Archivo de enero/2008

Quiz

This question is hanging around in the media. Today the UK Daily Telegraph addresses the issue in article that I attach. According to the newspaper some Spanish banks would have followed the path of Northern Rock if it had not been by the very active lending role played by the European Central Bank in the last quarter of the year. Spanish banks have been issuing record volumes of mortgage backed securities during the last quarter of the year. According to the article, Spanish banks have not been able to place these issues within an open market much affected by the credit squeeze and have resorted in the ECB discount window. Repo operations using these bonds as collateral have provided Spanish banks with liquidity. Most probably this liquidity would have not be found in the open market were asset backed securities have been much denostated.

This practice has been considered by many as a disguised rescue operation. Whether this is the case will be revealed when these short term loans (by the ECB) have to be rolled over.

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I believe you all have seen what has been going on in the markets and everyone is pretty puzzled about the swings. Last week ended with the fiscal proposal by Bush to stimulate the economy (investment deductions and rebates) in an attempt to boost the economy and avoid a recession. This seemed good news for the market. But just before the Friday closing of markets in the US , news appeared claiming that rating assessment on monoline firms (such as AMBAC and MBIA) could be downgraded. This monoline firms are bond insurers. The book value of the bond portfolio of many banks depend heavily on the financial muscle of these companies. So revisions on the credit quality of monoline companies would imply further write downs by banks and more financial distress.

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Soc Gen reported today a 7 billion dollars write-down because of a rogue trader. Someone within the prop trading group of the bank disguised a trade that is going to cost the bank half its capitalization. This is a big number. A loss bigger than those accounted by LTCM and Amaranth when they got into troubled. We will soon know more details about the affair but generally the explanation of risk mismanagement is straightforward. Someone (this someone is later called a rogue trader) holds a trade with a risk profile that is unknown to the risk manager either because the latter does not follow the positions of his group correctly or because he does follow them closely, but does not understand their implications. This latter reason is explained in terms of sophisticated derivative positions. The final conclusion is that: the trader fooled the manager. This probably happens more often that reported, though it is only reported to the press when it ends up in huge losses.
Who else did the rogue trader fooled? It seems it fooled the Fed. Or so the street is saying and the market is confirming with a steep rise in the stock market. The story is that the Soc Gen debacle forced the Fed into an emergency move by making officials think it was a situation of a market crash. Officials at Soc Gen said that the firm

Aunque es cierto que en las tres semanas que llevamos del 2008 se ha producido una espectacular p

Cenando ayer con un amigo, consejero de un importante banco espa

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El uso de opciones sobre acciones como una forma de retribuci

The fears of recession in the US have been announced from a few fronts. Those fears have not attained Europe, with the exception of the UK, that shows the same softness in its economy as the US. However history tell us that there is some sinchroinicity in business cycles in the US and Europe, with the US preceding European economies in the downturn and in the booms. Recent report released by Merrill and Goldman pinpoint weakness in the US economy predicting recessionary movements within 2008. Data is still non conclusive and future economic data will tell were the main economies are heading.

In this environment it seems that investment opportunities dry out and asset allocation becomes harder. Analysts offer some receipes for this stormy times. These would be:
a) Buy utilities (defensive sector) and sell financial (most fragile sector in this time).
b) Believe in the decoupling story of emerging economies and bet on these markets. The decoupling story maintain that emerging economies have initiated a new economic era where they can live with downturns in the main economies (US, EU,

For the doomsters, there is always a picture. Here goes one from Merrill on the relationship between recession and unemployment growth. Though I agree on the gloomy picture for the US economy given credit conditions and potential effect on consumption and investment, I would not make the inference Merrill tries with the below picture. Employment data has always been tricky and volatile. I would be more comfortable with level comparisons (unemployment level/employment level) rather than a possible outlier on unemployment growth.

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