Front Row: Back to Basics

Front Row represents the personal view of Rodrigo Rodriguez, European Head of developed cash trading for Credit Suisse.

Another Friday, another Front Row, and another election another mess…. when I heard at high school that those who do not know their history are condemned to repeat it…. I was not too sure what they meant. Now clearly I do. So, a practically identical result on the Italian election to that on the first Greek one, the outlier, the anti-everything party gets fantastic results, and the guy who played by the rules gets destroyed ( I hate to say I told you so…but I DID). The market immediately sells off and then the quick bargain hunters get in hoping for a quick recovery that unfortunately only happens in the States, and today we are back to the lows…let’s hope that the repetition of the History stops there as otherwise we are about to have a shocker!

  • Back to basics , it is called GAP
  • Spain that far far away investment
  • China que Sera, sera?

Back to basics , it is called GAP!
So what happened this week? We basically went back to GAP theory, Eurostoxx has moved sideways with big up and downs but closing all the gaps…Does not this start sounding to 2012….we are back to trade HEADLINES….How exciting!!!

BERLUSCONI SAYS ITALY NEEDS ELECTIONS AS SOON AS POSSIBLE… clearly he feels Bersani and Grillo are near to closing a pact J

So let me refer to a comment I have just received from a friend of mine (I will not name him as I think he could have just written it after the Greek elections and proved wrong too) Resilience has been led by the Italian bond markets ,Berlusconi being a little bit more conciliatory around coalitions, market getting a little more comfortable around sequestration starting and some month end mark-ups…

So yes only 1% down on the week basically the same that after the Greek election, and the S&P on steroids back to the highs as clearly sequestration, does not affect the debt rating, the need of higher rates or the limitation of monetary policy….

How can I be bullish if every time we rally back our commission is minimal and all the movement is led by CTAs and futures? However,here is the good news…. There is a gap at 2660 – so for the short term players there is hope… for me I will continue buying gamma, as while I am bearish short term, anything can happen in a market that moves on anorexic volumes
Once again vol might not be cheap but it is definitely low, I have no idea which direction market is going to move next but I know it is going to move. So for me is back to basics, stock picking, market neutral strategies with long gamma protection….

The key here , is not Italy as Italy can easily survive without Europe, the key is can Europe survive without Italy and more importantly how will Spain finance itself if the Italian situation deteriorates…OMT here we go! The move this week is clearly complacency…clearly everyone is relaxed as the Ben Draghi holds the market put but….countries need to ask for it, and Italians and Spanish seem quite stubborn to me to be honest.

Are they crazy ???? Spanish 10 years back almost to the lows of this year….on the words of my dear friend Juan “ Rod the Italian situation is like debt ceiling /sequestration , everyone knows this is dysfunctional, and that there will be new elections, but everyone is happy to look to the other side , and keep kicking the can forward at least till the German elections, so considering the liquidity that exists in the market I do not expect you see the market tanking”

But the FX market shows a completer different picture, is this the one that is really reading the situation properly?

Food for thoughts….the latest from my Italian friend Sacha….

The less politicians (and central bankers) meddle in the economy the better, so M5S might not be as bad (for Italy) as one might otherwise suppose. But there is no saving the FTMIB or the other European or US indices, they have to go down sooner or later and compensate for the excess of optimism in the past decades. My preference is for sooner rather than later and by go down I do not mean 20 or 30%…. We are in the middle of a huge bear market but it will take a long time for most people to realise, in fact they will only get it when “something” (Lehman x 100) happens, and then they will blame the decline on that event, even though (as in the case of Lehman) the market will already be down quite a bit by then. It will help them to sound intelligent with their clients/investors/cocktail party guests, but it will not make them any $ nor save them from $$ of losses.

Did that cheer you up…. It definitely did not to me.

Spain that far far away investment

All those who know me, know that while I love investing in real state as I make my living on equities, I had never bought anything in Spain. Well recently this has changed, and now I am the happy owner of one property in Ibiza and one in Huelva? Who from ? Banco Santander! Who decided that they are going to sell where the demand is – i.e. 60% discount.

Why am I mentioning this? Because I think this is a clear game changer. The first step to solve a problem is to accept you have one and Santander move on housing prices gives extreme opportunities to the medium / long term investor, especially to the foreign one .

One thing is clear about Spain, you have a well prepared unemployed workforce and great infrastructures in all areas… there has to be opportunities! On this line of thought my friend Daniel Lacalle prepared a document for the Spanish Government with guidelines to attract foreign investment into the countries, obviously our politicians are currently busy with something else….so I asked for his authorization to mention his main guidelines, for a country with an accumulated debt (private+public well above 300% of GDP), a problem that cannot be sorted through more credit or more taxes but through new investments.

So this is his recipe:

  • Transparency
  • Favourable corporate tax
  • Flexible work legislation: reduction of the complexity of hiring process, reduction of the number of regulators and increase speed on the process of opening new Companies in Spain
  • Establish Public/Government help through fiscal deductions and not subsidies.(currently 5% of GDP)
  • Change of a massively restrictive regulation regarding foreign investments , in order to attract private equity investments
  • Stop the “Siesta myth” Spanish productivity is one of the highest of the EU, while the costs are one of the lowest
  • Develop a proper mezzanine funding for small and mid-size companies.
  • Continue increasing private sector saving ratio
  • Maximize the usage of one of the best infrastructure networks in the world.
  • Improve housing market legislation for letting so there is an increase legal guarantee . Once the renting yield is perceived to be attractive and the risk lower than sovereign bonds the investment appealing increases.
  • romote the shale gas industry ( Spain has some of the biggest reserves in Europe)

On this basis my dear friend Daniel, thinks Spain could bring €500B , I really hope someone will listen to him……and learn that is not how good you are but how well you communicate it !

China….que sera sera???

So the transfer of power in China will happen next week from the 5th to the 8th of March and China did two 2% U turn trips this week with no apparent reason after quite a bad PMI…. I am certain next week that market will stay calm but what about after?…as I am brain dead this week, as you have probably notice on the quality of this note… I leave you with a comment from our Chinese Strategist summarized by the one and only Ben C….

Dong Tao (CS Chinese Economist) has published an interesting follow-up note on the explosion of shadow banking in China, estimating that its total size is now 44% of GDP, with half of new loans made last year accounted for by shadow banking. The structures are complex and highly interrelated, with significant exposure to the property sector and to local government, leaving the economy precariously exposed to interest rates and property prices. Is history repeating itself? A fair assessment in his view. He argues that it is reasonable to draw parallels with the credit crunch borne of the MBS crisis in the western world.

He fears that in time a significant rise in inflation could force up interest rates, triggering a squeeze on the property market and local government debt… a ticking time-bomb. The good news is that Beijing has the fiscal strength to bail out the financial system, though we are unlikely to see any pre-emptive measures. As such, the initial shock could be much worse than China experienced in 2008…

Thought piece on a significant longer term issue; not intended to suggest that there is an immediate crisis on the horizon for China.

About Daniel Lacalle

Daniel Lacalle (Madrid, 1967). PhD Economist and Fund Manager. Author of bestsellers "Life In The Financial Markets" and "The Energy World Is Flat" as well as "Escape From the Central Bank Trap". Daniel Lacalle (Madrid, 1967). PhD Economist and Fund Manager. Frequent collaborator with CNBC, Bloomberg, CNN, Hedgeye, Epoch Times, Mises Institute, BBN Times, Wall Street Journal, El Español, A3 Media and 13TV. Holds the CIIA (Certified International Investment Analyst) and masters in Economic Investigation and IESE.

One thought on “Front Row: Back to Basics

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