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Marc Lasry Dips into his European Shopping List

December 9, 2011 Leave a comment

A few months back I had the privilege to attend a panel with Marc Lasry and several other big shots in the hedge fund business.  Lasry is one of my personal favorites.  It’s not just that he’s a lawyer by academic training (in fact that might be more a negative than positive sometimes), it’s that he tends to have the best research and one of the more objective, clearheaded and apolitical views on markets.

When I last heard Lasry speak, he made it clear that he was developing a shopping list in Europe; however, he had yet to take a big splash into markets.  In particular, Lasry was looking for signs of a recapitalization plan for European banks in order to create a “crisis firewall” that would prevent further contagion.  My understanding was that an aggressive bank recapitalization was more important than a sovereign debt backstop, because it would allow for a temporary escape from the panicked environment, thus affording time to develop a longer term solution to the structural problems plaguing the Euro.

Yesterday morning, Lasry made a guest appearance on CNBC’s Squawk Box where he discussed the latest in the Eurozone mess.  Sure enough, despite the fact that many remain wary of Europe, Lasry disclosed that he was putting capital to work in the region, operating on a 2-4 year time-frame.  This is telling, because in the eyes of many, Europe continues to “kick the can down the road,” yet with someone like Lasry stepping in its a little clearer that a) the value is there from an investment perspective, and b) amongst those with good research and access to information there is an endgame clearly within reach.

Go ahead and give it a watch to learn more about Lasry’s perspective on Europe and a little further depth on precisely where he is making these investments (hint: the value is not in the PIIGS).

I’m having trouble getting the video to embed, so if it’s not working click on this link to check it out.

http://plus.cnbc.com/rssvideosearch/action/player/id/3000060922/code/cnbcplayershare

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What Next?

June 2, 2010 Leave a comment

As uncertainty reigns supreme amidst these volatile/choppy markets of today, investors and traders alike are trying to assess whether we are on the brink of a “double-dip recession” or merely just a experiencing a blip–or correction–in the recovery from the throes of the 2008 deflationary spiral.  The answer to this question opens the door for vast opportunity; however, it’s increasingly difficult to deduce exactly where we stand on the road to recovery.  With the markets sitting just above their breakdown levels, the rhetoric and tone are increasingly bearish.  Each attempted rally gets sold with increasing force.  Yet still, the market remains above what many investors perceive to be a solid “value”/breakdown level for the market–S&P 1,040.   I want to “dumb it down” and focus on just a couple of metrics to watch for each side and simply offer some of the competing arguments as food for thought (but inevitably, I’ll give my brief personal conclusive thoughts in the end).

The Bear Case:

Without getting into too much detail about Europe, I want to focus on some key indicators at home in the US that do not bode well for the sustainability of the recovery (I am not altogether ignoring Europe, as the indicators I will discuss account for Eurozone risks).  First, let’s look at a weekly chart of the 20 year Treasury Note (as reflected by TLT) dating back to late 2006.  This has been my personal favorite risk-sentiment gauge during the course of the crisis and in its wake.

The Treasury market is a great risk sentiment indicator.  When the notes spike and the yields drop, we know that investors are more risk averse and looking for a liquid source of safety.  Over the course of the last month, Treasuries reached levels not seen since July 2009’s failed head and shoulders breakdown.  This is a significant sign, considering that thus far in 2010, Treasuries traded consistently in a tight range.  So long as the TLTs remain above the highs of their early 2010 range, the markets will be in “flight-to-safety” mode. Demand for US sovereign debt is to many “irrationally” high considering the increasing budget deficits the government continues to run; however, in the zer0-sum game of global finance, this is the most liquid market in the world and is the natural source of safety when things are hitting the proverbial fan.

Along with the rallying Long Bond came a stronger US dollar.  This both poses risks to the recovery in increasing the prices of US exports and is reflective of decreasing risk tolerance on the part of investors.  A strong dollar means that there is increasing demand for dollars in the global economy, and such a move is deflationary (I’ve written about this several times in the past).  Considering we are in the dawn of a recovery from a major credit crisis, such deflationary signs are scary in light of the troubles in Europe and the lack of monetary and fiscal policy ammunition as tools to place a bid under snowballing selling pressure in global asset prices.

