30 August 2011

Who´s right?

Comparing the S&P 500 vs the Yield of the 2year Treasury Note I was wondering...

Who´s right Bonds or the Equities?

I believe, equities are always one step ahead of debt (2y US Treasury at Historical Low) could correct.Check out 2y US Treasury Yield (Historical Low since Lehman and due to QE programs)

23 March 2011

Portugal´s on the spot

During the morning markets have been very focused on Portugal. At 3 PM was scheduled to be discussed in the Portuguese parliament the new adjustment plan submitted by the government, so far has been delayed until 6pm Portuguese time, although the new austerity budget is supported by Brussels, it may be rejected by the opposition which could lead to elections since the Prime Minister has threatened that he will resign if that happens.

With this uncertainty in the neighboring country, the market has chosen to sell Portuguese debt; (CDS in Portugal 5yrs break the previous highest and right now is at 539.5) this has extended to other periphery countries.

The domestic market started the day very weak in all references mainly because of this, with higher pressure on the 5 yrs benchmark this boost the yield of Spgb Abr-16 +6bps chg in the day before 10am. In the 10yr reference the spreads vs Germany started to widen massively until midday when it reached the 200bps, this was the turning point where we began to see buyers in Spain. This flow helped the Bonos to close better in the day and recover the losses of the day. Specially in the 10 yrs where 10yrs Spread vs Germany remained flat in the day at 194bps.

I believe that this recovery of Spain is due to two things:

First, people which were short in Spain, had to cover themselves after the delay on the discussion in Portuguese parliament about the measures that Jose Socrates wants to take to reduce the level of deficit in Portugal. Depending on what happens tonight the market will react tomorrow in one way or another.

Second, FED Member Fisher made very bullish comments on Spain, while he affirmed that

“Spain was doing "a very good job" in pushing through economic reforms to restore confidence in its finances” that “Markets are not taking Spanish reform steps sufficiently into consideration” and finally

"I think Spain will surprise people," stressing that it was important to distinguish Spain from other troubled euro zone countries like Greece and Portugal.

Change in yield today were as shown below:
















































15 March 2011

Japan? ECB? Bonds?

We do not know if it will be Japan’s earthquake & nuclear panic, the new measures from the ECB or the increase of reliance on bonds, but what it is clear it’s that we are witnessing a great performance during last week. As the change in yield graph below shows (Yellow: Spain, Italy:Blue, Belgium: Purple, France: light blue and Germany in grey. In dots the yields one week ago).

The Spanish downgrade, seems to haven’t affected the Kingdom which continues with a great performance in the last days. Today Spain opened its 10yrs Benchmarks pay 31 cents more expensive than yesterday's close (to 102.20 crossed the first orders in the Spgb 5/05 4/21).
Great Rally today from Germany (The main up performer) which pull the rest of European countries (Apart from Ireland and Greece). Portugal ran 5 bps.

Futures also breaking yesterday´ s closings by 20 ticks.

Incredible moment that we are witnessing these days on the market side.
Have a good one.

3 March 2011

ECB meeting March 3rd

The main focus today was the ECB meeting undoubtedly, leaving aside the auctions in Spain and France which were highly paid.
With the announcement of a rise in interest rates next month, the Bund / Bobl & Schatz fell to the minimum 122.66 / 115.96 / 107.59. At that time the spread of Spain against Germany came to narrow 205 basis points, then went hand in hand with the drop of futures.

However, Spain, Belgium and Italy (Semi-Periphery) underperformed 2/3 less than the rest of EU countries:
-In the 2 yrs: 21bps Germany, Nether 21.4, Austria 19.7, France 19.5, Italy 15.8, Belgium 15.2 and Spain 12.6bps.
-5 yrs: Ger 17.2 / 15.1 NL / FR 15 / AT 15.5 / BG 9.8 / IT 13.3 / SPAIN 8bps only.
-10yrs: GER
10.3 / FR 8.6 / NL 9.5 / AT 10 / BG 5.4 / IT 9.1 / 5.9 SPAIN.

