2010 is not proving to be an auspicious start for the Paulson & Co. multi-billionaire (or any other hedge fund manager for that matter). Bloomberg has disclosed that John Paulson's recently launched gold fund has dropped 14% in January. Hopefully massive long exposure in Bank of America stock (anecdotally, and somewhat imprudently, unhedged with CDS) has made up for the disappointing beginning.
Why Blaming CDS For The Sovereign Risk Flare Is Idiotic, And Why Gold Is Now A Global Fiat-Currency AlternativeSubmitted by Tyler Durden on 02/05/2010 12:51 -0400
The ever so handsome Tim Backshall of Credit Derivatives Research explains to all rabid anti-CDSites why CDS is the last thing one has to worry about in the spreading sovereign crisis, and why looking at 10% budget deficits (just like Lehman's $50 billion underwater balance sheet was responsible for the firm's bankruptcy, instead of unfounded speculation that naked shorting was the cause) may be the actual reason why half of Europe will soon have to be bailed out. CDS are merely instruments to express a view. And if Joe Cassano found a job somewhere where he is the party responsible for selling tens of billions in gross sovereign notional, then so be it. That said, bailing out the seller of Greek, or any other nation's, protection will hopefully not become an issue all too soon. Alas, the rumor that this seller may be Goldman Sachs (that BS about Greek banks selling Greek CDS causes 5 minute bouts of hypoxia-inducing guffawing in every CDS trader in the business) may mean that one year from now, when AIG is long forgotten (and defunct), we will be discussing why the Fed bailed out Goldman's Greek exposure at 100 cents on the dollar. Lastly, another point by Backshall - don't sell your gold. Should a full blown fiat contagion take hold, the dollar may go higher, but gold, which can not be printed in the mad dash to prop up the Titanic in its final minutes, will surely not go lower.
Portugal's 9.3% budget deficit is about to get a whole lot worse. A proposed Law of Regional Finances, which was approved yesterday by a parliamentary committee, which would increase funds sent to Portugal's Madeira and Azores regions by €50 million, and keep rising until it hits €86 million by 2013, was just ratified into law by the Portuguese parliament. This is precisely what the Finance Minister had been dreading.
A few days ago we made some observations on the just-announced nearly $4 trillion 2011 budget. The key point was that while the ugly numbers already looked like a superglued Frankenstein monster without a Kardasian botox treatment, or even simple lipstick, it would have been truly disastrous had the administration done what Peter Orzsag threatened he would do 2 years ago, namely bring the GSEs, Freddie and Fannie, on the government's balance sheet. How this is not the case yet is simply stunning: the GSEs enjoy not only the constant "bid of first refusal" courtesy of the Fed's MBS QE program, but an explicit Treasury guarantee that has no ceiling as of last Christmas eve. Bloomberg's Jonathan Weil today came to the same conclusion, although being a Bloomberg employee he was characteristically much more crass, uncouth and downright cynical than the paragon of respected journalistic patois that is the establishmentarian concept known as Zero Hedge. In an attempt to awake the morts out of their stupor, a pandering Weil uses such cheap tricks as hyperventilating allegory, sarcasm, and hyperbole when saying that "[b]y all outward appearances, it seems
Obama and his budget wizards decided that including the
liabilities at Fannie and Freddie would be too much reality for
the world to handle. So they left the companies out, in a trick
worthy of Enron’s playbook, except not quite so hidden." Obviously, Bloomberg has an uphill struggle if its ever wishes to reach profitability (in the trillions of dollars that is... billions is so fin de pre-bailout siecle). We also fear for Weil's job prospects should he ever wish to find an occupation at such a highly respected place, where not only is there a 4 syllable word minimum but no sentences ever end in prepositions, as the Reuters blogosphere. Ironically, Bloomberg did redeem themselves somewhat later today, when in a Tom Keene interview, Goldman policy advisor Arthur Levitt is caught on tape performing more of the same hyperventilating, and in doing so blasting the administration, using the same Enron-esque analogy, when analyzing the paradox of the GSEs and the sovereign balance sheet.
Today's price action registered extremely bearish readings across the NYSE TICK and NYSE VOLD (Up-Down Volume Difference). In our oh-so-very-humble opinion ~ equity markets are about to enter the Temple of Doom.
Spreads were mixed in the US with IG worse, HVOL improving, ExHVOL weaker, and HY selling off. IG trades 9.1bps wide (cheap) to its 50d moving average, which is a Z-Score of 1.1s.d.. At 99.75bps, IG has closed tighter on 72 days in the last 283 trading days (JAN09). The last five days have seen IG flat to its 50d moving average. Indices typically underperformed single-names with skews widening in general as IG's skew widened as it underperformed, HVOL outperformed but widened the skew, ExHVOL's skew widened as it underperformed, HY's skew widened as it underperformed. 50.4% of names in IG moved more than their historical vol would imply as higher vol names underperformed lower vol names by 6.01% to 4.74%. IG's vol is around 4.38% per 1 day period, which leaves 97 names higher vol and 28 lower vol than the index.
