Subscribe: RSS Feed | Twitter | Facebook | Email
Home | Contact Us

Posts Tagged ‘Europe’

Will European Bank Stress Tests Be “Garbage In, Garbage Out?”

Posted by Larry Doyle on July 23rd, 2010 6:52 AM |

All eyes will turn toward Europe this afternoon for the much anticipated release of the Euro-style Bank Stress Tests. Those who truly embrace real ‘sense on cents’ know that the process and the data are far more important than the actual results. Why is that? If these tests are charades or nothing more than ‘garbage in,’ then the results will most assuredly be ‘garbage out.’

On this note, let’s review a few comments from a Bloomberg preview of these tests. Bloomberg reports, Success for Stress Tests Hinges on Data, Not Failures:

1. The success of the European Union’s bank stress tests hinges on how much detail regulators provide about the basis for their conclusions, not on the number of lenders that fail, investors said. (more…)

What Are Credit Suisse Clients Doing and Saying?

Posted by Larry Doyle on October 9th, 2009 11:30 AM |

High five to a good friend for sharing with us tremendous insights just released by Credit Suisse. While individuals can and should develop opinions on the economy and markets, the global flow of capital from investors (obviously central banks now count as investors given massive quantitative easing programs) will determine overall market levels. Let’s navigate and assess how Credit Suisse’s client base has positioned themselves and decipher what it all means.

Credit Suisse research analysts report the following:

We are close to finishing our marketing trip in the US and Continental Europe—and take a look at the main issues our clients are focused on at the moment.

1. Caveated bullishness: Hedge funds appear optimistic (focusing on Q3 earnings as the next catalyst). Long-only funds seem cautious, while retail investors are buying bonds rather than equity. We feel there is enough scepticism to leave us bullish.

LD’s comment: CS means bullish on equities.

2. Many asset allocators still prefer credit (bonds) to equity, so there is switching potential.

LD’s comment: Asset allocators are money managers, investment advisors, et al. This comment translates into the fact that money which has been allocated to the bond market could move into equities causing a move higher in equities and a move down in bonds.

3. Investors’ main dilemma: Why have margins stabilised at such high levels? Most feel the reason is cyclical (leaving limited upside in earnings), but we suspect it could be more structural.

LD’s comment: Margins refer to corporate profit margins. The fact that CS believes that profit margins are being supported by structural developments in companies and the economy is a VERY positive assessment as it indicates a change in the foundation of the global economy which would drive equities higher.

4. Economy: Very few clients are positioning themselves aggressively on a macro view. There is little confidence on final demand given the level of excess household leverage. A third of investors are bearish on US housing (too many, in our view). Clients still see inflation, not deflation, as the main risk.

LD’s comment: investors would appear to be more cautious than optimistic with concerns that there is excess liquidity from central banks which will ultimately lead to inflation.

5. Consensus catalyst for next leg down is severe dollar weakness (LD’s highlight), leading to a US bond funding crisis or government tightening fiscal policy too early. Two areas of worrying consensus: 99% of investors appear to be dollar bears and nearly everyone believes the Fed will be very slow to raise rates.

LD’s comment: if 99% of investors are dollar bears and are positioning themselves that way in one way, shape or form, then the dollar will find support. Why? When too many people are on one side of a boat, that boat tips. If the dollar does rally, then many ‘dollar carry trades’ may enter the ‘pain chamber’ and risk-based assets would likely sell off.

6. Regions: Strong consensus to be long of emerging markets (NJA is felt to have large upside potential if US retail sales recover and the dollar remains weak). Clients are more positive on Europe than they have been for the past two years. Investors have quickly capitulated on a tactically positive call on Japan. Renewed focus on domestic plays in dollar-linked countries (especially the Middle East).

LD’s comment: NJA is non-Japan Asia

7. Sectors: We believe most clients have a bar-bell type strategy. Consensus longs are tech and commodities/gold. We found far too many oil bulls for our liking. There is a huge variance of views on banks. Sectors where there is still doubt: life companies (too opaque), media, telecoms, steel and pharma. There were very few questions on defensives.

8. Style: Clients are looking for quality growth, shifting away from the credit-related plays.

Overall, I view this report as decidedly constructive on the economy and markets, albeit with plenty of reasons for caution.

Thoughts, comments, questions always appreciated.

LD

Revisiting the Weakest Link

Posted by Larry Doyle on October 7th, 2009 12:44 PM |

Are all regions of the world improving? Will Asia lead the globe to greener pastures and brighter days? Well, if so, the trek through the fields will not be easy and we will encounter many storms along the way.

While Australia’s raising rates yesterday is an indication of an improving economy in that country, as one moves out of Asia into eastern Europe we encounter a decidedly different dynamic. Let’s revisit the ‘weakest link,’ that being Eastern Europe in general and the Baltic nation of Latvia specifically.

