My call to buy the US stock market last night when the Dow was down 850 to 950 points is a money maker for now, as the Dow futures are up 250 points in the pre-market after an incredible 300 point rally in the last hour of trading on the NYSE last night. Faint heart never won fair lady or sold index put spreads at a yummy profit.
My conviction that Evergrande is not Lehman 2.0 is based on two existential facts. One, Evergrande has tangible assets like buildings and lands while Lehman’s $640 billion balance sheet was a toxic leveraged casino of illiquid subprime mortgage CDOs and credit default swap excreta. Two, Evergrande’s $300 billion debt is mainly owed to Chinese state banks who are used to the hokey pokey accounting standards that underpin the Maoist-Dengist-Marxist Middle Kingdom.
ICBC is the largest bank in the world by assets, yet it trades at five times earnings for a reason. True, some gwai-lo funds like Blackstone have lent Evergrande money, the reason I enjoyed shorting BX for a quick profit as it plunged 8% last night. Yet the financial markets are not pricing in systemic risk in the Chinese or global financial system. I expected HSBC credit default swaps to rise at least 150 basis points, a point at which I would have put on my diapers and covered all my long positions in the pre-market. Yet HSBC five year CDS rose a mere 20 basis points while I remembered money centre bank CDS rising to 300 to 500 basis points when the Lehman shock hit the global markets on 15th Sept. 2008.
Lehman was hostage to short term funding markets that froze when the ostensibly too big to fail (TBTF) investment bank was not saved via a shotgun marriage (ok, merger) by the Bush White House as Bear Stearns had been with J P Morgan. Yet Evergrande is not remotely a grey swan since its debt woes have been priced into the global capital markets since at least 2017. So it is illogical to assume that contagion risk will hit Western banking dominoes at the speed of light.
If you agree with me, just sit tight and watch Citigroup shares fly at least 3% tonight on NYSE. Matt does not need a crystal ball to make money on Wall Street, all I need to do is listen to the hoofbeats of the herd and watch sheep get fleeced before they get slaughtered by market insiders.
For instance, while bank shares got gutted last night, why was there no meltdown in the US high yield debt market? After all, Evergrande is the biggest corporate default in Asian high yield and surely contagion risk afflicts junk bonds as well as common stock? Since US high yield was like Sherlock Holmes’s dog that did not bark, I just dived into the market and grabbed the free money Mr. Market was kind enough to donate to me in his periodic nervous breakdowns. Elementary, my dear Watson, as Sherlock was wont to say once he cracked a case.
BTW, Dr. Watson was the most famous fictional character to come out of the Battle of Maiwand in 1880 in the second British-Afghan war, so was Malala.
Chief Investment Officer at Asas Capital
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