As a reminder, for anyone considering this a buying opportunity (other than for a swing trade) based on rebalancing or mean-reversion should note two things: fund outflows are picking up for risk assets, and, even more importantly in our view, risk budgets will mean that allocations will be materially lower (in their wondrously pro-cyclical manner) as we note IG's three-month realized vol is its highest since NOV08 and HY's three-month realized vol is its highest since OCT07 (higher still if we adjust for intraday vol)!
Goldman's Erik Nielsen has yet to disclose if he is joining his Euro-pal Jim O'Neill in declaring all out war on the bears (for those unsure about the reference see here, and FYI Jim, the grizzlies send their love... and in keeping with the animal references, they don't really give a rats ass about the occasional dead cat bounce). What he has no problem disclosing, however, is his latest round of rose-colored ebullience, even as other, "slightly" more objective europundits see the end of the Eurozone as ever more imminent. It is stunning how cognitive dissonance can lead two people to the following diametrically opposite conclusions: Erik Nielsen: "The European recovery continues to look pretty good and solid to me" and Ambrose Evans-Pritchard: "[the Pan-European austerity package] can end only in two ways. Either Germany tolerates massive monetary reflation by the ECB or Spain will be forced out of EMU, setting off a catastrophic chain-reaction through north Europe's banking system." Of course, when one is in the business of perpetuating ponzies, while another has a page view quota, the truth likely is somewhere inbetween. Then again, "inbetween" two polar opposites is a wide range. Anyway, since we will likely see a lot more pain "on the plain" shortly, here are some soothing words for all those who are still long and strong and need goal-seeked analyses.
All-in-all a miraculous day (once again) but with geo-political risk revving up in Asia, liquidity remaining a threat in Europe, and contagion ever-darkening the horizon, the significance of the cash market's weakness/thinness (and concessions) and gappiness in single-name CDS leave us comfortable long risk here for now (625bps or 670bps for nervous-nellies in HY are decent stops and 115.5 and 122.5bps in IG). We almost reached out target for HY-IG today and would perhaps bring up the stop on that to 500bps differential (in line with 625bps stop on HY).
Let's take a breath and re-assess - HY and IG at multi-month wides (OCT09 and JUL09 respectively), short-end of the credit curve underperforming, cash underperforming synthetics, new issue concessions high, HY deals failing, close to close widening today in risk premia everywhere (except stocks...), carry pairs actually weaker on the day, US and EU FINLs wider on the day, sovereign risk rising globally, funding markets stressed, and CP rates starting to crack. Short-term bounces will always happen and we must be prepared for them but rising dispersion in single-names is where we will be spending the bulk of our time (as per today's MFCI strategy article) as an elevated volatility and discrimination-driven dispersion is just what we need to benefit as credit fundamentals re-appear from beneath the liquidity Tarp (pun intended).
Did someone just spill some Gulf Of Mexico 2010 special BP vintage in the UK water supply? First Janjuah comes out bearish guns blazing, and now even the biggest permabull of them all, Goldman's Jim O'Neill, issues some very overcast observations, the most cheerful of which is the ominous stop of the clock of St. Paul's cathedral on Thursday when the market broke the 200 DMA... and yes, speculators will be blamed.
While Erik Nielsen is free to provide Goldman clients with a comfortably tabulated and bullish list of last week's events from the UK countryside, a realistic appraisal of the key events over the past 168 hours really boils down to one thing - central bank intervention. Whether it is definitive SNB intervention in the Swiss franc or questionable ECB involvement in the euro, the only catalyst that prevented an all out rout of European currencies was outright and blatant market participation by sovereigns and their printers. Yet something interesting happened on the way to the stick save - decoupling. As the chart below shows, once it became openly obvious that the SNB/ECB is intervening in the market, the traditionally very tight correlation between the euro and US stocks went up in a puff of ink cartridge smoke.
For the first time this year I am writing to you from my backyard here in Chiswick; the weather is impeccable and I couldn’t think of a place I’d rather be right now. A good cup of Nespresso certainly contributes to my well-being this morning, but more on that later. Here’s my view of Europe right now. - Erik Nielsen, Goldman Sachs
An interesting chart depicting European monthly yoy change in electricity consumption comes to you via Goldman. Now that Europe's true fiscal problems are being exposed, look for such datapoints, which Goldman is of course using as a pitch to just how great Europe's condition is (for a real indication how "good" things are, check the EUR Libor, or the TED spread posted earlier, but let's not forget Jim O'Neill fluff piece about How Good The World Is, issued about 50 S&P handles higher - tells you all you need to know about bias), another, and more objective way to read the data, is to expect European electric output to decline materially. What that may mean for nattie and spent uranium rods, one can decide on their own.
