Friday, June 22, 2012

You've Lost that Europe Feeling

"You've lost that Europe Feeling" - About the self-righteous bastards.

You never follow through anymore with your promises.
And there's no hope for us, as you just keep taking the piss.  
You're trying hard not to show it, (baby).
But baby, baby we know it...

You've lost that Europe feeling,
'Cause everyone else is leaving
You've lost that Europe feeling,
Faith has gone...gone...gone...wooooooh.

Now there're no Eurobonds, no Eltro from the damned EU.  
Instead you're trying to, tax me on every trade I do!
It makes me just feel like crying, (baby).
'Cause baby, my losses are terrifying.

I've got that Euro feeling,
Whoa, that Euro feeling,
I've got  that Euro feeling,
And I'm  long ...and ...wrong ..woooooah

Baby, baby, I was cut down at the knees by you.

If you would only listen like you never do, yeah.

You had a dream ...a dream ...a dream that never worked anyway.

And you''''ve let it slip away.

Save me  (save me), save me (save me),
I beg of you please...please,
We need your gov (some bloody gov),
Some Governance (just Governance)!  
So bring it on back (and don't be slack), Or get the sack (should get  the sack).

Bring back that Euro feeling,
'Cause everyone else is leaving.
Bring back that Euro feeling,
'Cause it's gone...gone...gone,
and it can't go on,

Bring back that Euro  feeling,
As everyone else is leaving.
Bring back that Euro' feeling,
'Cause it's gone...gone...


TMM are once again travelling next week so will be back in July, if July hasn't been cancelled, taxed, morally decried or closed due to austerity cuts by our illustrious leaders.

Thursday, June 21, 2012

Four Events and No Funeral

The FOMC - Twist but no QE has not had the effect that we felt many were expecting. Running into the event it felt as though many were thinking that the QE3 trade had been fully priced in over the previous 48 hours and that anything other than a liquidity barf would result in general equity selling together with UST and USD buying and all sorts of commodity linked selling. Well the Big B is still playing a cunning game as Mr Market asks "Is that a Bazooka in your pocket, or are you just glad to see me?"  Holding off and revising down growth and labour forecasts has effectively just rolled down market expectations to next month, yet given the FED some optionality. Ammo for the Twist is running low with probably only room to maintain the current 45Bln per month for the remainder of the year would leave them bereft of 0/3yr to sell. So for now why not play the waiting game as our parents said to us at Christmas, the waiting and expectation is as important as the present itself.

G-20 yesterday. Much press coverage and the multitude of comments are along the lines of "damp squib", but "The Daily Mash" take was probably the best. But to TMM the propensity of Eurocentric comments combined with a hints of intent that are naturally against German policy, sweetened with the obvious concession to Mangler of the "No softening for Greece" clause, actually leaves us less despondent than we normally are after a bout of G20 consensusness. The interesting flow of headlines today has our noses twitching,

*SCHAEUBLE SAYS EFSF CAN BUY IN SECONDARY MARKET &USE LEVERAGING  - Now whilst this is nothing new, Wolfie talking about it now is interesting.  




Greek Elections -  Whowuddathoughtiit! A government! But we are all well aware that Greek government is modelled on unstable large atomic isotopes and no doubt will soon spit out a few neutrons and split in an explosive fission event. But for the time being we are back with a body willing to lie commit to ongoing austerity programs to the EU whilst doing their best to wriggle out of them. Basically Greek issues should be back burnered for now.

Spanish auctions - Done and dusted. Not cancelled as some were suggesting at the beginning of the week and though the debate on sustainability of prices paid will rattle on surely for the NOW it is another risk behind us. Suddenly Spanish bonds look bid and there is a squeeze on leveraged positions as the locals are back in buying. Spain to the Back burner for now? Well lets get the stress tests results out of the way tonight, but we think it will be hard to shock a market that at the beginning of the week was running for the bunkers.

Where does that leave us? Well TMM are pretty happy as their Monday short term trades of long Spain short Bunds has bolstered the reserves. Considering the reasons we put this on, how far it has moved and the original short term nature we are taking profit on that one.

But if something is afoot post G20 and the news flow does see an increase in stories of policy response, then the chances of Euro blowing up diminish and the chances of a snap relief rally increase. Lack of policy response and coordinated action has been our biggest concern recently. So this is where we look towards the biggest toilet that everyone has been flushing their Euros down - Eur/chf.