The fire in the sovereign periphery is slowly moving to the core. Today, US CDS, on which we have been constructive since it hit 20 bps in September, as unprecedentedly cheap insurance, are trading 55/60, or almost 200% "higher." This is the most 5 year US protection has cost since the market lows in March. We anticipate at least another 15-20 bps of widening in US risk absent some dramatic and miraculous improvement in Europe, as existing shorts are forced to cover en masse. As for the "sure buy" out there, it doesn't get any better than German CDS.
The market action today makes me wonder if FX intervention is in the cards. A long shot that might happen.
We will start our market update with Greece's 5Y CDS market. The chart does not look like anything that could have a happy ending. Greece has come up with a plan to reduce the deficit which experts believe a) may not be enough b) will hard to achieve. The market obviously did not buy it either, and we have not really seen a wave of approval around Europe. If Greece wants to further they will have to start cutting entitlements and will face strikes which won't help the problem, so it leaves us most likely with some form of loan or bailout. We stick to our original thought that the EU won't let the IMF step in on their turf as it would be too humiliating, especialyl since this is the first harsh economic test for the union. The problem is that left holding the bag would probably be Germany (there are not that many candidates around the EU that can step in and help Greece, especially with Portugal and Spain waiting in line!). No wonder that today the German CDS was trading 8bps wider. As mr. Almunia said: in the EU there are no defaults! That does not bode well, because bail out or not, the problems of the EU are only beginning. - Nic Lenoir
The STUPID Index is on a roll: it is now 12bps wider to 224, the widest level since April 4, 2009. With UK CDS nearing 100 bps, STUPID non-member, and the country which will ultimately have to fund rolling bailouts, Germany - is somehow trading inside the US, north of 50 bps. Absent the Deutsche Mark making a stunning comeback, coupled with its becoming the reserve currency upon its reintroduction, there is no reason why the Germany-US spread should be negative (which is not to say the the US CDS is rich here).
- We hope you bought some: US CDS widest (why do they keep saying highest) since April (Reuters)
- Pesek: Biggest bubble in history is growing every day (Bloomberg)
- Weil: Obama's $6.3 trillion scam is America's shame (Bloomberg)
- Portugal, Spain lead worldwide decline in stocks, dollar gains. Why, oh why, can't every currency be a reserve currency? (Bloomberg)
- Roubini: The ticking US fiscal time bomb (Forbes)
- GMAC reports record loss on home mortgage defaults (Bloomberg)
- Micro investment bank Imperial Capital shelves plans to go public at a ludicrous 4.69 times net tangible assets per
share (3x more than prevailing 1.52
times). More importantly, everyone is expecting the IPO of Hustler affiliate, porn site AdultFriendFinder (Bloomberg)
Contagion is here. Portugal and Greece default risks are now racing whose CDS can hit 500 first... Then 1,000... Forget the bond vigilantes: the sovereign default vigilantes just called Almunia's bluff. At last check SovX was flirting with the record century mark, Greece was almost back to record wides with some bids of 410 bps floating around, while Portugal, which is today's whipping boy, exploded to 215 bps. We eagerly await to see which other country will join the CDS ballet. Almunia is now openly waging a two-front war, which will soon become multi. The last time this happened to a European, the results were not that good.
Zero Hedge embraces contrarian analysis. But its readers tend to be exaggeratedly and stubbornly critical of any opinion contrarian to the "ZH consensus". One of the most fallacious application of this proclivity is the never-ending attacks on TBTF banks, and the blame put on them for causing the current financial mess. We disagree with this myopic train of thought. Although banks have their share of criminality to pursue and prosecute, is the main blame argument posed against them merely the age-old straw man fallacy manifest?
Sovereign risk was once again front and center on the minds of investors today. Despite the EU's efforts to 'back' Greece's cost cutting plans, investors remain far less sanguine than Almunia. Greek bonds managed a small 7bps rally relative to Bunds (which widened 2bps) as CDS were around 9bps wider (compressing the basis a little more). Don't read too much into the small rally in bonds (the basis remains wide at 55-60bps and we suspect given the convergence today that some are putting the trade on).
Spreads were mixed in the US with IG unch, HVOL wider, ExHVOL weaker, and HY rallying. IG trades 1.5bps wide (cheap) to its 50d moving average, which is a Z-Score of 0.2s.d.. At 92.25bps, IG has closed tighter on 30 days in the last 282 trading days (JAN09). The last five days have seen IG flat to its 50d moving average.
After the earlier announcement of record risk in Portugal, it was only a matter of hours before the epicenter would feel an aftershock. Indeed, Greece CDS is now back to over 400 bps, after tightening under 370 bps yesterday. Those poor protection sellers just can't catch a break. The dollar flight to safety trade is on again. Lack of robotic, or otherwise, volume means the stock market has yet to digest what all this means. Lastly, in pursuit of an efficient sovereign risk market, STUPIDity is now back to April 2009 levels.