Moreover, the Gulf disaster generates economic risk in its own right.  As the destruction of one of our nation’s important ecosystems and economies continues, the unquantifiable nature of the damage makes it difficult to gauge the overall impact.  There will be significant job losses from the seafood and travel industries which rely on the Gulf as their source of livelihood.  Additionally, companies who rely on offshore drilling will face increasing scrutiny, regulation and diminished earnings in the near-to mid-terms.

The Bull Case:

This arena holds what I believe to be one of the more surprising and optimistic indicators seen emerge over the past month: the recent rally in the Baltic Dry Index (BDI).  Click on this link to check out a Bloomberg chart of the index.  For those unfamiliar, the Baltic Dry Index is an index that tracks the prevailing rate on global shipping.  Strong up moves in the index are reflective of increasing demand for shipping, and vicariously, increasing global trade.  Surprisingly, this index marched steadily higher despite the deterioration in the Eurozone.  Now this uptick may be demonstrative of a desire on the part of resource owners to clear out inventory before wave 2 of the crisis widens, yet for some reason that seems unlikely.  Consumer confidence also checked in nicely higher in May despite the growing Eurozone crisis and this move seems more consistent with the positive developments in the BDI–consumption is making a strong recovery.

Furthermore, the Eurozone’s troubles can become the US’s strengths.  The crumbling Euro has come hand-in-hand with cheaper commodity prices, thus lowering the cost of important input goods such as oil and copper.  A stronger dollar helps boost America’s purchasing power on the global level, leaving consumers with excess wiggle room in their budgets with which to save.  Savings will go a long way towards strengthening the awful balance sheets of America’s households and businesses and this is THE critical step in moving from a stimulus induced recovery to self-sustaining private sector growth.  The rising Treasury rates that go hand-in-hand with Euro troubles  help keep the cost of financing US deficits much more manageable.   These are tangible long-run benefits.

In the words of Rahm Emanuel, “never waste a good crisis” and the Gulf situation should be no exception.  There are important lessons to learn out of this that can lead to long-term improvements and real economic gains.  Yes this comes with a hefty cost; however, rarely is there progress made without some sort of accrued cost.  This disaster clearly highlights the nature of negative externalities when dealing with resource expropriation and provides a much clearer picture of the true supply/demand equilibrium of oil in our economy.  We now know with a higher degree of certainty that alternative energies come with a fairer price-tag than original closed-ended calculations projected.  This is the catalyst that should help lead us to reconsider how we generate energy for consumption.

In Sum:

There you have it.  The key points at the moment for both sides of the coin.  Ultimately should the S&P break the 1,040 level, everything will change and technical selling pressure will highlight and lead to further fundamental weaknesses; however, should that level continue to hold this could be an actionable “long and strong” value level to use as a line in the sand for a portfolio.   Personally I am a believer in the longs, but will quickly change my stance should 1,040 break.  This is so because I give much weight to the improved consumer confidence and Baltic Dry Index numbers despite the multitude of negative sentiment and indicators swamping the headlines.  If today’s rally can hold, and the S&P can once again retake 1,100 this impressive rally off of the March 2009 lows will/should take another leg higher.

The Bondholder Bailout

May 19, 2010 1 comment

I hinted at it the other day, but would like to take a moment to dig a little deeper.  The framework with which we discuss the “Greek Bailout” is demonstrative of the POLITICAL challenges that both the U.S. and Europe will face moving forward.  Let me be clear about one thing off the bat and that is that the risks of a Greece default are two-fold: first, there is the risk to Greece in their future ability to access capital markets moving forward; second, there is the risk to bondholders of Greek debt.  This bailout in many respects did far more to protect bondholders than it did Greece.  Greece has/had options.  They can outright default and not pay back ANYTHING to their bondholders (like Russia in 1998), in which case there would be massive losses across asset classes in Europe and around the world (just the consideration of such a risk is crushing assets globally); OR they can negotiate a better deal with their bondholders and arrange a way through which both Greece and their creditors can share some of the pain.

