I know what you all are thinking. The bull market is back. Technical signs look good for the various indices, especially the Dow and S&P500. This all came on the back of the "comprehensive" plan that was conjured up by Eurozone leaders during last Wednesday's Eurozone summit. One has to wonder why the market rallied that much when the plans that came in were way below expectations and sketchy to say the least. Well what can I say, this is what makes the market interesting. Unpredictable and irrational to say the least. First thing that came to my mind was how right my good pal "Earn Money Online" was when he said that his fengshui indicators showed that October was going to be a positive month. Boy was he on the right track! Never get into any disagreements with Fengshui masters.
Now that the markets have shown its strength, it is time for me to admit that I was wrong about it's short term direction. Do I think that we are back on the right track? I really do not think so. The signs are still ominous in my view and what the Eurozone leaders have done over the past week was once again another kick the can down the road move. This is the 3rd plan conjured up over the past 2 years to solve the sovereign debt crisis and it would be foolish to think its the last. The measures that have been announced do not address the real issues which led us to this situation. The politicians seemed more interested to find ways to appease the financial markets than to think of how to resolve the underlying structural problems.
Why am I so sure that the crisis is not over? Look at the Italian bond auctions on Friday. They did not manage to sell all the debt they put up for sale and throw in the fact that they were selling it at yields that were all time highs since the Eurozone was formed. If the market was so convinced that the sovereign crisis is behind us, why was a 6.06% 10 year Italian bond auction so badly covered? Two days after the Eurozone summit, we have seen Italian and Spanish bond yields rally, it does not truly reflect optimism does it? I do not deny, I had my doubts about whether I was right to continue being bearish on the markets, but the more research I did, the more convinced I was right. So be patient. I am sure that the markets will reach a point which is cheaper than what we saw on Oct 3rd, 2011.
In the mean time, I know it is hard to sit on your hands while the markets rally, but trust me, the rally will stall very soon as we approach the upper boundary of the current trading range.
I am not going to dissect the various measures proposed during the Eurozone summit because they really are not worth speaking about. The amounts were too little and most of the measures defied common sense and logic. All I can say is, if a 50% haircut is considered voluntary and does not trigger a CDS payoff, then who in the world is ever going to pay an arm and a leg to buy CDS protection? Do you know how much was being paid by investors to insure against Greek debt before this deal was done? Desperate times calls for desperate measures, these include totally screwing with the system. Now I will question the validity of checking CDS spreads for risk aversion going forward. Giving the Greeks a haircut of 50% on their debt means that their debt to GDP will be around 120% by year 2020. Does that sound a little high to any of you? 2020 seems like a really long time away.....God knows how many of us will still be around to see that day. Throw in the fact that the whole of Greece is no longer functioning and their economy is shrinking by 5% this year alone, what makes you think they will be able to honor the other 50% of their debt.
Portugal and Ireland will probably need to get haircuts in 2012 as their debt loads look too heavy considering their current turtle like growth rate. What do you think the haircuts will be? Lets not even consider Spain and Italy in the picture, or else it will get too depressing. Looking on the bright side, Portugal at least has the option of selling Christiano Ronaldo to Singapore, to aid us on our goal to finally reach the World Cup finals by 2030. Poor Ireland...no talented footballers to sell to help them cope with their deficits.
Now moving on to the banks. Yes I know what you are thinking, they are going to be recapitalized. That is good news. But considering the fact that companies in Europe are the most dependent on bank financing for their businesses, this is going to kill them. Why? Because the banks are all going to be shrinking their balance sheets to conserve their cash. Every 10 dollars invested in Europe, 8 bucks is borrowed. Do the math, without the banks lending freely, business investments in Europe is pretty much screwed.
Anyway, its now in the middle of the night on Halloween, it is not wise for me to stay up too late. Not going to keep writing too much about how silly the Europeans are, at the risk of me bumping into any supernatural entities. Have a great week ahead!
Best,
SVI
Sunday, October 30, 2011
Friday, October 21, 2011
Owe too much money? Don't worry, leverage up to bail yourself out. That is Europe's suggested solution!
