Monday, October 31, 2011

Halloween Markets

A few days after the Euro announcement and the weekend appears to be full of "it won't work" arguments, which is exactly what TMM expected. But like all good Investment Bank research pieces never combine a price and a time, most of the articles don't say when. Yes, Europe may well fail, but that doesn't mean it will do so before Christmas.

The Japanese came back to play again today, bang on schedule with respect to the upcoming G20 meeting. Whilst the market has instantly responded with skepticism citing every other recent failure of BoJ intervention to hold USD/JPY up, TMM congratulate the BoJ on their timing and purpose. Just as the CFTC positioning data showed new recent highs in Yen longs (and even a soothsayer trigger on Friday) they mullered the market. And of course the bonus is this: you print your own currency, sell it for USDs which at some point you then switch to Euros to purchase nice fresh EFSF bonds to bail out Europe, getting big handsome slaps on the back from all for your efforts from your G20 friends. We can't see anyone in Europe standing in the way of such helpful intervention and, on that basis, can see Europe going very quiet with respect to Chinese currency manipulation charges. First, down to the basic politics of criticizing your benefactor and second, building overseas reserves is exactly what the Europeans want them to do as long as it goes into EFSF.

Italian bonds have been the new focus of stress. Well, if your CDS is useless, you may be having to put on the only true hedge - selling the underlying. But TMM think the *real* reason is that MFGlobal is rumoured to be liquidating its European bond portfolio. Italy's austerity plan department must be using the same PR company as the banks. Announcing their purchase of the new government fleet of armour-plated Maserati's is on a par with Barclay's profit announcement. Not only are they higher than expected, at up 5%, but in announcing that investment banking is down, they are effectively saying "Yes, this has all been made from YOU, Mr and Ms retail St Paul's Cathedral campsite dweller". When will they learn humility?

Put the Italy, intervention and natural euro-scepticism creep together and we really aren't surprised that EUR/USD is lower and the equity bears are taking solace that the path to truth has been embarked upon again. But still TMM are not convinced. Positioning may well have flattened out dramatically as can be seen here (SPX - green line, HFR Equity Market Neutral - yellow line, HFR Macro/CTA - orange line, HFR Global HF - white line)...

...but the mentality is still so far entrenched in the "this is just a bear market rally that we cant see it really turning" we still see another push higher given that it appears that most people missed the 20% rally off the October lows.

Now Today is Halloween.

As TMM are somewhat UK-biased in local traditions, the implementation of this US festival has never really cut it against the age old UK tradition of burning effigies of religious motivated terrorists whilst at the same time having the opportunity to behave irresponsibly with your own explosives at home. Last night saw UK TV start to issue a new trendy version of "don't play with fireworks" warning, but TMM still feel there is no better way to learn to respect them than to have an old fashioned Jumping Jack firework lodge in your turn ups. But we will bow to popularism and TMM have been selecting their favorite outfits...




Friday, October 28, 2011

TMM's Ex-Product Sketch

As we approach month-end, after what has been one of the most eventful months of TMM's careers, we thought we'd expand upon our somewhat mischievous obituary yesterday.

In all seriousness, TMM have argued for some time that the Sovereign CDS market is ill-designed, particularly with respect to developed markets. Several bank analysts and traders - including Citi's Willem Buiter - have spent the past 24 hours trying to argue that the Sovereign CDS market will be unaffected by the latest Greek restructuring. Now, TMM rate Professor Buiter as one of the smartest people they have ever met, however, they strongly believe that he has got this wrong. So TMM now switch deftly from meta-physical poetry and paraphrase Monty Python:

"I wish to complain about this CDS what I purchased not half a year ago from this very investment bank"
"Oh yes, the Hellenic Republic... What's wrong with it?"
"It's not paid out, that's what's wrong with it."
"No, no, it's just voluntary, look."
"Look my lad, I know a dead product when I see one, and I'm looking at one right now"
"No, no, it's not dead, it's just voluntary."
"Yeah... remarkable product, Sovereign CDS... beautiful name, innit?"
"The name don't enter into it. It's not paid out."
"Nah, nah... it's voluntary"
"Alright then, if it's voluntary, I'll ask it again... HELLOOOO ISDA! I've got a nice bid/ask spread for you when you pay up, ISDA CDS!"
"There it moved"
"No it didn't, that was you pushing the market"
"I did not!"
"Yes you did! Helloooo ISDA!! IIIISSSSSDDDAAAAA!!! ISDA CDSSSS!!! PAAAAYYYY UUPPP!!! ISDAAAA.... that's what I call a dead product."
"No, No, it'll pay next time."
"Look, my lad, I've had just about enough of this. That product is definitely deceased, and when I bought it not half a year ago, you assured me that it would pay out when Greece defaults, and that it's lack of movement was due to traders being tired and shagged out after a long night at Stringfellows"
"It's probably pining for the Subords."
"Pining for the Subords?! What kind of talk is that?! Look, why didn't it hedge my bonds the moment they defaulted?"
"The Sovereign CDS prefers not to pay for voluntary defaults, it's beautiful product... lovely name..."
"Look, I took the liberty of examining that contract, and I discovered that I had reason to believe that it hedges a default as it has 'default' in its name."
"Well of course it's got 'default' in its name, otherwise we wouldn't have been able to sell it."
"Look, matey... this product wouldn't pay out if an asteroid the size of France hit Athens. It's bleedin' demised."
"It's not... it's voluntary..."
"It's not voluntary, it's passed on. This product is no more. It has ceased to be. It's expired and gone to meet its seller. This is a crap product. It's a fix, bereft of value, my P&L's in pieces. If you hadn't have said it would pay out on default, it would never have traded. It's gone down the toilet and joined the CDO unsellable. THIS IS AN EX-PRODUCT".

But jokes aside, TMM are incredulous that banks have been able to get away with selling Sovereign CDS for so long. The ill-design of the product is palpable - for it not to pay out in the event of a 50% haircut (60% in NPV terms) because the restructuring was "voluntary" is laughable. Sovereign CDS has turned out to be less useful as a hedge than a glass panel in a nudist camp. This is an exceptionally serious issue for the credit market as banks have used CDS to hedge their bond holdings, loan books and other related country exposures, particularly from CVA desks. And this is what worries TMM - these desks have been very large players in the Sovereign CDS market, hedging counterparty and country risk on bank balance sheets. Given the now exceptionally questionable quality and value of these swaps as a hedge, both in terms of MTM moves and in terms of eventual pay out, TMM expect that auditors and risk managers will be alerted. Hedges that offset bond positions are likely now to have lost money and require banks to restate their earnings, while at the same time reduce their gross books. TMM find it particularly amusing that this effectively represents a wealth transfer from US/UK and German banks toward those of France and Austria.

But this was all avoidable. TMM have been arguing for years in favour of the migration of vanilla derivatives on-exchange. And in particular, while TMM agree that the Corporate CDS market has improved both liquidity, price discovery and market efficiency, it does not appear to be like this with respect to Sovereigns. There have been many cries of "it's a fix, the politicians have changed the rules!". Well, that's not all that surprising is it? TMM have many times highlighted that the difference between this crisis and the banking crisis was that in 2008 the banks had to play to someone else's rules. In a sovereign crisis, the sovereign plays to its own rules and these it can be change to suit its purpose. We cannot help but feel the schadenfreude at how jealously banks guarded their CDS franchises of large bid/ask spreads and price opacity has backfired. Because there was never any reason why Sovereign CDS needed to be structured as it is. Why...?

There have been many cries to regulate or ban the existence of Sovereign CDS, both from the sovereigns that felt their nations under attack, and by the masses who see them as one of Satan's investment bank tools designed to steal from the poor. Rather than ban or regulate further, TMM feel (as noted above) that all it would take is for the auditors and risk managers to declare them invalid as a hedge (which they have now proved to be) and these CDS will be confined to the financial bin. If, however there are still folks stupid enough to see value in them, then true to Darwinian theory, they should be left free to trade them. Let's be honest, Greek bonds with a 50% haircut still have a better payout than the National lottery... and no-one's banned that yet.

