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Peter Tchir
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Peter started TF Market Advisors in 2011 as a platform to trade and provide market information. The trading strategies are macro, but the direction and value decisions are based on insights into the credit markets. The firm’s commentary has been gaining respect and Peter has become a recognized... More
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  • OMT Has And Remains The Key Driver For Risk On/Risk Off

    Even A Risk on/Risk Off World Isn't This Simple, Or Is it?

    This is the S&P 500 since July. We've had earnings, elections, open ended QE, attacks on embassies, doubts about the viability of social media as a business, weak economic data out of China, bouts of strength with U.S. economic data, budgets, and stress tests, yet I would argue that the ECB has had the single biggest influence on the market.

    (click to enlarge)S&P and OMT

    While it is impossible to tell what drove the overall trend, let alone any given day, there is a strong case to be made that the ECB has played the biggest role in the "risk on" trade, and for that matter, even the recent "risk-off" trade. The moment Draghi said he was prepared to do "whatever it takes" the market rallied. The ECB press conference immediately after was a bit of a disappointment, but reading between the lines, and the odd use of "transmission" by two ECB members was a good sign that something was in the works.

    OMT was announced, and while not the full and easy QE we get out of the U.S. Fed, it was fairly impressive. My initial reaction was to give it an A for Effort but C for Execution. It was the first clear sign that the ECB was looking to take new actions and was working hard to address market concerns. It would rely on the ESM to play a role and was a little short on details, but seemed good.

    This was followed up by QE, Spanish budgets, any number of things that added to the view that central banks were watching out for the markets, but then something happened. Spain didn't ask for the money, the last summit was a flop, and many countries seem to be backtracking on prior promises, rather than becoming more aggressive.

    While I think the link between the ECB and the "risk on" trade is clearer than the case for arguing that the inability to start OMT has caused this recent "risk off" trade, I don't think it is much of a stretch to say it played a major role.

    Has "Mañana" finally arrived?

    So for me, the biggest question for the market is when Spain will get a bailout and what will it look like? Sure the fiscal cliff is out there, but that isn't until after the election. The election itself is out there, but I'm not even sure which candidate winning does what to the market. On the one side, Romney is seen more pro-business, but there is a growing concern that labeling China a currency manipulator and demanding a hawkish Fed may not be the best for markets.

    So, I think Spain will finally ask for the money, and wouldn't be surprised to see it happen in the next week.

    A lot of "housekeeping" is out of the way. The fiction that passes as the Spanish budget is finished. The fiction that passes as bank stress tests has been completed. Regional elections are not only out of the way, but the demands being placed on the Spanish government by the regions is so high that it will need money. The unemployment rate hit 25%. I'm not sure why 1 in 4 people unemployed seems that much worse than 1 in 4.01 people, but maybe it's because we can't imagine a .01 person. ESM is up and running. Bankia's disastrous quarter (I wonder how it compares to the "stress tests") also helps pave the way for some capital injections.

    Those all either help nudge Rajoy towards asking for money or given enough excuses to the ECB and IMF to be lenient on their conditionality. Those are all good. At the same time, only a complete financial moron wouldn't be picking up on the signs that Europe is tiring of bailouts. Countries seem to be contradicting earlier pledges and can't make up their mind on how to give Greece a chance, which is a relatively small problem compared to Spain. The longer Spain delays, the more risk that there is no program available by the time they ask.

    So I expect Spain will act more quickly and we should hear something as early as this week. So that means I'm slightly bullish finally. A lot could go wrong, but it seems that all the moving parts are aligning themselves to attempt something sooner rather than later.

    Clear Sailing?

    Heck no. There is a real risk that Spain won't act in time. There is a risk that earnings continue to disappoint or something about the U.S. election spooks the market, or any other number of reasons the market can continue to sell-off, but I think we get support. The sense that Spain is finally about to ask for money will offer support. QE and the $85 billion a month is hard to completely ignore. Even Apple feels like it will find support around these levels, and the indices cannot do too much with Apple hanging in.

    So no clear sailing, but I think the bias is for the market to do okay here. I think stocks can outperform fixed income, and credit in particular. The weak earnings will be cause for concern in the high yield market. Even with CLO's clamoring for loans, which will help stressed companies, the reality that the chase for yield has to be tempered by risk, is at least beginning to creep into investor's minds.

    In the end, I suspect any OMT rally to be short lived. I do not think the program will look very aggressive, and while Greece lingers as a concern, there will be a wait and see attitude amongst investors. With shorts having been taken out of the market (naked sovereign CDS bans for example) I don't think the rally will be that strong.