Today is of those days when I decide to take a day off and sit down to look at the market from a personal perspective rather than for work. It is amazing how a day off can help a person regain some perspective about not just the market but also his life. As expected, the markets this week have been rather tepid while waiting for the Euro summit to takE place this Sunday. Expectations of a magic bullet are as high as the discontent amongst the Greeks as rallies turn violent and pictures of protesters are splashed across news channels.
For those of you who loves to watch dramas and movies, I would strongly recommend forgetting about your HBO and tune in to CNBC instead. Last night for example was a great example of how the twists and turns in the news coming out of Europe is just as intriguing as an episode of CSI or 24. If you had watched CNBC last night, you would have seen that the night started off with the EFSF discussion guidelines being leaked out to the press and brought some relief to the market. Following closely after that piece of good news, was the German finance minister commenting that germany and France had come to an agreement of an accord with regards to the new enlarged EFSF. Just when the markets were cheering this piece of news, an newspaper in Germany released the news that Merkel had cancelled her scheduled speech to the parliament with regards to the new EFSF plans. What a damper! Shortly after that, news of then possibility of another euro summit meeting being held next wednesday to finalize all the plans just got the whole market confused. Imagine that! All that in one night! Being very much a couch potato myself, I skipped a couple of my favorite movies on HBO and was glued to CNBC till 2 am.
Jokes aside, this week is ending on a strong note with plenty of investors wading into the market in the hopes of a strong plan being announced by next wednesday. Plenty of short covering happening here too. Speculation in rife with regards to the possible moves that may be implemented and they do sound interesting. But what really worries me is that the summit has been postponed twice already. I am not in the camp of believing that the countries are reaching agreement on what to do to resolve this mess. Even if they are in agreement, it does not mean that the compromised solution will be sufficient to solve it.
Last week, I mentioned that Italian 10 year yields are close to 6% once again and that worried me. This week, we touched 6% once again. The equity markets seem to be pricing in a solution to the Euro crisis but the credit markets are telling me another story. If we are so close to resolving everything, shouldn't the sovereign bonds be reflecting some of that? Well they are obviously not. One reason I can think of is that the participation in bond markets tend to be institutional investors while equity markets have substantial retail presence. That is why I believe that the smart money is still staying in the sidelines and not buying into the resolution story.
It is also interesting to note that Moody’s Investors Service downgraded Spain’s credit rating Tuesday and warned that France’s rating could also be at risk, citing both nations’ vulnerability as Europe struggles to manage it is persistent debt crisis. A hit on the French credit rating would seriously undermine the effectiveness of any bailout backed by AAA debt holders of Europe.
Another important thing to look at the composition of the EFSF to understand where all the money is coming from. It is ironic that Spain and Italy make up 12% and 18% of the contributions to EFSF. If only such a simple solution existed, the underwater U.S. homeowner would have loved to bailout himself. France is also a significant 20% which implies a hit on French credit rating undermines the EFSF. If France gets downgraded, the number of AAA rated countries backing the EFSF will drop to a pathetic number. Credit investors are also acting as if the EFSF is not a AAA rated issuer because its bonds are all trading at close to 100 basis points above that of similar dated German bonds. So if France gets downgraded the EFSF bonds will need to have higher yields to attract investors.
In my opinion even if a solution is announced over the weekend that is received well by the market, it will not be long before we are back to square one and another PIIGS-driven European crisis is front and center once again. Sweeping our problems under the carpet has never solved any problems and this will not be any different.
In conclusion one has to be skeptical about the European bailout plan and one has to keep in mind that we can’t solve a crisis which was caused due to excessive leverage by re-deploying leverage. Using more debt to solve debt issues will never be a solution and this is exactly what European leaders are proposing to do. You would have thought that they would have better sense to know that structural issues are not solved by throwing money at it. Lets hope they will wake up and acknowledge the need to assist these nations to improve structural competitiveness rather that pushing them to go through more austerity measures and thereby causing their economies to contract even further. Sigh....it is worrying to see that the guidelines on the plans being discussed in this Euro Summit does not address the real issues that are underlying this crisis.