But there is a viable alternative. TMM would like to introduce their readers to the humble Bond Future. That long-standing, well-understood derivative that has provided liquidity, transparency and price discovery to bond markets in many countries for 40 years. Bond futures with deliverable bond baskets allow basis trading, speculation and hedging, without the idiosyncrasies of CDS contracts. But of course, futures markets aren't that profitable for banks... well, you reap what you sow, right?

And on that note, TMM wish their readers a very good weekend.



Having received many insightful comments, TMM thought they would attempt to clarify a few points:

1) Sovereign CDS has been seen as an MTM hedge due to its correlation with country-related assets. As per one comment, if it is not known for several years whether or not it will pay out, via lawsuits, then it is hardly a "liquid hedge".

2) It only works as a hedge for a hold-out if a re-default does indeed occur and is ruled to be coercive by ISDA DC. By definition of “holdout”, this is only works for a minority of investors, and therefore its liquidity, pricing and usefulness as a hedge for banks will have to reflect this.

3) It is too complex as a product given the intentions behind it - to hedge the credit risk of the underlying asset.

4) Differentiation between voluntary and involuntary default provides politicians (or whoever else) a means to prevent their trigger inevitably leads to the question: your 100%-guaranteed working parachute has just had a moth fly out of it. Are you *sure* it will work when you need it to?

5) Finally, regarding the very valid point that the flaws of Sovereign CDS are common to all OTC derivatives, including ones that are a lot more liquid and actively traded, like vanilla interest rate swaps (IRS). Given the recent (as well as the not so recent) shenanigans around the LIBOR fixing, TMM agrees. However, let’s note that a) the vanilla IRS market has responded to these issues and there has been a sustained push to get away from OTC and onto exchange; b) there’s no question that there’s a LOT less settlement/litigation risk and uncertainty for contracts like vanilla IRS and FX options; c) the very fact that we’re not having discussions about the validity of the current mid 10y par swap rate suggests that there’s a lot less ambiguity among market participants about these derivatives. There are, obviously, other issues with vanilla IRS, e.g. pricing of these contracts under different funding assumptions, but the uncertainties that these issues introduce into the marketplace are not sufficient to cause a significant disruption. Moreover, the IRS market is responding and adapting as we speak.

There are two conclusions: as per another comment, either markets will need to price in the probability of actually getting paid, when they will get paid, and which court will govern that decision, not just the probability of default. This is an exceptionally difficult thing to do. Alternatively (or, indeed, additionally) markets need to come up with a simpler product that provides the hedging requirements without such uncertainty and complexity. TMM would suggest that bond futures, which are inherently simple, with a long and well-understood history, are a more appropriate model for such a hedge.

And there we were thinking that CDS was only stupid in its complexity. Now we’re forced to conclude that, additionally, it’s even complex in its stupidity.

The Fund

A quick intrapost post..

After stumbling across  John Donne's "The Flea" last night, it struck us that things really don't change over the centuries. So, with that in mind here is Sarkozy's lament to Merkel over the EFSF.

The Fund

Mark but this fund and market this,
How little that which thou deniest me is ;
It suck'd me first, and now sucks thee,
And in this fund our two bonds mingled be.
Thou know'st that this cannot be said
A sin, nor shame, nor loss of ratings led;
Yet this enjoys before it woo,
The Chinese to swell one bond made of two ;
And this, alas ! is more than we could do.

O stay, three lives in one fund at par,
Where we almost, yea, more than married are.
This fund is you and I, and this
Our marriage bed, and fiscal union is.
Though public grudge, and you, we're met,
And cloister'd in these rules we set.
Though use make you apt to kill me,
Let not to that self-murder added be,
And sacrilege, three sins in killing three.

Cruel and sudden, hast thou since
Defaulted thy bond, in plea of innocence?
Wherein could this fund guilty be,
Except in that buck which it suck'd from thee?
Yet thou triumph'st, and say'st that thou
Find'st not thyself nor me the weaker now.
'Tis true ; then learn how false fears be ;
Just so much honour, when thou yield'st to me,
Will waste, as this funds death took life from thee.

Thursday, October 27, 2011

RIP DM Sovereign CDS (2006-2011)

Like many derivatives products dreamed up by Wall Street's financial innovators, the Developed Market (DM) Sovereign Credit Default Swap (CDS) market was born out of the desire to transfer risk off the books of banks to investors suited to managing those risks. Following the successful establishment and effectiveness of risk transfer in the corporate CDS market, the onset of the Asian Financial Crisis spurred growth in trading in Credit Default Swaps on Emerging Market countries' debt. However, legal documentation issues relating to the 1998 Russian bond default hinted at the structural problems embedded in the contracts, subsequently confirmed when the economically coercive 2001 Argentinean so-called "Mega-Swap" did not trigger CDS. Indeed, even though Argentina eventually repudiated its debt unilaterally, many protection buyers' swaps had already expired by then, and trading volumes in EM CDS fell substantially, only really recovering post the 2003 overhaul of ISDA's rulebook.

It is then, perhaps, surprising that despite proven complications related to the terms under which EM Sovereign CDS would pay out that market participants extended the concept to cover Developed Market Sovereigns in 2006. Arguably, along with its siblings ABS CDS, made famous by Hedge Fund manager John Paulson's multi-billion dollar bet against the US Subprime market, trading in DM CDS took off as a way to hedge the risk of countries who had been forced to assume the liabilities of their banking systems coming under pressure themselves. But as with earlier EM-specific non-triggers, the Icelandic government's decision to put its banks into administration in November 2008 rather than default on its own debt, resulted in its CDS falling from as wide as 1400bps to current levels closer to 320bps. The LSE's Professor Willem Buiter, a former Bank of England MPC member, in early-2009 asked the question "Is London Reykjavik on Thames?", leading to CDS on the UK to spike to as high as 166bps, but this sparked many to point out that the UK's debt was denominated in Sterling, which the Bank of England could print an unlimited amount of. A month later, in March 2009 the Bank of England's decision to purchase £75bn in its Asset Purchase Programme seemed to support this view, despite a second widening of UK CDS in the run up to the 2010 General Election as investors worried about the UK government's commitment to its medium term solvency.

Nevertheless, the incoming PASOK-led Greek government revealed in November 2009 that the country had under-reported its deficits, triggering the onset of the Eurozone crisis, and Greek CDS began to widen, culminating in the April 2010 EU/IMF bailout of Greece, and a month later, in the face of contagion to other European government bond markets, the establishment of the European Financial Stability Facility (EFSF). An explosion in trading of DM CDS on Eurozone peripheral countries' debt ensued as hedge funds sought to speculate upon the likelihood of an eventual Greek default and banks sought to hedge their exposures to those countries built up over the preceding decade.

Inevitably, faced with the political cost of bailing out foreign countries, European politicians lashed out at the CDS market, blaming it for breeding panic and allowing speculators to "bet" against bond markets and the Euro. As seen in the 2008 Global Financial Crisis, banks under pressure, along with politicians, blamed short sellers and speculators for spreading rumours and exacerbating the situation, while speculators argued that the market was merely "the messenger", pointing to fundamental problems with balance sheets. As financial market pressures became ever more severe, European policymakers resorted to short selling bans and attempted to implement a ban on CDS trading. The debate continues to rage over whether the CDS market caused or exacerbated the Eurozone crisis, or whether the crisis was inevitable.

But what eventually killed the Developed Market Credit Default Swap market in the end, was the agreement with the Institute of International Finance (IIF), representing banks owning Greek bonds, to accept a 50% haircut on their holdings. The possibility that despite such a large haircut on Greece's debt, that CDS contracts would not trigger, led many investors and bank hedging desks to question the value of their CDS contracts. The repercussions soon spread, as those institutions that believed they had hedged their bond holdings, or bet upon a Greek default, rushed to sell their contracts before the price collapsed. Volumes soon collapsed as it became evident that developed market governments had the ability to force their banks into taking haircuts without rewarding what they view as speculators.

