Watch out the lion in the grass

The risks rebounded significant in European and US hours,  continue to head north  now. I cannot join the market here given a near-term unknown unknown in the market.

The known unknown, those recognized uncertainties like fiscal cliff, doesn't kill. somehow the market would price it in along the way until it really comes out.

What kills is the unknown unknown, which is not commonly seen by the majority, under-estimated by the market. We call it "lion in the grass" as it is how lions disguise themselves and prey on some other poor little animals .

In the coming weekend, we will have the chance to see one of these events. On the 25th Nov, Catalonia, an autonomous community of Spain, will have the parliamentary election, which is widely taken as an independence referendum.

Bear in mind that if Catalonia, one of the few positive contributors to the fiscal book of the Kingdom of Spain, leaves their motherland, all the assumptions/forecasts made before about Spain's debt-to-GDP ratio, debt sustainability will need to re-do. What would be the market reaction?

Here it comes to the question: How likely will Catalonia choose to leave? I really don't know. But whenever I watch FC Barcelona Vs Real Madrid, it seems the desire for independence is for real...

Watch out this Spanish lion in the grass this weekend...

An update on the repeat theme of 2010 in 2012: A bearish view

In the article of 2012 is going to repeat 2010 dated Sep 14 2012, I set out the repeat theme for risks in the rest of the year.

Nearly two months on, the repeat theme has played out nicely with Hang Seng rising from there to the peak by around 10%. For those who made money out of this rise, it should be the time to re-evaluate whether or not it is still justified to hold on with the risks.

The election in the US yesterday was clear a bad sign with Democrats claiming the President and Senate while the Republicans got the lower house. This unchanged setting basically tells us that NO way we will have a full resolution in fiscal cliff on time.  The best case is muddling through with some sorts of half year extension in tax cut.

I am turning bearish here with the fact that uncertainties in the market are growing. Today we have the national congress in China, but my real concern is still in Europe. 

After the US presidential election on the 6^th, the National Congress in China on the 8^{th (}Today), the market will face the Eurozone finance ministers meeting on the 12^th and the Catalonian parliamentary election in Spain on the 25^th.

The Greek Prime Minister Antonis Samaras said that his government would run out of cash on the 16^th of this month if the Eurozone finance ministers couldn’t make the decision to release another tranche of aid during their meeting. The case for Greece has always been a game of brinkmanship and it may actually turn out to be fine. However, the market will need to deal with another European country further down the road. Catalonia, the autonomous community of Spain which has been trying to gain independence, will have the regional parliamentary election. The victory of any anti-Spain party would cast doubt on the fourth largest economy of the Eurozone. 

The updated chart from the repeat theme on Hang Seng hinting a peak in November looks scary too, doesn't it?

Source: Reuters, click to enlarge 

Now, having sold out all Hong Kong stocks , I would go long 2-month ATM call (costs around 2.2%)  and sell 2-month future on Hang Seng Index. The long ATM call is basically a "down side protection" to my bearishness here. And my break-even point would be any 2.2% drop in the index.

The real risks to this short-biased view is that new Chinese leaders after today, namely Xi and Li, somehow feel the the urge to do something to boost the economy. 

But the upside is that if there is no stimulus after the 18th National Congress, what the market has been expecting, building into the price in the past 2 months seems groundless and reversal is due to come.