…and the rally continues unabated.
Interesting developments out of financials as Senator Carl Levin (for whom I interned two summers ago) released emails concerning the GS synthetic CDO debacle, while bank 5s10s invert on increasing solvency risk as political pressures mount. Deutsche Bank also was reported to have created, marketed, and sold similar CDO-squared’s, structured for Paulson & Co., but the SEC’s Khuzami (who worked as GC for DB before his current position at the SEC) recused himself of DB-related inquiries, even as DB’s head ABS trader Gregg Lipmann left DB. Deutsche has earnings on the 27th at 3AM and we are stalking DB as short.
The Greek situation continues to worsen, as Greek CDS spreads spike higher and higher by the day. The contagion risk is an even bigger issue, as PragCap points out (we are short France via the EWP ETF fyi):
Unfortunately, exposure to Greece is all throughout Europe and the market perception in the U.S. is not recognizing the events happening abroad.
According to Citigroup, 80 percent of Greek debt claims are on European balance sheets which are led by banks from France (25 percent), Switzerland (20 percent) and Germany (15 percent).
The fallout is now spreading to other countries like Spain, Portugal, and Italy as debt spreads are increasing as well. Signs of contagion are apparent as peripheral countries witnessed their bond yields and CDS spreads widen with the deterioration of Greece.
What is troubling is that Spain and Portugal comprise a large portion of CDS outstanding. According to the Depository Trust and Clearing Corporation (DTCC), sovereigns including Spain (15.2%), Greece (8.8%), and Portugal (9.6%) are among the largest reference entities for CDS outstanding.
According to Morgan Stanley, the risk for contagion is high as the countries are linked. 32 percent of Spain’s debt is owned by German banks while 25 percent is owned by French banks. In addition, 51 percent of Portugal’s debt is owned by Spanish banks. Therefore, problems in Portugal debt could easily spillover to the strongest economies.
We continue to be fundamentally bearish on risk assets, but positioned net-long risk and equity until charts suggest correction and/or reversal. Long-term chart of SPY below.
And to end this post, a terrific piece on AUD by Damien Cleusix, who shares strikingly similar theses as us regarding AUD, particularly in its relations with China, commodities (particularly copper), and the worldwide liquidity risk rally: