Monday, March 12, 2012
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.