If you don't want Euro then exchanging them at an artificially held price for CHF seems like a free way of getting optionality for a euro blow up. And indeed we were on that trade, but with a few key events behind us we have now lifted it. We are now even mulling the other side and wondering what exactly would happen if everyone else started to do the same. The World may be on the offer at the moment but that doesn't mean it has to be forever. A lift in mood as policy response becomes a bit more tangible, a drying up of eur/chf selling, SNB stop buying, SNB stop recycling  and their offer in eur/haven goes results in Euro gets another lift. And when if EURCHF does start to move there are an awful lot of positions short. Does the SNB come in and sell eur/chf straight away? Doubt it very much. So that leaves us with a payoff of (whilst the peg holds) of a couple of points downside against quite a lot of upside with a marginal bit of carry to boot. Of course the risk is it blows up but over the next 2 weeks we see the news flow getting better rather than worse (that was Monday). So that leaves us with a "flat to down a couple of tics" vs the chance of a decent "didn't expect that" spike up.

And finally. If the Euro is a sell vs chf on the ultimate blow up trade, then wouldn't you expect Xau/Eur to be rallying too and not going falling knife?

Wednesday, June 20, 2012

Consensual Failure.

TMM have woken up this morning pondering the uselessness of politicians and wondering how we have got to a stage where paralysis of policy response has reached an almost global level. We are at the point where we are once again wondering if politicians themselves are the problem or if there is a problem with the system in which they have evolved, or even whether the two are inextricably linked in one super-problem.

If the current seizure in the machine of response was a one-off then perhaps we could let it go, but it does appear to be becoming a global disease. TMM have touched upon this concern in previous posts, having worried that China may be catching the European disease of indecision (Sinostriches),  but it is worth listing some current examples

US - Last year's debt ceiling debate exposed the cracks in the efficiency of the US system to near breaking point. We doubt if it will be long before the same issue occurs again.

Europe - Apparent paralysis in response to a problem that the rest of the world can see yet, judging by Barroso's response at the G20 on Monday, the Euro politicians do not recognise, let alone take responsibility for, let alone think they need a solution for and let alone offer one for. UKIP Farage's speech last week in the Euro-parliament was worryingly symbolic. Not in what Farage had to say but the response of the Eurocrats around him. Their mockery betrayed a belief that there is no problem.

UK - Coalition hell. The lack of ability to implement strident policy due to consensus politics is somewhat hidden as the UK is muddling through at the moment. Like the US it is being hugely helped by capital inflows caused by European ineptitude. TMM like to think that the very low UK and US borrowing costs are not the product of either masterful economic management nor, as we are beginning to hear from some Eurostriches, some master plan of Western/Anglo political manipulation to stitch up Europe, in order to maintain global currency dominance, but they are just a result of competitive political stupidity, with the US and UK winning by being marginally less stupid than the Europeans.

Greece - The home of democracy where the current state of Greek politics makes the Monty Python's "Life of Brian'" political revolutionary parties look organised. Of course you can argue that there is bound to be paralysis when there is no solution,  but the petty bickering between parties point to self-serving political priorities over those of the country as a whole.

The feeling that the present system is failing is picking up steam. Of course there is rarely a demand for change when the populace is vaguely contented, no matter how useless the ruling body -  it's when things go wrong that the mettle of the rulers is tested. Until a couple of years ago the Euro-project had been an easy run, but  complacent growth (funded by sovereign profligate spending, funded by profligate lending) together with a self-regulated administrative budget has created a "Jabba the Hutt" of a European Parliament. Bloated, self important, dictatorial, living in a luxury created at the expense of its subjects only to succumb when confronted by a "Hans Solo" of a problem that they thought was dead. They are completely useless in time of crisis.

So knowing that we cannot rely on European Central Command to make a decision in this time of stress, we look to the European states themselves to unite and provide strong leadership, combined with an ability to make difficult decisions, despite populist concerns. Worryingly, policy appears to be set by consensus rather than coalition due to a misunderstanding that "consensus politics" are the same as "coalition politics". They are not. During World War II the UK ran a coalition government, however decisions were delegated to individuals who were given absolute power in their fields. Trying to run a war on consensus is impossible, yet Greece and Greater Europe are both trying to make some very difficult decisions by consensus, rather than by strong coalition. Not surprisingly they are failing miserably, leaving TMM wondering where the strong group leadership is going to come from.