I am in no way insinuating that Greece acted in the “right” way during the time leading up to this crisis.   They had a bloated public sector that should have been more vulnerable and/or expendable following the post-Lehman deflationary storm.  My point is more that the purpose of this bailout is to ensure that the losses suffered in Greece do not spread too mightily beyond the country’s borders.  Bailouts are inherently a conservative institution, as they are designed to protect the status quo, rather than accepting the costly need for short-term pain and change. Let me set the record straight once and for all: these bailouts protect wealth across Europe and not entirety of the Greek welfare state.

Those who lambaste Germany for bailing out Greece fail to realize that a considerable chunk of the losses in Greece will fall on the German economy no matter which way you slice it.  Greek consumers buy loads of German goods and German banks own plenty of Greek sovereign debt.   It is in their own self-interest that Germany is taking the unfortunate step of propping up sovereign debt across Europe.   Forget about the moral hazard.  This bailout offers sovereign debt owners a way to get out of their stupid investments without taking too much of the pain.  This is yet another example of the privatized upside and nationalized risk we saw play out in the United States throughout much of 2008.  One thing that is abundantly clear for Greece is that regardless of which solution they opt for (or that the powers that be arrange), the country MUST cut their spending and take a lot of pain.  This is not a bailout of the Greek welfare state.  It is dead.  The people can riot all they want, but in the real world, there is absolutely no way Greece can maintain the status quo.

Did Trichet Read AZ on Friday?

May 10, 2010 1 comment

On Friday, in my morning after summary I wrote the following:

Get a solution to Greece.  The ECB has to do something and do it fast.  That does not mean they have to rush into making a rash decision.  There are several options that do not require a total dismantling of the Euro or an outright default by Greece.  The most attractive option I have read about recently was to have the ECB buy up some sovereign debt around Europe and print away part of the problem.  Sure it is inflationary, but so too is the collapse of the Euro.  Each day the price drops farther, the corresponding costs of goods in the Eurozone rise a corresponding amount.  Jean-Claude Trichet: GET IT DONE ALREADY!  This accomplishes several goals, and most importantly prolongs Greece’s ability to come up with real solutions and decisions not made in the midst of an emotional panic.  We all know how poor decisions can be amidst chaos and it takes hindsight to truly reflect and realize our mistakes.  Let’s not let that happen again (no need to rehash Lehman, AIG, TARP, etc.).

Seems like someone in Europe was listening!  Right now the most important thing was restoring sanity to these incredibly volatile markets.  Correlation was exceptionally high and the contamination was spreading to even semi-healthy subsets of the GLOBAL economy.  Global being the operative word here.  The risks were far larger than just Greece or Europe.  Some might say that the European Central Bank (ECB) opened up the “moral hazard” door for Europe, but that is not the case.  The moral hazard long predates this sovereign debt bailout package and it long predates the 2008 U.S. financial crisis.  Moreover, can we please stop calling this a bailout of Greece?  Sure Greece gets “bailed out” to an extent, but this problem is a two way street–the bailout was as much for Greece’s bond holders (and more realistically, all owners of assets on Europe and abroad) as it was for Greece itself.  Labeling this solely a bailout of Greece is missing the point and hints at a not-so-subtle agenda–to save creditors at the expense of debtors.

I just want to reiterate one of my longstanding themes at this point in time: deflation remains persistent on a global level and hyperinflation is not a certain outgrowth of the massive bailout initiatives undertaken in the U.S. and Europe.  Hyperinflation requires more than just simply printing new money.  With continued deflationary pressures in the private sector, the expansion of public sector debt is not the catalyst that many pontificators deem it to be.  Our situation is far from that of Weimar Germany’s, the classic example of hyperinflation.  There is just absolutely no basis to make such a claim.  Anyone who does has a policy agenda, or a trading book that they would like to talk up.  People should take any such talk with a grain of salt.

