Quick Greece Update

As the election results are tallied, and the New Democracy party appears to have won (Syriza has just conceded), things are appearing stable for the time being.

As I write this brief update, the September e-mini’s on the S&P 500 are up a paltry 6.5 points.  This over-hyped Greek election reminds me of a line from Hamlet:  “It is a tale, told by an idiot.  Filled with sound and fury; signifying nothing.”

Kind of like the Facebook IPO.

Update at 20:46:  Nikkei is up 2.2% in response to the Greek election results.

Keep the Bonds and Pass the Kefalograviera

Today, in a case of deja vu all over again, the equity markets were roiled by the news from Greece.  This time, the news revolved around a select group of private creditors banding together to reject the bond-swap offer that had recently been proposed.

Greek officials now estimate that between 75% and 80% of all bondholders have agreed to participate in the bond swap.  That number, while high, falls below the 90% threshold required to avoid something called the Collective-Action Clause (CAC).  The CAC is a rather interesting bit of retroactive “law” stuffed into already-existing bond contracts.  Basically, it states that, in the event a 90% participation rate is not achieved, the majority of the bondholders can get together and vote to have the agreement be binding on all bondholders.  Except the ECB.  They’re exempt, of course.

The sticky wicket here is that the CAC triggers Credit Default Swaps, since it is (by definition) a case of the debtor telling the creditor the terms in which payment will be made (or not made in this instance).  These aren’t Greek rules, rather they come from the International Swaps And Derivatives Association.

The other sticky wicket is that, if the bond swap is not successfully executed, the second Greek bailout from the ECB will not be forthcoming.  Should that be the case, Greece would likely experience a dis-orderly default.  That is contrasted with how spectacularly orderly things have gone up to this point in time.

It is also now rumored by Reuters that four Greek pension funds have decided to opt out of the bond swap.

On the bright side, this whole thing needs to be sorted out by Thursday evening.

While laying odds on the success or failure of this bond swap is not a game for the faint-of-heart, believing anything that comes from the Greek media is done at one’s own peril.  One piece of history we can rely on, however, is that when these macro issues dominate the news, correlations among asset classes tend to lock up…  and not in a good way.


i Findithardtobelieve

A few observations about everyone’s favorite parabolic stock, AAPL:

  • So far today, Apple has added $15 billion to its market cap
  • The Apple 530 calls, set to expire this Friday, jumped from $0.70 to $5.20 — a 742% return — this morning
  • That same call has now fallen by 60% in early afternoon trading
  • 90% of today’s intraday NASDAQ return is the result of Apple
  • The S&P 500’s 4Q earnings growth was 11.6%.  The S&P 499’s 4Q earnings growth (if you pull Apple out of the index) was 2.7%.
  • Thanks largely to Apple, the NASDAQ is outperforming the Dow Jones Industrial Average by about 7% year-to-date

Now, I would never be one to provide investment advice on a blog, as the regulators tend to frown upon such behavior.  Feel free to draw your own conclusions.

The juxtaposition of this phenomenon vis’ a vis’ Europe (specifically Greece) would be funny if it weren’t so sad.

Here’s a few stats about the state of Greece’s population, from Germany’s Der Spiegel:

  • Homelessness in Athens is up 20% year-over-year
  • People requiring free food (mostly soup and bread) is up 15% year-over-year
  • Suicide rates have doubled year-over-year (6 suicides per 100, 000)
  • Greece’s economy contracted 7% in 4Q
  • Their economy has now contracted 16% from its peak

If those bullet-points aren’t startling enough,   this slide show is certainly an attention-getter (copy and paste in your browser to view):

http://www.spiegel.de/international/europe/0, 1518, 814864, 00.html

It strikes me that the OWS crowd is in the right church, but in the wrong pew.  Income disparity is a tremendous problem.  But it isn’t the 99% versus the 1% here in the U.S.  It is a global phenomenon that is becoming increasingly desperate and violent.  If governments don’t come to grips with this soon  (and not by implementing further socialist programs), I suspect that social unrest will be the next tail risk affecting the markets.

