Catharsis or beginning?

Much of Monday's price action resembled a climactic denouement, at least until the last couple of hours of the US session.  The subsequent recovery left Spooz with a dragonfly doji, which would normally signal a further bounce in the days ahead.   That being said, at the time of writing they've slid back down another 85 bps.


There are so many interesting talking points that it's probably easier just to cover them via quick-hit bullets:

* Further to yesterday's posting on the FANG/GDX spread, it's interesting to note what William Blake might have called its "frightful symmetry".   Just prior to last August's significant episode of risk aversion kicked off by a Chinese currency devaluation, the FANG/GDX index as calculated by Macro Man rose from 166 to 265 (59%) in just 19 trading days.   More recently, during a bout of risk aversion apparently kicked off by a devaluation of the Chinese equity market, that index has fallen from 272 to 173 (37%) in just 14 trading days.  If you're a believer in price symmetry, then things should start to slow down from here.  (That being said, GDX ripped through the 17 level mentioned a couple of days ago and looks set to build on its gains in absolute terms.)


*  While European banks may bounce given the speed and severity of their decline, you'd have to say that barring a policy shift it looks like such a rebound will be short lived.   People selling SX7E constituents at these levels generally aren't selling because they want to, but rather because either they're scared or they have to.  Meanwhile, if you had any doubts that Eurostoxx dividend swaps are just Eurozone bank stocks in a prom dress, recent price action should have put them to bed.   Just like bank stocks, divvy swaps look very cheap relative to "intrinsic value" on the face of it....but just like European bank stocks (cough, DB, cough) in environments like this there are serious concerns about the ability to pay out.  At these levels divvys are very likely a good long term bet....but one that only works if you have deep pockets and don't really give a hoot about daily P/L swings.


*  USD/JPY continues to thumb its nose at Kuroda-san and the BOJ's cack-handed attempt to put a jolt into the market.   Well, they did put a jolt into the market, in a way....insofar as they plugged in a toaster and chucked it into the water while Japanese banks and yen shorts were having a bath.  USD/JPY has sliced through support like a Ginsu knife and now looks very ominous indeed.  It's currently below the neckline of the last 15 months; the last stand between here and oblivion is the 100 week moving average just below 115 and the bottom of the cloud of the weekly Ichimoku chart.   If you were fortunate to sell some above 120 last week, prudence probably dictates taking something off here; if the support pictured below gives way, however, get ready to sell more...and expect plenty of company.


* If there were any debate that the market was trading off of pain rather than fundamentals at the moment, a quick perusal of the year-to-date currency movers wills set you aright.  It's not often that you find the HUF and the JPY in such close proximity among the top performers, given that one is a traditional safe haven and the other....isn't.    Consider also the disparity between the BRL (9th best performer) and the MXN (2nd worst, and the actual worst amongst currencies more valuable by weight than single-ply bog roll.)  That oil move's really been a bitch, hasn't it?   Sure, if you're the RUB, less so if you're the NOK or the MYR.


 * Perhaps the most interesting news of the day was the rumoured debt restructuring of Chesapeake Energy, long the poster child for over-levered oil wildcatting MLPs.   When Macro Man looked at the chart today, he was struck by the similarity to that of another over-levered firm emblematic of a failing industry.   The difference, of course, was that the bankruptcy of Lehman Brothers was the latest in a string of banking and financial failures, while CHK is just the first of the levered oil plays to go to the wall.

Ultimately, this is what markets will need to absorb.   Yesterday felt like a catharsis, and in the very short run perhaps it will be.   But Lehman's failure led to another six months of volatility and market-changing structural shifts before things finally reached as bottom.   Chesapeake certainly isn't a Lehman, and it's not even a Bear Stearns; a page has been turned, but it seems much more likely to mark the end of the beginning rather than the beginning of the end.

Housekeeping note:   Macro Man has gotten sufficiently tired of trolls and uncivil sniping that he will henceforth exercise his right to summarily delete any comment deemed to violate his policy.   This policy simply asks readers to debate markets or his commentary in good faith and with good humour, and that it is at the sole discretion of the author to determine what fits the bill and what doesn't.   Macro Man would prefer not to go to a required registration system, but will do so if given no other choice.
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Anonymous
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February 9, 2016 at 3:32 AM ×

Maybe central banks should consider buying equities


(this has been a test of the new comment moderation policy)

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Nico G
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February 9, 2016 at 3:34 AM ×

just covered USDJPY short

105 is still long term target but it doesnt hurt to take some heat off the plate

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thegreyman
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February 9, 2016 at 4:12 AM ×

$243B in market cap wiped out in the morning session

Topix -5%

http://imgur.com/9c4BLMf

Dollar/Yen at 114.95

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EschewObfuscation
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February 9, 2016 at 4:16 AM ×

OK the 3:32 anon was me. Ha ha ha.

But seriously...

I have seen commentary, around here and elsewhere, that the first major energy bankruptcy (CHK/BTU/etc.) will mark the beginning of the end or the end of the beginning or whatever for the carnage in the energy sector. But I am trying to understand the rationale. Is there a causal relationship, or even a correlation, between bankruptcy and the shuttering of operations aka. capacity reduction?

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NoE
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February 9, 2016 at 4:32 AM ×

Good post here on why its the beginning of the end...for oil anyway.

http://markdow.tumblr.com/post/138943096780/today-it-begins

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Noob
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February 9, 2016 at 4:53 AM ×

Vix not showing big panic still and we are below aug lows. What will it take for big panic ?

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EschewObfuscation
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February 9, 2016 at 5:22 AM ×

@NoE --

Thanks. That is certainly food for thought.

I am not sure I buy it, though. If delaying production is such a great idea, shouldn't a company be able to roll its short-term debt into longer-term debt? Or just pay near-term obligations by issuing equity?

Dow's claims sound vaguely like a violation of Modigliani-Miller. (Full disclosure: I have no idea what I just said. I just thought it sounded cool.)

