The T-Report: Greece and Other Reasons to be Less Bullish

Greece: One Less Reason for Risk On

Frankly I am surprised how well received the Greek headlines have been. I can only explain it as an example of people reading between the lines, because if you read the lines, this is far from a deal. I have appended my initial reaction sent to clients at the end of this, but think it can be summarized as:

• Any risk that some national approval fails for the current round of money release? It seems universally accepted that all countries will fall in line behind their finance ministers and approve further distributions. While likely, I think the risk that one or more countries raises some objections and throws the deal in doubt is real.
  
• All the other “sweeteners” are predicated by a “successful” bond repurchase programme. Why program needs an extra me in Europe remains one of my top questions, but the reality is there is no definition of what a successful bond tender program is. I cannot see the EFSF/ESM extending their debt to 15 years (2027?) if as much as €15 of other bonds have maturities prior to that. I can’t see bondholders accepting prices ranging from 35% of par at the “short” end to 26% at the long end without trying for more. Now that the Eurogroup has made a condition out of the bond repurchase, then, it is almost the obligation of the bondholders to hold their feet to the fire. Unlike in March (yes it was only March) when the PSI was forced on many of these same holders, they now own them at a basis that is in the context of the market price, and they are supported by English law as opposed to the feeble Greek law they had back then.
  

I think this deal as currently stands actually takes some support for the market. Maybe the pieces will all come together, but after the Catalan vote this weekend, and growing disillusionment with bailouts in general, and no obvious reason why current bondholders would tender at these prices, I think we are in for some headline risk in Greece. Some of the early enthusiasm will be dampened by the harsh reality that it isn’t a done deal.

This isn’t enough to change my overall bullish view, but reduces it and increases the likelihood of a pullback in the interim.

Fiscal Cliff: No Reasons

I don’t expect much, if anything on the fiscal cliff. This is still the biggest issue for the markets. There is still plenty of opportunity to set new highs based on a successful resolution of this issue alone.

I just don’t see much positive coming out of fiscal cliff this week. We seem to be in that stage where we are more likely to see some posturing than more handholding. Someone will be tempted to “take their ball and go home” or at least use that threat as a bargaining chip.

I still expect a successful “compromise” on the fiscal cliff (no big immediate tax increases and no big immediate spending cuts). On the other hand, I would be surprised if the process is as smooth as the market is now starting to price in.

With potential news flow on fiscal cliff more likely to be negative than positive in the short term it is another reason to be cautious on risk here. Better opportunities ahead.

Spain: No Reason to be Excited

I was hoping that the Troika and the Eurogroup would give a better indication of what is in store for Spain. About the only thing I’m certain of, is that the EU has finally realized that “Troika” conjures up images of communist tanks rolling through the lands and seem to be trying to avoid the word more than in the past.

From all past experience with Europe, they are being honest if they say they didn’t talk much about Spain during these Greek bailouts. It would be hard to mangle something so relatively simple and talk about something big and complex like Spain.

I’m sure at times they said things like “If we don’t do this, what will the markets do to Spain?” But that is probably the extent Spain was brought up. Not in a proactive way, but as a caution that they need to come up with some piece of paper than made it look like there was a deal in Greece.

The results of all the haggling about Greece do NOT give me comfort about Spain.

I am left “hoping” that Greece is different and that Spain will be treated differently. There are many reasons to believe that, but again, for me, the Greek deal was an opportunity lost.

While Spain is still like to get a good deal from the ECB, I am less confident about it now, than before.

Apple: Reasonless

I’m back to not liking Apple, the stock, not the products here, but honestly this stock seems to have divorced itself from all reason. $20 billion of market cap is now a daily change. It has made and lost the the Greek GDP twice this year, and has clawed half of it back in 1 week. Maybe I am stubborn, clinging to the view that the market cap should not change by that much, and that the stock price is more than a number, but I can’t help myself.

The shine is off the apple and I don’t expect it to fully recover. Remember when it was “cool” to get a blackberry. When having a blackberry at a meeting meant that you must be important to need to be reached. Then blackberrying became the adult version of ADHD, where people with no social courtesy would play with their phones rather than talking to the people around them (I am one, but still prefer to go by the ADHD diagnosis). Then finally, once you couldn’t stomach another game of breakout, or free cell, the allure of having a blackberry had diminished, and the stock went down with it.

I think I miss my Motorola Razr more than the blackberry (and seriously, I could text as fast as anyone on that phone). Apple is a long way from dying, but I think we have hit a peak, we can see pressure on the stock here in which case the indices go down with it.

