problem for Spain and Italy because their average maturity would continue to decline. Serious analysts have taken the time to recommend selling the market because the average debt maturity will be too short. I saw this and had to think. I have been a proponent that the longer the better. Without a doubt getting Spain and Italy long dated, cheap money is far more beneficial than short dated money, but right now, let’s see them ACTUALLY GET SOME MONEY.
There is something about the need to write about the negative long term consequences of a plan that hasn’t been announced yet, that just makes me believe negativity remains too high.
Watch the financial news for a bit. How many people are getting set with an easy ball to spike down on the bull side (their normal tendency) yet refusing to take it? In some cases, they are going out of their way to find the bad side. In many ways that is an encouraging sign, as it is far more balanced than it has often been in the past, but it feels that the pendulum has swung and too much effort is being put into pointing out negatives. It isn’t as extreme as when the philosophy seemed to be to turn everything positive, but I think it is there.
So I remain convinced, that while the market has moved to a more balanced position, it is far from overly bullish.
Yesterday’s Credit Market Underperformance
IG18 actually finished ¼ bp wider yesterday. It had gotten down to 101.5 but finished the day 103 bid. This was in spite of equity strength and a reversal from the bidless market we had seen for several sessions. That is definitely something to watch, but the rally has been strong, and yesterday’s pause wasn’t met with much real pressure in single names as the basis is now only -2 bps. That is about the least rich that IG18 has been in awhile. This means that positioning here is becoming more balanced. It was getting hard to have a sustained rally while being 4 to 5 bps rich, but at a much more neutral valuation relative to fair value, it has room to tighten again, which remains my base case for CDS.
The high yield ETF’s both sold off a bit yesterday. HYG and JNK were both down about ¼%. That caught some attention. The first thing I look to for confirmation of weakness is HY18, the CDS index. That was higher by about 1/8. Not much, but not confirming weakness in the ETF’s. HY18 is a spread product, so that indicates spreads tightened. Then look at rates. Treasuries moved lower yesterday. That move was picked up by LQD and MUB which are very sensitive to treasury yields. High yield, as I’ve mentioned, now has a large segment of the market that is trading at such low yields, that it is more sensitive to treasuries than usual. Some of that will have impacted the market. Too many “high yield” bonds trade as low yield, so will track treasuries at least somewhat (why I have said repeatedly at these yields, individual credit, and individual bond selection is more important than the beta trade).
If High Yield was really weak, IRM wouldn’t have been about to issue $1 billion of 5.75% coupon bonds. Those bonds only traded up ½ point (so not as much free money as you usually get from a new issue allocation, but still better than a kick in the teeth). For those who care about ratings, these are B1/B+ bonds.
So, yes, there was some weakness, but mainly in the cheapest hedge (IG18) and mostly a function of treasuries rather than spread, and the real key, the new issue side, remains strong.
I feel the need to point out that JPM closed at 37.01 yesterday, the highest close since the May 10th whale conference call. At one point, including the dividend paid since then, JPM hit 38. I am now virtually out of JPM. I will reload again, but above 37.50 just seemed far too good a selling opportunity to pass up. While the whale trade is out of the way (I remain convinced the residual is marked so conservatively and has so many reserves that even the worst summer intern could trade their way out of the residual and book a profit. There are signs that housing is stabilizing at these levels. Those are all good signs, but the risk of a nasty LIBOR headline concerns me at these levels. It has been a great trade for us, and we will continue to trade the name from the long end, and may add, but the main thesis is largely over now for me.
S&P 1,350 Puts, Could have, Should have, Would have, Won’t
All things considered, I will be looking to add back some risk here rather than continuing to sell. The amount of negativity still seems high. While it will be a pain to corral Rajoy, I find it hard to believe that after all the effort made, that Draghi, Hollande, and Obama will give up so easily. The credit market weakness that so many pointed out, seemed isolated to a couple things, relatively easy to explain and all part of a process that to me is as natural if it was preparing to break to new tights as much as it is a sign that it is about to turn around.
It still feels strange to be long, and feels even stranger to be looking to get longer as futures continue to drift lower, but the fact that so many people are happy to say how wrong I am, gives me comfort.
I am watching closely. It is possible that yesterday’s push through 1,400 and gap to 1,407 is all we get and I should have bought the puts, but for now I’m looking to replace what I sold and think we still push to a new high, largely because too many people are bearish and even the bulls are underweight.
Copyright © TF Market Advisors
Tags: Brows, Bull Rally, Bulls, Cheerleading, ECB, Herding Cats, Hollande, Market Weakness, Mental Image, Merkel, Negativity, Obama, Paws, Perfect Sense, Perma, Politicians, Refreshment, S Sales, Spx, Tf
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Wednesday, July 25th, 2012
by Peter Tchir, TF Market Advisors
Chinese PMI was better than feared, but if I had to bet on what number is less manipulated, Chinese data or LIBOR, I would have to bet on LIBOR. Since we don’t have much else to work with, I guess we are stuck looking at it, and it shows that the slowdown is slowing, but I can’t get very excited about that.
