Tuesday, October 04, 2011
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 Pets.com 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 -
FRENCH, BELGIAN GOVTS, WITH CEN BANKS WILL TAKE ALL NECESSARY MEASURES TO SAFEGUARD DEXIA SA ACCOUNT HOLDERS, CREDITORS -FRENCH MIN
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".