Buzz on the Street: Investors Prepare for Fed Announcement After Volatile Week
A look back at the happenings on Wall Street this week, as seen by Minyanville's Buzz & Banter.
Here is a small sampling of this week's activity in the Buzz.
Monday, June 10, 2013
Is the Home Price Increase From New Mortgages?
We'll be doing some work over the coming days to figure out where the real gain in household net worth is coming from, but I came up with what I think is a very cool and telling chart about the drivers behind the boom in real estate.
Lately, there has been a number of articles about how bids are heating up for homes and anecdotally that has been the case for about 9 months now. Also, a large number of articles have pointed towards private equity as the marginal buyer for homes. Below is a chart that hopefully puts that idea to bed.
On the top panel is real-estate loans as a percentage of total bank credit (residential only) vs the S&P/Case-Shiller unadjusted home price index. The second panel has the bank credit and real-estate loans broken down.
So this translates into a decline of $288.5b in real estate loans while overall bank credit has risen by $805.5b, and recently home prices have risen. The large driver behind bank credit has not been consumer loans or new mortgages, but commercial & industrial (C&I) loans, which have taken off after bottoming in the 1Q 2010.
Admittedly, there are a few holes in this chart. Home purchases could be done through all cash payments or through non-commercial bank loans (small, but possible). Private equity firms could be using non-bank credit lines, also small, but possible. Lastly, it's also good to look at home prices in the context of remaining home inventory.
The second chart shows existing homes on the market, which reached a 14-year bottom in the first quarter, suggesting distressed sellers may have been taken out of the market.
Bottom line, I think we'd be wary to point towards the individual home buyer as the driver of gains in the real-estate market over the last few years. More so, it's been private equity or corporate buyers, as referenced by the large decline in inventory. The takeaway is that we're extended, but at the same time have a lot more upside, because the individual buyer has yet to stop renting and return to the market.
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My old ugly/expensive friend Biogen Idec Inc. (NASDAQ:BIIB) is getting rejected by the old uptrend. This is one of my favorite trades and I think we can easily see the 50 break down on this one now. I am now shorting this stock again with a target of around 200 or so.
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Credit for Everyone!
The credit markets have been a little shaky lately to say the least, particularly in the junk world where things seem to go topsy-turvy every couple of days. And then there's what may be a real unwind of the long Treasury trade as rates continue to creep up.
So I think now is an interesting time to see advances in credit market structure:
1. The industry just cleared its first single-name CDS, with ICE clearing a trade brokered through Barclays for Citadel. This is being hailed as an important development as it will allow portfolio margin netting, and increase liquidity while reducing systemic risk.
2. Last week, ProShares filed to register 8 different CDS-based ETFs
3. ICE is launching CDS index futures on June 17, another example of OTC products being moved on to normal exchanges that should bring wider credit-market participation.
Now, the folks behind all these initiatives are making a big deal out of how they're all good for the market, and how they'll help folks comply with Dodd-Frank and increase market liquidity and help people manager risk.
They may have the best of intentions, but I'm not sure that greater availability of these types of products is necessarily a good thing.
Like with leveraged and other exotic ETFs we'll see an increased number of people masquerading as macro mavens, trading arcane products that they barely understand.
And secondly, the timing just feels weird -- all this stuff is coming to market exactly when credit appears to be under stress after a long bull run.
Tuesday, June 11, 2013
Good morning. Given how equity futures are trading it's no great shocker that the credit/credit derivatives complex is a mess this morning. PIIGS bonds and CDS are ripping higher; 2-year swaps are gaining a footing in the 19bps handle; even CDS of large US financials are somewhat wider. And the elephant in the room is the long end of Treasuries. At 139-10 the 30-year is now firmly below weekly TDST Level Down (139-30), and the next and last stop before things could get unruly is the weekly TD Prop Exhaustion Down target at 138-13.
Yesterday's new corporate issuance was again minimal as it's becoming apparent that buyers are taking a hiatus as they wait for higher rates.
It's the day before "judgment day" as the German Constitutional Court will hold hearings tomorrow on the legality of the European Central Bank's "outright monetary transactions" (OMT) program. The OMT is a program designed to give the European Central Bank (ECB) the ability to purchase government bonds as a "backstop" against higher interest rates. Surprisingly, the ECB has yet to actually engage in OMT. Despite that, it is none other than the ECB's President, Mario Draghi, who states, "OMT has brought stability, not only to the markets in Europe, but also to the markets worldwide." Still, while our markets are currently not paying much attention to the Euro Zone, I think there should be concern over what damage said hearings might do. Indeed, in past missives I have targeted June 11/12th as a potential "pivot point" for some downside action that I thought would be contained leading to higher highs into the end of the quarter. Accordingly, this week shapes up as an important week to see if we will extend higher into the first part of July, or if we will "fail" into quarter's end leading to this year's first meaningful decline. As of yesterday, the jury remains "out."
