Saturday, November 27, 2010

Bank & Roll!

CLSA’s Chris Wood Chimes In On The Endless European Banker Bailouts

Nov 26, 2010

CLSA’s Chris Wood has released his latest outlook on the world is out, and it is getting progressively gloomy: when even a banker says that he is “aghast” at the “grotesque” extent to which senior creditors are being bailed out left and right in Europe, one has to stop and wonder. Judging by the frequency of protests, even the most redimentary levels of European society seem to be realizing that with each passing day it is they that are funding decades of greed and foolish, not to mention wrong, decision making on behalf of the kleptoklass. And as such each rescued country is one more straw on the camel’s back of public patience, which will probably run out just as, or after, Spain is rescued, which should be within a few weeks, the reprieve for Europe’s fantastically intertwined cross creditors is shortly running out. In terms of trades, Wood recommends shorting Europe with an emphasis on Spain. On the other hand, his pro Asian bias is still here, although with ever louder rumors of tightening out of China, even that has been curbed somewhat. Looking into 2011, the CLSA strategist sees increasing signs of weakness in the US, borne out of the muni space. Of course, should senior bondholders in Europe be impaired, the weakness will come far sooner due to the extremely interconnected nature of global financial balance sheet where a writedown for one will promptly trickle down via a domino-like effect into massive haircuts for all.

From the latest Greed and Fear

The news of an estimated €80-90bn bailout for Ireland this week raises the issue of when a bailout will turn into a default or debt restructuring.
GREED & fear has been aghast ever since the financial crisis first hit at the grotesque extent to which senior bank bond holders have been let off the hook.

Greece’s goal to reduce its fiscal deficit to below 3% of GDP by 2014 is likely to require job losses in the country’s amazingly bloated and legendarily unproductive public sector. However, there is not as yet a populist clamour in Greece for a unilateral restructuring of Greek government debt.

In Greece an estimated government debt to GDP ratio of over 150% has infected the banks whereas in Ireland the opposite has been the case as a private-debt driven banking bust has undermined the state’s finances through the willingness to extend government guarantees.

GREED & fear’s guess is that the next few years will see Euroland groping its way to some Brady Plan-like equivalent of debt restructuring, a move which would involve a German-led Euroland accepting at least some partial collective responsibility for Euroland’s sovereign debt.

The end game of the ongoing sovereign debt crisis in Euroland lies in the future not the past. GREED & fear continues to recommend that those who want to hedge their long Asian equity exposure should continue to do so by shorting European financial stocks. GREED & fear also continues to recommend the Spanish flu trade.

Next year is likely to see much more focus on the ailing condition of states’ finances in America. The catalyst will be a sharp decline in federal support to state and local governments as a consequence of the fading fiscal stimulus. Equity investors will likely to have to start paying more attention to the municipal bond market where there are initial signs of rising risk aversion.

The end of last week saw yet another set of measures in Hong Kong seeking to combat speculation in the local residential property market. These latest measures seem completely over the top to GREED & fear and do not address the more fundamental need in Hong Kong, which is to increase supply of residential property. Their net result will be to reduce liquidity. A more illiquid market means a more volatile one.

A general election is likely to be held in Thailand before May next year, providing five by-elections due to be held on 12 December go well. The only Thai-specific negative of late has been its own effort at property cooling-down measures. But this seems marginal in the extreme compared to what the likes of Hong Kong has been announcing. It would also be contrary to the political interests of the current government to put the boot in on the property market.

GREED & fear will add another percentage point to the Thai overweight in the relative-return portfolio with the money taken from Australia. An extra percentage point will also be added to Thai property developer Preuksa and India’s Godrej Properties in the Asia ex-Japan long-only portfolio with the money shaved from the investments in China Mobile and ACC Limited.

The North Korean attack this week, combined with the deliberate unveiling a few days earlier of a new uranium enrichment plant, seem designed to bolster the political capital of Kim Jong-il’s designated successor, third son Kim Jong-un.

It is China’s continuing support for Pyongyang which is preventing the collapse of the North, an event which GREED & fear continues to believe would be hugely bullish for the Korean stock market in terms of precipitating a multi-year investment-driven cycle. But for now, sadly, that theory remains only an interesting hypothesis.

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