European manufacturing PMI came in at 44.1, worse than the already low expectations of 45.2. The situation in Europe is deteriorating and all the summits aren’t helping. The banks need to be recapitalized and “uncertainty” needs to be removed or else business will continue to grind to a halt.
Most interesting, I thought, was that German Manufacturing PMI came in at only 43.3 and even German service remained under 50. Germany is not immune to the woes in the rest of Europe or to the global economy. French manufacturing PMI was an equally dreadful 43.6. Maybe the growing weakness in the core will light a fire. It isn’t enough to have firewalls. They either have to spend that money and finally take serious default and currency risk off the table, or the economies will continue to slide deeper into recession or depression.
Pesetas and Real Madrid
Spain had a reasonable t-bill auction today. The yields were high compared to any of the core with 6 month t-bills coming in a 3.69%. In a normal world, that isn’t bad, but in a world where Germany and others get paid to issue money for 6 months, it doesn’t look great.
In any case, talk of redenomination continues. Many people argue that the only way out for Spain and others is to exit the Euro and create their own currency that they can devalue at will.
I continue to see several problems with that. Devaluation will be controlled by the markets and not the politicians making it uncertain where the exchange rate will settle in. If the bets are “too high”, “too low” or “just right”, I would certainly bet against “just right”.
The uncertainty created by a new currency will be immense. The confusion for banks and businesses will overwhelm any possible business. Who will want to do business in a country with a highly volatile currency where the end result remains highly uncertain? Who will do business in similar looking countries? Trade will grind to a halt and demand for non-essential goods will dry up as people wait to see the results.
Finally, in a country where much of the “daily essentials”, particularly energy have to be imported, it is far more difficult to see how the people or the country, prosper. In successful devaluations, the country has often been natural resource rich and been able to “harness” those resources for their domestic economy during the devaluation process.
But those arguments are confusing, so let’s look at Barcelona and Real Madrid. Will Barcelona be able to afford Messi? How much of the revenue of these clubs from domestic markets? The higher the percentage of domestic revenue, the more expensive players will be. And it wouldn’t just be foreign players. Spanish players would also be tempted to leave. The clubs would have to pay their players in Euros. That could become a huge burden for Spanish clubs. As the peseta plummets, how will they afford these top players? Will clubs in other countries be able to pay them?
What if the situation in Spain erodes where daily protests become a way of life? What if the devaluation causes domestic problems? If political tensions grow and civil unrest increases will players want to stay in Spain when they could demand the same money elsewhere, without the additional risk?
Maybe Germany is hoping to transform the Bundesliga into the best league through currency devaluation? Yes, this is largely tongue in cheek, but it may be worth thinking about what Liga BBVA would look like after devaluation. People may not be passionate or understanding of the economy, but they are passionate and informed about their football clubs. In a world where much of the talent is imported and the local talent is free to leave, the analysis may not be as fanciful as it sounds. M
any Canadians saw it happen to their teams when a combination of a weak Northern Peso (this was pre loonie) and high taxes made it hard for Canadian franchises to compete (the BlueJays have never recovered). It wasn’t just sports. There were big issues of “brain drain” as many top people and companies looked to move to the U.S.
A weak currency may not be as helpful as people think and in fact may cause far more problems than it fixes, especially since this wouldn’t merely be devaluing, it would be creating a new currency and leaving a union, adding to the confusion and complexity of the task. Any real “progress” towards a near term redenomination would cause me great concern for all risk.
Markets really don’t seem to know what to do. The greed is saying sell-off because Europe is a mess, yet the fear is that enough government money and liquidity comes into the market that we ignite another rally.
Domestic credit continues to do okay. Spreads have widened in the past few days, but very calmly and with relatively little enthusiasm for any move wider. You can pick up some high yield bonds marginally cheaper, but that’s probably only until you engage an offer and find out they aren’t really selling.
My concern that Europe will mess this up is growing. They seemed to have been implementing small steps that could work, but they seemed to have slowed down, and the level of dangerous (and poorly thought out) rhetoric is growing. I will continue to keep a close watch on the situation and am continuing to lighten up risk, though will add when drops seem overdone.
The price action in Spanish bonds is chilling, but volumes are incredibly low.
Tags: Bets, chinese data, Currency Risk, Devaluation, Exchange Rate, German Service, Global Economy, Libor, Low Expectations, Madrid Spain, Politicians, Real Madrid, Recession, Redenomination, Slowdown, Summits, T Bills, Tf, Uncertainty, Woes
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Thursday, July 19th, 2012
by Peter Tchir, TF Market Advisors
July 2007 to January 2008
These are the stock prices, “normalized” to 100 in July 2007. In the August swoon, JPM and C did the worst. Barclay’s eventually caught up in later August, while BAC did well. We briefly rallied on a Fed Rate cut in October, but then the swoon returned with C underperforming by far. It was down over 40% in that period. Barclay’s was in the middle, and JPM was actually the best performer, down only 11% by year end.
