Monday, May 23, 2011

Dam Breach!

And we are off! The roll-over that TMM has been waiting for in their JSTFR plan has arrived. We are fully aware of the TMM Non-Predictions re: Spain over Germany and EUR/CHF but we have plenty of time for all of that. For the moment, however, we are in a rerun of 2010. In fact, looking at the price action you could almost say that nearly to the day "EUR/USD May 2011 = EUR/USD May 2010 + 0.1800". Today's fuel for the fire have been the Spanish elections (following on from Catalonia's revelations last week, debt skeletons are expected to tumble out of regional closets), S+P putting Italy on credit watch negative, European PMIs (yes even you, Germany) and just to keep the risk globally balanced let's chuck in a weak Chinese PMI too. So for Europe, in the words of Queen, "Is this the real life, or is this just fantasy, caught in a landslide, no escape from reality"?

The perceived wisdom (and TMM's view) for the past 6 months or so has been that Spain was fine and de-coupled from the basket cases of Greece, Portugal and Ireland, as the Caja recapitalisation plans were progressing well, growth had returned and the stress tests for Spain were virtually the only ones with any credibility last year. However, this view was predicated on the condition that nothing else went wrong. And, with the combination of hidden debts (bringing back bad memories of Greece), more widespread social unrest and an electoral backlash, all of a sudden this isn't looking quite as clear cut as it was a couple of months ago. Indeed, S&P's weekend downgrade of Italy to Negative Watch underlines the fact that Spain and Italy are breaking out of the trading ranges they have essentially held since last year's bailout (exception a brief period in late November-early January) on the back of real domestic news-flow, rather than on the back of speculator-driven contagion. To TMM, this is an exceptionally important distinction, as it demonstrates that the dam around Spain & Italy is breaching.

TMM fear that all things Euroblx are in the process of becoming systemic once again, as it is clear that the politicians have decided that there will be some form of Greek restructuring imminently, the ECB are panicking at this prospect, and Spain and Italy no longer seem immune. The below chart shows the rolling average correlations of Spain's 10yr Bund spread with the rest of the PIGS (red line), Italy with the rest of the PIGS (blue line), the average PIGS cross-correlation (orange line), and periods of average PIGS spread widening denoted by the green line (TMM's Excel skills are wanting!) during 2010's episode. As can be seen, in the run up to Stress Tests in June 2010, periods of spread widening were accompanied by high or rising correlations between the PIGS, and it was only after that dispersion rose as systemic fears died down.

Looking at a more recent history, in spread widening periods, the cross-correlations tended to fall during spread widening periods as Spain & Italy had been judged to have decoupled from the rest of the pack. However, since mid-April, the opposite appears to have been happening, with spread-widening episodes being accompanied by rising correlations. This argues that the crisis is once again morphing into a systemic one.

So in summary, TMM think we are seeing a general dam breach in some of the levees that the Eurocrats had built and been pinning their hopes on. Acceleration is picking up in the downward S curve in prices in general to move TMM's stance from JSTFR to JFSI.


Anonymous said...


cpmppi said...

Just F****** Sell It :-)

Autore del blog said...

yeah, place some charges on the dams too, it was more fun when they paid 12%

cpmppi said...

Sorry appears there was a typo there!

Anonymous said...

Cool, no worries. From more of a dealing perspective how about JHTFB (Just Hit The F'ing Bid), followed by HAYL (How Are You Left), followed by Y (Yours) followed by HAYL, followed by Y and so on...

Great piece by the way, as usual, thanks.

Anonymous said...

i love the smell of napalm in the morning

Anonymous said...

especially on Monday mornings

Leftback said...

This calls for some music, TMM:


Now do that thing where you make goggles with your index finger and thumb, and I think you're all set for the day.

Tradebot said...

2.90% on the UST 10yrs here we come!

how low can it go?

Charles Butler said...

Be careful!

The big PP victory in Spain's municipal and regional elections, at least in theory, is a positive for all things Spain & economy - especially because lots of big and old money will not invest at home with the socialists in power. The 20's and 30's die hard here in certain sectors.

The FT article on hidden regional and municipal debt, published typically into the teeth of two bond auctions and elections, stands up to scrutiny about as well as you'd expect of a one-source, hyper-politicized take (Cato Institute at that, although FT don't actually admit that they've stooped there).

Supposing that 'social unsrest' refers to the acampada in the Puerta del Sol. Move along... nothing to see there. Believe me.

Bonds, true to form, tagged resistance way up there and are now trading at day's lows - not to mention mention it was a surprisingly good day to have that Ibex/Dax on.

Not to say that one day something might take hold and not let go, but until proof to the contrary is presented it's still the same old same old.

Anonymous said...

Is it possible that you are contradicting yourself,or should i say perhaps connecting up the wrong dots?.
You say that the PP vote is a positive for all things Spain. I'd agree with that.What I think you may be missing is that what is good for all things Spain may be equally bad for the connection of Spain to the Euro sovereign debt issue.
I read the PP vote to be a huge slap in the face for major unemployment and anything connected to that which equates I would say to the Euro policy.
It's a very nationalistic vote and that to me doesn't equal Eurozone positive. There's a conflict between what is 'good' for Spain and what is good for a Eurozone focussed on a policy that benefits predominantly Germany. This vote appears to me to set the stage for a major policy difference of opinion.

Charles Butler said...


The unemployment angle doesn't do much to explain why the PP wasn't turfed in Valencia and Murcia.

It looks to me like Zapatero was such a buffoon that he allowed voters to pin the recession on him and his party no matter who governed locally. It was a vote against an idiot.

Don't know about the nationalist angle. Not even sure what you're referring to. In any regard, it's going to be nearly a year before the PP governs nationally. Then, the problem will be relations with the unions. Zap kept them at bay probably by telling them the PP would win if they brought down the government with general strikes.


Anonymous said...

Keep the faith TMM....this market just cannot hold a direction for more than 24h and goes quasi-automatically for the maximum pain path..
end-of-QE denial is alive and well, but not for long...comos are first in line for a proper second leg down..