While we ponder the path of Pan-European rulership as current consensus democracy is failing, we are seeing Arab nations fighting hard to move towards consensus democracy, having shed oppresive dictatorships. TMM do wonder if they will succeed, as we are beginning to surmise a tendency for the success of a democracy to be inversely proportional to the diversity of the beliefs, behaviours, interests, cultures and religions of its populace (Egypt is in danger of bypassing its newly found democracy, remaining in military control). In other words, the more balanced and numerous the make up of subgroups, the less likely consensus politics will succeed. Which is, we suppose, why the oldest "democracies" sort of cheat by becoming two or three party systems where democracy is partially obscured by an oligopoly of power sharing. Before you ask  -"Then how come Greek democracy isn't working as it is culturally homogenous? - TMM suggest that Greece is actually made up of 12 million different interests!

None of this bodes well for Europe where each state's interest is given equal weighting creating an artificial multi-party system all with the same vote weight, thus making it even harder to reach agreement. This instability of indecision perhaps even increases the chances of a breakdown back into multiple stable units of common interests, in other words reverting  back to local country driven politics, where the number of disparate interests is reduced. Just as we are seeing?

The dread is, to paraphrase Aristotle, "extremism abhors a power vacuum", and this leads to a swift transition to oppressive dictatorship which is sold initially as being benign. But these rarely stay as such unless particularly wealthy (eg Saudi, Brunei, and even a certain Asian city state). Many point out that it wasn't that long ago that Europe had its own dictators and even now we are hearing the odd casual remark about the chances of coups and a return of  the military juntas, 1970s style. TMM really do not see this happening, though the thought of a NATO takeover of the European Parliament does amuse us.

As it is we are left hoping that Europe swiftly moves from consensus policy to a coalition, with strong delegated responsibility, as the hope of the European Parliament ever being able to make a useful decision seems as remote as the chances of a Greek taking personal responsibility.

Monday, June 18, 2012

Monday Map Reading.

Despite our cynical look at the Euro-statement in last night's post, we are more optimistic than we were a week ago and apparently more so than nearly everyone we speak to. Our original plan on how to play Greece rested upon the Greek vote becoming a referendum on Euro membership, which it rapidly became. As everyone is pointing out, this result is no immediate fix to a country which is still reliant on EU aid, but the result does mean that the likelihood of that aid being severed is a great deal less. So that is good news. TMM are well aware that the Syrizapaths are still lurking in background and despite their change of rhetoric during the election campaign as they realised it WAS becoming a Euro debate and they had no hope at all if they stood on a general anti euro platform, they are still perfectly capable of dropping large clunky spanners in the machine of coalition government. But TMM think that Greece will still be in the Euro at the end of the summer and that time has indeed been bought so positional unwind associated with the Greek play can continue. Meanwhile the monocular of the markets can move back to other woes - Spain and friends.

With Spanish 10yr back above 7%, market reaction appears to be following a self re-enforcing map of last Monday when supposedly good news price rallies unwound within hours. Which is exactly what everyone is telling us to do today "Sell the rally". Well, at time of writing, the rally has been sold and last Monday's price map is being waived as evidence to maintain similar expectations. TMM though are looking to buy this dip instead. Of course it would have been nice to see the Europeans follow up this Greek result with support in Spain and Italian markets, whether by SMP, new announcements or ANYTHING to chase confidence higher, rather than leave it faltering. Even if Germany was seen to be handing out conciliatory offerings to the Greek people in gratitude for "doing the right thing". But nothing so far, in fact just the opposite - **GERMAN GOVT SPOKESMAN SAYS NOW IS NOT TIME FOR GIVING DISCOUNTS TO GREECE. But we should know better as one thing we have learned is that European policy is based on reaction rather than pro-action.  

Should we expect G20 to offer something more tangible?  No. G20 has rarely offered anything tangible so other than agreeing on the reinforcement of liquidity safety nets and behind closed doors threats to European representatives, TMM don't think it is possible for them to disappoint us more than we can already imagine. We really don't think we are alone in our lack of expectations so in fact the surprise bias from G20 should be to the upside.