This is flattening all the market (Core, periphery, Swaps, etc)…

Take a look at the German yield curve.

Also, what we are seeing in the past week is a new positive correlation between Spain and Germany, when back in the days; the fall of the Bund used to help narrow the spread between Spain/Germany…Today this fact is less important as the correlation is starting to increase.

Check graph below between the 10 yrs benchmarks Spain/Germany.

Spanish auction went allright, placing €3.8bn (3-4bn target). Good demand and lower yield than previous times.

- The 3.25% Apr'16 was tapped for €2.65bn @ 4.389% (4.542% in Jan), obtaining a b/c of 2.17x times in the auction (2.1x in Jan). Marg rate @ 4.408% (vs 4.59% in Jan). According to my BBG, this reference closed yesterday at 4.40%, 15bp off February's yield highs (2.55% on 14 Feb); it had cheapened this morning 2bp before the auction (4.42%).

- The 4.75% Jul'14 was tapped for €1.15bn @ 3.592%, obtaining a b/c of 3.04x times in the auction. Marg rate @3.609%. This reference had not been tapped since May'09, so comparison with previous auction adds no value. According to my BBG, this reference closed yesterday at 3.63%, 13bp off February's yield highs (3.76% on 14 Feb); it had cheapened this morning 3bp before the auction (3.66%).

On the French very solid auction they delivered €8.9bn (in line with €8-9bn target). Paid above mid market.

-OAT 4.25 10/17: €2.1bn @3.08% average yield

-OAT 4.25 10/18: €1.4bn @3.27% (cheaper than last one @2.92%)

-OAT 2.5 10/20: €3.22bn @3.61% (at same level in last auction)

-OAT 3.5 4/26 €2.11bn @3.97% (last @3.76%)

As it was expected in the ECB meeting, rates remain unchanged for the moment although JCT said that interest rates could be raised at the next policy meeting in April (but not to expect BIG rate move), and Trichet warned on inflation “It is the duty of all central banks, including the ECB, to preserve the solid anchoring of inflation expectations.'' and blames “oil prices shock”.

"Reports from the 12 Federal Reserve districts indicated that the overall economic activity continued to expand at a moderate pace in January and early February," the Fed's Beige Book. Main conclusions are that the economy is slowly growing, improving the retail and manufacturing output without upward pressure on wages, the labor market remains weak and improved housing market. President of NY FED has repeated that rates are likely to stay low for an extend period. This is for sure one of the drivers today in the opening of the Bund which opened with a big gap below yesterday’s closing price.

Also in US employment initial claims have remained at 368.000 (395.000 expected).

Tomorrow very focus in the change of Nonfarm payrolls at 14:30 (Survey 195k).

EUR/USD continues to rises to 1.394 levels (highest in 2011).

18 November 2010

The Fake Richness

Yesterday's CPI (Consumer Price Index) number in US pointed what everyone was warning in recent months...US is aproacching a deflationary season (like Japan in the 90's). The inflation data it's the lowest since the 50's. Yesterday, the FED bought another 8bn of their Treasuries following the QE2 plans. But even with the support of uncle Sam (see article from Warren Buffet supporting the measures taken by the FED http://www.nytimes.com/2010/11/17/opinion/17buffett.html) it doesn't seem that US is waking up from recession...

I bet, this will be the trendline until the end of the year and beggining of 2011. The Dollar will keep devaluating against the Yen / Eur / GBP.

Which will be good to rebuild the appetite of investors in the Stock Market.
In recent weeks we have seen a very bullish stock... See below the Nasdaq evolution since September:

I think it will continue in this mood until the end of the year... with some in and outs from the investors, getting some profits for their portfolio as it happened in 8th and 10th of November trying to break the resistance at 2,580.