These are “normalized” CDS spreads. You can see that at first they moved in line, then Barclay’s underperformed, but returned to the fold by the time of the Fed rate cut, and then ultimately we saw a separation as JPM did the best (just like in stocks) and Citi did the worst (just like in stocks). But this overstates the divergence a bit. Looking at the outright spreads shows that Barclay’s actually started the period trading tight, and JPM was the widest, but by the end CDS markets viewed JPM, Barclays, and BAC as similar, but Citi was noticeably wider.
These are “normalized” LIBOR. All banks were submitting very similar rates. Then the stock market decline started and bank LIBOR increased. This was a function of credit spreads. Then as Fed programs kicked in (discount window) and then rate cuts were implemented, LIBOR moved down.
The outlier to me, is Citibank. Citi was the worst on CDS, the worst on stock, but actually did the best on LIBOR? Really? Was Citi really able to borrow from other banks at rates equal to or lower than BAC and JPM? Shouldn’t it have been closer to Barclays? There is the fact that Barclay’s was reliant on BoE rather than the Fed. That is one reason for Citi to more closely track JPM and BAC, but that close? CDS was relatively tame, so maybe the differential in 5 year CDS overstates the issue, but just doesn’t seem right.
August 2008 to January 2009
All the banks moved more or less in line at first. Then Citi, Barclays, and BAC underperformed. For one brief moment, Citi actually bounced and got back to JPM levels, then a long slow decline started. Barclays was for awhile the worst performer, but Citi took over, being down 80% at one stage and finishing down 65%. Those are big numbers. Citi, BAC, and Barclays all saw their stock price decline by 55% to 65%. JP was “only” down 23%.
On a “normalized” basis, it’s surprising to see Barclay’s CDS do better than anyone else’s at any time during the period. What is clear, is that on a “normalized” basis, Citi consistently was the worst name. One spike up with JPM, one with Barclay’s, and one big spike all by itself. But maybe like in 2007, the levels were low enough that the differences might be immaterial?
No, these moves in LIBOR are real. Citi started the crisis as the highest spread name, and maintained that “distinction” throughout the entire period. Barclay’s never traded as wide in CDS as Citi. JPM was probably the best, but BAC wasn’t too far behind (though it widened as noise about hidden ML losses came out). Barclay’s was surprisingly not as bad as I would have guessed. Citi though is just clearly the worst.
This is “normalized” and Barclay’s is a clear underperformer. You can tell when they were allegedly “told to catch up”, but throughout, they remained the high submitter. They underperformed through the entire crisis. Not quite consistent with stocks or CDS and may explain why they complained that others weren’t submitting “true” rates. Citi was somehow consistently able to submit LIBOR that was lower than BAC but was even lower than JPM on some days. By the end of the year, once Barclay’s was presumably fully in liar mode, they were similar to BAC and C. Maybe it’s the normalization process screwing up the data?
I’ve added the 3 month yield so you can get a sense of the Ted Spread, but it is clear that Citi felt they funded in line with BAC and at times with JPM. It is only at the end when we see Citi, BAC, and Barclay’s submit similar rates.
If Barclay’s said others were lying, who could it be? There were days the separation between the U.S. banks and Barclay’s was as high as 100 bps. 50 bps difference wasn’t uncommon. I can justify JPM trading that much better. The stock market performance and CDS of JPM would all be good explanations of why JPM was better than Barclay’s at funding. That much lower, is a guess, but it actually doesn’t seem unreasonable.
Citi in particular looks bad. Especially since BAC’s spikes in LIBOR coincide at least somewhat to times when their stock and CDS underperformed.
This is only one point in one curve. I have focused so far on 3 month USD Libor. That is the most important one in my opinion in terms of number of contracts that reference it. The 1 month has such short duration that I didn’t focus on it yet. The 6 month is interesting because it would have more credit risk and should reflect more differentiation. The same analysis would have to be done for every bank, every currency, and every spot on the curve to get a true estimation of how much LIBOR LYING was done. Determining, or guessing how much each bank lied would be critical to any lawsuit. Lawsuits will ultimately have to be tied to how much a bank lied, and how much of that lie impacted the LIBOR setting. The complex mechanism by which LIBOR is calculated means that not all (or possibly any) of a lie would impact LIBOR’s setting. In spite of Barclay’s rush to catch up, they were still being excluded from the LIBOR calculation on most days for being too high.
From this data, there is no way to prove anyone lied, or to prove by how much if they did.
I have spent more time focused on Barclay’s and their US issues. So far, it looks to me like they were submitting LIBOR more accurately than other and their claims that others were too low seem right. I have more work to do, but am getting to the point where the damage to Barclay’s stock price is worse than the risk.
Concerns over JPM’s exposure seem overdone as well. Yes, they were at the low end of submissions, but I think it would be hard to prove that is a lie without some real evidence. They had low submissions, but their CDS and stock performed the best. I do not think that they can be sued just because they have a large book of business if they didn’t have material amounts of “lying”. Again, I’m not concluding anything yet, but fears related to them seem overdone from all the work I’ve done.
