rushed bailout designed and structured at its heart with the
Shadow Capitalism top priority of limiting further contagion. The markets
MARKET COMMENTARY BY NAUFAL SANAULLAH
Monday, November 29, 2010
Does Ireland = Eurozone’s Indymac moment?
The EU & IMF agreed on a €85b bailout package for Ireland
on Sunday, and as I expected Germany’s desires for senior
bondholder haircuts for Irish bank debt investors were left
unsatisfied (this, of course, does mean that subordinate
debtholders will likely face sharper haircuts than originally
thought). The bailout involves €22.5b each from the IMF &
EFSM, €17.5b from the EFSF, €5b from bilateral loans (from
the UK, Sweden, & Denmark), €12.5b from the National
Pension Reserve Fund (more than half of its current size), and
€5b from state cash reserves; with €35b being used for bank
recapitalization and €50b for sovereign budget funding. The
average rate, if drawn today, would be 580bps, but as several
observers have noted, if the interest-free funding from the
NPRF & cash reserves are accounted for, the effective
borrowing costs would be >700bps.
The conditions for the sovereign portion of the bailout were
in-line with the 4yr budget proposal released last week, as
expected due to IMF/EU backing. As long as Cowen’s coalition
can prevent every single opposition MP from voting against
the budget (unlikely, given that even one abstention
undermines the threat and that two independents will be
voting with Cowen), the December 7 budget vote will mark
the official affirmation of the bailout. Give the multilateral
and layered structure of this bailout, in contrast with the US’s
various bailouts, the budget vote likely won’t be an event
upon which the near-term direction of the euro hinges.
Concurrently, Eurogroup introduced the European Stability
Mechanism (ESM), which will replace the ESFS in mid-2013.
All EMU member sovereign paper issued post-ESM
introduction will carry CACs that introduce the potential for
sovereign bond restructuring with private sector
involvement, while the ESM will only grant funds to
sovereigns that pass a joint ECB/EC/IMF debt sustainability
test. Additionally, Olli Rehn announced that the EC will be
proposing to extend Greece’s bailout package maturity by 4.5
years.
However, none of this seemed to quell any contagion risks in
the market. The Irish bailout went against the wishes of a
majority of polled Irish citizens and included a very significant
gutting of the state pension fund, and overall seemed to be a
shrugged off the developments, with periphery bond spreads
rising again today, in stark contrast with the reaction to the
Greek aid. This leads me to believe that the market has
crossed the threshold of welcome liquidity injections and will
now only react positively to truly fundamental news.
Considering Thursday’s ECB meeting was originally designed
to lay out exit plans from ECB support mechanisms, the
market is calling the political system’s bluff and the skeptical
pessimism exhibited in response to any proposed EU facilities
is similar to the threshold crossed by the FDIC’s takeover of
Indymac in July 2008. In this context, Bear Stearns (with its
consequent strong rally in the indices from March to May
2008, based on “worst-is-over” sentiments), correlates with
Greece (and the euro’s 2000 pip rally and “exit strategy” talk
from the ECB). Ed Harrison actually made the analogy before
me, so credit to him, but I think it is a very useful comparison.
It is important to remember that the US stock market crashed
just ten weeks after the Indymac moment.
More and more it is appearing that monetization by the ECB
is all that is left to occur, especially given that the Irish bailout
did nothing to quell contagion risks spilling over to the
Iberian. I noted in a piece last week that anti-US/QE backlash
may be a political platform from which Berlin could justify
easing, and in fact, Russian PM Vladimir Putin seems to be
recognizing just that, as he called for increased German-
Russian economic trade today, and issued harsh statements
about the current dollar hegemony. Spain is too big for the
EFSF yet big enough to warrant Bundesbank haws to agree to
inflationary ECB policy, and no effective options remain to
address the increasingly near-term Spanish crisis. This is a big
reason why I had (and continue to hold) such high conviction
in shorting the euro, because in a QE scenario, the bond
spreads may compress, but the euro would actually decline
further. And of course, a Spanish default would make the
entire EMU’s existence suddenly up in the air. The “Indymac”
moment was what I was waiting for to confirm it and the
muted response to the Irish bailout provided me just that. QE
would also help distinguish insolvent from illiquid, important
for Germany in justifying populist-driven aggressiveness in
external policy (which will become increasingly significant and
politically-driven, given that Hamburg’s CDU-Green coalition
collapsed over the weekend, setting the stage for no less than
seven state elections next year).
