Friday, September 30, 2011
We are heading out early today after suggesting a new market adage...
"Sell on Friday and go away
Don't buy again til next Tuesday"
Wishing you all a none too terrible month/quarter end and hoping that your Octobers not be red.
We leave you with the commisioner for EU policy -
Thursday, September 29, 2011
Europe and all things European have been holding the world's attention to an extent that it’s all too easy to forget that life goes on elsewhere. One of the corollaries of the European shock has been a general global deleveraging rolling right through to the emerging markets.
TMM had some pretty dark things to say at the start of the year about emerging markets and particularly China. As trades go, this has worked – The Hang Seng and Hang Seng China Enterprises index has dropped gradually throughout the year and has really been hammered since August in particular. As noted by the esteemed commodities analysts at the US ex-investment bank, copper is very closely correlated to China fixed asset investment, which appears to have become public enemy number 1 of the People’s Bank of China’s latest tightening campaign. It dropped off heavily and has taken copper with it. See below the bonds of Evergrande, a property developer, and copper and China fixed asset investment. All jokes aside, the China real estate bond market really is copper with a coupon.
Much of what seems to have kicked off this panic is not anything particularly new to TMM: China has an unbalanced economy, is too dependent upon fixed asset investment and its banks end up short puts on a lot of bad investments. So far so good – China property, banks and basic materials have been a great short.
But here is where TMM find themselves out of line with the market thinking. First, you haven’t thought anything through until you consider the government and likely policy responses, given the command economy context. In TMM’s opinion watching the banking sector explode into a flaming wreck is not something the government will sit by and watch idly and the last time we heard of Wenzhou SME’s blowing up, credit loosening was not far behind. Similarly, some will point to high levels of inflation, but breaking China inflation down into food, non food and housing (see chart below; white line - food, orange line - non food, yellow line - rents), a big part of non-food makes it pretty clear that food is beginning to turn for its own reasons, while house prices and rents really are falling out of bed. Given what global financial conditions have been doing (and reading some chemical company transcripts), we are inclined to think that the global situation has gotten bad enough for the PBOC hawks to stay hooded when the local banks scream for looser credit.
In summary: the worst may be yet to come, but probably not in the next 6 months.
On valuation, China’s banks are about as beat up as they ever have been historically as you can see below:
On a back-to-basics corporate finance level they are looking cheap, assuming that most of the book value isn’t a complete write off. Now, bears may scream “BUT IT IS, INNIT?”, to which TMM would agree, - but then again we would also note that the government has demonstrated prior ability to take on pools of toxic loans, throw them in an AMC and forget about it for quite some time (lessons for the Europeans?). Being super short on the assumption that the banks will have to issue equity that will allow you to cover may not work. Given these numbers, if we see a combination of loans bought by Huarong and Cinda and a stimulus, we could see a squeeze that could rip this stuff 30-40% higher.
Which gets us to positioning data and, suffice it to say, the market has got itself very net short in copper per the COT data and the short sale turnover / total turnover picture in HK below is looking pretty extreme too.
And on that point, TMM are covering and running. When shorting Chalco and Anhui Conch looks more like a T8 Typhoon day in Hong Kong (see below), we’ll be back.
In the meantime, we’d rather sit out the next move down and not risk the squeeze and instead start thinking about what the next white elephant nation building/wealth expropriating capex binge China will come up with next. Rail? Soooo 2008! TMM are looking at stuff like this instead.
Wednesday, September 28, 2011
As Tom Jones would sing ..
"Tape Bomb, Tape Bomb , you're my Tape Bomb.
You can give it to me when I have just gone long"
Today it's pretty quiet in the minefield of the market, which is somewhat deflated by a turn in the RORO (risk on risk off) mood spoiling the bears' party. The cries of "well, it went up on nothing changing, so it is not valid" is just as easily countered with "well, it went down on nothing changing last week too, so plus ca change". However, the market is now attuned to "no news is bad news". We are running into quarter-end now and have the new "month-end flows" excuse to throw into the blame game of short term losses. Especially handy if it goes against whatever trade you have on (it's not my fault! it's all a conspiracy!).
We have out-analysed ourselves yesterday, so are sitting back today staring at the potential tape bombs as they weave by through the minefields of the news screens.
ECB ALLOTS 500 MLN DOLLARS IN 7-DAY OPERATION - one bank only again. Not much different to last week and not indicative of any USD funding crisis - Fuse nearly fully retracted soon to be labelled "safe"
*EU PROPOSES FINANCIAL TRANSACTION TAX TO START IN 2014
*EU PROPOSES 0.1% TAX RATE FOR STOCK, BOND TRANSACTIONS
*EU PROPOSES 0.01% TAX RATE FOR DERIVATIVES CONTRACTS
*EU SAYS TAX WOULD BE PAID BY INSTITUTIONS, NOT HOUSEHOLDS
*EU INTENDS TO PRESENT TRANSACTIONS-TAX PLAN TO G-20 IN NOVEMBER
*EU ESTIMATES NEGATIVE IMPACT OF TAX PLAN WOULD BE 0.5% OF GDP
FX .. Land of the (tax) Free. Well, the numbers don't stack up to start with. With nominal GDP of €12trn: 0.5% GDP = €60bn COST of tax plan vs €57bn revenue. Nice one, boys! This is just making us feel like buying cheap Libyan property and setting up a Singapore equivalent in European timezone, as there are more reasons for financial markets and multi national corporate treasuries to leave. "We don't need 'em anyway", - cry the baying mob whipped up by Alessio Imatwati's interview. We will see.
*EU SAYS TROIKA TO RETURN TO ATHENS - Must be modelled on a UK schools exam, where you are allowed to redo the modules until you get a pass. "D minus, please redo". Which has TMM going one stage further and recommending that the TROIKA fully adopt the hallowed Oxford and Cambridge exam regulations, whereby if you die during the exams you are deemed to have passed. Interesting. They would also be allowed to demand "cakes and ale" during the examinations, but must remember to be wearing their swords at the time or else will be liable for fines. These sorts of rules must be right up Germany's Strasse.
THE EURECA PLAN - Now this is interesting.
1. Bundling the assets into a holding company and selling it to the EU for €125bn would represent a fiscal transfer of around €100bn, given that Greece is struggling to raise €25bn through privatizations, and will probably only get around €15bn, given it is a distressed seller.
2. The paper is optimistic about the potential for these assets to recover value, but we would guess this would be the main sticking point for France/Germany. That said, it is a very similar model to the one that was applied for East Germany. Some opposition to the sales is bound to occur in Greece, but it seems like the EU would be massively overpaying in our view. Papandreou/Venizelos should be able to sell this to PASOK relatively easily ("Guys, this is a lay up... Let's sell them this stuff and then when we can just build a new welfare state afterwards", etc...). Moreover, in light of the EU being a buyer (rather than Alessio Imatwati-type evil capitalist speculators), it should be significantly easier for the Greeks to swallow.
3. It contains an 8% GDP stimulus over 3yrs, which will make this a lot easier to sell in Greece and will also support the economy. This growth strategy is important in breaking the debt-deflation trap.
4. CDS spreads would collapse and burn speculators, reducing the probability of further contagion to Spain/Italy and creating a model for what a sustainable package might look like.
5. It will be difficult to sell this to the Germans, but it is promising that Roland Berger have credibility on their side, given their involvement, if we recall correctly, in the East German transformation.
6. Risks would involve the Greeks selling their national assets to their new German overlords only to re-nationalise them once they are over the stress (would have to be governed by strong international law, not Greek)
7. And, last but not least, would the British Museum have to arrange transport of items to Luxembourg?
Of course Europe is on the F-Plan Diet. A new F'in plan every day designed to reduce debt corpulence; works really well for a month but you've put it all back on by Xmas.
Back to sleep.
Tuesday, September 27, 2011
Team Macro Man chuckled to themselves upon reading the A-Team's latest trial balloon, as the irony of an idea grown out of financial innovation and structured credit coupled with leverage is presented as the solution to a crisis caused by precisely the same things. But in seriousness, TMM are unconvinced that this particular implementation is going to work and give them a B- for effort and finally realising that the time has come to whip out the bazookas, but "must try harder".
