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Friday, 15 December 2017

Transparency and Third Avenue sales prompt classic air-pocket

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  • Peters 475px June 2014

Talk about shooting fish in a barrel

Monday, leading into Tuesday and on the back of Friday, was marked by a distinctive lack of positive news flow. Anyone with a bent towards self-harming given the general air of misery might well have found themselves pushed further towards the edge. But then again, the investment industry is largely populated by people who joined it because they are congenital optimists and so, despite the poor performance of risk assets yesterday, they will be hoping for one of those good old reversal Tuesdays today.

Sadly though, the ointment is knee-deep in flies, the first of which has to be the persistently falling oil price. I won’t even venture a guess at how many forests will be cut down in order to produce research reports which predict why what is happening can or cannot continue to happen and what to expect next but I can say for certain that, Goldman excepted, very few analysts forecast the sort of volatility we are currently experiencing.

Yesterday saw WTI break through the US$35.00/pbb level but then bounce sharply to close at US$36.31/pbb. The jury is out as to whether we have finally found a bottom and whether this is where smart money should be looking at getting back in again but, don’t forget, we had the same discussions at US$60.00, US$50.00 and US$40.00. I picked a low at US$45.00 and thought that looked like decent value but fortunately did nothing about it. Even I deserve a bit of luck from time to time, don’t I?

I wonder how many of those clever lawmakers and regulators are proudly looking at the performance of the credit markets while patting themselves on the back for having removed all that horrid risk-taking without a loss of liquidity. My arse!

The iTraxx Crossover rose a further 16bp yesterday to close at 358.5bp – 74bp above the recent low of 284.5bp which it marked as recently as December 2.

IT’S EASY TO blame everything on tomorrow’s inevitable Fed tightening, but those of us standing in the mud know darned well that a humble 25bp increase in Fed Funds from 0%-0.25% to 0.25%-0.5% is not what is poisoning the world.

I won’t go into the way in which liquidity and transparency have different effects in bond and in equity markets and how they are, in the case of the former, as good as mutually exclusive.

My views on the subject have had their own, idiosyncratic effect on the well-being of forests.

Suffice to say that all the theoreticians can take their electronic trading platforms and blind markets and other tech solutions to the very human traits of fear and greed and maybe a little more fear and then put them … well, I’ll leave that to you to decide where they can put them.

IN THE DARKEST days of the global financial crisis, I once asked the rhetorical question what, if a market is a place where buyers and sellers meet, one should call a place where there are only sellers and no buyers?

Conventional wisdom is that Third Avenue’s competitors have used the power of transparency to see what assets Third had in its portfolios and which would be up for liquidation. Talk of shooting fish in a barrel!

The smart and the quick simply went short the names which they knew would be sold in the knowledge that there would be as good as no bid.

So much for the theory which blithely assumes that the CDS market was happy to sell protection on the names in question. My little spies in the default swap market tell me that the story looks good on paper but that in practice it would have been hard to impossible to find a seller of that kind of protection.

In other words, we seem to be facing a sell-down without volume, a classic air-pocket in the credit market. With or without the Fed, it’s mid-December and there is nobody adding risk, whether long or short.

The FOMC of course only represents one of the two big risks in markets between now and Christmas, with the Spanish elections still hanging over the eurozone like a bad smell.

I am a big fan of Spain with its global language - sorry, France - its benign climate, educated workforce and its stunning infrastructure.

It is 40 years and four weeks since the death of the Caudillo, Francisco Franco, but I well remember travelling around Spain while he was still alive. It really was still all donkey carts and dirt roads.

Liberal-inclined students met, not quite in secret, but certainly with one eye over their shoulder.

Pablo Iglesias, leader of Podemos and Albert Rivera, leader of Ciutadans, weren’t even born when Franco died. Whether that is a good thing or a bad thing is a moot point but it is joy to find them in a position to freely and openly express their views, irrespective of whether one agrees with them or not.

Virtually every election held in Europe in the past two years has been accompanied by the question as to whether this is the one in which the old right/left division of the electorate is about to be blown away. This weekend that failed to happen in France and the case for it happening in Spain on Sunday isn’t so clear cut.

Spanish 10-year bonds are trading 8.5bp back of Italy. On fundamentals they look cheap, on political risk they look rich. For choice, I’d go into the weekend short Spain, long Italy but reverse again, gain or loss, by mid-week.

FINALLY, ICM PUBLISHED a poll which has the Brexit referendum, were it to be held today, at a fairly even 50/50 split, although from my soundings in the pub and in the field, the momentum is on the side of those preferring to leave. More to the point, I find an ever increasing proportion of the “educated middle-class” favouring the exit vote.

Dave “you may now call me David again” Cameron has got a fight on his hands even though he still evidently trying to convince his treaty partners that they have more to lose by a British exit than does this country.

Once the mould is broken, who knows what happens? Denmark next? 2016 looks as though it could be a very political year and not only in Europe. Watch China meet America in the Pacific, both of whom seemingly regard it as their Mare Nostrum. Cuban missile crisis all over again?

Whether the Fed tightens another 100bp next year or not might prove to be one of our minor worries. My guess is that this time next year the president-elect will be called neither Hilary nor Donald.

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