Well all the best for the coming week!
Best,
SVI
For those of you who loves to watch dramas and movies, I would strongly recommend forgetting about your HBO and tune in to CNBC instead. Last night for example was a great example of how the twists and turns in the news coming out of Europe is just as intriguing as an episode of CSI or 24. If you had watched CNBC last night, you would have seen that the night started off with the EFSF discussion guidelines being leaked out to the press and brought some relief to the market. Following closely after that piece of good news, was the German finance minister commenting that germany and France had come to an agreement of an accord with regards to the new enlarged EFSF. Just when the markets were cheering this piece of news, an newspaper in Germany released the news that Merkel had cancelled her scheduled speech to the parliament with regards to the new EFSF plans. What a damper! Shortly after that, news of then possibility of another euro summit meeting being held next wednesday to finalize all the plans just got the whole market confused. Imagine that! All that in one night! Being very much a couch potato myself, I skipped a couple of my favorite movies on HBO and was glued to CNBC till 2 am.
Jokes aside, this week is ending on a strong note with plenty of investors wading into the market in the hopes of a strong plan being announced by next wednesday. Plenty of short covering happening here too. Speculation in rife with regards to the possible moves that may be implemented and they do sound interesting. But what really worries me is that the summit has been postponed twice already. I am not in the camp of believing that the countries are reaching agreement on what to do to resolve this mess. Even if they are in agreement, it does not mean that the compromised solution will be sufficient to solve it.
Last week, I mentioned that Italian 10 year yields are close to 6% once again and that worried me. This week, we touched 6% once again. The equity markets seem to be pricing in a solution to the Euro crisis but the credit markets are telling me another story. If we are so close to resolving everything, shouldn't the sovereign bonds be reflecting some of that? Well they are obviously not. One reason I can think of is that the participation in bond markets tend to be institutional investors while equity markets have substantial retail presence. That is why I believe that the smart money is still staying in the sidelines and not buying into the resolution story.
It is also interesting to note that Moody’s Investors Service downgraded Spain’s credit rating Tuesday and warned that France’s rating could also be at risk, citing both nations’ vulnerability as Europe struggles to manage it is persistent debt crisis. A hit on the French credit rating would seriously undermine the effectiveness of any bailout backed by AAA debt holders of Europe.
Another important thing to look at the composition of the EFSF to understand where all the money is coming from. It is ironic that Spain and Italy make up 12% and 18% of the contributions to EFSF. If only such a simple solution existed, the underwater U.S. homeowner would have loved to bailout himself. France is also a significant 20% which implies a hit on French credit rating undermines the EFSF. If France gets downgraded, the number of AAA rated countries backing the EFSF will drop to a pathetic number. Credit investors are also acting as if the EFSF is not a AAA rated issuer because its bonds are all trading at close to 100 basis points above that of similar dated German bonds. So if France gets downgraded the EFSF bonds will need to have higher yields to attract investors.
In my opinion even if a solution is announced over the weekend that is received well by the market, it will not be long before we are back to square one and another PIIGS-driven European crisis is front and center once again. Sweeping our problems under the carpet has never solved any problems and this will not be any different.
In conclusion one has to be skeptical about the European bailout plan and one has to keep in mind that we can’t solve a crisis which was caused due to excessive leverage by re-deploying leverage. Using more debt to solve debt issues will never be a solution and this is exactly what European leaders are proposing to do. You would have thought that they would have better sense to know that structural issues are not solved by throwing money at it. Lets hope they will wake up and acknowledge the need to assist these nations to improve structural competitiveness rather that pushing them to go through more austerity measures and thereby causing their economies to contract even further. Sigh....it is worrying to see that the guidelines on the plans being discussed in this Euro Summit does not address the real issues that are underlying this crisis.
Well all the best for the coming week!
Best,
SVI
Subscribe to:
Posts (Atom)
Posts
