Skip to main content

Posts

Showing posts from March, 2016

Bond Yield a predictor

This graph tells a hard story; bond yields 30y UST Bonds are on there way down again:




This is not the first drop, and looking at the yield compression between the 30y and 2y you get the following graph; and if you overlay the US Financial index...well the trend is not great for owning financial stocks, just saying

This diagram would seem to indicate that the trend is ugly for financials.
BTW my discussion about the the perfect hedge that turns out to be a disaster... Peabody is apparently thinking bankruptcy; on Wednesday it filed an SEC notice that it was at risk of filing for bankruptcy.  Well my friend's hedge fund could not hold till the end, they had to liquidate their position at a massive loss.
Turns out that the killer for my friend was the excessive amount of short positioning (with the same trade -- long the debt short equity) that led to a massive squeeze on the stock and an unwind of the debt position -- the impact price on equity doubled and price on debt fell to noth…

The voice of doom -- the bust that never happens

Reading the financial press over the past few months the overall view is that the markets are overstretched, ready for an implosion.  Yet over the past 12 months the S&P is largely unchanged -- from 2060 to 2040 -- in 12 months, in the US at least unemployment, at 5.1% is at a historical low -- labour participation is not rising, leading analyst to assume that the reduction in the American labour force is a systemic and not economic events (the percentage of the population that is over 55 is growing -- that impacts participation rates).
The US dollar is more or less unchanged, interest rates are still hovering in the low single digits -- despite the US Feds desire to tighten the screw -- in a sense, an that's probably where the unease arises, there is a sentiment that the economy has not really recovered from the 2008 crisis.  
Of course that's America's story -- Canada story is different, but then as soon as the commodity complex improves, Canada's fortune will i…

Belgium, France and Quebec

I would be remissed if I didn't address the terrorist bombing in Belgium earlier today.  The coordinated act (in three separate events it turns out) is simply a continuation of what a bunch of barbarian would do, the reason seems to be that the guy who planned the terrorist attacks in Paris was caught in Belgium -- that's all these guys need as an excuse.  What is amazing is that it has been known for some time that many terrorist cells have been using Belgium as their home away from home, now the Belgian government has declared martial law...  France has left in place a substantial percentage of martial law system in place since last summer's attack.  Its starting to look like a political ploy by President Holland.  Now two European countries have suspended basic rights...I guess to protect their citizen's right?
As for the France/Quebec thing, it is truly amazing that Mme LePen came to Montreal/Quebec for meetings with the political class -- but had not organised a …

Why hedging is so difficult

I am often asked why I say that hedging your position is so difficult (Ok not that often -- still) one thing for sure it can be a challenge to understand.  This week I was handed the perfect example; Peabody Energy -- which has a large HY debt exposure and is a publicly listed company with a sizable float (e.g. large percentage of shares widely owned).  Peabody is a coal company -- not exactly the market darling, in fact, its a bit of a dog.  At this current burn rate its tangible net worth will be negative within 6 months -- I'm speaking trend her -- it has $900 MM in TNW and is losing about $800 MM per quarter.  In 2014 it has more than $2.5 billion in TNW...
The debt market had been pricing Peabody in the dumpster, but there was still a bit of play, and so the obvious trade was go long the debt  and go short the equity.  In other words the price of equity will drop much more than the price of the debt (this relates to the fact that debt is more senior than equity and if there …

New banker rules in the UK -- will it migrate?

I cannot think of a better reason not to be a banker but this latest is certain to ensure that lots of talented (and scruples-free) bankers take a long look at their future career.  I knew my industry was broken when I noticed how many of my then colleagues considered their employers (aka the bank) rental cars as opposed to their own.
You know the old joke: "What's the world's fast car! a rental car"  
Over the past decade more and more of bankers have been following this mantra, not that they've been so great before, nevertheless it's worse now.  Bankers will routinely adopt high risk solutions because if they win they get big bonus and if the lose --  well the bank eats it!  It would seem the UK authorities have had enough of this.  As of today, March 7th new rules have been introduced.  What we find here is a situation where the senior managers of UK banks will be personally responsible for their errors -- 
I wonder if that's going to work, there'…

Canada's Gold Reserves: Zero

This morning the Bank of Canada and the Federal Ministry of Finance confirmed that over the past 5 years, Canada had been selling off its gold reserves.  As of close last night, Canada's total gold reserves stood at zero.

For the Gold Bugs this is entirely incomprehensible, for them, gold is money (its not).  It is a store of value, but so is copper and zinc.  There is no particular reason for a government to hold gold as reserves, since its meaningless -- Nixon removed the gold standard, whereby gold was sold at US$35/oz.
Personally, I think that gold is a terrible store of value -- take a gold coin out of its protective envelope and watch its value plummet.  One of my closest friend worked in a Swiss private bank for many years.  Having purchased gold bars on behalf of clients they were disappointed to find several "counterfeit" bars in their vaults.  Moral of the story; don't buy African gold!  
Canada has decided to '86 its gold reserves because it no longer …