All eyes on Spain! You thought I was going to say Ireland, didn’t you? Greece is done. Ireland is done. They got their bailout, which will hold everyone off until Thanksgiving, but not much more; it’s Spain thats the problem. Spain’s economy is roughly 5 times the size of Ireland’s, for starters. But enough about that…I don’t want to talk about the euro or the member nations for now. It’s just a wait and see game on whether Portugal will fall today, next week, or next month, and whether it will happen before Spain or after. There are reports of violence in Ireland, and we can expect the same from around Europe. All eyes on Spain! You thought I was going to say Ireland, didn’t you? Greece is done. Ireland is done. They got their bailout, which will hold everyone off until Thanksgiving, but not much more; it’s Spain thats the problem. Spain’s economy is roughly 5 times the size of Ireland’s, for starters. But enough about that…I don’t want to talk about the euro or the member nations for now. It’s just a wait and see game on whether Portugal will fall today, next week, or next month, and whether it will happen before Spain or after. There are reports of violence in Ireland, and we can expect the same from around Europe. In the meantime, we have a shortened week in the US due to the holiday and I’m sure Bernanke and co. Are thankful for that. Some other people who are thankful… The folks at Novell (novl). Trichet, who’s term will soon end. Not china’s farmers who will be forced to sell goods at below market prices. In the US, when price caps were put in place in the 1970′s, the futures markets became the place for price discovery. Will that happen in china? I don’t think any farmer will have that option. Back to the thankful – Pelosi is thankful. Palin is thankful for her new show. You get the point. Later this week, we’ll revisit gold and silver. Preview: they will peak on fear not greed. In the meantime, we have a shortened week in the US due to the holiday and I’m sure Bernanke and co. Are thankful for that. Some other people who are thankful… The folks at Novell (novl). Trichet, who’s term will soon end. Not china’s farmers who will be forced to sell goods at below market prices. In the US, when price caps were put in place in the 1970′s, the futures markets became the place for price discovery. Will that happen in china? I don’t think any farmer will have that option. Back to the thankful – Pelosi is thankful. Palin is thankful for her new show. You get the point. Later this week, we’ll revisit gold and silver. Preview: they will peak on fear not greed.
It’s back – although, for some of us it was never out of sight: Europe is in trouble.
Greece is facing gdp growth rate of -3.5% and is now officially beyond low double digit unemployment (and rising).
Spain, in the meantime, is facing another liquidity crunch.
And the only thing saving the credit markets from freezing up is a quickly eroding common fund that is going to face some huge losses in the very near term. (See article here.)
We often speak about the difficulty of timing. On an individual position level it’s difficult, but alas, necessary, to predict the size of the move and risk, the specific position where it will occur (implementation), and the timing. It’s especially true for securities that have embedded time value/decay such as options or futures. For some securities however, looking at the entire curve can give you a sense at least of the market’s expectations for the timing. In the case of futures we discuss (too often?) how backwardation and contango can impact the implementation. In the case of the yield curve, well…you know my thoughts on the coming bear market in the longer parts of the curve.
ft.com has a posting on the structure of the CDS for Spain and Hungary. In short, these curves are showing that the market expects both to default sooner rather than later, or at least that IF they default, it will happen sooner rather than later (that’s a very fine but important different since the market isn’t expressing that they WILL default, just when to expect it IF it happens – it’s an issue of conditional probabilities).
For the full article, click here.
First, read this article from the NY Times.
LONDON — Next target: Portugal.
Speculators have begun to zero in on another small member of Europe’s troubled monetary zone, highlighting the same economic flaw that brought Greece to the verge of insolvency: a chronically low savings rate that forces a reliance on the now-diminishing appetite of foreign investors to finance persistent deficits.
Guess what – when governments told you that Greece was contained, they were wrong.
Guess what else – the stability of the euro is temporary.
Guess what else – the Greek bailout won’t help the euro long term.
Guess one last time what else – even after we all pass the Greek and Portuguese mishmash, Spain is coming up with the same issues.
This is not the time to buy dips, but rather, it’s the time to wait for serious undervaluation in any position. The real money and returns are made in the waiting.
For some further readings, click here for an article from BusinessWeek.
