Esoteric Insights for October 2013 (sample)
- 1. The Esoteric Report Published by, Nariman Point, LLC Monday October 14th, 2013 Nariman Point, LLC 1
- 2. Global Briefing • SCll no resoluCon on the U.S. Government shutdown and debt ceiling debates, but a plan should pass within the next 48 hours. – PrioriCzaCon of payments is technically a default but a 8 week debt ceiling raise is the most likely outcome. “Nudging the can down the road” in the worlds of a TV commentator. ExpecCng markets to rally strongly on a deal; however, it could fade just as quickly a la the “no taper” announcement rally last month. • China makes another round of comments on the US’s posiCon as global reserve currency. – Chinese inflaCon rose 3.1% YoY, exports fell .3% YoY. • German officials cite US as posing a larger risk to Global Markets than EU or Emerging Markets. – Angela Merkel sCll has not obtained her coaliCon government. – Talks of EU banking Union conCnue laterally with no REAL progress. Nariman Point, LLC 2
- 3. Global Briefing • ECB begins discussions on European bank recapitalizaCon. – Bank stress tests next year may reveal substanCal losses presently kept out of view from the invesCng public. – The IMF states: “Nobody knows the true scale of poten6al losses at Europe's banks, but the Interna6onal Monetary Fund hinted at the enormity of the problem this month, saying that Spanish and Italian banks face 230 billion euros ($310 billion) of losses alone on credit to companies in the next two years.” – Depositors, share holders and bond holders will be expected to bare the first losses if Germany and Finland get their way, while Spain and Italy will push for access to ECB bailout funds. The quesCon becomes how will the losses be broken down and how long will it take to agree on such a plan? • German courts will determine the legality of the Outright Monetary TransacCons (OMT) later this month. – This policy tool allows the ECB to suppress borrowing costs for European naCons. Nariman Point, LLC 3
- 4. Global Briefing – The most likely outcome is that German courts rule that OMT is condiConally legal. CondiConal on what? We will find out. Since OMT was announced European volaClity receded significantly. 10Y BTP Yield since OMT Announcement 7.5 7 6.5 6 5.5 5 4.5 4 Nariman Point, LLC 10/2/13 9/2/13 8/2/13 7/2/13 6/2/13 5/2/13 4/2/13 3/2/13 2/2/13 1/2/13 12/2/12 11/2/12 10/2/12 9/2/12 8/2/12 7/2/12 6/2/12 5/2/12 4/2/12 3/2/12 2/2/12 3 1/2/12 3.5 4
- 5. The Euro is on Fire: Why? • The Euro has been on a tear over the past 8 months due to an increasing current account (CA) surplus as well as USD weakness. – European officials are poinCng to the Euro’s 8-‐month high as proof of a European recovery but this may not be the case. – The largest contributor to the Euro’s strength has been Germany’s contribuCon to the current account surplus. • Germany makes up approx. 67% of the total Eurozone’s CA surplus. – Total EU CA = 363B USD; Germany CA =241B USD – In 2012, Germany = 104% of EU’s CA surplus. • Germany’s largest trading partner is the rest of Europe; CA surplus implies Germany not purchasing goods and services from the periphery. – Italy, Spain, Portugal and Greece will not be able to address their employment issues unless Germany increases consumpCon of goods produced in the periphery. The data suggests that this is not happening. Nariman Point, LLC 5
