European Close
Monday's? Always a struggle to redial the intensity, look at your (risk) positions and decide 'what do I really believe?'
For once - fortunately? - my 'strong opinions, weakly held' are all in play.
So-called fundamental (& bias) aside I believe charts (& the risk-reward) support:
- A core short in European equities;
- Waiting (hoping?) for the $SPX to 'complete' a top @ 1280-1300;
- Continuing to sell/cover/re-sell EURO/$USD;
- Building a short in AUD$/USD$;
- Tentatively (VERY) buying $/YEN above recent lows.
Two themes dominate:
First, whilst I'm unsure when/if this becomes a full-blown 'risk off' trade, I think European equity markets have: (a) peeled away from the EURO 'break-up' trade; (b) face major macro economic headwinds; (c) are clinging on to the relative strength of the $SPX.
Second, I expect the USD$'s strength to broaden (beyond the EURO's travails) & with dampening global growth (see: China) the AUD$ (& other Asian currencies) looks very vulnerable. Buying the USD$ Index may well be the simplest (best) trade.
The rest (& I'll post my levels/entires) is in the trade management.
More of a 'muse' on the US close
Monday 9 January 2012
Thursday 5 January 2012
Dublin Calling: Trading 101
As a trader I believe in looking for the looking for the TRUTH - however illusive - and interpreting the PATTERNS.
TRUTH? I'm a cynical (ex hedge fund) macro kinda guy.
PATTERNS? I'm a old fashioned wave (fib) counting tech.
Putting the two together - creating an edge? - is a life times work. And that only works if you get the DISCIPLINE right - most of the time?
I like to take a clear view - to swing risk on/off to use modern parlance - but I'm always tentative ('strong opinion weakly held') in my risk taking.
Markets morph.
Markets often make no sense.
But the price is always RIGHT.
For 2012 I'm going to write about my trading semi-religously and very philosophically.
I've recently returned to full-time trading after a 3 year interlude.
I'm Irish.
I'm passionate.
I'm worried.
And in my (no so weak) opinion I think I've see this parts of this movie.
I hope to contribute - to add value to fellow traders/investors - but its gonna be fun regardless.
Tomorrow - few themes to start the year.
TRUTH? I'm a cynical (ex hedge fund) macro kinda guy.
PATTERNS? I'm a old fashioned wave (fib) counting tech.
Putting the two together - creating an edge? - is a life times work. And that only works if you get the DISCIPLINE right - most of the time?
I like to take a clear view - to swing risk on/off to use modern parlance - but I'm always tentative ('strong opinion weakly held') in my risk taking.
Markets morph.
Markets often make no sense.
But the price is always RIGHT.
For 2012 I'm going to write about my trading semi-religously and very philosophically.
I've recently returned to full-time trading after a 3 year interlude.
I'm Irish.
I'm passionate.
I'm worried.
And in my (no so weak) opinion I think I've see this parts of this movie.
I hope to contribute - to add value to fellow traders/investors - but its gonna be fun regardless.
Tomorrow - few themes to start the year.
Wednesday 21 December 2011
Squaring the Euro Circle
Rehashing some numbers from the Economist (p. 81 November 26th 2011) illustrates the scale of the imbalance poisoning the heart of the Eurozone.
The net foreign liabilities - what business, households & governments owe to foreigners less the foreign assets they own - of Greece, Ireland, Portugal and Spain are close to 100% of their respective GDP's.
Yeap - that's in all all four cases - not cumulatively.
And to quote the Economist: 'Much of their debt is being financed by local bank borrowing or bonds (issued) in creditor countries - such as Germany.'
Now it's no secret that the so-called 'core' of Europe's banks have lent heavily to finance the 'extravagance' of the so-called 'periphery' - but think about this.
As an Irishman I understand the burden that the EU/ECB's brutal refusal - unfortunately reinforced by the farcical Greek misadventure - to contemplate an orderly restructuring (default) of privately owned debt has placed on my countries finances.
Of course it may be a necessary evil - to save the sovereign you must first save their banks? - but lets not pretend that economic consequences are not very disproportionate.
I doubt this circle can hold.
The net foreign liabilities - what business, households & governments owe to foreigners less the foreign assets they own - of Greece, Ireland, Portugal and Spain are close to 100% of their respective GDP's.
Yeap - that's in all all four cases - not cumulatively.
And to quote the Economist: 'Much of their debt is being financed by local bank borrowing or bonds (issued) in creditor countries - such as Germany.'
