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Systemic Risk Elevated

Tyler Durden's picture




 

From Capital Context

Systemic Risk Elevated




The credit risk of the 30 most systemically critical financial entities in the world just broke an important channel and is at its highest in over four months at 135bps with its largest three-week rise of over 14% since Nov2010.

Before and during the financial crisis, we were crucially involved with the creation of several indices designed to track stability in financial markets with a focus on both liquidity and counterparty risk. While the liquidity measures we designed have been largely disintermediated by government intervention since then, the measures of counterparty risk remain highly visible and appear to have been a successful guage of public perceptions regarding financial systemic risk.

The
Financial Stability Board

created a list of 30 large global financial entities that represented to it the most systemically worrisome firms in the world. The chart above tracks a weighted average of the 5Y CDS (or credit risk) of these 30 names. The higher the index, the great the credit risk perceived among the world's most systemically worrisome financial entities. The greater that credit risk, the more concern there should be for another round of potential insolvencies or collapse of the financial industry.



While the currrent level is certainly not in the critical zone, it is rising rapidly and is approaching key levels at which risk managers will begin to start evaluating CVA overlays in our opinion.
A 14% rise in the index over the last three weeks is extremely fast

and we note that at current levels we are
almost twice as risky currently as were prior to the financial crisis

and also at the trough post the financial crisis in Jan2010.

The geographic split is evidently more concentrated in European entities than in the US and Asia, as seen in the chart above, and we also note that while a cursory glance shows considerable dispersion (the table is sorted worst to best in each geographical region), it is clear that migration (or discrimination) among these banks is drifting upwards. North American components average 120bps, European components average 138bps, and Asian components average 126bps.

With China raising rates (and a housing bubble seemingly bursting), Japanese stress from the vicious circle of the tsunami and macroeconomy spiralling with a weak demographic, European banks clearly burdened by mismarked sovereign debt on their books, and a US financial system that continues to practice extend-and-pretend all the time hosuing weighs heavy and TLGP debt must be refinanced, it would make sense that risk is elevated. It should be clear from the chart above that not only is systemic financial risk rising but globally it is becoming more correlated - a factor that should be of great concern for both central bankers and risk managers attempting to mitigate any insolvencies. The apparent realization, of an increasingly inter-linked and even bigger financial system since the financial crisis, among credit market participants is a signal not to be ignored.

 


We have not seen this reflected in the typical measures such as Libor, OIS etc which became so prevalent among the media during the crisis and the simple reason is the amount of government overlay of simple impliciit guarantees that seem so evident in those markets. This index is transaparent and offers a very clear market interpretation of the stress the global financial system is under. All too often, we have found our old agage that credit anticipates and equity confirms to be true. Keeping a close eye on this financial stability index over the course of the summer as European stress continues will be important.


As actionable trades

, we still like Financials vs Ex-Financials decompression (especially given where SovX is trading). The triangle trade between SovX-Main-SENFIN remains in a regime where we think there is upside also. Senior-Sub financials spread remains lower than expected. In the US, interestingly, our contextual framework shows that XLF (the financials ETF) is actually modestly cheap at current levels given current and empirical relationships between credit, equity, and vol - but this would be a long XLF for a trade with maybe 5% upside and a tight stop.

 

 

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Wed, 05/25/2011 - 14:44 | 1309815 Hard1
Hard1's picture

Hey, I won the top spot again: "Elevated bitchezzzz!!!"

Regarding the post, just don't push that first domino on the long row!  CDS levels indicate first one is BBVA, what is your guess?

Oh and I just don't get the last paragraph. The author says that an index of financial CDSs just broke an important channel, but as actionable trade recommends....(drumroll)... financials!!! What am I missing here? Is that a bet on the next TBTF rescue package while ex-financials try to stay afloat on their own? or does he/she sees the CDS widening and equity outperforming??

Wed, 05/25/2011 - 14:50 | 1309885 CapitalContext
CapitalContext's picture

Hey Hard1, thanks for comment. One is systematic and one is a trade. As an arb we see US financials cheap in equity land relative to credit land and would expect some strength relative to other sectors in XLF in the short-term - hence the tight stops etc (or use an arb but that is generally not available to most of our non-institutional investors). Fundamentally, the trade makes me nervous and we prefer (far higher conviction) the US vs EUR banks (EUR to underperform) and the other arbs in European financials that we mention. US financials may face some serious pain in November when a lot of TLGP comes due (http://www.scribd.com/doc/49078265/USD-TLGP-Maturities) - this will necessitate dramatically higher interest expense and lower earnings.