And lest we forget, Italy & Belgium are now officially in the
crosshairs as well, the former with the second-largest
deficit/GDP—after Greece—in the EU and the latter with no
effective government since the summer and significant
periphery exposure. Italy’s debt auctions today showed
significant yield appreciation from late October auctions,
while Belgium fell €500m short of its €2.5b goal in its debt
issuance today. To add to the political crises in Belgium,
Portugal Spain, Greece, & Ireland, Italian PM Silvio Berlusconi
faces the confidence vote in mid-December, following the
passage of budget, which he sought to restore confidence in
his coalition, setting up a potential general election next year.
we could see a real challenge of a 1200 breakout soon. Dallas
Fed Manufacturing Activity for November came in at 16.2,
greatly beating expectations of 4.5, and the two Fed POMOs
helped the bulls case as well today. I remain cautiously long
US equity to hedge my pervasive short-risk exposures across
the globe, and think it’s early to top-call until leading stocks
stop showing fresh breakouts and follow-throughs.

Stepping outside of the Eurozone for a moment, the new

headline Wikileaks cablegate release pertains to 19 missiles
obtained by Iran from North Korea that would presumably
provide the “building blocks” for creating long-range missiles.
Meanwhile, S Korean President Lee Myung Bak addressed
populist outrage of the government’s weak handling of the
DPRK attacks by promising that “North Korea will be made to
pay for any further provocation no matter what.” China
remains adamant about its proposals for resumption of talks
between the members comprising the former Six-Party Talks,
with PRC’s Foreign Affairs Vice Minister Wu Dawei repeating
those calls today. Conflict tensions continue to rise in the
Korean peninsula and it appears that the breaking point has EURUSD continued its selloff today into its sixth consecutive
finally been reached where another attack from the North session, although I think it may find a near-term bid at its
puts the region on the brink of literal war. The Wikileaks 200d and 50% Fibo retracement from October highs, both
releases and heightening Korean tensions are bullish oil, around 1.31. A bounce to its 61.8% Fibo level around 1.335-
which posted another strong rally today, as well as uranium 1.36 would provide a nice short/sell entry for those inclined.
prices, an equity proxy of which I went long last week ahead Additionally, EURCHF has significant support at 1.306, which
of >9% gains today. marked cycle lows in June & September, while EURGBP shows
Fibo support as well and EURAUD shows long term support. It
Further PBoC tightening risk, exacerbated today by inflation- may prove costly to chase short-euro trades here, especially
hawkish statements from the China State Council, are putting since a lot of traders were caught short on the gap down,
a damper on EM/NJA risk, poorly timed to be concurrent to which gave way to intraday rallies in risk during the US
heightening Korean tensions. With AUDUSD now decisively session. As you may have suspected, I expect rallies here to
below its 55d and talk of RM position unwinds/liquidations, it be short term and countertrend. A long position in EURAUD
appears that Asian risk (and its proxies) will be led on the way may not be a bad punt here, especially if hedging a
down by inflation/hiking risk and on the way up by US equity preexisting EURUSD short, as unwinding the trade via further
and oil. High school riots and plunging demand for expensive EURUSD selling leaves the portfolio with nice entries in short
food, whose price inflation is running above 10% right now in both EURUSD and AUDUSD.
China, represents rising risk of social unrest, which is why
tackling the inflation/food crisis is priority #1 for the PBoC,
although at the expense of a very much liquidity-fueled
property sector, whose decline has significant ramifications
across the waters in Australia. This issue is also very pertinent
to consider in the context of the Korean concerns.

The S&P shrugged off a gap down today, posting a strong

bullish reversal off of its 55d and significant support at 1170.
The 1170-1200 zone remains the important consolidation
area from which a breakout or breakdown would presumably
provide significant directional context. Given the no-
confidence vote extended to the Irish bailout by the market,
such a rally seems relatively bullish all things considered and
NZD looks good for a trade here, as the combination of
significant support from previous resistance, trendline
support, and the 38.2% Fibo retracement, all coming in right
around the 74 big fig, make it attractive near-term from a
technical perspective. Given important S/R around 1.2950,
short AUDNZD may be a good expression of that thesis, again
especially if one considers current bounces countertrend and
uses them to unwind via selling NZDUSD and being left with
attractive risk-adjusted entries for AUD bearish expressions.
GBPNZD, a trade I’ve tried before, also looks attractive from
the short-side, with a potentially longer permissible
timeframe for holding as well.
Q3 Swedish GDP posted significant prints today, up 2.1% QoQ
vs 1.2% expected and up 6.9% YoY vs 5.4% expected. I
responded by selling some GBPSEK at 10.905, to add to my
underexpressed bearishness in GBP vs a strong currency by
relative and absolute fundamental and technical analysis.