The Eurocrats have certainly succeeded in making this plan to leverage the EFSF via the European Investment Bank (EIB) appear complex and thus fulfil the requirement of "pulling the wool over the eyes of electorates and the media", but there are a few problems with this particular implementation that in TMM's view make it a non-starter. As TMM have noted before, bailout complexity can be useful in addressing problems without political or electoral opposition, and they recommend readers take a look at Phillip Swagel's excellent account of the US Treasury under Hank Paulson. The key paragraph from that Brookings piece is:
"At Treasury, two additional lessons were learned: (1) we had better get to work on plans in case things got worse, and (2) many people in Washington, DC did not understand the implications of non-recourse lending from the Fed. This latter lesson was somewhat fortuitous, in that it took some time before the political class realized that the Fed had not just lent JP Morgan money to buy Bear Stearns, but in effect now owned the downside of a portfolio of $29 billion of possibly dodgy assets. This discovery of the lack of transparency of non-recourse lending by the Fed was to figure prominently in later financial rescue plans."
And this is where this plan falls down: it does not involve non-recourse lending. To see this, the plan diagrammatically looks like this (please excuse TMM's Noddy paint skills!):
So the leverage in this case would come from the SPV issuing bonds to the Eurozone banks which they could then repo with the ECB. As a result, the SPV, as a wholly owned subsidiary of the EIB, would have to be recapitalised by the EIB should its capital become depleted. And there are three serious problems here from what TMM can see. Either (i) the SPV is not guaranteed by the EIB, in which case its credit rating would be something like single-A, and therefore there would be few investors willing to buy its bonds, (ii) it would be guaranteed by EIB, and therefore in the case of it requiring more capital, EU members would be compelled to inject more and (iii), the UK is joint equal largest shareholder in the EIB (see chart below). The latter two possibilities are clearly very problematic as the leverage effectively comes in the form of more explicit exposures to EU governments - i.e. France and Germany lose their AAA ratings. But that is not all... The UK will also lose its AAA-rating. This just isn't going to fly in this form and TMM suspect the Dambusters will ruin the A-Team's attempt to build a Dam in front of the rest of Europe.
In TMM's view, the leverage HAS to come from the ECB, just as it did in the Fed lending programs like the Bear Stearns bailouts and TALF etc. And the lending *has* to be non-recourse, in order for losses beyond the initially capitalised 20% to accrue to an entity in such a manner that the EFSF bond and the SPV itself get a AAA rating (and therefore attract demand from SWFs). TMM think, therefore, that the structure needs to look more like this:
The trouble is, that the Bundeathstar really don't want to do this, and the Panzer tanks are firmly blocking the ECB lending to such an SPV. But, as mentioned yesterday, TMM get the impression that the Germans have overplayed their hand (for example, they don't have any friends at the G20), and unless they really are about to leave Europe, they are going to be forced to accept some such plan. The key thing with the above is that it maintains the cloak of complexity for the public, while showing markets where the money comes from, thus avoiding the need to put the plan to electorates. Because action is needed *now*, and there just isn't time there just isn't time to vote on this. Europe is unlikely to change its history of doing what it likes, regardless of voters' wishes.
There was an interview on the BBC on Monday that has shocked not only those it intended to, but those it probably didn't too.A young man purporting to be a "trader" appeared on BBC news being asked his opinion of the current crisis. The interview can be seen here:
Now whilst TMM are fully supportive of anyone explaining to the BBC how the real world works outside UK politics and social issues, the content and style of this young man's outburst were so stunningly dreadful that TMM have been forced to consider things are not as they seem. Having dug a little deeper we found this trader to be fairly opinionated on his abilities judging by the content and title of his web site.
But TMM are completely baffled as to how he ended up on the BBC, and after much head scratching and worry are considering the following:
1) Said trader had escaped from a lunatic asylum and was holding the producers family for ransom his demands being that he lets the world know how mad he is.
2) He is Sacha Baron Cohen's next character to be launched.
3) The BBC really is so completely clueless about any subject that has numbers involved in it, that they actually thought he was an "expert".
4) And this is the one TMM are most convinced of...
This man must have been a stooge, set up by Ed Balls to appear just when he was trying to launch a new round of "really it wasn't our fault last time but if it was we've seen the light, spend our way to more votes" policy to highlight just how satanic and parasitic anyone involved in finance is.
Whilst the BBC presenters were of course shocked that someone could be so heinously evil as to wish depression on people, their highlighting of the fact rubbed in it nicely. The clincher was the line that governments didn't rule the world, Goldman Sachs did. Now whilst a few may suspect as much, you certainly don't go blurting it out on TV unless you are about to go on about the Illuminati, UFOs, crop circles and astrology. But then that would just confuse the BBC too much as they struggle with where to separate truth from fiction or more importantly, emotion.
Whether this man is for real or not, whether or not the interview was a spoof (nope, its not April 1st) just let it be shouted from the roof tops - TMM and everyone they know in the field of finance think him a disgrace and only wish he was "trader" enough to own a Bloomberg Account (which he doesn't) where we and our like could message him to tell him such.
Of course, as TMM know all too well... Great traders trade. Bad ones run courses.
Monday, September 26, 2011
Looking at the price action overnight it looked similar to Friday with Asia and EM getting in a panic over Europe and selling off and yet Europe calmly correcting most of it. Which leads TMM to suggest that the stories out there are not just solely Europe but are multiple and overlapping, yet the general euro wrapper is being used to encompass all.
We have had dumps in western equities over the past week, but if you were to listen to the press and hadn't seen prices you'd think we were 20% lower than we are by now. TMM's DPI indicator and newly launched WMMT indicator are certainly reflecting that with weekend conversations pointing to a disconnect between where prices are assumed to be and where they actually are with "well, we are only back to where prices were in early August" being greeted with disbelief. (WMMT = "What My Mother Thinks").
Gold meanwhile has had all the spam chuckers scrabbling in their coffers to buy the dip, though "with what?" we would like to ask, as we thought they'd spent every scrap of fiat currency on it months ago. Maybe it will be just a little longer before they can afford to return to society from the log cabins. Having said that though, the bounce does look solid. -100 and + 80 bucks of gold within 7 hours is a pretty good sign of a blow off and would have TMM normally looking to buy. But if this is a long term play we can afford to wait.
Meanwhile Asian and EM moves continue to show signs of greater self-fulfilling worries than the rest. This just adds to TMM's belief that all of this is just that deleveraging trade we have all been talking about for so long. Europe may be the story, but the effects are global deleveraging. Europe is already so deleveraged on the long side that it's now short, the UK and US appear pretty neutral, so we are left with the leverage residing in EM and particularly EM fixed income.
Now then, looking at this proposed IMF super package that has been the result of the Euro offsite in the States (lots of coffee, lots of networking breaks, lots of playing blackberry games under the table and plenty of trying to stay awake after too big a "get to know you" evening the night before). Well, on the face of it we have nothing concrete, but instead see the first phase of EU policy launch. Having obviously learnt this trick from the Labour Party in the UK, it involves leaking a potential idea and watching how the market reacts. If it's a disaster, then deny it ever existed, and if positive, then work in that direction. If there is one thing that TMM are learning from this crisis, it's that tape bomb shock has induced an inherent mistrust of anything being done until it is. But as we also know with this style of leakage policy, by the time it is announced it will be fully priced in, so we are therefore forced to consider the ramifications of this latest idea leak.
The €2trn has not been agreed yet but it could come either from the ECB or from just allowing the EFSF to borrow more itself. In the first case, the EFSF would issue bills that it would present to the ECB in exchange for Euro just like a bank-like financing, or it would sell those bills/bonds directly to the market. The Germans (cf Schauble) appear to be leaning in favour of that latter though at the expense of credit rating (it would act in a CDO-like manner). Which is fine as long as the German public don't notice.
On the German point, TMM frequently come across the view that the Germans, finally realising that they will have to pay, will just give up and re-adopt the DEM. The problem with this view is that both the economic and geo-political consequences of such a move - which, judging by how spookily similar the past few years' events have been to the post-1929 Wall Street Crash timeline, may well end in War - seem too much of a hurdle for them to be worth considering. Indeed, TMM reckon the Germans have overplayed their hand, and the leaks coming from the G20 suggest they have no friends. It's a case of "JUST SORT IT OUT, OK?!"
