The T Report: I’m Starting to Feel like Bill Murray in Groundhog Day

Posted by on Jul 20, 2012 in Uncategorized | No Comments

More Of the Same

Spain is weaker again this morning. Stocks and bonds are both lower.

Corporate credit is a touch wider with MAIN at 163.75 or almost 2 bps wider on the day. IG18 is opening at 109.5 or 1 basis point wider. German stocks are down, but nowhere near as much as Spain or Italy.

So it is risk off in periphery again today, with a mild reaction, so far, in “core” markets.

As I wrote yesterday, it is incredibly tempting to be short, and so far that would have been the right trade with futures down and IG a little wider, but somehow I can’t quite pull the trigger yet.

Commentary still seems very skewed to the negative side. Everyone seems to be pointing out that VIX at 15 will mark a top. I tend to agree, but the widespread agreement scares me.

There are some people pointing out that last year when Germany hit 0% yields, it was a low for stocks and we saw a significant rally, but far more people continue to point out Spanish bond yields as a core problem.

If I felt that the majority of people were pounding the table suggesting to be long here, I would definitely be short, but as it stands I will remain with my roughly 50% long weighting.

IG18 does look extremely rich. It is trading at least 4 bps rich to intrinsic, which seems overdone. With fixed income ETF’s like HYG not even trading at a 1% premium, that just seems to rich and is likely to underperform regardless of market direction, as even in an improving environment, it will lag as single names catch up.


Banks remain a focal point. Their underperformance yesterday was telling. There is real concern about the future profitability of these institutions. There is concern about the LIBOR scandal. As a whole I am torn between whether the market is overreacting to weak earnings out of Morgan Stanley and the overhang of more regulation and lawsuits, or that in spite of some better housing data, the economic malaise we have seen in Europe is spreading here, and will hit the banks hard.

It is hard to own any of the “LIBOR” banks without a better assessment of their exposure. As I dig deeper, I’m growing comfortable with some of them and getting a little scared that there are some big potential issues at a couple of the banks.

Will Europe “Evergreen” Spain and Italy

There is some conjecture that the EFSF will start buying bonds. I think the most likely outcome, that is easiest to swallow for the big countries and still gives some benefit to Spain and Italy is to participate in t-bill auctions.

The lending nations should be relatively comfortable with t-bills. Even Greece never defaulted on t-bills, so the EFSF can borrow 6 month money at next to nothing and pass it along to these countries.

That isn’t as good as providing long dated cheap money as it retains a lot of roll risk and depends on ongoing commitment to support. But it is better than nothing, should be palatable to the lending nations, and takes advantage of the fact that EFSF really can borrow at zero.

I don’t think supporting the secondary market does much as Spanish banks aren’t selling much – they have their bonds tucked away in hold to maturity books, so using what capital money is left in the EFSF for primary market operations seems a better use to me.