Sweden, along with Denmark and the UK, was one of three
nations to provide multilateral support for the Irish bailout, as
well as provided aid for Latvia and Iceland. This goes along
way and is cementing Sweden as a regional safe haven
competing against the heavyweight Germany, which is
showing aging demographics, massive political divisiveness,
an export model being harassed by beggar-thy-neighbor
competitive debasements, and incessant bailout demands
from the periphery. A Riksbank hike mid-next month appears
likely and would further the bull case. The Swedish model
successively addressed the banking crisis and the negative
rate on reserves effectively prevented a liquidity trap, and
Sweden is one of the few sound economies and financial
systems remaining to qualify for true safe haven status,
especially in the European area.

With milder-than-expected meteorological outlooks, natgas
took a tumbling today, erasing the optimism budding from
recent constructive technical action and outperformance in
the energy complex. The potential head & shoulders
development in oil likely had many traders shorting ahead of
a hoped breakdown, and probably seeing the potential for a
reversal in the long oil/short natgas trade that has been a
common theme since the commodity bubble collapsed in
summer 2008. However, the trade betting on the spread
unwind got killed today, as crude futures broke out through
$85/bbl (invalidating the H&S), crude ETFs broke out through
their 200d, and natgas broke back below its 200d. I went long
crude and short natgas for a pair trade today, while shorting a
couple natural gas equities to pair my oil stock longs. Also
important is recent CAD outperformance during the rush to
USD, which has left support at 9950 still very challengeable in
USDCAD, and any bout of USD weakness could lead to new
highs for the Canadian Dollar, which ties in well with my oil
bullishness and recent geopolitical stresses. A break through
9950 could send CAD surging to levels not seen since 2007
highs. Below is an ETF-based reconstruction of the short
oil/long natgas spread-unwind trade.
Big news out of Forbes today, as an interview with Wikileaks
editor-in-chief Julian Assange indicates that a “megaleak”
concerning a “big U.S. bank,” on the magnitude of tens to
hundreds of thousands of documents, is due for release early
next year. Should this bank be Goldman Sachs, JP Morgan, or
the like, and should this release by damning in one way or
another, this could be a very significant development. It could
equally as likely be a non-event, even if the material is juicy, if
it isn’t market-substantive. However, Assange claims very
high substantive value in the leaks, likening it to the “Enron
emails,” stating that: “It will give a true and representative
insight into how banks behave at the executive level in a way
that will stimulate investigations and reforms, I presume.” I
am anxiously awaiting their release, out of sheer curiosity
alone.
To close, I’d like to bring up an old topic: PMs. In the event of
QE from ECB, gold surges. In the event of sovereign
restructuring, gold surges. Are either fully discounted (or at
any significant level? I don’t think so. I’ll be watching to see if
gold invalidates its H&S like oil did today and/or if silver
breaks out of its triangle pattern soon. Just to be clear, I am
(and have been for a long time) bullish gold, on the dual
theses of heightening sovereign credit risk (on all fronts) and
eventual inflationary risk from monetary easing (which is just
beginning to pop up, in EM, a bit earlier than I’d expected).
However, I do think that the end game is for a bubble to
develop in gold (as I see it more prone than almost any asset
to psychological/sentiment/paradigm shifts) and a parabolic
surge sometime within the next 5-12 years, only to crash just
as hard. The top in gold will likely coincide with a bottom in
US Treasurys, and I will be the guy selling all of his gold once
the parabolic move shows some significant high-volume
multi-trendline breakdowns, and using those USDs to pick up
Tsys trading at deep discounts most likely. From there, I’d
expect gold to plunge right back to $400-500/oz or so, and
stay dormant until the next wave of credit and/or spending
excess leads to similar crises. The charts will tell. But the key
point to drive home is: I don’t believe in “good” or “bad”
assets, I only believe in a good time to buy/short and a
BETTER time to sell/cover. And to top off the discourse about
QE/bailouts, I’d like to quote Paul Krugman in his amusing
characterization of the Irish crisis (which explains exactly why
the market has now officially called the EU’s bluff):
It’s as if we’re having the following dialogue:
“Ireland really can’t afford to pay these debts.”
“Here’s a credit line!”
“No, really, we just can’t afford to pay.”
“Here’s a credit line!”
It really is like watching a car wreck.