Developed Market CDS soon faded into history alongside Perpetual Floating Rate Notes, Libor-cubed Notes, Asset Backed Collateralised Debt Obligations, War Loans, Endowment Mortgages and other financial products that were found wanting.

Tuesday, October 25, 2011

The Euro Summit Schedule (maybe).

Tomorrow's schedule for the Euro Summit is said to look like this

12:00 - Merkel delivers speech to Bundestag
14:00 - Bundestag starts voting
17:45 - Leaders arrive for the Summit
18:00 - Working session of the EC
19:15 - Working dinner
20:00 - Continuation of Eurozone meetings
22:00 - Press statements could start to emerge

Now over the years, TMM have attended many management "off sites" with just as impressive sounding schedules. However, from experience we think it will actually go like this -

11.30 - Meet at the venue for first round of coffee and the type of biscuits that go with coffee that you never actually see in the shops. Head straight for the most friendly unthreatening face in the crowd and make small talk.
11.50 - Wander into main hall for opening speech with coffee cup and find all seats too closely spaced, so no shoulder room to lift arm and drink coffee. Leave coffee on floor.
11.55 - Watch as delegate squeezing past kicks your coffee over the pile of papers you found on your chair but moved onto the floor.
12.00 - Listen to speech, guaranteed to be peppered with references to challenges, rising to them, team, going forward, commitment (normally yours to them not theirs to you) and success.
12.15 - Start checking Blackberry in bored manner.
12.30 - Start to regret not visiting a restroom after the 4 bolted coffees in the foyer.
12.45 - Find a Blackberry game in the depths of the menu and start playing it for the next hour.
14.00 - We have to vote?? On what? But I wasn't listening ! Oh jeez. Ask neighbour if it's a secret ballot. Yes? Oh good , doesn't matter which I tick then.
15.00 - Ask someone what you are meant to do now and calculate if there is time to go back to your room for an hours nap as still wearing the pain of the "get to know you drinks" from the night before.
16.00 - Realise, scanning your handout, that you are meant to have prepared a case study, entitled "How you would rescue a European in trouble (with examples and calculations)", ready for the 18.00 working session.
16.05 - Panic and ring a friend and ask for ideas, fending off protestations of "well its a bit late isn’t it”
17.00 - Start writing out a sketchy framework based on what you know from personal experience and from your friend.
18.00 - Rush to the "Working Session"and arrive to realise that you misread the title and they weren't referring to dragging a European from a burning building or out of the sea, but the financial rescue of the Euro Zone. Panic and start scribbling down what you have recently read in the press and seen on TV news.
18.30 - The white flip charts appear and everyone has to present their ideas. You are luckily 5th. Still scribbling, take ideas from last four presenters and build them into your own.
18.45 - Present your ideas on how to save Europe using 3 different coloured pens and the flip chart. Phew, think you got away with it
19.00 - Working dinner - Apparently your presentation caused a stir and they would like more detail.
20.00 - Asked to lead present your idea at the next round of meetings. FKFKFKFK. That wasn’t meant to happen.
20.30 - In for a penny in for a pound, make up the most ridiculous nonsense but present it with a gravitas and air of authority that has your audience nodding sagely. Dispel any questions or criticism with references to papers and studies that you have just made up.
21.00 Your idea is voted the best they have. You protest that surely someone has a better one. They don’t. Your single white flip chart scribbles are rushed off to a PR group for tidying up before being presented to the world. No, this can't be happening!
22.00 You slip away through a back door unnoticed as the two main leaders of Europe take the stage to offer the world the solution to Greece, the recapitalisation of the banks and the indebted structure of the other periphery nations.

The world holds its breath ........

Monday, October 24, 2011

Caarmm on!

TMM came in this morning, saw Spoos up at 1240, the rally in H shares and Eur/Usd spike to 1.3950 and thought "here we go". The CFTC report is still showing large EUR/USD shorts, so there is still plenty of juice there for a continued squeeze. We were especially positive in FTSE which has so much Asian growth dependency-weighted stocks in it that it should fly after the HSBC Flash PMIs let some air (lead?) out of the China Hard Landing theory. So what has happened? Well, first off, it would appear that the early spike has faded and we are left theoretically as excited, but a bit peeved we didn't get acceleration.

Reasons to be disappointed-

1) It hasn't taken off
2) It's gone down.

Reasons to maintain our stance-

1) Europe likes filling gaps on opens - ok, you ve filled you gap, now get on with it and go up.
2) Compared to Friday, we are closer to resolution.
3) Europe issue is going to be back in a dark cupboard by Wednesday, like a bucket of horsesht on which to grow mushrooms, but it should be out of sight and, to the markets, out its ADHD mind.
4) Denial is still in the air. TMM don't think we stop going up until some respectable people (rather than us) start to say the markets are going higher.

Perhaps we are just getting too excited for anything ahead of Wednesday, but to be breaking range highs when, if this was occuring at any other time over the past 4 months, we would normally be breaking the bases, is pretty bullish.

Elsewhere, good to see Cameron winding Sarkozy up. "Here you stay out of eet" comes the Sarkozy rebuff. "My good fellow, we never had any intention of being in it, phnnarf" should have been the counter. Sarko does seem to be getting a bit snappy and angry at the moment. Oh the pressures of being a new dad married to a supermodel, not getting enough sleep whilst trying to sort out the noisy neighbours. Germany and UK spotted it and may be playing up to this weakness in French policy hoping that if they gently tease Sarkozy he'll go "off on one" to the amusement of all around, finally exploding in a Napoleonic fit of rage. "Waiter? Bring me another short dictator, this one is broken!"

But, basically, TMM think we are nearly there on Europe and really should look elsewhere for our fun. And fun there is: China has continued to bounce on OKish PMIs and bullish projections of how low inflation can go there due to base effects (some say 5% by December, TMM are not so sure). We would note that while a lot of clever people like PIMCO are coming around to the idea of slower growth in China, meaning weaker equity multiples and growth for some time, the pace of the China selloff by the markets has got to the point where there is actually a case for being long of China property bonds. With 15%+ yield "all" you have to do is not default and you'll be ok even if equity holders are hopelessly diluted over the next 5 years. Now of course the "all" is what many may already be scoffing at, but you are buying at 70 cents and 20% yield say and if credit loosens even slightly, those higher quality names will survive. Perhaps we should "buy Bonds and sell appartments"!

TMM have played the general bounce in equities and are now beginning to think there may be even better potential in corporate credit in Asia in general. Call overwriting has its appeals for those who want to cut delta and get paid some still respectably high vols into year end.

Oh dear, as we finish writing markets are grinding down again. We'll tough it out. Finally, God we love the Daily Mash and wish we had written this. Hail.


We have just seen the most splendid line appear on the wires .


How absolutely wonderful that they call the special purpose investment vehicle a SPIV. As the OED defines a Spiv as - "A man who lives by his wits and has no regular employment; one engaging in petty blackmarket dealings and frequently characterized by flashy dress". or " A petty crook who will turn his hand to anything so long as it does not involve honest work."
That really does describe the fund so aptly.

And finally to the commenter that wanted Angela Merkel as Lady of Shallot, we won't do the whole thing as its far too long, but here's a start.

On either side of Europe lie
Yields on bonds that reach new high,
All up on "risk", not CPI,
And all pray for a bailout by
The place that just won't spend a lot.
And up and down the people go,
Gazing where the credits blow
Yet hope a lead the Germans show
So please don't say "shall-not".

Knuckles whiten, lips a quiver
Little rumours dance and shiver
Through the markets, run for ever
About the union they may sever
Will they please just spend a lot
Four bust nations yet o'er all towers
Committee rule that lost its powers,
Yet up against this mess now cowers
The Lady who "Shall not"

Friday, October 21, 2011

The Charge of the Euro Brigade

This waiting really is getting tedious. TMM are now seriously wondering if European policy is based on Zeno's Paradox of Achilles and the Tortoise, the Tortoise being the Eurosummits and Achilles the markets. The time scales are now getting pretty compressed. We wait for the inevitable "reductio ad absurdum" to play out. In the meantime the pathos of the current situation has TMM wondering how history may recount today's European turmoils. Would Alfred, Lord Tennyson have immortalised it thus?