Just another reason to be less bullish than last week, and longer term, I really need to think about if I’m wrong that a market cap shouldn’t move so much, so easily.

Bullish, but Less So

I remain bullish, but less so than yesterday. Fortunately the market so far disagrees with me, so I can exit some risk on strength. My base case is still 1,430 on the S&P (basically the election night highs) with a chance that we break 1,450 and maybe even make it to 1,500 on successful “fiscal cliff” resolution and something positive on Spain.

In the meantime, I’m looking for some small weakness, so would add at 1,390 on S&P. I expect credit to outperform as the lack of calendar and chase for yield are more direct there.

I had gone from neutral to bullish Spain and Italy. It has worked, and I am clinging to that bullish stance, but it gives me the chills saying that, so may almost be time to go back to neutral there.

First Take on Greek Announcement (C-/D+) From Last Night

Lots of congratulations at the start. Mentioning how Greece has increased its commitment. More safeguards. Basically trying to appease the lenders and the citizens of the countries that are lending. Mostly garbage. Is useful that they are trying to spin it as positively as possible, in spite of the real world knowing it has been a mess.

 

The proceeds from “privitizations” are mentioned. Almost comical. Until the debt crisis is over, banks are functioning, and some belief that the laws won’t be changed in the future if necessary, then there will be no big privitization effort. You cannot drum up big demand from private equity or even foreign companies while the fate of the country and currency remain in doubt. Especially for anyone who remembers the retroactive collective action clauses the bond holders got dealt.

 

They talk about Greece tendering for bonds at no higher than the prices on Friday. I assume these are the PSI bonds, though maybe they include some legacy bonds as well, though there aren’t many of them, and those have been getting paid at par.

 

My first thought is to laugh at this tender. No idea what the real terms would be like, but I expect that at least 40% of par should be paid. These bonds are English law so not so easy to default on, and some of the other measures improve the Greek debt situation so it may well be worth holding on, especially if these are just the final steps before capitulation.

 

Greek bank rescue has been delayed at great cost. Of all the things the EU gets HORRIBLY wrong is that it doesn’t fix banks in a timely manner. You need functioning banks to have a functioning economy. Sub debt holders look likely to get dinged, which means equity should be wiped out. ABOUT TIME. I view this as a positive and don’t think it has implications beyond Greece that aren’t already priced in. I have to think about this more, because maybe it will lead to a sell-off in Spain, but I think it has been hinted at enough, that I don’t get too worried, and resolution of the banks would far outweigh that. The worst outcome is further delays as they haggle over the values.

 

This is where it starts to get bad. The Eurogroup will CONSIDER the following initiatives. NOT having agreed to them. The consideration involves commitments from Greece and a positive outcome of the buy back initiative – which again have no details on how Greece will get the money for those buyback and who would sell at those prices.

 

Lowering the interest on the Greek Loan Facility by 1%. Honestly, I am not sure which of the loans this one is. Certainly doesn’t hurt, but doesn’t seem like a big deal either.

 

Lowering the guaranty fee by 10 bps that Greece pays on EFSF loans. Remember, so far this has been a big money maker for the lender, but they have Regling’s salary and all the expenses of EFSF (and now ESM) to pay. 10 bps in a country where people are committing suicide at a record pace must seem like a good balance to someone, though I’m guess not anyone with a name ending in poulos.

 

Extending the maturity of EFSF and bilateral loans (i think those were the ones made originally in early 2010 prior to EFSF) to 15 years and making them zero coupon for 10 years. THIS IS A BIG STEP. It would help the current situation by allowing the bonds to PIK, and 15 year maturity takes a lot of pressure off. But you can see now why the Eurogroup would want the bond buyback done first. If the 2023 bonds remain in place, then these loans to Greece would become structurally subordinated. So they need the buyback to work. But the buyback may not need the new bailout because in a default scenario it will be hard to jam those bonds worse again.

 

SO NONE OF THESE GOOD THINGS IS NECESSARILY GOING TO HAPPEN. That is concerning.

 

At the end the Eurogroup agrees enough has been done to go back to the countries to request the next round of funds. I assume that will pass, at least at Germany and France, but it might be rejected elsewhere?

 

More noise that the ECB might relinquish its claim on profits – hmmmmm making horrible decisions and then pretending that they were profitable has remained one of the stupidest things the ECB has done during this crisis. And as far as I can tell they could have found ways to get the bonds back to Greece at cost rather than par a long time ago – treaty or no treaty. Demanding a profit is much more than “not financing a state”.

 

This is less than I hoped for and I am cutting some risk with futures up. I think they should be down on this “agreement”