Tuesday, May 31, 2011

IG16    90   -3/4
HY16  102 1/4  +1/4

SOVX  196  -5
MAIN   102 1/4   -2 1/4

Markets stronger across the board on rumors of a new Greek bailout.  Having said that, the market response seems reasonably muted.  SPX is only up 1% and SOVX only 5 tighter.  Either people are doubting the rumors (which seems unlikely) or people already expected some form of bailout and these rumors do nothing to truly fix the longer term problems.

Friday, May 27, 2011

G8 and the Long Weekend

Markets have rallied a little bit as we head into the G8 meetings.  It is likely that we will hear positive noise about global government co-ordination and support for economies.  That can lend a little support to the market, but is unlikely to do anything significant. 
Volatility is increasing as the intra-day swings are getting larger again even if the closing changes aren't very big.  Greece remains the big headline generator.  It looks like the issue will be pushed to the brink before everyone caves in and kicks the can down the road.  I think that 'brink' is still a couple of weeks away, so have a short bias for a bit.  More economic data due out.  The market has been resilient in the face of weak data, but that has gone hand in hand with increased QE3 chatter.


Sovx   198   unch
MAIN  103  unch

IG16     90.50  unch                          LQD   111.33
HY16    102.125  unch                     HYG      91.87

Wednesday, December 8, 2010

The "Tell"

For the past few months the stock market had been taking its cue from the FX market.  We think that this is about to change.  The FX "tell" has lasted a long time - longer than most - but it is too widely followed now and, with all the competitive devaluation, commodity inflation, final goods deflation, bailouts and EM currencies its ability to provide a clear road map is getting low.  We always transition from one driver to the next. LIBOR, Greek spreads, bank spreads, Baltic Dry, oil prices, Turkish lire - you name it and at one time or another the stock market was fixated on it.

We think that rates, both in the US and Germany, are likely to become the new drivers. Where can the safe countries fund themselves.  In a week, we'll probably be listening non stop to treasury price action on CNBC.  Right now it does not seem to be telling a positive story. Maybe it will become the next "tell" or maybe it will be something else, but blindly following FX moves is no longer the right strategy.

Are Long Dated Treasuries "Risk" Assets?

There was a brief moment yesterday where it felt like treasuries had been added to the "risk" asset class. They were dropping and dragged stocks down with them. Its all back to normal right now with futures up and bond prices down, but overnight, there was another spell where stocks and bonds were moving in tandem. It is an almost universally accepted investment thesis is that QE2, among other things, will push investors out of bonds into stocks. But, it seems like people are long bonds and stocks. Bonds to flip to the Fed via POMO, and stocks to hold as retail finally jumps on the bandwagon. Owning bonds to sell to the Fed has been an unmitigated disaster since the announcement. The old 10 year is down 5 points since QE2 was officially announced. That's almost 2 years of "income" with a 2 5/8% coupon.

It feels like yesterday's "compromise" on taxes and unemployment insurance actually spooked the market and for the first time added some element of "credit" to treasury yields. With the government clearly unwilling to make any tough decisions, the risk to the treasury market is growing. The Fed will buy, but normal people may not. We are in no risk of becoming a Spain or Italy any time soon, but I think we are drifting away from the safety Germany seems to provide. With the Fed, ECB, IMF, and government all trying to support global equity and credit markets, its hard to be short, but we need to carefully watch the performance of long dated treasuries. If they become a "risk" asset, we could see a very large move down in stocks as no one is set up for that trade. Even the economic bears are not set up for a sell-off in both. From a trading standpoint, I would trade off the moves in treasuries. The stock market is still very excited about the shift from bonds to stocks, heck, they are almost giddy with relief that its finally occurring. But so far, it is the professionals anticipating this move rather than an actual shift to stocks, and it will take the stock market a few hours or days to catch up. The price action on the open seems to suggest shorting stocks right now.

Tuesday, November 30, 2010

If You Kick a Can Down the Road Long Enough...

If you kick a can down the road long enough you will eventually reach an intersection or a dead end. We can't help but picture a child kicking a can down a quaint dirt road. Its a peaceful and bucolic. Now, that same kid but caught in an intersection, and not just any intersection, but of two 4-lane roads during rush hour with no traffic lights! Melodramatic imagery aside, the attempt to bailout Ireland has thrown these two concepts into the spotlight.

First and foremost is the contagion risk. This is not new. We saw it with U.S. banks and have been fighting it on the sovereign side for the past 9 months. PIIGS is at risk of becoming BIG PIGS.  Not only have the spotlights refocused on Spain and Portugal, but Italy and even Belgium are gaining some notoriety. "G" is in twice since Greece is already back renegotiating their prior bailout. But at this rate, the "G" could eventually become Germany as it continues to take on the obligations of other countries.

Second is that for the first time we have a recipient that does not seem to want the bailout. Ireland seems extremely reluctant to take the money. There is a real movement growing to just take the pain. Perhaps their anger at bankers may be clouding their judgement and making this option appear better than it is, but it is the right option. The austerity plan is more of a fiction than our New Year's resolutions.  Sure, they sound great, but what is the realistic chance of any of this occurring?  ZERO!  So the recipients are becoming more reluctant to live with the consequences of bailouts and are starting to seriously contemplate just dealing with it now.  Since politicians have finite terms in office maybe some of them are more willing to deal with it than corporate CEOs who have huge upside from kicking the can down the road.

