Sunday, January 30, 2011

The Armchair General Rides Again

Well, well, well, its been an eventful few months and aside from the ongoing messy situations in Pakistan and North Korea it appears that Twitter and Facebook have accidentally put the entire Arab world in play. Mark Zuckerberg, what hast thou wrought? The Armchair Generals are back, and most amusingly of all given that they are

a) almost all on the sellside and therefore
b) their employers block all social media at the office

Its even harder to take them seriously given that the best on the ground coverage comes from stuff like this (note, translated):

All the people are in Liberation Square. Kebab business off the hook. - Abduls_Kebabs, Thu 12:36 via IPhone 
Got overexcited and threw a kebab at the police. Felt good. Mubarak Resign! - Abduls_Kebabs, Thu 20:36 via IPhone
WTF my Kebab Stand is on fire! - Abduls_Kebabs, Fri 01:22 via IPhone
Ok fuck it I'm getting in on this Molotov cocktail thing. Next up - plasma TV 4 free. - Abduls_Kebabs, Fri 03:48 via IPhone

All TMM can say is that they are quickly getting into Twitter and Weibo - Reuters and Bloomberg just aren't fast enough anymore. Nemo is here and others may follow. With the madness raging on in Cairo TMM were a bit too busy at the end of the week trying to work out how to play this and getting trades done to post but here it is. Given that we are already on the long oil bandwagon that is more or less taken care of so our thoughts as to how things might evolve in rates and FX was more of interest. For some quite astute commentary on oil and the Suez Crisis, go here.

Firstly, how bad rioting resulting in government getting turfed out is really determined by 1) how long it goes on for and 2) who the viable alternatives are. In countries like Thailand the pluto-clepto-crat prime minister Thaksin getting booted doesn't really help political stability but it's not as if there aren't a number of viable alternatives. The kind of disaster zone that ensues when a dictator withdraws and there is a power vacuum has plenty of nasty precedents in places like Indonesia circa 1998 which really makes one worry about what is going on in Egypt. Egypt does have some civil society that could vaguely form a caretaker government in a lead up to elections but many places don't and also have the same simmering pot of political resentment. We are of course, referring to Saudi Arabia who as of late last week did not seem to be having much go on in CDS land which TMM find odd.

As can be seen above, Egypt 5 yr CDS in white has been breaking new highs and the currency has been taking some serious pain though that is more due to underlying fundamentals. In  contrast, Saudi 5yr has been rock solid and the Saudi Riyal has been kept pegged. TMM take the view that given Saudi doesn't have much of a political plan B 75bps is a small price to pay to sleep well and night but what does one do to offset the trade? For those with hands made of Kevlar you could buy some Orascom Construction or Centamin but TMM view the Saudi Riyal as a decent bet too. If the problem is food inflation and you have truly enormous FX reserves a one-off revaluation is a good way to cut inflation very quickly in the short term -- and when the political landscape is moving as fast as you can Tweet the short term is all you've got. Long SAR, long Saudi CDS would seem to be a good way to sleep well and get paid at this point.

In the interim, the broader picture is as such (according to what we've heard): if Saudi goes you simply can't own enough 5 delta oil calls and 5 delta spoos puts because it will completely screw up the oil market and likely spill over into Iraq, Jordan, you name it - banks aren't the only thing that can be TBTF. If Iran goes that isn't necessarily a bad thing - TMM are generally not pro-Islamic state - but you can bet that before Ahmadinejad goes he will angry up his proxies in Lebanon to try to create an external drama to distract the populace. At any sign of trouble in Iran getting short all things Israel does not seem that silly at all.


Anonymous said...

It was to be expected that the kiddies would see Egypt, see Mid East blowup equals buy oil. It's a fear trade and calm plus day 1 will blow it out of the water.

Nemo Incognito said...

We will see Anon, Cairo footage still looking pretty messy from here, leaving aside that we like the fundamentals anyway.

CV said...

*Sigh* ... so you are saying I have to worry about geopolitics now?

Well, like the MM of old I am also drawn to the Alpine slopes at this time of year so I will probably watch on the sidelines and if the world blows up while I am away, I reckon there will be some nice dimes to pick up as the dust settles.

Come on guys ... short SPY, long gold ... take it, I know you wanna!! ;)


Anonymous said...

Any idea on CBKD?, dropped a lot more than other EGPT eq today, very illiquid though

Nemo Incognito said...

CV I think buying Egypt equities on the hope of a sane Baradei oriented outcome makes sense but covering one's ass with crude options or saudi CDS while doing so makes sense too. It ain't over til Mubarak steps down and even then it could be an Indonesia 1998 shitshow.

Leftback said...

Agree with anon.

Fade TEOTWAWKI trades in crude, JPY, gold and silver. We bought Egypt on Friday, doubt if we will sleep on it another night, who knows what tomorrow brings.

Take the money and run.

Leftback said...

2s30s hit 403 bps today, a record spread. This extremely steep YC seems unsustainable. Something has to give, and the risk:reward ratio is much more favorable at the long end than the short end.

If the economic data weaken, the whole curve will flatten and move down, whereas if the economic data show real strength, the short end will be annihilated.

Nemo Incognito said...

LB: true on both counts. Also WTF are those safe haven flows? Clearly people aren't all THAT panicked.

Charles Butler said...

LB - and, especially in the growth case, euro core-peripheral spreads will tighten. Perfect opportunity to clean out the excess baggage from the argument.