1. February 17th 2012
Fasanara Capital | Investment Outlook Weekly
Investment Outlook
This time around, maybe for the last time, we expect the ECB and German paymasters to be
trying everything they can not to spoil the early signs of improving market sentiment and
stabilization of financial conditions, by coming to an agreement on Greece, one way (PSI) or
another (ECB bond swap). Although we are cautious about second-guessing policymakers in
this market, our sense is that a patch-work solution will be found in the short-term to
avoid a disorderly default of Greece at a time where (i) Portugal would be following blindly,
(ii) Italy and Spain do not look stable enough yet in the eyes of European policy setters, who
are pretending that the German solution works there (spreads have compressed, yes, but
not enough to withstand a Greek event), and (iii) most importantly, the second LTRO is in
the doings, expanded to accept most securities as eligible collateral so as to make it a real
bazooka of liquidity, and it would be unwise to jeopardize such effort right at the outset.
Our view for the longer-term is unaffected, and we remain bearish. We simply do not
believe the timing is imminently right for a setback of the liquidity-driven rally of risky
assets. For these reasons, we would think it is risky to go against the massive incremental
monetary stimulus expected at month-end (possibly a total of 1trn+ by then): it is hard to
imagine that such powerful steroids will not affect asset valuations.
Sometimes after the LTRO is done and dusted, our undivided attention will be devoted to
spot signs of a reversal, as we anticipate the economic fundamentals to eventually prevail
on liquidity provisions. Few arguments are worth mentioning to this point. (i) European
issues are structural, long-overdue, and our take is that they are being treated with the
wrong medicine of more new debt thrown at old unsustainable debt (even after a successful
PSI Greece will bear an unsustainable 120% debt to GDP ratio by 2020). Too much emphasis
is put on short-term monetary stimulus in an attempt to overshadow depressive fiscal
policies, with the result of reducing the risk of immediate tail events in the Eurozone, but

2. failing to restore growth and setting the stage for actually lower output and a multi-year
period of internal devaluation amongst peripheral countries - which actually viciously
increases the tail risks themselves in the medium term. (ii) Confidence is a fragile decaying
capital. If the ECB implements its debt exchange, thus avoiding CACs (Collective Action
Clauses), it is de facto making others bondholders subordinated: just another bad
precedent to have and one which should somehow demotivate even the most optimistic
natural private holders of peripheral sovereign paper (iii) The risk of a renewed credit
crunch is wide open in the medium-term, as the money multiplier has collapsed and most
money aggregates are contracting. The ECB survey published last week showed disturbing
signs of tightening credit standards, in particular for certain loans (to non-financial firms), in
particular for certain countries (Italy). Credit in Europe is currently recorded as contracting
more – in relative terms to output – than during the months following Lehman default.
(iv) The strength of the Euro does not help either, in restoring Europe’s competitiveness
through external devaluation (nominal depreciation of the value of the Euro). But the
dangerous positive correlation to the balance sheet of the ECB (interpreted by market
participant as removing imminent tail risks) prevents its most needed quick depreciation.
All the while, we like to derive three conclusions from this macro backdrop when it comes
to investment opportunities: (i) Public markets crowding out private markets will mean
trouble in the corporate world for weaker balance sheets, (ii) in particular the Refinery
Industry is at risk of a retrenching banking industry, coupled with the risk of higher oil prices
(and compressing crack spreads) in the short-term, fuelled by rising Middle Eastern tensions
(this week attack on Israeli embassies is a reminder), (iii) in particular the Shipping Industry
(especially on dry bulks) is at risk of a retrenching banking industry, coupled with the
unmissable much slower Imports in China underway (last month saw a 15.3% year-on-year
fall, more than $37bn), (iv) the more sustained the market is or the more it elevates further,
the better it is for the establishment of Fat Tail Risk Hedging Programs – see below.

