By Simon Lack
Greece has been warned by the troika (EU, ECB, IMF) that personally signed pledges from key political leaders are required before the next tranche of the bailout is released. Greece apparently has enough cash to last 20 days. The threat is that failure to comply will result in Greece being allowed to default.
Well, at least Greek CDS contracts should finally have some value. At this poker table, who really believes the troika holds a strong hand? Both sides continue to avoid their Lehman moment. At this stage, with no clear strategy to avoid contagion, forcing Greece into bankruptcy simply isn't a credible threat. The troika will find a face-saving way to provide the needed funding.
The Super Committee has done nothing remotely super, and as a result leaders of both parties assert that the $1.2 TN in automated spending cuts will take effect in 2013 absent an earlier negotiated settlement. $1.2 TN, cut equally from Defence and Entitlements. Who really believes that will happen? Congress wrote the law and can re-write it. There are several paths resolving the U.S. fiscal deficit that may follow, but automated cuts immediately following a general election is not credible.
It's becoming harder to figure out who holds a strong hand on either of these issues. Investors with no leverage, invested in quality companies and with some available cash probably hold the best cards. For our part, we have been defensively upgrading quality and raising modest amounts of cash. Equities remain an attractive investment, but government paralysis on both sides of the Atlantic looms ever larger over the economic and investment landscape.
In Fixed Income we continue to like senior loans and hold BHL and PPR. In Deep Value Equities we have modestly lowered our exposure to natural gas E&P names, although our largest position remains Devon Energy (DVN). We also increased our position in McMoran Exploration (MMR), who will report on their Dave Jones flow test by the end of the year at which point the company's prospects should be much clearer. And we continue to be short the € by holding EUO.
Most of the government players at this poker table need stronger hands.