Thursday, January 14, 2010

A Greek Tragedy?

The good news is that the snow has finally started to melt. The bad news is that the precipitation hasn't stopped; we've just reverted to the usual miserable rain. Still, it's said that misery loves company, and while there is tragically an all-too-real wellspring of misery in Haiti in the purely financial sphere there is plenty of unhappiness to go around as well.

Greece, after enjoying a respite over the Christmas holidays (both Western and Orthodox) has come under the cosh once again, with yesterday's rather unflattering ECB view of Greek debt restructuring proposals putting sovereign debt under pressure one again. While there was no doubt selling of actual bonds pushing the March '12 yields over 4%, it would appear that most of the pressure was speculative in nature; observe how 5y CDS (white line, left hand scale on the chart below) attained fresh highs even as the price of the 2012 bonds didn't plumb fresh lows.

With Trichet speaking today after the ECB announces rates, markets will be keen to watch for signs that Greece is being cut adrift or in for further censure. (It should make entertaining viewing if for no other reason than that the Vice President of the ECB is himself Greek.) The market will also watch for signs of policy normalization, though it's probably premature for such signals; that didn't stop last month's press conference from being aan expensive proposition for Macro Man, alas.

Speaking of normalization, there were conflicting reports out of the US yesterday. Macro Man's favourite purveyor of fairy tales was at it again yesterday, as a "paid advisory service" reported that the Fed may look to eventually allow the funds rate to drift up towards 0.50%, and they plan to start talking about it as soon as June. Wonderful! So now conversations planned five months in advanec are now news? Mark it in your diaries, ladies and gentlemen: Macro Man has strong plans to talk about football (not the American version) on June 12th....

In any event, comments from NY Fed president Bill Dudley, who presumably knows a bit more about the trajectory of rates than the paid advisory service, said that rates could stay low as long as two years. Possibly coincidentally (but probably not), Mr. Dudley's successor as Goldman's chief US economist is among the few forecasting unchanged rates through the end of 2011.

Finally, Macro Man shed a tear yesterday (OK, not really) as he bade adieu to the longest surviving resident of his portfolio yesterday. He closed out all of his positions in Eurostoxx dividends, which he first bought in February of last year as a hedge against his short-risk portfolio. The 2014 vintage, shown below, more than doubled in value.
Whil there remains some upside to these contracts, it is considerably less enticing than it was just a few weeks ago. Assuming dividend payouts of 150 Eurostoxx 50 index points in 2014 (more or less consensus) , the annualized gain to be had from curent levels is just over 4%. (Broadly similar to the yield available on 2y Greek paper, funnily enough!) While they can certainly richen further, these suckers do tend to build in a term premium a la eurodollar futures, so Macro Man wonders how much upside is really left. Moreover, the ongoing travails of Greece, as well as unpleasant surprises like yesterday's SocGen writedown, provide a timely warning that serpents still roam the apparent Eden of current market sentiment.

It's been a good run, and these divvy positions singlehandedly kept Macro Man's equity book (modestly) in the black last year. With a lot of the juice now squeezed from the fruit, it's best to lock in the rewards so as not to live through a Greek tragedy or any other misery that might othrewsie come his way.


Anonymous said...

" Assuming dividend payouts of Eurostoxx 50 index points in 2014, the annualized gain to be had from curent levels is just over 4%"

Is this missing a few words - what are you assuming?

Surely there remains the possibility that dividends growth at 5-10% a year and being long contracts provides significant return that way as mkt prices in growth?

Macro Man said...

Whoops...assumption is divvy payout is 150 index point, more or less consensus. That does suggest tasty rises from '09 levels., but the point is from current levels being long the futures only makes you a bit over 4% p.a. if payouts do turn out to be 150. Frankly, being long the index, earning the dividend payouts and potentially participating in capital gains makes a lot more sense to me at current pricing.

If the divvys slip back, however, then I would take them over the underlying index. Given I don't have the investment horizon to hold the index that long, meanwhile, I am just flat now.

Anonymous said...

MM - Anyone have any idea on what happened yesterday in the ESH0 (mini s+p) at 1203p NYT? Volume spiked, 226k traded in about 2 seconds. CME said that one person bought and sold, seems vry fishy to me, considering u can only put in 5k per oda.

Anonymous said...

SPX emini trade - looks like someone was trying to do an acct swap ... offered all the futures on the screen & was supposed to simutaniously buy them -- however the offer was picked up by algos & someone bought alot of them knowing what was going on... & the the buyer had to sweep it higher (thats why we didn't see a sell after the buying.. b/c they actually needed to buy it)

Macro Man said...