So what do we trade? Well part of our background belief is that we are in a "bonds to equities" phase change which has been stymied by the current crisis. If the spring is released then the next big calamity is going to be in G7 bonds (read any of the current safe haven big bond markets - USTs, Gilts, Bunds) which may well be lead by the periphery safe havens (read the likes of Aussie and Swedish bonds). Even if this weeks FOMC gives QE III, (real or suggested)  - in this case we see equities taking the lion's share of the gains over bonds.

So let's start with beating up the Bund some more. The short term longs we put on in euro related risk last Tuesday we are willing to morph into medium term, and we are going to add some really unstable fuel to our portfolios - buying Spanish 10yr as the "Monday map" and renewed rumours of Spain having to cancel this week's auctions pushes yields over 7% again. However we will wait until the US has opened and played out their dose of rally selling.

Must dash - We are off to pay the remaining balance on our Greek summer holiday.

Sunday, June 17, 2012

Euro Statement on Greece Translated

Today the Euro Zone Finance Ministers issued a statement on Greece. Team Macro Man offer a translation.

"The Eurogroup takes note of the provisional results of the Greek elections on 17th June, which should allow for the formation of a government that will carry the support of the electorate to bring Greece back on a path of sustainable growth."

We hope that the result so far means that Tsipras will get back in his box and we can get back to enforcing our plan on Greece.

"The Eurogroup acknowledges the considerable efforts already made by the Greek citizens and is convinced that continued fiscal and structural reforms are Greece’s best guarantee to overcome the current economic and social challenges and for a more prosperous future of Greece in the euro area."

Tell them something about doing very well so far, blah, blah. Better thank Joe Papapublic for "doing the right thing" but we ain't swaying. It's our plan, not their's and if they want to stay in the Euro they'd better understand that. Ungrateful ^*£%ers .

"The Eurogroup reiterates its commitment to assist Greece in its adjustment effort in order to address the many challenges the economy is facing."

Stop struggling, we are stronger than you. You WILL take your medicine, even if our assistance isn't what you hope for, but is just us holding you down whilst we pour more austerity down your throats.

The Eurogroup therefore looks forward to the swift formation of a new Greek government that will take ownership of the adjustment programme to which Greece and the Eurogroup earlier this year committed themselves.

And once a new euro-puppet government is in place it will get back to doing our bidding.

The Eurogroup expects the Troika institutions to return to Athens as soon as a new government is in place to exchange views with the new government on the way forward and prepare the first review under the second adjustment programme.

Our special forces advisors will be back in Athens to tidy up, taking names and reminding our dear Greek brothers of exactly what we expect of them. And yes, we expect a few of them may just "trip on the stairs" Ahhmm.

Right phrase that lot in some Euro-waffle and with any luck we may even get through the summer without being disturbed on the beach, but phew that one was close. Now where's my expense sheet? How many hours do you reckon we can claim for that statement? Oh yes, Sunday too, double time at least. Hey what are you still doing here.. Switch that damned tape off.. [Click]

Wednesday, June 13, 2012

Team Macro Man reads the newspaper (again)

With apologies to Professor John Allen Paulos's lovely "A Mathematician reads the newspaper" , which TMM think is compulsory reading for all Daily Mail readers, we have been watching headlines glide past and as is usual with these short sound-bites have been guessing what they might really mean. We let you choose.


a) Oooh, that's nice! Now why didn't we realise it's that easy.
b) Ok, so he has some compromising photos of Mangler and Weidmann enjoying some form of Greek hospitality?
c) Tsipras? Is that the one with the cucumber and mint? Or the chick pea one?
d) Tsipras is a financial Assad - smooth suit, looks sane but is a financial psycho-nutter


a) Well not a great surprise and typical of any institution wanting to diversify risk and pick up some yield
d) Forget it, no matter what the BUBA do AUD is still toast.


a) The "get me out of all Europe", including the bund, trade?
b) The "Oh Germany are being sucked in to bail out others so therefore the Bund is not going to be as pure as the driven snow due to possible dilution effects - Sell" trade?
c) A general unwind of the periphery spread trade, or a start of it?
d) Bill Gross talking down bunds, as he looks for an opportunity to scoop them up on the cheap
e) A knock on effect from the Scandies imposing a moratorium so they don't need to buy cart loads of bunds at zip% just to keep the regulator happy, as Euro-refugees led by the SNB drive yields through the floor

