Adam Parry – Beware the Ides of March!
Now after nearly six months of this blog, most of you will be used to the mix of vacuous drivel about films, pop music and cricket as a starter, followed by a main course of a diatribe about how over-inflated the markets are and all finished with a dessert of a recipe.
This week, however, we are going to try and be a little more cerebral.
We start off with a little bit of Shakespeare and a play first performed in 1599. The Tragedy of Julius Caesar.
The play begins with the commoners of Rome celebrating Caesar’s triumphant return from defeating the sons of his arch rival, Pompey. Caesar duly holds a victory parade, and during that parade a gnarled old soothsayer warns him to “Beware the Ides of March”. Caesar brushes him away and ignores the advice.
Meanwhile, Cassius tries to convince Caesar’s friend and ally Brutus to join his conspiracy to kill Caesar. Brutus is hesitant to slay his friend, but agrees that Caesar is abusing the power he has accrued. The pair then hear from Casca that Mark Anthony has offered Caesar the crown of Rome three times, and that Caesar has refused it with increasing reluctance, hoping that Rome’s mob would beg him to accept the crown. They did not, merely applauding him for denying the crown.
On the eve of the Ides of March, the conspirators meet and Brutus finally decides to join them, worried that Caesar may destroy Rome should he be crowned.
The next day, Caesar ignores both the soothsayer and his wife and goes to the Senate where he meets the conspirators, who present him with a fake petition pleading on behalf of Metelus Cimber’s banished brother. Caesar rejects this and the conspirators pounce on him and stab him. His friend Brutus delivers the final blow, with Ceasar’s last words being “Et tu, Brute? Then fall, Caesar”.
The rest of the play deals with the aftermath of the murder and the civil war that erupted between Cassius and Brutus and Mark Anthony, which is eventually won by the latter.
All very dramatic, but the point here is that today is the Ides of March. And there is plenty to beware. But in keeping with this more cerebral report, we are not going to rant about how dangerous these markets are. Instead, we are getting a little bit technical and discuss the iTraxx CDS index rolls, which takes place at the back end of the week before Series 35 starts trading next Monday.
The CDS rolls are a little more complicated than the Eurex futures rolls because the index constituents change due to market movements in the previous six months. Some firms will have dropped from investment grade into high yield and vice versa.
And from that perspective, it is always difficult to look back and compare index levels on a generic basis over a long period of time. The fact of the matter is that every index is different and hence you can’t really look at generics.
I am not going to baby you here and give you the roll fair valuation. You can do that yourself by obtaining single name CDS levels and taking out those that are dropping out of the indices and replacing them with the levels of the new names. You also need to factor in 6 months of curve using the 5/7yr Series 34 indices.
Let’s start with the Main, and out of the 125 constituents there are 6 changes between S34 and S35.
Leaving the index are Adecco, Linde, Rentokil, Philips, OTE and Relx. They are replaced by Fiat, Hochtief, Smurfit Kappa, Auchan, Louis Dreyfuss and Next. Now you don’t need to be a highly qualified mathematician to realise that the roll effect here will be negligible.
In the Crossover, though, it could well be a different story. Out of the 75 constituents, there are 10 changes.
Out go Auchan, Europcar, Fiat, Garfunkelux, Louis Dreyfuss, Next, Peugeot, Synlab, Smufit Kappa and Syngenta to be replaced by Bellis Acquisition, Cirsa Finance, Nidda Healthcare, Orano, PPF Telecom, Technipfmc, Teollisuuden Voima, Verisure, TK Elevator and ZF Europe.
The more observant amongst you will see that 5 of the 6 new constituents of the Main have come from the S34 Crossover index as they have moved back into investment grade territory. And from that perspective, it is fairly obvious that the names that have replaced them will have much higher CDS levels. Hence we can expect a fairly significant roll.
You might ask whether any of this actually matters? Well, these days the answer is not really. Single name CDS is a more or less defunct market. There is no liquidity and it hardly ever trades unless a company really looks in trouble, at which point the market makers will charge you the CDS premium plus an upfront fee to insure your cash position.
The CDS indices are, however, still seen as a benchmark of how the credit market is trading. And from that perspective it is useful to know about the six monthly rolls if only from the point of view of walking in next Monday, seeing the Crossover up quite a few basis points and thinking that you had missed some credit negative news over the weekend.
Right, onto a more cerebral recipe this week. And I’m going to give you a couple of sweeties to try.
Firstly here’s a weird one for Tobacco Chocalates.
Start off by bringing 150ml double cream to the boil and add 3g pipe tobacco. Leave to infuse for half an hour. Bring the cream back up to the boil, pass through a sieve and then whisk in 150g of top quality milk chocolate. Once all the chocolate is melted and combined add 20ml Armagnac and allow the mix to cool naturally, stirring frequently. Once it has thickened up a bit, put into a piping bag and pipe straight lines onto a flat tray covered with clingfilm. Cut into 5cm bits. Then temper 500g 80% dark chocolate. Place a bit of the tobacco infused chocolates into the dark chocolate using a dipping fork. Remove and allow the excess to drip off. Then place into icing sugar and allow the chocolates to set in the sugar. Serve at room temperature.
Next, some whisky jellies. Mix together 220g sugar and 15g pectin in a pan. Add 200ml lemon juice, 20g liquid glucose, 150ml whisky, a tablespoon of Angostura bitters and half a teaspoon of salt. Put on a low heat until all the ingredients are combined and dissolved. Increase the heat and when the mixture reaches exactly 118 degrees C add another 100ml whisky. Immediately pot into a small container, chill and let it set. Once set, cut into 2cm cubes and roll in caster sugar.
Enjoy and as ever have a great week.
On the Agenda:
Monday: Empire State Mfg.
Tuesday: Import Price Index; Retail Sales; Industrial Production; NAHB Housing Mkt Index.
Wednesday: Housing Starts and Building Permits.
Thursday: Initial Jobless Claims; Philly Fed.
Monday: German Wholesale Price Index.
Tuesday: French CPI; Italian CPI; German ZEW Survey.
Wednesday: Area Wide CPI.
Thursday: Dutch unemployment; Italian Trade Balance.
Friday: German PPI.
Monday: Rightmove House Prices.
Friday: GfK Consumer Confidence; Public Sector Net Borrowing
Wednesday: FOMC Meeting at 6pm GMT; Rates expected unchanged at 0.00%-0.25%.
Thursday: MPC rate decision at Noon GMT; Rate expected unchanged at 0.10%; APF expected unchanged at £875bn; Corporate Bond Buying expected unchanged at £20bn.