Monthly Archives: February 2012

Until its Broken – Part II

One presumes the ECB knows what it is doing.

One assumes using the banking sector’s balance sheet  – not their own – to prop up the peripheral’s sovereign bonds was the price of Bundesbank’s acquiescence.

But in their determination to ‘firewall’ their own balance sheet the ECB risks setting dangerous precedents.

Their refusal to participate in the Greek PSI ‘debt swap’ – elevating themselves to IMF status &  booking ‘notional’ profits instead – has encouraged the EIB to follow suit, and the arbitrary distinction between ‘public’ and ‘private’ bondholders will have consequences. The rules have been changed, and all else being equal – the peripherals risk premiums – the spread they pay over the ‘AAA’s’  – will rise.

And, despite its attractions the LTRO, also adds to the problem.

First, it sub-ordninates existing bondholders. The ECB has first call on eligible collateral.

Second, it creates an unnatural dependency. Eight hundred banks took funding today. How many will use the cheap money to postpone inevitable write-downs and deleveraging?

So – for Mr. Draghi – the price for successfully circumventing the immediate liquidity crisis – for banks and governments alike – has been to alienate private sovereign bondholders and place a large part of the European banking system on a drip that might be very hard to remove. The irony is that whilst promoting necessary ‘economic structural reforms’ the ECB has hiked the risk premium on the Euro’s weakest members and helped its most vulnerable banks postpone their own day of reckoning.
Sounds very Irish. And from our experience – good luck with the growth story.
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Until its Broken – Part I

As their largesse continues, John Burbank (founder of Passport Capital) believes ‘confidence in central banks is overdone.’ More specifically he also believes oil with continue to rise until it ‘breaks the US economy.’ Its a disconcerting thought with oil already back above its Euro denominated 2008 highs – back at the beginnings of the extraordinary pre/post Lehman central bank balance sheet expansion. Unsurprisingly the ECB’s balance sheet is beginning to come under more and more scrutiny. Including today’s 2nd LTRO its liabilities have balooned to Euro 3.2 trillion, and with ‘only’ Euro 80billion in capital this looks frightening. It is. And it isn’t.

With revaluation gains and enormous long-term ‘seigniore’ – basically the spread its makes on printing cash – I don’t think ECB’s solvency is the question. The ECB is way to precious to risk its own balance sheet. Rather, and far more problematic is the ECB’s unstated policy of stashing the sovereign debt risk upon the banking sectors balance sheet. As John Plender writes in today’s FT: ‘ unlike the Federal Reserve and the Bank of England, the ECB has loaded sovereign risk onto the balance sheets of undercapitalised private banks instead of taking it onto its own balance sheet. The economist Charles Wyplosz argues that this is tantamount to the ECB taking a trillion euro bet.’

European banks used the first LTRO cash in two major ways – to replace Euro 700 billion of bank debt expiring in 2012 & to buy their own sovereign debt. A large chunk has also placed back on deposit with the ECB itself – the circular logic of this knows no boundries – but lets disregard any notion this is about helping lending to the real economy. This funding helps but European banks face years (estimates of Euro2.5 trillion) of de-leveraging thier balance sheets. More interstingly we now know Italian & Spainish banks increased their (own) To some extent – sovereign holdings by 13% (to Euro 280billion) & 29% (to Euro 230billion) between December 2011 and January 2012. In the process the ‘Sarkozy spread’ was crushed in the shorter end of the curve. After today’s second slug of money – can this continue?
To some extent – whether it constitutes ‘financial repression’ or not – it makes a lot of sense for the peripheral banks to buy their guarantor’s own debt. Why not? But under the cover of imposing its own seniority (second piece follows) the ECB has created a mother load of moral hazard. And with the Euro-zone consigned to the illusion of ‘expansionary austerity’ it appears only a question of time before the stresses of solvency (not liquidity) return.
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Opening Quotes



“This continues the trend of burden-shifting,” said Gabriel Sterne, an economist at London-based brokerage Exotix Ltd. “This is bad crisis resolution and it’s going to affect things for years to come.”

The ECB bought Greek and other euro-region government debt in an attempt to hold down borrowing costs amid the sovereign crisis. Making private-sector investors effectively subordinate to the claims of official bodies risks making it more expensive for countries to borrow in the future.

“This bolsters the case for pricing in additional risk premia in peripheral bond markets,” said Richard Mcguire, a senior fixed-income strategist at Rabobank International in London. “While the EIB’s holdings of Greek debt are small, if true, this exception further underlines the unevenness of the playing field.”

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Zero Defense

Despite his endless self-promotion (aggrandizement?) – 0n the eve of the ECB’s 2nd ‘banking sugar fest’ – Bill Gross remains an astute investor and elegant commentator.

From <Bloomberg> a commentary he posted on Pimco’s website today:

“An instant replay of these past few decades would have shown that accelerating asset prices weren’t due to any particular wisdom on the part of academia or the investment community but an offensively minded Federal Reserve and their global counterparts who were printing money, lowering yields and bringing forward a false sense of monetary wealth that was dependent on perpetual motion,”

 “The offensively oriented investment world that we have grown so used to over the past three decades is being stonewalled by a zero bound goal-line stand,” Gross, the founder and co-chief investment officer of Pimco, wrote today. “Investment defense is coming of age.”
A longer – no doubt less elegant critique – awaits tomorrows ‘number.’
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Opening Quotes


“They’ve thrown away the rulebook of crisis resolution,” said Gabriel Sterne, an economist at London-based brokerage Exotix Ltd. “It’s a cynical move that will affect the world for years to come and they did it because they can get away with it. It’ll push up costs for other stressed sovereigns so they’re shooting themselves in the foot.”