- 6. 0 -‐5 -‐10 Nariman Point, LLC 4/1/2013 12/1/2012 8/1/2012 4/1/2012 12/1/2011 8/1/2011 4/1/2011 12/1/2010 8/1/2010 4/1/2010 12/1/2009 8/1/2009 4/1/2009 12/1/2008 8/1/2008 4/1/2008 12/1/2007 8/1/2007 4/1/2007 12/1/2006 8/1/2006 4/1/2006 12/1/2005 8/1/2005 4/1/2005 12/1/2004 8/1/2004 4/1/2004 12/1/2003 EU Current Accounts Current Account % of GDP 2003-‐2013 10 5 Portugal Spain Greece Italy Ireland Germany EU -‐15 -‐20 Source: Nariman Point, LLC 6
- 7. Emerging Markets: Taper • Taper in 2013 does not seem likely given the Government shutdown and debt ceiling debates, especially given a new debt ceiling deadline of Jan 7. – This would be posiCve for currencies and equiCes of countries with large current account deficits who need to borrow money to plug their spending gap. No taper means financing costs will remain low…for now. US10Y Yield 20 15 10 12/1/12 2/1/11 4/1/09 6/1/07 8/1/05 10/1/03 2/1/00 4/1/98 6/1/96 12/1/01 Nariman Point, LLC 8/1/94 10/1/92 12/1/90 2/1/89 4/1/87 6/1/85 8/1/83 10/1/81 2/1/78 12/1/79 4/1/76 6/1/74 8/1/72 12/1/68 10/1/70 0 2/1/67 5 4/1/65 • If the US 10 Year conCnues to rally past 2.7%, this could be bullish for the Indian Rupee and other large CA deficit countries like Turkey. While these are not necessarily reasons to invest in a country for the long haul, this is certainly a logical way to play lower U.S. rates with greater upside than simply buying bonds outright. TUR (Turkish ETF) has outperformed the TLT (20 year US Bond ETF) since the “no taper” announcement. Genng long US 10Y+ bonds has generated approximately 3% returns post the Fed announcement, where as TUR is up over 20%. 6/1/63 • 7
- 8. 0 -‐2 -‐4 -‐6 Nariman Point, LLC 3/1/2013 11/1/2012 7/1/2012 3/1/2012 11/1/2011 7/1/2011 3/1/2011 11/1/2010 7/1/2010 3/1/2010 11/1/2009 7/1/2009 3/1/2009 11/1/2008 7/1/2008 3/1/2008 11/1/2007 7/1/2007 3/1/2007 11/1/2006 7/1/2006 3/1/2006 11/1/2005 7/1/2005 3/1/2005 11/1/2004 7/1/2004 3/1/2004 11/1/2003 7/1/2003 3/1/2003 EM Current Account Current Account as % of GDP 2003-‐2013 6 4 2 Indonesia Brazil India South Africa Turkey -‐8 -‐10 -‐12 8
- 9. EM Currencies • Large budget and CA deficits in EM counCes like India have led to significant currency declines, but have rallied sharply since the “no taper” announcement. INR SPOT No Taper 70 68 66 64 62 60 58 56 54 52 50 Nariman Point, LLC 9
- 10. EM Benefits from No Taper TUR vs. TLT % Change from 2012-‐2013 40.00% 30.00% 20.00% TUR 10.00% TLT 0.00% 9/24/12 10/24/12 11/24/12 12/24/12 1/24/13 2/24/13 3/24/13 4/24/13 5/24/13 6/24/13 7/24/13 8/24/13 9/24/13 -‐10.00% -‐20.00% No Taper Nariman Point, LLC 10
- 11. Alpha GeneraCon: Trading US Fear • We closed a short VXX posiCon on Thursday aqer iniCaCng the trade on Tuesday. – Purchased 11/16/13 $16 Puts for approximately $1.40, sold $2.10. • Implied vol was trading north of 70 with realized in the 50s suggesCng that the market was overdoing the probability of U.S. Default. 11/16 $16 VXX Put 3.5 3 2.5 2 Nariman Point, LLC 10/11/13 0:00 10/10/13 0:00 10/9/13 0:00 10/8/13 0:00 10/7/13 0:00 10/6/13 0:00 10/5/13 0:00 10/4/13 0:00 10/3/13 0:00 10/2/13 0:00 10/1/13 0:00 9/30/13 0:00 9/29/13 0:00 9/28/13 0:00 9/27/13 0:00 9/26/13 0:00 9/25/13 0:00 9/24/13 0:00 9/23/13 0:00 9/22/13 0:00 9/21/13 0:00 9/20/13 0:00 9/19/13 0:00 9/18/13 0:00 9/17/13 0:00 1 9/16/13 0:00 1.5 11
