Friday, 17 February 2012

Weekly Commentary on Financial Markets: 13 Feb 2012

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Weekly Commentary on Financial Markets: 13 Feb 2012
Issue: 5/2012    13 Feb 2012
  More Money
News of the week: Greek parliament approves austerity measures; now awaiting next tranche; Apple shares hitting USD 500 mark; more liquidity by ECB and BoE
JHS standard
Europe - Euro
European finance ministers will meet again this week, to discuss the latest austerity measures, but the news is that Brussels / Berlin wants a written commitment that the parties will also stick to the plan and actions after the next elections. In addition they switched from the proposal of an EU budget commissioner to the idea of an escrow account for the servicing of the debt. While conceptually interesting we do not believe that this will fly with the Greeks: they feel that the rest of the EU do not trust them and lack to treat them as equals. The very tough measures combined with other conditions will - in our opinion - lead to a very dangerous socio-political development in Greece. Comparisons to the Weimar Republic and the rise of the far right in the 1920 and 1930 come to mind. We are very concerned.
My Grade: C

The Euro
The ECB will provide more liquidity via the LTRO (another tranche at the end of Feb) and the BoE via a GBP 50 b program announced last week. This liquidity injection is key to keep markets running, but we ask what the central banks will and can do if the situation gets worse, Greece and other peripherals default and banks get into trouble. The answer is even larger balance sheets. The Euro looks overvalued at these levels.
My Grade: C

Greece took the first hurdle on Sunday when they approved the austerity measures. Now the next step is with the EU which will discuss the plan on Wednesday and should release the funds for the next tranche. Thereafter the restructuring is on the agenda. If all goes well we will not see a default in March and Greece can concentrate on bringing down its debt to GDP level from 160% to 120% by 2020 and go to elections in April. For the local population the outlook is very sad and tough as they will face harshest economic conditions for the foreseeable future. From a macroeconomic POV the austerity plan and the restructuring do not make any sense. Greece cannot service the debt load without growing which they can't under this program. As written above we are concerned that the socio-political situation might turn for the worse, a weakening of the mainstream parties, more poverty and unemployment and civil unrest. We believe that given the tough stance of the EU on austerity, written commitments and escrow account, Greece will be forced to leave the Euro and the EU as they will not be able or allowed to renegotiate. But this might happen only in 2013, as a default and more Euro volatility is not helpful for the upcoming elections in France and Germany does not want a Euro problem either. Greece might choose leaving the Euro sooner than that: very unlikely to be before the elections, but anytime thereafter.
My Grade: C-

President Obama praised premier Monti's efforts and results at his Washington trip last week. 10 Y BTP yields continue at the sub 6% level, short dated at the 3% level. Root problem of high level of debt is unchanged.
My Grade: B

Bad news out of Japan, where the Q4 GDP dropped by an annualised 2.3%. A warning sign for Europe and the US.
My Grade: B-    
Obama unveiled his budget, a balancing act of cuts and stimulus, to be voted on today. Sentiment in the US continues to be good.
My Grade: B+

Swiss banks reported earnings last week, depicting the tough conditions in the markets: investment banking activity is down in all three banks (CS, Julius Baer, UBS), focus on getting more private clients, more on shore and less offshore and of course the higher capital requirements. Barclay's earnings were also lower and showed a similar picture.
In light of the facebook IPO other internet and tech companies get the investors' attention. Groupon's results were weak, but they fiddle around with the website and services. Linkedin had good numbers. And Apple, certainly not an internet company but a also trading at a high price and multiples, has hit the magic USD 500. Rumours of dividends could make the stock eligible for income investors. We would not be surprised to see a stock split to make the shares look cheaper.
On the M& A front Vodafone is considering a bid for Cable and Wireless.
My Grade: A-

Overbought conditions continue in the equity markets. Traders and investors took Sunday's vote in Greece as a good sign, despite the worsening situation in the country and many other risks in the markets. We believe that the overbought condition will change when the market realises that no new money will be added at these levels and bad news will hit the wire. While many hedge funds are net long, many long only investors have cut their positions and many traders are net short.
My Grade: A-

Interest Rates
US and German rates at low rates, unchanged, due to QE, operation twist and the increasing fear factor.  
My Grade: C

Spreads continue at the tighter end. Corporate credit and EM preferred by investors.  
My Grade: B-

Gold and Silver range trading.
My Grade: C+

The VIX has gone up from last week's low of 17.3% to the 19.5% levels. Still looking cheap given the risks in the markets.
My Grade: A

Hedge Funds
Good times for L/S stock picking, relative value and event hedge funds as volatility is high enough to move markets, allowing managers to exploit dislocations without getting whacked by crazy markets.
Our preferred strategies for 2012 are event, L/S and credit / distress.
My Grade: A

We believe that the markets are dancing on very thin ice, as the Greek situation is getting worse, banks are directly and indirectly exposed to the sovereign risks and geopolitical risks in the Middle East are on the rise. The overbought equity markets might hover at these high levels for some time, and suddenly sell off as e.g. in the summer.

Caution in the markets is recommended. My grade: B-

Grading: A, A-, B+, B, B-, C+, C- D (adapted from American University Grading / Marking System), higher marks for visibility, clear outlook, little risk, lower marks for little visibility, unclear outlook, high risk.

Jacob H Schmidt,international financial markets expert, HF expert, Webster Finance Professor. Expert Witness. Anglo- Austrian, multi-lingual,-cultural, critical thinker. CEO of Schmidt Research Partners Ltd, an investment advisory firm and MD of SFP-International Ltd, a consulting and training company. Available for high quality investment advisory, due diligence and consulting projects.
Schmidt Research Partners are expert providers of advisory services, due diligence, research, consulting and training in financial markets.

This commentary is for information only. Nothing contained herein constitutes investment, legal, tax or other advice nor is it to be solely relied on in making an investment or other decision. It is not an invitation to buy, sell or subscribe and is by way of information only.

Watch Jacob H Schmidt latest interview on Bloomberg TV:
Feb. 6 (Bloomberg) -- Jacob Schmidt, founder and chief executive officer of Schmidt Research Partners Ltd., discusses Julius Baer Group Ltd., Credit Suisse Group AG and UBS AG. He speaks with Andrea Catherwood on Bloomberg Television's "Last Word." (Source: Bloomberg)

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