Archive - Apr 2010

A massive arbitrage has developed in European sovereign CDS, where the differential between local and foreign-denominated (euro and dollar most typically) CDS has jumped to record spreads. Case in point Germany, where €-denom CDS trade at 30 bps, while the $ equivalent is 43 bps, a 30% spread differential. The reason for this is obvious: as concerns of pan-european defaults have hit the euro, getting paid off on euro-denominated default protection seems increasingly less attractive. Should, say, Germany default, €10MM worth of protection on a German credit event would be worth much less at default which would certainly be accompanied by an almost full devaluation of the euro, resulting in a huge hit to the "at converted" currency, presumably dollars (as the euro would no longer exist). This has led to a major drop in demand for EUR-denom German (and other European) protection, with the differential hitting the abovementioned 30% margin. As Fitch discloses, this spread was just 7% in January. As this is a second derivative play on both currency devaluation/vol and increasing default risk, arguably the most profitable way to bet on a the confluence of factors that impact the eurozone could be a simple quanto swap trade, which could reap massive rewards should peripheral or core European weakness persist.

And now for a Milken conference panel that isn't a waste of 99% of your time: Nouriel Roubini, James McCaughan and Bo Lundgren, moderated by TCW's very astute new Chief Global Strategist (presumably one with less of a fetish for dildos and marijuana than his predecessor) discuss the topic de chaque jour: the Eurozone, and specifically Greece. Roubini starts his presentation by saying that it ain't gonna work. Something tells us Roubini does not work for the IMF, the EU, the ECB, Germany, Greece or any other government organization (and thus CNBC).

We have been saying for quite some time that the epicenter of the next downturn would be Europe and European banks. We are puzzled by the lack of reaction of Eastern European CDS but it is just a question of when not if. The will be announcements in the near future which might (probably will) give some short-term relief but don't be fooled there are no easy way and the markets has yet to price most of the associated losses. What about Greek stocks? "Buy when the blood is in the street" (Baron Rothschild)
We are value investors at heart as you know. They are rapidly approaching the lows of last year and 2003 and some value should be appearing. We have attached a spreadsheet with the top 20 Greek stocks based on our trend magic formula (same as J. Greenblatt except that we normalize earning using 5 years of data) as well as those having a Piotroski score above 5 (we can provide the complete rankings with the various balance sheet and income statements used for those interested). Black highlighted stocks are on both lists. - Damien Cleusix

The oil complex had been higher in trading on Tuesday night and into Wednesday morning, although it was rising more on the back of positive data for the economy than on moves seen in equities – which had been lower early Wednesday morning across Asia and opening weakly in Europe, with financial and resources companies getting hurt in the early trading. The US dollar, which had erupted against most other currencies on Tuesday, started out on strong note on Wednesday morning, but that strength dissipated over the course of regular ring trading, leaving the dollar comparatively weak by the end of Wednesday’s normal activity. The DJIA ended up 53.28 points at 11,045.27 by its 4 PM closing ceremony.

Spreads were mixed today with the major US indices managing modest gains as HY outperformed IG. This spread compression is optically misleading though as, in general, curves flattened in 3s5s and more technically indices outperformed weak single-names as the theme of the day appeared to be skew compression and profit-taking. Modest short-covering and single-name (sovereign and corporate) repricing was the mood of the day and while we rallied it seemed like there was very little conviction to it (despite IG closing at the day's tights) - though well off yesterday's tights.

Well it seems that at last Europe is embracing currency debasement, unless the parliament decides on a final insult to injury and turn down the package proposed by the ECB/IMF French dynamic duo Trichet/DSK. The choice was slim with contagion raging. No help means an inevitable downgrade by Fitch of Greece (at 20% 2Y borrowing rates like we saw this morning refinancing is impossible, there is no way out) which in turn renders Greek bonds inelligible for repo at the ECB facility. Who are the holder of Greek bonds? European banks of course, especially French ones. Then obviously the same happens for Portugal, Spain, and the entire banking system in Europe collapses. - Nic Lenoir

Meet your latest group of Fed doves. The pass fail criterion was: ZIRP __ Yes __ No.

RANsquawk Market Wrap Up - Stocks, Bonds, FX etc. – 28/04/10

If your one dream in life has been to hear four bloggers (well more like the MSM posing as bloggers since the "blog" arms of Reuters and DebtWire, pardon the FT, the first is the truly profitable business of the FT, don't strike as unconflicted - you never know, all those $20 CPM ads may get insulted and say goodbye, while the other two are a "contributor" and an "independent" so we are not exactly sure where in the blogging food chain it puts them aside from "thinktank" panels) in this case John Carney, Felix Salmon, Heidi Moore and Stacy-Marie Ishmael discuss blogging, online media and "The Frontier of Financial Journalism" together, today is your day. The four sat down at the Milken Institute Global Conference today, and the following 74 minutes are what ensued. The topic covered was Zero Hedge. Some interesting observations. Some not so interesting. Among these, is that over 120,000 daily "Hills" viewers salute Heidi Moore. Another, is that we (erroneously) thought groupthink disguised as "original thought" only permeated the pages of VIC and the hedge fund community.