But back to the IMF idea, TMM reckon that with a fund that big, coupled with a broad based bank recapitalisation, the ECB and EFSF buying of bonds would be enough to convince markets that Italy/Spain will not suffer the Greek fate and that should be enough to give real money the nerve to reallocate.
So overall, TMM are encouraged that even if it did take the Americans to ram it down their throats, the Europeans are perhaps at last "getting it" and are actually discussing the policy responses we would want to be in place. Even the hardened Eurobears would have to take note.
But, back at home in Euroland the random word generators of the Eurocrats continue to spew out non-committal statements about what they haven't decided and what is possible with a frightening lack of what IS going to be done.
*GERMAN FINANCE MINISTRY SAYS NOT MULLING THIRD EFSF EXPANSION
*ECB'S MERSCH - WILD EXPECTATIONS ABOUT ECB RATE CUT SHOW SOME PEOPLE HAVE LOST DIRECTION, ECB HAS ONE NEEDLE IN COMPASS
*ECB'S NOWOTNY - ECB INTEREST RATE CUTS CANNOT BE EXCLUDED
*ALMUNIA SAYS MERKEL, SARKOZY KNOW WHAT IS AT STAKE
*DUTCH PM RUTTE SAYS NO PLANS TO RAISE AMOUNT OF MONEY IN EFSF
So maybe all the great ideas hatched in the Euro "offsite" in NY will evaporate, like most offsite action plans, on the plane journey home. We look forward to the follow up call from the offsite coordinator in 3 months time .. "Hi, we wanted to know how your progress plan we discussed at the offsite in September is going .. You haven't had a chance to look at it? .. Your line manager isn't supportive? I see.."
Friday, September 23, 2011
It would appear that the knife has stopped falling. Whether or not it has been successfully grasped by the Kevlar gloves of the Asian central banks or whether this is just a moment Matrix style slo' mo' is yet to be seen. But the action of the Asians in pretty coordinated FX intervention this morning has killed momentum, leaving the market a bit deflated as high emotion fizzles to "now what"? TMM have often mentioned the PIN (Price Is News) function of price, and it is beginning to feel like that right now. The latest falls in prices were pinned (no pun intended) on the FED saying that growth is gloomy and a post-twist let down. But TMM feel that the moves in Emerging Markets were much more relevant to yesterday's moves as a potential opening of third front of the current two-pronged Europe and US-focused global woe story. What is more, a story that involves the saviour of the world having its own cancer was so terrifying that shouting "YOURS!" and running away screaming could be seen as a natural emotional response.
We come in this morning and our way to work was dominated by radio reports of the usual x grillion of wealth being destroyed and how the price falls in the markets are indicative of how terrible things are. This was exemplified by the Reuters headline "Market's 3% Plunge suggests deepening worry". But, as we have mentioned before, the longer the PIN function goes on the more it feeds into the real economy via sentiment-influenced indicators such as Consumer Confidence, PMIs etc and reduced credit availability, and then the whole lot engulfs itself in a vortex of descent. This is where we stand with Europe at the moment, with it heading for recession unless the Eurocrats pull a rabbit from the hat, but for Asia we feel that the PIN function is even greater.
With politicians all around the world proving how the whole dire process of mediafication of politics has produced governments of spineless, self serving, opinion poll watching, issue ignorant, middle of the roaders, it really can't be long before the rest of us have to roll our sleeves up and fix it ourselves. "Right, come on lad's, they haven't a clue". Greece's recent solid commitments to urgent austerity reform then backed by this sort of news "Greek Parliament Vote on Austerity Postponed Due to Insufficient Votes". Yes, its urgent, but we won't be turning up to vote as we fancy a lie in. TMM have to suppress their rage in these instances. Meanwhile the stalemate of intra-European lending goes on. G20 hinted at no more Lehman-like events but what is really needed is them shouting it from the roof-tops combined with an actual recapitalisation of the banks, rather than this tortuous nail pulling of half hearted news headline hints, the last of which shows just so much mindboggling stupidity as the EU Commission says that the banks don't need a faster program of recapitalisation.
TMM are surprised how things have got so bad. Especially as things that used to be seen as good are now perceived to be bad as well.
The price of lots of "stuff" has gone down. This is bad news because the people that own the stuff are made to look sillier than the people that don't own the stuff. Most people own the stuff in some way because that's the way the world works, so most people look silly and they don't like that. This is bad.
The prices of stuff that we use every day (commodities) has also fallen. This is bad news as, though it means we need to spend less on this stuff or could afford more of it, it implies that the other people that we were moaning about buying all of it leaving none for us now don't want it anymore. Which is bad.
Inflation is dead. Despite whatever was said in the 70s and 80s we now really like inflation. So it not being around is bad.
Interest rates have fallen to practically zero. This is bad news as it means that no one wants to borrow money. We would apparently much rather borrow at 15% because this would mean that all is well with the world (which may explain why the Greeks can't see the problem!). But this is bad.
Particles have been found that are able to travel faster than the speed of light. This is very very bad news as it could prove that everything we believe to be true is false.
European and US politicians are too busy fighting their own agendas rather than grasping the nettle. This is very bad news indeed as it could prove that everything we believe to be true is true.
Gold is going down. When a religion dies things are very bad.
Thursday, September 22, 2011
TMM isn’t sure we’ve seen this ugly a start to the day in Asia since 2008 – or is that Pearl Harbor? Going into the Asian close we see the indices have really taken a spectacular turn for the worst in Asia for a whole host of reasons.
1) Talk of Chinese Regulators Tightening Shadow Lending: Chinese developers kicked off the swan dive with talk of regulators pushing companies to report dealings with Greentown China Holdings which is one of the sketchier China property developer credits out there. While it doesn’t have much high yield out TMM gets to about a 1350 odd spread on their CBs. IG it ain’t. The implication of this is that China is getting concerned about either shadow / trust lending (more tightening) or thinks that some developers are close to failing (real estate market terminal). TMM don’t like the credit or the equity in this space and do not see an easy solution here: either China loosens or a lot of these companies will have big problems. It does not help that SOE developers are rapidly cutting prices on apartments to raise cash in the interim. TMM have learnt that in a crisis, just because your model says something in cheap does not make it cheap if the drivers or the derating are still very much in force. And on that point, we can’t see what could make any of that improve barring a pretty massive Chinese stimulus or a move towards more price driven credit controls (higher rates) since we’re getting to the outer limits of what the real estate sector can take from a credit point of view. Now TMM would like to point out means that when we are at the outer limits of credit the equity may be worth zero. And don’t get TMM started on the solar sector where senior secured offshore high yield for LDK solar now trades with a forty-something bid at some dealers. Suffice to say, for a number of sectors in China its high noon at the OK Corral.
2) Momo Plays Crying For Momommy: Sometimes a picture says a thousand words and this one is a good summary of what happened to 3 big popular themes: rare earth metals (Lynas), “the cloud” (Netflix) and EM macro (Indonesian Stock Exchange). As can be seen, there is nothing so utterly unsafe as a position that is heavily owned. Anyone who says that this isn’t hedge fund deleveraging needs their heads examined.
3) Further Pain in EM FX: TMM aren’t sure whether to include AUD in this but frankly AUD is looking more and more EM in how it trades. Hard to see daylight here until we go a week or two without a global growth downgrade.
4) No news from the EZ that is even vaguely useful, aside from a few platitudes from our dear friend Jurgen. Otherwise known as a "Jurgenought"
Which leads to the question, what Is TMM thinking? Views vary somewhat but what we are seeing is pretty clear here: and equity buyers strike until policy issues get resolved. Some of these are easier (China loosening) and some of them are much harder (dealing with eurostriches). In the interim, we
can’t see much of any way that risk on trades can recover without some kind of a circuit breaker here. In the meantime, we are hoping that this screen gets the attention of regulators and governments - time is running out, and with US short term paper downgrades we are perilously close to a major breakdown in US money markets.
Wednesday, September 21, 2011
The Asian contagion deleveraging trade rolls on. We've seen more selloff in FX (though less violent) and a widening of local FX bonds' spread to treasuries. To date it appears to be the worst in the most liquid and crowded macro trades with Korea taking the brunt and Indo/Phils relatively tame thus far. Per everyone's NEER model for Sing Dollar and the like, this could still go some way and TMM aren't stepping in front of it all just yet - when Indo cash gets moving it really moves.
