m22au's journal

Today reminds me a little of the trading action between February 2010 and April 2010:

Despite weakness in EUR/USD and GBP/USD, both gold and equities continue their climb higher. At the time of writing, ZG and ES and both up by about 4 from Friday, but EUR is down by about 0.80% and near its low of the day.

Eventually this "risk on or off?" disconnect ended in late April, when the PIIGS concerns infected the stockmarket, and there was the plunge from late April through to June (for EUR/USD) and July (equities).

It's possible that the same thing could happen again, ie, equities ignore the EUR/USD (and PIIGS) problems until they can't.

The other alternative, is that the EUR/USD stops falling at some point and is dragged higher (albeit slowly) by a rising "risk-on" tide.

 

In the event that oil does go over $100, the airlines are an obvious short.

$XAL,
AMR, JBLU, RJET, SKYW,
DAL, UAL, LCC, ALK, LUV

but also consider aircraft leasing companies (two recently mentioned on Bloomberg TV):

FLY and AYR

keywords:
airline stocks, airlines

 

I watched the following interview on Bloomberg yesterday:

http://www.bloomberg.com/video/64862370/

"Anthony Crescenzi, a strategist at Pacific Investment Management Co., discusses Ireland’s bailout and the outlook for Spain and Portugal. European governments’ 85 billion-euro ($113 billion) bailout package for Ireland failed to quell the market turmoil menacing the euro as stocks, bonds and the currency declined. Crescenzi talks with Margaret Brennan on Bloomberg Television’s “InBusiness.”"

http://www.bloomberg.com/news/2010-...concern-european-debt-crisis-will-spread.html

"It may take years to bring down Europe’s debt levels, said Anthony Crescenzi, a strategist at Pacific Investment Management Co., which runs the world’s biggest bond fund.

"The Ireland bailout doesn’t solve the problem of reducing the nation’s debt, said Crescenzi, who is based the company’s main office in Newport Beach, California.

“The average interest rate is said to be about 5.8 percent,” he said in an interview on Bloomberg Television’s InBusiness With Margaret Brennan yesterday.

"Can we expect Ireland’s economy to grow 5.8 percent in years ahead? Probably not. The debt will grow faster.”

***************************

Crescenzi's point was that although bailouts are a short-term fix (liquidity), they don't solve the longer-term problem (solvency).

This is especially true given the interest rate that Greece / Ireland must pay on their bailout funds.

If:

(1) a sovereign has a lot of debt relative to GDP (let's assume 100% or more), and
(2) if the interest rate on that debt is over 5%,
(3) then the GDP growth rate required to reduce the level of debt is more than 5%, and unlikely to happen.

I note that Greek and Irish 10-year bonds yield over 9%, which suggests that the bailouts aren't enough to reduce fears of insolvency.

 

I dont believe the initial rate is relevant, its done for political purposes. Remember AIG, the initial bailout had 'tough terms' then when they realized AIG wouldn't survive paying that they cut and started to loosen the terms. The EU leaders are willing to do anything to prevent defaults, the EU fund is not like the IMF but more like Santa

 

I've read on ET and elsewhere that Spain is going through the aftermath of the bursting of a property bubble.

AIB was a profitable short for me earlier in the year, and I added some short AIB calls in recent days based on the additional amount of capital required (more than 10 times current market cap).

While I realise that the big Spanish banks may be stronger than the cajas, it is worthwhile to keep one's eyes on the performance of Spanish banks. They may provide similar shorting opportunities, especially if capital raisings are required.

SAN, BBVA, POP, SAB, BKT, BTO, PAS

Quotes:
http://finance.yahoo.com/q/cq?d=v1&s=san.mc,bbva.mc,pop.mc,sab.mc,bkt.mc,bto.mc,pas.mc

Charts:
http://finance.yahoo.com/q/bc?s=san.mc,bbva.mc,pop.mc,sab.mc,bkt.mc,bto.mc,pas.mc

USA symbols:
STD and BBVA

Bloomberg link for Santander:
http://www.bloomberg.com/apps/quote?ticker=SAN:SM

Keywords:
Spain

 

I also note the following article from Bloomberg today:
"Spanish Banks Face Funding Hurdle Amid Bailout Threat"

http://www.bloomberg.com/news/2010-...nding-hurdle-in-2011-amid-bailout-threat.html

snippet:

"Spain’s banks may struggle to refinance about 85 billion euros ($111 billion) in debt next year as costs surge on concern continental Europe’s fourth- biggest economy may need an Irish-style bailout. "

 

Interesting / ominous article about the "Lehman unwind" or "insolvent insurers" situation that could be developing in Europe:

http://www.zerohedge.com/article/ne...companies-assicurazioni-generali-cds-explodes

Snippet:

Case in point: Italian insurance company Assicurazioni Generali (CDS ticker: ASSGEN). The proximal reason - today the company's CDS spread has gone vertical, wider by 34 bps on the day, or about 20%, to 184 bps.

Why is this happening? Simple: ASSGEN has total assets of €423 billion, and more worrisome, a fixed income portfolio of €262 billion, of which 93% is European-bond based (Italy 28%, France 22%, Germany 25%). We all know what has happened to Italian bond prices in the past weeks: as of today, Bund spreads have just hit a fresh all time high.

But all this is irrelevant since the bank must have a capital buffer to accommodate the losses. After all, what idiot would run a company with almost €300 billion in Euro-facing bond exposure and not factor for deterioration in risk after the events of May... Well the ASSGEN CEO may be just such an idiot.

The company's balance sheet as of 9/30 discloses that the firm had a mere €10 billion in tangible capital (excluding €10.7 billion in intangible assets). So let's recap: €262 billion in Euro bonds on.... €10 billion in tangible equity!

A 26x leverage on what is promptly becoming the most impaired asset class in the world. We are amazed that it has taken the market so long to realize that European insurers are the next shoe to drop, and doubly amaze that instead of trading points up, ASSGEN is only 184 bps.

******

I note that the stock is listed in Milan under the symbol "G".

Any other insurers (probably European) with a similar situation?

Or maybe it's just another reason why (in the coming weeks and months) the EUR may weaken against USD.

 

Some other insurers to consider, as suggested in the comments section of the above Zero Hedge article:

Allianz

AXA

Aegon (NYSE: AEG)

Hannover Re

Mapfre

Zurich Re

Or some others:

Aviva (AV.L)

Sun Life (SL.L)

Old Mutual (OML.L)

Legal and General (LGEN.L)

ING (NYSE: ING)

Or some American insurers:

KIE

MET PRU AET HIG GNW

AFL AIG ALL CB CI CNO HIG LNC PFG PL TRV

 

It's often interesting to look at what stocks are down (up) on a big up (down) day.

In this case, with ES +1.00% premarket, and IBEX +1.35%, several Spanish banks are down on the day.

POP down 0.6%
SAB flat
BKT down 1.6%
BTO down a little bit
PAS down 1.4%

also notable that SANT (NYSE: STD) and BBVA are slightly green. This confirms something already known: it's probably the smaller Spanish banks that are in the worst shape. Several cajas have already been forced to merge with each other.

SANT and BBVA look relatively strong compared to the likes of POP, SAB, BKT, BTO and PAS.