Monday, March 12, 2012

Cigars: Smoked and Layed

TMM feel like the guy in the above clip this morning as everything seems to have gone wrong for them. Their desired correction in equities came and went, but was of such minimal magnitude that they missed the opportunity to get long again. Then, having stupidly ignored one of their key trading rules of only buying hedges from garden centres, they have found their portfolios effectively performing as "short risky assets". Oh cock.

But that is not all. TMM also got the Greek CDS trigger wrong. It seems the little darlings at ISDA have managed to salvage the almost ex-parrot that is the Developed Market Sovereign CDS... at least for the time being. So TMM must offer a mea culpa for their evidently pre-emptive and cocky call that the when it seemed likely that a "voluntary" PSI would avoid triggering Greek CDS, thereby consigning these turds to the dustbin of failed financial innovation. But TMM are going to follow that old market adage: when in trouble, double. The reason we are going to do this, is that it seems reasonably clear that the only reason Greek CDS triggered was that Collective Action Clauses were required to get the participation in the bond exchange up from mid-80s to the final 95%-ish number. And the need for that was that Greece's debt burden (and success at achieving primary surplus) was so astronomically large and poor that there was no alternative from a policymaker standpoint.

And this is kind of key, going forward. Because the burdens faced by the other "potential" candidates for PSI (e.g. - Portugal/Ireland) do not have anything like the level of debt relief needed by Greece. Given that Greece managed to get 80-something percent "voluntary" participation in an exchange representing close to a 75% NPV reduction, TMM would view the probability of Portugal getting a similar participation in a 50% NPV reduction as very high. And that would obviate the need for a CAC-trigger on Portugese Bonds.

So TMM reckon that the doubts have now irrevocably been sowed in DM Sovereign CDS... if policymakers can possibly get away without triggering them, they will. The "Voluntary PSI" template is clearly the way that Europe approaches the problem. Which means that DM Sovereign CDS is now an implicit bet on the probability that debt levels approach the point that NPV reductions of the order 65-75% are needed on private sector holdings with near-universal participation. Which looks a lot more to TMM like a binary option on peripheral debt struck at about 35c on the Euro. That is not exactly a "hedge" for Portuguese bond holdings, and TMM reckon that it will become increasingly difficult for the Basel committee to offer capital relief on such packages.

So we are left wondering whether to chase our tails and pile back in OR (and this is where we know we should be more disciplined) just give it a wee touch longer and only pile in when old highs break. TMM remember only too well chasing a market flat out only for this to happen:


The trouble is, that any investment decision at this time is implicitly a bet on Quarter End. And window dressing can be a powerful force leading to either powerful trend extension or abrupt reversal. And TMM have so far not found a particularly consistent model for which of these it will be. But they would proffer the view that the least likely outcome is a sideways drift into the end of the month.

So TMM sit (as their mate Right Field would say) as disappointed bulls hoping that prices dip, providing them a re-entry point. The trouble is, the way markets are trading... slow drifts off, followed by abrupt stop-loss driven moves higher suggests that the weak side is the top side. Leaving TMM left behind... and wishing they could smoke Hamlet cigars in the office.

20 comments:

Anonymous said...

the key difference being neglected here is that most of Greek bonds are under greek law which was a key contributor to the result, teh market accepted 75% NPV reduction in an act of desperation...because going to court in Greece is useles..

Portuguese bonds were issued under British law in size. So the market will be less reluctant to accept the same kind of NPV.

The way all of this affects CDS pricing for periphery just makes the whole mkt segment there hard to value and subject to unpredictable political decisions.

Anonymous said...

Don't quite follow your point on CDS. Voluntary? As voluntary as appearing before the Spanish inquisition as one banker remarked. ISDA has become irrelevant in deciding whether a default has been triggered. It will be the courts and in the courts. Lawyers of CDS buyers will be all over these contracts to ensure their client buyers get what they asked for - their money back and no blarney. And if they cannot ensure, then use the paper for the toilet. Banker legerdemain can only go so far. This farce is going to run longer than the Mousetrap. This is just the first night.

Amplitudeinthehouse said...

Partial to your price analysis that has occurred of late.This one thinks this weeks movement may prove to be the big decider, can you say deer in headlights?

Going back to my post related to the flip-side notion in macro land,I kinda think my NFP call was a stretch(stuck in hell 0-150,000) The bulls maybe thinking I'm uploading stuff just to disrespect them by shoving such intolerable graphics in the face, it's being corrected from this moment to AVG 2012 150,000...sounds kinda good don't ya think?

ps...that horse came cheap, just a packet hamlets!

abee crombie said...

we will get a real pull back at some point, its just whether its 10% higher than where we are now or or a lot less... really hard to say

I am gutted as well. Technicals really looked great last week for at least a 2 day sell off.

Anonymous said...

C says'
many of these markets that appear to have been grinding tend to end with expanding top swings which frankly unless you have mastered a Mr Whippy Course are unplayable.
My preferred course of action take the money and step aside to avoid being chewed up.