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Leftback
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February 9, 2016 at 5:30 AM ×

Noob, Around 1800 there is a support level of little significance. Below that there is only a void, down to the 2007 top.
So below 1800, and below Usdjpy 114. That's where the big panic starts, if it happens.

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February 9, 2016 at 7:19 AM ×

The Qe trade when over wiĺl have the desks looking for another case to harp about..but before it goes it wishes to have one last parting note in the inbox for you traders " say goodbye to the Qe cases..this is the baddest cases you'll ever see..you need cases like me to talk about and trade, So ..say goodnight to the cases"

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Eddie
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February 9, 2016 at 8:28 AM ×

I am still trying to get my head around what would happen if for example CHK goes bust. Let's face it, they made money over the last couple of years by buying and selling land (and maybe some historical maps and stamps) but not by drilling and pumping. So probably their business model was never really viable.

Now let them go under. The equity is wiped out, senior bonds become the new equity, maybe some acreage is sold and then what? The new owner has a very low cost base, so it would make sense to produce some oil and gas and sell it, even at current (low) prices. On the other hand, there is no need to do so since the pressure to pay interest on your bonds is gone. But shutting down a well is expensive, so unless prices drop much more it probably makes sense to keep on pumping...

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CV
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February 9, 2016 at 9:34 AM ×

Not surprised one bit that CHK is the first victim. Suprised it didn't happen before to be honest! I think more skeletons will rattle out of this closet before it is over. Of course, these energy turds do have assets of some kind, so vultures will be buzzing.

I am to some extent fully on board with losing faith in CBs meme, but while I think equities are tracing out some measure of rationality here. After all, PG is up 4% ytd, while AMZN is down 27%. Seems perfectly sensible to me really.

Now bonds! Don't get me started on bonds. It seems to be that CBs retain an almost crazy stronghold of these things. They are an accident waiting to happen.

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Booger
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February 9, 2016 at 9:36 AM ×

Eddie: I don't see bankruptcy as reducing supply for commodities in the short term.
Most of the shale plays will go BK at current oil prices but that will make them more competitive. Once the debt load is wiped out their marginal costs should be much less.

In iron ore, the mid tier players like FMG will go BK, then they will be able to take on RIO and BHP in terms of cost basis. suspect only at much lower prices will supply be cut, when everyone is hurting a lot including the big players, who currently are not hurting at all and still ramping production. In oil, replace RIO/BHP/Vale with Saudi Arabia/Iran/Russia.

The higher cost players going BK is only the first step. The next is the recapitalized higher cost producers emerging out of BK with lower costs taking on the volume producers. Then output cuts at much lower prices. But this all takes time. We are still at the end of the first innings I suspect. In the offshore drilling space, only Hero has gone BK as such and the shoe has not even dropped yet for Seadrill etc. So I still see it as very early in the game.

Oil peaked in 1980 in the last commodity supercycle and did not bottom until 1998. The current cycle will be different, but if it did follow the last one then oil would have peaked in 2008 and would bottom in 2026. Now that would be a something current commodity bulls would find difficult to stomach.

MM: great new layout, did you know that your new look graphs and site has been quoted by other sites ? You're famous !

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noob
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February 9, 2016 at 10:03 AM ×

"MM: great new layout, did you know that your new look graphs and site has been quoted by other sites ? You're famous !"

That explains the flood of anon trolls then... I preferred it when this place was smaller lol

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Anonymous
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February 9, 2016 at 10:08 AM ×

Without wishing to be a pedant, Chesapeake is an upstream E&P, not an MLP.

Other people are correct in identifying that these some of these assets are economic at these price levels. The best thing that could happen (in the long-term) is that these assets fall into the hands of cash-rich entities, unencumbered by debt.

This is where the Saudis have made their mistake. In an ideal world (for them), they would have squeezed these companies as zombies but it looks as if firesales are coming - that will take a while but it will cement the US as the swing producer.

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abee crombie
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February 9, 2016 at 10:09 AM ×

While US supply certainly is a problem for US Henry hub gas it's less so for global oil prices, especially at say sub $40. You are getting major capex reductions all over the globe and in the US. As well, opec is still the major reason prices are where they are...

Chk was a badly mismanaged company for a long time under mcclendon.

ETE and other mlps took a big hit as investors worry what bankruptcy or restructuring will mean for midstream contracts, especially as wmb, owns chk,s old midstream, access. It's going to be a huge restructure process.

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Nico G
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February 9, 2016 at 10:22 AM ×

from best Italian friend who is also the equity megastar there 'non stop selling those days, mandatory, at any price. Like Kerviel day but much much bigger - monster size liquidating'

as much as i want to it is hard to buy today's dip in Europe

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Nico G
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February 9, 2016 at 11:13 AM ×

dip bought target 2900 stoxx

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noob
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February 9, 2016 at 11:34 AM ×

Nico 2900 target is close on 20 Jan ?

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Black Ink
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February 9, 2016 at 12:04 PM ×

Ah, thanks for the BB screenshots, kind sir. I can't afford a terminal.

All the best. I''m enjoying Kurida-san being made a fool.

But such is life. The least expected outcomes ... well you know the rest.

Kind regards.

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Bruce in Tennessee
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February 9, 2016 at 12:39 PM ×

"All the best. I''m enjoying Kurida-san being made a fool."

Well, yes, BUT the problem is what bubbas have been pondering since 2008. What would happen in an era of ZIRP if we have another recession? I think it is pretty evident that the problems in 2016 are not limited to Japan. All the Gloomy Gus tea leaf readers who said CB's would be out of bullets if we didn't let interest rates rise back to normal look as though they will be right. It is becoming more and more obvious that manipulated markets can be nuclear.

Unfortunately, the play has gone from being merely interesting to tragic....

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Corey
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February 9, 2016 at 12:39 PM ×

Yes, swap debt into equity and get a fresh start - couldn't agree more.

So how does a sovereign issue equity?





