We start this article with the summary;
A clear preference for up-in-quality trades, up-in-capital structure trades, and idiosyncratic shifts (as opposed to systemic) suggest safety is winning over yield-grab for now and looks set to continue as markets revert back to pore QE2 risk relationships. There are a lot of funds chasing very similar trades in the credit/CDS/corporate bond market (we mean the basis, flip-the-new-issue, or curve steepener) and as is always the case liquidity is there until you really need it. Our efforts tend to focus on finding low cost long vol style positions cross-asset to benefit from the high gamma potential of these moves and with spreads relatively tight and relationships relatively mis-aligned we think there are opportunities to do just that (drop us a line for details on these tail hedge ideas).
For a time, management can use low credit spreads (and low rates) to add value to their business – intentional relveraging for shareholder friendly dividends, buybacks or M&A – but unfortunately in the real world where WACC curves do not perfectly fit Modigliani and Miller’s utopian economy, the cost of credit can eat back into future cashflows rapidly and reduce any positive initial impact. This is always seen in the credit-equity cycle as the period of equity outperformance and credit underperformance lasts 6-9months before the credit market begins to weigh on equity valuations once again.
Whether or not this ‘soft patch’ of economic data is transitory is unknown, but what we see from our contextual analysis of the credit, equity, and vol markets has us more nervous than we have been in a while. Even if the softness is weak enough to warrant QE3, we believe its format will leave HY credit hurting still (remember stocks are USD-denominated but credit spreads are not and while there is a devaluation impact thanks to the linkage between debt and equity, HY will underperform stocks on that next surge should we see it – especially given how ‘expensive’ in general HY bond prices are). (capitalcontext)
Below some charts on risk;
For full must read “risk” article;
Even though Mr Kahn is a great French MAN, we have had some doubts regarding his express departure from the World’s Spotlight. Irrespective of the plan (whoever outlined it), the USD popped up, and regained it’s world currency status, and the new French Lady, Lagardere, seems the new favorite. She loves the US, and will follow the orders well. The death of the SDR is definite by the removal of mr Kahn.
French Finance Minster Christine Lagarde has emerged as the front-runner in the race to replace ex-IMF chief Dominique Strauss-Kahn. She is a champion swimmer, an accomplished attorney, and a competent bureaucrat. She’s also a friend of Wall Street who will ferociously defend the interests of big capital. Research assistant for the far-right American Enterprise Institute Jurgen Reinhoudt notes that under “France’s free-market oriented economics minister”…”the top income tax rate was cut and, in a frontal assault on the 35-hour workweek, overtime work for hourly workers was made tax-free.” (Don’t Give Up on Sarkozy Just Yet, AEI)
But Lagarde has not moved to the head of the pack due to her anti-worker bias alone, but because she’s a trusted insider who will implement the IMF’s privatization and structural adjustment programs without challenging their merit. Strauss-Kahn’s promises of “reform” at the fund were a constant source of anxiety for big finance. Lagarde won’t make that same mistake. She won’t go off the reservation, consort with progressives like Joseph Stiglitz, or veer from her script. Here’s how The Guardian summed up Lagarde’s impressive resume:
“Christine Lagarde stands for protecting big banks…..she’s the most pro-bank bailout of the lot.
“The Americans are going to try and put in [White House adviser] David Lipton as number two. Lipton is Mr Bank Bailout. He worked for Citigroup. If they put in Lagarde and Lipton, what does that say? We are going with the total bank protection plan. That would be a disaster.” (“IMF under growing pressure to appoint non-European head”, The Guardian) http://www.guardian.co.uk/business/2011/may/19/imf-pressure-appoint-non-european-head
According to the New York Times Lagarde is not only a snappy dresser, but has plenty of friends in Washington and Wall Street. Here’s an excerpt from the NYT:
“Ms. Lagarde, the former head of the Chicago-based law firm Baker & McKenzie, lived in the United States for 25 years. Tall and stylish, with a shock of silver hair and a penchant for Chanel jackets, she is as connected and as respected in Washington and on Wall Street as in Europe.” (A Favorite Emerges for Helm of I.M.F., New York Times)
Some thoughts on the Arab Spring and the MENA situation. Courtesey John Pilger.
When Britain lost control of Egypt in 1956, Prime Minister Anthony Eden said he wanted the nationalist president Gamal Abdel Nasser “destroyed … murdered … I don’t give a damn if there’s anarchy and chaos in Egypt”. Those insolent Arabs, Winston Churchill had urged in 1951, should be driven “into the gutter from which they should never have emerged”.
The language of colonialism may have been modified; the spirit and the hypocrisy are unchanged. A new imperial phase is unfolding in direct response to the Arab uprising that began in January and has shocked Washington and Europe, causing an Eden-style panic. The loss of the Egyptian tyrant Mubarak was grievous, though not irretrievable; an American-backed counter-revolution is under way as the military regime in Cairo is seduced with new bribes and power shifting from the street to political groups that did not initiate the revolution. The western aim, as ever, is to stop authentic democracy and reclaim control.
