Bill Gross on Rating Agencies !

Excerpt from a very interesting article by Bill Gross of PIMCO on rating agencies...

Firms such as PIMCO with large credit staffs of their own can bypass, anticipate and front run all three, benefiting from their timidity and lack of common sense. Take these recent examples for instance: S&P just this past week downgraded Spain “one notch” to AA from AA+, cautioning that they could face another downgrade if they weren’t careful. Oooh – so tough! And believe it or not, Moody’s and Fitch still have them as AAAs. Here’s a country with 20% unemployment, a recent current account deficit of 10%, that has defaulted 13 times in the past two centuries, whose bonds are already trading at Baa levels, and whose fate is increasingly dependent on the kindness of the EU and IMF to bail them out. Some AAA!

Now let’s go the other way. GMAC, that only too recently near-bankrupt finance company, carries recentlyupgraded B ratings from the rating services. Profiles in courage for all three, I say! I mean the U.S. government has injected $20 billion of capital and owns 65% of the company. It’s the auto industry’s equivalent of FNMA and FHLMC, except those are AAA and GMAC is B with a “positive outlook!” For that, you can buy a GMAC two-year bond at 6½% (8% with what are called “smart notes” that Investment Outlookreaders can buy through their broker), while you receive only 1.2% at Fannie and Freddie. Vive la différence!

Euro creeps up again...

After a vicious sell-off following the Spanish bank failure, the Euro has begun to recover. If this is intervention, then the Central Bank dealers have changed their tactics.. no more 100pip 'shock and awe' moves. However, the risk to the Eurozone remains.

The Swiss National Bank has been intervening in the EUR-CHF markets aggressively.. read post on FT Alphaville.

Real Estate in Spain has been a pain for some time to come. This can be the next damper in the Euro saga.. Watch out for news events linked to Spain.

RNRL vs Reliance? a 50% trade? - Update III

Ho boy.. lucky that we got out of the trade while RNRL was still at 45.. Mukesh and Anil Ambani patched up. Now this is interesting if you think about it.. How exactly does this help RNRL.. They were getting gas at $4.2..which they still are.. nothing else changes. RCom can now hug and be merry with MTN now; but that should take the market cap down not up if Bharti-Zain is anything to go by..

This is a mere sentiment booster.. I think RNRL's longer term valuation still should remain at 30 to 40 levels.. Don't buy.. Shorting an ADAG stock is not a feat for the faint hearted.. and anyway, the quick trading move is over as discussed in my last post.

RelInfra and Relcap (esp RelCap which is a steal at 650 levels) are good buys from the ADAG group at current prices..

Update: Long Equity/Short Gold.. Doubts creep in..

Just a few days back I had recommended a long equity/short gold strategy .. I'd like to revisit that stance.. We've made between 1% to 3% on that trade.. gold was at 1200-1220 levels .. and the SP500 was slightly lower..

I'd take the money off the table at this point.. The new trade's a long bull spread with Long 1x 2% OTM calls and Short 1.5X 5% OTM calls.. A naked futures position is not warranted at this point given the global market situation.

My expectation is that we'll move lower from here.. but the risk/reward is clearly in favor of a long equity position at this point. I'd still like to bet with the Central Banks (see previous article), just that my conviction levels are lower now.

Trade safe !

ps.. stay out of currencies.. they're a rigged game now.. and the house may not have complete control !

Wanna make money...? go long equity/short gold

We're witnessing historic times.. Just 18 months after the largest financial crisis since the Great Depression, speculators around the world are playing yet another end-of-world game.. and a game with higher stakes.

Here's what's happening.. Short Euro, Long Credit Default Swaps of the UK, France, PIIGS.. eventually the US and Japan. Short risk assets, move money into dollars.. but people are worried about the debt situation in the US as well so the natural end of world trade commodity - gold - should go up. These trades will payoff if the Euro collapses..and if it does, then one can move to other OECD sovereigns and play the same game. Greek, small as it may be, has become the unfortunate playground for the clash between Central Banks and Speculators.

Greek, which should ideally have been allowed to restructure its debt, can't be let to do that as the European banking system will then need to be bailed out. Fixed Income desks around Europe have been in the convergence trade since after the institution of the Euro - they go long high yielding bonds from countries such as the PIIGS and short the bunds to earn the spread (assumption was that credit risk of all euro countries is equal).. If the Greeks restructure their debt, banks in the Euro zone will have to take large hits on their bond portfolio which contribute towards their Capital Adequacy Ratio.. They will then need to be bailed out/recapitalized by the public sector. Markets will freeze and we'll see an uglier version of 2008 banking crisis as contagion will spread to other asset classes. In short, to avoid a really large, potentially unmanageable, bailout of the entire Anglo-Saxon financial system, private mark downs on Greek government debt needs to be avoided.

The reasons why I think the Central Banks can win this war against speculators on the currency front are simple

• they've got infinite capital (they can print), and they don't care about MTM. The P/L is not their target, nor is their compensation linked to the P/L
• they understand the stakes and they have the legal powers (which was not the case when the US authorities had to let Lehman go.. they understood the stakes but did not have the legal authority to save Lehman)

For the Central Banks and Governments to win against the speculators to win against the speculators, in addition to the interventions, they also need to cut debt to inspire market confidence in the longer term. Unfortuantely, the incentives created by the electoral cycle are misaligned with the economic cycle; cutting salaries now tends to cause governments to lose support while the sops associated with higher debts normally bring in more votes.

The immediate downside risk to global financial markets right now is not economic or financial activity;its political instability in Greece. If Greece decends into political and civil chaos, all bets are off. Best thing to do would be to wait till things settle down. If not, go as levered long as you can on equities for a really rapid 5% gain (and a 5% fall in gold)...

RNRL vs Reliance? a 50% trade? - Update II

Reliance at 1017 ..flat
RNRL at 45...frm 70 (40% fall) !

My trading call was an expected outperformance of 50% of Reliance over RNRL.. though i still think the last 10% will come about, it'll be slow and boring to play for that.. suggest that profit on the trade should be booked here !

RNRL vs Reliance? a 50% trade? - Update

well.. the Supreme Court judgement will be out today.. at 10.30am on the RNRL/RELIANCE gas dispute. I'm not so sure anymore about being short RNRL.. At the time of the earlier post, RNRL could've been shorted (and I shorted some) at 72-75 zone; and covered at 67.

Going into the event I'd like to maintain only long Reliance with no RNRL position. Depending on the outcome, we can do one of the three things

1. If judegement totally in Mukesh's favour, short RNRL like hell for a target of 30 to 40
2. If judegement totally in Anil's favour, you can buy RNRL for 80 but it'll probably trade to that point in seconds (no opportunity)
3. If judegement aimed at a settlement between the two, just go long Reliance and possibly stay out of RNRL

Zero Hedge on HFT and Down -999 !

RNRL vs Reliance? a 50% trade?

In the next 2-3 days, we'll see a great 'event' driven trading opportunity in the Indian equity markets.. the court case between Reliance and RNRL will see judgement. Since a lot of the analysis is subjective (and speculative), I'll stick to the conclusions.. I expect the judgement to be more favourable to Reliance than the Mumbai High Court judgement.. and for Reliance to outperform RNRL by up to 50% in the next 3-4 months.