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Macro Man
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February 9, 2016 at 12:44 PM ×

By issuing bonds with the coupons and/or principle linked to nominal GDP growth

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CV
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February 9, 2016 at 12:47 PM ×

"By issuing bonds with the coupons and/or principle linked to nominal GDP growth"

Indeed! Greece, incidentally, might still go down that road. If Tsipras had played his cards in another way, I reckon they could have gotten that already on the official debt. Water under the bridge now, of course.

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washedup
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February 9, 2016 at 12:57 PM ×

Corey - you could argue that for most developing countries, privatization of nationalized industries (the artist also known as structural reforms) would be in some sense be the equivalent of issuing equity. Any public-private infrastructure program would also have the same characteristics.

Lets not forget that we are still in a fiat currency world, and the problem is deflation not inflation. In theory the helicopter drop can take infinite forms (with varying winners and losers limited ultimately by the political climate, which is as we know a function of how painful the GDP/equity rout gets), so I would be wary of making the 'out of bullets' argument on a permanent basis.

Nico/BinT curious on ur thoughts on whether spoos are a here and now short or if a bounce to sell into could be reasonably counted upon like MM seemed to imply. The 2001 (patently not 2008) feeling is growing in me, but things seem just as dangerous on the short as the long side.

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forgot2hedge
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February 9, 2016 at 1:14 PM ×

2016 roadmap

Case for up
-real US economy not bad
-wages not bad
-low commodities putting a little $ consumer pockets
-startup boom good for US economy (young talent going to industry, not paper pushing)

Case for down
-no juice(QE)
-SnP/Dow/QQQ breadth weak
-SnP earnings falling and Price-to-earnings/tobins-q at 2nd std dev
-TBTF banks are better 'capitalized' on month to month balance sheet snapshots due to mensa-level accounting fugazi
-E&P chap11 up, $ up, credit funds liquidation up
-fear overbot on media but no action from participants by exiting mkts into cash;

conclusion
-week-to-week trading is now hour-to-hour trading




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Bruce in Tennessee
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February 9, 2016 at 1:16 PM ×

washed,

I am making all my investment bets on lower rates and decreasing equity prices. KISS. But as is my method all my life, I am starting and adding to, not letting is all ride on red. I think Lefty got out of fixed income early, and have been amazed at what rates have done over the last couple of weeks. That has been my plan since I got stopped out of SDS, and I just had raised my stops too damn much.

(Leftback is smarter than he looks...)

Bin T

BTW...I do think stability in times of equity corrections is removed by the already pre-existing ZIRP...but I've already gone into that and am not as smart as Rosenberg or Hatzius, so I'll must mention it and let it ride...where is my bond/CD return for the bad times?

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WorriedAboutBanks
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February 9, 2016 at 1:29 PM ×

Would be very interested to hear MM and everyone's views on US/UK/EU banks; particularly the stability of them, and which ones look the strongest/weakest. My understanding is the US/UK banking systems have been re-capped to some extent, EU not so much. I am beginning to worry about return of equity rather than return on equity. All views appreciated.

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Eddie
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February 9, 2016 at 1:31 PM ×

All the Gloomy Gus tea leaf readers who said CB's would be out of bullets if we didn't let interest rates rise back to normal look as though they will be right.

Bruce in Tennessee,

the Fed eased aggressively during the last two bear markets. To me it didn't make a lot of a difference... the question is rather whether their bullets were not blanks from the very beginning.

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abee crombie
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February 9, 2016 at 1:31 PM ×

Funny how Japan does ZIRP, scares the living crap out of ppl and now the yen is STRONGER. I mean if we were worried about the BoJ intervening before, what is stopping them now from SELLING their own currency? Or maybe I am missing it and its just the unwind of all the Mrs Wantabe carry trades? Markets are funny.

Though as we learned with the Swiss, which were doing the same thing (selling their own currency to keep the Euro peg) markets can overwhelm.

Total fear of losing money over FOMO. CS CoCo's down again today, yielding 7%, even though they are rarely thought in the same vein as DB. The subordinated CDS for CS is at 217 vs the 2011 peak at ~350. Guess this is what Nico was talking about... liquidation

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the greyman
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February 9, 2016 at 1:33 PM ×

@elerianm "We cannot afford for banking sector to become unhinged."

Now that statement gives me real confidence UGH!

TARP like bailout coming for EURO banks.

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Macro Man
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February 9, 2016 at 1:41 PM ×

@ Worried I can't really pretend to be an expert on individual banks, but I would say that European banks generally have two headwinds: NIRP in EZ and Switzerland, and the COCO issue, which I suspect relatively few understand completely (including me, though I am reading up on it as much as possible.)

Suffice to say that the latter issue in some ways introduces a negative downside gamma position to COCO holders, insofar as the lower the stock goes the more likely it appears that their bond will turn into stock. Hence there is a desire to hedge. That being said, US banks face neither NIRP nor Cocos, and they are getting crushed too. I'd be less worried about them (though that's not to say you shouldn't be worried at all.) That front euribors traded down yesterday is a very worrisome sign IMHO, as it suggests the nascent pricing of funding pressure. Despite SX7E carnage today it has not repeated, so that at least is good news.

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Anonymous
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February 9, 2016 at 1:44 PM ×

Equity financed vs debt financed is correct and it's simple corporate finance.

Tax effected CoC on debt is lower than the same on equity (obv up to a point) which allows more marginal projects to be executed all other things equal.

As companies BK, there is no impact on production due to how reorganization works.

If prices go low enough, people with a higher marginal production cost (where production cost is more similar to gross margin than EBIT or EBITDA) will drop out, but this is orthogonal to filing for bk protection.

What forces US rationalization (aside from low prices that make projects uneconomic) is that the reorganized entities have WACCs determined by distressed hedge fund return hurdles (which are quite high) and don't have access to enough (or any) debt to dilute that.

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Bruce in Tennessee
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February 9, 2016 at 1:45 PM ×

http://www.hussmanfunds.com/wmc/wmc160208.htm

"Put simply, the Federal Reserve has created the third speculative bubble in 15 years in return for real economic improvements that amount to literally a fraction of 1% from where we would otherwise have been."

