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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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  • There Will Never Be a “Good” Time For Greece To Default 0 comments
    Sep 24, 2011 6:06 PM | about stocks: SPY, IWM, JNK, HYG, LQD
    I have been a proponent that Greece should default sooner rather than later for a long time. At first most people argued that Greece would never have to default. Now many people argue that Greece should default, but now isn’t a good time. The argument goes that Europe needs time to prepare for the default or the risk of contagion is too high.
    My view is that Europe needs to let Greece default. Europe needs to abandon the existing perimeter and fall back to a more defensible position. Europe doesn’t need to collapse, but it does need to retreat to a core, stronger position, where it can dig in its heels and defend itself. Battles are not lost because every soldier is killed, battles are lost when morale gets so low that the soldiers give up and flee for their lives. Wars are won when isolated, broken units, are captured or killed. I think Europe has to take the pain now, or risk further pain.
    My argument against “waiting for a better time” is that it may never come. Europe has squandered the last year. Europe was in much better shape to deal with a Greek default last year than they are now. Contagion was a concern back then in regards to Ireland and Portugal, now it is a reality. Only the darkest of the doom and gloom crowd believed that contagion could really spread to Spain and Italy, yet now that risk is palpable.   Banks were more worried about fighting Dodd-Frank, and raising dividends, and creating almost record bonus pools, not trying to convince employees that the firm’s are solvent.

     
     
    Stock Market
    5yr Yields
    5yr CDS
    Country
    9/30/10
    9/23/11
    Chg
    9/30/10
    9/23/11
    Chg
    9/30/10
    9/23/11
    Chg
    Germany
    6,229
    5,196
    -17%
    1.48%
    0.91%
    -0.57%
    39
    108
    69
    France
    3,715
    2,810
    -24%
    1.75%
    1.75%
    0.00%
    79
    196
    117
    Italy
    20,505
    13,665
    -33%
    2.82%
    4.98%
    2.16%
    194
    518
    324
    Spain
    10,514
    7,997
    -24%
    3.33%
    4.43%
    1.10%
    228
    414
    186
    Portugal
    7,508
    5,722
    -24%
    5.23%
    14.11%
    8.88%
    410
    1158
    748
    UK
    5,548
    5,067
    -9%
    1.61%
    1.32%
    -0.29%
    66
    96
    30
    USA
    1,141
    1,136
    0%
    1.27%
    0.87%
    -0.40%
    49
    56
    7
    Japan
    9,369
    8,560
    -9%
    0.27%
    0.35%
    0.08%
    61
    142
    81
    China
    22,358
    17,668
    -21%
     
     
    67
    173
    106
    Brazil
    69,430
    53,230
    -23%
    2.31%
    2.68%
    0.37%
    115
    203
    88
     
    Contagion in many ways has already hit. The EU stocks are down over 20% in the past 12 months in most cases. Germany has performed better than the rest, but that is a very large drop and the market in Europe as a whole are in a Bear Market. The U.K. with its proximity to Europe, and Japan with the earthquake are also lower, but the U.S. stock market has remained relatively unscathed (despite what you might be reading this weekend about how our sell-off is overdone). China and Brazil are experiencing some troubles in their own stock markets. In spite of the hype of the BRIC’s coming to the rescue, they may be too busy taking care of themselves. It is worth noting that the EUR/USD exchange rate was 1.36 on September 30th last year, and is 1.35 now, so it is not all about exchange rates.

    The credit story is more bleak and stark. Credit has clearly picked the safe havens, the next Greece, and those in between. Italy and Spain are now trading almost where Portugal was a year ago. How much easier would it have been for Italy to withstand a Greek default when it’s 5 year bonds were trading at Bunds + 134 instead of Bunds + 407. CDS has blown out across the board, including the allegedly cash rich China, but there is a “basis” swap element as the CDS trades in a currency different than what the country uses (ie, all Eurozone CDS trades in dollars). 
    It is hard to look at the data and not with that the bold steps of letting Greece default, had been taken last year when countries were in better shape. It is also clear, that the contagion has occurred without a default. Portugal has clearly moved to the plagued group and Italy and Spain are trying to fight it off.
    Last September, the Eurozone and the U.S. had just posted 2nd quarter GDP growth of about 0.9%. This year, both the Eurozone and U.S. only had 0.2% growth in the 2nd quarter. At the risk of being ridiculed by proper economists, you cannot guarantee that GDP growth will be even worse or in contraction if we wait any longer for Greece to default.
    It also worth pointing out that at the time, the ECB was only an amateur at overpaying for bonds. It has since purchased even more bonds well above the current market price. All that purchasing power would be nice to have now, but it has been spent. They can always spend more, but the ECB would be much stronger if it wasn’t sitting on such a big inventory of losing positions, that clearly did little to stem the crisis.
    What about the banks?  Don’t we need to wait so the banks can be stronger?
     
    Stock Price
    5yr CDS
     
    9/30/10
    9/23/11
    Chg
    9/30/10
    9/23/11
    Chg
    Deutsche
    40.15
    23.17
    -42%
    105
    200
    95
    SocGen
    42.25
    16.65
    -61%
    125
    375
    250
    Dexia
    3.06
    1.31
    -57%
    700
     
    RBS
    47.21
    22.83
    -52%
    178
    394
    216
    Barclays
    310.75
    146.00
    -53%
    125
    244
    119
    Intesa
    2.23
    1.01
    -55%
    133
    459
    326
    B of A
    13.10
    6.31
    -52%
    165
    391
    226
    MS
    24.68
    13.72
    -44%
    178
    435
    257
    JPM
    38.06
    29.59
    -22%
    84
    153
    69
     
    It doesn’t take a rocket scientist to see that the banks squandered a year to improve their capital base. BAC wasn’t selling cheap options to Warren Buffett when their stock was at 13. The SocGen CEO wasn’t on TV trying to convince investors that they had no funding or capital problems when his stock was at 42. The banks are even worse off than most of the countries, but why should anyone assume that waiting will make it easier for them to digest a Greek default.

    To me, it seems that a lot has already been priced in and that the contagion is occurring whether we want it to or not, so we may as well let Greece default now and figure out how much has already been priced in and how to really stop the contagion from spreading to Italy and Spain and to banks that deserve to be saved. Let’s just admit it is gangrene and that it has already spread farther than is safe, but it is still better to cut off an arm to save the body. If we keep waiting it may not be possible to save the patient. The patient is getting weaker by the day, and being blind to that is just as big and just as dangerous as letting Greece default now.
    Stocks: SPY, IWM, JNK, HYG, LQD
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