This is an interesting development to watch.  We would imagine that at least some politicians in Greece are contemplating ditching the whole plan and scoring major populist points. And the countries providing the bailouts are also getting tired, and possibly scared. Germany, in particular, seems to be realizing that one possible end game is that all the bailouts will eventually drag them down. They are caught in a dangerous situation. They have played the "loaded bazooka" game to make the capital markets blink and lend to the weaker countries. Well, the capital markets have done their work and realized it is not safe to lend to some of these countries. Now Germany is trying to figure out how to make people lend money without having to take risk themselves. Very tricky and unlikely to work out.

As the street realizes that the big countries do not really want to bailout the little ones, we will see continued pressure on sovereign debt. We are still amazed that the U.S. contribution to the bailout has not hit the mainstream news.  The media has dubbed this a European Debt Crisis. Really, this is just the continuation of the debt crisis that started in the U.S. Too many people borrowed too much money. Everyone relied on either income or assets appreciating to repay the debt, or at worst that someone would just roll the debt over at maturity. It started with U.S. subprime borrowers. It has worked its way up to prime borrowers, smaller banks (the number of FDIC takeovers continues to grow) and weaker countries. It had hit big banks but that seemed to have been resolved. Its starting to hit bigger countries - Spain and Ireland. There is some concern it is starting to hit municipalities.

What scares us more than anything, is that the problem of borrowing too much spreads beyond those currently mentioned. Can France, or Germany, or even the U.S., run into trouble? Not likely right now, but it would be foolish and arrogant for those countries to proceed as though they are immune from the consequences of too much debt and not enough income. The mantra of decoupling is coming through loud and clear. Every stock bull is mentioning the good economic data. This week has a lot of economic releases. IF the economic data does not come in strong, the market seems very susceptible to a sell-off. It seems to me that most people are back to being long, have bought the recent dip, and are buying into the argument that European debt issues will be contained. We think its unlikely that they remain contained and that if we are right and the market is long, we are due for a continued pull back. GM stock continues to hold the issue price. It has come close to breaking it a few times, and that would probably put some additional pressure on the market. MUB was weak again. LQD was okay, but not strong and shares outstanding continue to trend lower. Recent new issues are well offered. Always a telling sign is when it gets hard to move recent new issues. Too many flippers and not enough real long term holders. Whenever it gets difficult to trade recent new issues, the market has sold off as people eventually start the cycle of buying CDS, buying index, and hitting "throwaway" bids on bonds. There is enough data out there that we could rally, but away from that, its getting hard to see what takes the market higher/better in the near term as the government bailout game seems almost over.

Wednesday, November 24, 2010

Mixed Bag of Economic Releases and News

Certainly initial jobless claims number looks good.  Last week's good number was only revised a little higher (will one ever be revised lower?).  We also continue to question the view that numbers below 450k are indicative of growth.  We remain convinced that the combination of a smaller work force, and a massive structural shift in employment to part-time and consultants means that companies will have fewer people to lay off.  Also, as this crisis has continued, we question whether people are getting let go but don't qualify to apply for unemployment benefits.  Anyway, for now, it is clearly a good sign, although not as good as people would have you believe, and somewhat understandable coming into the holiday shopping season.

Is it just us, or does opening at midnight for $5 barbies, and 3 a.m. openings across the board seem insane? Playing the fiddle while Rome burns down somehow comes to mind. The rest of the data seemed disappointing.  The situation in Europe remains fluid.  It looks like Ireland will get its money.  Even though the credit markets will quickly shift its attention to Portugal and Spain, the equities and corporate bond markets seem stable.  Maybe it is the end of contagion, but if Spain really does come into play, the slippery slope may not end there.  Concern could spread to Italy. Not just because of Italy's existing problems but also because that they will have bought or guaranteed so much other debt.  It feels like the market is pricing in Portugal, but not Spain. If Spain does step up to borrow money from ECB/IMF/you and me, the markets will react very negatively. It is just too big relative to the "bailout" facilities. 

Korea and China seem calm.  Maybe this is a chance for Obama to play peacemaker and win another Nobel Peace Prize.  On other continued themes, GM looks like it could break $33 today which would not be good, and LQD continues to see shares outstanding decrease. As does TLT and JNK. So seeing evidence of retail investors pulling out of longer dated treasuries, investment grade corporates (~20% financials), and the weaker end of the high yield market (JNK). The fact that HYG shares continue to be stable may mean that JNK is being affected by GM or something and not a sign of investors pulling out. Somewhat surprisingly to me, MUB shares have not been reduced.  Either investors aren't pulling out, or dealers are more scared to own the actual bonds than the shares so they haven't redeemed inventory.

Should be a quiet day. It wouldn't surprise us to see a modestly higher day in the U.S. as people want to be long for the bailout. I would trade that position in futures as it may not last until Friday. A very wise trader once mentioned a few years ago that weakness into long weekends or the thanksgiving holiday is a very bad sign. Good luck and Happy Thanksgiving.