catalyst calendar february 2011

8/7/2019 Catalyst Calendar February 2011

http://slidepdf.com/reader/full/catalyst-calendar-february-2011 1/25



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Latent and Active Catalysts – Three Threats

2

Slowdown inChinese Demand

Central BankPolicyMissteps

Sovereign Debt Crisis




Slowdown in Chinese Demand

3

579

1113151719212325

Mar-94

Dec-94

Sep-95

Jun-96

Mar-97

Dec-97

Sep-98

Jun-99

Mar-00

Dec-00

Sep-01

Jun-02

Mar-03

Dec-03

Sep-04

Jun-05

Mar-06

Dec-06

Sep-07

Jun-08

Mar-09

Dec-09

Sep-10

Loan Growth

GDP Growth

7

9

11

13

15

17

19

Jun-06

Sep-06

Dec-06

Mar-07

Jun-07

Sep-07

Dec-07

Mar-08

Jun-08

Sep-08

Dec-08

Mar-09

Jun-09

Sep-09

Dec-09

Mar-10

Jun-10

Sep-10

Dec-10

Chinese RequiredReserve Ratio

Chinese Required Reserve Ratio for Major Banks

Source: The People’s Bank of China; Bloomberg; Knight Research

Chinese Loan and GDP Growth (% Change YoY) • NYT article 2/2/2011 stating China is

poised to hike rates within one month

• Mixed PMI data recently; new 5M low

and second consecutive decline for

January

• Chinese press reported 2/1/2011 that

the PBOC may implement price controls

to stabilize inflation

• PBOC may be backing away from

differentiated RRR in 2011 as liquidity is

tight (around New Year)

• Salient Questions:

– Is China like Japan in that it absorbs

more global growth than it

provides?

– How much will the RE and banking

sectors be shielded from a

slowdown?

– Is it a normal cycle or a bubble?




Central Bank Policy Missteps – Inflation and Credit Problemsvs. Job Growth

4

50

100

150

200

250

300

J-89

J-90

J-91

J-92

J-93

J-94

J-95

J-96

J-97

J-98

J-99

J-00

J-01

J-02

J-03

J-04

J-05

J-06

J-07

J-08

J-09

J-10

Income/ExpenditureDifferentialCommodity Prices

90

110

130

150

170

190

210

230

J-05

M-05

S-05

J-06

M-06

S-06

J-07

M-07

S-07

J-08

M-08

S-08

J-09

M-09

S-09

J-10

M-10

S-10

Income/ExpenditureDifferentialCommodity Prices

7

7.5

8

8.5

9

9.5

10

10.5

J-05

M-05

S-05

J-06

M-06

S-06

J-07

M-07

S-07

J-08

M-08

S-08

J-09

M-09

S-09

J-10

M-10

S-10

0

50

100

150

200

250

O-09

N-09

D-09

J-10

F-10

M-10

A-10

M-10

J-10

J-10

A-10

S-10

O-10

N-10

D-10

J-11

F-11

U.S. Inflation and Credit Eurozone Unemployment (%)

SOVXWE

Source: Marklt; Bloomberg; Knight Research

Source: Eurostat; Bloomberg; Knight Research

Source: Bureau of Economic Analysis; NYBOT; Bloomberg; Knight Research




Makeup of European Spreads

5

• Market expectations are dependent on the prevailing belief in both the risks inherent in sovereigns on a stand-alone basis

and the mitigants associated with Eurozone membership. Both are moving targets, with the stand-alone spread defining

process being iterative in information and the risk mitigant factors subject to numerous political factors. Understanding the

catalysts that move these factors is key to understanding European sovereign risks.

• Reflects

• High levels ofindebtedness

• Aging population

• Higher marketsensitivity tosovereign risks

• Globalindebtedness

• Banking system risk

• Reflects

• Belief in fiscal unity

• Possibility ofcentral treasury

• Continued bailoutefforts

• Reflect Combinationof Both Cases

N

on-Externally Supported Spreads

EurozoneMembe

rship Mitigant

Observed

Markets

- =




Risk Pricing in Peripheral Europe – A Return to Normal

6

Max EMU Member Spread to Bund (10Y, bp)Deterioration of Periphery Maastricht Treaty IndicatorsSince Euro Formation