An additional point that deserves stressing right about now is that this past week demonstrates the prevalent fragility of credit markets and our economy at this point in time.  We are not at the point where this recovery is self-sustaining.  Yes there are particular subsets of our economy performing exceptionally well; however, fear and macroeconomic volatility remain at heightened levels.  The “extended period” language with regard to interest rates should remain a key component of near-term Federal Reserve statements as a result.  The risks are far greater in pulling that support too early than leaving it around too long.  The lack of any real inflation in the economy is just one more factor that adds credence to the Fed’s decision to maintain its aggressive monetary policy stance.  Let us all factor this reality into our investment decisions moving in the near to mid-term.

um yes that really did just happen…

May 6, 2010 2 comments

Wow…you might not believe it, but yeah that did just happen.  Here’s the chart, below it are some thoughts/observations.

I mean seriously?  This is not real.  Stuff like that cannot/should not/does not happen in a real world.  In a world dominated by robots and inundated with fear, the story reality is a little different.  I am tempted to post the Proctor and Gamble (PG) chart but when a stock that is far from volatile plunged from $60 to $40 it’s hard to get a succinct visual depiction of what really transpired.  Pardon the rambling nature of this post, but my stomach is tumbling, my arm hairs are standing tall and my heart rate is through the roof.

There was no intraday/unique catalyst for this move.  We all know that Greece is in trouble, we all know that the Euro is particularly vulnerable at this time, but don’t we also know that the U.S. recovery is far more robust than anyone anticipated?  Well clearly fear is back in play in U.S. markets.  I said just the other day that a down move of that magnitude (Tuesday”s) generally gets follow-through.  Never in my wildest dreams did I expect this (and sure enough, I lost more money than I would’ve liked trying to buy this market too early…).

Tuesday was a rough day, today was a bloodbath.  Greece needs to leave the euro and get this over with now.  There is no other endgame that works.  Staying on the Euro and deflating is not an option.  It won’t work.  The euro may or may not survive this panic, but one thing is clear: the risks of monetary union in tough times are far greater than the rewards in good times.  After today, what people feared is now confirmed as the truth.

I will be back later on with some more thoughts, but I just wanted to put this out there for now.

More Dollar Strength on the Horizon

May 5, 2010 2 comments

This post originally appeared on T3Live on January 12th, 2010.  This theme continues to play out and the trade continues to work.

In looking at a daily chart of the Euro (FXE), we can see the development of a bearish continuation pattern–the bear flag. The FXE index struggled mightily with the $150 level. After what appeared to be a breakout failed above that level, the currency quickly reversed course and traded lower.


Drawing in the Fibonacci levels shows that the recent rally stalled at exactly the 38.2% retracement level of the move from the November highs to the December lows. Aggressive traders looking to anticipate a breakdown can use yesterday’s high of $145.30 as a level to short against.

In taking a step back and looking at a monthly chart of the Euro, we see a bearish engulfing bar in December that wiped out nearly four months worth of gains for the currency. The next big level appears at around $140 on the FXE and will be a crucial tell as to whether lower prices are in store for the Euro and consequently higher prices for the dollar.


Several fundamental factors add up to add fuel to this potential move. Firstly, the Euro zone appears to face some significant troubles in the near future. Sovereign debt concerns in the PIIGS nations–Portugal, Ireland, Italy, Greece and Spain–has some talking about a move away from the Euro in the troubled countries. While such a move seems drastic, and is most certainly not imminent, the uncertainty that comes with growing public debt without localized monetary policy control will continue to weigh on some countries in the Eurozone, and vicariously weigh on the Euro.

Secondly, deflation in the private sector in the U.S. remains persistent. Demand for dollars and the need to capitalize outstanding debt are ultimately positive catalysts for the price of the dollar. While asset prices continue to appreciate in price, real demand in the economy remains sluggish. Case in point are the Alcoa (AA) earnings. The Market Guardian summed it up well in a post from yesterday evening:

The primary uses for refined aluminum are automobiles, aircraft, trucks, railway cars, marine vessels, bicycles, and other machines, as well as packaging such as cans and foil, along with construction with windows, doors, siding, building wire, studs, and framing, plus in a range of household items and consumer electronics.

Is manufacturing in any of these areas which extensively use aluminum improving? NO.

Will manufacturing using aluminum increase significantly in 2010. NOT LIKELY.

So, then, why exactly isn’t Alcoa’s stock price reflecting a dramatic drop in the use of aluminum and why isn’t the price of aluminum itself down substantially rather than up due to much lower demand?