For some reason I want to say something bad about BAC, and my gut tells me I’m right, but as of now, they seem reasonable. Their LIBOR moved with their stock and CDS. Maybe they were slow occasionally, but if anything they come out better so far than I would have guessed.
Citi. It is impossible to say they did anything wrong from the data I’ve looked at, but their submissions don’t pass an initial smell test. If Barclay’s is saying banks were submitting LIBOR that was too low, they strike me as a candidate for much deeper scrutiny. Their stock and CDS did the worst, yet consistently during those peak times, they submitted LIBOR closer to the better performers. Again, it could be a function that it is so short dated, and a function that Barclay’s was so high they were being excluded, but I would want to take a closer look at Citi’s submissions and would be nervous that their stock does not fully reflect the risk.
We are not lawyers, and have no access to actual interbank trades from the time, and this is not a recommendation to buy or to sell, but if the market is going to throw around lawsuit numbers in the $20 billion to $50 billion range and move prices based on that, figuring out how real those numbers are and who would bear the brunt of the burden is key. From all of our work so far, any “manipulation” prior to August 2007 would have had minimal impact as all the submitters were so close together and there really wasn’t a “credit” problem so the fluctuations of LIBOR seem reasonable, at least within a bp or two.
More banks to look at, more points on the curve, and more historical bond prices to dig up.
Tags: Barclay, Barclays, Boe, Citibank, Differential, Divergence, Fed Programs, Fed Rate, Jpm, Liar, Libor, Nbsp, Outlier, Pants On Fire, Stock Market Decline, Stock Prices, Stocks, Swoon, Tf, Year End
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Thursday, July 5th, 2012
by Peter Tchir, TF Market Advisors
The Fed does everything it can to keep Libor low
This chart says it all.
The Fed cannot affect LIBOR directly, but in general LIBOR trades in line with Fed Funds. You can see that historically as Fed Funds was changed, LIBOR responded appropriately. There was typically some small premium to reflect the “credit risk” of banks versus the Fed, but it was relatively small, and fairly stable. 3 Month LIBOR would deviate a bit as rate cuts and hikes were anticipated in the market, but in general, it was a fairly stable game.
That all started to break down in 2007. We saw the first real signs of LIBOR deviating from its normal spread to Fed Funds in the summer of 2007. The Fed responded by cutting the “penalty” rate for using the discount window, and in fact encouraged banks to use the discount window (I still can’t shake the mental image of someone sitting in a dark basement with a green eye-shade doling out money to banks that request it). Then the crisis got worse. Bear needed to be rescued. Facilities such as the Term Auction Facility that had been put in earlier were increased in size. The Fed backstopped some portfolios that JPM acquired as part of the Bear Stearns deal.
As the crisis re-ignited in the late summer of 2008 and peaked after Lehman and AIG, the Fed took step after step to reduce borrowing costs. The Fed was blatantly clear that it wanted borrowing costs to go down. They had the obvious tool of reducing Fed Funds to virtually zero, but when LIBOR didn’t follow, the Fed took further action. The Fed did not want bank borrowing costs to be high.
They increased dollar swap lines so foreign banks could borrow. The Fed stepped into the commercial paper market so banks wouldn’t have to use money to meet drawdowns on revolvers. TALF was another creation to take pressure of bank lending.
The FDIC allowed banks to issue bonds with FDIC backing (so not quite Fed program, but who is going to quibble).
Fears that MS and GS and GE would topple the banks were alleviated by making them banks.
The list goes on. The Fed has done a lot and trying to control LIBOR as a key borrowing rate is one of the things they have worked on, both directly and indirectly.
Tags: 3 Month Libor, Aig, Auction Facility, Bear Stearns, Bonds, Credit Risk, Dark Basement, Eye Shade, Fdic, Fears, Fed Funds, Foreign Banks, Green Eye, Lehman, Manipulator, Mental Image, Nbsp, Portfolios, Stable Game, Term Auction, Tf, Trades
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Wednesday, July 4th, 2012
by Peter Tchir, TF Market Advisors
How Much Worse Would Our Budget Problems be Without the Fed?
The biggest difference between what is going on in Europe and what is happening here, is the ability of the Fed to get rates where they want them across the entire curve. For all the talk about Spain and Italy not being “sustainable” at today’s rates, where would the U.S. be?
Starting with just our fixed rate debt look at what the Fed has done. Since Q4 2009, the Treasury department has extended the average maturity out from 5.8 year to 6 years. At the same time, they have managed to get the average coupon down from 3.37% to 2.5%. That is a huge cost savings to the government. If we were paying 3.37% on the $8.2 trillion of bonds, our annual interest expense would be $275 billion instead of “only” $204 billion. That is huge difference and is largely a result of the Fed’s treasury purchase programs. Keeping rates low and buying up the long end of the curve has resulted in substantial savings for the government. This is something Europe hasn’t figured out how to do, yet.
The more you think about it, the more impressive it is what the Fed has been able to help treasury do. They have allowed massive new issuance, at a longer average maturity, while driving the rates paid down significantly.