Europe continues to try and flog its copies of the "Big Issue" around the world. Brazil has chucked in a sympathy $10bil which in Euro spending terms wouldn't even buy a cup of tea. The Japanese are offering to buy some more EFSF, but, however, not sovereign debt. Much like "Look, I'll give you it for a sandwich, as long as you promise not to spend it on booze". Sure guv'nor.. 'course I won't. Meanwhile, the French banks burn.
But today it feels as though the market is trying to take a break from the stream of Euro-headline watching and is using FOMC as the excuse. That suits TMM just fine and gives us a moment to consider an outstanding issue. Last week we asked for suggestions to be added to the Glossary of TMMIsms. As with all competition announcements, there will be tears. Tears of joy, tears of disappointment and tears of boredom. After a week of fierce debate the panel has decided that the following, chosen from a very strong field, will be added to the TMM glossary to be found top right of this page.
Honorary mention first goes to "EUROs" offered by "the Original"
EUROs - Convergence Unravelling, Non Taxpaying Spivs.
Now whilst this is a beautifully crafted expression it is pretty hard to use without causing too much confusion and, as this is a family-friendly blog, we will save it for the HBO/Cinemax Film release of "Macro (mother****er) Man" starring Samuel L. Jackson and Al Pacino.
But the winners are-
MBA - Mindlessly Bullish Analyst. To be used in the hushed tones of Test Match Special, "Oooh that's a ripper from the MBAs at Banca Indebta".
This entry struck a cord and appears to fit Asian analysts particularly well. Education and blinkered bullishness is a dangerous combination.
RORO - Risk On Risk Off.
So obvious we wonder if it hasn't been used elsewhere already, but so apt in these current "RORO" markets. Lovely play against the "Roll On, Roll Off" original term which is exactly what this new RORO reflects.
MTMB - Mark to Make Believe. An accounting technique perfected by French and other European banks during the sovereign debt crisis, which ignores conservative accounting principles and practices market pricing by a range of obfuscation including "hold to maturity" accounts, secret internal valuation models, conveniently excluding Greek government bond holdings maturing later than 2020 from the hallucinogenic 21% haircut because they are excluded from the PSI etc.
A well-crafted description of a function we all know far too well.
BOLIVIAN - Balls Out Long, Infinite Var, It's A No-brainer. As in "We are going Bolivian, can't lose."
A much, much better description of a trade that has us SEWCPS (so excited, we can't pee straight). We anticipate this entry getting a lot of use in future posts, though not always in a complimentary manner.
PISN - Price is News.
Now here we want to be a little devious and ask the creator (Corey) if we may shorten it to PIN. In doing so we can open up a subclass of TMMisms, such as "PINball" - Price is News, having a ball; "Hear a PIN Drop" - suspect an oncoming fall that is self-fulfilling on price panic; "PIN Money" - money made on a no-news move (large hedge fund manipulating stuff, perhaps). And if only a small amount is made perhaps it could be called a PINnickle?
And finally to the overall winner. In TMM's eyes this encapsulates form, functionality and craziness in a way that still makes them chortle - The link provided sealed it.
Vengabus - A trade/idea that has everyone jumping on board and becomes immensely popular, but is destined to return to the obscurity from whence it came leaving everyone scratching their head as to how, being so terrible, it ever got the amount of traction it did in the first place. As in, is the driver of the Euro Vengabus falling asleep at the wheel? The GGUF Vengabus seems to have gone into reverse gear.
The idea of a Vengabus led TMM to ask themselves what Venga actually is. We suggest that "Venga" is "an asset value's sensitivity to something no one was talking about 3 months ago". This could lead it to become a tradable value in its own right. We anticipate the likes of "where are you seeing the Venga on that basis swap?" or "see how the Venga has changed on copper to China off balance sheet financing? Think it's probably peaked now that Ambrose Evans-Pritchard is talking about it" being heard across dealing rooms of the future.
Congratulations to the winners in meph (twice), bcordischi, Corey and to the Anon, whose winning entry surely means he or she should step forward to accept the glory. However we hope it doesn't lead to a Spartacus moment .. Who is Anon? I'm Anon .. no, I'M Anon.. no I'M Anon.
Tuesday, September 20, 2011
TMM have been chatting amongst themselves this morning having convened feeling non too happy for various individual reasons. Normally, the mood waves tend to cancel out, but today a set of troughs have interfered to create a rogue wave of grumpiness. To try and understand what has caused this we thought we'd get on the TMM therapist couch and answer ourselves some questions from the red tape recorder behind the "in case of emotional crisis break glass" glass.
So here we go...
In HAL voice:
"Can you hear me TMM...?"
"Yes, we can hear you."
"How is your P/L TMM?"
"Its a P , but it should be bigger."
"Why do you feel like that TMM?"
"Well look at what's going on in the world, there is so much of what we've always believed would happen happening yet we are fighting so many twists and turns in the shorter term that fading short term news and emotion just adds to our own."
"So are you telling me, TMM, that the space-time reference frame is interfering with your P/L?"
"Err... Yes, we suppose so."
"Well why cant you just put on a long term trade and walk away?"
"Because of the pressure to have stuff on."
"Just when the world is busy talking 'stuff off'?"
"Yes. Look at Asia. That is a 'stuff off' story that is so obvious that its obviousness had become clouded in unobviousness."
"What do you mean?"
"Well, the Emerging Market FX complex has seen a massive unwind of leverage yet the underlying local paper hasn't really budged. We would just sell that normally."
"Well, why haven't you TMM?"
"Because EVERYONE expects it to fall as it's so obvious and so must have front run it and yet it still hasn't fallen and so if it hasn't then the front runners will have to cover and and and..."
"I can see you are confused TMM, just relax..."
"Just think clearly now. DO you KNOW that the world has front run a sell in underlying Asia?"
"Well, we haven't got figures, but if the CTA's are all over it then EVERYONE must know about it!"
"OK... well, let's leave that and come back to it later. Is there anything else troubling you?"
"Ahhhh yes... this is very common."
"You mean we're not alone in having that dream of being chased down a dark alley only to come out of the other end into blazing sunshine, but it isn't sunshine it's a nuclear flash and it's coming from the old home we lived in as kids? Oh... and there's this big whale and helicopter in it too somehow?"
"No, that's completely normal. It represents the current turmoil of indecision by the Eurocrats, but the growing positive newsflow pointing towards a cobbled together solution that, though eagerly anticipated, turns out to be a complete disaster destroying all the stability that you have known through your life. Oh, and that whale is a reference to Fat Tail risk that you are trying to hide from, but can't. And that helicopter... was Trichet wearing a beard at the controls?"
"Yes he was! Ah right, well at least understanding it makes me feel better."
"Yes, so your long DAX belief and faith that the Europeans will come up with a solution are being challenged by your concerns of the fat tail risk of europe collapsing in a Yugoslavian style cataclysm."
"OH I seeeee."
"And are you at one with yourselves over the US?"
"Well no not really, we're all twisted up over that too."
"Do you think you need a twist operation?"
"We think probably not and it's priced in anyway. But whereas QE3 proper has been off the table given inflation expectations, things might be changing in some respects."
"Have you asked why you feel that way?"
"Well one of our metrics for the Fed to expand its balance sheet is inflation expectations, and in particular the 5y5y forward breakeven. And the Fed's version of that is close to the 2.5% level. And in 2009 and 2010, when we moved below it we got QE1 and then QE2."
"Hmm I see. You are in quite a state arent you? Why don't you take some time off and give yourself time to reflect?"
"Time off?!?! Are you mad?! Do you know whats happening in this industry?! If you so much as blink you'll be packaged up and HR'd off to spend more time with your family. Love 'em as we do we cant afford that!"
"Ahh... Yes.. Depressing isn't it?"
"Yes it is. What should we do?"
"HMMMMMmmmmm... Well as I see it, you are struggling with the problem that the usual narrative for a really bad year has worked out thus far: (i) sell the rubbish (Eurobanks, China property, finance and cyclicals everywhere), (ii) sell the liquid hedges and try to scare the carry monkeys (AUD, ZAR, Itraxx crossover), and (iii) start dumping core conviction positions ($Asia, US tech), but on (iii) we seem to have taken a pause. You see, for (iii) to really, really make sense you need to have a full blown systemic crisis and funding squeeze and per a previous post there will be no funding squeeze."