...Read him every week, but he's much too rigid to buy into his funds...you'd have lost your shirt since 2008.....(He does say he's "reformed" now, to his credit)...

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forgot2hedge
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February 9, 2016 at 2:02 PM ×



"I'm in love with the coco"

https://www.youtube.com/watch?v=Lypj5YO-Irc

Unbeknownst to these guys, they are in the same biz as the primary dealers.

Not sure if MM and others would understand their lyrics, but...

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Gnome of Zurich
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February 9, 2016 at 2:04 PM ×

Is John Paulson blowing up? Just wondering about the liquidation pressure in some names and the story about him having to back the fund's credit lines with his personal investments.

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washedup
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February 9, 2016 at 2:08 PM ×

The way I understand it, COCOs may accelerate downside to equity holders but they actually take that ultimate risk, a run on the bank, far less likely. I'm curious if anyone's heard anecdotes on whether or not counterparties have balked at taking DB's name yet - I highly doubt it but u never know.
BinT I hear you - I think forgot2hedge put together a great summary - very balanced - I totally get the case for cyclical risk aversion and further downside, and capital getting defensive, but its a bit hard for me to imagine the system comes unglued when bonds are rallying, not selling off. The market can't be in thrall of financing the man and then claim the man ain't the man anymore, yes?
I am struck by how different this sell-off has been from oct 2014 and aug-sep last year - less panic and more de-risking (get out of longs and shorts alike, thus explaining why nasdaq is at the lows and energy is not) as opposed to a bunch of bulls waking up to find themselves prostrate on I-95 at rush hour. Does that rambling conclusion tell me anything at all about what happens next? Hell no - thats why I asked Nico and BinT.

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Macro Man
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February 9, 2016 at 2:25 PM ×

@washed, yes, Cocos were designed as a risk mitigator for banks by allowing them to shore up capital ratios by either a) labelling coco investors with stock, or b) writing down the debt. That's all well and good, but if either of those happens you cannot expect markets to be happy, nor indeed can you expect them to not to pre hedge. Indeed, the academic literatre on cocos recognize that share conversion versions can have multiple pricing equilibria (alongside stock prices) for a given book value.

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washedup
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February 9, 2016 at 2:35 PM ×

MM - correct - but across all those equilibria bankruptcy is a lower probability than it otherwise would be, which buys the system time and the worst case becomes zombification. The flip side is that if the market over-reacted in the first place, the probability that the bank becomes 'artificially cheap' due to that portfolio effect, also increases. Hence my question about the counterparties taking their name or not, because that determines whether its the former or the latter.
I love how everyone is laughing at the German FM for defending DB and calling for a crash of the system while simultaneously providing him with a fee for lending him money!

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Leftback
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February 9, 2016 at 2:35 PM ×

Very very negative media chatter, very very gloomy retail investor sentiment.
Very high put/call ratios.

Another turn approaches.... EMs over DMs at some point?

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washedup
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February 9, 2016 at 2:37 PM ×

LB - indeed - all depends on whether the dollar selloff this time is for keeps or not - no one in the world (except Nico) expects that, which should tell you everything you need to know!

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Macro Man
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February 9, 2016 at 2:40 PM ×

I hear you, washed....I asked the same question re market chatter last week and heard nothing. I do think however that there is a gap between DB or EZ banks being "artificially cheap" and going to zero/being DK'ed in the market. However, in many ways it's a self-fulfilling prophecy: DB is cheap on a px to book metric currently, but if current distress continues and they have cocos convert to stock, that dilutive effect means that current P2B isn't as cheap as it looks if you think that will happen- which the current environment makes more likely.

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thegreyman
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February 9, 2016 at 2:55 PM ×

More reason to be nervous...

Germany's Finance Minister Schäuble Has 'No Concerns' Over Deutsche Bank. Really?

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CV
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February 9, 2016 at 3:00 PM ×

BIS primer on COCOs,

http://www.bis.org/publ/qtrpdf/r_qt1309f.pdf

Will be reading tonight.

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Macro Man
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February 9, 2016 at 3:03 PM ×

Already read that one, and a follow up study by the same author ;)

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CV
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February 9, 2016 at 3:04 PM ×

"but if current distress continues and they have cocos convert to stock, that dilutive effect means that current P2B isn't as cheap as it looks if you think that will happen- which the current environment makes more likely."

I think this the key, and also why DB is a dangerous punt. In the end, COCOs with a yield of 7% was too good to be true, and now they are reverting to mean, as it were. One thing I DON"T understand is the link with CDS. These things will NOT afaics pay out if you are converted. It's in the contract, not? It's a bit like being called on a bond, rigth?

Not sure how this works. COCOs were treated as very close to equity as far as I know, which means that the investor has to bear most of the risk, if converted. Or in other words, if DB doesn't pay the CP, it's a conversion, right? Assuming of course, they are in their good right to convert? I am getting confused, sorry ;).

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Macro Man
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February 9, 2016 at 3:10 PM ×

Yes, even if the Coco involves a principal reduction it does not trigger a CDS event. However, a coco default/conversion is a necessary condition for cds default, so if it occurs it means that you've taken a step down the slippery slope. As I am sure you can appreciate, CV, the pricing of these types of outcomes and risks is decidedly nonlinear.

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CV
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February 9, 2016 at 3:23 PM ×

"Already read that one, and a follow up study by the same author ;)"

Figured that much :).

"As I am sure you can appreciate, CV, the pricing of these types of outcomes and risks is decidedly nonlinear."

Absolutely, and in any case. Weakness begets weakness. If DB's share price stays here, the next "review" will have to conclude more capital is needed etc etc.

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Anonymous
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February 9, 2016 at 3:42 PM ×

I usually comment on my name, but choose to post this anonymously just in case...I have a day job with a US based oil E&P that is exclusively shale in the lower 48. You know, one of "those" companies!