Wed, 05/25/2011 - 14:56 | 1309907 Hard1
Hard1's picture

Hey, thanks for answering, srry for harsh comment, probably a byproduct of my user name.  I really liked your post, except for the contrast between the analysis and the trade recommendation.  Financials have underperformed dramatically and may look cheap, but I still wouldn't touch them with a 10 mile pole in this environment, specially if we start moving towards a risk-off environment, which I see as more likely at this time.

Wed, 05/25/2011 - 14:32 | 1309827 user2011
user2011's picture

Well, someone is keep pushing the market up.     Bad economic report, no problem, dip in the morning and up in the afternoon.    Bad housing data,  no problem, dip in the morning and up in the afternoon. 

Volume is getting to 52 week lows, yet the market will be up.

Someone said that there is 2.7 Trillion dollar parked in money market.  Individual investors are shy away from the stock market.    I am guessing someone is trying to "fabricate" a safe and advancing market to lure those investors back in.   Then they will do the slaughtering.  

 

 

Wed, 05/25/2011 - 14:43 | 1309863 Doyle Hargraves
Doyle Hargraves's picture

Like they were sheep in Australia being exported to Costco for sale. Gold is no balance sheets counterclaim and no currency's fool. Better to cut through the bullsh*t and get some PMs then believe the market, drop that $2.7T in and poof it is gone. Even better to have brass, lead, and copper to protect the Gold you get. This is just the last push to extract the wealth from the individual investors who haven't been wiped out yet. Rather than continue to play their rigged game, I took my ball and went home! PHYSICAL GOLD AND SILVER BITCHEZ!

Wed, 05/25/2011 - 14:29 | 1309828 user2011
user2011's picture

Well, someone is keep pushing the market up.     Bad economic report, no problem, dip in the morning and up in the afternoon.    Bad housing data,  no problem, dip in the morning and up in the afternoon. 

Volume is getting to 52 week lows, yet the market will be up.

Someone said that there is 2.7 Trillion dollar parked in money market.  Individual investors are shy away from the stock market.    I am guessing someone is trying to "fabricate" a safe and advancing market to lure those investors back in.   Then they will do the slaughtering.  

 

 

Wed, 05/25/2011 - 14:33 | 1309830 Ray1968
Ray1968's picture

Wow, there is a chart for everything.

Wed, 05/25/2011 - 14:30 | 1309831 savagegoose
savagegoose's picture

fuck i look at that list and think let em burn, am i bad?

Wed, 05/25/2011 - 14:37 | 1309855 JW n FL
JW n FL's picture

No! you are pissed off becuase you have been robbed blind! and they as well have robbed their companies Blind.. and "We the People" will be left to pick up the pieces again! this is the next wave of bailouts! after record years of bonus monies! when banks made no loans! when banks wrote down no assets! when banks did nothing but front run their clients.. and now they need more bailout monies!

 

This is what it looks like when POMO is turned off!

 

POMO is Not! Train Wheels! for the markets!

POMO is the only wheels the market has!

 

"We the People" Fucked! Coming or Going! no matter heads they win tails we lose!

Wed, 05/25/2011 - 18:23 | 1310653 SheepDog-One
SheepDog-One's picture

Agreed, POMO is NOT 'temporary training wheels' for the market, POMO is all the market has!

Wed, 05/25/2011 - 14:34 | 1309834 FunkyMonkeyBoy
FunkyMonkeyBoy's picture

Tyler,

You going to do a post about the latest comex silver inventory news?

http://jessescrossroadscafe.blogspot.com/

Wed, 05/25/2011 - 14:35 | 1309850 Smartie37
Smartie37's picture

Latest data from Comex shows roughly same grand total for Eligible and Registered that has been tracking lately:

www.cmegroup.com/trading/energy/files/Silver_Stocks.xls

Does data from Jesse's site contradict this ?

Wed, 05/25/2011 - 14:49 | 1309882 Seacap81
Seacap81's picture

"They" are out of bullets.....can't use margin hikes, been there done that and their fraud would look to obvious to pull that rabbit out of the hat again.  So this is their latest trick, suddenly the comex has ample silver supply.  It's laughable.  The continued corruption is beginning to look more and more exhuastive. 

