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Sunday, January 4, 2015

2015 Market Risks $spy $bac $fxe $baba

Starting off the new year with the vix elevated, and the hang over. No better time to talk about the prominent 2015 market concerns.

1. Rising rates

Rising rates gives, especially the treasury yields, give competition to other investor instruments (including Miss Market). This would lead to multiple compression. But if earnings hold up, at current levels, market seems like its in decent shape. (Below is SP500 target with multiple compression of forward anticipated earnings through Q1.)

The residual risk (more of a benefit), higher rates are better for the banks, especially BAC. Which is still valued on book. Higher rates will allow the stock to trade toward 20, the higher-end of its intangible book value.

2. Europe

Europe has been a risk for 7 years now. Although, this time really is different. (Stop laughing! I'm cereal!) Europe on the whole is basically fucked up, especially youth unemployment. Lets put aside the long-term structural issues, that have given the 'extreme' political groups a bit of resurgence (basically everywhere), and simply focus on the Grexit because it is in arms reach. 

Fiscally, all of the PIGS are in seemingly better shape, except for Greece. I'm most definitely biased here, but economically the EU should have done more to during the reset of their debt. And Greece should have been more aggressive with their policy changes. Regardless, a controlled exit is more likely. Greek debt is not as dangerous to the EU (mostly German) banks as they once were. And if there are flare-ups in the bond markets, the ECB is there (with unlimited fire power) to calm things down. 

A public-private stimulus fund has been talked about. A concern for Greece, if they leave the Euro, will that mean no stimulus funds? Not sure what is more needed, a proper default level or stimulus funds. Maybe the former.

The decline in the Euro helps, but for Greece more is needed to battle unemployment. (A Euro at par with the dollar, vigilance on complacent policy and fiscal stimulus.)

Either way, Europe will definitely not allow Greece to leave the Union. Without question, Greece is needed for strategic-security reasons to the south of the continent.

3. Russia

Until Putin stops acting like a douche, the Ruble will keep falling and oil will stay depressed. Once he stops, or the $400B foreign currency reserve cushion depletes and can no longer afford to act like a douche, global GDP will accelerate (and Germany will breath a sigh of relief).

The black swan here is how Puten or a successor will act. The most dangerous animal in the jungle is a wounded animal. How will this wounded animal act when pushed too far into the corner (even if it deserves to be there)?

4. China's financial system

President Xi is working on corruption, and maybe trying to remove some of the funky accounting and debt issuance. But there has been a large accumulation of corporate debt. These risks are not new, and have been talked about as much as China's ghost cities. But in the latter part of 2014 we saw the central back start to accomidate. The big question is what strategy the Chinese powers-that-be will take? Allow for defaults or zombie banks? (There is about $4T reserves it can utilize.)

Either way, the actions to be taken appear to be in a controlled manner, minimising a potential domino effect. Also, any financial crisis that were to happen in China is inherently ring fenced. There is no or minimal interbank lending with western institutions. A real consequence would be a big slowdown in global GDP growth. 

A wild card here, if there is a financial issue in China, curious how it will effect one of the largestsfinancial institutions in the world, Alipay (Tianhong Asset Management).

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