"Err yes... That about sums it up."
"So... feel any better?"
"Well, I really wouldn't worry... There's a lot of it about"
"Can you give us something for it?"
Monday, September 19, 2011
The Pirate Party in Germany got 9% of the vote in the Berlin elections.
- Why are they called the Pirate Party?.......
- Because they "Aarrgh!".
TMM never thought they'd get the chance to use one of their favourite jokes topically though in this case "because they'll force the Greeks to walk the plank" may be as apt an answer.
Now other brewing things.
First, Adoboli and UBS's now $2.3bn rogue trading loss. The latest news on this front is that Adoboli traded equity index futures and "hedged" these positions with forward-starting ETF trades, in a manner remarkably similar to Jerome Kerviel. However, UBS, unlike Societe Generale, did not pick up the fact that in some cases, the false trades did not appear to have counterparties (Kerviel, in such cases, allegedly said they were mistakes and then booked a different trade). The FT reported over the weekend that these trades dated back to October 2008. TMM are astounded that Adoboli was able to run such a record of false trading in such a similar manner, despite the events of January 2008. UBS's risk controls are clearly even worse than TMM thought on Friday.
TMM noted the similarities between Leeson, Kerviel and Adoboli's starting in the Back Office and then moving to the trading floor, and thus their expertise in the risk management and settlement systems allowed them cover their tracks for long periods of time. But the similarities don't just end there. It is generally very difficult to hide trades that require settlement in the next couple of days, or exchange margining, especially in the aftermath of Leeson's famous 88888 "error" account. However, Leeson's losses were not all in the error account. There was also a fictitious trade for 7.78bn Yen, where Leeson "sold" some options to generate the appearance of cash in an account, but this was an OTC trade. Kerviel also worked on the Delta One desk, trading equity swaps, ETFs and so forth, with OTC hedges against equity indices. And now, Adoboli is alleged to have done the same.
TMM reckon that there is now sufficient evidence that the risk controls with relation to OTC trades is woefully lacking, partially because of the underinvestment in systems over the past 20years (that TMM witnessed firsthand at several of the banks they have worked at in the past). Often ill-fitting trade templates have made booking non-standard trades into systems difficult and in some cases impossible (TMM remember a trade being booked in Microsoft Outlook at one of their previous employers), but this is a different issue entirely, as the Adoboli trades were pretty vanilla. What astounds TMM is that the back office did not pick up the fact that these trades would not have been confirmed with the alleged counterparties. Clearly, by the time these have been picked up, both in the SocGen case and the UBS case, it was too late and weeks/months after the trades had been booked.
But it's not just the actual confirmation with counterparties that can be the problem here. In the absence of clearly marked exchange prices, OTC trades are usually valued using internal models taking market inputs from broker pages etc. One of the more bizarre instances of rogue trading TMM have heard of was an internal trade between an options market maker and another trader on a different desk. After a few weeks of both traders posting a profit on said trade (marking against their own curves/surfaces), the middle office was eventually alerted but it turned out there was a lot more exposure from the guy mismarking the book with the rest of the Street. Of course, the problem here was having adequate internal marks, but the products themselves were not particularly sophisticated. TMM struggle with the need for these products to be OTC in the first place (given their simplicity makes them easily Exchange-mutable), other than to add margins to the banking cartel, but given that they have been involved in several rogue-trading losses now, it seems obvious to us that regulators need to apply more pressure upon banks to move these products on-exchange. That way, under-resourced back offices would be able to concentrate on the exotic trades, thus reducing the risk of rogue trading more broadly. As John Hempton says, there will always be criminals, but you can minimise the risk of such actions generating large losses and, to TMM, migrating vanilla derivatives on-exchange seems like a pretty sensible solution here.
And now, onto Europe. Schaueble & Weidmann's comments with respect to leveraging the EFSF have sparked rumours that Timmy G has lost his job running Europe for being too direct and suggesting the obvious. Very Un-European. Geithner last spotted trying desperately hard to steer the Eurostriches in the direction of the finishing line.
The usual imminent Greek default rumours have been spreading this morning, with tomorrow's EUR 769m coupon payment a point of focus, but TMM reckon it is a bit more subtle than that. Evidently, the Troika are becoming less enamoured with the Bubbles, and the view that Greece has to be cut loose is gaining more traction in policy circles. The problem, as Merkel stated last week, is that there is no current way to shield everyone else from the consequences. Much like demolition engineers trying to figure out where to stash the charges in order to avoid the building falling on top of those around it. TMM find it encouraging that the Eurocrats at least understand this (unlike the Paulson Treasury's belief that the fall-out from the Lehman default would not be large). That means that while the sabre rattling appears confrontational, like the Greeks being asked to walk the plank, that there is a good deal of double-bluffing going on here. We would need to see the rest of the PIGS backstopped to a degree that markets would not immediately attack Italy, Eurozone banks recapitalised to the extent that they could cover the theoretical losses of Italy defaulting, and capital controls imposed to prevent domestic bank runs.
The Greeks, for their part, have realised they have lost the upper hand that they had as recently as July. Still running a primary deficit of something like 3% (see chart below), the domestic consequences of a unilateral default in terms of a "sudden stop" would be significant. And TMM find it interesting that Venizelos spent time talking about the need for a primary surplus to shield the country, as well as reiterating Greece's need to reform and consolidate, as well as the cabinet meetings aimed at producing more fiscal measures in order to meet the deficit targets necessary to receive the next loan tranche. TMM reckon (though this could be their famous last words!) that the Greeks are unable to take the drastic unilateral default step without running a primary surplus, which TMM reckon should happen sometime next year.
Of course, not running a primary surplus is not a complete barrier to unilateral default. As many have pointed out, governments can only continue austerity as long as the population will allow it. With no elections until 2013, there is some political cover, and while there have been riots and protests, these have not been to the degree that they threaten implementation. Such moments come when riots become "serious" rioting, i.e. - a lot of people die or the armed forces get involved. Think Arab Spring. We are not there yet, but there is certainly plenty of potential for the situation to develop to that point.
But for now, TMM are sitting on their long US equities, but are worried about the actions the Eurostriches may have on their DAX position. Meanwhile, we note Asian Air Traffic Control has given landing permission to a large Pink Flamingo.
Friday, September 16, 2011
Having spumed out all their funding ire yesterday, Team Macro Man are resting back exhausted. It is time for reflection. So what have we learnt this week?
- Funding disasteristas have had their guns spiked by CB actions, or rather - offer of actions (you know TMM's thoughts on the funding story from yesterday's post).
- TMM are surprised that so many people who should know better don't (on many issues).
- SNB have survived the first week of eur/chf 1.2000 defence despite a crucifiction of everything Euro earlier in the week and a market adamant that it will fail. Looks solid.
- UBS didn't and doesn't. There is a really good reason why you don't promote people from back or middle office to front office: they know the systems well enough to cover their tracks. Better the norm where very few front office people have a clue what happens to a trade once they press "done". Leeson, Kerviel and Adoboli all had this in common. Note to management - if you want to hire a back or middle office guy to do a front office job, hire them from a different bank.
- When traders are in the office past 10pm, something is a foot. Risk managers should have an alert for when traders fail to "beep" out of the office.
- Judging by TMM's inbox Nigerian scammer jokes are easily transposed to Ghanaian scammer jokes.
- TMM are still scratching their heads as to how he managed $2bio, or is this the biggest kitchen sinking ever?
- All European politicians should be fired.
- Timmy G is running european policy.
- Lagarde has bigger balls than the tow hitch on a redneck's pick up.
- Be sceptical when punters declare Asia/NOK/SEK the "new safe haven".
- MXN may be cheap, but some folks seem determined, to TMM chagrin, to make it cheaper.
- Materials inventories are piling up in China and Chinese cement co's are trading really poorly (which makes TMM happy).
- In non-political land Global IP was actually not too bad in August.
- Ringfencing bad european debt would have to involve seas and oceans.
- Banks are to become village post offices.
- Village post offices are to be closed.