But from a critical point of view, is this 22% really an increase of wealthness??? For sure not, what is really creating is a "false richness/wealth" trying to encourage consumption, recover confidence, increase the exports and make them more competitive (thanks to a weak Dollar and ultimately a better Trade Balance) to give the spark for US Economy engine.

22 March 2010

The "moving abroad" Tax

As I commented last week in my Twitter the rising of corporate and personal taxes in the UK are making big companies to move out of the UK to other places.

An example of this is Ineos, the biggest private company by sales in UK. The company realized that moving abroad it's headquarters and tax residance to Switzerland will save up to €450m in the next four years and with the plung of the economy nowadays it would be ridicolous to not save this amount of money.

In my opinion the latest tax reforms are not helping the UK recovery and I bet this will hit the future of the world's financial City.

23 February 2010

Greece, the new Iceland?

I read a very interesting article at the February 22nd Financial Times. Mr. Alan Beattie wrote of how the “…Parties of the centre- left are in retreat. What should have been opportunity to reorder national and global economies seems to have left many ideologically adrift”.

A good example of this is Greece, with the socialist Prime Minister George Papandreou the country is living the worse Debt Crisis in its history. This is not a serious problem to Mr. Papandreou, he has only been on the charge for a few months but he is not alone in the ineptness side of Europe´s worst leaders, this position is for my president Jose Luis Rodriguez Zapatero in power since 2004.

He couldn’t foresee the crisis when half of Europe was beginning to tighten their accounts and did little to prevent the house bubble that has punished Spain more than other countries. Instead he keeps talking on television trying to please the crowd with temporary social aids rather than work on a sustainable way to get out of the crisis without increasing dramatically Spanish deficit. The reality is that one out of five Spanish is unemployed and this figure appears to continue to grow. As seen below, Spain and Greece should pay special attention to their deficit to GDP above 12. Or their economy will suffer a downward trend in rating their debt bonds.

As the article also mentions Norway and UK seems to be another plummet in the Euro-Economy and this will become the biggest test for Europe since it was founded. €uro´s health is on the bench and I hope that Germany and France begin to pull the wagon of the 16´s. It is for sure that the European Union will not allow Greece or the others to collapse because the Central Bank will have to change the rules to provide guarantees or loans, if necessary to help the PIIGS (Portugal, Italy, Ireland, Greece, and Spain).

17 February 2010

Barclays rise up

Mr.Diamon's (CEO of Barclays) bet on Lehman, a great decision.

After 2009 net profit it is obvious that Lehman acquisition had a big impact on Barclays´s business. As the CEO said on Tuesday the Deal has been "transformational for the bank" Not only this gave them more diversification (absorbing the loans losses in 2009) but also has made Barclays to become bigger in the US. The perspectives for the equities business of Barclays will arise strong after a 2009 year with most of revenues from fixed income business.

Another great news for Barclays is that they believed their loans-loss charges reached its highest in 2009. "We are past the worst and have now seen a turning point in impairments" the banks’ risk director said.

22 November 2009

The Double Dip Recession (W shape for me)

It´s funny how a month and a half later, Mr. Obama starts to talk about an issue that I mentioned in my twitter and in an article at this blog. Even some of my friends made fun of me when I told them about my “W shape recession” or as Mr. Obama calls it “Double-Dip”. But it also makes me proud because the signs that I saw in the past months were indicative that this recovery was partial.

For someone that doesn’t know what a double dip recession is I will say that it´s a problem after the GDP growth back again to negative numbers after a period (usually 1 or 2 quarters) of positive growth. A double-dip recession refers to a recession followed by a short-lived recovery, followed by another recession. The effect that the economy will move back again into a second recession makes the new recovery even more difficult because you have to add the loss of confidence.

Here are the probes of what I said in the pass…

In the Financial Raindrops at Facebook

In Financial Raindrops´s blog.
Even on Financial Raindrops´s Twitter:

The words of Mr. Obama during his nine day trip to Asia were collected in a interview in Beijing by most of the media cover. I took the two best ones.