SNB - Well there are constant comments about their EURCHF floor

a) SNB have become the Voldermort (see Glossary) of Europe
b) Europe will beg SNB to buy periphery debt
c) Scandinavians will beg the SNB NOT to buy their debt
d) US will accuse the Swiss of currency manipulation and impose sanctions

UKIP leader Nigel Farage's gives his speech in the European Parliament.

a) Hmm, a well balanced argument, even if I pretend he is a joke for intellectual reasons
b) He is the Messiah of Europe! Why do those corpulent Euro-morons around him mock?
c) Phnarf... Zis little man knows nothing about our master plan as he is not part of it, one day he will see the error of his ways
d) What? What do you mean we have no master plan?

From the sports pages - A lovely line doing the rounds in the City today -
GREECE: UNCONFIRMED reports that after losing to Czech Rep yesterday, Greece have applied to borrow 3 points from UEFA.

And finally we had another headline asking us to help out the Roche company "Children's Walk". Whilst it is a good cause, we really think that someone in Roche's corporate communications department might have pointed out that the picture on their page is just plain WRONG! [16th june update - we see that thanks to one of our readers tweeting this to Roche, they have actually changed the picture used!]

TMM are away travelling for the rest of the week so unfortunately will not be back til post Tsiprageddon.

Tuesday, June 12, 2012

European Duct Tape

 Yesterday the markets reminded TMM of the English climate. Eight months of winter followed by 4 months of shit weather became the markets  4 hours of relief followed by 8 hours of shit trading, which has left all around us commenting a conviction of "That is it, the rally has failed so the only path is downwards". So does TMM agree with this? TMM doesn't like agreeing with masses once the mass gets over the Pareto figure of 80%. Applying Pareto further we might suggest that 80% of the bearishness is coming from 20% of the news. Which is fairly easy really when the amount of visible news is probably only 20% of what is really going on. Hence all this micro-analysis of non-statements from Europe.

Yesterday TMM tried to apply a "could" ratio to news headlines and  use it as a bearish indicator (counting the ratio of "could", "perhaps" and "maybe" against the "wills", "haves" and "agreeds"). On that basis yesterday must have hit a new nadir of mood as surmises failed to pin down what exactly a promissory 100bln of Spanish bank support actually entails. Indeed TMM agree, it's not clear, it appears ill thought out and it does look like another sticking plaster applied to a flimsy framework. But the Eurocrats do have a habit of creating elastoplast art that is bordering on the structural. But can it be successful? The assumption is no, but we are reminded of that myth-busters episode where they manage to make a fully serviceable floating boat purely out of duct tape.

Perhaps we should not dismiss out of hand the efficacy of this version of European policy. It may just work.

But back to today. We have had little time to get deep but we do smell a bounce after consensus towel chucking yesterday combined with the positional information, the "Price is News" action focusing on Spanish 10 year, the risk of shock of a good headline vs bad and basically our guts. With the long term still a lottery over the Greek elections, TMM are going to play counter sentiment extremism, go short term and pile into some short term risk longs to hopefully supplement some pained portfolios. If there is one thing we have learned, it's that getting the position on before things move is lot more profitable than spending 3 days analysing it, missing it then back fitting facts to explain history to justify why you were right but yet unprofitable. We leave that to the strategists.  


Wednesday, June 06, 2012

Holiday wishes

What a week to have booked as holiday all those months ago when tagging 3 days on the end of double bank holidays looked so easy. Having tamed the TMM positions and taken them off to the kennels for a week we are determined not to have the UK jubilee week upset by thinking about the markets. So despite all the ECB noise (ok we had a peek through the curtains) and despite the British summer monsoon TMM are doing their best to enjoy their week off and will not be roused from their traditional UK holiday.

With that we return to our rain covered window gazing, jigsaw puzzles, novels, sudoku's, magazines, old dvds, takeaway fish and chips and NO research.

Back on Monday... maybe.

Friday, June 01, 2012

Telefonica: Where are Activist Hedge Funds When You Need Them?

TMM were looking at the Ibex again and the slotting thereof and wondering – just where does this end? Looking at its components we see the following.