- Old fashioned Merchant Banking will respawn with TMM looking forward to names and addresses such as "Wimble, Womble and Phlewwin, Old Dribble Lane, The City" returning to fashion.
- leverage is for pivots.
TMM are now settling back to watch the second half of Greece vs Germany...
Thursday, September 15, 2011
But first, what a difference a phone call makes.
- Germany and France put in a "catch up" to their pal Papa in Greece and tell the world that they told him that they are right behind him.
- The Letch makes a "tell it like it is" call that mentions Mangler and is overheard.
- A UBS trader makes a couple of calls which result in a final one to his imminently ex-boss involving the words "HOW MUCH?????" being screamed a lot.
To which the market is replying:
- "Oh good, that's all sorted then. Can I now buy Greek debt yielding over 100%?".
- "Ooohh... he's a one isn't he!".
- "Jeez, that's not good. I'd better shut down my risk just in case I haven't dotted an 'i'."
But TMM is thinking:
- Is that Timmy G's voice in the background? This should be enough to divert the attention of the attack dogs long enough to focus on other market things. Isn't Aussie looking sick!
- Its always been hard to prove that Berlusconi has lied.
- We wish we were forensic auditors, demand is about to go through the roof again. Oh gawd, we are going to have Vince Cable on every media outlet crowing his 'told-you-so-evil-bankers-turn-them-all-into-village-post-offices-staffed-by-sweet-old-ladies' mantra. Also, rogue trader announcements have uncannily marked market turns (Leeson and Kerviel).
There has, however, been one phone call made that makes no difference at all:
"Hello Mr Osborne. This is Dr King. Mervynflation and our expectations thereof are running like Usain Bolt on speed, but as policy bias appears to be moving from monetary to fiscal, it's not my problem and I suggest you raise taxes".
Now then, on to something that has been sticking in the craw of TMM for some time and has them jumping up and down in frustration every time a headline on European funding is waved in front of them as example of "the massive US$ funding crisis that European banks are suffering". The sheer frenzy that journos and punters whip themselves into reminds them of this scene.
TMM reply "there isn't a funding crisis - there are more dollars floating around than you can imagine" and here we put our case as to why and try to debunk some of the recent hysteria over "funding" headlines, messages, emails and cut n pastes from the "Hero Zedgers" that appear to confuse simple issues. We want to clear a few things up.
Forgive us for starting with old material, but for completeness, in the early days of the crisis, as USD funding markets shut down, leveraged institutions in Europe and elsewhere were forced to use the FX Forward market to borrow Dollars in significant size, driving the Cross-Currency Basis sharply negative. In the case of EURUSD, this basis is the difference between exchanging a stream of US 3m Libor coupons and a stream of EUR 3m Euribor coupons, and is quoted as the number of basis points deducted from the 3m Euribor stream. If 3m Libor and 3m Euribor were both riskless and there were no relative liquidity preference for USD over EUR, then this difference would be ZERO and the FX Forward would be priced as the difference between the two deposit rates. However, that is the world of textbooks, academics and arbitrage, something TMM have rarely found to be useful in their careers. But we digress, the point here is that the more negative the basis moves, the more people are willing to pay for USD through the FX Forward market.
Since 2008/9, cross-currency based funding has reduced significantly as banks and hedge funds de-levered their balance sheets, and the advent of QE led to the explosion of the Fed's balance sheet and a sharp increase in the excess reserves of foreign banks' US subsidiaries accounts with the Fed. This means that cheap and abundant USD funding has been available to those large international banks lucky enough to have an account with the Fed, but smaller ( and usually peripheral European banks) in need, have usually had to utilise the FX Forward market to borrow dollars.
With the European situation deteriorating, the 3m Cross-Currency Basis (see chart below) has once again moved sharply negative, but in contrast to 2007-8, TMM's mates in the forward market report more USDs than pieces of Lego in the overnight and tom/next markets, while term prices are moving largely on the back of broad-based risk aversion. This is an important point - early on in the crisis, FX Forward and basis markets were a leading indicator of trouble precisely for the reason that such large funding exposures had been built up in the 5years prior. This just isn't the case anymore. By early-2009, the large part of bank cross-border funding exposures had been unwound as European banks sold EUR/USD in order to pay down the losses on those US assets. And, as above, central banks have provided significant amounts of liquidity and liquidity back stops in the form of FX Swap lines - simply put, the amounts traded in this market just aren't that large anymore, because generally, banks do not need to tap it for USDs.
Yesterday, TMM's IBs lit up in excitement at the ECB's USD Auction Allotment showing that two banks had borrowed the princely sum of $575m from the ECB. The below chart of the facility's usage should put this into perspective. Today's ECB marginal lending facility showed a jump to EUR 3.4bn borrowed, from the usual few hundred million a day. More excitement. I don't think anyone would be particularly surprised that a few peripheral banks might be having a tiny(!) bit of problem funding, and were forced to go to the ECB facility to pay 2.25%. But let's be realistic- versus assets earning yields of 5% or more, this is hardly going to force them to go bust. But that is a different point entirely. TMM's main point here, is that this number often bobs up and down because of technical factors such as:
- A missed payment from a counterparty for a number of reasons ranging from human error to IT systems issues.
- Someone not accessing the ECB's MRO in enough size and thus being forced to pay up for funds.
- Someone getting their funding calculations wrong (TMM have seen it happen first hand) and it being too late to rectify by the time they realised this.
- An unexpected late day payment.
This stuff just happens, it is not unusual. Of course, were the amount to move rapidly higher then it would certainly signal something more serious, but as of now, TMM are unconvinced.
Next, while historical data for European CP issuance in the US is sketchy, due to the primary nature of the market, as a proxy, the below chart shows 30day Natixis Commercial Paper, which should be a reasonable approximation to the rates that European banks are paying directly on CP in the US. It has certainly moved higher over the past two months, but as a reality check, 0.45% for one month unsecured money is hardly a sign of severe funding stress.
As a comparison, the below table shows the current implied US $ funding rates from the FX Forward Market vs the ECB $ Auction and the above direct US $ CP issue assuming different rates of Euro funding - unsecured (Euribor), EUR Repo market, EONIA, the ECB's 7 day MRO, the LCB's LTROs and the ECB's main refinancing rate. The ECB $ Auction works out to be about 1.1% (1week US OIS +100bps), but in reality is a bit more expensive than that due to the need to post collateral for the 12% haircut. The point below is that generally, market Dollar funding costs are just not high enough for banks to need to tap the Fed/ECB swap lines, with only the 3m Euribor-based rate being really higher than the ECB auction rate.
Graphically, looking at the 1M implied funding rates, it's not really obvious that these are particularly extraordinary, and only at the kind of levels seen last December. The Orange line shows the rate implied from Euribor, the yellow line implied from the ECB's LTRO, the whte line implied from Eonia, the green line implied from Euro repo and the pink line the Natixis US CP rate. The chart makes clear the distinction between unsecured borrowing in Europe and swapping it (orange), and accessing the ECB's LTRO and swapping it (yellow) and the secured repo-based borrowing (green) and the better-quality banks that are still able to access the Eonia market (white line) and US market direct (white line). As we have hit the level at which it is becoming attractive to access the ECB's US $ Auction facility, TMM would not be surprised to see the allotment here move higher should current market rates prevail, but would not read anything into it other than the fact that it may well be cheaper to tap than the market itself...
A slightly longer term chart:
Unless the allotment spiked dramatically into tens of billions of Dollars TMM does not think there really is a Dollar funding crisis in Europe.
Wednesday, September 14, 2011
Tuesday, September 13, 2011
Today is the fifth birthday of this Blog. Macro Man couldn’t have picked a more torrid 5 years and perhaps one day a lump of magnetic material will be dug up from a bog, analysed and found to contain the financial equivalent of the iridium that pointed to an explanation for the death of the dinosaurs. The Macro Man diaries could be pawed over by academics of the future to then be held up in business schools, philosophy, psychology and history classes as proof of how NOT to run an economy, financial institution, monetary system, political system, society or world.
Or, more likely, held up as an example of how in the past people had nothing better to do with their lives than invest man-years developing complex technologies so that they could waste more man-years filling them with complete rubbish, (if they don’t find Facebook and Twitter first).
