Housekeeping, the Week Ahead and Kyle Bass

Behind the light flow of blog posts last week, JF Capital has been restructuring ahead of 2012.

Read on for more details, our take on what is likely to be a defining week for the EZ and an alarmingly insightful feature-length discussion involving Hayman Capital's Kyle Bass.

Housekeeping: Pay-downs and 2012

Given the volatile nature of markets over the past few months, conditions have been perfect for swing positions. We rarely entertain long term bias at JF and continue to trade the markets day-to-day week-to-week, holding relatively few positions over the longer term.

This strategy catalyses our continued outperformance of risk assets.

With this in mind, and with political shocks ever frequent, the board has decided to pay down the most recent round of investment, returning, on average 9.8% to investors. The majority of this substantial release was returned as a result of our contrarian short position toward the end of October.

Going forward, fund raising continues into 2012. As of Jan 1 2012, we reset the scoreboard, reevaluate open positions and drive to replicate our value strategy into a year that will provide little respite for the traditional long-only investor.

The Week Ahead

"This week, the stable future of the euro and thus the economic recovery in Europe and employment are at stake," EU Economic and Monetary Affairs Commissioner Olli Rehn told Reuters. "This calls for a convincing package of measures from the European Council (summit)."

On Friday, our heads-of-state take another bite at the cherry. The Dec 9th summit looks set to disappoint the market, buoyed up by recent Fed action in the swap market. Indeed, risk-assets are at levels similar to those that provided our short entry at the beginning of November.

EZ (Eurozone) sovereigns only experienced modest yield improvements last week and structural mismatches still haven't been tackled. The multi faceted swap agreement last week is likely to prop up the European banking system temporarily, but it does little for sovereigns, especially since the relevant banking authorities have instructed banks to de-lever, directly shrinking bank demand for local bond issues. 

So we expect a pull back in equities, further Dollar strength and a renewed enthusiasm in the fundamentals from the media (the numbers are awful - there's no escaping it).

2-10 Year View

Kyle Bass sums up our view eloquently and succinctly, even if we do differ over Japan.