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Opening Quotes

Sixty-two percent of German voters said they want lawmakers to reject aid for Greece in today’s vote, an Emnid poll of 500 people for Bild am Sonntag newspaper showed yesterday. Thirty-two percent said they backed the bailout.

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MACRO (MICRO): Techers & Risk

Friday February 24th 2012 @ 14.15 GMT 


S&P 500 @ 1366

View: Essentially unchanged – new highs of 1370 has not (yet) altered the outlook (or range) – but there is one important development: the ‘risk-on’ up-channel (from mid-December) is finally under some pressure – with the S&P bouncing resiliently (23rd) off its trend-line @1353. If there’s is no upside follow through today a re-test should follow – and much will be learned.

Position: Still cautious and spent the week scalping very conservatively in the 1355/70 range. Still trying to establish some breathing room for a 1365/70 short with an minimum objective of 1300 (= 4-5/1 ‘risk’reward.’)

Euro Stoxx 50: @ 2515

View: Minor new highs (@ 2558) didn’t convince and 2520/30 continues to be a short-term pivot. As per S&P500 the ‘up-channel’ is is play, but I’d need a sub-2500 close to feel confident in a deeper (perhaps very significant) correction.

Position: Below 2560 stops (and some defensive trading) have kept me in the core short. Below 2535 the ‘5-down – abc’ count (2558-2490-2530) preferred and the ‘risk-reward’ remains attractive.

$AUDUSD @ 1.0710

View: Consolidating or topping? Between 1.0820/1.0600 tough call – but below 1.0800 we are now out of the up-channel and until/unless that is regained I’ll continue look for a meaningful (1.0400) correction.

Position: Difficult – but continue to trade a core short with 1.0780 becoming the significant upside pivot.

$EURUSD @ 1.3405

View: I was wrong – we finally did make it to 1.3400 – but the count is now much stronger. The whole 1.2630/1.3430 rally looks like a perfect ‘5up’ with the ‘5th wave’ from 1.2990 equally attractive. Little damage as I’ve traded small shorts very lightly up to 1.3400 (always seemed likely) but with 50% of the whole 1.42/1.26 sell-odd retraced the ‘risk-reward’ favors shorting 1.3400/50. Interestingly – the ‘5up count’ implies a decent low (1.2630) might be in (perhaps after a good old fashioned re-test ) and going long EUR/AUD is intriguing me.

Position: As above – setting core short – risking big figure – for a re-test of the lows.

$DAX (is a TAX): @ 5835

View: Unsurprisingly – it is the DAX – we extended towards 7000 but that only made for a week of heavy trading. Closing below 5900 (big pivot) would increase confidence a massive ‘abc-correction’ might be complete.

Position: Micro managed – and after a poor beginning – relatively happy with core short average @ 5835 +now!?)  Intend to stay very tuned and keep trading around core.

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Mr. Kenny Goes To Rome

Phillip Stephens writes (FT: ‘Europe says goodbye to solidairty’):

“Contagion is not a fact of economics but product of politics.’

Brilliant. Really wish I could write like that.

And aside the flowering of self-interest amongst the ‘AAA’s’ – this seemed an appropriate sentiment on the day our good Taoiseach is visiting the admirable Mr. Monti on his 100 day anniversary.

Ireland is – as all bullish market participants know – the poster child of European style austerity. And even better – the state where despite the horrendous cost (=40-50% GDP) – those nice <bank> bondholders have nothing to fear.

Naturally, Mr Monti hasn’t missed the chance tell Italians there is hope to be found in Ireland’s ‘successful implementation’ of its ‘structural reforms.’ And not doubt Mr. Kenny – the good (and apparently popular) European he is – will rally Italian spirits with tales of Irish resilience and recovery.

Lets hope for the same when Ireland play Italy in the Six Nations tomorrow.

Alas the ‘truth’ – the truth on the street – promises Italian (read Spain et al) less room for optimism.

After three crunching years of recession and falling disposable incomes the Irish ERSI this morning forecast growth of 0.7% in 2012, and 2% in 2013. With unemployment still rising (14+%), annual deficits still double digit and a debt/GDP ratio > 100% – even with an open economy, booming export sector and healthy trade surpluses – you should ask someone in the pub about Ireland’s ‘success.’ Problem is even the pubs – which are ‘ worse than the 80’s’ according to my local landlord – are empty.

Without a ripple in the markets the EU yesterday revised its 2012 Euro-zone growth projection to <0.3%> from + 0.5% in Autumn. I’d SELL THAT.

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Thursday February 23rd 2012 @ 15.25 GMT


Views & Positions – given we haven’t broken any of the recent ranges – accompanied by some inevitable ‘stop-reset’ chopping around –  remain unchanged from previous post (Friday February 17th) – with the exception (addition) of an ongoing battles of wills with $DAX (= average short <just green> @ 6790.)

However, there’s a growign sense that volatility is re-emerging.

And a full risk re-assessment follows today’s close.

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Markets Rents

I was editing a longer piece – drawing together a few long standing themes – but given the rather bumpy looking (potential risk reversal?) day that’s in it – I think I’m better advised to keep today’s post very brief.

From this morning’s FT – ‘Economics and Society: Barrier to a breakthrough’ – concerning the financial markets rent seekers:

‘Finally, the financial sector is ground zero as an arena in which some firms and individuals have power and information, while others do not. Investment banks know what securities their customers buy and sell; high-frequency traders compete to locate their computers closest to the exchange; and the entire active investment management industry, which collectively returns the same as the market minus its own fees, earns something that resembles an economic rent.’

Stay tuned.

Times are a-changing.

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