Wed, 05/25/2011 - 15:24 | 1310013 Tyler Durden
Tyler Durden's picture

Because it is a mistake: link

 

Wed, 05/25/2011 - 14:32 | 1309838 buzzsaw99
buzzsaw99's picture

The FSB is just like the IMF. They just want to bail out their friends.

Wed, 05/25/2011 - 14:36 | 1309843 Great Unwashed
Great Unwashed's picture

Risk is sooo 2008. Let's move on, shall we? We all know that nothing will go down except the value of fiat. When assets threaten decline central banks will devalue fiat faster, until finally we are bartering turnips.

Wed, 05/25/2011 - 14:39 | 1309854 plocequ1
plocequ1's picture

Wheres Robo to tell us none of this matters because NFLX is at an all time high?

Wed, 05/25/2011 - 14:37 | 1309858 Vergeltung
Vergeltung's picture

I love ZH dearly, I really do, but there are 2 or three obvious typos/mis-spellings in that short article above.

"let them eat spell check!"  :-)

 

Wed, 05/25/2011 - 14:42 | 1309861 Ruffcut
Ruffcut's picture

Time for more stress tests. I think David Letterman has the answers,  on his top ten list.

Wed, 05/25/2011 - 14:44 | 1309876 alien-IQ
alien-IQ's picture

obviously this will trigger the "Systemic Risk Elevation" Rally because...they roll like dat.

Wed, 05/25/2011 - 14:48 | 1309879 SheepDog-One
SheepDog-One's picture

Risk? Bah! There is no risk, we got the Benny and the Inkjets! All is welllllllll !!

Wed, 05/25/2011 - 14:49 | 1309881 baby_BLYTHE
baby_BLYTHE's picture

Ben is great, Ben is good, let us thank him for our food.

Thu, 05/26/2011 - 00:33 | 1311982 StychoKiller
StychoKiller's picture

Mmmm, crunchy, crunchy iPads...

Wed, 05/25/2011 - 14:51 | 1309896 alien-IQ
alien-IQ's picture

just guessing here but I'm thinking the /ES will close at either 1325 or 1312. Precisely.

Wed, 05/25/2011 - 14:57 | 1309904 LRC Fan
LRC Fan's picture

Does it matter?  Technicals are just another tool they use to bait more shorts into this market.  Look at last night-big "technical" breakdown all the way down through the key levels and then we pop right back up today.  The only thing that matters to the ES is the DXY, which is mostly the Euro.  So it's Euro up, stocks down and vice versa.  Charts, technicals, news, earnings and all else be damned. 

Also can anyone answer my question from earlier in the week...if US stocks go up because of a cheaper dollar vs Euro, why do European stocks go up on a more expensive Euro? 

Wed, 05/25/2011 - 15:02 | 1309930 alien-IQ
alien-IQ's picture

Regarding the technicals on the /ES. I largely agree with your take on it. the only real technical indicator that has been consistent since Sept. 2010 is the 100 day MA which it has yet to breach and bounced off of today. and yes, the DXY also must be watched when playing the /ES.

As far as Europe markets...I really don't know how to answer that. I have never played it and do not follow it closely enough to have a worthwhile opinion on it.

I'm not committed to being short or long in my trading. I just trade in and out. Fast. My idea of holding a position a long time is anything over 1 hour.

Overall, I think the market is a joke. Nothing makes sense. It has no correlation to reality whatsoever....

Wed, 05/25/2011 - 16:33 | 1310255 oogs66
oogs66's picture

I think the explanation that a weak dollar is good for earnings and therefore good for stocks is an oversimplification.  I believe the dollar is weak when people are comfortable that the global economic situation is getting better so they put their money into risk assets - foreign currencies, stocks, and commodities.  It helps explain why generally stocks seem to do better when oil is up rather than down.  If we only followed what is bad for consumers, stocks should be down when oil is up, but the energy companies do well when oil is up (which often happens when the dollar is weak) and the macro players see oil price increases as a sign of improved global economic conditions?

