The T Report: Complaining About Free Beer

Posted by on Sep 6, 2012 in Uncategorized | No Comments

We All Know the Type

They get handed a free beer and the first thing they say is

  • Too warm
  • Too fizzy
  • Too flat
  • Doesn’t taste right out of plastic cups
  • Don’t you have any Labatt’s?

They forget the beer was free and only focus on the negative details.

Well after the Draghi leak yesterday, all I heard was

  • Sterilized
  • Only 3 years
  • Unlimited doesn’t seem like much
  • They won’t be able to do unlimited
  • No Yield Cap
  • Germany won’t like this
  • It will be senior

We need to get the actual details, but I think many people missed what looks like a very significant step. The ECB is talking about buying front end bonds to keep yields in line with their expectations. It is more targeted than the original SMP. It is being done without support. It seems as though it will be a permanent policy, so in a year, bonds that were 4 year bonds today, could then qualify.

Many of the Fed programs also started originally at the short end. Operation Twist was only added later to fully extend. The FDIC insured bond program only covered 3 years but worked.

I will respond with my thoughts on the actual program and any other announcements – such as EFSF involvement – as they come out.

Trade the Facts, Don’t Sell The News

As far as I can tell, everyone is ready to sell the news. So we will likely see the rally fade, at least initially as people sell the news. Some will then react to that weakness by saying the market doesn’t like the policy. That won’t be the case, but many looking for direction will also sell thinking the plan was a failure. This is largely what went on yesterday on a small scale, and I expect to see on a larger scale today.

I have taken some profits, but will add on dips. I think the “sell the news” trade works well when not everyone is doing it. I think it will turn out to be a mistake. I also think the complaints that support the downward move are more likely to be “free beer” type complaints than legitimate ones. And just like after a cup or two of free beer, most people stop complaining, as the potential impact of ECB program settles in, the markets can continue their strength.

I remain firmly in the “re-coupling” camp.

Long EU stocks, particularly Spain and Italy versus US. I also am starting to like China stocks, and am getting negative on German stocks.

Long periphery debt versus short core, though long EFSF vs core is something I’m looking at.

Long via CDS, not long via bonds, and negative on high yield ETF’s.

Will send you updates as details come out, and in meantime, I don’t think you need to add risk right now as I expect a bit of a fade, but I would use that to buy/reload rather than selling along.