The propaganda machine's favorite subversive mechanism to instill confidence in the prevalent population, is by nudging none other than the Confidence Index itself. And indeed, over the past few months, the Conference Board and UMichigan indices have been on a straight upward slope. What better way to get Joe and Jane Sixpack out to the mall to spend, than to give them the impression that all their neighbors are out, doing just that (and buying 5 iPads in the process). Don't forget the US economy is based on reckless spending and credit, and the Sixpacks love that, especially if they don't have to pay their mortgage ever again (as Obama told them to do). Yet the Consumer Index is nothing but just another massive scam. To wit: observe the ABC Consumer Comfort index, a representation of consumer "confidence" which according to many is much more detailed, due to its larger sampling size, and more up to date, due to its weekly updates, yet one which, refusing to drink the Kool Aid has never once been mentioned on the biggest propaganda channel of all, CNBC. Yesterday, the latest ABC numbers came out, and they were a stunner: at -49, the index is barely a few points away from all time record lows, and well into deep recession territory. In fact, the only confidence consumers can have, is that there is absolutely nothing predictive about the CONsumer indices out there: the spread between the ABC and the administration darling's Conference Board just hit a record high, as see on the chart below. In fact, it has gotten so difficult to sway popular opinions with these simplistic methods of subliminal control, that even Goldman Sachs is concerned about the utility of such indices going forward. Goldman's Jan Hatzius, in discussing Consumer Confidence, notes: "Since the monthly spending figures are noisy estimates of the true underlying trend, it does make sense to put some weight on confidence alongside actual spending when trying to gauge the outlook for consumption. This still points to a U-shaped rather than V-shaped recovery in spending." If after reading this, you still think that consumer indices are indicative of anything at all you probably were one of those who did buy 5 iPads over the past month.

Before I get pilloried for this article, just forget everything you believe about Goldman and their ethics and role in the economy because those mean nothing in this case. There is one issue and that is, within the facts set forth in the SEC complaint: What did Goldman do wrong? Here is a way to analyze it.

It appears the impasse on the financial non-reform bill is over, and now that it has been stripped of anything and everything relevant (not much to begin with), the toothless product is about to be voted on by everyone. The "bill" as it now stands will do nothing but accelerate the collapse and the most spectacular banking system blow up in history. We will get you more as we see it.

There is no question now that the complacency about Greece and the peripheral European implosion is identical to the Bear->Lehman->Financial collapse pathway that the US experienced between March and September 2008. And just like back then Bear was small enough to bail out, soon we will hit a country that not even the IMF's half a trillion rescue facility will be sufficiently large to prevent from teetering over. At this point it is nothing but a waiting game. However, unlike the US, when after Lehman the Fed scrambled to throw $24 trillion of Fed signed paper at the fire, expecting a comparable coordinated and rapid response from the Eurozone is ludicrous, especially with Goldman shorting it. So those who believe they can time the market melt up until the next unsustainable sovereign blow up - good luck (of course here we refer to the daytraders who take their guidance from the Momo Money brigade, whose refrain for 60 minutes each day is "it will go up because it is going up." Brilliant). For everyone else, we present a short primer from UBS on how to play the sovereign crisis, at least until the point when playing anything is futile and the global scramble for cash crashes the Keynesian dream.

The third one is proof positive that all those in charge of anything during the great Keynesian unwind are clinically insane and live in a parallel universe:

04/28 02:29PM GREEK PM SAYS WE ASK FOR NO BAILOUT, JUST REASONABLE TERMS ON OUR LOANS

04/28 02:02PM GREEK PM SAYS WILL CUT BUDGET DEFICIT BY 4 PCT OF GDP IN 2010

04/28 02:23PM GREEK PM SAYS GREEK INTEREST RATES ILLOGICAL BASED ON MARKET FUNDAMENTALS

1. IMF is likely to reach agreement this coming weekend.  It'll then go to the Board for formal approval, which is a formality.
2. The program will NOT be 100-150bn.  Not realistic.  But it will probably include a year of full funding (55bn), and indications of a long term commitment to help Greece.
3. The program will not include a "private sector contribution", ie a demand for debt restructuring.
4. the first European money, including in Spain, will be approved on Friday; others including Germany will followed very shortly after.  It looks as if the European money will be disbursed in parallel with the IMF, with the first money going out before mid-May, safely in time for the May 19 "deadline".
5. The ECB is extremely unlikely to intervene in Greek sovereign debt (what would they want to achieve by doing so?).