The lack of end demand in the economy makes it increasingly likely that the Federal Reserve Bank will not raise interest rates as soon as some may think. The dollar rises when demand for dollars outpaces supply. Should the dollar breakout yet again here (and the Euro breakdown), we will have confirmation that private sector deflation is happening at a far greater rate than public sector inflation. Watch the FXE closely for the next tell.

The Future of the Euro

May 4, 2010 1 comment

The following is a post I wrote for T3Live on 2/19/10.  I was just re-reading this after seeing the Greece/Euro crisis play out and think it’s just as relevant right now as it was then (I guess 2 months is not that long a time in the grand scheme of things, but it is in AZ’s history).  Greece is in a whole lot of trouble and it seems as if the logical solution would be for the country to either leave the euro or “revalue” it’s national price level.  Not a pretty picture.


In early 2010, the Eurozone monetary union faces its single biggest challenge to date. In theory, the euro is supposed to create a unified economy in Europe through which people, goods and money flow with ease across international borders. In some respects, that aspect of Union has been a resounding success—there has not been a war between member nations, and there is a growing amount of economic cooperation within the Eurozone.

It is impossible to contemplate the future of the euro without considering its past. The European Union started as a collection of treaties in the wake of World War II designed to forge a cohesive, codependent economic community of European nations who were formerly military foes. The idea was that in building economic cooperation amongst member nations—originally Belgium, France, Italy, Luxembourg, the Netherlands and West Germany—that economic interdependency could set the foundation for political and military cooperation.

The community of nations expanded to include a larger chunk of Western Europe and the scope of the relationship broadened, reaching its climax with the Maastricht Treaty in 1993, where the European Union was officially born and the goal of a unified currency created. On January 1, 1999 the euro officially came into being as an electronic accounting currency and paper notes went into circulation on January 1, 2002.

Now that we have a very brief outline as to the formation of the European Union and the euro currency, let us consider one of the serious consequences of a currency union. One component of this history that I purposely left out from the brief time-line above was the Treaty of Amsterdam in 1998. The treaty of Amsterdam established the European Central Bank (ECB) to oversee a unified and coordinated monetary policy for the EU member states, based in Frankfurt, Germany, the Eurozone’s premiere commercial center. The consequences of this treaty are only now being learned in a painful and economically frightening way.

In creating a currency union, member nations sacrificed localized control over monetary policy. While economic union has forged a closer relationship between the member nations, there remain vast and considerable difference in the underlying structure of each of the member nations’ local economies. Different challenges face the each country at different points in time, and these various challenges require unique and different remedies. Economies facing troubles in some respects were forced to rely more heavily on fiscal policy with the lack of control over monetary policy.

In July of 2008, as the world was entering a global credit crunch and deflationary spiral, the ECB raised, I repeat: the ECB RAISED, interest rates due to concerns over rising commodity, particularly energy, prices. This could not have happened at a worse time for Greece, as a country heavily reliant on its maritime and shipping sector was suffering severe economic harm from the catastrophic collapse of global trade after the U.S. economy entered its own crisis. This does not completely explain the budgetary troubles in Greece. It was well known that upon joining the currency, Greece suffered from high fiscal debt as a percentage of GDP, and the country has a history of governmental corruption and inefficiency. However, the monetary action taken by the ECB was not only bad for Greece; rather, it was in stark contrast to what Greece actually needed at the time.

Eventually the deflationary spiral that started with the subprime crisis in the U.S. caught up with Europe and the ECB followed the U.S. Federal Reserve Bank in aggressively cutting interest rates.  Unfortunately this action was too little, too late for Greece and some other troubled nations. All this begs the question as to whether a monetary union is truly a beneficial economic structure. Does the sacrifice of control over monetary policy cause more harm than the benefit derived from the ease of trade afforded by the euro? In some respects, the costs of the harm to countries like Greece must be borne by the relatively healthy member nations regardless of whether they bailout the troubled ones. While no answers are certain at this point, it seems clear that some sort of change needs to happen. As far as what kind of change, that remains to be seen, but maybe the risks of currency unions in slump times outweigh the rewards in boom times.