The Charge of the Euro Brigade.  

Half a year, half a year ,
  Half a year onward,
All in the valley of Debt
  Rode the unfunded
'Forward, the Euro Brigade!
Charge for the loans they said:
Into the valley of Debt
  Rode the unfunded

'Forward, the Euro Brigade!'
Was there a bond unpayed?
Not tho' the Eurocrats knew
  Some one had blunder'd:
Theirs not to make reply,
Theirs not to reason why,
Theirs but to do or die:
Into the valley of Debt
  Rode the unfunded

Spending  to the right of them,
Spending  to the left of them,
Spending in  front of them
  Follied and blunder'd;
Storm'd at, all rushing to sell,
Boldly they bought and well,
Into the jaws of Debt,
Into the mouth of Hell
  Rode the unfunded

Flash'd all their policies bare,
Flash'd as they turned into air
Shattering  the investors there,
Meetings and summits while
  All the world wonder'd:
With policy of mirrors and smoke
the global economy they broke;
Chinese and Russian
Reel'd from a rate cutting-stroke
Shatter'd and sunder'd.
Then they rode back, but not
Not the unfunded

Selling to right of them,
Selling  to left of them,
Selling behind them
  Follied and Blundered
Storm'd at, all shot up to hell,
While investors continued to sell,
They that had bought so well
Came thro' the jaws of Debt
Back from the mouth of Hell,
All that was left of them,
  Left and unfunded

When can their story fade?
O the wild charges they made!
  All the world wonder'd.
Honour the blunders they made?
Honour the Euro Brigade?
  Forever unfunded!

Thursday, October 20, 2011

An Important Four Letter Word

OK, we said we wouldn't get sucked into the Euro guessing game, but unfortunately a stream of EFSF headlines have tweaked our interest. Weak willed we are.







Most of that could be said to be just an addition of some specifics to generalities that are already known. But the word that has tweaked our interest is in the last line - "REPO".

Innocuous, but in typical Euro-style, the addition of a little word could make all the difference. As we have espoused all too often leverage is the key to the success of EFSF yet the Germans are pretty adamant that the ECB should not be the source of that leverage. However, this Repo point is particularly interesting ito us, as it provides a potential backdoor mechanism to EFSF leveraging. To see this, imagine EFSF repos a BTP with a commercial bank. The EFSF is still liable for the loan vs the commercial bank regardless of the quality of the collateral (repo is right at the top of the capital structure). The commercial bank can then re-hypothecate the bond to the ECB in exchange for cash. The commercial bank no longer has the bond on its book, effectively providing leverage to the EFSF indirectly from the ECB, without it appearing like ECB leverage. TMM think that this could be a surprisingly clever way of pulling the wools over the eyes of those Germans concerned.

In the hypothetical chart below, TMM have used a separate Bank A and Bank B in order to make it a little clearer. Bank A sells BTPs to EFSF, then EFSF repos those BTPs with Bank B which in turn rehypothecates them to the ECB. The leverage provided can then give EFSF cash to inject into Europe's banks and as collateral for the much mooted "First Loss" Insurance.

There are fundamentally two problems with European debt. First, that there is too much of it. Second and more critically, the debt collector is now banging on the door. Whilst the debt hasn't gone away, fobbing off the debt collector with a story of a tangible solution may buy enough time in which to earn some money to pay him back when he next comes round. Whilst some may say that packaging up all the systemic risk in the pressure cooker of the EFSF is going to amplify the original problem, systemic risk can be reduced in the shorter term as as non-guaranteed paper is effectively removed from the market.

As far as TMM are concerned, while we need to see the details, this plan has promise and provides an interesting way to get around the German reticence to use the ECB to provide leverage. Of course, TMM could just be getting excited about something that the ECB would refuse to allow to happen - say by limiting the amount of funding the EU banks could be provided with - having banks in between as intermediaries at least makes it look less like monetisation.

TMM have been dropping like flies in the face of the latest bout of Manflu and are going to have to leave it there and grab some more Asprin.


The below clarification that the repo facility is purely for liquidity purposes means we wasted our time writing the above... Bugger!


Wednesday, October 19, 2011

TMM read the newspaper

Forgot how day 2 after renewed exercise is worse than day 1. Walking is a struggle. Yes, we know that stretching and all that stuff should be done properly but it doesn't seem to have worked. No amount of Himalayan Pink Salt, green tea, ayurvedic donkey dung or whatever else is today's fashionable gym-hippy food can cure a good old fashioned case of over doing it.

Markets, well really not much to say. Core view persists, market is still fighting any up move and yesterdays EFSF 2+ trillion Grauniad story appeared to come as an excuse after a days up grind rather than a cause. So today's "it doesn't exist" should matter as little. TMM are beginning to wonder if the market fascination with how the motor of the new EU vehicle works is getting a little over obsessive. When we buy a car, we rarely measure the diameter of the injector jets, check the burn dynamics in the combustion chamber or query the back pressure of the exhaust system. We just want to know it will work and get is from A to B. If we did want such details we would rather trust the manufacturer rather than a journo's views. So TMM having previously laid out what they think "should" happen, are stepping back from the Guessfest of what will happen and think they will wait for the "something"... or not.

The sharp turnaround in mood yesterday and a continuation of the selective comment bias is still to the bad news side which suits us fine having reloaded at our favourite time of the day (don't ask, we won't tell). We know we are taking a bit of a risk being long into resistance and against some pretty interesting soothsayer signals... But hell, so what?

With little else to debate TMM have been perusing the papers for lighter topics. One thing we noticed was that Stone Roses are reforming. TMM have noticed over the past couple of years a massive revival of rock tours by some old classic names. Now we know that royalty income has been hit by everything online but we are wondering if the return of past greats (and Duran Duran) to touring is now more due to their investment portfolios returning no income and hence forcing them back onto the road. Poor old UB40 appear to be too late, having just declared bankruptcy, leaving them filling in UB40s for real. Perhaps they could relaunch as P45?

Nice to see the UK and Singapore property markets are about to get a fillip. "Horst Reichenbach, who heads the EU task-force on Greece, told the Financial Times Deutschland that Athens is pursuing an agreement with Switzerland that would significantly increase Greece's ability to pursue tax evaders who have deposited money in Swiss bank accounts. Greek citizens have deposited an estimated €200 billion in Swiss accounts". Which is nice! However magnanimous we believe the average Greek citizen to be, we can't see all that money returning directly home.

Oh what's this...? "Android releases Ice Cream Sandwich". Has a robot been holding a frozen food based snack prisoner? Is it going to exchange it for 1000 cream puffs? Oh no... it's just the most stupid name for a new phone operating system. TMM remember in the 90s when traditionally named companies (usually in insurance or accounting) changed their names to some global-nonsense word. But this trend for food based tech is getting silly.

Oh look more on food: Dale Farm. Now what is that Northern Irish dairy up to now? They in a hostile takeover bid? Ah yes... but by Basildon council. That's odd. Ahhhhh... Not THAT Dale Farm. This one is a sanctuary for people who don't have to follow the same laws as everyone else based on a tradition that they haven't followed the same laws as everyone for hundreds of years. Oh dear.

Next page. Greece is on strike. Wow at this rate there is a good chance that Greece could end up like Naples. Have to say that European sympathy is not that forthcoming whilst those average wages and pension comparison tables are doing the rounds. As far as markets go though, Greece really has been written off. It's already crashed and its just a matter of how it is hosed off the European pavement and how you support its dependents.

