Thursday, December 17, 2009

Hidden Truths

Macro Man isn't sure that we learned much from the FOMC last night, but that doesn't mean that markets have receded into a pre-Christmas stupor. It's hard to know what the DGDF crowd was looking for...but whatever it was, they certainly didn't get it. Cue the by-now predictable battery of stop losses from dollar shorts and, dare we speculate, initiation/expansion of dollar longs by the CTA community.

In any event, one could argue that there was a significant development last night, via S&P's downgrade of Greece and maintenance of a negative watch. Greece will soon be knocking on the door of the lower threshold of eligible ECB collateral; one doesn't need a terribly vivid imagination to conjure an idea of what might happen should that occur. 15-month Greek paper is currently trading north of 3.5%.

In a possibly related development, it's interesting to observe that the ECB now wants to lift the hood on the collateral that it's holding and find out how bad the turds are. Macro Man wonders if they won't find that they've been the victim of the old "flaming bag of poo" prank. Perhaps that could be the catalyst for untangling the web of deceit that surround the global banking sector.

Even when there's no malfeasance and information is publicly available, it's surprising how easy it is to misunderstand the current state of play. Gallows humour has been a staple of trading desks everywhere for the past couple of years, and Macro Man isn't immune to the odd jibe here and there. When he talks to mates at Citi, he sometimes muses that perhaps he should buy a few C shares p.a. at the current knock-down price, since "I can leave my stop only three and a half bucks away."

As you can see below, the once-mighty C has seen its share price is down some 48% from the 2008 close, so it's badly underperformed the braod market. Or has it?
Sure, if you've been long since last year, you're rather out of pocket on your investment. But for the insitution as a whole, it's been something of an annus mirabilis; thanks to its capital raising/share issuance, etc., C's market cap has nearly tripled this year. The company's now worth nearly $100 billion!
Betcha didn't know that. Even more remarkable is fact that Wells Fargo's market cap is now at all time highs (at least at the close of the year.) Yes, this is the same institution that has both hands thrust deep in the stinking morass that is the Califoria real estate market and that has employed every trick in the book to avoid fessing up.
Readers are invited to judge for themselves what, if anything, this remarkable recovery in bank market caps means for 2010. It certainly suggests that something should be changing, and it doesn't take Sherlock Holmes to deduce where Macro Man's bias lies.....


Anonymous said...

Well the DGDFs were looking at TIC and the Saudo-Kuwaiti-Bahraino-Quatari GMC but then the DGUFs won the Greek downgrade.

Crisis Management said...

Obscured deep in the rarefied realm of ultra-left politics lies an interesting article Shock Therapy for Greece, published by the Trotskyist International Committee of the Fourth International.

The Trots fume: "These vague promises are above all aimed at enabling the trade unions, the nominally “leftist” alliance SYRIZA, and the Greek Communist Party (KKE) to collaborate in imposing his austerity measures. These organizations have played a central role in implementing cuts in the past."

They continue to explain that today's Communist backed one day strike is actually "designed to let off steam" surrounding said proposed cuts.

Recent examples of economic shock therapy generally involve the release of FX controls, one wonders if the EC is opening a Pandora's box in forcing Greece to endure shock therapy without recourse to currency devaluation.

Strange things often happen around New Year's and the present Euro rout certainly has momentum.

Anonymous said...

oh oh oh, Sterling puking on the back of poor sales data... Greece, Spain, UK, lots of countries I wouldn't lend a hand... 2010 is going to be fun, will the Euro survive?

Charles said...

From Bloomberg
"they may(so it is not sure...) approve the start(so we don't know when it is going to end...) of a consultation (so it is just chit-chat, no action) process(when people qualify something with "process", usually it is because it is going to take a long time) with banks, investors and market participants (the more people you ask, the longer it takes) asking them to how residential mortgage- backed securities can be made more transparent (not only they don't have the answers to their questions, but they don't have the questions as well !)"

Dont hold your breath !

Anonymous said...

i think some of the shorter term cta's got in around 1.47...longer term cta's still short dollar i think..think 1.40 is the level in eurusd. but a very valid point i think

Gregor Samsa said...

MM, I share your bias, but it did not help any in the last weeks. My plan is to just sit there watching and see what happens in January.

Anon 10:02, the Eurozone is big enough to make Greece a side show. The caravan moves on, with or without Greece. With the $ reserve currency status at stake, there is far too much to lose or to gain, this implies there is far too much spin going around.
The UK might join the Euro a few years down the road.

Anonymous said...

to what extent can Greece be bailed out, I don't know.

I don't expect the Germans to take over Germany's debt. That's why Bunds exist and are different from BTPs for instance.

Possibly, the big trade for 2010 is long Bund short the rest.