Now it's no secret that the so-called 'core' of Europe's banks have lent heavily to finance the 'extravagance' of the so-called 'periphery' - but think about this.
As an Irishman I understand the burden that the EU/ECB's brutal refusal - unfortunately reinforced by the farcical Greek misadventure - to contemplate an orderly restructuring (default) of privately owned debt has placed on my countries finances.
Of course it may be a necessary evil - to save the sovereign you must first save their banks? - but lets not pretend that economic consequences are not very disproportionate.
I doubt this circle can hold.
Monday 19 December 2011
What is a Government Bond?
Quite simply
“It is the ability to print one’s own currency to pay government bond investors back under any circumstances that makes a government bond a government bond, i.e. a (credit) risk- free asset for hold-to-maturity investors,” Elga Bartsch, the chief European economist at Morgan Stanley in London, said in a report this month to clients.
I believe this is as good as any definition.
And, therefore, following comments highlight why the Euro-17 will continue to see their credit-worthiness eroded:
European Central Bank President Mario Draghi damped expectations that the bank will step up bond purchases to tame the sovereign debt crisis, saying it can’t overstep its mandate.
“People have to accept that we have to, and always will, act in accordance with our mandate and within our legal foundations,” Draghi told the Financial Times in an interview, confirmed by the Frankfurt-based ECB. “The important thing is to restore the trust of the people -- citizens as well as investors -- in our continent. We won’t achieve that by destroying the credibility of the ECB.”
http://www.bloomberg.com/news/2011-12-18/draghi-tells-financial-times-bond-buying-unlikely-as-ecb-abides-by-mandate.html
As oft repeated, the ECB is NOT the Federal Reserve and - to the chagrin of the French - its NOT the Bank of England either.
That's the (terminal) dilemma that must be solved.
Wednesday 7 December 2011
The Geithner Effect
Aside from worrying about his bosses re-election, Mr. Timothy Geither's idea of a 'solution' to the Eurozone crisis is best described in Simon Carwell's excellent "Anglo Republic - Inside The Bank That Broke Ireland.'
I paraphrase Chapter 19 - particularly page 312.
In mid-November 2010 Ireland's then Finance minister - the late Brian Lenihan - was (privately) negotiating the terms of the nation's impending bailout with the ECB & IMF. To his eternal credit Mr. Lenihan insisted that senior bondholders in Anglo Irish Bank & Irish Nationwide (Building Society) - both bust; both nationalized - should face substantial haircuts. The deeper the haircuts, the lower the already onerous cost of the bailout.
The IMF - to their credit - believe 'lenders should pay for their stupidity before it has to reach into its own pocket' - a quaint, seemingly old fashioned idea unless you are a ordinary home owner - and presented a plan that would impose haircuts of up to 2/3rd's upon Euro 30billion of unguaranteed bonds. Lenihan was reportedly 'overjoyed' and told the IMF: 'You are Ireland's salvation.'
Its worth noting that this 'notional saving' of Euro 20billion represents 10-15% of Irish GDP (depending on your timeline) and almost equals the (2008-2015) fiscal adjustment. This is not a small (relative) number.
According to Morgan Kelly (a well known Irish academic/economist - writing in the Irish Times) the IMF's proposal was: ''torpedoed by US Treasury Secretary Geithner, who 'believes bankers take priority over taxpayers.' Unsurprisingly, the US government denied Kelly's account, but Irish government sources confirmed senior European figures were also strongly opposed to burning senior bondholders who had lent money to Irish banks.
As Carswell writes - we will never know. But we do know: 'that every key event from the guarantee (September 2008) to the EU-IMF bailout (November 2010) was structured in a such a way as to make the Irish taxpayers responsible for the massive private losses of the banks and for protecting the vast majority of institutions and investors that lend to them.'
Earlier today Mr Geithner proclaimed; 'Financial crisis are resolved when governments and central banks create conditions that make it compelling for investors to take the risk involved in lending to governments and banks.'
Earlier today Martin Wolf (FT) wrote (amongst much else): 'The decision (the so-called Merkozy compromise) seems to include not compelling private bondholders to take losses on Eurozone bailouts.'
Geithner (& the ECB) have had their way. Greece is 'an exception.' For now.
When these guys talk austerity - they mean it.
I paraphrase Chapter 19 - particularly page 312.