The Fed has been even more supportive than that. The Fed gives back their “profits” to treasury, so all of the coupon income the Fed earns, goes right back to the treasury department, further reducing the annual deficit. Assuming 20% of the bonds are held by the Fed, that would be an extra $40 billion cut off the annual expense. So instead of paying at least $275 billion if the Fed wasn’t involved, the current government is only spending $165 billion or so. The Fed is “enabling” the government to overspend by $100 billion a year.
Low rates aren’t so much for the consumer, but for the biggest debtor nation on the planet.
I don’t know whether Europe and the ECB will ever be able to match the Fed and the U.S. government in terms of being able to control rates, but assuming they can’t or won’t come close is dangerous, especially as they continue to take steps, albeit baby steps, in that direction.
Americans think Politicians Outside of the U.S. are Different
We get a Supreme Court ruling and every party is a winner. It doesn’t matter who you talk to, their party won. The spin is out of control, but we accept it. The U.S. has only two parties and has regularly scheduled elections, making it one of the easiest political situations to navigate. Everyone understand that. Everyone understands politicians say what they want.
Yet, somehow we believe European politicians tell the truth. That Merkel says what she actually plans to do? That Rajoy actually believes he won? Every comment from European leaders is viewed as a clear signal of dissent and that the deal will fall apart. Maybe, just maybe, investors need to pay attention to the actions and steps the leaders have taken, and less of the rhetoric they are selling their voters.
Could you imagine Romney saying the SCOTUS decision was a stunning defeat because he thought the decision would be much stronger? Or Obama admitting that calling it a tax is a horrible thing? Probably not, so why would you expect Merkel and Rajoy to go home and focus on what they gave up, rather than what they gained?
Ignore some of the noise coming out of Europe. It is leaders trying to placate their voters. They are politicians the same as ours. Watch and see if actions occur. In spite of the talk, the German government ratified the treaties and ESM. Yes, we have to see if their court upholds the law, but they are doing what they said, so far. It is scary that it is beginning to look like the hodge podge of European leaders may actually be able to implement programs to help their people while the U.S. politicians go out of their way to avoid accomplishing anything in their effort to get a couple more years in office.
The Economy Is What Matters
One key theme I keep reading is that Merkel won’t give in because people in Germany no longer support the programs. Merkel will do what she thinks will have the best results for the German economy. If you think, as I do, that a Greek Exit would lead to a collapse in Spain and Italy causing a devastating drop in the German economy, you would find it easy to see why she would change her attitude. Her best hope of getting re-elected is having a strong German economy. How she achieves that goal is of secondary importance. Many of the governments in Europe that were toppled, were doing what their people wanted, but it didn’t matter when the economy declined.
Ultimately, this is where Europe and the U.S. are the same. In spite of all the other issues, the election will likely be decided based on the economy at the time of the election. Right now, that is bad for Democrats as every indication is that the economy here is slowing. It also won’t help if Europe starts pointing at the U.S. to get its house in order. Without the Fed, our deficit would be much worse and the EU knows this. There is typically no better way to get a disparate group of people to work together than to find a common “enemy”. I expect that as European leaders continue to take incremental steps on their debt problem, that they will focus attention to the U.S. to divert some internal scrutiny. I have no idea what that will do for markets, but should throw another dynamic into global markets.
Will Short Covering turn into a Reach for Yield?
So far, this rally is one that even a mother can’t love. Friday morning, virtually everything I read was negative. More positive comments came out, and today I finally see them as being balanced. I see the number of table pounding bulls about equal to the number of red-faced bears.
We are still in the “short covering” phase as far as I can tell. We are getting little moves up and down, as people adjust their positions, but for the rally to gain momentum, it has to be driven by a reach for yield or risk rather than just short covering. From Saturday, here is why I think we could see a reach for yield trade. So far Spanish and Italian bonds are still slightly better again after Friday’s monster move, and CDS indices are all grinding tighter.
A Data Intensive Week
ISM just missed by a lot. Though how long before someone points out that prices paid dropped even more? Is anyone that prepared to bet that the EU, ECB, Fed, and PBOC will do nothing? Look for the market to bounce back from this weak data.
On NFP, the best possible outcome for the Fed is a job number close to the 90k expected, but for a nice uptick in the unemployment rate due to people entering the workforce. At least to the extent they are looking for excuses to act, while hoping the economy hasn’t truly derailed.
Tags: 6 Years, Bonds, Budget Problems, Coupon Income, Curve, Debtor Nation, Fixed Rate, Hasn, Interest Expense, Issuance, Italy, Maturity, Nbsp, Profits, Q4, Spain, Substantial Savings, Tf, Treasury Department, Trillion
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Wednesday, July 4th, 2012
by Peter Tchir, TF Market Advisors
How is LIBOR calculated?
The BBA provides pretty detailed analysis of the process. The key here is what the rate is meant to be. The contributors, are supposed to submit a rate for each currency they contribute for overnight, one week, two week, and monthly out to a year. The rate is meant to be:
“At what rate could you borrow funds, were you to do so by asking for and then accepting inter-bank offers in a reasonable market size just prior to 11 am?”