What's this? Bears on the rampage? We know... that's why we are long. Oh hang-on, Lions and Wolves too? Reading this story is like reading a potential Movie Script. But which one would you make it into? Night at the Museum? A Disney cum Toy Story animal escape escapism special? A mammalian Jurassic Park? A Jungle story? Or go all introspective and do "The Deer Hunter". Or just blast it up with a Chevy Chase/Steve Martin roadtrip meets the wild comedy? But after reading "In the summer of 2010, an animal caretaker was killed by a bear at a property in Cleveland. The caretaker had opened the bear's cage at exotic-animal keeper Sam Mazzola's property for a routine feeding. Though animal-welfare activists had wanted Mazzola charged with reckless homicide, the caretaker's death was ruled a workplace accident. The bear was later destroyed. This summer, Mazzola was found dead on a water bed, wearing a mask and with his arms and legs restrained, at his home in Columbia Township, about 15 miles southwest of Cleveland" we think we'll go for Pulp Fiction .

Oh hang on something's going bleep... Back to work. Aussie Dollar crosses. Some interesting soothsayer turn signals have been pointed out to us on many of them. Worth a punt? Lets look. OK, yes let's buy some GBP/AUD to keep us amused...

Tuesday, October 18, 2011

Aching and Inflating

TMM went to the gym last night. It's been a while. Starting again is always worse than starting for the first time. Any sense of achievement isn't new, it's just getting back to where you knew you once were, so is just hard toil. Knowing what lies ahead makes it so much harder to walk back through those doors. But it was done and it was as depressing as anticipated. Fitness levels depleted and now feeling rubbish. We would have liked to imagine that Merv feels the same on approaching inflation data each month, he knows he hasn't done enough and he is dreading the monthly weigh in.

Now TMM may have put on a few pounds since their last visit to the gym, but their gains are nothing to what Merv has put on in UK inflation over the past month.

In seriousness, TMM must admit they are flabbergasted. Flabbergasted that RPI is north of 5% for what seems like the 20th time in the past four years. Flabbergasted that the BoE has printed even more money. Flabbergasted that inflation expectations have moved higher, but that Linkers are below their historical averages. Flabbergasted that Gilt yields are on a 2%-handle. But most of all, they are flabbergasted that wage growth has not responded to the move higher in inflation. TMM presume this is a remarkable result of the combination of the labour market reforms of the 1980s and the establishment of the independent BoE (something politicians on both sides of the House can be proud of) allowing a real adjustment of the economy to be cushioned by negative real interest rates. An incredible achievement. Perhaps we are back to the world looking like the old-fashioned Phillips Curve.

Elsewhere it really feels as though the market is on hold (unsurprisingly) with the Europeans shitting themselves that they haven't finished their homework before handing it in at the weekend. Schauble already trying to buy time with a "well it's not very good and could do with more work, are you sure you need it now?" type comment. But we do also know that the class swot is always the one that says "well it's not very good" before producing a PowerPoint (spit) presentation that gets the A*. So .. Europeans .. class swot? or dog ate my hamster spliff heads? Tough call... hmmmm...

But as we wait the markets have become pretty dead and dead normally involves vols falling and carry creep resuming. But with prices falling again their has been an audible sigh from bears with the past 24hrs cranking up the majority view of "this is just a bounce to be faded". But TMM are still looking for the break out to be on the top side of risk and see the current sell off as a dip to buy on. Today's concerns du jour of Schauble and China just don't hold enough water to sink the world on. In fact the China debate is beginning to show up on TMMs DPI (Dinner Party Index) now that Evans Pritchard is getting his teeth into it. TMM are not on board the Chinese train to a hard landing. But more on that soon.

Today we are sitting tight but twitching to buy.

Monday, October 17, 2011

Another Twenty Ifs

1) If you are a European politician you

a) Have graduated from a political school which didn't have any windows onto the outside world
b) Are currently applying to be a traffic warden after a skill scoring test showed you would be better suited for it.
c) Are made for life.

2) If Europe were to learn a lesson from the France/Wales rugby match it would be that

a) Europe could happily play with a man down (Greece) and still put in a very credible performance.
b) The ref will always make sure that France is OK, so why bust a gut trying too hard.
c) There is no match, what are you talking about?

3) If you were to join an "occupy London" protest would you pitch camp in

a) The stock exchange, bearing in mind no one actually does any business there.
b) Mayfair, where the Hedge Funds live but bearing in mind coffees are extortionate.
c) Canary Wharf, bearing in mind that the Jubilee line could go down leaving you stranded, like the occupants, for months.
d) Get confused and end up on the steps of a Cathedral that looks like the front of the Exchange building in the City, which isn't the stock exchange anyway but is full of posh shops, well that's good enough for me.  

4) If you write for a blog, then the current run up in equity prices is due to

a) A natural bounce away from extremes of bearishness, but expect it to roll back lower again.
b) A growing realisation that economic data is not that bad.
c) Concerted intervention by dark forces bent on market manipulation to better their own ends at the expense of democracy and the little people.

5) If you are a US citizen and have $500 available from a loan shark do you

a) Take it and roll over your existing loans to avoid current physical threats on your well being.
b) Refuse it, citing Europe as an example of where borrowing without spending reform can lead to crippling structural problems.
c) Grab it and spend it on an Iphone 4s.

6) If you were working for the UK Met office would you

a) Suggest unsettled weather, but nothing too disseasonal then make a cup of tea
b) Just repeat what the new supercomputer says and look pretty.  
c) Go Rambo and scream that the UK is about to experience "Day after Tomorrow" style freeze apocalypse.

7) If the market is approaching important resistance lines do you

a) Sell or take profit on longs as they are called "resistance lines" for a reason
b) Buy like hell because just imagine what stops must be the other side.
c) Redraw some new lines to suit your position.

8) If you are newly graduated and finding it very hard to find a job do you

a) Explore every possibility, even if it means being flexible on role, income or even overseas location.
b) Sign on and hope it gets better.
c) Sue someone for suggesting that spending money on getting a degree would lead to a job (see FT Lex column last Saturday)

9) If you own a Bentley GT continental and lose your work car park pass down the micro gap in the back of the burr-walnut ashtray do you.

a) Spend 3 hours with a knife and tweezers trying to recover it only to see it drop further away into the depths of walnut heaven.
b) Go to Bentley and pay $$$$$$$$  to have them retrieve it.
c) Stay very quiet and don't tell anyone, but ask for a new pass saying that the old one went down the windscreen air vent on your Prius.

10) If you were a producer of Discovery Channel and had to create a new action adventure documentary would you chose

a) European Road Truckers - Hardened Ice road truckers try and haul a policy change through European Parliament.  
b) Most Dangerous Collateral - See how a French bank tries to refill its empty capital base and get it measured before it goes off (like the last lot).
c) Swamp Loggers - A family of loggers try and recover the reputation of US politicians from the depths of a mire.

11) If you were the UK Secretary of Defence would you

a) Be so stupid
b) Hope no one noticed
c) Be relieved as you never really liked the job anyway, but amazed you had to go so far to lose it.

12) If you were a teenage daughter and wanted something from your parents would you

a) Spend a couple of days diligently trying to please before broaching the request.
b) Build a strong case as to why your need should be supported.
c) Be as rude as sin, consciously do nothing to help and then scream and threaten to leave home should your request be challenged.

13) If you were a vegetarian and fancied a change would you

a) Go to that new restaurant that's opened in Covent Garden
b) Go on holiday.
c) Try the Chocolate and Pigs blood dessert at Bocca di Lupo.

14) If you own a UK energy company do you

a) Guffaw "Mwauhahahahaha" as you raise retail energy prices again.
b) Argue that you can't apply last year's costs to this year's revenue when calculating P+L and try and suppress a "Mwauhahahahaha" as you raise retail energy prices again
c) Point out that the design, PR and installation of a fancy new Danish Electricity Pylon to be used in the UK doesn't come cheap, before opening the window and bellowing  "Mwauhahahahaha" to the world as you raise retail energy prices again.

15) If you were Jean Claude Trichet you would

a) Depart in a dignified manner, keeping to the code as you know your speaking career will be supported by those you don't betray.
b) Spill the beans as you know your speaking career and book sales are directly linked to the dirt you dish.
c) Think who cares about a speaking career when Italy and Spain owe you so much. Another frappe please Silvio.

16) If Italian Industrial Production prints high do you

a) Explain it away with seasonals and any other factor you can find
b) Accept it as a signal that things aren't so bad
c) Ignore it and instead point out that Greek yields have just hit a new high.