- 12. Overblown Fear of U.S. Default 1M T-‐Bill Yield U.S. CDS Curve 0.4 70 0.35 60 0.3 0.25 50 0.2 40 0.15 30 0.1 20 0.05 0 4/15/13 -‐0.05 10 5/15/13 6/15/13 7/15/13 8/15/13 9/15/13 0 6M 1Y 2Y 3Y 4Y 5Y 7Y 10Y The CDS curve has inverted due to largely unfounded risks of a U.S. default. This creates an opportunity to bet on curve normalizaCon similarly to the summer of 2011 during the last debt-‐ceiling related inversion. Nariman Point, LLC 12
- 13. Alpha GeneraCon: Debt Deal Trade 90 80 70 60 50 40 30 20 10 0 6M 5Y 6m5Y Spread 30 20 10 Bps The last Cme the curve was inverted and 6m CDS spread traded to a premium over the 5Y was the last debt ceiling debate in 2011. In order to match duraCons, one needs to sell roughly 6.8x the 6m than the 5Y. In 2011, the spread normalized by roughly 40bps and now the inversion is more pronounced senng a trade up for an even larger potenCal gain. Bps 6m vs. 5Y US CDS 0 -‐10 -‐20 -‐30 -‐40 Nariman Point, LLC 13
- 14. Alpha GeneraCon • ConCnue to be bullish on U.S. 10Y – CPI remains low, government shut down will shave approximately .5% from Q4 GDP growth (although this should be made up in Q1 according to Goldman Sachs research report), U.S. earnings disappointment risk, no 2013 taper. – Probability of U.S. default is infinitely less than risk factors menConed above. – Those who are somewhat worried of a disrupCon in the U.S. Bond market may be interested in diversifying into Mexican and South Korean Bonds. • • • • Mexico has a slight -‐1.45% current account deficit relaCve to the over 5% CA deficits of other EM. South Korea has over a 5% CA surplus. Both countries weathered the EM volaClity throughout the year. Although very high correlaCons (see next slide) to U.S. Government bonds, in a tail-‐risk even these bonds may outperform simply due to a lack of safe haven assets in the developed word. Asia’s former safe haven asset, the JGB, is a death trap; Bonds of Eurozone are too risky; Other developed naCons are simply not as auracCve. Nariman Point, LLC 14
- 15. AlternaCve to U.S. Treasuries US, Mexico, Korean Govt Yields (%) 2008-‐2013 12 2008-‐2013 Correla6on Current Bond Dura6on 10 US:MEX 81.81% MEX:KOR 92.74% US:KOR 86.25% US 8.6 MEX 7.07 KOR 8.31 8 US10Y 6 MEX10Y KOR10Y 4 2 0 10/15/08 10/15/09 10/15/10 10/15/11 10/15/12 Nariman Point, LLC 15
- 16. Similar Credit Risks Korea vs. Mexico 5Y CDS Spread 800 700 600 Bps 500 KOREA CDS USD SR 5Y Corp 400 MEX CDS USD SR 5Y Corp 300 200 100 0 1/6/06 1/6/07 1/6/08 1/6/09 1/6/10 1/6/11 1/6/12 Nariman Point, LLC 1/6/13 16
- 17. Recap • US equiCes seem vulnerable to a melt-‐up/down depending poliCcal rhetoric and earnings season (downside risk on earnings). • The Fed Taper, German ElecCon, Syria, Italian poliCcal risks subsided and lower gas prices are all bullish signals; however markets are not soaring. One the same token, the government has shut-‐down for 14 days and the U.S. is approaching the debt ceiling and the markets have not collapsed. The U.S. does not “run out of money” on Thursday it only cannot borrow any more. There is sCll some, $30B in reserve + tax receipts leq so a U.S. default would be highly unlikely. Nariman Point, LLC 17
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