Sometimes it's important not to know the answer to everything

Newedge – Blain’s Morning Porridge – January 27 2012

By Bill Blain, senior director, special situations, Newedge (as seen on TV)

T: +44 207 676 8615; Mobile: +44 777 088 1033; E: Bill.Blain@newedge.com

Today: Newedge ‘Greek Outlook and Outcomes’ Call - 2.30 London time.

What's on the agenda today? The rally continues. Unstoppable? When everyone is heading one way, perhaps it's time to think about heading the other?

But first: time for some gloating. I was delighted to read in the FT an unnamed senior trader quoted: ‘this rally has been a big surprise to most of us. We thought the ECB LTRO would boost banks with a backstop for funding, but the strength and the length of the [Peripheral Bond] rally was not expected’. Hah..! The morning after the LTRO was announced I'm on record (check out Bloomberg TV and Porridge), saying the three-year liquidity bomb meant it was time to fill your boots with Italy and Spain debt.

Comment in Porridge Dec 9: “Last night's abject failure of European politics matters not one jot. The key thing is the ECB is providing three-year long term repos. So, if I was a cynical bank treasurer, I'd be filling my boots with 6-7% yields from Italy bonds, and telling my management committee what a great job I was doing”.

(There is also Bloomberg footage of a senior bank economist berating me for thinking the LTRO would boost markets .. "the LTRO is not about Government bond markets, but about bank financing." Wrong.)

But after two weeks of the frenetic rally monkey drumming, perhaps it’s time to stop and think about the euro. Are Spain and Italy less a threat simply because yields have fallen? Is Germany any closer to allowing a real solution? Are the economic outlooks for peripheral Europe and growth any different? Is growth evident? Are the political structures any stronger? Aren't they still uncompetitive countries trapped in someone else's currency? Rally on, but with caution – especially on Italy, Italy growth and the Monti government. No point fighting market direction. Yet.

Greece

Next point is Greece...yawn. There are rumours the PSI negotiations could be completed as early as today. Which may mean our informal Client Call this afternoon to discuss what's happening, what's not happening and likely outcomes for Bubble creditors, gets even more interesting. As an agency brokerage we don't have any in-house axe to grind, and we certainly don't have access to non-public data, but we will present some trading ideas and the logic behind them.  

We will be touching on holdout outlook, default scenarios, CDS, legal and restructuring options. I'll be joined by a leading restructuring lawyer to present informed opinion on these matters, rather than my usual wild speculation presented as irrefutable fact. Even if you think you are insulated from Greek effects or contagion, you might yet find it interesting - email for details (Bill.Blain@newedge.com).

One of the major issues I've been focusing on is the Greek banks. If they get zeroed by a disorderly Greek collapse, banking - rather than the now limited sovereign losses - is likely to be the main contagion vector to the rest of wobbly Europe. Greek banks holding defaulted/restructured GGBs will likely find the ECB shut, in which case they have no money and a massive run ensues. But if they are holding new post-PSI exchange bonds - Greece international bonds under English law - well...other outcomes and they stay open even if CDS triggers on a GGB event. That opens a new run of possibilities. If you are intrigued, join the call or drop me an email (Bill.Blain@newedge.com).

Banks

Rally on in financials and the funding markets are open! But the fervid mood seems to be discounting the many threats - like delayed EU proposals on future bail-ins. EC finance chiefs say the new proposals are being delayed till after the EU crisis is sorted, which by any sensible measure means we likely won't hear of them for many a year. The idea senior bank losses could be formalised in EU Cant & Creed is one that should terrify investors – but hey-ho, we can forget it for now. Rally on.

I have to congratulate Lloyds for a superb fifth senior bond issue yesterday thats caught the fear-off mood and rallied strongly. Just like comedy the secret of good financing is .......   ........ timing.

Across the financials space we've seen dramatic tightening to the stage where many of the Tier 1 and Tier 2 ideas we've been showing just aren't so attractive any more in terms of risk reward. Much of the smart money has divested into insurance paper, while playing the likelihood of calls and tenders has been another theme. Yesterday it was Credit Agricole that made a tender offer. A few months ago we were recommending Credit Agricole 7.047% T1 at 72 and this morning they are at 97/98. Nice.

About the only mainstream large bank still to play the capital management theme is HSBC, but they remain old school. We suspect they are unlikely to do anything their investor base might consider whoosh or taking advantage of sub-par pricing. What should HSBC stockholders think of passing up opportunities to increase capital and improve capital efficiency through capital optimisation exchanges? Perhaps pleased if it further differentiates the World's increasingly less Local Bank from the rest of the pack.

Out of time and have a great weekend.