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More Color on the Spanish Whatsermajiggie


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#1 Russ Winter

Russ Winter

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Posted 10 June 2012 - 11:06 PM

One of Zero Hedge’s best contributions has been educating the gente about the tossing pari passu concept.  My explanation of it is here. It now appears (not surprisingly) that existing Spanish sovereign debt holders will also be subordinated to the official holders, in this case the ESM and /or EFSF (so far).   This means that when the inevitable Spanish sovereign debt restructuring occurs the losses are concentrated on private holders.  In the meantime, Spanish bondholders will be receiving a new wake up call on their new subordinated status, and will be reminded again and again every time an official holder takes on more Spanish debt holdings.  So once the hype dust settles watch Spanish yields. Incidentally after LTRO increasingly those debt holders are drum roll please, Spanish banks.Seperately Bruce Krasting writes that this is not a rescue of banks at all, but a defacto nationalization and bail in. He points to a recent IMF report on this aspect. I think this is a correct assessment.  Bail-in is defined as: the statutory power of a resolution authority to restructure the liabilities of a distressed financial institution by writing down its unsecured debt and/or converting it to equity.I would argue that this will extend in some cases all the way through to the senior bank bond holders.  A bank capitalization structure typically has these components in order of senority: Deposits, Senior Secured Debt, Senior Unsecured Debt, Subordinated Debt, Preferred Shares. Common Equity.The idea of the bail-in is to save depositors. I think bail-ins are inevitable,  necessary and the best chance Spain has of avoiding bleeding to death when the sovereign restructuring occurs. This diverts some of the burden of costly bankster bail outs. This is however bearish for all financial stocks in general. If this is what is really happening, and the market wakes up to it,  and the Spanish market tanks, it is a buying opportunity in non-financial Spanish stocks like TEF.Steve Keene, Australian debt jubilee economist laid it out best:

[The banks] have to suffer and suffer badly. They will have to suffer in such a way that in a decade they will be scared in order to never behave in this way again. You have to reduce the financial sector to about one third of its current size and we have to also ultimately set up financial institutions and financial instruments in such a way that it is no longer desirable from a public point of view to borrow and gamble in rising assets processes.The real mistake we made was to let this gambling happen as it has so many times in the past, however, we let it go on for far longer than we have ever let it go on for before. Therefore, we have a far greater financial parasite and a far greater crisis.

On actionables I am fairly flatly positioned, with my primary play a forex holding of Swiss Francs equal to 6% of my capital [Out of Their Tiny Little Minds]. I am already positioned and will not be chasing after this, and instead will look to sell half into 1.09  convergence, holding the rest for a breakout above 1.11.I think any big Monday rally reverses and wipes out all gains by Tuesday’s close or early Wednesday.  After last week’s latest bailout hook rally, there aren’t enough shorts left now to create more than a wet charcoal flame out, and no real money either. The market action will be driven by a Euro short squeeze.  If big enough, that is disruptive, not bullish.  After the initial “risk on” reaction, a euro rally will not translate into more “risk on” action.By the beginning of the week of the 18th we should end much lower than where we are now.  If the Euro rallies a lot, a big hedge fund or more could collapse.  If that happens before the Fed meeting on the 19-20, they will act in a QE manner (as opposed to tweaking). This will in turn kick off an oil rally and bond swoon.  Also over the next weekend comes the Greek election, and now I think Syrza, the anti-austerity partido wins big, with one caveat, the Marshall style plan I alluded to earlier to buy off Greek voters. This needs to come within the next few days however.  Very dangerous not hardly bullish week lies ahead.  I will try and post trades as timely as possible. Obviously Ditto Trading is just getting set up and won’t be operational during this period.I need to check IVs to determine if these will be a put buys or naked call sells or a mix. General short set ups would be this going into Monday, and I will be actively tracked if we get a big rally:IWM 78.1,  XLI 36.74,  XRT small trade at 58.95, more at main convergence 60.16 JNK 39.69, SKF buy at 44.4, XLP; no visible convergence, will wait a day or two.  I would reenter HDGE on a 50% retracement to about 23. I am tracking SBUX 56.10,  JWN 50.69,  M 38.54, LULU 69.98, MCD 89.77, YUM 68.51, and some others on big spikes.

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