Libya is the immediate opportunity. The Nato attack on Libya, with the UN Security Council assigned to mandate a bogus “no fly zone” to “protect civilians”, is strikingly similar to the final destruction of Yugoslavia in 1999. There was no UN cover for the bombing of Serbia and the “rescue” of Kosovo, yet the propaganda echoes today. Like Slobodan Milosevic, Muammar Gaddafi is a “new Hitler”, plotting “genocide” against his people. There is no evidence of this, as there was no genocide in Kosovo. In Libya there is a tribal civil war; and the armed uprising against Gaddafi has long been appropriated by the Americans, French and British, their planes attacking residential Tripoli with uranium-tipped missiles and the submarine HMS Triumph firing Tomahawk missiles, a repeat of the “shock and awe” in Iraq that left thousands of civilians dead and maimed. As in Iraq, the victims, which include countless incinerated Libyan army conscripts, are media unpeople.
The Spanish protesters are getting a lot of beating. The situation has become even worse judging by the emails and videos we receive. Austerity sucks, and Europe looks suddenly rather disintegrated. Stay tuned for all events during this weekend. We have Spain, Greece and Egypt (again) about to explode.
Meanwhile a video from one of our readers.
Some of the happenings in Europe/MENA today. The world seems rather angry.
http://www.youtube.com/watch?v=c4A-hd471tk (special thanks Lisa)
We are getting many videos sent to us by readers. Barcelona violence seems to be escalating. El Pais is writing of businesses suffereing from these protests, that definitely don’t attract more tourist. As we have argued, these protests are not well timed considering the summer season is coming up. But it seems people are still angry and want change. Stay tuned over the weekend for full coverage of the Spain and Greece protests.
Wonder what tourist likes going to Barcelona to watch Sagrada Familia, or the Prado in Madrid? Sunbathing in Greece sucks too.
Two arrested and 99 minor injuries is the result of clashes between police and camped in the 15-M that occurred this morning in Barcelona. After a tense morning, the campers have recovered the Plaza de Catalunya on 13.00 and riot police have left the place to consider that they had completed their primary task of cleaning. The joint operation between the Autonomous Police and the local police has begun to 7.00 am in the Plaza de Catalunya to the campers of motion 15-M temporarily leave the area and clean up the area for “reasons of health.” However, the Assembly have refused indignantly removed to allow work crews cleaning. ”This is not clean, it is an eviction,” chanted some of the campers.
The Mossad have surrounded a group of about 200 campers in the center of the plaza, where they have remained calm while shouting against the police intervention.All around cleaning operators have removed the camp set up by the indignant in recent days, tents, tents or pans to straw bales. (El Pais)
And now to some “bullish” news. German banks can survive Greek hit….problems solved then. Kathimerini reports;
A top ratings agency says Germany’s banks could survive losses on the Greek debt they hold in case the country restructures its debts and pays less than the full amount owed, boosting arguments that support a default by Athens.
But the agency is warning that a Greek restructuring could spread ripples through the banking system as a whole, making it harder to borrow at a time when many banks are still recovering from the financial crisis.
Fitch Ratings says it does not foresee any ratings downgrade for German banks based on their exposure to Greece.
Even a severe loss of 50 percent on bond holdings would not deplete bank financial buffers so much that they would lose their current ratings.
Fears about what a Greek default or restructuring would do to the banking system has been a driving force behind EU efforts to prop Greece up with bailout loans.
Meanwhile, Pacific Investment Management Co.’s head of European credit portfolio management said Greece may manage to extend the maturities of its bonds without causing credit-default swaps to pay out.
“Before you get to a really bad outcome, I think you’re going to get some kind of voluntary process in place first and that means it doesn’t necessarily trigger CDS, it doesn’t necessarily get people into trouble straight away,” Luke Spajic told Bloomberg.
“There will be this kind of soft, coercive suggestion that the debt should be extended.”
Greek government bond yields and five-year credit-default swaps surged to records since Luxembourg Prime Minister Jean- Claude Juncker, who also leads the group of euro-area finance ministers, said earlier this month he wouldn’t rule out a “reprofiling” of Greek debt.
Swaps pay the buyer face value in exchange for the underlying securities or the cash equivalent should a borrower fail to adhere to its debt agreements.
On Wednesday, European Economic Commissioner Olli Rehn said that the European Commission is evaluating a mechanism to ”reprofile” Greek debt on a voluntary basis, without reducing the debt’s capital.
The mechanism must be voluntary to avoid scaring lending nations, he said.
The yield on 10-year Greek government bonds was 16.8 percent on Wednesday, while the spread over similar duration German bunds was 1376 basis points.