I present a small item of note for anyone interested in the reservoir engineering minutiae of unconventional oil and gas production. It's technical but does actually matter. When companies HBP (hold by production) acreage units they may drill one or two wells that hold all the acreage. If oil prices are conducive they may in-fill the unit with more wells up to some NPV10 value or other measuring metric. When prices fall, like they have, companies either don’t drill as many in-fill wells or don’t drill any more at all. The problem then comes from the reservoir production characteristics. These “unconventionals” are pressure depletion drive, which means the longer you produce the less access you have to any oil and gas remaining in the production units. With one or two wells producing to hold the acreage given enough time they may reduce pressure enough that future in-fill wells will never be economic. So it’s a case of drill them now, because if you wait long enough you will never be able to drill them in the future.

All companies operating in “frac’d” unconventional plays face this challenge.

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Anonymous
admin
February 9, 2016 at 3:47 PM ×

just checked my portfolio, began mid Jan net long and short (spread) euro equities, 50 50, after closing most longs for a loss I am now almost all short and up!

but, my data and Tech. analysis for Jan gives me more long signals than short

is this thing going tank or whats the deal?



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Eddie
admin
February 9, 2016 at 3:54 PM ×

If DB's share price stays here, the next "review" will have to conclude more capital is needed etc etc.

Right now the plan is to have 12.5% CET1 in 2019, which is above the mandatory 12.25% but... this excludes the Counter Cyclical Buffer, which can be anywhere between 0% and 3%. Some countries introduced it already and values between 2% and 3% seem likely for DB, judging from similar banks.

So a lot of good things must happen, on top of their current plan, to avoid another capital increase...

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JohnL
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February 9, 2016 at 4:14 PM ×

Anon 3:42, so the way I read that. The longer rig counts stay low ie little to no drilling is happening. Producing reservoirs atrophy and can ultimately reach the point that no capex can recover the acreage?
So some of these Co's could die with worthless assets, besides undeveloped properties?

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washedup
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February 9, 2016 at 4:18 PM ×

anon 3:42 - pretty intrigued by that - after having traded energy for as long as I did Im still surprised by how much I don't know especially on the unconventional side. Your comment has interesting implications, because this is the first time, really since 2002, that we have seen the oil and natty rig counts down (not to mention an increasing amount of horizontals) together at the same time AFTER the low hanging fruit in terms of well backlog etc has been picked. Really at this point if, at the very least, NG supply doesn't fall a good 2/d by year end, the laws of physics may be different than what I always believed.
I presume crude on the other hand will act like NG did in 2010 - just defying expectations of a supply drop because of pent up productivity boost. Look forward to your thoughts is any.

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washedup
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February 9, 2016 at 4:20 PM ×

anon 3:42 - additionally, I took your comment to mean that the capex required to recover the acreage is not infinite, just a lot higher than it would be if the wells were pressurized - correct? What would it be in say a Marcellus vs a Haynesville?

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Nico G
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February 9, 2016 at 4:44 PM ×

regarding cocos the only hedge those nervous holders have found is to short the stock against the free put they actually wrote years ago. This is the worst possible position you can find yourself in but hey! none of those 'sophisticated' investors saw it coming. This is a big tell about financial markets at large. They are just a joke and there is so much adverse convexity in the market that things will turn bad faster than you could even write 'but this time banks are better cap....'

now thinking forward, since coco boys are de facto hedging a short gamma there could be an EPIC bank share short covering in the making once those bank shares hit a bottom. Read it again: EPIC

haha

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February 9, 2016 at 4:51 PM ×

Until now the only epic is their downfall...

However nice to see ECB in action on BTPs: spread contracting and mkt index in freefall.. they really can't understand :)

well nico, it's true, pretty big sellers on Italy stocks.. dramatic

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Anonymous
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February 9, 2016 at 4:51 PM ×

@ JohnL & washed - Y'all are essentially correct. I'm not saying that the hydrocarbons will be lost forever, it's just that the cost of getting them out of the ground would be way to expensive. If today you in-fill a 1280 unit in the Eagleford or Bakken that has 2 wells currently producing with EUR's of 450k boe/well you might expect the in-fills to net 300k boe/well EUR. If you lay the rigs down, don't in-fill and still produce the original two wells for 2-3 years the in-fills might fall from 300k to 100k EUR. Unless drill and complete costs come down by 2/3's (hard to imagine that) then those wells would need 3-4 times current oil prices to become economic again. The longer you wait the worse this problem becomes. Individual plays in the US will vary in economics of course, but any pressure depletion drive reservoirs that require hydraulic fracturing to produce will suffer from this problem.

The US is sitting on a leaky asset when it comes to unconventional oil and gas. Once punctured you have to develop it to the maximum or it will become realistically unavailable. Any company/fund looking to pick up "cheap" unconventionals from BK'd E&P's and sit on them till better prices come along should realize they have a depreciating asset on the books.

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Anonymous
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February 9, 2016 at 4:54 PM ×

Interesting piece on O&G assets:

http://www.economonitor.com/thoughtsacrossatlantic/2016/02/09/the-power-of-bankruptcies-in-the-energy-sector-will-we-ever-see-oil-back-above-100-usd-per-barrel/?utm_medium=twitter&utm_source=twitterfeed

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thegreyman
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February 9, 2016 at 4:58 PM ×

6 3/8 CoCo was trading at $97 last week. This morning it's at $89.

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washedup
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February 9, 2016 at 5:17 PM ×

anon 4:51 - thx for that - makes sense.
anon 4:54 i agree with that article's premise that bankruptcies in and of by themselves do not impact supply, and may in fact work in the other direction - however, it is also true that shale is a bit of a wildcard in terms of depletion rates and no one really knows how supply will act once assets stop being optimized - my base-case is, it will be like any other time in the business with people intellectually catching a falling knife for a long long time - however, anon 4:51's point about 'leaky assets' potentially sets up for a much more volatile regime between say 20 and 50, with shale as the swing producer over 2-3 year cycles instead of the long gestation conventional projects people are used to from the 1980's cycle, which created an L-shaped price trajectory (interrupted briefly by the Iraq war) all the way to the late 90's.