In the past five years we have spectacularly seen the western hegemony go from boom to bust. The complexities of economic theory proved, E=MC2 like, to be nothing more complex than a meld of "live within your means" and "if someone else is willing to do your job for less, you are screwed", leaving us at this very moment unemployed with the debt collector at the door.
Today's story is once again that the debt will be paid off by a massive infusion of money from China, the type O universal money donor to all the type AB universal money recipients of Europe.
"Nothing changed there over the last 5 years."
Meanwhile the second wave banking crisis appears to have come to fruition. The mighty French banks that appeared unscathed by the 2007/8 sub-prime mortgage disaster are currently suffering from their own sub-prime sovereign disaster. To the point that the vigilantes are marking BNP's market cap at EUR29bio... This, for a company that has 50bil of tier one capital, made E7.8bio profit last year, had assets last year of 3.1 trillion and most importantly, is the pride of a government proved to be interventionist in the protection of its national treasures and whose demise would make Lehman Brothers look like a Buckingham Palace tea party, TMM think that it has all gone too far and refer you to Andy Haldane’s superb speech. Especially the part:
“Asset prices are guesses about the future. Faced with uncertainty about the future, market participants form these guesses using their own heuristics. One such heuristic is the “popular narrative” – a simple story that aims to make sense of reality. Risk on/risk off is precisely such a popular narrative. The effect of popular narratives is to increase psychological contagion in financial markets. Simple stories generate market mood swings. The greater the uncertainty, the more compelling the simple story and the greater the amplitude of these mood swings...
...All of these behavioural elements have come together in today’s financial markets – disaster myopia, intrinsic uncertainty and deep trauma. This may help explain why risk-takers have their foot poised on both brake and accelerator, why risk capital is in stop-start mode. That implies a risk of heavy and persistent financial congestion in the period ahead. With hindsight, Roosevelt’s fear (of fear) in 1933 was well-founded,
economically and psychologically. It may also be being repeated."
Roughly paraphrased as "MAN UP!".
This is particularly apt today where simple story 1, the “we are saved” FT story, has been replaced within a couple of hours by the “we are doomed” story written by a proven euro shock jock trying to whip up panic over BNP using the well known and innocuous ECB/FED swap lines.
TMM urge the market in true scouser style to please “CAAAAALM DOWN”. Which is really not their job as it should have been enforced by a stern hand and clip around the ear from the Eurocrats. But, like a ginger haired teacher in a Peckham Comprehensive school, they appear to have lost complete control of the class.
The rest of the world is steadily losing patience with the lack of European control too. The US’s Timmy G is being airlifted in to sit in on the EU finance ministers gathering in Poland on Friday which to TMM smacks of early 2010 when he taught the Eurostriches the one trick of STFU which worked so well throughout the summer of 2010. Unfortunately it is now completely inappropriate and is having the wrong effect. Now they urgently need to be taught how to speak again, but with one voice. So TMM are hoping that a new era of SWOV will be forthcoming.
That’s enough of the heavy stuff. Normally at school on your birthday you get a cake and are allowed to play games so to celebrate we would offer up the chance to expand TMM’s glossary of TMMisms and invite suggestions. The top 5 will be added. More if thought apt. We know this is pretty pathetic but as we don't have any TMM T-shirts, mugs or financial bailouts to hand out its the best we could come up with.
Monday, September 12, 2011
With the G7 having once again pulled off another spectacular impression of a wet sponge, the market is now feeling like Neville Chamberlain declaring "I have in my hand a piece of paper..."
But they are not as naive. So thanks G7, your commitment to solving a problem that unfortunately has time dependency attached to it has left today's markets looking like a work by Hieronymus Bosch.
Observe the French banks in the background of the work providing the back lighting for the rest of the scene as periphery debt holders jump from the cliff (top left) as the battle at the gates of Fortress Europe are fought. The rest of the symbolism is pretty obvious though TMM invite your own observations.
But through TMM's less medieval eyes we see the picture slightly differently and can sum it up as:
- Greece obviously wants to get away with doing as little as it can. Hence, fiscal slippage.
- Germans have foot on Greek neck, and whenever they loosen it, Greeks backslide.
- Germans push their foot down harder on Greece's neck, so Greeks come up with the goods.
- It doesn't make sense for Greece to default when it's running such a large primary deficit, so the Greeks acquiesce when pressure is applied.
- IMF/Germans send the cash.
But with the G7 sailing on by, it looks like the markets are going to be left alone to sort their own problems out rather than counting on any lifebelts being thrown in by the CBs or policy makers in the short term. TMM hope that the need for self help rather than spoon feeding will result in a little more introspection rather than the mad dash from bad headline to bad headline. This morning's news flow really hasn't been that bad as the Europeans do seem to be trying to show a little more unity than usual, and official expectations of the Troika outcome are being flagged as positive. TMM hope that it's worthy of Prokofiev's cheery "Troika" that they can't get out of their minds every time they hear the word. But for today we are back to "price" once again being the news...
Friday, September 09, 2011
We mentioned yesterday that the hopes of the world were resting upon the actions this week of the central banks and policy makers. A day later we have had the results in from the BOE, the ECB and Obama's job package with only the G7 to come.
ECB - TMM's take was that JCT spent the first 15 mins trawling through the usual numbers associated to CPI and other price stability measures to justify their "no move" stance. Meanwhile the market was starting to mumble "errr.. and? Does the guy really not get it?" The growing "does he not get it" then manifested itself in the more and more pointed questioning along the lines of "do you not get it?" to which he more and more violently expressed the view that it wasn't his job to "get it" as the only stupid piddling target he had been given to play with was "price stability" - Which TMM think he felt is like being told you are in charge of the cup holder in the Millennium Falcon as you take on the Empire's Deathstar. Mind you, he did put a very convincing case for what a wonderful job he had done with the cup holder and how he was amazed that no one had called him into the Federation's Galactic headquarters to give him a medal. Unfortunately TMM didn't quite see it that way and think his reading from the start of his forthcoming memoires has instead just highlighted the rift between the ECB and the politicians at a time when unity of response is needed. Lagarde, even this morning, is saying that monetary policy needs to be more accommodative but until they change the ECB's mandate TMM think it will probably take until December before the rear-view mirror of the ECB 12 yr old quants picks up enough historic data to trigger an inevitable rate cut. -1 Point.
BoE - Think they must have had McKinsey Consultants in to advise on their policy announcement having obviously been told just to photocopy the last one and send it out again. Nil Points
Obama - Better advised (probably by Simon Cowell) having already teed up the market for a $300bil plus from an earlier $250bil, he went for $447bn (why not $450bn?!). TMM didn't actually hear the announcement but would not have been surprised if it had been accompanied by the "sentimental rising success of underdog to winner" music, so overused in X-Factor style shows, after brief background interviews with his friends and family all saying how much he REALLY REALLY wants this to work, it's his dream, how it will change his life should he win and how he really hopes the Republicans will give him their votes. TMM think that him holding out the olive branch of $245bn of tax cuts mean the bulk of the stimulus should be enacted. Not the viewers' favourite, but having Simon Cowell behind him means through to the next round. +2 points.
The net effect of the above has been to make Eur/usd the litmus paper of Austerity vs Stimulus policies and it's now trading on a 1.38 handle.
As a quick aside on another function that TMM is being told to sell Eur/usd on - There has been plenty of muttering out there about a possible announcement of HIA2, a sort of super HIA where repatriated funds are conditional upon "good" investment. TMM however think the likelihood of such an announcement in the short term is neither likely nor advisable because all it does is encourage corporates to keep cash abroad for the future, on the expectation that there will be another future tax holiday with result being that corporation tax receipts fall structurally. Bad idea.
We now await G7 - Whereas the results of the other announcements appear to be parochial, the response to this one should be global. Interesting that we had the first glimmer of agenda with Geithner's piece yesterday in the FT. Not exactly earth shattering in its novelty but if they actually get any of this done then it will be seen as a seismic shift relieving some of the stresses in the plate tectonics of imbalances. TMM's reading of punters is that little is expected ."What can they do?", which means they start a point up. TMM would like to see something a little more punchy and wonder what the chances of the following happening are:
1) G7 propose global bank stress test administered by the IMF, and commit to forcibly recapitalise banks either directly (for those governments that can afford it) or via EFSF (for those that can't).