Anonymous said...

I meant the Germans taking over Greece debt.

Anonymous said...

I said it before and I will say it again...DGDF will change to OGDF and the spread between nat gas vs crude oil will skyrocket in 2010.

Anonymous said...

I haven't seen any comment on latest US CPI.

A negative real earnings yield is quite a reliable indicator of a market fall ahead.

Look out below?

Anonymous said...

But vere do out guut frienz at DB fit in za banking scheme? The second season of Aquateen Hunger Force with the All Knowing Cube had a very instructive episode on the flaming bag of poo. Don't have time to link it now, but will do it before Christmas.

L/S Equity Guy said...

Oil is definitely the thing on my mind. I know MM has long said he prefers spec long oil to spec long gold (and I have agreed with him) but I think the rise in both has been a silly function of the DGDF nonsense.

As a measure of my annoyance the last few months, I'm taking extreme pleasure in the dollar reversal even though (as an equity guy), I'm not really directionally positioned for it.

So, let's open up the floor: what possible rationale for oil >70bbl?

Steve said...

Being the bear that I am I went around looking for something to BUY and came up with Gilts. If there are 260bp of differences between the UK and Japan I can't find them.

Gregor Samsa said...

Steve, if you are desperate to buy something, go for gold, if your investment time-scale is longer than next week.

zjin said...

MM, did you consider bot wells fargo and wachovia?

Anonymous said...

L/S Equity Guy : oil > 70
Basis what: ave cal10 for CLo1?
The annoying thing is switch away from WTI pricing (saudi + kuwaiti crude to US) to Argus Sour index,which is priced off wti still, but....we'll have to see how this pans out in cal10. Also, i wld not be too surprised if more PG crude for Asia is getting priced off DME's Dubai/Oman in cal10 proactively rather than retroactively with a diff , as is now the case.
As a 'global' 70/bbl price in cal10, I'm a buyer of that on back of demand growth,OPEC remaining in driver's seat of the marginal bbls(and thus targetting >70 prices),DGDF scenario holding firm in '10, declining oil output in a lot of ageing fields,risk of political events in MEast,OECD stocks (at about 60 days fwrd cover) high but cld see lower days' cover in 6 mnths + last but not least: futures' curve holding its contango. However, it will be a bumpy ride with impl vol at around 40% for all of cal10 in WTI now.

Steve said...

Gregor I don't disagree but am short gold at the moment, think we can work our way down to 1030.

On crude, both crude and gold are anti-fiat but crude is too expensive to store for that purpose. Can demand sustain crude above $70? Not for long, I don't think.

L/S Equity Guy said...

Anon at 2:16, appreciate your thoughts on crude. Confirms my basic thinking that bullish crude in 2010 depends on DGDF. I'm bullish DXY to mid 80s but, like I said, no real money to work on this thesis. Do own airlines which have benefited from this but that thesis has more to do with industry consolidation issues.

Anonymous said...

a lot of 'new' demand for products (mogas+diesel) is in Asia + MEast.
Pump prices are heavily subsidised so demand grwth remains regardless. And ,under DGDF scenario, a hard currency helps as well to cushion expensive (in us$) oil.

leftback said...

AUD:JPY and AUD:USD not looking good today. Mrs Watanabe will have some 'splainin' to do when Setsuo wakes up.

Yield on Treasuries is looking more appealing today, relative to that from C, and other smelly instruments.

Looks like the EoY flight to safety trade finally arrived, MM. Just when we'd all decided to trade smaller, of course.....

Anonymous said...

That's 'cause we have on our Christmas balls LB

Anonymous said...

wcw said...

Ah, WFC. I was short for a good while there, long enough to have taken a loss despite covering at a reasonably good point during the TARP-exit rumors. I still hate the thing at current or higher prices given the likely path of economic conditions facing its borrowers, but have great hopes to short later at a higher price. I expect the extraordinary support the government is providing the residential housing market will provide the opportunity eventually. Where and when, of course, is the big question. I have always been terrible at timing.

FD: no WFC position now.

Macro Man said...

Steve: If there are 260bp of differences between the UK and Japan I can't find them.

Try looking at the inflation stats! UK +1.9% y/y, Japan -2.2%. UK real yields are pretty darned low compared with the rest of the developed world, inflation is already at target and rising, the Bank is telling you that they are prepared to remain behind the inflation curve for some time, and the delta in non-monetized issuance in Gilts dwarfs that of JGBs next year.

(I went small short a couple of days ago.)

Donlast said...

Why has the anxiety about sovereign debt suddenly emerged in recent weeks? This may seem a naive question but candidates for the sovereign intensive care unit have been lying around for many months, ever since the debt crisis began. Who has been placing their bets and now feels it is time to let loose the dogs of debt default. Psst out for Dubai...avoid Greece. Who wants the Dollar up and the Euro down? Curiouser and curiouser, said Alice.