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abee crombie
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February 9, 2016 at 6:00 PM ×

Thanks anon for the infilling reminder. Also I would point out the super steep decline curve for all unconventional (shale) wells. The first 2 years production usually declines like 70%...US Crude oil production peaking in March..

Well there goes turn around Tuesday.
I'll buy some CS CoCo's when they are 15% yield. While NIM pressure is for sure a reason to sell equities, if you are selling CoCo's, conceptually you should really be worried about increasing NPL's, not really profitability as much.

If you want the fun of the financial sector without the stress of Investment banking or European CoCo, take a look at regional banks. Trading at less than Book and frankly have pretty clean credit books, that is unless Equity markets are correct and we are facing a full blown recession.

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USIKPA
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February 9, 2016 at 6:23 PM ×

anon 4:51

So, since somebody somewhere said that "shale is the last squeeze", nothing had really changed. Unless folks don't mind contaminated water and frequent earthqakes

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Nico G
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February 9, 2016 at 6:29 PM ×

only two things to keep in mind at all time:

1) that throughout the 6 years the Fed rigged the system pushing normal folks to loan their money with hardly any pay to it and/or pursue risky assets far too high, while carry trade stretched EM market valuations and currencies to absurd levels, we all said 'next financial crisis will make 2008 look like a picnic'. Fed was creating yet another (global) bubble during 2009-2015 with almost zero room for maneuver should crap hit the fan + its credibility killed in the process. We are here. We are at the 'next financial crisis'.

2) in case you had doubt the price action on spoos has been as relentlessly vicious as i can remember. There was no gong at the top and market sold off last days of year + a gap down into January and a flush + a bounce just short of people's expectation. Everyone wanted to have time to think around 1960, or perhaps 1980 you know, and why not being given 2020 for a comfortable short as you could read here. None of that happened and i warned of European pronounced weakness minutes before Spoos turned around under 1950

In conclusion it is very hard to design that market will double base in the low 1800s for a sustainable bounce. I want to be optimistic but the 2007 top on spoos is becoming more and more obvious a target to inflict maximum pain, with such retracement needed to flush the record margin around. Folks monitored NYSE margin new record last year without the blink of an eye, it is dumbfounding to read that so many were not expecting nastiness as soon as the 'record year' (in terms of M&A and banking fees at least) was closed.

Investment bankers will get record record bonus this year, they will certainly get donuts next year. And all the corporate buy back of 2014-2015 at record market valuations... while contracting dirt cheap corporate debt.. i want to write about that 'wealth extraction' one last time, for it is profoundly sickening how many folks got fooled into lending to companies at a ridiculous rate only for those companies (executives) to prop their own shares and pay off. You add to this, the negative interest charged to the average guy in Europe or Japan and you have the hold up of the century. 'Your money is worthless and hey, we are happy to take it'.

Bears are hated and bullied when they try to poop a rally party. Then they feel bad making money when the whole world cries. It has to be the worst job on the planet.

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Nico G
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February 9, 2016 at 6:38 PM ×

on that note, good luck to Trump in NH today and later that year

with the global recession looming only a mad dog like Trump will have the courage to shake and rethink the whole system.

As much as he is the only decent man in American politics, Sanders would be swallowed by the task at hand just like Obama in January 2009 when he shat in his pants and the boys (Treasury and the Street) took over, the consequences of which we are now living today

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Nico G
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February 9, 2016 at 6:39 PM ×

never let Wall Street fix Wall Street problems - they will only double down.

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Macro Man
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February 9, 2016 at 6:45 PM ×

Please can we avoid political commentary, especially given the paucity of quality across the spectrum of candidates this year.

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washedup
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February 9, 2016 at 7:12 PM ×

abee - how does one (gulp) buy cocos - I think ill stay away from DB but was thinking CS may be worth a look - got a CUSIP you could throw my way?

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Anonymous
admin
February 9, 2016 at 7:21 PM ×

EU probes suspected rigging of $1.5tn debt market

http://www.ft.com/cms/s/0/04befd8a-cf35-11e5-92a1-c5e23ef99c77.html#axzz3zhT6GXQi

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washedup
admin
February 9, 2016 at 7:31 PM ×

Nico - how are we at the next financial crisis if the the bulwark against the previous one (the transfer of liabilities from private to public sector) is so heavily favored that it carries negative yields?

We have big problems, yes - could spoos go to 1500 or further in an eye-blink? totally with you there - these are markets. But a total financial system freeze and a 4% contraction in (local currency) GDP? Nope - this will go down as garden variety when the dust settles.
Talk to me when we get corporate spreads and US govt yields expanding at the same time with productivity continuing to trend lower - thats the big one that could break the system - this ain't it.

MM - with all due respect, politics are currently a bit relevant aren't they? You don't think sanders' 'all of wall street are crooks' and donald trumps 'we are in a big fat equity bubble' are impacting sentiment on financials? Whether or not they see it that way, clearly these guys are talking their books (I see their beta as 5% increase in polls for every 200 point drop in spoos) but they are hardly fringe loonies at this point - investors in financials were beginning to see green shoots and low price to book and they've been reminded everyone hates banks and any money they make could be confiscated readily - that matters.

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Bruce in Tennessee
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February 9, 2016 at 7:58 PM ×

washed,

There are plenty of sites that talk nothing but politics...I suspect MM knows if you allow politics in a financial site soon you have nothing but crazies..

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MrBeach
admin
February 9, 2016 at 8:00 PM ×

Just bought some DB.

http://www.nytimes.com/2016/02/10/business/dealbook/deutsche-banks-hybrid-bonds-are-in-a-death-spiral.html?_r=0

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MrBeach
admin
February 9, 2016 at 8:01 PM ×

Based on this rumor:

http://www.marketwatch.com/story/deutsche-bank-may-buy-back-billions-of-euros-of-debt-ft-2016-02-09?link=MW_home_latest_news

Thinking that sellers of CDS who simultaneously shorted the stock may be forced to cover if the death spiral can be stopped.