17) If the A-Team decide to announce the leveraging of EFSF along the lines of the Allianz "First Loss" plan do you:

a) Argue that anything that looks like a CDO is bad, and therefore conclude it won't work.
b) Think hmm.. actually that's quite clever, isn't it?
c) Point out that Greek yields have hit new highs

18) If earnings yet again beat expectations do you:

a) Ignore it, as they won't have been affected by the summer chaos yet, and next quarter's will miss.
b) Accept that the real economy doesn't give a sh1t about what Sovereign CDS says.
c) Point out that Greek yields have hit new highs

19) If you were Schauble and said this morning  "UPCOMING EU SUMMIT WILL NOT PRESENT FINAL SOLUTION FOR EURO ZONE DEBT CRISIS"  You would

a) Hope it buys you yet another couple of weeks
b) Hope that your expression of realism will curry you more respect from the markets
c) Really regret having used the phrase "final solution "

20) If you were to protest about corporations would you

a) Use a balanced argument about how the world is changing and that greater transparency would be for the good of everyone.
b) Pick and choose which ones you protested about so as not to leave yourself open to charges of hypocrisy.
c) Stand there naked having realised that everything you own is made by a corporation.
d) Protest that Apple isn't a corporation, surely it's a charity that gives to the rest of humanity?


Thursday, October 13, 2011

It depends on who you listen to

Yesterday saw towel chucking on FX but equities failed to break or hold their relative range tops so Team Macro Man, thinking that upside momentum can now fade a little, has taken profit on their risk longs and is going to place stop entries to reestablish longs above yesterday's highs. One line of response we are consistently hearing on this run up of risk is that nothing has changed over the last week, the world is still a mess so we must sell all rallies. But TMM think quite a lot HAS changed over the last week

1) US does not look like it is heading for recession anymore. In fact, growth looks trend like.
2) The past few days have contradicted the survey data in Europe... it actually looks like Q3 was a quarter of growth - ie not necessarily in recession.
3) Italy in particular had vigorous IP growth in August, reducing the need for EFSF to be leveraged.
4) Merkozy agreed they need to recapitalise banks and said they will get a plan together to implement it. Acknowledging the need is a significant positive.
5) The ECB didn't need to buy many bonds last week, the private market absorbed supply from Italy.
6) The EU bank bond market has reopened... Deutsche issued 2yr paper and Bank of Ireland 3yr paper.
7) Dexia breakup burned equityholders, but not senior creditors. This was a big worry in the unsecured bond markets. Precedent set along with ECB insistence that bank bondholders do not get hit reduces the prospect of calamity.
8) Asian exports have not collapsed and have surprised to the upside in China/Korea and Taiwan. Stabilisation elsewhere (Phillipinnes isolated).
9) Policy easing in Asia. Bank Indonesia rate cut this morning along with a Chinese province easing property purchase regulations. Add to that Government agency buying Chinese bank shares on the secondary market.

So our core view remains that the background data is better than many would have us believe and that Europe is not going to implode by Christmas, though many are still strongly pushing this "recession", especially in the UK, where it is being overhyped by those with vested interests.

It is sad to say that the once mighty and trustworthy British Broadcasting Corporation is one of those and appears to be doing it's damnedest to whip up fear and financial panic amongst the population, with Radio 4 being a litany of stories focusing on social welfare cuts and public sector employees who are losing their jobs. We have expressed our ire at this before but it was whipped up again yesterday. "World at One", one of the UK's most serious news programs delved into the problem of the young unemployed and interviewed 3 recent graduates who couldn't get jobs and held them up as example of how "job creation" was a must. However the degrees these three had were in Media Communications, Broadcasting Journalism and though the final one had two business degrees he wanted to go into Market Research designing questionnaires. All were horrified that they couldn't get jobs. (click here for interviews 7min 30 onwards)

TMM didn't know whether to laugh or cry at this point. Do the BBC really think that Media Studies and Broadcasting degrees are representative of today's graduates? We'd have been much more impressed and concerned if they had unemployed graduate engineers, physicists or medics being interviewed. Or perhaps this story was coordinated with the 2000 cuts being made in their own organisation? Or perhaps, oh dear its true, the UK really is churning out a load of graduates with degrees in uselessness. The most telling comment was right at the end of the interview by one of the girls referring to a "False hope of a degree leading to a job". TMM have predicted before that the next great mis-selling scandal in the UK will be that of the student debt racked up in exchange for degrees that don't lead anywhere. All of this is most pertinent to Team Macro Man who are seeing their own offspring deciding on future further education choices and, whilst matriarchs might be insisting it's more important to be happy, this patriarch is forcefully explaining that happiness is dependent upon having a job and preferably one that they are proud of. If you doubt that then go back to the interviews above.

And finally from Guido Fawkes' great blog

A newbie MP talking to a young blonde lady. The MP says “it was nice to meet you, but I’ve got to go and show my face at the British Venture Capital Association reception”. The young lady immediately says “wow, that sounds like a very right-wing group.” The MP looks bemused, replying “I wouldn’t say that. It’s business, it’s not left-wing or right-wing. So what do you do?”The lady suddenly looks embarrassed: “I work for the BBC.” “Oh? Doing what exactly?” “I’m public affairs – it’s my job to persuade all of you lot that we’re not a bunch of raving left wingers.” “You’re not doing a very good job so far…” came the reply.

TMM still think they should set up TMM radio.

Sunday, October 09, 2011

The Merkozy Line

The two chief Eurostriches had a meeting yesterday. Did we learn anything from their comments?

"We are determined to do what is necessary to guarantee the recapitalization of our banks," So they now know that their banks need re-capitalising even if we've all know it for more than a while, but what is more, they will do "what is necessary". Like re-capitalise them we hope.

"We will make proposals in a comprehensive package that will enable closer cooperation between euro-zone countries that will include changes to treaties." This could encompass many things from changing the rules within the current Euro group to trying to drag in the new members to contribute more. Poland, is that you hiding behind the sofa looking smug? TMM hope it will also include a change to the mandate of the ECB. handing them a full pin cushion of new needles for their compass. Fat chance.

"We think the troika will propose a sustainable solution for Greece," "We are working closely with the troika. Greece is part of the euro zone and we will find solutions to ensure the financial stability of Europe and a long term solution for the Greek problem." The first statement hints that they know what the Troika has up their sleeve but the wording of the second "we will find solutions" implies they haven't yet got any. Sounds like hope, but it is more likely they will back any Troika plan that may work even if it entails national expense.

"It's not the moment to go into details of all questions," Because they don't have the answers? Or an implication that it is so cunning it needs a grander unveiling.

So basically they have decided they could probably get away with another month of procrastinating before they have to pull the rabbit from the hat and are hoping that sounding pretty serious about it will once again buy them a couple of weeks in which to cobble together something more lagomorphic than strong words.

TMM have for a while been suggesting that one of the prerequisites of a successful European bailout plan is to "Keep It Complicated Stupid" to prevent the public asking too many focused questions about what is really going on whilst providing just enough clarity for the markets to regain comfort. We had assumed that said complexity would be built in to a single EFSF/SPV/IMF/Bank recap super weapon that would be wheeled out of the Frankfurt financial armourers shed. However, it is dawning on us that complexity doesn't have to be within a single plan, but can be achieved by implementing many simpler separate plans at the same time. We may be preparing for a tiger when perhaps it is more likely to be an army of ants. Over the past few weeks there have been various plans and ideas mooted that individually have been found to be lacking, but TMM have considered what could happen if many of them are implemented at once and wonder if the Euro solution could actually look more like this.

It certainly looks complex enough:

Lets have a quick look at the different campaigns:

EFSF - The world's financial spies and espionage units have deployed all their agents to try and get their hands on the plans to the secret bailout mechanism that Europe is trying to build as their ultimate terror weapon with which to defeat the enemy. TMM have already suggested their view of how such a plan should work and do see it containing the sub clause that will safety net the banks. But instead of being the solution we see it as just part of a bigger manoeuvre. Provided Spanish & Italian growth hold up (see below...) , the EFSF doesn't really need to be larger.

