From the Barbers's Chair 2.21.2012

First, private bondholders will get a 70%+ haircut, by trading their old Greek bonds for new ones. These new bonds will pay about 3% over a very long term. Once these new bonds hit the open market, what will they sell for? 50% of par? 35%? In other words, the new bonds are likely to be total junk, unless the market believes that getting 3% is a good deal because the EU is backing Greece. However, recent events show the questionable extent of this commitment. Thus way below par may be a good guess, unless future magic tricks by the EU come into play.

This raises another personal question: How can I short the new Greek bonds that will go to private bondholders? There is money to be made here.

Another key issue arises because European governmental entities are apparently able to rid themselves of their bonds at par. Doesn’t this new risk create an interest rate premium on ALL private purchases of sovereign debt in the future? In other words, if the risk to private investors in sovereign debt is far greater than that of government purchasers, shouldn’t the interest rates reflect that?
Specifically, will there be an immediate risk premium in bonds issued by Portugal, Spain, Italy and others?

As Bill Gross tweeted last week, “ECB subordinates all Greek debt holders & in so doing subordinates all holders of Euroland sovereign debt.” This subordination should show its face in a new interest rate premium.

Another important question is, how will the ratings agencies react to the deal? Will they call it a “default?” In last week’s Barber’s Chair, I addressed this issue in depth, concluding that they would. As I stated, “A duck by any other name is still a duck…It is not a daisy or a bluebird or a polar bear with feathers.” In my opinion, the ratings agencies should declare the Greek action a default, and they will.

But if there is a default, this raises another crucial question, How will this effect the credit default swap (CDS) market? A clear “default” would mean that CDS’s have played their proper role in guarding against defaults. But what if European government entities or others claim that the deal is not a “default.” Will CDS issuers try to not pay off? This could result in a decade of litigation, and muddy the entire CDS market. If a CDS will not pay off in the case of a clear default, what good is it? If CDS’s do pay off, how big will the damage be to the CDS issuers? Are we looking at another AIG contagion situation?

In sum, there are many unanswered questions that arise from the Greek debt deal. These questions and others are likely to result in an unclear picture for Europe and the world over the coming weeks and months. Be careful out there!!

Floyd at KOTM please follow me on Twitter @USKOTM

Trade of the Week (SVU) 2.17.2012

Unprofitable: This trade is unprofitable if SVU Closes under $7.20 by March 16, 2012. The most I can lose on this trade is the amount I paid for these Calls, $.20

Reason I like this Trade:  I have watched and traded SVU over the course of the last couple of weeks.  I have been profitable, so I continue to trade the names that I have made money on and pass on stocks that I lose money on.  SVU has sold off very hard on earnings and I remembered that a customer sold 32,247 SVU Feb 7 Puts about a month ago, so I figured the stock would rally today and close above $7.  When a customer bought 5700 March 7 Calls for $.20, I jumped on board and bought them as well.

UPDATE 2.17.2012 I sold 1/3 of these Calls for $.25, 1/3 for $.30, and then 1/3 of the Calls for $.35.  This averages to $.30 and I paid $.20, so this is good for 50% in a day.  Ill take that for some beer drinking money and move on to the next trade.

Read more about february by

Halftime Report for 2.17.2012

UNUSUAL OPTION ACTIVITY:In FTR, they sold 20,000 MAR 4 Calls, post earnings for $.60. This could be against Feb positions that a customer has been building over the last few months. We have seen a customer sell 22,000 GFI Jul 18 Calls for $.45. In XLF, a customer bought 175,000 May 16 calls for $.21. This is a huge bet on America that things are getting better. Perhaps risk is here to stay.

By: Greg Zimny