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Bo Peng
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I run a fund based on automated trading and technical analysis. But my favorite pastime is thinking and talking about political economy. I guess I'm George Soros. Writing helps clarifying my thinking. All opinion expressed here is mine, wholly mine, nobody's but mine. And all trading/investment... More
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  • Trouble Shoots Galore -- Credit, Eurozone Baliout Uncertainty, Japan 1 comment
    May 28, 2010 1:11 AM | about stocks: EUO, EWP

    Of all the financial markets, equities is always the most myopic, the last one left holding the bag, although it often gets the headlines because it has the widest participation by the unwashed public. It's a sad state of affairs when you think about it, but I won't dwell in this here.

    On the other hand, relatively "obscure" markets like credit (cash and derivatives), money markets (repo, Libor), and forex foretell much more about what's going on with the financial and economic world. These are the places where big boys play. There're two kinds of big boys -- corporations looking for financing and hedging, and institutional traders with access to money and information speculating and hedging. Playing in equities without keeping a constant eye on these markets would be akin to flying an airplane with one wing in a lightening storm at night, blindfolded and with hands tied to the back.

    In light of Thursday's laughable rally and especially misleading, no, outright deceptive media coverage thereof, I feel obligated to share some info I've gathered this evening, randomly between playing with the kids and planning the weekend trip.

    1. Bloomberg has an excellent summary of the goings-on in credit markets in May, which is sad because such quality financial journalism has to share the same platform with their earlier groupie headline of postmortem market summary attributing the day's rally in equities to -- get ready for this -- China expressing confidence in Europe.

    Even though I called this "correction" spot-on and have become much more bearish since then, I didn't realize it's this bad. You should read it yourself. But I'll summarize a few points here:

    1) Corporate debt issuance in May, from dollar to yen, dropped to the lowest monthly amount since 12/2000. That's not a typo. The corporate debt market is more dead than late 2008. In Europe, it was the slowest month on record. European bank selling debt in global markets was the least since 1999.

    2) US corporate bond spread over treasuries was the highest since at least 11/2008. Many planned issuances were canceled due to prohibitive cost. But for how much longer can they hold their breath? Some are desperate enough to pay the high cost anyway, like Goldman, paying 1.05% more in spread over treasuries compared to two short months ago.

    3) Cost for insuring European corporate bonds had the biggest monthly increase since 10./2008.

    4) Libor was highest since 7/2009. This shows how reluctant banks are to lend short-term money to other banks. It used to be universally applicable, but recently it's mostly for European banks since it's getting harder to get dollars there. Not noted in this report but of importance is that different banks are charged widely different rates, meaning some banks are perceived to be higher risks even in the short-term.

    To summarize: corporate and banking finance in Europe and US have reached a difficulty level only surpassed by the craziest days of 08 crisis.

    As I said earlier in the week, the Euro crisis was started by PIIGS sovereign debt, but it will trigger a global contagion via the private sector, and mostly through banks. Is there any chance bank/corporate financing improve soon? It may moderate somewhat if no further bad news comes out, but it will remain elevated for a long time since none of the root causes for the elevation -- PIIGS default risk, European bank exposure thereof, Spanish bank exposure to real estate, risk of double-dip even in the US due to the end of various stimulus measures, risk of Eurozone long-term recession due to wide-spread, severe austerity measures, viability of EUR, etc etc -- has come any closer to resolution; indeed some have been made worse by various policy blunders.

    The vicious feedback loop has already started.

    2. It's really come to this, Germany vs France.

    France's Europe Minister publically asserts that Eurozone bailout package is "expressly forbidden" by the EU Constitution. While a German court turned down legal challenges to the bailout, now opponents have found an unlikely sympathetic ear in France. I expect legal challenges to revive within days, CDS on PIIGS and European banks to surge up again, EUR and GBP to resume their regularly scheduled diving exercise, and the squabbling between Germany and France to heat up.

    Both Germany and France want to turn this crisis into an opportunity to transform the monetary union into a political union. Perfect agreement there. Only problem is both want to be the leader. But there's always an alternative -- let PIIGS default, dissolve EMU, and go their own merry ways. Beats war.

    In any case, I (along with the market) was too early dismissing the sovereign risks. It's back on the table.

    3. Some bad news out of Japan.

    Latest numbers, for April, from Japan point to higher unemployment, more deflation, and lower domestic spending. Expect some nasty surprise in May export when it comes out in a month.

    So where's hope?

    Oh, yes, China reaffirms its confidence in world economy, banks, and everything. And there's always that bridge in Brooklyn.

    Disclosure: Long EUO, Short EWP

    Stocks: EUO, EWP
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  • Diggintunnels
    , contributor
    Comments (331) | Send Message
    Thank you, I needed some counter balance after watching some of the MSM's analysis of this 'bull' market.
    1 Jun 2010, 07:48 AM Reply Like
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