Guest post by Peter Tchir.
But Quebec Isn’t a Country? Exactly.
The Catalonian elections are interesting and shouldn’t surprise anyone. In stressful economic times people look for alternatives. They want someone to blame (“the other guy”) and like to be told how great they themselves are. If that wasn’t the case, it is unlikely that an angry megalomaniac with a toothbrush moustache would ever have ruled Germany.
At this stage, the elections and referendum movement remind me a lot of Quebec in Canada. Economic decline coupled with an identity lead to the belief that separation was a good way to go. For many of us outside of Spain it is hard to realize how long Catalonians have held a belief that they are different. I remember back in the 1980’s being corrected by a soccer player when I said he was Spanish, and he replied, with a bit of anger, that no, he was Catalonian.
Guest post by Peter Tchir.
Go Ahead, Make My Day
Greece has negotiated like the Clint Eastwood that spoke to an empty chair for 10 minutes. It is time to bring out the Dirty Harry. Point a magnum at the Troika and tell the “go ahead, make my day’!
Greece has been asking for money in some form or another for almost 3 years now. It begs and pleads. It is forced to do things to its people. Then it is back to begging and pleading. It is time to stop. The negotiations have been stupid. Not once has Greece come up with a credible alternative to more Troika money.
The Troika actually benefits as much, or more from supporting Greece and everyone would be better off if Greece was given real breathing room for a change. Since the Troika either doesn’t see it, or refuses to believe it, it is time to make the Troika see the error of the ways.
Defaulting Takes Planning
Defaulting, properly, is as much a process as anything else. You need to plan. You need to line up post default financing. You need a credible story of why investors should come to you post default. Sovereign defaults are particularly tricky since there are few rules to begin with, and enforcing those rules is tricky.
Another day in Europe. Euro-area finance ministers gave Greece two extra years to wrestle down its budget deficit, pledging to plug the resulting financing gaps in order to keep the country in the single currency and prevent a renewed flareup of the debt crisis.
Guest post by Peter Tchir.
Last week was a feeding frenzy for algos and a disaster for those who were poorly positioned. Crowded complacent trades were pummeled, including, or especially, investment grade CDS. But now we have had some time to think about what happened and the markets seem calmer. On this bond market holiday, let’s just take a look at 5 simple things. These will be the drivers for the market.
If there was ever a case of people lamenting now owning a stock, swearing they would buy more if it ever came down, then dumping en masse when it did come down, this is it. Apple is unique in that it isn’t just a huge component of the indices (which it is) but it has become such an indicator of sentiment, that guessing Apple correctly is very important, if not critical. I like AAPL here. Sadly I started liking it at $570 but added some Friday morning. The sell-off seems overdone, at least for now. All those worried about paying taxes on their “big” gains, now need to worry about the gains. While everyone else was “amazed” by the great Apple products, I went to stores and found the iPhone 5 available on launch date, and remain confused about why the iPad mini which is either a small iPad or a big iPhone with no voice capabilities was such a big deal. But that was at $650 and above. Here I like it and it is oversold by many measures, including my personal favorite – RSI. I am also encouraged how many people were talking about the 200 day moving average. Many were investors who normally would demand you wash your mouth out with soap for saying such a naughty word. Finally, if they finally do something big with their cash, the multiple should look very attractive.
A few observations via TF Market Advisors.
The week started positively. In spite of fears related to hurricane Sandy, risk assets started the week on a positive note. Wednesday, when U.S. markets finally opened, the rally was a bit tentative, but then it gained strength on Thursday. We had remained positive that morning on risk, in a large part because of The Visible Hand of central banks. But as the day wore on, we became concerned that news out of Europe was not good. We recommended getting out of risk-on trades and ultimately on Friday morning became bearish over fears that the European “Maniacs” would finally do it and let Greece implode, causing problems for Spain and Italy.
Apple certainly helped the bear case as it broke its 200 day moving average and triggered an avalanche of selling – I’m assuming a lot of algorithms were set up to push on that once it broke.