I initially addressed the economic weakness in this part of the world last February in writing, “The Weakest Link.” Today, we learn that Latvian Currency Scare Rattles Markets:

The Swedish krona and a range of eastern European currencies have tumbled as Latvia appears to edge closer to devaluing its currency.

In a re-run of the last major devaluation scare, Latvia failed to attract any bids for one of its treasury bill auctions earlier Wednesday. The country’s treasury received no bids for its offer to sell eight million lats ($16.7 million) of paper maturing in April 2010.

The poor auction results are the latest sign of economic stress in the Baltic nation, where the government is struggling to meet budget cuts required by the International Monetary Fund, the European Union and other bilateral lenders in return for aid.

The Swedish krona, linked to Latvia through Sweden’s large banking exposure to the country, tumbled as news of the failed auction emerged. The euro extended earlier gains to reach a peak at SEK10.3670 against the krona.

Meanwhile, Europe’s emerging market currencies, which often suffer from nerves over risk when Latvia’s problems intensify, also fell.

The euro soared to over HUF269 against the highly risk-sensitive Hungarian forint, from under HUF267 at the start of the day. The euro also swept to over PLN4.24 against the Polish zloty, from a low of PLN4.18.

The Turkish lira and, to a lesser degree, the Czech koruna, also weakened. The failed bond auction was “not good news,” said Nigel Rendell, a European emerging markets strategist at RBC Capital Markets in London.

“It has all the makings of the final chapter in the Latvian story,” he added. In credit markets, the cost of insuring Latvian sovereign debt against default continued to climb from recent levels, in a sign that investors are increasingly uncomfortable with the outlook for the country. Regional peers Lithuania and Estonia, which also peg their currencies to the euro, saw their swaps spreads widen.

Still, the debt and currency markets shouldn’t be overly troubled by Latvian devaluation risk, as the threat has been building for some time, and the global financial markets are now much more robust than they were several months ago.

“If they did devalue, there would be a selloff [in eastern European assets], but the impact would not be as severe as it would have been six to nine months ago,” said Mr. Rendell at RBC. “If we had big currency moves, I think people would buy them back,” he added.

Devaluation is also unlikely to catch the Swedish banks off guard. To brace for the potential onslaught of defaulting customers, both Swedbank AB and Skandinaviska Enskilda Banken AB have set up Baltic units to deal with problem loans and seized collateral.

While officials may care to discount the impact of a full blown devaluation of the Latvian currency, the interconnectedness of the global markets has proven to be more of a risk propellant rather than a risk mitigant. How so? The use of derivatives across currency and credit markets has been shown to be as much speculative in nature as pure hedging. In fact, there certainly are market participants who will benefit by a Latvian devaluation.

Can that devaluation, if it does occur, be well contained?

I’ll be watching.

LD

Related Sense on Cents Commentary

Let’s Cross the Pond and Revist the Weakest Link (May 23, 2009)

Let’s Cross the Pond and Revisit The Weakest Link

Posted by Larry Doyle on May 23rd, 2009 2:27 PM |

The Washington Post is running a lead article today about the concern that the European Union in general, and the United Kingdom specifically, may derail the global recovery. Let’s cross “the pond.”

European Slump May Stall Global Rebound

Some countries, such as Ireland, are so cash-strapped that they’ve raised taxes in the middle of a deep recession, making things worse. In addition, European leaders have only recently signaled their willingness to conduct broad, systematic stress tests on their financial institutions, similar to the ones on major U.S. banks already concluded by the Treasury Department. 

This is not news. Nothing of substance has dramatically changed in Western or Eastern Europe from my writing, The Weakest Link and The Weakest Link Is Weakening in late February and early March.  

The media, government officials, and market pundits have been been attempting to talk the economy up more than the actual reality would dictate. The equity markets rebounded from an oversold condition in early March. For short term traders and those focused on technical analysis, I hope you caught the move. For those focused on the long term fundamentals of the economy, the risks remain very high.

While, WaPo and other media outlets may voice concerns now or report developments as new, the “strains in the European chain” remain very real. Along these lines, I had written on April 30th in my April 2009 Market Review: Brave New World:  

I believe it is a question of when – not if – in terms of a major European country defaulting on its debt and requiring a rescue from the EU and/or IMF.

The Washington Post should be a little more rigorous in terms of checking their facts. They report:

While U.S. banks have already written down about half the estimated $1.1 trillion in troubled loans and toxic assets on their books, Europe’s financial institutions have thus far written down less than 25 percent of their $1.4 trillion in bad debts related to the crisis, according to a report from the International Monetary Fund. 

In actuality, the IMF has forecasted that U.S. banks have upwards of $2.8 trillion in troubled loans and toxic assets and have written down approximately 40-45% of it. That’s bad reporting. At least the reporter is diligent enough to highlight that Western Europe’s major concerns relate to the financial exposure to Eastern Europe. Although, this is not new news, they report: 

Many major Western European banks are also heavily invested in hard-hit Eastern Europe, where the risk of a fresh wave of corporate and consumer defaults is considerable.