This is a bit like self-reporting your weight. The bank is supposed to submit a rate where they think they could borrow, not where they actually borrowed or where they would lend to other contributors. Right from the start the question raises questions that have been discussed for years.
How can a bank “know” where some other bank will lend them money? Can’t they use transactions? Can’t they get firm “offers” from other banks? Why not have the banks submit levels where they would lend to other banks?
The very nature of the question used to solicit rates tells you all you need to know. LIBOR has always had an element of “gamesmanship” if not outright lying.
In general, banks will tend to submit lower rates and attempt to artificially lower LIBOR. There are two reasons for this:
- Signaling Effect – banks don’t want to say it would cost them more money to borrow than their peers because that would be admitting to weakness and may cause their lenders to pull back and create a financing freeze. Each contributor’s LIBOR indications are published so if a bank shows up with a particularly high estimate of what it would cost to borrow, it would attract unwanted attention. It may be the truth and should be evident in the CDS and bond markets, but for some reason banks remain concerned about the signaling impact and tended to skew LIBOR submissions lower than they should have been
- Risk and P&L Impact – The big banks always have a lot of risk associated with LIBOR. It will affect their borrowing costs, it will affect what they receive on floating rate loans and it will affect the value of their interest rate derivative books. It might have other secondary impacts, but those 3 areas are big. It is probably safe to say that banks in general benefit from lower LIBOR, but that won’t be true for all banks and won’t be true for all days. There are occasions where banks may benefit from a higher LIBOR. If they have a disproportionately large amount of floating rate loans resetting on that day, they may benefit by having LIBOR higher that day, thus locking in slightly higher income for that period. Someone at the bank will know their exposure to the LIBOR setting on any day, and it would be hard to believe that on days when the exposure is large either direction, the group that submits it would be unaware of the potential P&L impact.
That is a dangerous concoction. A question that leaves a lot of wiggle room, and banks that may have strong incentives to use that “wiggle” room.
Controls and Actual Calculations
For me, the single most important rate is the 3 month USD LIBOR rate. It certainly impacts Americans more than any other rate calculated by the BBA. Here is yesterday’s submissions, and the calculation.
There are 18 banks that submit U.S. LIBOR. The 4 lowest rates and 4 highest rates are thrown out for purposes of the setting. Then LIBOR is set as the average of the remaining 10 rates.
You can see the wide discrepancy in rates. HSBC and Barclay’s clearly think they have easy access to money. SocGen and BNP seem to think it would cost them a lot of money relative to the others. There is no indication how much borrowing and lending is occurring in the interbank market, so there is no easy way for an outsider to tell if this reflects reality or not. JP seems conservative given that their 5 year CDS trades at 125 which is similar to HSBC’s 120 level. Barclay’s 5 year trading at 205 would indicate a possibly optimistic view of where they could get short term funding, and Citi and BAC barely behind JPM again seems a bit optimistic given their CDS trade at 235 and 250 respectively.
So by throwing out the outliers, and using a relatively large pool to calculate the average, the BBA attempts to mitigate the risk of any one bank skewing the setting. The problem is that it doesn’t do much if multiple banks collude to manipulate the setting.
If multiple banks have the same incentive to skew their own submission, and worse yet, communicate that to “friendly” banks, then the BBA methodology breaks down further.
The problems with the BBA methodology is there is no confirmation that the rate submitted is reasonable, and nothing is done to protect against group rather than individual bias in their submissions.
I don’t think this will turn into lawsuit mania. In spite of the huge notional amount of contracts and loans outstanding based on LIBOR, it may be difficult to pursue a case. We will go through the cases that might make the most sense in a moment, but here are the main reasons that I don’t think this will snowball into a massive amount of litigation
- Individuals and Many Corporations benefitted from lower LIBOR settings. To the extent the bias was to artificially lower LIBOR, the direct impact would be to reduce amounts owed on floating rate borrowings. Anything where individuals as a class were hurt would expose the banks to big problems, as they would be getting sued by a group that would have a lot of jury sympathy. But in this case, individuals that had any LIBOR exposure, typically directly benefitted from any bias to make the rates low, as they borrowed in LIBOR and little of their investment income was based on LIBOR.
- The duration of LIBOR is short. Even if you have a 10 year swap where you paid fixed and received floating, you would likely have to demonstrate that on each reset date, the bank colluded to move LIBOR setting against you. Maybe you can argue that the overall trend was enough to impact your mark to market, but that may be a stretch. Having to show that at each quarterly reset, on the day your contract resets, there was collusion, could be very difficult. The duration also comes into play on the damages side. Let’s assume you had a $10 billion swap (a reasonably big trade). If the banks all colluded against you on a particular setting and managed to move LIBOR by 10 bps (a big differential) your “loss” would be $2.5 million or 0.025% of notional. Not small, but another example of how the short term nature of LIBOR makes it hard to build a big claim.