With the election looming, some allegedly good numbers out of China and the speed of the correction, so clearly led by one stock, I wouldn’t be surprised to see some stability early in the week, and even a bounce, particularly if some people get caught short Apple here and the algorithms decide to sweep it the other way.
In spite of the potential to bounce, and in spite of lingering thoughts on Spanish OMT (the thoughts are fears when short, and hopes when long) we are in mild “risk off” mode. I’m not expecting a big sell-off, but events in Greece and comments from various Troika representatives send a chill down my spine. After 2.5 years of trouble, they still don’t seem to understand credit.
Guest post by Peter Tchir.
For now we can ignore the brutal statistic of 25% unemployment. That sounds callous, and I guess it is, but that is not why Greece is going to become a key issue in the ongoing battle of European bailouts.
There is growing talk of some official sector losses for Greece. We see the denials, but the reality is the only real place for debt reduction is in the official sector.
This isn’t the easiest chart in the world to read, but as I think I can walk you through it and explain why it is so important.
Official Greek Debt is €288 billion. I don’t think this includes every bilateral loan made by the EU and certainly doesn’t deal with any national central bank loans.
It does include the entire Public Sector debt. That is bonds held by actual real people or institutions and not government entities. The PSI bonds total just over €62 billion. There is about €4 billion of Greek legacy bonds documented under non-domestic law. So of the €288 billion, at most, €66 billion is held outside of the official sector.
The PSI bonds trade with an average price for the “strip” around 22.5. So there is about €14 billion in PSI market value.
A few thoughts by Peter Tchir of TF Market Advisors.
Don’t Ignore the Irish Comeback This chart is important for a couple of reasons. The story in Ireland doesn’t get much attention, but what a comeback. The Irish 2016 bonds started the year yielding 7.5% and are now down to 4.43%. So while we are inundated with reports about “Italy is not Greece” we rarely see anything about the improvement in Ireland. Or for that matter, Portugal, where the 5 year bond started the year at 15.6%, peaked at almost 22% and is down to 7.6%. That is still in the danger zone, but a stunning turnaround.
So while it is easy, and even fun to point out how nothing worked in Greece, the situation in Ireland has turned around and even Portugal seems to be coming around. Heck, even the much maligned Greek PSI bonds are getting back to their CDS auction level from March. The “front-end” bonds (which are 2023 maturities) have clawed their way back to 22 from a low of 14, and have actually managed to accrue more than 1% of interest. I’m not making light of the situation there either and think it remains precarious unless the Troika does some form of debt extension (or better yet forgiveness), but there have been signs of slight improvements.
Patience is Running out in Spain and Delays are Costly
Over the past week or so, the market is starting to question whether anything will happen in Spain. The 2016 bond hit a low yield of 4.99% on August 21st and has drifted back to 5.45%. The move in the 10 year is more pronounced as it went from 6.18% to 6.83%.
One encouraging sign is that the 2 year has been pretty stable, moving from 3.42% to 3.59% and the yield here actually declined.
Guest post by Marc Chandler of Marc to Market.
The simple truth is this; equities are NOT really ‘cheap’. The chart of the S&P500 (middle, left) shows what valuation tops and bottoms look like in terms of P/E ratios and dividend yields and we are not there yet. Government bonds are at levels we have pretty much never seen before and likely never will again (chart, top left) and are only being bought out of fear or in the hope that the government will come in and be the greater fool (which I will admit is usually a pretty safe bet, but this time, the stampede to sell the government what it offers to buy will be absolutely overwhelming and many investors will get trampled in the rush). High yield debt is also getting way ahead of itself as a look at the number of shares outstanding in BlackRock’s iShares iBoxx $ High Yield Corporate Bond Fund ETF (HYG) demonstrates (chart, below left). Investors are being forced, by financially repres- sive government intervention, into chasing yield wherever they can find it—even if that means heading in directions that traditionally warrant a lot more caution.