Guest Post: ECB And Spain And Follow Up From This Morning

Tyler Durden's picture

From Peter Tchir of TF Market Advisors

2 weeks ago the ECB spent 22 billion Euro.  More than expected.  The Spanish 10 year bond went from a low of 94.5 on Thursday August 4th, to close the following week at 104.  After spending 15 billion Euro last week, the Spanish 10 year ended the week at 104.125.  Greek and Portuguese bonds actually decreased in prices last week.  Of the PIIGS, only Ireland seemed to see continued strength in their bonds. 

So the EU spent marginally less money this past week than the prior week.  Is that a trend that will continue?  Are they getting reluctant to use their balance sheet?

If 22 billion could move the markets massively 2 weeks ago, why did 15 billion do almost nothing last week?  Has the marginal benefit from every euro of intervention declined?

These two trends combined show that we are no closer to solving anything in Europe than we were 18 months ago when it first started.  SOVX is back to 300.  That is almost as wide as it got before the big bailout announcement that inluded an IIF proposal for private sector involvement and new powers for the EFSF.  As my kids would say, it has been "crickets" on the private sector involvement front.  The EFSF, if it ever gets approved, may not be of as much use as people want to believe, and it is already big, at least in terms of the burdens it is placing on the AAA countries.  Anyways, it is curious that SOVX (which so far hasn't been manipulated by the ECB) is right back to its wides. 

BAC CDS is 30 wider, and back to 360.  Its stock is getting hurt.  How long before some renewed focus is applied to the other banks here.  Every day it seems that it is news about real estate that drags down BAC.  The residential problems are at the forefront, but there are problems with the commercial market as well.  Rating agencies, burned so badly before, may be reluctant to provide such generous ratings when deals need to be re-financed.  And in a country where commercial building continued for the past 3 years, but jobs haven't reappeared, how much pricing power is really there?  The CMBX are hitting one year lows (in price terms).  Since commercial real estate problems haven't been grabbing the headlines, I suspect there is more room to go on banks.

In Europe, the banks are all under renewed pressure.  This is morphing into both a sovereign debt problem and now a senior bank debt problem.  Stories of some difficulties getting overnight funding abound.  Most stories are probably just rumours, but in this environment, they are believable.

High Yield may be cheap.  It definitely offers some value, but I think a big part of the sell-off has been a function of relative value versus other competing assets - stocks and European credit in particular.  So far, I think only a small portion of the sell-off is related to potential credit specific problems.  That is just my guess from the moves, but if economic weakness starts getting investors concerned that some of the weakest high yield companies may default, we could see further pressure on this asset class.  It also seems like a lot of credit hedge funds got caught on the initial move lower and are trying to manage their exposure through indices.  If they get caught long on a down move (because they took off hedges) we may see a round of actual bond sales.  So far, many people seem to have been happy to hold onto bonds, remembering how hard they could accumulate.  That could change, so is worth watching.

In spite of the Fed telling us LIBOR should be effectively zero for a few years, the leveraged loan space may be getting attractive.  The coupon income is still going to be low, but as prices have fallen, almost in lock step with their unsecured bond brethren, some interesting opportunities may develop.  The low prices and senior secured nature could provide a nice balance of safety with profit in this shaky market.

Anyways, I just don't see why we aren't at new lows.  Since we hit 1100 almost 2 weeks ago, the vast majority of the information seems to have been negative.  Mind you I thought we were oversold at 1150 at the time (too early), but right now it feels that if anything, at 1125, we are overbought in stocks.  And credit is trading like once again people got caught too long with IG and Main moving out steadily here.