Friday, 20 January 2012

Auctions. Downgrade. Banks. USA. Risk

Yes I am a bit OCD about bond auctions these days. It is because that is the place where we have the clearest view from the frontline of the euro-crisis. As long as the euro-zone countries can finance themselves at reasonable costs in the open market, there is no real crisis. At least for the moment.

France and Spain sold a total of eur 15bn worth of government bonds at lower yields than before the S%P downgrade. Spain has now sold close to 20 percent of the planned issuance for 2012. And we are only 20 days into the year.

Has this started a rally in risk assets? No, that one started in late September.

Another downgrade coming
Fitch, the smallest of the three major (i.e. US-chartered, free-speech protected) rating companies is likely to downgrade 6 euro-nations in the coming days. That will be yet  another non-event. Then we will wait for the inevitable downgrade from Moody’s, and we can all move on.

I look forward to see if Fitch will also make an attack on Germany’s plan for the “fiscal compact”. In the good old days, Moody’s was the most openly political of the three. Now they try to reposition themselves, so maybe Moody’s will now drop the political comments.

Commerzbank, MPS
If the euro-crisis is on the backburner for the time being, the European banking crisis is still simmering. Commerzbank is banging the drums that they almost have found all the new capital they need. One of the tricks is that Allianz appears to be willing to convert a holding of non-tier 1 capital into an equity holding. From Italy we hear that the world’s oldest bank, Montepaschi di Siena, is pulling off a similar stunt. It is a beginning. We need far more action on this front.

Good data from the USA
Please do remember that you read it here first (or in my blog back in August): The US growth pause ended in September and growth improves nicely. Initial jobless claims fell in December, housing starts increased and manufacturing output accelerated. At the same time the US budget deficit is shrinking – as it always happens when the economy accelerates.

We know that the fears of a “new” recession is over when the likes of CNBC and Bloomberg TV again begin to interview people who offer “stock tips”. We are on our way. The perpetual bear, the original Mr Doom and Gloom, Marc Faber now assures us that the stock market will not collapse. Time to exhale!

Risk indicator
It will come as no surprise that I am a harsh critic of risk control methods based on “portfolio diversification”. When the things really heat up in the markets, correlation between asset classes increase and the diversification of portfolios lose its effect. 

At Origo we have made an indicator of this, and guess what: it signals that we are moving back towards normal. The risk management departments of this world are soon back where their models again work. I would not be surprised if the message going out from the risk controllers in the banks is “risk is falling, you may take more risk on”. Stock pickers will also feel it is worth going back to work again.

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