As of 2/7/11

Source: Bloomberg; Knight Research

Greece Ireland Italy Portugal Spain

Maastricht Treaty

Budget Deficit -11.1 -2.9 -8.6 -4.1 -3.5

Debt/GDP 87.8 92.5 108.1 54.4 46.8

EMU Launch

Budget Deficit -3.3 2.7 -1.7 -2.8 -1.4Debt/GDP 94 48.5 113.7 51.4 62.3

Current

Budget Deficit -13.6 -14.4 -5.3 -9.3 -11.1

Debt/GDP 115.1 65.5 116 76.1 53.2

Since Maastricht Treaty

Budget Deficit -2.5 -11.5 3.3 -5.2 -7.6

Debt/GDP 27.3 -27 7.9 21.7 6.4

Since EMU Launch

Budget Deficit -10.3 -17.1 -3.6 -6.5 -9.7

Debt/GDP 21.1 17 2.3 24.7 -9.1

Source: EuroStat; OECD; Knight Research

0

200

400

600

800

1000

1200

90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11

Maastricht Treaty

Euro Launch

Max Spread to Germany(bp)


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Europe Faces Rising Debt Burdens and Limited Fiscal Flexibility

7

-2%

0%

2%

4%

6%

8%

10%

12%

14%

16%

18%

10% 15% 20% 25% 30% 35% 40% 45% 50%

Interest Expense (% of GDP) *

IrelandGreeceSpainItalyBelgiumPortugalUS

Japan

Global Debt Rankings (USD)

European Debt Burdens

Country Debt (MM)

1) Japan 10,744,088

2) United States 8,998,373

3) Italy 2,122,356

4) France 1,684,882

5) Germany 1,656,882

6) United Kingdom 1,653,165

7) Spain 835,838

8) Canada 605,947

9) Greece 444,142

10) Belgium 423,532

• Italy and Spain are the largest debtors in the

periphery

• Italy is more heavily indebted with more

onerous rollover requirements

• Italy, Belgium, and Portugal have a high

sensitivity to funding costs * Represents interest expense if total debt were priced at current levels.

Tax Revenue (% of GDP)

More Fiscal Flexibility

Less Fiscal Flexibility

Bubble Size Represents Debt to 2011 Projected GDP

European Tax Revenues vs. Interest Expense

Source: Eurostat; World Bank; Bloomberg; Knight Research

As of 1/4/2011, Stressed Scenario: +700 over current bunds for Euro Periphery, 5% for US, and 4% for Japan

Greece Italy Ireland Portugal Spain Belgium US Japan

GDP 233,046€ 1,520,870€ 159,646€ 168,046€ 1,053,914€ 339,162€ 14,119,000$ 5,06$

Debt 293,755€ 1,557,670€ 94,975€ 137,696€ 607,956€ 310,873€ 8,890,643$ 10$

Average Rate Debt Burden % GDP 14.44% 4.19% 4.92% 5.23% 2.58% 3.19% 1.39% 1.40%

Stressed Scenario 12.46% 10.13% 5.88% 8.10% 5.70% 9.06% 3.15% 8.25%



Growth Projections Seem Predicated on FiscalResponsibility Not Being Contractionary

8

Economic Growth Forecasts (YoY, % change)

2009 2010 2011 2012 2011 2012

United States –2.6 2.8 3.0 2.7 0.7 –0.3

Germany –4.7 3.6 2.2 2.0 0.2 0.0

France –2.5 1.6 1.6 1.8 0.0 0.0

Italy –5.0 1.0 1.0 1.3 0.0 –0.1

Spain –3.7 –0.2 0.6 1.5 –0.1 –0.3

Japan –6.3 4.3 1.6 1.8 0.1 –0.2

United Kingdom –4.9 1.7 2.0 2.3 0.0 0.0

Canada –2.5 2.9 2.3 2.7 –0.4 0.0

Projections

Difference from

October 2010 WEO

Projections

Source: WEO Update, January 2011; Knight Research



EFSF – CDO Solution, Quasi-Treasury, or Debt Spiral?

Drawdown ofEFSF

Less EFSFFunding

Available

MoreIMF/Int’l

Involvement

NewHierarchy of

Debt

More DifficultMarket for

SovereignIssuance

Difficult

FundingEnvironment

9

Senior

• IMF/Int’l Loans• Domestic Bank

Deposits

• EFSF Loans• Sovereign Bonds

Junior

• Bank CapitalBorrowings

• Offshore BankDeposits

Expansion to Bond Purchases Raises More Questions than Answers:

• Price sensitivity of sellers

• Potential sellers considering price sensitivity

• Voters realize this is debt transfer/subsidization

• Direct issuance an ever clearer signal to voters

• Legal and ratings issues

• < € 440B available versus > € 3.2T periphery debt load (treasury level only)