After-the-close addendum:  The option I mentioned earlier that was up over 700% this morning closed the day at a 50% loss from yesterday’s close.  After reaching $5.20 during the day, it closed at $0.35.  Makes sense.

Negative Interest, Loans, Submarines, and Attack Corvettes

After taking a Holiday hiatus from the blogosphere, I thought I’d jump back in with one of my favorite topics of late — Europe.  Scanning the foreign papers today I came across two interesting articles; both of which centered on Germany.

Story #1:  Earlier today, Germany held a 6-month bond auction of $3.9 Billion Euro ($4.9 Billion).  The auction was so successful, that the yield actually came in negative.  That is, “investors” are paying Germany 0.01% interest for the privilege of owning these bonds!  In that light, the 0.86% yield on a US 5-year doesn’t seem so bad.

Story #2:  Greece is planning on doing some significant defense spending.  In and of itself, that isn’t too surprising.  They’ve long had a territorial dispute with Turkey involving Cyprus and a sometimes-deadly maritime border dispute in the Gulf of Aegean.  What I found interesting was that a large part of the Greek hardware purchase is to be two submarines manufactured in Germany.  So, if I have this right…  Through various funding mechanisms Germany loans money to Greece to keep it from going belly-up.  Then, Greece buys submarines from Germany using the borrowed funds.

You really can’t make this stuff up.

The epilogue to Story #2:  Over Greece’s forecast period of 2011 – 2016, here is a list of other expected military procurements:

  • Fourth-generation fighter jets
  • Maritime patrol aircraft
  • Advanced jet trainers
  • Armored vehicles
  • And my personal favorite… Attack Corvettes!

I don’t know what an Attack Corvette is, but I want one.  Maybe once the Greek bankruptcy is officially declared I can pick up a low mileage, slightly-used AC at a distressed price.  Better get a Carfax, though.

Has the slack gone from the rope so soon?

Three business days ago, we (somewhat skeptically) blogged about the proposed Euro-bailout plan and the relief rally it brought in its wake.  The gist was that the risk markets may be misinterpreting some slack in the rope that could hang the European Union as a severing of the rope altogether.

Last night, Greece reminded the world that the rope remains snugly in place.

Greek Prime Minister Giorgios Papandreou stunned the Euro zone last evening with the announcement that he will take the recently agreed-upon bailout plan to the citizenry for a referendum vote.  On one hand, there doesn’t seem to be anything particularly distasteful about asking a governed population in a democratic system their opinion on increased austerity.  On the other hand, all other European players at the table have to be questioning how in the world to negotiate with a leader who could pull such a stunt in the 11th hour.

In an article from Der Spiegel, expressions like, “shocked and furious, ” “stunned, ” “irritated, ” and “disorderly default” dominated the quotes from other European leaders regarding the referendum decision.  The Finnish minister said, “The situation is so tense that it would in principle be a vote on Euro membership.”

Should such a referendum actually take place, the results would be hard to handicap.  While over 70% of the polled Greek population believe it is beneficial to remain in the Euro zone, 60% view the new agreement as either negative or probably negative.

Rather than handicapping the outcome, we’d prefer to handicap the content of the referendum question.  Since we perceive the idea to be a purely political move by Papandreou, the referendum would likely be worded in such a way that its passage would be virtually assured.  If that wasn’t the case, why would Papandreou risk his country’s Euro membership and his political future on a stunt such as this?

And, to make this theater of the absurd even more…  well, absurd…  this just in from a socialist party official:  The referendum is “basically dead.”  That sentence fragment sent the Euro/USD up 90 pips and lifted the stock market 130 points from its pre-announcement lows.

Trading on sentence fragments…  Seems like a tough way to make a living.