With all due respect, tell us something we don’t know.

LD

Dr. Edwin Vieira’s Amazing Crystal Ball, 2006

Posted by Larry Doyle on March 24th, 2009 9:52 PM |

I will admit that I am not a student of the Great Depression, but I have started reviewing that period. Obviously I, like every American, hope our economy stabilizes and we regain our footing and return to prosperity. While the pragmatic optimist in me believes that can happen, the trader and risk manager in me tells me to review the Depression, understand the dynamics, assess the risks of our current period, and prepare accordingly.

I hope and believe people who have been reading my work for a while appreciate that I am not an alarmist.  Whether working on Wall Street as a trader and salesman or now writing for Sense on Cents, a measured, analytical approach has always generated the best results. In that vein, I discount speculators and salesmen who attempt to make a buck from heightened levels of anxiety. That said, the elevated levels of risk in our economy, markets, and global finance require an equally elevated sense of risk analysis and historical analysis.

Given some of the economic saber rattling emanating from China and the lessened fiscal support emanating from Europe, the threats of global protectionism are clearly growing. That scenario also occurred during the Depression.   (more…)

Let’s Revisit Europe: The Weakest Link

Posted by Larry Doyle on March 17th, 2009 5:15 AM |

I thank our loyal reader in Michigan, Mr. Fiscal Liberal, for sharing with us a piece written by Simon Johnson, the former chief economist of the International Monetary Fund, a professor at the MIT Sloan School of Management, and a senior fellow at the Peterson Institute for International Economics.

Mr. Johnson writes about the growing problems in Europe. I am hard pressed to see how the European situation, both in the East and West, can not end badly. There are too many economies that are effectively insolvent or on the brink of insolvency. I believe this is the region of the world which will experience increased economic strife leading to social unrest and political change. Can the problems in Europe be contained given the massively interconnected world of global finance? 

Thank you again FL for sharing this very enlightening piece from Simon Johnson!!   

G-20s Real Agenda Should be Saving Europe from Itself
By Simon Johnson
Last Updated: 10:28AM GMT 16 Mar 2009

The media coverage of the G20 finance ministers meeting this weekend was dominated by the apparent battle between those who support more fiscal stimulus and those who want to impose more regulations on the financial system.

This, we are led to believe, is the big debate facing the full G20 heads of government summit early next month: the US is pushing for a bigger global fiscal stimulus (2pc extra government spending from everyone, to be monitored by the IMF), while the continental Europeans are holding out for greater regulation. Gordon Brown is trying hard to cast himself as the broker for any apparent deal.   (more…)

Why is George Soros Short the Euro? MUST READ!

Posted by Larry Doyle on March 3rd, 2009 6:10 AM |

In very short order, I have gained a deep respect and regard for our Economic All-Star, John Mauldin. I have come to appreciate that Mauldin and I view the market through the same lens focused on the global economy. While many media outlets focus on the day to day, if not hour to hour trading activity, I believe they are truly missing the forest for the trees.

While I have written twice over the last week about eastern Europe being the weakest link in the world of global finance, Mauldin and his colleague Niels Jensen of Absolute Return Partners provided insights and analysis that is numbing.

Why is George Soros short the euro? Let me provide a synopsis of Mauldin’s and Jensen’s “Europe On the Ropes.” Assuming those visiting Sense on Cents have an interest in the markets and economy, this piece is somewhat lengthy, but a MUST READ!! A link is provided at the end of my review. (more…)

The Weakest Link

Posted by Larry Doyle on February 27th, 2009 10:45 AM |

It is widely believed that the weakest link in the global economy centers on Eastern Europe. In light of that, the leaders of 12 eastern European countries are holding an emergency economic summit this weekend. From that summit, it is expected that these countries will request an international bailout.

 As of now it appears the countries in greatest degree of stress are Hungary, Ukraine, and Serbia. The expectation is that the group of countries will request the European Union to arrange a $230 billion bailout package. Who would provide the funding? A conglomerate of European Central Banks, the International Monetary Fund, the World Bank, European Investment Bank, and European Bank for Reconstruction and Development.

A major issue for eastern Europe is that their creditors, largely western European banks along with western European countries, are not exactly in great shape themselves. These countries may look to accelerate their entry into the EU and the full adoption of the Euro along with it.

As the pressure and stress builds, the chance of political dislocation also grows.   

For further details on how Hungary Seeks $230 Billion Bailout for Eastern Europe.  I will be monitoring this situation as it develops.  As our global economy is very much interconnected, the increase in sovereign credit risks is a very serious concern. 

LD






Recent Posts


ECONOMIC ALL-STARS


Archives