Advanced Economies’ Projected Path is Unsustainable

10

•Public debt has increased to unprecedented levels, rising from a postwar low of 34% in 1974 to a projected record high of 110%by YE2010•Unprecedented adjustments are required across the G-7•The status quo is not an option

General Government Net Debt Scenario Under 2010 Policies(In percent of GDP)

Source: IMF



4%

6%

8%

10%

12%

14%

16%

02000400060008000100001200014000160001800020000220002400026000280003000032000340003600038000400004200044000460004800050000520005400056000580006000062000640006600068000700007200074000760007800080000820008400086000880009000092000940009600098000100000102000104000106000108000110000112000114000116000118000120000122000124000126000128000130000132000134000136000138000140000142000144000146000148000150000152000154000156000158000160000162000164000166000168000170000172000174000176000178000180000182000184000186000188000190000192000194000196000198000200000202000204000206000208000210000212000214000216000218000220000Greece IrelandJapan United StatesUnited Kingdom SpainPortugal FranceBelgium AustriaNetherlands

Unprecedented Fiscal Imbalance Creates Policy Conundrum

• Nearly a dozen countries require fiscaladjustments, representing approximately

54% of global GDP.

• Policies that promote near term economic

growth are mutually exclusive to policies

that are fiscally responsible.

• Policy choices are affected by election

cycles.

• This elevates monetary, fiscal and

regulatory policy risk to new levels, which

in turn affects economic growth prospects.

11

* Reflects fiscal adjustment needed to reduce a country’s debt/GDP2009 Gross domestic product in constant 2000 U.S. dollars Sources: IMF; WEO; WDI

Required Adjustment Betw

een 2010

and 2020 *

Indebted Countries’ Contribution to World GDP

Bubble size indicates magnitude of GDP contribution



Die Deutsche Frage – A Difficult Balancing Act

12

European Banking Exposure to GIIPS nations (% of Common Tier 1 Capital)

Sources: BIS; SNL; Knight Research

0%

50%

100%

150%

200%

250%

300%

350%

0.5 0.7 0.9 1.1 1.3 1.5 1.7

Exposure to GIIPS

(% of Tier 1 Common

Capital)

Core ROA

German Banks

French Banks

U.K. Banks

Italian Banks

Spanish Banks



March Madness - Political Risk Is High and Rising

• Funny thing about democracies is the feedback loop

between electorates and national policy

• Policy risk remains tethered to national, and even

regional political risk across the European Union

– Higher risk within coalition governments

– Breakdown of coalition (i.e. Ireland) can lead

to snap elections and uncertainty around

policy action

• Two primary sources of political risk as it relates to the

Euro sovereign crisis

– Stressed states (periphery Europe) lose the

electoral support to carry out reforms, trim

deficits, and curtail debt

– Core Europe or payer states (e.g. Germany)

lose electoral support to bail out Peripheral

Europe or debtor states

Eurozone Political Sound Bites:

“We believe that Ireland may be left with no option, in

the absence of a renegotiated deal, but to write down

the value of the bonds in the Irish banks or face the

prospect of a hugely damaging sovereign default”

Fine Gael, Irish Opposition Party, February 2, 2011

“62% of [German] voters oppose further bail -outs of

weak euro members….”

The Economist, January 13, 2010

“49% of Germans would like to have a return of the D

Mark”

YouGov Insitute, December 26, 2010

It may be “useful for the € 440 billion European

Financial Stability Facility to buy government bonds”

Jean-Claude Trichet, January 26, 2011

13



March Madness – German Regional Elections Will SignalVoter Sentiment Toward Bailouts

•Spanish national election due in March

2012•13 autonomous regions hold

elections in 2011

•Greece national election due in 2013

•Portugal national election late 2013

•Italian national elections due in April 2013

•Early election could materialize in

Spring 2011

Image Courtesy of www.expansys-usa.com

•Irish national election on February 25,

2011 •First national election spawned by

crisis•Fine Gael positioned to form

coalition government with Labour

•Election one year ahead of

requirement

•German federal election in 2013

•7 regional elections in 2011•Four elections in February and

March•In 3 of those elections the CDU

(Angela Merkel’s party) is in the

ruling coalition

•Losses in the states will reduce the

ruling parties’ representation in the

Bundesrat, the upper house at thenational level

•French national election June 2012

14



March Madness – Debt Maturities Heavily Loaded in March

15

0

50,000

100,000

150,000

200,000

250,000

300,000

350,000

J F M A M J J A S O N D

Sovereign Debt Financial Sector Debt

2011 Total Eurozone Monthly Debt Maturities: Sovereign and Financial (€, MMs)


- Irish National Election - German Regional Election

- 3 German Regional Elections

- German Regional Election - Spanish Regional Election - 2 German Regional Elections