SMP - Out of sight and generally out of mind, but the SMP program has steadily been buying Italian and Spanish debt preventing yield from further deterioration. If the other actions can hold off any renewed attack then the ECB can keep providing conditional liquidity support ad infinitum. This is an interesting one, because the ECB have provided market discipline - to the Italians in particular - by requiring structural reforms and increased fiscal tightening in exchange for providing liquidity, without the negative side effects that Bond Vigilantes tend to bring with them (i.e. - yields spiraling to the point of turning a liquidity problem into a solvency problem).

Barroso Tax - In launching the Brussels proposal for a financial transaction tax that would most significantly damage London, Barroso has effectively pinned down the UK's forces, leaving Europe to solve its own problems without UK interference. Indeed, the Barosso tax threat may be used as a stick with which to later "encourage" UK participation in the rescue. This is typical of European Commission salami tactics.

Berger Wave 1 - The Roland Berger suggested solution is plausible for Greece, even if it isn't suitable for the Spanish and Italian behemoths. It can be considered as a tactical solution to Greece.

Berger Wave 2 - If Portugal and Ireland completely collapse then the Roland Berger plan can be used as a model to rescue them, should a rescue be needed.

Finnish Feint - The Finns have agreed to the enlargement of the EFSF conditional upon collateral, but the collateral deal they have agreed to is so onerous, involving the proceeds of the sale of existing Greek bonds, that it's unlikely anyone else will push for a similar deal.

GDP - Quietly in the background, Irish and Spanish growth has been doing relatively well. Given enough support, this local resistance movement could make life painful for the bears. This morning's Industrial Production Paratroopers have had significant success in discrediting the recent PMI numbers, particularly in Italy where IP jumped sharply, reducing the risk that Italy falls victim to economic contagion from Greece.

Helios - As with all European "Grand Plans", the diktat from German Finance Minister Schauble several months ago was that Greece's growth model should involve exporting solar power to the rest of Europe. TMM thus found last week's approval of a EUR 27bn solar energy development in Greece particularly notable.

US Growth - It has become particularly apparent that the US data have not collapsed, with ISM refusing to plumb below the 50 level, and the employment report revising away this summer's jobs slowdown. With most indicators now consistent with trend growth for Q3, there is hope that a convoy of better US growth may be coming to assist (as opposed to arriving two years too late).

SWFs - The most critical part of the plan. Everything else is working towards the Sovereign Wealth Funds and other regular investors regaining enough confidence in Italy and Spain (Greece being a lost cause) to start buying again. If they do, then not only are those countries back from the brink but the European banks will see their capital recover as the peripheral debt they hold rallies. The short term objective is to crank up the EFSF or an SPV to a suitable credit rating that will prime the pumps. But ultimately for direct investment.

Bank Red Cross Packages - Beginning with Dexia and the Merkozy agreement to recapitalise Europe's banks in a coordinated fashion so as to reassure markets that senior bank bondholders are not going to be hit, unleashing a wholesale run on the banking system a la 2008.

Anti-Ratings Agency Guns - Shoot them down before they bomb anymore countries.

Now this may not be "the" solution , but TMM do think that we should stop looking for a single solution and instead consider what would happen if all the suggested policies are implemented as part of a of a more complex Masterplan. Let's face it, when has Europe ever been won without the involvement of many armies fighting on different fronts?

Friday, October 07, 2011

That's why the lady is...

Non Farm Lottery day. TMM are all a little weary after late Thursday nights and have used this lull to trim back some risk ahead of today's lottery and are aware of generic "sell Friday" tendencies. We will be just happy enough to make it through 'til home time and some sleep. But as we doze, the lilt of the "Ol' Blue Eyes" classic that was playing in the bar last night is still echoing around our muddled brains...

She gets impatient, over the greek debate
She'll never rescue, lazy people she hates
She loves to tighten, just don't do it late
That's why the lady is a tramp

Won't go to Athens, there's nothing to see
Doesn't like crap games, with the ECB
Won't compromise, with the FDP
That's why the lady is a tramp

She loves the free, free Germany
Export ecstasy
PIIGS broke, but it's "OKE"
Distrusts the French, they're not in her camp
That's why the lady is a tramp

Doesn't like dice games, with the Finns or the Nords
Rides in Mercedes, not Seats or Fords
Will dish the dirt, wont sign the accords
That's why the lady is a tramp

Thursday, October 06, 2011

Scrap silver

So the market waits with bated breath for Trichet's last meeting as ECB President. TMM must say they are glad to see the back of him - over the years he has inflicted significant damage to their P&Ls on a consistent basis. While TMM strongly believe that given the weakening in the European PMIs that the ECB must cut - in particular to provide global cover for the BoE and Fed to embark upon a new round of QE - history would dictate that the ECB stubbornly refuse to cut until it is too late. We hope we are wrong here and that the ECB have seen the light, but given the risks, TMM have lightened up with a view to buy a dip in risk.

But now onto one of TMM's favorite subjects - precious metals. While our opinions remain divided on gold, we think our previous comments on platinum and palladium weren't too far off the mark - performance was good in 2H 2010 and the downside was gappy as predicted. Which leaves us with one metal left and that's silver which TMM thinks is still profoundly overpriced even 40% down from the highs of this year.

Much like PGMs silver is a pseudo precious metal. Gold gets a bid from any or all of: central banks, Congolese warlords, Chinese retail, Indian weddings and The Illuminati, with industrial uses not really being that big a part of the picture. Any sort of analysis of demand misses the point as soon as you are above marginal cash costs, which in for gold are now above $1000 for higher cash cost operations.

If you get the GFMS data or the data from the Silver Institute, silver is about 50% industrial demand of which 20% is from photography - a dying business if ever there was one. Similarly silverware appears on the decline and the only thing keeping silver up is demand in ETFs/investment and the like. So far so good - basically it's got horrible fundamentals on the industrial side, but the investment demand is fine, right?

Well, no, it isn't. You see silver, unlike PGMs, does not come from the godforsaken political and labor relations minefield known as South Africa. It is mostly mined in stable places in Latam and Australia and production has been rising steadily - not least of all because silver is a by-product of making other stuff.

So supply has been going bananas and cash costs, thanks to the by-product game, are $5 per ounce - about 15% of the current spot price. By way of comparison many industrial metals aren't that far above cash cost now. If you're looking for something that performs due to cost push pressures, silver is not it.

TMM used a very quick lift of the Silver Institute data to work out how much investment demand is required to balance the market for 2011 and 2012 and compare that to ETF flows and the picture is not pretty. ETFs aren't everything, but 50 million ounces have bled out of the ETF market this year while there is a requirement for 214 million ounces in demand to fill in order to achieve balance in the market.

So with cash costs about 80% down from here and pending collosal oversupply, TMM can't work out why people like this metal. If you want something with cash cost support, buy some PGMs. If you want to trade monetary debasement, buy gold. And if you're not comfortable with all that metals risk, short some silver because this market makes absolutely no sense.

Wednesday, October 05, 2011

Beware Bears Bearing Maps

Wowza. That was interesting. China CDS apart, the response to our calling for a turn in risk in the markets was most informative. TMM's "comments rule" played out again where bullish posts are either met with no response or a stream of disagreement to the point that we think we proved one of yesterday's observations - "On balance the blogosphere wants a recession so they can say 'told you so'". TMM received similar ribald jibing in their work environments too. Now such biased response certainly does not mean that TMM will be right, and with a 2 horse race of bottom or no bottom. A 50/50 outcome is all we should expect. But if price reflects information and expectations, and expectations as detected by our mockery meters are pretty extreme, then where do we go from here? Who is the seller who is more stupid than you who hasn't been exposed to stories that are so tabloid they are on the back of cornflakes packets?