I'm not sure that makes sense, but more and more it seems that everything is risk on or risk off and it is really hard to determine what is driving what.  Also the various 'tells' in the market change over time.  $/Eur has been a big one of late, but hasn't always be the case, and will likely be supplanted by some new indicator that drives the risk on/risk off trade.

Wed, 05/25/2011 - 16:01 | 1310180 oogs66
oogs66's picture

or exactly in between

Wed, 05/25/2011 - 15:13 | 1309936 Mercury
Mercury's picture

< dupe print >

Wed, 05/25/2011 - 15:04 | 1309937 Mercury
Mercury's picture

Do you know who I am !?!

I'm the head of a top 30 systemically worrisome institution !!

Now bend over!!

Wed, 05/25/2011 - 15:11 | 1309953 plocequ1
plocequ1's picture

Do you know who I am?  

Wed, 05/25/2011 - 15:21 | 1309994 Mercury
Mercury's picture

Hello housekeeping?  I'd like to request a different chamber maid...

Wed, 05/25/2011 - 15:29 | 1310056 JW n FL
JW n FL's picture

Hello housekeeping?  I'd like to request several MORE chamber maid's...

Wed, 05/25/2011 - 15:07 | 1309941 mynhair
mynhair's picture

Look out above.  Back in TZA.

Wed, 05/25/2011 - 15:09 | 1309946 Piranhanoia
Piranhanoia's picture

None of these firms provide anything of value, worth or need for this planet or any inhabitant. When they are dissolved we may undertake the cure that removes their excuse for an existence. To get an outcome of "happy" we must ignore the Vogon constructor fleet in the room.

 

Wed, 05/25/2011 - 15:25 | 1310035 SYantiss
SYantiss's picture

Nobody panic!!! The CME will put a stop to all this risk.

Wed, 05/25/2011 - 15:47 | 1310119 JW n FL
JW n FL's picture

“With NYSE Technologies Marketplace we can now provide our members access to more than 1,200 buy-side and sell-side institutions and connections to exchanges and other electronic trade execution venues around the world,” comments PhD Lin Pei, vice general manager, STOCOM, in the release. “This new connectivity will help to differentiate our market participants from the competition while also benefitting QDII (Qualified Domestic Institutional Investors) and QFII (Qualified Foreign Institutional Investors) brokers to greatly reduce the cost and time to reach overseas markets.” Through this new connectivity service, NYSE Technologies will offer Chinese institutional clients access to Marketplace, one of the industry’s largest FIX-based communities where more than 1,200 global trading counterparties connect to one another via more than 10,000 fully managed FIX-based messaging channels. Marketplace members benefit from access to a wide range of liquidity sources, lower trading costs and speed-to-market with new trading counterparties and services.

http://www.advancedtrading.com/articles/229625558?cid=nl_at_daily

Wed, 05/25/2011 - 15:45 | 1310125 JW n FL
JW n FL's picture

short China / Chinese Stocks (syntheticly) that much quicker!

 

You are welcome!

Wed, 05/25/2011 - 16:03 | 1310176 speconomist
speconomist's picture

Woah, can't understand what's wrong with a Bank as diversified as Santander (and with so great results in 2008 and 2009).

 

If there is only one solvent bank in Spain it is Santander for sure!!

Wed, 05/25/2011 - 16:05 | 1310187 slewie the pi-rat
slewie the pi-rat's picture

The credit risk of the 30 most systemically critical financial entities in the world just broke an important channel

LOL--those banksters can paint a chart for ev'ry tranche & derivative, can't they?

Wed, 05/25/2011 - 16:14 | 1310216 DosZap
DosZap's picture

OT, but in light of this, and so much other wonderful news..........

Curious.

What percentage of folks here are actually holding phys,in an over 50% of their actual  NAV?.( Do not count stock).

Real stuff in hand.................

Curious.

 

Wed, 05/25/2011 - 17:10 | 1310389 PulauHantu29
PulauHantu29's picture

mmm...when is this meltdown expected to occur? Didn't they say,"it's only a tiny leak."

Wed, 05/25/2011 - 18:48 | 1310747 Downtoolong
Downtoolong's picture

Well, that’s progress for ya. Twelve months ago authorities and financial experts were still trying to identify what systemic risk was. Now they’ve distilled it down to a single index. That’s fantastic. This will allow the biggest banks to get systemic risk under control by writing $20 trillion in hedging derivatives against that index and laying them off on AIG.  

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