Risk Premiums

16

0

50

100

150

200

250

300

Feb-10 May-10 Aug-10 Nov-10

Italian Sovereign

UniCreditIntesa Sanpaolo0

50

100

150

200

250

300

350

400


Spanish Sovereign

SantanderBBVA

0

100

200

300

400

500600

700

800

900

1000


Poturguese Sovereign

Banco Espirito Santo

BCP

0

200

400

600

800

1000

1200

1400


Irish Sovereign

Bank of Ireland

AIB

Italian Sovereign vs. Financials (5Y CDS) Spanish Sovereign vs. Financials (5Y CDS)

Portuguese Sovereign vs. Financials (5Y CDS) Irish Sovereign vs. Financials (5Y CDS)




Volatility in Non-Externally Supported Nations

17

French Sovereign/ CAC 40

Credit Agricole

Societe Generale

BNP Paribas

Standard Deviations

German Sovereign/ DAX

Deutsche Bank

Commerz Bank

Standard Deviations

U.K. Sovereign/ FTSE 100

Barclays

Lloyds

Standard Chartered

HSBC

Standard Deviations

Japanese Sovereign/ Nikkei-225

Sumitomo Mitsui

Nomura Holdings

Standard Deviations

U.S. (Deviations from 2Y Mean)

Bearish Bullish

3 2 1 0 1 2

U.K. (Deviations from 2Y Mean)

Bearish Bullish

Japan (Deviations from 2Y Mean)

Bearish Bullish

France (Deviations from 2Y Mean)

Bearish Bullish

Germany (Deviations from 2Y Mean)

Bearish Bullish

3 2 1 0 1 2 3

3 2 1 0 1 2 33 2 1 0

3 2 1 0 1

U.S. Sovereign/ S&P 500

Bank of America

Citigroup

JPMorgan

Wells Fargo

KBW Bank Index

Standard Deviations

Equity

CDS




Volatility in Externally Supported Nations

18

Italian Sovereign/ FTSE MIB

UniCredit

Intesa Sanpaolo

Standard Deviations

EquityCDS

Spanish Sovereign/ IBEX 35

Santander

BBVA

Standard DeviationsEquity

CDS

Portuguese Sovereign/ PSI-20

Banco Espirito Santo

BCP

Standard Deviations

Equity

CDS

Irish Sovereign/ ISEQ

Bank of Ireland

AIB

Standard DeviationsEquity

CDS

Portugal (Deviations from 2Y Mean)

Bearish Bullish

3 2 1 0 1 2 3

3 2 1 0 1 2 3

Italy (Deviations from 2Y Mean)

Bearish Bullish

Spain (Deviations from 2Y Mean)

Bearish Bullish

Ireland (Deviations from 2Y Mean)

Bearish Bullish

3 2 1 0

3 2 1




Total Divergence

19

Equity/ CDS Differential by Standard Deviation (2Y Mean Basis)

Source: Bloomberg; Knight Research 0 0.5 1 1.5 2 2.5 3

Sumitomo MitsuiBank of America

Deutsche BankStandard Chartered

BarclaysJPMorgan

CitigroupBanco Espirito Santo

BCPWells FargoHSBC

Credit AgricoleBBVA

Nomura HoldingsUniCredit

LloydsSantander

BNP ParibasIntesa SanpaoloBank of Ireland

Societe GeneraleAIB

Commerz Bank

U.K. Sovereign/ FTSE 100Spanish Sovereign/ IBEX 35Italian Sovereign/ FTSE MIB

Japanese Sovereign/ Nikkei-225Portuguese Sovereign/ PSI-20

Irish Sovereign/ ISEQFrench Sovereign/ CAC 40

German Sovereign/ DAX

U.S. Sovereign/ S&P 500

Sovereigns/

Equity Market

Index

Banks



Key Takeaways

• Primary catalytic events revolve around two key themes

– Slippage on fiscal reform in the GIIPS

– Popular (read voter) revolt in both the adjusting countries (e.g. GIIPS) and/or the

paying countries (e.g. Germany)

• Volatility should remain a defining market characteristic in the coming yearas policy action attempts to simultaneously address

– A sluggish economic recovery

– High unemployment

– Record levels of fiscal imbalance

20



Notes

• Notes to Slide 10, “Advanced Economies’ Projected Path is Unsustainable”: Weighted average by PPP-

GDP. The debt scenario assumes that the cyclically adjusted primary balance, corrected for fiscal

stimulus measures, remains constant at the 2010 level (in percent of GDP). Nominal GDP is assumed

to grow by 3 percent per year. The interest rate–growth differential (r-g) is assumed to equal zero until

2014 and 1 percentage point afterwards. Moreover, the scenario accounts for the estimated increase in

aging-related spending.

