Buzz on the Street: Shootout at the Monetary Corral
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 17, 2013
All Eyes on the Fed
This week is starting off nicely. The Nikkei 225 (INDEXNIKKEI:NI225) rallied nicely spurring a rally across global stock markets. What is most important in our opinion is the strength of treasuries.
The 10 year treasury is pushing towards 2.10%. Some might argue that stocks are doing well "in spite of" the move in treasuries, but we remain firmly convinced that treasury strength is crucial for stock market strength here.
We saw Thursday as a make or break point for the markets and turned neutral and Friday we became bullish as we saw that Ben has our backs.
Credit Markets Should Outperform
While we see support for treasuries as crucial for all markets we are looking for credit markets to outperform.
We finally started to see positive flows into the big fixed income ETF's and assume that mutual funds started to see the same.
CDS has the all important roll coming up which should offer some further support for that market.
Dividend Stocks Remain Our Weak Link
We think that the "cascading yield sell-off" is over for now. Whether that lasts a day or a week is largely dependent on the Fed, but we see dividend stocks as a particularly weak link in the market right now. They remain a crowded long that investors chased into, that just don't look that attractive under most scenarios as credit is looking cheap on the one side and growth is compelling on the other side.
I Prefer Shark Week to Fed Week
I would rather be watching "Shark Week" but this week we are stuck with a focus on the Fed. Wednesday's FOMC decision and press conference should provide some clarity over the Fed's intention. We expect commitment to 0% Fed Funds for some time to come, but an attempt to reduce actual QE purchases sooner than later.
The size of purchases never seemed to be meant to be as explicitly tied to the economic data as the fed funds rate was. Also, whether the Fed will admit it publicly or not, there are growing signs that they are nervous that both their treasury purchases and their mortgage purchases have started to distort the markets more than it is worth.
We will be sending out our in depth analysis on what we see as likely to occur. We also need to decipher how the market will react, but we think that finally more investors are realizing that tapering is as bad or worse for stocks as it is for bonds anyways, which is a relatively new dynamic for the market.
ICE CDX Futures Begin Trading Today
We are watching this development closely (CWIU3 on Bloomberg). We published our guide to trading the futures on Friday. It will be interesting to see if volume grows but in the very near term we are looking for some pricing anomalies that could be traded profitably as the market determines the appropriate value of a "When Issued" portfolio of CDS.
Context on Housing Recovery
I wanted to give some context to the housing recovery and mortgage rates. The NAHB housing market index rose to a seven-year high this morning as real rates (TIPS rates) go back into positive. If the housing market recovery was predicated on negative real rates because of artificially low rates, and they are no longer negative, it doesn't paint a pretty picture.
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Biotech Says "Be Careful!"
Hoofy's certainly got the mojo this morning given the liftage in the major market averages. You have to respect that, as Todd's been writing about this morning.
I'd be careful not to get carried away, though. I've got a fair amount of red on my screen in biotech land, and rarely will the major averages continue with their jiggy ways when biotech is red. There are some reasons why biotech might be red on its own (index rebalancing and sector seasonality), which is why the relationship between biotech and the major averages is not perfect.
Just providing Minyans with one more set of eyes on this whippy, trippy market.
Tuesday, June 18, 2013
Good morning -- fairly quiet on the credit front after a decent day of new corporate bond issuance. Buyers came back for two large issues, $6 billion by Chevron Corporation (NYSE:CVX) and $1.55 billion by Ingersoll-Rand PLC (NYSE:IR). And with a few more smaller sellers, they walked away with $8.875 billion worth of bonds. High-yield spreads tightened a little as well, despite yet another lousy day for Treasuries.
PIIGS bonds and CDS are a little wider this morning, large US financials' CDS are a tad better and the 2-year swaps are trading between 15.75 and 17.5bps. The latter's level is fine, but there's a lot of jumping around there, which in and of itself is a sign of a bit of jitters.
The sore thumb this morning is the US CDS which has risen from 27.5bps to 30.5 bps. Not sure if it has to do with pre-Fed positioning or what, but if it is more than a couple of days thing it would mark a "change of character", even though the absolute spread is still near all time tights.
Long-term Treasuries, which after a rally in spite of the horrible 30-year auction, appear to be snatching defeat from the jaws of victory. Daily TD Ref Close Down for today sits at 138-24 (Sept contract), and there's a daily unmet TD Prop Exhaustion Down target of 138-17 after TD Prop Momentum Down was qualified yesterday. After covering my short post 30-year auction, I'm sitting tight until the technicals become a little clearer.
Market breadth is balanced; no tell there.
The banks opened green -- hence the green tint -- but have since come for sale. Note Goldman (NYSE:GS), which is dancing in Red Dye, as it's been our single best tell.
