Garrison Hill Capital Management: “Unstressful Assumptions”

Derailed Capitalism:

Garrison Hill Capital Management issued its latest report on the
macro economic environment. The firm looks at the ridiculousness of the
European stress tests, summarizing as to why the CEBS report is
absolutely meaningless:

• “The CEBS test applies haircuts to bonds held in a bank trading
  book under the “sovereign risk shock” scenario. The haircuts are very
  conservative. As an example, the assumption of the haircut on Spanish
  debt under CEBS most extreme scenario is 6.7%. If a country defaults you
  can bet that that the haircut is at least 20%
• The “sovereign risk shock” only applies haircuts to a
  banks trading book [excluding the banking book].  If there is
  impairment, meaning a bank knows it might not recover your full loan
  amount, it should create a loan loss provision to write down income
  until such time the loan is repaid (in full or in part). Here is the big
  question, why would the CEBS tests exclude the banking book? The reason
  is that it was up to the discretion of the banks whether to classify a
  loan to a government or the ownership of sovereign debt as being in the
  ‘banking book’ or ‘trading book’. This means a bank can hide losses it
  would have faced under the tests by classifying them in the banking book
  – which was excluded from the test.
• The CEBS stress test does not even consider the effect
  of liquidity risks. The last time I saw a sovereign risk shock without a
  liquidity crisis was, um, never.”

The firm later goes on to discuss its market outlook and positions:

“We went into the month of July with a long Canadian dollar
position / short Australian dollar position and skewed to being long
risk assets marginally. We have subsequently closed the long Canadian
dollar leg of that position and are now outright short Australian
dollars. The Fund is short the Spanish and US equity markets at this
point with a view that the indicies may give back some of the gains made
in July, against being long approximately five fundamental names
outside the gold sector.

We also believe gold futures are now posed to rally towards $1300
and a portion of the Fund is now dedicated towards owning the
‘physical’ commodity as well as having fundamental positions in gold
equities.”

Garrison Hill Multi-Strategy LP I Newsletter - Aug 2010

Comments

[BudgieLover]

i've got one of those bills taped to my monitor - you can buy them on ebay for a few bucks, probably overpaid...

[JohnG]

haircuts, bitchez