• Note to Slide 11, “Unprecedented Fiscal Imbalance Creates Policy Conundrum”: Countries included

need at least a 5% change in fiscal policy to bring debt/GDP to 60%. Diagram excludes Cyprus, which

also requires a fiscal adjustment greater than 5% of GDP.

21



Acknowledgements

• Slide 10, “Advanced Economies’ Projected Path is Unsustainable”: Graph entitled “General Government Net

Debt Scenario Under 2010 Policies” from IMF Staff Position Note: “Long-Term Trends in Public Finances in the

G-7 Economies” by Carlo Cottarelli and Andrea Scheachter, September 2010.

22



Appendix A: Disclosures

Data as of February 4, 2011

DISCLOSURE STATEMENT: This information and opinions in this report have been prepared by Knight Capital Americas, L.P. and may be distributed by

Knight Capital Americas, L.P. or its affiliates (collectively, “Knight”). Any recommendation contained in this report may not be suitable for all investors.Moreover, although the information contained herein has been obtained from sources believed to be reliable, its accuracy and completeness cannot be

guaranteed. Knight has no obligation to tell you when opinions or information in the report change.

Analyst Certification

I, Brian Yelvington, hereby certify that (1) the views expressed in this report accurately reflect our personal views about the subject issuers and the

securities of those issuers and (2) that no compensation, direct or indirect, is related to providing a specific recommendation or view in this report.

I, Charles Mounts, hereby certify that (1) the views expressed in this report accurately reflect our personal views about the subject issuers and the

securities of those issuers and (2) that no compensation, direct or indirect, is related to providing a specific recommendation or view in this report.

Important Disclosures

Knight prohibits research analysts and members of their households from owning securities of any company of the analyst’s area of co verage. Knight

permits its research analysts and members of their households to own diversified mutual funds or exchange traded funds that may include companies

in a sector that the analysts covers.

Knight prohibits any research analyst from serving as an officer, director or advisory board member of any publicly traded company.

Analysts Compensation: The research analyst responsible for the preparation of this report receive compensation based on various factors, including

total revenue of Knight, a portion of which is generated by investment banking business. They do not receive compensation from any specific

investment banking transaction.

23




Appendix A: Disclosures (cont’d)

Knight Research Disclosure for United Kingdom and European Union

This report is approved for distribution in any European Union jurisdiction by Knight Capital Europe Limited (KCEL) and is only suitable for an investment

firm or investment professional . KCEL does not itself act as a market maker in any of the securities discussed in this report. Research analystsemployed by Knight Capital Americas, L.P. who wrote or who were involved in writing this report are not compensated by KCEL.

Knight Capital Europe Limited is Authorised and Regulated by the Financial Services Authority and a member of the London Stock Exchange.

Registered Address: City Place House, 55 Basinghall Street, London, EC2V 5DU United Kingdom.

Other Disclosures

This “Catalyst Calendar: a Sovereign Roadmap” is asof February 7, 2011.

This research presentation was prepared for the institutional clients of Knight. This presentation was not prepared for any individual client or prospective

client of Knight. At any time, employees of Knight may hold opinions that differ from those in this research report, based upon their independent review

of the issuer or securities that are the subject of this research report. Knight regularly trades in and regularly holds long or short inventory in thesecurities discussed in this research report. The positions held can be inconsistent with the technical opinions or recommendations outlined in this

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Securities mentioned, recommended, offered, or sold by Knight or its affiliates are not insured by the Federal Deposit Insurance Corporation and are

subject to investment risks, including the possible loss of the entire principal amount invested. Although information contained in this report is based

upon sources that Knight believes to be reliable, we do not guarantee its accuracy. All estimates, opinions and recommendations expressed herein

constitute judgments as of the date and time of publication of this report and are subject to change without notice. Past performance is not a guarantee

of future results, and no representation or warranty, express or implied, is made regarding future performance of any security mentioned in this report.

Additional information is available upon request.

This report is issued and approved for distribution in the United States by Knight Capital Americas, L.P., member FINRA, NYSE and SIPC. This

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without the prior written permission of Knight Capital Group, which permission may be sought by contacting Tim Daileader at [email protected].

24

catalyst calendar february 2011

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