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washedup
admin
February 9, 2016 at 8:09 PM ×

Thanks for that BinT - want to quickly exchange e-mails before MM banishes me for making that comment? I am really regretting it..
insight Nazi - thats what we call MM in hushed tones - thought u'd like to know!

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MrBeach
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February 9, 2016 at 8:10 PM ×

BTW - if the DB trade described above works, this would be potentially describe the effects of a European TARP. Force feed the banks money, allow them to retire outstanding debt, and pulling them out of death spirals caused by CDS sellers hedged thru equity shorts.

Hypothesis: European TARP --> Face ripper in European banks?

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Macro Man
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February 9, 2016 at 8:20 PM ×

@washed, saying I think x will be bad for bank stocks and y for pharma is one thing, saying I hope z wins is something entirely, all the more so because just about all of them are direct descendants from the father of the categorical imperative.

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Macro Man
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February 9, 2016 at 8:22 PM ×

@ Mrbeach, if DB had all this loose change to buy back debt, wouldn't the Cocos and stock be doing better? their core capital took a nasty hit with that last "earnings" statement, and I would be surprised if they bought back debt without issuing some equity

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February 9, 2016 at 8:24 PM ×

Not sure that could work really but let's try...it's a trade versus a sistematic loss of confidente.

What's is stunning is that spoos is outperforming also now vs eustoxx futures

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MrBeach
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February 9, 2016 at 8:38 PM ×

@MM: It is not clear to me how they might generate the cash to retire the debt. My observation is that if this is a negative feedback loop death spiral caused by the unique structure of the Coco bonds, then it behoves DB to find the money wherever they can. At some time a death spiral could lead to loss of confidence as a counter party - making an equity raises impossible (outside of a European TARP). So doing whatever is necessary to kill the death spiral seems to me to be the most prudent action.

From the NYT article: "Consider Deutsche’s 6 percent perpetual bonds. In early January, these yielded around 7 percent, on an expected maturity in 2022. Yet as equity prices fell, investors started to discount AT1s with equitylike yields, pushing down prices. As yields rose, the chances that Deutsche might not call the bond in 2022 increased, thus extending the possible maturity and magnifying losses. Finally, renewed threat of coupon termination meant the risk of a smaller near-term cash flow. What looked like a short-dated bond risked becoming a long-dated, zero coupon instrument. The price fell to 72 percent of par on Monday, from 93 percent at the start of the year.

The problem for regulators and investors alike is that all this creates a feedback loop. As AT1 prices fell, investors had few places to sell. Banks do not like making markets in the distressed debt of their peers, and Asian private banks – big buyers of high-yield securities – were on holiday on Monday. So investors sold credit default swaps. That pushed Deutsche’s senior credit default swaps to over 270 basis points, a level not seen since the eurozone financial crisis. Yet the risk of Deutsche failing is barely comparable: Its 53 billion euros of tangible book value is 40 percent higher than the 2011 figure."

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Anonymous
admin
February 9, 2016 at 8:54 PM ×

Debt Tsunamis, Doom Loops & Death Spirals?

Unlikely. More likely: 'hyperbole bottom'.

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hipper
admin
February 9, 2016 at 9:56 PM ×

Thanks for that anon 3:42. So if I get it right it's usually better to produce the max amount from the reservoir at the same time from multiple wells in order to make the pressure drop matter less and get a better recovery rate, whereas otherwise water needs to be later injected making it more costly? I read once that Siberian wells can't be "turned off" (=makes no sense) either, probably temperature related.

Re: price, apparently a flattening future curve is the thing to watch:

https://pbs.twimg.com/media/CaPKgAaVAAAcE5Q.png

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abee crombie
admin
February 9, 2016 at 10:05 PM ×

CS CoCo XSIN XS0989394589. Bloomy is saying if CET1 <5.125% you get a writedown. CEt1 Currently at 14.3%.. bond is trading ~93.5 for 8% yield. SocGen i was just looking has a 10% yield.

There are only certain investors who hold CoCo's and its not like there are a tone out there, mostly in EU banks, a few in Brasil and a few in China.

If I had the extra min purchase size lying around I'd be looking at something like Intesa, Llyods or BBVA, something without an IB

Nico what makes you so sure we are having a financial crisis? Maybe I am stupid but I dont see how you have a crisis when interest rates are so damn low. To me its more like a buyers strike of anything risky. Granted this EU CoCo stuff is not good but I dont see bank in nearly the same poor shape as in 2008.

I welcome a test of 1600 in the Spoos. That would be a great buy for LT investors, IMO as you'd have valuations pretty darn attractive vs 1% 10yr rates.

I frankly worry a lot more about what kuroda will do in terms of bringing out a bazooka vs S&P going down another 10% (even though it will still hurt). He's all in IMO and Japanese savers gotta do something with their money, like everyone else when they wake up from under their hole

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abee crombie
admin
February 9, 2016 at 10:19 PM ×

From Mr Blues and Spoos yesterday. I guess this is what most traders are thinking

I just want to make the claim that the Smart Car and P45 style monetary policies of the ECB and the BoJ are insufficient to create reflation. In that sense I am quite happy to have pulled away from the long Dax/Dollar trade and the long NKY/short Yen trade back in December after both institutions disappointed. Looking ahead, I am not sure how quickly Mario and Haruhiko will come to the conclusion that purchases need to be in the multiple hundreds of billions per month, and nominal short rates need to be LESS than MINUS 1%. My guess is it may take some time (and some nasty currency and equity market price action) for them to come to their senses. For now, I am quite happy to sit back in US risk parity land with Spoos and Blues. So far that trade has held up remarkably well to start the year given all the market turbulence (thanks to those wonderful Blues).

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February 9, 2016 at 10:27 PM ×

@abee, you arent undestarding what's happening.. Nirp is the problem, not the solution.
Please read last Bill gross's letter

Cet1 of CS was 14.1%. Adjust for the equity collapse

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Macro Man
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February 9, 2016 at 10:30 PM ×

@abee, agree with TBS. People who understand the situation re the banking system aren;t thinking like Zervos at all. I think he's drunk too much of his own Kool aid.