In mid-November 2010 Ireland's then Finance minister - the late Brian Lenihan - was (privately) negotiating the terms of the nation's impending bailout with the ECB & IMF. To his eternal credit Mr. Lenihan insisted that senior bondholders in Anglo Irish Bank & Irish Nationwide (Building Society) - both bust; both nationalized - should face substantial haircuts. The deeper the haircuts, the lower the already onerous cost of the bailout.
The IMF - to their credit - believe 'lenders should pay for their stupidity before it has to reach into its own pocket' - a quaint, seemingly old fashioned idea unless you are a ordinary home owner - and presented a plan that would impose haircuts of up to 2/3rd's upon Euro 30billion of unguaranteed bonds. Lenihan was reportedly 'overjoyed' and told the IMF: 'You are Ireland's salvation.'
Its worth noting that this 'notional saving' of Euro 20billion represents 10-15% of Irish GDP (depending on your timeline) and almost equals the (2008-2015) fiscal adjustment. This is not a small (relative) number.
According to Morgan Kelly (a well known Irish academic/economist - writing in the Irish Times) the IMF's proposal was: ''torpedoed by US Treasury Secretary Geithner, who 'believes bankers take priority over taxpayers.' Unsurprisingly, the US government denied Kelly's account, but Irish government sources confirmed senior European figures were also strongly opposed to burning senior bondholders who had lent money to Irish banks.
As Carswell writes - we will never know. But we do know: 'that every key event from the guarantee (September 2008) to the EU-IMF bailout (November 2010) was structured in a such a way as to make the Irish taxpayers responsible for the massive private losses of the banks and for protecting the vast majority of institutions and investors that lend to them.'
Earlier today Mr Geithner proclaimed; 'Financial crisis are resolved when governments and central banks create conditions that make it compelling for investors to take the risk involved in lending to governments and banks.'
Earlier today Martin Wolf (FT) wrote (amongst much else): 'The decision (the so-called Merkozy compromise) seems to include not compelling private bondholders to take losses on Eurozone bailouts.'
Geithner (& the ECB) have had their way. Greece is 'an exception.' For now.
When these guys talk austerity - they mean it.
Tuesday 6 December 2011
Fiscal Liasons
Are we just waiting for the last of the fix of hope-pium to fade?
Whether the ECB commits to some larger scale bond buying/yield limiting program (absence signed and sealed Treaties (with referendums) - not loose intergovernmental commitments - I find this very improbable) OR it simply continues to provided the banks with every which way to finance their (collateral) balance sheets (& they could & should cuts rates again) - does it change the underlying dynamic?
The ECB will liquify the system, buy time (& 'some' bonds) and attempt underwrite the worst of the austerity risks - but it will not (can not) bail out any member states sovereign debt. One thing is abundantly clear - as far as the Germans are concerned - you borrowed it, you owe it and you will pay it back. However long it takes.
As an Irishman I feel somewhat informed as to how this type of fiscal adjustment will work. The Irish economy has shrunk by 15% since 2008. The government has cut spending and raised taxes by a similar amount. Unemployment stands @ 14.5%. Our deficit will be 10% of GDP in 2011. Best scenario we are looking at 3-4 more years of the same. And we mock our own quiet acquiesce.
Not unsurprising the EU see's us as 'poster boys' for good ('take your well deserved medicine') behavior and takes solace in the robustness our external sector. They think austerity works. They think 'problem' was solely created by the extravagance of the peripheral. They resolutely defend their banks by forcing other counties taxpayers to make their lending whole.
Rightly or wrongly I am skeptical other nations (for example - Italy - with a growth potential of close to ZERO) can travel this road. But then I don't believe the Germans (& French) seriously expect anything like all 17 to survive a souped up Stability Pact. History (study Latin America) suggests there will be defaults in coming years - but I doubt the ECB, the EFSF/ESM or - more particularly - the German taxpayers will pay for them.
So whenever happens - whatever the market wants to believe for 5 minutes - Thursday/Friday will bring further clarity. I strongly suspect the Euro will survive. But the number of members is to be determined. And the economic cost will be high either way.
Whether the ECB commits to some larger scale bond buying/yield limiting program (absence signed and sealed Treaties (with referendums) - not loose intergovernmental commitments - I find this very improbable) OR it simply continues to provided the banks with every which way to finance their (collateral) balance sheets (& they could & should cuts rates again) - does it change the underlying dynamic?
The ECB will liquify the system, buy time (& 'some' bonds) and attempt underwrite the worst of the austerity risks - but it will not (can not) bail out any member states sovereign debt. One thing is abundantly clear - as far as the Germans are concerned - you borrowed it, you owe it and you will pay it back. However long it takes.
