Guilt, Growth, Lies, Laziness, And Liquidity

From Peter Tchir of TF Market Advisors

Guilt, Growth, Lies, Laziness, and Liquidity

We are getting closer and closer to some actual details.  Eventually EFSF will be only one or two things.  We will see how much or how little outside money gets contributed.


I attended a presentation yesterday and the one thing that surprised me the most, was the apologetic tone of the Germans.  They seemed sorry they hadn't done enough and almost seemed to be asking for forgiveness.  It was strange, since the largely American audience in most cases had already thought they had done too much.  It seems that there is a real struggle (more than I realized) between doing what they think is right and what they think other people think is right.  We will see how far this goes.  It won't show up in the headlines of any plan, but will be obvious in the details where restrictions are spelled out.


Austerity is off the table and now Greece and the other PIIGS have to "export" their way out.   China wants to keep Europe as strong as possible so they can continue to "export" to Europe.  Germany wants the PIIGS alive so they too can continue to "export".  The US is interested in making sure Europe is "fixed" so that we too can "export" to them.  Sounds like we need to rename some EXIM banks to EXEXEX or XXX banks for short.  It is great that the solution for the PIIGS is to export, and the reason to bail them out is so we can export, who the heck is doing the actual buying and importing?


This category could fill up entire pages, but I will stick to a couple of points.  If the EU doesn't get a signed, sealed, and delivered deal on PSI from the IIF and its members before the plan is passed, they never will.  Yesterday started the parade of IIF officials and Bank lobby groups mentioning it might be too onerous, etc.  The second the EU has signed off on the money, and PSI will be so watered down it will be hardly worth it.  The EFSF can allocate money for bank recapitalizations, but if it is done in the form of a free option, don't expect any banks to use it.  Banks will use the rally to say "see how much better we are" rather than raising capital - look at Lehman post Bear Stearns.  The more open ended the capital commitment from the EFSF, the more likely it won't be used until we are in the midst of another crisis just when no one in the EU can afford to provide the capital.

Italy and Spain.  Yes mommie, if you give us dessert we will do our homework, and our chores.  Really, we promise.  Please, we are sorry, but this time, really, if you just give us dessert, we will be better.  Greece might feel intimidated by the IMF and Germany and France, but I have this strong feeling, that Italy in particular will be quite happy to flex its muscle as biggest borrower and biggest economy at the trough - they will have the power once any grand plan is approved (unless the plan has a lot of conditions, in which case is it so grand?)


I continue to read about "how nobody knows where the CDS exposure is for Greece".  Here is an idea.  Regulators, call the banks, tell them to send you all the Greek CDS trades they have on their books.  Give them a file format you want it in, and tell them to have it by end of business today.  The banks all know and have records of each and every CDS trade they have on their books.  They would have to supply that info to a regulator if they asked.  On top of it, demand to talk to the person responsible for each book that has Greek CDS (single name desk, correlation desk, and bank hedging desk) and have them explain what trades they have on and with which counterparties.  10 junior analysts should be able to piece the entire Greek CDS puzzle together in 3 days (I'm being conservative, I think 3 people could do it in 2 days).  It is complete laziness if the regulators and politicians don't know the positions at this stage or are not working on getting the positions.


Everything in Europe and the Grand Plan is designed to provide liquidity.  Solvency is not the problem and the market seems to have more liquidity than it knows what to do with.  LQD - it is back close to its low yields on the year (4.4%) and that is with treasuries selling off dramatically over the past 2 weeks.  Shares outstanding have been rising as well, though not as much as for HYG.  HYG shares outstanding and price are rising almost parabolically.  HYG is back to almost below 7%.  If this was all about liquidity, the Grand Plan, would do something.  It isn't about liquidity, it is because Italy and Spain are on the paths to default and all the Grand Plan does is shift who bears that cost.  On a side note, HYG seems very overbought.  The difference to NAV is almost $4 and although the cash market is doing extremely well, the NAV isn't underestimating the strength by that much.  HYG should be sold, and if you really want to go long High Yield, HY17 seems a better choice.