Many comparisons are drawn between today and 2008. Back then, the discovery of a new land of economic doom had all the financial cartographers mapping the landscape, but such mapping appears to have given today's financial navigators a false confidence that their 2008 GPSs of financial crises are to be followed blindly today. But TMM, just like any good navigator, suggest that the 2008 GPS is an assistance to traditional navigation methods, never to be trusted fully and to be used together with a wily local knowledge and a healthy respect for the uncertainty of what lies ahead. Things are only ever obvious with hindsight. Especially new things.

Our point is that the observation itself has feedback into the price and so the outcome will never be exactly the same again. Most of the price moves of 2008 were on a shock of the new, if you think you have an accurate map then there should be no shock and so price moves will not behave as many expect. Not only does this feedback occur from the punters side but also the policy makers, who, having seen the disaster of 2008 have learned their own lessons. This last point is hard for many to believe and indeed the intransigence and lack of discernable action from Europe would support that disbelief, but TMM really do trust that the lessons of 2008 HAVE been learned and will not be allowed to happen again.

Let's dig a little deeper. As mentioned above, TMM find it particularly interesting that the "default" view as to the natural path of events is "this is 2008". We remember vividly back in the summer of 2007 that many were of the view that "this is 1998" and that rate cuts would fix the problem. TMM would argue that traders minds are usually framed, as far as crises go, on the last crisis they experienced. So "This time is NOT different" is more the norm than not, from an expectations standpoint.

The trouble with this view is that ALL crises ARE different. But they DO share one common element: the inability of markets point in time to distinguish between a liquidity problem and a solvency problem. To wit, once upon a time, shortly following a financial crisis in one part of the world, credit markets began to seize up as a basket case economy with a large amount of debt started to have problems. It entered an IMF programme, but kept missing its targets. Meanwhile, financial conditions globally tightened, PMIs began to fall sharply and ISM printed below 50. Equity markets fell sharply, and speculation grew about US Investment Bank exposures to this country and a certain systemically important financial entity. Then that country defaulted. Markets panicked, and the equity prices of several investment banks fell as much as 70% from their peaks a month before.

How did it end? Ring-fencing of that certain stressed systemically important entity, liquidity provision by the Federal Reserve and a 30% Q4 rally in the S&P500. For those that haven't guessed already, this was 1998. And it turned out to be a liquidity crisis rather than a solvency crisis.

And this is the point TMM are trying to get across. In a crisis, you just DO NOT KNOW whether it is solvency or liquidity. Now, TMM believe that European banks are insolvent *conditional upon* the PIIGS collectively being insolvent. Clearly this is the case for Greece, but for the others, this is unclear - and, particularly in the case of Spain and Italy, a function of the rates at which they can borrow. So while the ECB provides a liquidity backstop, they have the room to adjust. Of course, the missing ingredient is growth, Europe already looks as though it has slid into recession. But nothing is certain.

While we're on the subject of differences with 2008, TMM would note that by July 2008 - a full two months prior to the Lehman default - the World had entered recession. This is clearly not the case now, though growth has indeed slowed, there are signs the US and UK are picking up, just as they began at a similar time in 1998.

So is the *real* Black Swan (a 30% rally in SPX) the outcome in which things start to look like 1998? Greece defaults, the UK & US embark on further QE, the EFSF leverages up alongside the IMF to provide liquidity to the rest of the PIGS, or the ECB continues to cap yields on Spain and Italy on a conditional basis, growth expectations gradually rebound and the next bubble is born...

...Beware Bears bearing maps.

Tuesday, October 04, 2011

Buy back Tuesday?

We left on Friday with the plan to sell and not buy back until today. So far so good, but do we buy back now? Glancing through the OED, as one does over morning coffee, the page flopped open at the perfect description of this morning's markets.

"A functional disturbance of the nervous system, characterized by such disorders as anaesthesia, hyperaesthesia, convulsions, etc. and usually attended with emotional disturbances and enfeeblement or perversion of the moral and intellectual faculties".  Also called colloquially - Hysterics.

Let's start with the fastest riser up this week's Top Ten chart of hysteria. China. Today we bring you our nomination for the 2011 CDS Darwin Awards. Last year saw those proud owners of BP CDS win in spectacular style, but TMM would like to nominate the recent purchasers of China CDS for this year's CDS Darwin award.

Now, TMM have for some time felt that CDS on debt for countries that can print their own money is a lot like Magic Cards: an obscure game that can be expensively played by 30 year old man-children, who should be doing something else. On that basis we could make fun of most of the sovereign CDS market - US, Australia, Japan, you name it. But TMM feel that those who have pushed China CDS out over the last few months are a special bunch indeed. China has reserves of approximately $3 trillion and a grand total of $1.2bn in external borrowings at the sovereign level. Now, TMM know that China has a lot of NPLs - don't get us wrong - but those are in local currency. Ooooh, but what about SOE borrowings in USD? TMM would like to point you towards creditors to Vinashin, a hopeless Vietnamese shipping company, who appear to be 1) taking a big fat haircut 2) not getting control of the company and 3) now hold busted, useless paper that is not deliverable into sovereign CDS. The bottom line is, if they don't feel like paying you, they won't and your CDS won't pay out. This is EM credit 101: willingness to pay is often far more important than ability to pay. So anyone buying CDS on China is buying something that is collateralized about 2500x with cash and rising. Remember - China doesn't sell its reserves to print money to recap banks, it just expands the monetary base. Just like the Ber-nank.

TMM don't doubt for a moment that China CDS could widen further, much as had its day in the sun and BP briefly went deep into the high yield zone. However, as a whole we are calling this trade what it is - deeply, profoundly, ridiculously stupid, poorly conceived and no doubt primarily owned by equity and corporate credit guys who've thought about it for around 2 seconds before putting this trade on, like thick pants, in the vain hope it will stem a haemorrhaging from their posteriors that makes Ebola look like Deep Vein Thrombosis. TMM would like to say to these people's investors that if you want to stop the bleeding caused by a portfolio disease known as tight monetary policy and poor corporate governance, then stop giving your money to credit analysts that can't analyze credit and equities analysts that can't analyze equities - Please! Don't buy China CDS.

Next Dexia -


Note the word CREDITOR in there. The return of bank liability guarantees would be a significant policy response, given that credit markets have been under significant stress in the face of worries about bondholder bail-ins. Markets need an explicit confirmation that governments do not intend to inflict losses on senior bondholders, so this is a positive development. Having said that, this is only one bank, so can't get too excited, but it is a step in the right direction. Of course, this has to increase the probability of France getting downgraded even though, in TMM's eyes, the upside to preventing a bank collapse is significantly better than the downside of a ratings downgrade from less-than-credible agencies.

Back to the mood. The technical picture has yielded cries of  "Bring me a new support, this one is broken" across the city, especially in SPX, with many now ready for the next leg lower. We have even had Battledeathcrosstar Galacticas sighted in various guises. But notable was the way that yesterday's varied positive economic data were pretty much studiously ignored or explained away to such an extent that TMM are beginning to wonder if Alessio Rastani is actually representative of many more than we thought, with all secretly hoping for a recession to serve their own nefarious purposes.

The UK Government wouldn't mind a recession as a justification to its spending cuts (Osborne highlighting the severity of the economic downturn yesterday). Meanwhile the Labour party wouldn't mind a recession to prove how wrong Tory policy is. Every socialist-leaning government in the western world would like a recession as further reason to neuter the banks. On balance most of the blogosphere would like a recession so that they can cheer "told you so". Every holder of Gold ETFs and physical outside of central banks wants a recession to justify their holdings. Sell-side sales folks, rather short-sightedly, seem to want a recession as it means they can scream "not since the last time" a lot and charge wide spreads. Buy side analysts want a recession as they have learnt in 2008 that being contrarian gets you noticed, they just haven't noticed yet that being bearish is now consensus. Is there anyone apart from normal folks with normal jobs, who can't control whether there is a recession or not, who don't want a recession?

Whilst TMM may have been a bit over the top there, the point we are making is that this has to be one of the best flagged and prepared for recessions we have known, accompanied by localised and, in TMM's mind, overhyped short term hysteria. So TMM are indeed going to buy back today, as there is a chance that this may be a beautifully crafted bottom. What one might call a "Pippa Bottom".