- The complexity of the process helps the banks as a group. How would you prove you were hurt by a particular bank? If a bank submitted a “bad” price, but was already in the outlier group, it would be hard to make a claim since it didn’t affect the calculation. If a banks “bad” price moved it from the calculation group to the outlier, it is only the difference between what would have been fair for them, and what the bank that is now being used submitted. It is really hard to show how much 1 bank affected the outcome. Larger groups caught in the act would be required, but this will be more difficult to find consistently, and remember to prove real loss, you would need that group collusion on each reset date. Then those banks would split the cost. That is ignoring the difficulty of proving what a “bad” price is. The question certainly allows for the defense tactic of “well, that’s what I thought it would be”, especially during periods where interbank activity went to zero and the banks were relying heavily on central bank funding.
It is easy to salivate over the potential lawsuits and the losses the banks might have, but a dearth of sympathetic victims, the rolling nature and short duration of LIBOR based products, the lack of a test to determine if a submission was “bad” and the complexity of the setting process make it far harder to bring successful lawsuits than the headlines might suggest.
I would expect more firings at banks. Clearly Barclay’s was not acting alone. In this environment, no bank is going to support an employee who was involved in this. The banks will defend themselves in court against lawsuits based on the letter of the law, but at this stage, none are going to fight to save staff that participated in schemes to move LIBOR (or at least those dumb enough to use e-mail and other recorded forms of communication).
Will other big heads roll? That to me is less clear, but is a possibility. I’m assuming like in most other things at big banks, if the people in charge are well-respected with no big internal rival, they survive, but if the person has been on the edge and has a group happy to force a regime change, we could see one.
Ultimately the LIBOR setting process will have to change. The current process is too vague. There have been some calls for an alternative to LIBOR, but with so many contracts outstanding, I think that is unlikely. It will be far easier to just amend the methodology and try to improve the existing LIBOR process rather than starting an entirely new rate series.
There will likely be some cases brought that get settled and cost the banks some money. If anything, I suspect municipalities might form the best class action. I think many did enter into pay fixed, receive floating swaps, so as a group they might have the size and sympathy to pursue something, though I bet the lawyers for the banks will gain the most, with lawyers for the plaintiffs coming in a close second, and the plaintiffs and banks wondering how they got sucked into spending so much on legal fees. I could be wrong on the lawsuit side, but even the evil side of me, has trouble figuring out how to make a strong case with big potential payouts.
Tags: Amp, Attempt, Banks, Bba, Bond Markets, Contributor, Currency, Element, Firm Offers, Gamesmanship, Lenders, Libor, Nbsp, Peers, Reason, risk, Submissions, Tf, Truth, Unwanted Attention
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Friday, June 8th, 2012
by Peter Tchir, TF Market Advisors
Yesterday’s price action was about par for the course. Markets were higher on Chinese rate cut and that Merkel said something other than “austerity now”. Stocks dipped as Ben didn’t provide any immediate plans for QE. Then stocks rallied because no one had believed Ben was going to do much anyways. Finally, into the close, consumer credit and news that a strike might affect the timing of the Greek election helped push everything to lower on the day. It is worth noting that HY bonds and EM debt managed to close higher yesterday in spite of the late day stock slide.
Asia followed through with more weakness, and Europe has bounced up and down a little. The latest news is that there will be some sort of a call or a conference of a “virtual summit” this weekend to deal with Spanish bank recapitalizations. I doubt we see a “direct” bailout though I’m not sure the difference between direct and indirect is meaningful as others seem to think it is. If Europe follows its usual course of action, it will do something, but it won’t be enough to take the problem off the table for long. The best outcome would be to wipe out the equity and sub-debt of these banks and truly nationalize them. That would require the least amount of new money. That would likely spook the markets initially seeing equity wiped out, and all bank share prices would probably drop, but once the market figured out which banks wouldn’t need to be nationalized we would see them bounce back, followed by the market at large, because that would actually help convince people the banking problem was “solved” for longer than the usual month or two.
The global scenario remains the same, weakening economic conditions partially offset by the risk of central bank and policy intervention. Left alone the market will continue to sell off as the global economy continues to weaken. Some huge intervention in terms of liquidity or actual money printing can reverse the growth picture (at least temporarily) and spur another round of yield and risk chasing.
The “whale” story at JPM seems to be finally running its course. The daily hype around it has died down and now we are getting into the finger pointing and government soundbite stage. The complete lack of disclosure remains depressing. The fact that every investor must now realize they don’t have enough information to analyze a bank’s fair value has also hit home, yet nothing seems to be happening about that. Yet, I wonder what would happen if JPM split into an investment bank and a commercial bank. The investment bank would do all the trading, all the “sexy” business. I suspect that every good employee would want to be part of the investment bank. Ironically, for all the complaints about “risk taking” most investors would probably want to own the investment bank and not the commercial bank. The funniest thing to me would be listening to people complain that it is unfair that the investment bank went private and shareholders can’t get a piece of the action. Seriously, for all the TBTF arguments, for all the complaints about the risk JPM took, what part of the business would you want to own?
I expect a reasonably quiet, but positive day, with Europe already preoccupied by football and bears being cautious heading into the weekend with the threat of some near term quasi resolution to the Spanish banking problem. Credit is likely to outperform, particularly as investors seem comfortable with U.S. high yield once again.
