Want to play a part in recovery? Buy our bonds…

I can’t really describe the trepidation of Tuesday, you see, so much hinged on Wednesday that I actually lost sleep over it. What was on Wednesday? The NTMA issuance of €4 billion in Irish Government Bonds.

The way it stood was this, the CDS (credit default swap) spread on Ireland was 400 basis points and that was almost 300 basis points in of a Bund spread (comparing ours v.s. ze Germans), and the auction was going to go one of two ways, either firstly, it would succeed, albeit at high margins, or secondly (and what had me worrying) was that it would fail, then Ireland would be seen as lacking creditworthiness and billions would flow out of the nation in an instant.

I think it’s important to qualify some of this. For starters the fear began due to the CDS spreads, institutional investors use credit default swaps to protect them from a reference entity (in this …

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Market based solutions to the financial crisis

If you want to nationalise a bank then you are putting it into the hands of the state, therefore the taxpayer, so how can you be fair to the people of a country when you nationalise a bank while also giving the shareholders and bondholders some opportunity at redeeming at least a portion of their money, and most importantly, how do you do this with a market based solution? Is there a market based solution?

Currently the answer has been to take the good, the bad, and the ugly onto the national balance sheet. Is this really what the taxpayer wants? Instead would it be better if they only took the good assets – thus protecting the tax payer, and left all of the toxic debt to the bond and shareholders and let them see what they can get out of the remaining assets?

They may not be getting protected (shareholders/preference shareholders/bond holders) but when was it a taxpayers responsibility to protect investors of any firm? It certainly is not in …

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Short selling, what is it? What does short selling do?

Most of us are familiar with the idea of being able to buy and then sell a share, normally this is referred to as going ‘long’ in other words you feel it is a good share and you want to hold on to it. The opposite of this is where you sell and then buy which is going ‘short’, in other words you don’t think the stock is good and you don’t want to hold on to it so you borrow it and sell it today, buy it tomorrow (and dispose again to the original owner) and your position is set by the difference.

In a short sale a drop in the price makes you money because (for instance) if you sold today at $3.00 and bought back at $2.80 then you made 20c per share. If however, the price goes up to say $3.20 then you have to make up the difference. This is before we get into other areas like options or any derivatives. An easy …

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Irish Government bonds, what is happening?

Governments often have to raise money to achieve their objectives over the short and medium term, in Ireland we do this by raising bonds which is basically where a buyer (private or institutional) acts as the ‘bank’ for the state. The creditworthiness of our nation is currently the lowest in the Eurozone, below that of countries like Greece and Portugal. This means that we have to pay more interest to attract a buyer.

Today Moody’s (a rating agency) has put Ireland on watch for a debt rating downgrade (it means our debt will be considered less secure), and that means that we will have to pay even more in order to attract new investors for bonds. How this trickles down to the person on the street is simple, we’ll have to foot the bill eventually because the ultimate guarantor of state borrowing are the people in that country. The tools to achieve this with are higher taxes and less public spending, both equally unpopular.

For now we …

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Some past market performance figures

Naturally past economic cycles don’t tell us exactly what will happen in the future, but as Mark Twain once said ‘history doesn’t repeat itself but it does rhyme’. And for that reason it is worth looking at some key figures from the past, showing that often the gains in bull markets are all found at the cusp of a bear market.

The stock market generally reacts before consumers and the real economy do and equally it will generally see recovery before them as well. Taking a view of the 20th century markets we can see the following:

In the recession of 1926 to 1927 the market increased by 41%. The years of 1933 to 1937 saw some of the most impressive gains ever in the S&P 500. The eight month recession of 1945 saw markets rise 19.5%, the eleven month recession of 1948-49 saw the markets go up 15.2%. Again in 1953-1954 the ten month recession ended with a market that rose 24.2%.

Any reader will note that much of these ‘gains’ did …

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ECB rate cut expectation tomorrow 6th November 2008

This is an interesting take on the rate cut we are expecting tomorrow, it comes from Fixed Income expert Marc Ostwald of Monument Securities. In a survey of 54 economists it was expected that we may see a 50 basis point or half a percent rate cut.

We have felt that this is likely but you cannot rule out a greater than 50 bip drop because the ECB may want to deliver a good jolt of stimulation and the way to do that may be a greater than 50 basis point reduction, our belief was that it could rise as much as 75 basis points however, Marc Ostwald seems to think that even a whole 100 bips or 1% is not off the cards. We’ll just have to wait and see!

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