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The Vicious Cycle of Sovereign Selling


Just follow the money.

So, lemme get this straight.

Concerns are sweeping Wall Street that member-listed firms-such as Jefferies (JEF) and the now-defunct MF Global (MFGLQ.PK)-have too much exposure to sovereign debt... which leads to them selling that sovereign debt... which triggers higher rates for those countries as they issue new debt... which makes it harder for them to service their old debt... which requires more debt auctions to shore up their finances... which obviously requires buyers... which are traditionally the member-listed firms that are trying to shed sovereign debt in the first place?

I'll be the first to tell you that I'm no credit expert-I learned this business from the inside-out on the worldwide equity derivative trading desk at Morgan Stanley-but I've absorbed my fair share of education through 20 years on the street and my decade in Minyanville.

I mean, who can forget Pirate's Booty on September 3, 2008 when we looked at the landscape, swallowed hard, and declared (to those who didn't want to hear it) that we must brace for an imminent credit cancer or "an outright car crash, where credit seizes, capital markets freeze, price discovery permeates and social mood shifts as we come to terms with the new world order."

I've drawn this parallel for a reason; while the timing is elusive and policy is presumably more proactive-this point can be debated-this is the second side of the financial storm, the sovereign sequel to the first phase of the crisis. We referenced a "new world order" in 2008 and indeed we're there; we live in a world where governments topple each weekend, politicians can't stand the sight of each other, and words like "Bazooka" can single-handedly shift the entire capital market construct.

We've touched on this dynamic a lot so I won't dive too deep. Suffice to say there are no simple solutions, just the lesser of many evils. While I believe the "Bazooka" could take the shape of eurobonds or a printing press (neither of which is currently formed), both will simply buy time-and sharply rally markets-rather than fix the underlying structural problems.

What then, you ask, is the medicine? Debt destruction or broad reorganization-like what is currently being proposed in Greece-which would haircut existing debt holders and potentially reverberate up and down the financial food chain. Again, there are no simple solutions, but this is the writing on the wall; the scary aspect, I suppose, is if we imagine what it will take to induce the political will necessary to take such drastic measures.

Alas, it's not all guns and butter-it's Turnaround Tuesday in the 'Ville, and that provides a semblance of hope for bulls of all shapes and sizes. Please remember to manage your risk with an eye to the thin and thinning ranks, and allow an ample margin for error, as we most certainly live in interesting times.

Random Thoughts
  • As discussed last week, I tried a few upside schnitzels-Bank America (BAC) and Apple (AAPL)-but quickly moved to the sidelines last Wednesday when I felt a "nagging, steadfast, guttural sense that social mood will shape the financial markets."
  • This hasn't been the snazziest trading year of my career but it's been decen--and our mantra this year, heading in and heading out, is "survive and thrive."
  • I foresee generational opportunities on the back-half of this decade and a bevy of trading opportunities nestled on the path toward that destination, but that doesn't mean we need to toss our chips on the table every single day.
  • I love to trade-trust me, "Risk" used to be my middle name-but one of the key ingredients to wealth accumulation is capital preservation. Trust me on this one-when the day arrives to pick up dollars for dimes, you wanna be in a position to grab your fair share.
  • What do cranberries do for the other 364 days of the year?
  • Do you have Gold $1600 circled as the next level of lore?

Click to enlarge
  • Or is this the "other side" of The Gold Scold?
  • Autumn wind what?
  • And finally-Festivus 2011 is next Friday! If you wanna chow some fine BBQ and cut rug to live music with the Minyanville community-human capital than includes Jeff Saut, Pimm Fox, Keith McCullough, Matt Miller, Deirdre Bolton, Brian Sullivan, Michael Santoli, Scott Redler, Peter Prudden, Michael Gayed, Barry Ritholtz, Peter Schiff, Tony Dwyer, Don McPherson, David Stockman, Kevin Depew, the Sedacca clan-and many more!-lock your spot as it promises to be our best fete yet! 100% of the net proceeds, of course, go to The Ruby Peck Foundation for Children's Education as we give back to the leaders of tomorrow. Thanks!!!

Twitter: @todd_harrison

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