    Until Friday, I had been negative. I thought we had been at levels where the rally from any action would be negligible and that it wasn't going to happen just yet. At these levels, the rally would be meaningful enough that you don't want to miss it, and the timing seems to have accelerated. So I can be constructive here.

    I like (NYSEARCA:SPY) and particularly (NASDAQ:QQQ) with (NASDAQ:AAPL) providing support in addition to OMT. I would continue to have some (NYSEARCA:BKLN) and (NYSEARCA:HYG) or (NYSEARCA:JNK) but would avoid (NYSEARCA:LQD) for now as the rate risk is too high, and spreads remain near tight end of range. (NYSEARCA:EWP) would be even riskier but would get most immediate lift from OMT.

    Oct 29 8:55 AM | Link | 1 Comment
  • The Weekly T Report: Brotes Verdes

    Game Changer or Not?

    That is the question on everyone's mind.

    Was this just another temporary measure in Europe that will fail sooner or later, and most likely sooner? Or is it something real. The start to a truly European Central Bank that can drive rates low as it chooses?

    Is the economic data here stabilizing, albeit at an anemic level or was this too just an aberration and we are due to see the march of weak numbers resume?

    To some extent, the real question is Europe having an "October 2008" moment where they are addressing some issues but the markets fail to respond for long, or are they having a "March 2009" moment, where suddenly everyone is looking for the "green shoots" or "brotes verdes"?

    The Über Bull Case

    This seems by far the most unlikely, but cannot be completely discounted. Europe stabilizes. The politicians start focusing on getting the economies in order. Not only do they implement some "infrastructure" growth products but they start forcing the underground economy into the taxpaying world. Here and there we get little hints of confidence and see diffusion indices creep closer to 50, and finally one of the periphery countries shows signs of small, but definitive growth off the bottom.

    Some semblance of "business as usual" in Europe would creep into the U.S. data and Chinese data, taking some pressure off of earnings estimates. The slow job growth continues and accelerates as housing shows more signs of having hit bottom and global trade starts picking back up.

    I find this case unlikely, but "green shoot" sightings can have a lot of impact. Expect European stocks and Banks to do the best under this scenario. They have paid the biggest price for the problems and will have the most direct benefits.

    The Comme Ci Comme Ça Case

    This remains the base case. Brief fits of happiness followed by outbursts of fear. Every time something positive happens, we get some negative headlines. The focus turns from Europe to our own Fiscal Cliff and broken political system. That we get caught by a rogue trader somewhere or that France was in worse shape than we fought. Some encouraging signs of life come out of Greece followed by more LIBOR arrests and lawsuits. Talk of QE spoiled by fighting in the Mid-East.

    It seems that this is the mode we have been in and are most likely to remain in. We are near the high end of that trading range, and we should be waiting for the next bit of bad news. I think we will see balanced returns, where Europe and the U.S. take their turns leading the way higher or lower. At these levels, U.S. politics, deficits, and actual corporate earnings can be as much of a drag as news out of Europe. Fixed income should continue to perform, though with an outperformance from the risk on fixed income assets as opposed to the risk off ones.

    Il Mondo si Trasforma in Merd@

    I think this case is less likely than it was a week ago. The Central Bankers and Politicians are all too aware of it, and so scared, that they will continually step up and avert it, but it is still as likely as the most bullish case.

    This is where we see a chain reaction of exits from the Euro, resulting in a global halt in trade and finance just like when the world froze after Lehman. An already slowing China cannot sustain any growth, and the fragile recovery in the U.S. is doomed to recession or worse by the events in Europe and our own inability to get the government to do anything.

    The world spirals down, and nothing the central banks do is viewed as effective or is timely enough to avert another leg down. I think the risk of this is low and no great than the ultra bullish case, but isn't off the table.

    Europe will likely do worse because they don't have a Fed, but China would also likely be a disaster. Puts are probably the best way to play this. Vol is relatively cheap and you are looking for 6 month puts, but with strikes of 1,100 on the S&P 500. If this case occurs, it will not happen in a straight line because the central bankers will try.

    Aug 05 9:17 AM | Link | 7 Comments
  • From QE To PE

    Don't the Markets NEED QE?

    No. While QE has helped support the market and was the main reason the S&P 500 managed to stay above 1,300 in spite of weak data, it isn't necessary. Taking the most "disruptive" scenarios off the table in Europe is more important. If Europe can stabilize, then the markets could price in a better "multiple". One thing holding down the PE multiple is the concern that Europe could become a complete disaster. As that get removed, there is the real possibility that investors will get more comfortable with risk and we can see a multiple expansion. If we see over time, some (and I hate the term) "green shoots" in Europe, then we could actually see some increased expectations of earnings. Europe has been a drag on earnings, and pessimism about Europe is keeping earnings forecasts down, but it wouldn't take much of a turn in Europe to give earnings here a small boost.