33.5% consists of banks which are part of the sovereign/financial system #REF loop that has been covered extensively elsewhere. 10.7% is Inditex, which judging from what the Mrs Macros have to say is not having any problems anytime soon and trades as such. Then, there is Repsol which has been receiving the gaucho grill, a bunch of utilities and Telefonica. As Telefonica is by no means small we thought we’d discuss it in detail.

Telefonica is big telco that derives its income from a great many places – not least of all Latin America. As you can see below it is primarily a Latin American business and by all means should be able to get by in a deflationary domestic episode pretty well given that the Spanish business consists of a moribund fixed line business and a mobile business which is growing, but not growing anything like Latin America.

So why does Telefonica’s equity and its longer dated USD bond performance look like this?

The way to look at Telefonica in TMM’s opinion is to break it up into its various business and look how it is funded. Firstly, lets look at the Spanish business in light of the serious risk of having hard currency debt (Euros) and the risk of having to move back to a local currency at what TMM estimate would be a 15-20% devaluation. Surely this is unprecedented, right?

For those with a sense of history there have been Telcos that have lived through massive devaluations and there is no better example than Telecom Argentina. As can be seen below a 70% devaluation and an 80% drop in operating income in hard currency terms tends to lead to bad stuff – like bond defaults.

Bondholders did ok even here though as you can read here. Recoveries were 85-90c which is pretty remarkable and the equity was largely OK as can be seen below. In Telefonica’s case, bondholders would likely go for the equity so the emerging market equity wrangle probably doesn’t work here. Nonetheless, this is a lot of asset recovery for a 70% devaluation, so why is Telefonica looking so distressed when it would face, at worst, a 20% devaluation?

TMM think they have the answer and as per usual it’s in the cash flow statement. Telefonica is the first company they have seen that thinks it’s a good idea to increase leverage in a financial crisis which is, you know, kind of odd if not crazy. Note the amount of cash being ripped out of this company by creditors and equity holders per year. It is not small. 100% of cash from operations plus cash from financing is being pulled and there appears to be a large shift in the lender base.

With regards to which creditors are stepping in and stepping out Telefonica looks like it is the usual story in Europe – bank balance sheets out (revolvers, term loans) retail and real money investors in (bonds and notes). No surprises there.

What is surprising are the dividends which keep increasing per share as can be seen below, along with the buyback – who owns this company anyway and thinks it’s a good idea to lever up in the teeth of a crisis?

These guys. When you are a cash cow and your lenders are distressed and also your biggest shareholders, you are going to be under pressure to pay out a lot of dividends to them, pay back a lot of loans to them and try and issue a lot of bonds to other people.

The problem of course is that this strategy is the quintessence of short term greed. BBVA and Caixa may need that money yesterday but it is not in the interest of the other 89% of Telefonica’s shareholders to pay out 7.5bn of dividends, equal to a third of OIBDA when credit markets are saying “no mas”. Not least of all when Telefonica looks cheap – really cheap – compared to regional peers and its listed Brazilian subsidiary looks the same since everyone expects them to sell of more of the crown jewels to keep a couple of banks afloat for a few months more.

TMM took a pivot table of Telefonica’s debt to work out what needs to be done here. It is shown below:

Telco’s tend to fund themselves in local currency where they can to avoid a mismatch of funding and income, though in Telefonica’s case there is a lot more Euro borrowing at the Spanish holding company than would be justified by OIBDA in Spain. At present there are about 14bn of bank borrowings in Euro which TMM presume sit mostly with their Spanish lenders / shareholders. TMM think this has got to go and be replaced by funding matched to income, likely in BRL. Note that this is a large sum, some 16bn but it is only two years of dividends and buyback, both of which could be suspended immediately if management worked for anyone but a couple of Spanish banks. TMM think that if Telefonica paid these down, replaced some Euro borrowings with BRL and left about 14bn of EUR bond and note debt on ~4bn of Europe it would be hard to argue that Telefonica has a problematic balance sheet or one with major exposures to a currency union breakup.

But in the interim, TMM see headlines like this about them selling off their German unit and think this is mad and bad and it is high time someone did something about it.

In the interests of disclosure - yes, TMM do own some of this stuff! Finally we apologise for the blurriness of some of those screen shots. At the moment that's the best we can do.

nemo incognito