Monthly Archives: May 2011


The EU debt situation appears to be on better footing from a market price standpoint this morning. In actuality, another weekend of meetings and public denials has resulted in no hard plan. The cucumber may be the vegetable that forces the EU to act where pervasive debt problems have not. A significant e-coli outbreak in cucumbers has led to 14 deaths and over 400 serious illnesses through Germany and the Netherlands. Spain has been accused of being the source of the outbreak. The Spanish are not happy with the charge. Several Euro countries and Russia are banning the importation of Spanish cukes. The EU system is stressing to the breaking point.

The risk markets are more concerned with looking good for the end of the month. The growth pullback in the US is the key story at home with a host of important data points to show in the short week. After Friday, the end of QE2 will dominate the rates complex flow. Blamed for everything that could possibly go wrong in the world, one would think the suspension of QE would be viewed as a positive. The flood of cash that washed into the front end in April and May has pushed short rates to the floor. The switch from B/S growth to steady state should be reflected in this sector first. As expected to better data should put the T-Bill and LIBOR markets back on the radar.

Crowding In

Basic economics entertained the possibility that if a government over stepped its spending boundaries it could engulf the credit markets and "crowd out" private borrowers. The huge fiscal outlays of the past 3 years provoked more than a few commentators to opine of this coming event. After a successful new cash refunding and the majority of this week's issuance done, "crowding in" appears to be the actual phenomenon.

Of course, QE and the ZIRP are exerting powerful mojo. Both of these policies are common characteristics of similar cycles so should not be treated as outliers. April and May have seen fairly robust corporate borrowing given the overall lower economic flight path. A host of Blue-Chip equity is available with decent T+ dividend yield pick up. Investors appear to us to be Crowding In. (Craftier writers have termed  it "return free risk"-not sure who coined it)

There  does seem to be a significant aversion to applying investment cash in this manner. More waiting room than lock box, if data were to improve or international developments calm, most would entertain other locales. And yet, this incredibly gratuitous situation casts off little more than a growth glimmer. Crowding In is occurring during a period of gargantuan monetary voodoo but economic suspended animation. More pox than policy. As Peter Gabriel sang in the 70's, "You gotta get in to get out."

Trigger Happy

The debt ceiling, and cavalier chatter of missing an interest payment or two, has put a bid into US sovereign CDS. This is a small market compared to notional amounts in other countries. The question is would a delay in payment trigger a CDS event? If not, why purchase the insurance? And this brings us to the conundrum in the EU.

The net exposure in Greek CDS is roughly 6 billion, or so. The Credit Default Swap is a derivative that looks like insurance against non-payment. However, the Eu situation is stagnating on negotiations of how to restructure/re-profile/reschedule/default and not trigger the CDS. What is the point of purchasing it then? Would another 6 billion euros of exposure crack the system? I've got news for you, its already cracked. Who wrote the CDS that now has the bureaucracy in AIG-like cold sweats? Everyone knows the situation cannot continue in present form. We are just waiting for the lawyers to decide how a credit event can occur without triggering the insurance bought to protect against that event. Now, that will make you trigger happy.

In addition: Ytesterday, the NY Fed announced the GSEs as RRP counter-parties in the Chupacabra of exit strategies (discussed and heard of but never seen). This will be an important addition to holding the relationship between IOER and FF relevant on the way up. The Home Loan banks had to make advances in the billions during the crisis; we believe they will be the active GSE participant should a Chupacabra sighting ever take place.

The New Daytime

All My Children and One Life to Live are toast. Oprah is heading to the coast. The New Daytime schedule is reality based. There will still be plenty of sex, greed, crime, philandering, scandal and shouting to fill the void. Market based programming is gunning for those 7 - 9 million viewers left gaping into the abyss. Prepare yourself for more over analysis and hype.

Today Uncle Sam returns to the market with more paper after heavy corporate issuance in the days after the refunding. The Eu-IMFs Lipsky says the EU debt situation is "fully ring fenced."  I'm not sure what that means but a Greek national asset fire sale as other countries watch will need more than a fence to contain the anger.

A concession before news and data come back to the tape would be healthy for the rates complex given the 2 week advance. The FX market is sitting tight for now, for once. As Doug Kass pointed out this morning, a buyer of 50,000 Gold calls for Aug - Dec in the 1600-1800 strikes has been observed. Stay tuned for more drama. The New Reality Based Daytime is here to stay.

The Bond Man Who Should Be King

Dan Fuss of Loomis Sayles has 146 Billion under management. According to the Weekend WSJ (the best thing to happen to Saturday morning since Quisp), Fuss' overseas clients are already nervous and a bit shocked by US debt intransigence.

Mr. Fuss is a "Bond Man" to his core. He is adjusting his holdings. Heavily in corporates, he has taken his average maturity to 9.5 years from 10.5 this year. (Per the WSJ interview) That may not sound like much when "other" more visible managers are being more vocal. I thought I saw the Goodyear Blimp over The Preakness Stakes with the message: We're Short. Maybe it was a dream. To put the adjustment in perspective, the elderly and always congenial Mr. Fuss said this,

"This is the biggest strategic shift in 30 years." Hmm, 30years ago?...wonder what he thought of bonds then? Oh ya, he was buying.