Friday, June 17, 2011

Weekly Recap, 2011 06 17

Another week and not a lot has changed.

Below some parts of e-mails I exchanged with friends regarding the European situation:

I like going long Germany CDS at current levels, 40bp.
I think this says it all.

Not that Germany will default, but compared to costs on limited risk bets with a 6month expiration (puts on DAX, SPX, EURxsomething) it seems cheap.

10yr spanish bonds broke today to the upside and Italian 10yr tested the break-out.
Irish, Portuguese and Greek debt yield made new highs...

Short term eurodollar futures yields (3m USD Libor) and TED-Spreads rose around 10-15bp the past few days which indicate a likely tightening in funding mkts..

The 3 french banks put under review by rtng agencies participate deeply in the CP/CD european mkt.. If they go....

We're in the hand of politicians and they will flip their finger at foreign banks/investors to 'save' their country.

The deposit base in Ireland and Greece is at the lows now I heard, dont remember the source or level.

Italian banks stocks are screwed, no technical supports in sight.. 
 And a reply to theirs:

Never underestimate the ability of politicians to waste other people’s money.
ABSOLUTELY. Take for example Iceland. Defaulted on British banks. Screw them!
Why would they have growth drop dramatically with necessary austerity measures because of German and French banks? That is what Greeks have in mind right now.
I know that Greek politicians know that financial chaos will come if Greece defaults, but they can just say “Hey, I don’t care! I’ll pay the price here, but everyone will share the burden!”

I do see the event of Greece leaving the Eurozone as positive for the Eurozone and fundamentally bullish for the Euro currency.
The problem becomes, then, the stability of the Eurozone being put to question.
If one country which is screwed fiscally can leave the Euro… others could too, perhaps if they are sound fiscally. This puts the soundness of the currency in check.
I wouldn’t want to be long this uncertainty at 1.25%/year in yields! Nor do I want to be long duration in sovereign European debt with this uncertainty on my portfolio.
For that I would do a basket of (USD+EUR+GBP) x (CAD/BRL/CLP/CHF/NOK) with a carry of around 4-5%/year and I’d hedge that tail risk with long USDCNY 3y calls… vols are crushed and there is also a positive carry on the USDCNY call (short CNY).
Stress would ensue and the basket, full of cyclical currencies, would suffer, but medium term, after total chaos, we would see recessions and money printing.. especially in America, Europe and the UK… so weakness all over again and a boost to EM/cyclical growth.

How cheap will be the bonds issued by the EFSF, backed in part by Spain/Italy/Ireland/Portugal/and stronger dudes? Why would anyone buy 10yr bonds ar 4% if a decent share of the guarantors (spelling?) of this debt trade at higher levels? I mean… the problem is solvency, not short-term liquidity.
I consider the EFSF a subprime CDO-squared. It is exponential-loss waiting to happen.

Domino effect.
If there is issue with bonds because of Greece… Greece isn’t part of it and larger slices of guarantee go to all the other countries (Port/Ire/Italy/Ger). Portuguese and Irish sovs yields go up.
If there is an issue with Portugal…. Greece and Portugal aren’t part of it… larger slices to Ger/Fra/Ita/Spa/Ire. Italian and Spanish yields go up.
If there is an issue with Ireland…. Greece, Portugal and Ireland aren’t part of it…

Until the whole burden falls on the back of France and Germany… and bang. Money printing (short EUR) or dead-bonds (long CDS/swap spreads).

And below those charts no one looks at.

I'd like to point out that WTI Crude, Shanghai Composite and Hang Seng stock indexes are now below 200-day moving averages and breaking long-term trend lines that started back in 2008-2009.
Commodities also took a beating and the CRB index is now at important support lines.


*Disclaimer: charts and data are presented as I receive/see them. Sources are usually not checked for validation and my own calculations are of 'back of the envelope'-type. I am aware that some math that I do myself might be wrong and/or misleading to some extent. In financial markets the rate of change of economic data is often more important than the actual level and the perception of 'what is priced in' is more important than 'what is actually going to happen'. This is actually the way people pick entry and exit points. So... yes, sometimes you might say 'This guy is an idiot, this is way wrong!' with a high conviction, being right. Not to worry. Markets are made of expectations and the clash of conviction between its participants. Portfolio managers know that being an idiot is sometimes profitable and being smart is often a bad choice. It is all reality, sometimes good, sometimes bad. By the way: corrections to my analysis and intelligent debate is welcome. theintriguedtrader AT gmail do com

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