As an Irishman I feel somewhat informed as to how this type of fiscal adjustment will work. The Irish economy has shrunk by 15% since 2008. The government has cut spending and raised taxes by a similar amount. Unemployment stands @ 14.5%. Our deficit will be 10% of GDP in 2011. Best scenario we are looking at 3-4 more years of the same. And we mock our own quiet acquiesce.
Not unsurprising the EU see's us as 'poster boys' for good ('take your well deserved medicine') behavior and takes solace in the robustness our external sector. They think austerity works. They think 'problem' was solely created by the extravagance of the peripheral. They resolutely defend their banks by forcing other counties taxpayers to make their lending whole.
Rightly or wrongly I am skeptical other nations (for example - Italy - with a growth potential of close to ZERO) can travel this road. But then I don't believe the Germans (& French) seriously expect anything like all 17 to survive a souped up Stability Pact. History (study Latin America) suggests there will be defaults in coming years - but I doubt the ECB, the EFSF/ESM or - more particularly - the German taxpayers will pay for them.
So whenever happens - whatever the market wants to believe for 5 minutes - Thursday/Friday will bring further clarity. I strongly suspect the Euro will survive. But the number of members is to be determined. And the economic cost will be high either way.
Friday 2 December 2011
Sequence This
Last Thursday (November 24th) I posted 'Inferring the truth' - and suggested a Eurozone 'solution' (of sorts) was in the making and given the market's sentiment a sharp rally was highly probable.
I wish I'd taken all (not just half) of my own advice.
Now we've seemingly spun a full 180 degrees what's next?
Discount the EFSF and other proposals - there'll be a lot more more fudge and fuddle - and you can see the outlines:
- The Germans (and the French) are driving for full blown - sanctions, veto's et al - fiscal union;
- They will try to circumvent the democratic (political/referendums) process;
- We will hear a lot more about the Schengen Agreement, Protocol 14 and other legalistic maneuvers;
- The minimum objective (December 9th) is that the 'core' (& Italy's unelected government) sign up.
This is all very plausible.
But will it provide the 'political cover' - enough crime and punishment - for the Germans to sanction greater ECB involvement &/or the issuance of some type of 'stability' bond?
Well, that depends.
How many countries will sign away their fiscal independence without any democratic mandate?
How many won't?
Is the ECB ready to commit? And to what?
Will the German Constitutional Court (& others?) re-enter the arena?
I could go on, but the point is obvious:
Fiscal union is the end-game and it probably does unleash the ECB, but getting there - legally? - with all 17? - is going to be extremely difficult.
Either way the problem (shifted onto the ECB's balance sheet) remains and Europe faces a grim (austere) year or two (if its lucky.)
I see two scenarios:
(1) Markets rally on, European equities complete 'a-b-c' (.618 fib) corrections to the 2011 sell-off into year-end, and a new bear market begins in early 2012.
(2) Markets fail here and it all unravels very quickly.
I wish I'd taken all (not just half) of my own advice.
Now we've seemingly spun a full 180 degrees what's next?
Discount the EFSF and other proposals - there'll be a lot more more fudge and fuddle - and you can see the outlines:
- The Germans (and the French) are driving for full blown - sanctions, veto's et al - fiscal union;
- They will try to circumvent the democratic (political/referendums) process;
- We will hear a lot more about the Schengen Agreement, Protocol 14 and other legalistic maneuvers;
- The minimum objective (December 9th) is that the 'core' (& Italy's unelected government) sign up.
This is all very plausible.
But will it provide the 'political cover' - enough crime and punishment - for the Germans to sanction greater ECB involvement &/or the issuance of some type of 'stability' bond?
Well, that depends.
How many countries will sign away their fiscal independence without any democratic mandate?
How many won't?
Is the ECB ready to commit? And to what?
Will the German Constitutional Court (& others?) re-enter the arena?
I could go on, but the point is obvious:
Fiscal union is the end-game and it probably does unleash the ECB, but getting there - legally? - with all 17? - is going to be extremely difficult.
Either way the problem (shifted onto the ECB's balance sheet) remains and Europe faces a grim (austere) year or two (if its lucky.)
I see two scenarios:
(1) Markets rally on, European equities complete 'a-b-c' (.618 fib) corrections to the 2011 sell-off into year-end, and a new bear market begins in early 2012.
(2) Markets fail here and it all unravels very quickly.
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