PPT ut in a huge order to a bank that decided to take the other side? Seriously, it is very odd, I thought about writing about it today but didn't have anything to say othre than it's odd. Can't be a fat finger, since it was a trade that was crossed. So yes, very strange, and I haven't heard anything to shed any light on it.

JB said...

FYI: Macro man gets mentioned in the Indian version of wall street journal:

Clueless, as ever

Our Man in NYC said...

JB -- wow, impressive to see how widely read Macro Man is becoming!

Greg said...

While I have little doubt that Goldman wants Fed Funds to stay zero forever, and will order its many cronies in government to make that happen, the problem with this view is that only the big banks benefit from the FF rate. Most of the economy (and most registered voters) are already paying a LOT more.

The Goldman Fed is running out of credibility, and more importantly, friends.

Obama's bank tax is a political ploy of course -- but that just tells you how hated (yes hated is not too strong of a word) Goldman Sachs has become. Lloyd Blankfein was singled out in pro-Obama news coverage as unrepetent for his acts leading up to the crisis.

The writing is on the wall: free taxpayer money for incompetent (and ethically challenged) bankers is coming to an end sooner than Wall Street is pricing in

Its politics, not economics :)

leftback said...

June 12th is going to be a big day. Can't for the life of me remember why...?

Launched some short PM positions and wondering whether we are close to a Sell The News event in US equities as we start to get into an earnings season that will be uneven at best.

Had to check out that link after the title, "Clueless as Ever"... in case they were sticking the boot in.

Have seen millions of debates about whether there is a PPT. It seems clear that the New York Fed has a desk that may buy assets from time to time.

CV said...


June 12th... Hmmm... Was that your BELO HORRIZONTE moment for the day?


CV said...


"Obama's bank tax is a political ploy of course"...


EXACTLY - and a tax that the banks are sure to pass on to their customers via higher transaction fees...

Nobody here thinks "bankers" are going to suffer from any of this, do they?

Anonymous said...

LB: the clash of the fallen empires?

CV said...


Yeah, no "Clash of the Titans" there... More like "Tits of the Clashons"...

Steve said...

On PPT, where was the Fed in March last year? I can't see it. These things get leaked and it would be a political disaster if it came to light.

The Japanese did have such an operation, and look where it got them.

If they don't intervene in currency markets, why should they in stocks?

CV said...


"On PPT, where was the Fed in March last year?"

They were just waiting until the Obama Press Corps could fronr-run them a little with their:
“What you’re seeing is profit and earning ratios are starting to get to the point where buying stocks is a potentially good deal if you’ve got a long-term perspective on it,” comments...

CV said...

Whoopsy ... we have two "CVs" here I see. Well, I usually end my comments by "Claus" ... so it should be fine I guess. But for a while I thought I was in a parallel world ...:)

On the topic du jour:

I kind of liked the way JCT went out of his way NOT to promise any help to Greece et al. This means imho that the IMF is about to announce its formal entry onto the scene


Bob_in_MA said...

Do people honestly believe in a PPT? I'm not sure if my leg's being pulled.

The problem I have believing in it is that supposedly it's been around for years, under different administrations, etc., and not a single person involved has talked.

It seems to be one of the few things the government has managed to keep secret, along with the CIA's assassination of JFK, covering up the alien invasion and faking the moon landing...

CV said...


I'm YOU dude... :-) Good thing this isn't a Friday, otherwise you'd have all weekend to mull that one over...:-)

Just effin' wit cha'

CV2 ("johnny" come lately)

leftback said...

Bob in MA: You, sir, have a remarkable talent for being wrong about almost everything. The PPT isn't really secret, it is all out there in plain sight in terms of operations in the credit markets. As for the question of whether the Fed buys equities, I suppose you will have to wait for Mr Brian Sack to write his memoirs in about 25 years time. Anyone who thinks we are in an era of free markets, devoid of political interference, is smoking crack.

Now, are there any of those "Death of Treasuries" lunatics around today after the 30y auction? Once again, rumors of the demise of US sovereign debt have been greatly exaggerated. The Treasury market will remain weak only as long as risk assets in the credit markets are supported artificially by a weak dollar, QE and bailouts.

Crisis Management said...

LB, now that you mention it, there was one such lunatic spotted a bit earlier:

Volcker: US Fiscal Accts "Plainly Overextended"
Volcker: US World Leadership No Longer Assured

Who does he suppose is to replace the US, Voldemort and its masters in the CPC Central Committee?