One arena where the jury remains "in" is household net worth, which rose by $3 trillion in 1Q13 to a record $70.3 trillion. Obviously that increase reflects the rise in the value of financial, and real estate, assets. Yet, those gains are NOT evenly distributed among participants. Such uneven distributions seem to be getting attention from the Federal Reserve. Moreover, the Fed governors seem surprised long-term interest rates have risen so rapidly. That rise is not justified by the economic outlook. Inflation is trending low. With the improving near-term federal budget outlook, the Treasury is borrowing less than expected. None of this suggests upward pressure on L-T interest rates. Yet, yesterday the 10-year T'note tagged another new reaction high of 2.231% as its yield broke out to the upside in the charts (see chart). The result left the S&P 500 (INDEXSP:.INX) (SPX/1642.81) in a sideways session, but it could have sent the SPX back to the downside if this was the start of the decline I have been expecting to commence in mid-July. Nevertheless, there are more energy signals targeting a retreat in prices perhaps until the end of this week, but the "tea leaves" are confusing since the SPX has had a massive upside move. This morning, however, it is not Germany that is spooking markets, but Japan as the Bank of Japan decided not to follow up on its $1.4 trillion stimulus program leaving the yen sharply higher and world markets sharply lower. The support zone for the SPX lies between ~1608 (its 50-DMA) and last Thursday's intraday low ~1598.
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It All Comes Down to Prepayment Speeds on Mortgage Pools
There is a lot of chatter about convexity hedging from the mortgage market, much of it wrong.
It is on a pool or portfolio basis, not individual mortgages.
As rates rise, the speed of prepayment slows. So if at 2% you're expected a certain pace of prepayments (or refinancings), then at 2.5% you expect less prepayment. It is the lower prepayment assumptions that effectively extend the pool/portfolio.
For the mortgage investors trying to maintain it as a spread product, they have to hedge and extend the duration of the hedge. Yield investors may reclassify the maturity bucket, forcing them to rebalance other yield product holdings (selling longer bonds to possibly buy shorter-dated bonds)
There are many other factors that affect prepayment speed assumptions, but rates are the one people are focused on.
One thing to remember is that this convexity goes both ways.
Wednesday, June 12, 2013
S&P e-mini Update
S&P e-mini holds the critical 1620.75 level so far. If that should break, we would get a quick run to confluence of the June 6 naked VPOC and weekly S1 at 1608 (see chart below). Bulls regain control on a close above 1639. Upper resistance is at 1645.50. For now, we are chopping around the grey zone between 1620.75 and 1639. Sentiment has finally gotten a bit negative, with equity put call jumping up to the highest level since April at 0.81. This could help bulls mount a rally at some point.
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S&P 1624 breaks, and some sell-stops kick in; I've used this move to peel out of another 10% exposure, which reduces my SPDR S&P 500 ETF (NYSEARCA:SPY) short to 50% of a full position (I came in with 60%, added 10% on the opening lift, punted that overage into the dip, and now I'm 10% "out" on the session, which sounds about right given we're 20 handles lower than where risk was added yesterday, at S&P 1639).
Market breadth is 2.5:1 negative and the banks are (again) under-performing to the downside, so we'll see how the tape acts/reacts once the sell-stops clear. I still sense S&P 1600 as an intuitive first stop but I've been wrong before, hence the disciplined process of "trading around" a bias with a defined risk stop.
Yearning for Yen?
Keep an eye on USD/JPY as the strengthening continues in the Japanese currency, which currently attempting a breakout above resistance. Anecdotal reports target the unwinding of carry trades by hedge funds, most of which are thought to be European. After Europe closed today, the Japanese Yen surged once again, perhaps suggesting major money center treasury departments had been pressuring the currency on behalf of their clientele.
This trade was put on and added to in massive amounts over the previous weeks and will take some time to fully unwind should strengthening continue (which is likely due to near-record level speculative short positioning). A look at the chart says another nasty 2% - 3% move could be taking shape. I am short USD/JPY at 96 and looking to cover between 92-93. Keep in mind that USD/YEN has been trading eerily in tandem with both the S&P and Dow Jones Industrial Average (INDEXDJX:.DJI). Good luck out there!