Anonymous said...

Donlast: Why has the anxiety about sovereign debt suddenly emerged in recent weeks? This may seem a naive question

"suddenly"??? Do you live under a rock or do you work for Moody's?

When Tim Geithner became Treasury Secretary at the start of this year (months before "recent weeks") -- he went to Beijing for a series of talks and did a presentation in front of several hundred Chinese students.

Geither assured the students that US Treasuries were perfectly safe -- and the students burst out laughing

The concern for highly risky sovereign debt isn't new -- the Chinese students were not the first to notice something was wrong.

Iceland (months ago), Greece and Dubai simply put the story on the front page of every newspaper.

What changed "recently" is that dumb people on Wall Street and credit rating agencies can no longer claim this garbage paper to be risk free

Bob said...

Steve: If there are 260bp of differences between the UK and Japan I can't find them.

The British government is woefully over-dependent on two sources of revenue: North Sea oil field royalties and taxes from the financial industry.

The oil field royalties topped a few years ago -- both the government and independent oil companies agree the fields have peaked and future revenue will continue to decline

The financial industry is quite obviously in trouble in the short term (next 4-5 years). RBS continues to bleed cash, and it hasn't even started to be restructured. Other big banks are not exactly in great shape either. And most recently, the government decided to try to shrink the size of the financial sector with a series of taxes, new regulations, and higher capital requirements -- while simultaneously calling for the same banks to lend more to underwater home owners.

Any corporate bond issued by a company whose two main revenue streams were drying up and in trouble would be trading in junk status.

The only difference with the UK is the number of former students who were brainwashed into thinking sovereign debt is risk free, because the government can always print money

Like Greece? Like Argentina? Like dozens of other banana republics? Countries that print lots of money to pay their bills end up in defacto, if not literal, default

And the UK? This time will not be different

leftback said...

Surely this is just a dress rehearsal for the main event? Not really expecting any major melts before New Year, are we? Anyone have predictions for 2010?

k1 said...

>>LB: Anyone have predictions for 2010?

Anecdotal, but surprising to me, is the fact that at my firm, we're having trouble getting orders for business equipment filled before end of year. I don't know whether others are seeing this as well, and I hate the thought of the drum-beating hairpieces on tv being right, but the tech sector might be worth a second look.

PJ said...

LB: 2010 -- see 2008.

Anonymous said...

What changed "recently" is that dumb people on Wall Street and credit rating agencies can no longer claim that the “sovereign CDS” “market” did not hint this garbage paper was risk free.

As far as predictions for 2010 go - short tha silver!

Anonymous said...

So is it in the interest of Germany or any other EU exporter to bail out Greece when the Euro is getting weaker and weaker thanks to Greece's (and Spain and Ireland) problems?

Anonymous said...

umm no?

+ why not invite the UK to the party 2 ?

Anonymous said...


leftback said...

This has not been a very good month so far for late-arriving DGDFers and fans of the "barbarous relic". The death of the Treasury market seems to have been delayed again - at least for another 24 hours.

One could obviously say more regarding the folly of chasing overcrowded trades, but the "ref" may be waiting with yellow card in hand..... LB doesn't want to end up like the (Pohang) Steelers of South Korea against Estudiantes. The over-enthusiastic Koreans ended up with only 8 men on the park.

Anonymous said...

I'm sure the early arrivers to DGDF and the barbarous relic don't give a monkey's - they must be coining it. They were probably close to the best trades of the year.

Our Man in NYC said...
This comment has been removed by the author.
Our Man in NYC said...

I'll bite:
- Australia will cut rates.

- China devalues (though I more hope that -- I think it'll be a 2011 thing, as they'll float...there'll be a mass inflow of foreign capital leading to a blow-off top).

Our Man in NYC said...

Oh, and more importantly:
- Giants pip the Cowboys for a wild-card spot (though if the Steelers could rouse themselves to beat the Packers, that'd help too).
- AFC Wimbledon will return to professional football!
- England won't win the world cup (and the press/players will be shocked). In fact, they'll even lose to the USA (ruining my social life for a week or 3).

leftback said...

"England won't win the world cup (and the press/players will be shocked). In fact, they'll even lose to the USA"

LB can endure any forecast coming true, but not that.

"I'm sure the early arrivers to DGDF and the barbarous relic don't give a monkey's"

That really depends upon when they left the building, doesn't it old sport? It certainly was the trade of '09.

Anonymous said...

MM please explain "delta in non-monetized issuance in Gilts dwarfs that of JGBs next year."
Are we talking QE or inflation?