In a famous exchange between Chou En Lai and Henry Kissinger, the U.S. Secretary of State asked Chou what he thought of the French revolution. It being 1972, Chou answered it was too early to tell yet. The reason we bring this up is as the Greek tradegy unfolds it will take a German led bailout to keep the Greek government from defaulting. Today the German/Greek ten year note spread widened to 245 basis points and the German/Irish spread of like duration widened out 20 basis points to 200 basis points. Being that the European Union has no statute for a bailout, it will take a massive amount of transfers to shore up the Greek economy, let alone the rest of the PIIGS. Several pundits have imagined that the Greeks will get their debt situation under control by cutting public sector wages, but they seem to forget that this is a democratically elected socialist government. The chances of squeezing the unions has as much chance as going a day without seeing Obama on television making a speech. From a trading perspective the only way to play in this arena is to use the bund futures and the recently relisted Italian bond futures, both at the Eurex and denominated in EUROs. Check your system provider for the appropriate symbols—and no this is not a paid advertisement but a public service message. The question facing Europe is what political price the Germans will exact for any aid they may provide. So maybe it is too soon to determine who in fact was victorious in World War 2.
The calendar is heavy tomorrow with three central bank meetings. The Kiwi bank has already announced and they stayed at 2.5% but changed some language to suggest that they may move earlier to tighten than previously thought. The KIWI went bid against all the crosses but we think that this is an overreaction. The BANK of ENGLAND and The SWISS NATIONAL BANK both meet in the early morning but no change is expected from either. The Brits presented the pre-budget plan and it had to do with raising taxes and very few budget cuts. The middle class in Britain will carry the brunt of the hike but some red meat was tossed to the torch and ax crowd by placing a supertax on bank bonuses over 25,000 pounds. We will never defend the pay of bankers but this tax will go a long way towards subverting the role of London as a financial center. Sarkozy and Merkle [French and German leaders] are laughing in their Reisling. Europe is a mess and not getting out of this predictament anytime soon, yet the EURO held up fairly well today. It really makes one wonder where the safe havens are–we know the DOLLAR for lack of anywhere else, but the news from the U.S. today was not helpful. The Obama administration moved to extend TARP until October 3, 2010. This cannot be a positive event as this program was meant to be for the insurance of systemic financial solvency. But with the banks rushing to repay TARP funds what can the real purpose be–this is Paulson’s ghost as he jammed this through with little thought and much malice. Remeber his 3 page missive demanded that there could be no judicial review of Treasury’s actions. Oh, Expediency what has thou wrought! So risk may be declining but where does one go for wealth and capital preservation–oh well the gold/currency crosses seem to be the last bastion of financial rectitude. HMMMMMMMMMMMMMM
Tomorrow morning brings us the jobless claim number[463,000] is the guesstimate and that is followed with the trade number. The trade report was always a center piece for the currency world but because markets are dynamic this data has little relevance presently. If something way out of the ordinary is reported it could have a minor impact but most probably a yawner–negative 36 billion is projected just to prepare you. Tonight the aussie employment report came out and it was much stronger than estimated putting a bid to the AUSSIE DOLLAR. Also we wish to point out that Spain was given a negative outlook by S&P, presenting Europe with one more problem—something more to think about.
Tags: Aussie, britain, Currency, Euro, gold, Greece, kiwi, Spain
Commodities/Futures, Currency, Fixed Income/Bonds, Strategy/Allocation | yharris | 
December 10, 2009 6:42 am | 
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Readers of our newsletter won’t be surprised to learn that the world cares about Greece (and Dubai) – still.
From The Big Picture: Yesterday no one cared about Greece, today they do
From the FT: Fitch strips Greece of A-grade credit rating
As I mentioned, my view is that this is a big net negative for the Euro, and may thwart Bernanke’s reinflation plans as USD gets squeezed up. I also have a feeling that Dubai and Greece aren’t the only ones. Smaller countries in the eurozone may also be in trouble, which will place added pressure on Austria (which has built it’s recent economy on lending to emerging Europe). In my mind, Austria and Spain are the big ones to watch. If they hold, the euro will have a fighting chance. If they go down like Greece and Germany needs to finance increasingly large neighbors, we’re going to see the euro crack.
Sarkozy came out with comments criticizing the weak dollar policies of the US. Of course Europe can’t cope with a relatively strong USD (http://www.hihifrds.com/hihifrds/news-and-content-updates/sarkozy-says-europe-cannot-cope-with-weak-dlr). Europe is facing it’s own debt deflation spiral and with individual countries unable to control their monetary policy, the results are a broken system. As we posted before, Dubai is just the first taste. Look out for Greece and Spain.