Thursday, June 13, 2013
Quick Comments On Latest Short Interest Data
Short interest numbers for the NYSE have been reported for the period of settlement date May 31. They have decreased to 13,442,785,071 from 13,489,929,546 shares (revised) for a decrease of 47,144,475 shares. This is a drop of 1,528 advancers and 1,970 decliners, and we've seen more advancers than decliners in 44 of the last 87 initial reporting periods.
NYSE and Nasdaq (INDEXNASDAQ:.IXIC) had risen the last six of nine reporting periods but not across the board over the last three months.
During this period on a trade date basis (5/10 to 5/28) the S&P 500 rose by 1.61%. The conclusion is shorts held to their positions with some small covering in front of a pretty decent move to the upside. The next short interest collection covers from 5/28 through 6/11, which is yesterday and the S&P 500 fell by -2.04%. It will be interesting to see if shorts pressed the weakness.
Short interest numbers for NASDAQ are reported for the period of settlement date May 31. Short interest numbers have decreased to 7,488,661,708 from 7,573,777,549 shares for a decrease of 85,115,841 shares or -1.12%. There were 969 increases and 1,505 decreases. In the last 87 reporting periods, the Nasdaq has seen more advancers than decliners in 46 of the 87 last reporting periods.
What Honey Badgers Care About
For several months now, I have been calling this the honey badger stock market, which has completely ignored negative economic news and concerns over deflationary pressures, which have been building since the end of January. On Twitter last night, many were freaking out about Japan, but I continued warning that it is risky to get too bearish here. Why? Because what the honey badger cares about now is the oversold nature of emerging market stocks and Treasuries. We could be re-entering a period of rising bonds and rising stocks, given that both have been beaten down on QE tapering talk. Next week's Fed meeting could result in a reversal by Bernanke and a near-term end of its Confuse and Conquer strategy. There is no way they are willing to risk their precious wealth effect. That's good for stocks and bonds, as it calms concerns over the speed with which bond yields rise.
Options Trade: Cliffs Natural Resources
Please welcome Minyanville contributor Andrew Keene to the Buzz.
When taking a look at the charts for Cliffs Natural Resources Inc (NYSE:CLF), it is to be noted that the stock has been on a bearish trend for quite sometime now, since early April to be exact. With the current drops, CLF currently has a 9-day moving average of 18.26 and a 52-day moving average of 20.48; down from it’s early of the year mark of 38.08.
Thus far in 2013, Cliffs Natural Resources has had a very rough year with share prices down nearly 55%. With these dropping commodity prices and their huge load of debt obtained through acquisitions, there has certainly been some weight put on the company.
With recent delays in Cliffs’ huge chromite-mining project (costing $3.3 billion) in northwestern Ontario, it leaves many wondering why they wanted to start the project in the first place. It was far from understandable that Cliffs would be able to restart the project due to the low iron ore prices, pressuring its prices to go elsewhere. According to Daniel Rohr, a Morningstar analyst, he says, “It is hard to see why Cliffs would undertake a project of this magnitude when its core business, the source of all its cash flow, is withering.”
Using the ATM Straddle, I can get a Measured Move Target, one to the Upside and one to the downside, Lets Check this out.
CLF is currently trading $18.30, I am Bearish, but not extremely Bearish. The June 18.5 Straddle is $1.30 implying the stock can move to:
Upside: $18.50 + $1.30= $19.80
Downside: $18.50 - $1.30= $17.20
My Trade: Buying the CLF June 18-17-16 Put Butterfly for $.20 debit - same as: Buying the June 18-17 Bear Put Spread and Selling Bull 17-16 Put Spread
Risk: $20 per 1 lot
Reward: $80 per 1 lot
Reward to Risk: 4-1
Breakeven: $16.20 and $17.80
Greeks of this Trade:
Friday, June 14, 2013
Get your FOMC statement here.... read all about it!! That would have been your first reaction to the Hilsenrath article yesterday that said the Fed was unlikely to make the moves the market was implying at next Wednesday's FOMC meeting, especially given the recent data trends. The Fed may be looking to taper or talk down markets, but it's not due to data, that's for sure.
If there's one thing you can take away from the last three weeks of activity in the Treasury market... the flow of purchases from the Fed has absolutely zero effect on the movement of rates both up and down. All about expectations.
TIPS doing great this morning across all points on the curve. This is a major point that should be made. The whole way down TIPS led the selloff, which is the inverse of what you'd normally expect. If that logic, which took over for the past three weeks, is any guide, these should be a tailwind for Treasuries if they head higher, rather than in normal times where they would underperform. We irrationally sold off, erasing all of the inflation expectations built in from QE3 and QE2, and now we'll probably irrationally revert back to the old area. Just saying. I'm not playing this trade, but a 1.5x TIP long vs TLT short would be a good trade to take advantage of this widening in breakeven rates over the next two weeks.