3. Opportunity Set
Meanwhile, whilst we await to see the market’s temperature after the second round of
LTRO, levels have improved to a level where it is made easier and cheaper to hedge
against certain negative scenarios, both through Select Shorts or Cheap Hedges (Fat Tail
Risk Hedging Programs - more in the February Outlook). The scenarios that may be targeted,
at different probabilities (for how low they may be) and costs, range from (i) Renewed
Sovereign woes, (ii) renewed Credit Crunch and stress in the Banking industry/HY/Lev Loans,
(iii) Default Scenario (sequential failures and exit from EU of certain countries), (iv) Inflation
Scenario (as a result of monetary expansion getting out of control, or even Defaults and
derailing fiscal train wreck), (v) China hard landing. Such scenarios have still low probability,
all of them, in absolute terms, but such probability was never higher than it is today.
Our investment philosophy is not to change delta from positive to negative at every turn of
the market, but rather to have a balanced investment portfolio, where we (i) position
ourselves on what we believe are the safest asset classes/capital structures (strong cash-
flow generative companies, from countries who still dispose of a domestic currency,
preferably senior positions or collateralised positions), until the market emerge from its
direction-less status and the sky at the horizon is clearer, whilst simultaneously (ii)
equipping ourselves with the cheapest hedging programs available, at various points in
time, which are reasonably expected to let us endure as large a number of negative
scenarios as we can expense.
What I liked this week
50bn Greek bond swap by the ECB: two reasons More ..
David Rosenberg - "Let's Get Real - Risks Are Looming Big Time More ..
Trasfer of resouces to peripheral Europe. The new LTRO will boost TARGET2 imbalances -
Bank of Italy example More ..
Greek bond accounting, encore encore encore More ..
109 banks on review for possible downgrade into “non-investment grade” by Moody’s: it
may force selling and artificially distort prices of such obligations. More ..

4. W-End Readings
BIS Working Paper. Central banks are increasingly seen as all-powerful, without any limit.
The trend towards unlimited intervention combined with ultra-low interest rates does
have potentially serious side effects on the functioning of the market economy. Three
major risks: financial dominance, exchange rate dominance and fiscal dominance; and the
ultimate possible consequence is an inflation surprise. More ..
For the ECB, a French (history) lesson from the 1920s. Don’t cook your books. More ..
Hedge funds faulted for not being short-term enough More ..
Visualizing The True Cost Of War, in a series of simple, easy to understand charts More ..
Danny Hillis outlines an intriguing theory of how and why technological change seems to be
accelerating, by linking it to the very evolution of life itself. Video ..
Francesco Filia
CEO & CIO of Fasanara Capital ltd
Mobile: +44 7715420001
E-Mail: francesco.filia@fasanara.com
16 Berkeley Street, London, W1J 8DZ, London
Authorised and Regulated by the Financial Services Authority

5. “This document has been issued by Fasanara Capital Limited, which is authorised and regulated by the
Financial Services Authority. The information in this document does not constitute, or form part of, any offer to
sell or issue, or any offer to purchase or subscribe for shares, nor shall this document or any part of it or the fact
of its distribution form the basis of or be relied on in connection with any contract. Interests in any investment
funds managed by New Co will be offered and sold only pursuant to the prospectus [offering memorandum]
relating to such funds. An investment in any Fasanara Capital Limited investment fund carries a high degree of
risk and is not suitable for retail investors.] Fasanara Capital Limited has not taken any steps to ensure that the
securities referred to in this document are suitable for any particular investor and no assurance can be given
that the stated investment objectives will be achieved. Fasanara Capital Limited may, to the extent permitted
by law, act upon or use the information or opinions presented herein, or the research or analysis on which it is
based, before the material is published. Fasanara Capital Limited [and its] personnel may have, or have had,
investments in these securities. The law may restrict distribution of this document in certain jurisdictions,
therefore, persons into whose possession this document comes should inform themselves about and observe
any such restrictions.”