The FT article is well structured, it starts with the problem using Obama´s quotes, and then it gives some data about the deficit situation. To end the article, the FT concludes with some coverage about China, the “biggest foreign holder of US Treasury bonds”, it's worrying about their investment and makes a comparison of Obama´s trip “as that of a debtor visiting his banker.”

For the Times, they give more information about the debt problem of the US administration “The National Debt has increased about $1.6 trillion on Mr. Obama's watch, and has now topped the $12 trillion mark, bringing it dangerous close to the $12.1 trillion statutory limit”. It also uses an external source, Société Générale, to alert from a future recession in 2010 putting the worse scenario with some previsions “public debt would explode within two years to 105 per cent of GDP in the UK, 125 per cent in the US” and the article ends up with a very pessimistic comparison…”The underlying debt burden is greater than it was after the Second World War”

So if they don´t change the financial system and the pillars on where to support the growth we will end up again in a longer recession. We have seen that during the past US and other countries have been laying their economy in a huge deficit, passing the problem between generations as a “hot potato”, but it´s good signal that Mr. Obama recognize this big problem as the FT article says “It is important though to recognize if we keep on adding to the debt, even in the midst of this recovery, that at some point, people could lose confidence in the US economy in a double-dip recession”.

I hope governments and economic institutions starts to approach such a huge problem such as “the underlying debt burden” when nowadays is even “greater than it was after the Second World War”.



15 November 2009

Warren Buffett´s Legacy

One of the oldest inventions of the world seems to be one of the pillars on which to support the future of United States economy. Or at least that is the vision that the investment `guru´ Warren Buffet has to make the largest purchase in his career, a $26.3 billion deal to buy Burlington Northern Santa Fe Corp (the largest US railroad operator), he called the acquisition an "all-in wager" on the U.S. economy.

Everybody knows that Mr. Buffet is not a speculator and that he bases his theories in a deep analysis of sectors. That´s why “I´m unsure about the immediate future but an efficient railroad system is vital to U.S. prosperity” Buffet says.

So...what does he see?

As the WSJ mentions in his article (Art.1) “Mr. Buffett is betting that in an era of high fuel costs, railroads will perform better than the trucking industry. More broadly, the investment is a wager on the long-term strength of the U.S. economy as it emerges from a prolonged recession.” This is how Buffett is confident that, after the recession, the world's largest economy will rebuild again and encourage the transportation of commodities and goods within its borders.

What´s behind this purchase?

There are two main reasons, first one is that oil prices will keep increasing and everyone is aware of the shortage of this good. It´s also proven than diesel trains are inherently more efficient than planes, trucks or cars. As we can see in the table below.

Another major reason for this huge investment it’s that the commodities market goes hand by hand with Burlington Northern on the index. We can see in the graph how the shares of Burlington replicate the movement of the commodities.

The coverage on the media about this news was very similar in every newspaper, for the New York Times the story was told in an objective perspective giving support to Buffett´s movement into the railroad industry to carry the U.S. economy “America’s best-known investor, Warren Buffett, is making his biggest bet yet on the nation’s economic future by buying, of all things, a railroad. They also ironically compared the new purchase with his childhood dream to get a train set form his father “His new toy will not come cheap”. Same in the Guardian where they also comment about his new toy “is buying himself an enormous train set by acquiring one of America's largest freight railway operators, Burlington Northern Santa Fe, in a deal worth $44bn (£27bn) that signals confidence in a long-term revival of the US economy.”

Warren Buffett's Legacy

To conclude this last entry it´s amazing how with 79 years and the second largest fortunes in the world, Buffett has no plans to retire, but want to be sure that the business of Berkshire will last for decades after he´s gone. He is betting that any new technology will not outdate the train and I think he may be right.


(Art.2) http://www.nytimes.com/2009/11/04/business/04deal.html