Anonymous said...

C says'
One of thise little things that appears to have slipped under the radar was this ; H.R. 4105

What if anything do we make of this given it's historical Albatross status.

abee crombie said...

btw you can always play brazilian rates / inflation curve if you are looking for some action

Steve said...

Any thoughts on the Fed? This WSJ article on sterilization last week was, uhm, rather well timed, coming immediately after a 3.5% sell-off in Europe. That's what seemed to derail the correction party.

Secret--Sauce said...

I too was pleasantly surprised by ISDA reversing itself. It seems that only corporate default can be deemed not to be a credit event (when needed), at least for now. I think the future of DM CDS will have a lot to do with Basel/other regulation and how risk/CVA desks behave.

Still, the retroactive implementation of CAC, or even the threat thereof, should be a wake-up call for investors. Then again, the Chrysler debacle should have led to massive repricing in fixed-income land - it didn't. And now it looks like seniority of 1st and 2nd liens will be abrogated in the latest US bank bailout. A yes, good old safe, stodgy bonds.

If I had more tin in my sombrero, I might be inclined to see an effort to push investor towards risk . . .

Leftback said...

With oil and US gasoline prices where they are, it's hard to see how the Fed could reasonably decide to once again line the pockets of commodity speculators at the expense of the rest of the population.

Bugs and Peak Oilers might want to don their hard hats today, b/c Bernanke does not exist for the sole purpose of enriching you. The US economy is indeed much weaker than most think, but this is definitely not the meeting to announce anything that would juice energy prices.

In lower and middle income US communities, gas prices are already eating into the family budget. The Fed will wait until the signs of slowing are a lot more obvious and they have some extra breathing room in energy prices.

Expect "no immediate need for intervention" today, although language about "possible additional asset purchases in the future" likely to remain.

Leftback said...

I believe there is no May meeting, so that means April would be the meeting to announce a modest program of asset purchases, like Twist 2.0, for example.

No candy today.

Steve said...

No candy???? We MUST have candy.

Leftback said...

Big Figureitis, TMM?

NAZ 3000
DAX 7000
Dow 13000
Nikkei 10000
Shanghai 2600
Gold 1700
Crude oil 110

How about them apples?

Leftback said...

TMM, a suggestion for a post title:

It's frothy, man....
http://www.youtube.com/watch?v=WdnUo1q2E90

It's really getting a bit silly out there.

Polemic said...

I dunno LB . The ship has left port and it may not be the Titanic and it may be a while before it's back. I remember 1999 but this is could be only 1996.

Leftback said...

LB is inclined to believe that normal market dynamics are suspended when one enters the rabbit hole of QE/ZIRP. So every screaming rally is self-limiting, b/c of the need to keep interest rates from swallowing banks, homeowners and shopping malls whole.....

But while it is screaming higher, the rational analysis bit is extremely difficult to hold on to. Recency Bias is King. But we have been here before, it's deja vu all over again, just as recently as last April, and the same commercials from Interactive Brokers are on TV, flogging the same idea of buying high dividend stocks at the top, on margin b/c central banks are printing more and more money. The inflation bogeyman will be trotted out very soon and then the pundits with no eyes and no soul will come on TV spouting the rhetoric about being priced out for ever.

At some point, US data will show that demand, retail sales and employment were brought forward by the mild weather. At some point after that, someone will turn around and say "Look, Portugal have been very very Naughty Indeed". Spain will close their eyes and pretend they are not in the room. Soon after, there will be a Flash Crash, and some mid-size brokerage will take a long walk off a short pier.

The media will be Shocked, Shocked to find out that a respectable brokerage has been co-mingling customer money with the firm's trading account and it has been vaporized after unexpected margin calls.......

Dee Dee Humberside said...

It's not only the mild weather LB. The amount of US fiscal retrenchment baked in the cake for late 12 and 13 will start to show up in businesses/consumers decision-making (or lack thereof).

It's very difficult to remain cool headed given the melt up, but this remains a (admittedly fatter and fatter) range: chasing here makes as much sense to this humble reader as selling DAX short did back in October.

Steve said...

Here here. Painful to be missing it though.

China? No other markets care?

JGBs?

Gold, and Dennis Gartman's margin clerks?

Mortgage spreads are so tight the rise up in bonds will have to feed in nearly 1:1.

Frustrating because for us bears it's all theory, no evidence of the least bit of stress. Claims are obscenely low.

Steve said...

And how about that LB, no candy AND a 2% rally.

CV said...

Agree with LB's observations ... macro data in the US can only disappoint from here. Could a bad payroll number be enough to stop this rally?

On the other hand, was that a break up in US govvy yields I just saw there. TMV, TBT anyone. Could be a juicy move. Yields have a lot of catching up to do and unless the Fed wants to invert the yield curve through Twist and Shout the curve itself may shift up?

Am I being mad?

Claus