The whole world is still stunned from what just happened today. In essence, Germany has taken a major step to not only declaring it is the master of the European continent and all those who don't like it can just focus on their own bankrupt banks (Sarkozy), but is breaking ranks with the US, as the surprising nature of today's move was aimed not so much at European "speculators" but at Wall Street. Furthermore, knowing full well it may soon lose access to US capital markets, Germany is likely preparing to abandon the EU and EMU (to which "good riddance" is likely all it has to say). But the key implication from today is that Bernanke must now move with urgency to find a way to keep the pressure on the dollar as he is now solidly losing the currency devaluation race. The impact of this on major multinationals and on the "must do" reflation experiment could be cataclysmic. Additionally, without gobs of new domestic liquidity to prop it up, the US market will now likely collapse, further forcing Bernanke to act against the interests of the US Middle class and America's savers. We can not wait to see what he pulls out of his sleeve. With ZIRP ravaging the nation, and negative interest rates still illegal, he may just find his hands very much tied.
In the meantime, here are some preliminary shocked observations on today's events from Goldman Sachs and Morgan Stanley.
Jim O'Neill is here to tell you that things are not as bad as futures (at least the part trading between 6pm and 3am, not the Fed manipulated portion since) will have you believe. As always, his words can be summed up: "BRIC, and ye shall receive." Side effects of reading include nausea, miraculous appearance of rose-colored glasses, and head sinking in sand.
Goldman On What The Neverending [Private|Public|Global|Galactic] Bailout Means For Market IndicatorsSubmitted by Tyler Durden on 05/12/2010 06:27 -0500
- The European Financial Stabilization Mechanism backstops EMU public finances without distorting incentives.
- The focus now turns to budgetary plans by individual countries, and the new rules on fiscal coordination.
- The ECB’s ‘interventions’ in sovereign bonds have so far targeted the smaller, weaker credits.
- Secondary trading in Spanish and Italian government bonds is slowly ailing; over time, this should help financial risk subside.
- The dispersion of EMU sovereign spreads will remain wide going forward, reflecting greater differentiation across fiscal positions.
- EMU GDP-weighted 5-yr government yield is now 2.4%, comparable to the US, and roughly 80% of Emu public debt is held within the Euro area (relative to only 52% in the US)
The race to the currency devaluation bottom is now in its final lap. And gold is the only alternative to the now imminent collapse of the fiat system: the world had a chance to take writedowns on losses, punish those who took risk and failed, and refused to do so. There is now no risk left, but it only means that eventually all the risk will come back and lead all capital markets to zero. The result will be the end of Keynesian economics as we know it. Do not trade in this broken market, do not hold your money in a bank as they are all now one hour away from a terminal bank run - buy and hold real, FASB mark-to-myth independent assets.
We now know that the European Union, as part of its most recent ridiculous idea for a global eurozone bailout, is planning on soon issuing its own bonds and thus becoming a defacto Treasury. How the hell it plans on doing this is simply beyond comprehension, but it certainly involves a lot of "financial innovation"... ergo - enter Goldman Sachs, from whom it would need a ringing endorsement to proceed with its plan. Alas, the just released note from Erik Nielsen is anything but favorable: "All in all this is good news, but it is unlikely in itself to calm markets; its all too “slow-burner” stuff." (and yes title is a ref: Douglas Adams - the EU has the answer, if only they could find the question now).
We recently highlighed the words of Erik Nielsen who stated that the E110 billion Greek bailout package will simply not be sufficient, expecting that at least another 40 billion will be needed for an effective rescue operation. Today, the WSJ and German Bild, get on board this theme, likely causing further anguish for Greece and for the euro, as it once again highlights just how incompetentEuropean bureaucrats are. Ironically, in their attempt to lowball the rescue numbers, they may have just doomed the package, because we are confident German opposition (and you should see the cover pages of all German newspapers - there are 99 headlines blasting the rescue for 0.5 praising it) will use this disclosure to mount an attack on the "openendeness" of the what may soon turn out to be a neverending rescue package. And this does not even contemplate Portugal and Spain.
ECB Will Accept Junk-Rated Greekman Brothers Debt As Collateral In Suspenion To Rating Threshold ProgramSubmitted by Tyler Durden on 05/03/2010 03:42 -0500
Did the ECB just learn the last bastion of rating agency insanity, aka Moody's, is about to downgrade Greece? Today Trichet decided to abandon all caution, and has proceeded to officially recognize all Greek toxic garbage as collateral for ECB-backed loans. Looks like the ECB president has been paying careful attention during Bernanke 101 in which his transatlantic colleague has been advocating the collateralization of a sovereign currency with all sorts of gamma decaying substances, for well over a year now. Now Ben is starting to get woefully behind the curve in the devaluation race. In the meantime, using simple math, we wonder: if Greece, which as so many have pointed out is only 2.7% of European GDP, ended up costing 110 billion euros, does that mean that a full blown bailout of Europe will be over $5 trillion? Surely this is a bargain compared to the $20+ trillion that the rescue of the US ended up costing. Looks like a slam dunk relative default pair trade to us.
Since we feel there is little need to post on the Greek "update" as we don't believe anything new has happened or anything has been resovled, we will instead provide that from Goldman's Erik Nielsen: "With the May liquidity crisis now practically dealt with, here are the risks for the rest of 2010 and 2011 (and beyond) as I see them: (1) Implementation of the program in the face of a social unrest; (2) the likely need for further adjustments when/if GDP doesn’t respond as expected; and (3) European approval of the second phase of their part of the package (which will emerge in their fiscal bills for the next two years.)"