Greg said...

CV 4:46: "Nobody here thinks "bankers" are going to suffer from any of this, do they?"

IMHO, yes the banks will ultimately suffer from this.

It would not surprise me at all if the banks attempt to pass some (or all) of Obama's bank tax on to customers.

But it doesn't matter. Countless people who thought they were retiring on their own schedule got wacked 30% (or more) on their 401K / IRA.

We aren't seeing a raging mob in the street with pitchforks and torches (which is scary but tends to blow over quickly). We are seeing really deep seated seething anger simmering below the surface.

There were no mass protests in October last year -- but incumbants were destroyed in the elections anyway.

Whatever happens this year, the future of big banks is the same as it was for big department stores.

There are plenty of alternatives - small banks, credit unions, discount brokers, etc. Most grocery stores will cash checks for known customers. Mutual fund money market accounts pay better than a bank (and have for some time). The best asset managers work on the buy side now already.

There is absolutely nothing a consumer gets from Citi / BofA / JPM that they can't get 50 other places -- cheaper and better.

High net worth customers have boutique alternatives to Morgan Stanley or Goldman -- sometimes cheaper, but always better.

And as Kraft learned from Warren Buffet's recent scolding -- the era of pompous CEOs overpaying for mergers is winding down. Many large firms (from GE to Exxon) already do a lot of their M&A business in house.

No one needs the big banks anymore.

That's why they are in trouble. Obama's tax is just vultures fighting over a corpse

CV said...


I suppose it comes down to what the "definition" of hurting the banks is...

I'll explain...

After experiencing this whole ordeal, I've moved my cash based transactions over to a credit union (used to be with BofA)...

I know of a lot, A LOT, who have done the same...

I guess if you can't "lynch 'em", collectively we can make them die of 1,000 paper cuts...


Bob_in_MA said...

Sorry, I seem to have touched a nerve.

The strength of an argument can often be measured by the proponents' need to attack skeptics. Maybe you have an abduction tale for us leftback? ;-)

leftback said...

CM: I do not think Volcker is a lunatic, I think he is merely pointing out the obvious, that continual printing would lead to a collapse of US sovereign debt. The lunatics are the people who think this is actually going to happen. If push comes to shove, the credit markets will be saved at the expense of equities, and the lower quality credits will go the way of equities.

Bob in MA: You wouldn't be able to spot a nerve, even if you had an electron microscope handy, old chap.

Anonymous said...

Alright then LB - put your money where your mouth is. Why don't you buy a truckload of treasuries (and tell us where you bought them) and then sit on them for a year and see what happens. That is your job right? or is it just talking trash on blogs?

The rest of us who don't agree can take the other side of your trade and again, see what happens.

What do you say LB, got the balls for that, "old chap"?

Didn't think so...

leftback said...

Anon at 9:32:

You misunderstand completely. I am not trying to get you to buy Treasuries at all, and what would be the point of doing that on a blog? I am perfectly happy for you to invest by arguing this is 1974 or 1982 or 2003, or whichever analog you prefer.

I could care less what you do, I am not on the sell side, and already own some Treasuries, buying at or near the top of the trading range in yields that has been in effect since the summer, e.g. the 3.95% 10y yields in June. From time to time I have and will continue to hedge against this position.

My thesis is that yields will (contrary to popular expectation) stay low in 2010, and that spreads will not continue to narrow asymptotically to approach zero. The economy will not overheat, and in fact will weaken significantly in the second half of 2010, and the SPX will not proceed upwards to the sky. Therefore the long end of the curve will not blow off into outer space, although the short end may rise to some degree.

Increased US savings rates will be one factor that will support domestic buying of Treasuries - even if foreign buying decreases. There is a perfectly good macroeconomic precedent for this, in 1990s Japan.

So yes, I am perfectly happy to come back and look at yields at the end of the year, along with the price of gold, silver, crude oil or ladies underwear. Of course, if they do decide to listen to Krugman and the FED announce additional QE and spending excesses before the end of 2010, then the situation changes. I think all that happens much later, in 2011.

There is actually a diversity of views on this topic. For example. one B-D predicts a 5.5% yield on the 10y at the end of '10, while another predicts 3.25%. By the way, the dividend yiield on the SPX is now down to 1.95% and I am reliably informed that the index has been known to decline on occasions. The yield on gold bars is lower.

Good luck, old chap.

Anonymous said...

...& please, short some silver.