2) G7 and China state they are ready to support the Eurozone by explicit purchases of government debt from Exchange Stabilisation Funds.
3) G7 agree to extend the scope and attractiveness of central bank swap facilities and explicitly encourage their use by banks.
4) G7 reiterate commitment to "No More Lehmans".
5) G7 reintroduce bank liability guarantee schemes (e.g. TLGP).
6) G7 announce a new round of gold sales in order to recapitalise banks.
7) G7 central banks agree to purchase bank bonds
And finally, this has been out for a bit but considering the Lagarde comments and those she made at Jackson Hole and pre-G7, TMM wonder if this paper first pubished in March could form the basis for a new Marseille Accord creating a new system for Global Capital Markets and FX?
TMM have over the past year experienced first hand the absurdities of Greek economics and now hold up as exhibit A this latest piece of data.
"Data released by the Hellenic Statistical Authority (ELSTAT) suggested that Greece imported 1.5 million euros worth of olive oil -- once a staple of its agricultural production -- from Germany in 2010"
Thursday, September 08, 2011
Who would have thought that the ballooning of fear would be deflated by the sedentary Swiss. But that is certainly what appears to have happened with the hysteria levels much lower as our IB chatometers have returned from doom+ levels to a more balanced outlook with stories of hope tentatively being offered. So for now the equation is:
Global Terror + SNB + Hope(G7+HIA+ECB+UKQE) = Relief
Which suits TMM just fine.
TMM have, as you may have detected, been erring between tentative equity buyers in the style of "on the one hand" hedge me calls analysts, to outright "so excited we cant pee straight" buyers. Of course, the SEWCPS signal is usually a sure indicator of unreasoned stupidity, so we thought we d better have a closer look and see if it is justified.
And that brings TMM onto the DAX, which has taken a very large pummeling in recent weeks. Obviously, the imposition of short-sell bans in Europe, preventing the EuroStoxx future from being used as a hedging mechanism has played a large part in its under-performance as "hedgers" moved to short the DAX instead. TMM use the term "hedgers" loosely, as it seems to them that given the wild cheering on their IBs and email messages the past couple of weeks to the move lower in the DAX, that there are a great deal more players short the index than merely hedgers alone. Indeed, TMM's sales coverage has highlighted a lot of interest from macro hedge funds in being short, meaning that there are a significant number of "Tourist Traders" in that market. The trouble with this is that the DAX is a lot less liquid than the EuroStoxx. Now, TMM have learned very painfully in the past that when trying to get out of positions that are illiquid when everyone else is positioned the same way that the door isn't big enough and you get Pink Flamingo-ed.
Now, TMM admit, positioning is not a sufficient trigger for reversals, and neither are valuation-based arguments - which as many point out - are vulnerable to becoming value traps. But for completeness, TMM reckon it is worth considering what the downside in DAX could be. As with all models, the below (very) naive model for the YoY change in EPS for the DAX (based upon lagged ISM, IFO, CPI, PPI and Wage growth) is meant only to be illustrative from the macro level, rather than fully explain earnings growth or margins or any particular specifics. [Stats Geeks: the large tech-related write-downs in 2001-3 make it not particularly meaningful to look at YoY % EPS growth when modelling, but looking at the straight change in EPS growth should eliminate the root unit problem in the regression.]
The last model print in the chart assumes that IFO falls 4pts this month to 102 (which seems reasonable given the falls in the PMI etc), and the final three lines are rough forecasts of the underlying variables for a Mild Recession (e.g. 2001-3), a Mid-Cycle Slowdown (e.g. 2005) and a Global Financial Crisis-style Hard Landing (e.g. 2008/9).
Translating these into more meaningful %age changes and the implied Earnings yields under those scenarios, and making the exceptionally conservative assumption that the current DAX price discount ZERO fall in earnings (while it clearly does)then in a GFC-style crisis, this would imply earnings falling nearly 87%, leaving an earnings yield of around 1.4% (vs. Bund Yields at 1.89%). Now, TMM tend to think this model is perhaps too pessimistic, given that in 2008/9, earnings actually only actually fell about 60%, and that would leave the earnings yield sitting around 5.8%.
Either way, the point of this exercise is to demonstrate that the DAX already pricing in a pretty dire macroeconomic outcome. In fact, TMM reckon that it is hard to argue that the DAX does not already price in EPS falls of some degree, and thus the above numbers understate the actual Earnings Yields in such scenarios. And thus, it is pretty hard to argue that the DAX is anything but exceptionally cheap in this framework, with a forward P/E of just 7.3x.
Now lets look at the background. Interestingly news-flow has begun to improve, with the German Constitutional Court ruling and Italian fiscal packages voted through, the US economic data stabilising, a US Jobs Plan in the offing and the potential for a G7 policy response that is likely to target the recapitalisation of Europe's banking system (judging by recent leaks), all falling onto a market that has been up until recently been wrist slittingly suicidal. The technical picture is also supprtive of a run higher with dojis/island reversals in various equity markets and even a soothsayer signal in the DAx itself, we reckon that the conditions are in place for a more dramatic rally.
SO, are we still at SEWCPS levels? Yeah... why not...? Where's the fun in life if you can't jump around like a 9 year old at the sound of the ice cream van coming down the road*?
* TMM have a friend whose dad told them at a very early age about the tune the ice cream van plays: "Well they play it when they have run out of ice cream and have to go back to the yard". Masterful parenting.
Wednesday, September 07, 2011
A reading from the Book of Genesis, Chapter 7, Verses 1-24:
7:1 And the European said unto SNB , Come thou and all thy house into the ark; for thee have I seen righteous before me in this generation.
7:2 Of every clean currency thou shalt take to thee by sevens, the cash and the debt: and of currencies that are not clean by two, the cash and the debt.
7:3 Of foul peripheries also by sevens, the cash and the debt; to keep them alive upon the face of all the earth.
7:4 For yet seven days, and I will cause it to rain upon the speculator, forty days and forty nights; and any value in your currency that I have made will I destroy from off the face of the earth.
7:5 And SNB did according unto all that the European commanded him.
7:6 And SNB was two hundred billion short when the flood of CHF selling was upon the earth.
7:7 And SNB went in, and his sons, and his wife, and his sons' wives with him, into the ark, because of the flood.
7:8 Of clean currencies, and of currencies that are not clean, and of foul peripheries, and of all the debt that creepeth upon the earth,
7:9 There went in two's and ten's unto the SNB ark, the cash and the debt, as the European had commanded SNB
7:10 And it came to pass after seven days, that the flood of CHF were upon the earth.
7:11 At six hundred billion short, the SNB, in the second month, the seventeenth day of the month, the same day were all the rules of monetary policy broken up, and the taps of QE were opened.
7:12 And the rain of CHF was upon the earth forty days and forty nights.
7:13 In the selfsame day entered SNB, and Hildebrand , and Jordan, and Danthine, the sons of SNB , and SNB's wife BOJ, into the ark;
7:14 They, and every Central bank after his kind, and all the policy makers of their kind, and every creeping regulator that creepeth upon the earth after his kind, and every foul politician after his kind, every bid of every sort.
7:15 And they went in unto SNB into the ark, cash and debt and two of all the structures, wherein is the breath of life.
7:16 And they that went in, went in cash and debt of all ratings, as the European had commanded him: and the European shut him in.
7:17 And the flood of CHF was forty days upon the earth; and the levels increased, and bare up the Ark, and it was lift up above the earth.
7:18 And the flood of CHF prevailed, and were increased greatly upon the earth; and the Ark went upon the face of the world.
7:19 And the flood of CHF prevailed exceedingly upon the earth; and all the high debts, that were under the whole heaven, were covered.
7:20 Fifteen trillion upward did the CHF prevail; and the mountains were covered.
7:21 And all debt died that moved upon the earth, both the foul periphery, of Greece and Italy and Spain, and of every creeping crisis thing that creepeth upon the earth, and every speculator.
7:22 All in whose balance sheets was the leverage of shorts, of all that was in the deflationary land, died.
7:23 And every bearish substance was destroyed which was upon the face of the ground, both hedge funds, and day traders, and the creeping blog things, and the foul bears; and they were destroyed from the earth: and SNB only remained alive, and they that were with him in the ark.
7:24 And the CHF prevailed upon the earth a hundred and fifty days.