 OPEN TRADES
Short APOL | 51.90 | stop 54.00 | +33.91%
Long VECO | 39.00 | stop 36.30 | +17.18%
Long USD/JPY | 80.75 | stop 79.85 | +330 pips
Long ACAS | 6.67 | stop 6.25 | +8.85%
Long CAD/JPY | 79.60 | stop 78.55 | +290 pips
Short EUR/CHF | 1.3725 | stop 1.3490 | +645 pips
Short BP | 42.40 | stop 44.80 | +4.27%
Long CEO | 226.96 | stop 210.55 | -2.23%
Long USD/HUF | 195.45 | stop 192.70 | +215 pips
Short X | 47.30 | stop 49.25 | -1.04%
Short ACOR | 28.00 | stop 28.70 | +4.32%
Short /HG | 4.06 | stop 4.15 | +7.14%
Short AUD/USD | 0.9980 | stop 1.0075 | +360 pips
Long SGD/JPY | 63.60 | stop 62.95 | +15 pips
Long SNE | 33.70 | stop 32.30 | +3.86%
Long HIT | 47.35 | stop 44.80 | +0.46%
Long /NKD | 9768.00 | stop 9686.00 | +2.17%
Short REV | 10.50 | stop 11.20 | +4.57%
Long EK | 4.79 | stop 4.30 | +1.04%
Long AMR | 8.22 | stop 7.90 | +3.16%
Long N | 24.00 | stop 23.20 | +6.42%
Long EXXI | 25.50 | stop 23.35 | -0.16%
Long LVS | 49.30 | stop 43.50 | +2.43%
Long GOOG | 591.00 | stop 579.50 | -1.50%
Long TGA | 14.65 | stop 13.45 | +14.20%
Long NOG | 22.20 | stop 21.80 | +2.84%
Long USD/SGD | 1.3085 | stop 1.3015 | +125 pips
Long AAPL | 307.50 | stop 395.35 | +3.05%
Long CSTR | 63.45 | stop 58.15 | +3.34%
Long MAT | 25.25 | stop 24.80 | +1.70%
Short ARG | 63.50 | stop 64.90 | +2.76%
Long DG | 32.35 | stop 31.30 | +1.33%
Long SNDK | 42.95 | stop 40.35 | +5.29%
Long SSYS | 33.50 | stop 33.10 | +2.06%
Long CMCSA | 20.15 | stop 19.70 | +0.30%
Long REGN | 29.25 | stop 28.35 | -1.95%
Long VSAT | 40.75 | stop 39.90 | +1.28%
Short LMT | 68.30 | stop 69.50 | +0.15%
Short XRX | 11.50 | stop 11.90 | -0.87%
Long THRX | 21.65 | stop 20.55 | +16.40%
Short MT | 32.00 | stop 33.10 | +0.72%
Short PIN | 23.75 | stop 25.00 | +1.14%
Long XEC | 81.00 | stop 78.15 | +0.72%
Long FWLT | 28.30 | stop 27.00 | +2.86%
Long GRA | 33.40 | stop 31.00 | +1.89%
Long UAL | 28.10 | stop 27.00 | +0.36%
Long VSH | 14.15 | stop 13.30 | +3.75%
Short GBP/USD | 1.5700 | stop 1.5850 | +150 pips
Long CHF/HUF | 208.00 | stop 205.00 | +90 pips
Long NG | 14.05 | stop 13.50 | +0.36%
Long SLW | 34.80 | stop 32.80 | +2.96%
Long DNN | 2.85 | stop 2.60 | +11.58%
Long CIE | 10.85 | stop 10.10 | +3.69%
Long URRE | 2.90 | stop 2.50 | +20.34%
Long STT | 43.50 | stop 41.80 | +0.46%
Long PCAR | 54.95 | stop 52.00 | -1.42%
Short FRO | 26.10 | stop 27.00 | -0.69%
CLOSED TRADES
Long SBUX | 30.25 | sell 30.60| +1.16%
Long EL | 72.00 | sell 75.00 | +4.17%
Long VIA.B | 37.35 | sell 37.60 | +0.67%
Short FCX | 99.95 | cover 98.50 | +1.45%
Short SCCO | 42.75 | cover 42.30 | +1.05%
Short DB | 52.60 | cover 48.55 | +7.70%
NEW TRADES
Short CCE | 24.00 | stop 25.75
Long /CL | 85.00 | stop 82.80
Short /NG | 4.33 | stop 4.55
Long SINA | 63.75 | stop 62.05
Short JKS | 25.65 | stop 27.90
Long CLW | 80.80 | stop 78.50
Long IO | 7.03 | stop 6.64
Long /ZW | 690.00 | stop 675.30
Long /ZC | 550.00 | stop 541.90
Long BHP | 82.55 | stop 80.90
Long MOTR | 30.90 | stop 26.30
Long NZD/USD | 0.7440 | stop 0.7390
Short GBPSEK | 10.905 | stop 11.115
Short EOG | 89.00 | stop 93.10
Short CHK | 22.00 | stop 22.70
Long EURJPY | 110.05 | stop 109.35
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DISCLAIMER: Nothing contained anywhere in this commentary, including
analysis and trade ideas, constitutes or should be construed as investing or
financial advice, suggestion, or recommendation. Please consult a financial
professional and do due diligence before engaging in any purchase or sale of
securities.