With Tuesday's trend ending day in Treasuries looking solid (as Prof Zucchi and I both pointed out, Prof Cooper also offered the "other side" of that move with the possible reversal of a reversal) it's looking like we see higher prices from here. I prefer 5's 7's or 10's on the way up (FV or TY future, IEF ETF) and think 30's will underperform (US or WN future, TLT ETF) so a bullish steepener with 2.5x/1 or 3x/1 positioning could be in order. Though, I'm sure I'm not the only person on the planet thinking about that kind of trade so keep that in mind.
Given the now confirmation of positively trending PPI data from the month of May, this should translate into better CPI figures in June. Additionally, I think manufacturing will turn up in June and should be a drag on any Treasury rallies as growth expectations improve.
I've been beating the negative repo horse a lot, and to prove that I'm not crazy, repo fails to deliver for the 10-year in the week ending June 5th rose to $33.5b from $468m the week prior. The thinking was that the $21b re-opening of 10-years on Wednesday would help the supply issue, but at the best unless we see shorts cover or more longs added, it's not going to be until next month that it works itself out. Also, if you are short UST's, be wary of a Fed/Treasury notice to large holders to report position sizes now that they've seen the market disruptions, and it should cause a covering rally.
On the equity side, be aware that the S&P e-mini (ES) contract started rolling yesterday from the June to September contract. And it kind of seems like the irrationality of bonds and stocks going up together has returned.
Closed end bond funds doing better again today and I added and brought my credit position to full (along with a full muni position). Not looking so much for beta gains here, but discounts of 5%-8% to NAV and 4%-6% vs historical NAV is appetizing for me. My time horizon for these investments is three months and then I will reassess.
T-Rex In The Ointment
Bullishly, the S&P left an outside up day on Thursday as, remarkably, the index carved out the FIRST turndown in the 3-Day Chart in 2013.
In other words, yesterday was the first time the S&P showed 3 consecutive lower intraday lows this year.
When the index went ‘into the position’ early Thursday morning, it didn’t stay there long -- the ensuing rally left an outside up day.
All systems go, right?
The T-Rex in the ointment may be that now the S&P has carved out the first Minus One/Plus Two sell setup in 2013.
This is because the 3-day chart is pointing down and the index has 2 consecutive higher daily highs (the + 2 part of the strategy).This occurred because yesterday two-plotted, meaning the outside day up was the first higher daily high (following the turn down on the 3-Day Chart in the morning) and this morning shows a higher intraday high than Thursday.
In addition, the Minus One/Plus Two sell pattern is a potential Holy Grail sell as it is occurring on a test of the overhead 20-day moving average.
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Eyes of the World
I was supposed to hit PT today at 1 p.m. -- their last appointment on a Friday -- but I blew that off to ride the tide with ye faithful through the end of the week. And by "blew that off," I mean that I'll do solo PT after the market closes today; as I've said in the past, I'm "on the program," which means PT every day, without fail.
Some top-line observations:
As go the piggies, so goes the poke; the banks were my catalyst to add to my short SPY position this morning and they've led the tape lower (KBW Bank Index (INDEXDJX:BKX) -1.6% vs. S&P -.6%).
Market breadth on the big board is 16:13 (negative) while the Nazz is 2:1 negative.
Does anyone else find it nuts that we're already bumping up against the 4th of July?
I'm offering another 5% of my SPY December put position out there, as a function of discipline. (I'm currently at 65%, after adding 25% this morning and peeling out of 10% into the slippage, not including this current offer). Aaannd just got lifted on that offer.
Remember "The Fed only only has so many bullets and the last one will be pointed inward?" I wonder what will happen if Big Ben is dovish next week and the market doesn't care? I have no edge here; just thinking out loud. I think it's safe to assume Mr. Bernanke will be a dove.
Those trend channels are nutty, eh? Through objective eyes, competing patterns typically resolve in the direction of the larger pattern (in this case, higher) but I'll trade 'em in the band until they stop working.
Goldman Sachs Group Inc (NYSE:GS). LOD (Low of Day)
In a perfect world, I'll be IN-N-OUT on my intraday exposure as I trade around my defined risk core. The world is far from perfect, so we'll trade 'em as a function of time and price.
Thank you; seriously. That goes to the team (Michael, Michael & the squad), and those of you who spend your sessions with us. What a long strange trip it's been!
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