The Final Act of an Entertaining Greek Tragedy

The Greek bailout/default story continues to be a solid crowd pleaser with an easily recognizable list of characters and ability to be serialized.  Germany, the fiscally conservative powerhouse of the EU, in its role as the tragic hero, has said and done all the "right" things to no avail.  In fact, Germany's prescription of fiscal austerity has well and truly finished off the Greek economy, and our hero now realizes that the only way out is to jettison its principles and turn its back on history - AKA, "back Greece and print Euros".


For the international media this Greek tragedy has been a bonanza.  First, we've been presented with the shocking expose of how Greece cheated and lied to join the Euro (everyone knew this, but nothing beats simply republishing old material); second, we're brought the amazing story of how Greeks don't like austerity (really, who does?) complete with images of rioting in the streets (nice footage); third, the media happily brings us the news that government pledges turn out to be nothing but empty rhetoric (we are all shocked); and so on and so forth.  Together these episodes in this latest Greek tragedy are entertaining while adding to the audience's sense of inevitable doom.  Now, as the curtain rises for the final act, the audience sits in rapt suspense.


It is this rapt attention and suspense which is, in fact, the biggest tragedy.  From the very beginning, the main storyline has been the possible, probable, perhaps almost "certain" Greek default, but even in the first act in 2010 it became obvious that there was nothing uncertain about a Greek default - unless someone credible wrote a blank check.  In the process of presenting this tragedy the politicians and the media have managed the improbable - they have manipulated the audience to such an extent that the very meaning of the word "default" has become a topic of debate.  Everyone knows that if you don't service your loan and don't pay back the agreed upon final amount at the agreed time, there's a default (even rating agencies and issuers of CDS actually recognize this as a fact and not a topic of debate).  It really is tragic that there still is a sense of suspense; ask yourself, when was the last time anyone thought Greece could afford to service its national debt and raise new loans in the open market?  


In effect, everyone knows that Greece will default unless Germany agrees to write a blank check.  This conclusion rests on simple assumptions: first, the EU will need to continue to bail out Greece (the Greek economy simply can't service the interest payments and make the principal repayments); second, the debt markets are pricing Greek risk at a level which makes it impossible to refinance; third, out of all the Euro countries only Germany has the financial strength to write the required blank check.  If Germany does not write the check, Greece defaults.  If Greece leaves the Euro, Greece defaults.  And tragically, if Germany ignores its own lessons and writes the check, it'll scupper all appearances of EU fiscal responsibility and be inflationary.


On the way out from this Greek tragedy, it's tempting to place all bets on an inflationary spiral, but keep in mind the competing (not "competitive") nature of credit markets, and the "race to the bottom" by the world's leading currencies - after all, everything is relative.  Finally, who wrote all those CDS?

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It turns out that restricting who can post comments caused some problems.  If there's too much spam then we'll look at ways to restrict who can comment.  For now, spam and "horribly" off topic comments will simply be removed.  Anyone having problems either posting or commenting please contact alloptstrat@gmail.com.

The Root of All Evil

The Fed now promises low rates well into the future. After the 24/25 Jan FOMC meeting Bernanke added more than a year to their previous “low rate” pledge. Ostensibly this is good news for everyone (unless you happen to hate gambling and would rather get some nice interest on some bonds, a CD, or perhaps your bank savings), but I'd wager that this is mostly another attempt to resurrect the atrocious US housing market, and provide the right conditions for government to address the negative equity trap - the post 2008 “root of all evil”. 


Every week I'm getting offers to buy houses in the Atlanta, Georgia area (single family units with a garage, a lawn and so forth) for around $50,000 – this is cheap by all standards and certainly cheap compared to the pre-foreclosure prices of the properties (which were typically $100,000 to $200,000). The fact is, before foreclosure owners pay what they can in the hope of getting out of the trap, and after foreclosure they're denied credit. I'd like to credit Bernanke with some basic human compassion and a sincere desire to ease the pain of those caught in the trap; from an economic perspective the global economy needs the return of its number one consumer and if the Fed can be instrumental in turning the US housing market around it would be a major victory. 


If it was easy to administer and trade a portfolio of Atlanta houses I'd make an allocation and take a gamble on a return to a period of “safe as houses” (aided by low interest rates courtesy of the Fed), but the complications and costs involved in transfers, tenancies and various filings makes this an unreasonable proposition. Looking at alternatives brings me to the mortgage REIT companies. The MREITs profit from low interest rates and provide some participation in the potential comeback story. There are complications, in fact there are quite a few potential problems on the horizon for these companies, to highlight a few: Freddie and Ginnie are under review and any changes to these participants will impact everyone; the Fed's buying and financing the purchase of mortgages – effectively competing for business and driving down the yield for mortgage investors, while low interest rates encourage refinancings (also decreasing the value of MREIT portfolios); and there are regulatory concerns which may result in MREITs being treated as investment companies and not simply another way to invest in property. All these issues warrant attention, but provided the MREITs continue to be able to finance their operations and maintain their leverage it's tough to ignore their double digit dividend payouts. 


Just in case this round of Fed “easing” is effective at getting to the root of it all – how about picking up some Annaly (NYSE:NLY) at around $15.80... or if it never gets there (towards the close today it's trading around $16.80) write an appropriate March put option and get in line for a dividend – provided dividends aren't cut that should equate to about a 14% annual payout - or simply collect the premium. 


 All for now, have a good weekend!

Welcome to the site!

As the site is new, please feel free to comment on the layout, content, etc.  Does the background make the site hard to read?  Do the "gadgets" make the site load too slowly - are they a waste of space?  Should we ditch Blogger and look for a better home?

With time we'll hopefully have some topical posts deserving of comments.  Here are some recent "big" issues I've tried to come to terms with (they should give some ideas for contributions):

1. The Euro vs USD debate.  The value of the Euro tells us that it's not important that Greece defaults, and that the ECB prints its way out of trouble - how can this be?

2. The Japanese Yen and Swiss Franc are viewed as safe havens, but aren't both economies fundamentally unsound?  Japan is supposed to be an export economy, but how can this happen/continue with such a strong Yen (and there's surely a government debt time bomb ticking away as well)?  Isn't the entire "safe-haven" economy of Switzerland undermined by a combination of EU/USA anti tax evasion initiatives, while its export/research sector crumbles due to the high CHF?

3. Corzine bankrupted MF Global with a bet on Portugal.  Back when Long Term Capital flopped they made a series of badly timed bets which ultimately paid off, and now it looks like some Lehman creditors are being made whole by cashing in their collateral.  This last week, US long term government bonds have fallen about 3%, is this the beginning of a narrowing of spreads in the government bond markets?

4. With earnings season well under way... why are the stock markets rallying, when all that is happening is that companies are, on balance, meeting their previously lowered earnings estimates while providing even lower guidance for the future?

These are big topics, and I'll probably mostly post on individual stocks, currency pairs, bonds, commodities, and trading strategies, but any and all efforts to tackle the big issues would be welcome.  Examining the macro environment and highlighting the next round of "probable" headlines will give us the edge and profitably lead us to safer shores.