Tags: Austerity, Bailout, Bonds, Central Banks, Consumer Credit, Economic Conditions, Global Economy, Global Scenario, liquidity, Merkel, New Money, Policy Intervention, Qe, Share Prices, Spanish Bank, Spanish Banks, Spite, Stock Slide, Stocks, Tf
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Wednesday, June 6th, 2012
by Peter Tchir, TF Market Advisors
Expectations for the ECB meeting seem high with U.S. futures back to 1,298 recovering almost two thirds of Friday’s drop. The range of possible outcomes from the ECB meeting seems exceptionally high. Some ideas being bantered out seem unrealistic because it isn’t actually the ECB’s mandate. Others have so many possible variations that the mere headline won’t be enough to make an intelligent assessment of its value.
We will walk through a few of the possible outcomes and try and assess some measure of “risk on” or “risk off” to each.
Any sign of global coordination will count for a lot. Any announcement about global swap lines is a +1. Unless they dramatically drop the rates or extend the maturity this is purely symbolic as the swap lines are already in place, but the confidence that yesterday’s G7 conference call was productive will increase on the back of any global coordination.
The BOE is expected to announce more QE so that won’t do much, but if China was to cut rates or reserve requirements that would be another +1.
ECB Rate Cut
This won’t do much since the good countries already trade tighter than the ECB’s overnight rate, and the weak countries don’t trade based on it either, so largely symbolic. It does help banks that rely on LTRO and other ECB funding programs as they would see the benefit. I think at this stage no rate cut is -1/2 and any rate cut is +1. I think a rate cut of 50 bps would initially spark a better rally, but concern of panic and running out of ammo would become a concern so think the net benefit is the same as a 25 bp cut, and that is what I would rather see.
I doubt we get a new LTRO program launched. No talk about LTRO is a -1 or possibly as much as a -2. Talk of another round of 3 year LTRO in the future is a wash. Everyone pretty much expects that. Further loosening of collateral requirements would be +1/2 as a lack of collateral is a growing concern, but a second order concern. An extended LTRO, such as a 5 year program would be a big change and take pressure off the entire front end of the curve for banks and would be +1 at least.
Secondary and Primary Market Purchases
My understanding is this responsibility has largely been passed to EFSF and ESM which may be why we haven’t seen any SMP. The ECB may be free to comment on this though as they would act as advisor to the EFSF and ESM and it is unclear, but they could possibly still initiate on their own. Any talk that this policy is on hold until politicians get their act together is a -1, reminder that it is one of their tools is a 0, and any talk that it will be resumed or the ECB will provide leverage to the EFSF to accomplish this task would be a +1. I don’t see the ECB doing direct purchases themselves given the mess their portfolio caused in the Greek restructuring negotiations.
Bank Recap, Bank Deposit Insurance, Bank Union
The ECB would have some involvement in these, but they are only a cog in the machine. Any negative comments would be a -1, but since I don’t see how they can actually implement anything, the best case, even if they come out aggressively supporting bank recap or bank union or deposit insurance is +1/2. The ECB just doesn’t have the power to accomplish this unilaterally. At this stage insurance wouldn’t cover currency conversion risk, which is a growing problem anyways.
Financing EFSF, ESM, EIB
Any aggressive action such as talk about a banking license or special facilities to finance bonds for these issuers would be a +1. The EFSF in particular doesn’t have the firepower without significant leverage from the ECB. The ESM isn’t up and running yet, but support from the ECB that it should get a banking license would be encouraging as they could do a lot more with their limited capital, assuming it is ever launched. The support of EIB would help ensure “project bonds” get done. I think this area has the least downside if not addressed, and has the potential to add to risk on if addressed as ECB has just enough power to help push it through.
Redemption Bonds, EuroBonds, Pixies
Any positive comments on these issues will be largely ignored as it is really outside of the scope of the ECB. So even if Draghi gets on his hands and knees and looks to the sky and says these are the best things ever and has his full support, it is a +0.00001. It just isn’t in his control. In spite of that fact, the market is looking to him, so saying nothing is -1/2 and being negative on the idea is -1.
Dumping it back on the politicians
Any comment that ultimately this has to be addressed by politicians is -1 as everyone knows how unlikely that is. If he takes no actions, is not dovish, and blames it all on the politicians than this is a -2 rather than just a -1. Any comments that the central bank will do what is necessary for the financial system in spite of politicians would be a +1 as at least the markets know someone has their back.
Update to follow actual announcements
Going into the various announcements and conferences this is my assessment of what could be done and what it would mean. I lean towards enough getting done that the risk on meter is at least high enough to support current levels and possibly enough to push it higher. Anything that adds up to risk off would lead to stocks breaking back down below Friday’s lows.
Copyright © TF Market Advisors
Tags: Ammo, Boe, Bp, Bps, China, Collateral Requirements, Conference Call, Ecb Rate, Futures, G7 Conference, Global Coordination, Intelligent Assessment, Mandate, Maturity, Overnight Rate, Playbill, Qe, S Central, Tf, Two Thirds, Variations
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