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Macro Man
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February 9, 2016 at 10:32 PM ×

@abee, there are at least $450 billion of Cocos that have been issued, all of which have an uncertain pricing dynamic to some degree, and most of which were issued in the last 3/4 years. That may not be 'a ton', but it's not peanuts either.

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Leftback
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February 9, 2016 at 11:17 PM ×

Short covering may be on the way. Dame Janet's Humphrey-Hawkins testimony ahead, but it might be the Humphrey-DOVEins testimony tomorrow. Anyone made that joke here before? Not expecting to hear about 4 rate hikes in 2016.

Relief rally in USDJPY looks likely from here, and Spoos and oil may follow. We are looking to fade the recent plunge in rates for our punt of the week. Options expiration beginning to appear in the near distance and that will drive some profit taking.

Very quietly, EMs have been performing a little better as the USD has softened since the Kuroda NIRP spike. We'll see a lot more of that as the year progresses.

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Macro Man
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February 9, 2016 at 11:46 PM ×

120. there's something ineffably satisfying about that number....

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MrBeach
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February 10, 2016 at 1:54 AM ×

USDJPY was a bit above 109 on Oct 31, 2014 - before the BoJ launched another round of easing. Nikkei was 16413.

As or right now, USDJPY is 114.373, Nikkei is 15836.

It was curious that the BoJ's Oct 31, 2014 announcement happened *right* as QE3 ended. To me this suggested, at least some sort of interaction between the BoJ and the Fed. A global QE handoff as it were.

What might trigger another mainlining session by the BoJ? Will they act alone? By comparison, the Plaza Accord seems odd and quaint.

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Bruce in Tennessee
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February 10, 2016 at 3:16 AM ×

http://www.project-syndicate.org/commentary/futility-of-quantitative-easing-in-japan-and-eurozone-by-daniel-gros-2016-02

"Despite their shared struggles with deflationary pressures, these countries’ monetary policies – and economic performance – are now diverging. Whereas the United States and the United Kingdom are now growing strongly enough to exit their expansionary policies and raise interest rates, the eurozone and Japan are doubling down on QE, pushing policy long-term interest rates further into negative territory. What explains this difference?

The short answer is debt. The US and the UK have been running current-account deficits for decades, and are thus debtors, while the eurozone and Japan have been running external surpluses, making them creditors. Because negative rates benefit debtors and harm creditors, introducing them after the global economic crisis spurred a recovery in the US and the UK, but had little effect in the eurozone and Japan."

....one bubba's reasoning...who knows what Janet will decide..



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Nico G
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February 10, 2016 at 4:41 AM ×

washed

Europe is already having its next financial crisis. You remember how folks saw Europe as the last 'relay' (read, hope) for world growth last year? with depressed commodities and consumer fatigue all around the world i am not sure EM will pull Europe/US out of their misery buying DM exports as consumers of last resort like they did 2009-2012

MM

ditto on the line up this year - but i do believe elections will have a monster impact on markets come November, be it Trump or Sanders i did not think it was off topic. Someone needs to step in and regulate your house of cards (US capital markets)

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Corey
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February 10, 2016 at 5:29 AM ×

@ washed

"Nico - how are we at the next financial crisis if the the bulwark against the previous one (the transfer of liabilities from private to public sector) is so heavily favored that it carries negative yields?"

First the yields are negative doesnt mean the coupon pymts on debt stock has decreased, just subsidized new issuance.
Everyone is thinking about it from the standpoint of "we cant have a financial crisis bc banks are better capitalized." Of course they are. Take another step back - subprime was the catalyst in 08, but the real issue was overabundance of debt and there is more of it now than in 08 at a time where markets are having serious questions in central planners ability to wave their magic wand. They have done their part and are now looking to the fiscal side to do theirs and no matter whether you are rooting for candidate x,y,z none of them seem to have a clue.

We tried to grow our way out of debt when one of the effects of over indebtedness in the first place is slower growth (Rogoff & Reinhart). We would have had to double down just to keep growth the same, but increase growth? What simple stupid creatures we are that we cant see our own folly in that logic. Suppose it's just human nature. We've had 6 yrs to find solutions to the problem and just like every other crisis we choose to avoid them bc we think everything has been fixed once the market starts going up. We've got to the point where we've been successful in perpetuating the myth for so long that we dont want to believe it's not true. And no 2016 is not 2008 we have a whole different set of problems and I'm not talking low oil prices or DB stock. Many of them are of the kind of cycle that is completely missed bc of its long term nature; peak margins, peak debt, peak demographics. And now peak confidence in our central planners to be capable of fixing everything when it goes bust. You want to make money in this environment, just do what the government is doing, double down on your own debt. Buy as many long bonds as you can with as much leverage as you can and there's the added benefit that your career risk is aligned with those of politicos and CBsers. You cant lose.

Janet will do what Janet does, there has been an increase in volatility yet US data havent fallen off a cliff (yet) so she will stick to her guns hoping to bore everyone to death with her endless monotonic droning. She and her ilk are likely to view the mkt response to the Kurodatastic policy though the lens that the market has lost confidence not because negative rates are bad (they helped Europe until this whole DB fiasco - which again in her mind will be a separate issue) but the change in policy as the source for the loss of creditability (read any paper on forward guidance). So, she will be fearful of doing the same. Ah, what is it they say about pride?

Seriously though if someone can provide a rational explanation for why the yen is strengthening when rates are negative it'd get me to stop thinking that the financeapocalypse is near. Right now I feel like the lunatic standing on the street corner holding up a cardboard sign with something to that effect.

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Corey
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February 10, 2016 at 5:41 AM ×

Forgot to mention the biggest long term macro news of the day - Aleppo. Europe about to receive another large wave of human capital. What a tragedy.

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Leftback
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February 10, 2016 at 7:09 AM ×

MM, so far tonight usdjpy is holding up or at least not falling precipitously. We will see whether Dame Janet provides punters with a happy ending tomorrow.

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