    So if (and it remains a big if) Europe takes tail risk off the table we could see an increased multiple, and if Europe actually manages to stop the slowdown, then we could see earnings expectations grow, so the market could do well as it shifts from QE to PE.

    I think much of that is already priced in. I keep thinking that 1,400 to 1,425 is a top for the S&P 500 in the near term. The U.S. has decoupled so much that there just isn't that much upside, and as the world turns its attention to our problems, we could well see weakness here.

    Banks should be the sector that benefits the most from any fix in Europe. They have been most hurt as an industry over concerns about Europe (separate from Volcker rule concerns and LIBOR scandals). Spanish and Italian companies can benefit the most as they have felt the brunt of the "risk off" trade. While the S&P 500 is up 10% YTD, and the DAX is up 13%, Spain is still down 23% and Italy is down 10%.

    Europe Won't Deliver?

    Ugh. I'm not sure that "ugh" is a real answer but is my reaction to that question. I would like to give an unequivocal and resounding NO but history demands some caution. While Europe has failed to deliver on so many occasions, there is real reason to believe this time is different. There are more people who have openly expressed a willingness to do what it takes. The hints of the plan are within existing mandates. The German economy is deteriorating as well, changing their focus. The farce of complaining that Greece isn't making reforms when most of the money is being used to pay back the ECB has become too obvious. The economies across the entire region are faltering or in depression. Both Draghi and Novotny used the "transmission" expression which seems too specific to believe it was a casual reference and not a rallying point. There are more reasons than that, so I believe they will act, but have taken some risk off the table because they have failed to deliver so often, so betting on success at these current levels makes sense, but I want some room to add if they fail. Monday was the time to be "all-in" today is not.

    There is no plan?

    Wrong. Details are coming out and it looks like there is a plan. What has leaked so far is a multi-pronged approach that would address many concerns and fits within the existing mandates. Even more importantly, in spite of confusion to the contrary, it works around many of Germany's concerns. That is important and I expect the Draghi Weidmann meeting to confirm that they can work together. In fact the template we have discussed often and re-iterated yesterday morning seems to be in line with what has been leaked so far.

    Even if the plan is implemented, nothing is fixed?

    Wrong. The economies in Europe are grinding to a halt at least in part because of the risk and confusion about currency redenomination. Investors are scared of owning Spanish and Italian assets out of fears that they will get converted into some worthless Pesetas or Lire. Even Germany is being affected. Who wants to do business in a country that could see a spike in their currency if they switch back to the Deutschemark. So this plan should take currency redenomination risk off the table for now. That risk cannot be underestimated as it caused bank runs and much of the distortion in negative bond yields.

    Taking the conversion risk and imminent default risk off the table is a big step. It eliminates some of the worst scenarios as an investor, and more importantly as a businessman. Companies can spend less time worrying about their existing assets and exposure to the region and spend some time on developing new business strategies.

    So Europe is fixed?

    No. There is a big difference between nothing being fixed and the whole problem being fixed. This plan, assuming it is implemented (ideally in the way that I outline) then the immediate problems of default and redenomination are taken off the table. That is it. From there we need to see growth.

    The private sector will still be reluctant to do much, so the EIB and the "project bonds" will have to be used to spark some growth. The governments will have to use stimulus to stop the decline and give the first sign that things can get better. They need to spark some job growth. Money has to get to companies and they have to see opportunities to make even more money by investing. That won't happen quickly, but just like the U.S. in 2009, the markets will react positively to any signs of "green shoots" (I really hate that term).

    Europe will also have to work towards a more "standardized" approach. Countries will have to move to a normalized tax and benefit system. Spain in particular will need to focus on bringing the underground economy into the measured and taxed economy. There will have to be some painful changes, but these don't have to happen overnight - nor should they. But they have to happen.

    Europe needs to use the breathing room an aggressive ECB program creates to implement these changes and spark some growth.

    Is Draghi Dumb?

    No. The bear case relied in part on Draghi being so stupid that he couldn't see the obvious consequences of his inaction. Well, he saw what would happen if he didn't act and is trying to act, so clearly he isn't the "deaf dumb blind kid", though I don't know if he plays a mean game of pinball or not. I will ask him when I meet him.

    Enjoy the weekend as there should be no shortage of headlines to move the market next week.

    Tags: EWP, JPM, HYG, SPY
    Jul 29 11:35 AM | Link | 1 Comment
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