N's over S's early, as tech has a better tone, paced by Google Inc (NASDAQ:GOOG), LinkedIn Corp (NYSE:LNKD) and Amazon.com, Inc. (NASDAQ:AMZN). The homebuilders, meanwhile, are giving back some of yesterday's love.
S&P 500 (INDEXSP:.INX) 1648 remains a huge level for both the bulls and bears. The bears will lean against it on the short side; the bulls, meanwhile, will try to put it in the rear view for the first time in June.
I am trading around some small SPDR S&P 500 ETF (NYSEARCA:SPY) exposure as a function of time and price, with every intention of being out of the way by the time Big Ben chimes tomorrow. That's why you see the position below; if I take a stand or make a bet, which I don't expect to do in front of the FED, you'll be the first to know.
Keep half an eye on SPDR Gold Trust (NYSEARCA:GLD) as it continues to struggle; $1325 remains an important technical level for those involved in the yellow metal.
I'm still there in Facebook Inc (NASDAQ:FB); again, not big, but directionally there, as the trendline below continues to hold.
It's my wife's birthday today and I promised her an afternoon with the kids, who leave for the summer this Friday. I could tell you that I've got all kinds of meetings to attend but that's not so; I am going to focus on the important stuff -- her -- later this afternoon, as she most certainly deserves it (she puts up with me!).
As always, I hope this finds you well.
Has the Yen Started a New Downleg?
So far, the action off of the May 22 high in USD/YEN is following my preferred price path relatively closely, which called for the conclusion of the correction off of 103.70 in the 93.75-92.25 target zone.
Last Friday's low at 93.79 followed by a strong upside reversal to today's high at 95.76 has the right look of the end of the decline and the start of a new upleg.
That said, should we expect a powerful new upleg that rockets USD/YEN above 103.70 towards my next optimal target zone of 107 to 110, or a back and forth type of move that carves out a 6 or 7 big figure range for several weeks ahead of a thrust to new highs?
Right now, I really don't know, but the reaction to Wednesday's FOMC announcement might provide us with valuable clues about the forthcoming path of USD/YEN.
In any case, my near-term work points to 97.50-99.50 prior to more technical information about the underlying strength of the upmove off of last Friday's low. ETF traders may want to watch the ProShares UltraShort Yen (NYSEARCA:YCS).
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Wednesday, June 19, 2013
Time to Short Homebuilders
The housing market recovery is going to take it on the chin as 10-Year US Treasury Yield (INDEXNYSEGIS:AXTEN) jumps 4.7% today. Homebuilders (NYSEARCA:XHB) are weakening. Resistance is 31.46 (stops), and XHB could retrace all of 2013 if it closes below 30.49.
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Treasury Curve Flattening Hard
Notice the activity in the Treasury curve, flattening significantly. The back end is lagging in a large way while the belly's getting annihilated. A few reasons:
- Bullard dissenting on "who believed that the Committee should signal more strongly its willingness to defend its inflation goal in light of recent low inflation readings" is very significant to me, and rhymes with our idea that the Fed may abandon its goal of stoking inflation.
- Inflation forecasts were lowered significantly, 2013 inflation lowered by 0.50%!!!
- Unemployment forecasts were lowered steadily into 2015, not that these might have any accuracy, but it's causing rate hike projections to be drawn closer and validated at their current early 2015 idea. That's what the belly is pricing in.
- To reiterate, the selloff in bonds has essentially nothing to do with tapering, if anything QE is probably going to go on longer than everyone expected (end of 2014).
This is your friendly Minyanville reminder to put limits on your orders; you can drive a truck through some of the option spreads I'm monitoring. THIS wide.
Walking through our checklist, as the first real move is lower.
Gold: muted to lower.
The Financials: lows of the session but thus far above the lower band-tag of the pennant formation. Goldman remains a primary tell.
Internals: 2:1 negative.
The dollar: The DXY is grinding lower; still below the 200-day moving average at 81.
S&P 1650: Up north, but not out of the picture yet; let's revisit on the close.
What have I done? As discussed, I was skewed short as a function of my gamma and I offered some of my puts on the news; they went bid, but I have yet to get a report, but that's what I'm trying to do (cover some on the dip and keep my gamma in play).
Lemme hop; good luck!
Cooper Tire Now 7% Below Offer Price; Interesting Options Action
We flagged Cooper Tire & Rubber Company (NYSE:CTB) as a stock to exit after Apollo Tyres of India announced a $35/share bid.
Apollo's stock got crushed by a quarter in India on the announcement due to concerns over the debt load (and has since fallen even more), and Cooper's stock has continued to drift lower.
Now Cooper is now trading at about $32.56, which is 7% below the offer price.
Note -- we're not finding any news outside of the lawsuit filing regarding investigations of the deal, which is not unusual, so it is possible that someone somewhere is hearing something fishy.
One thing to note: today 3,499 Cooper put options have traded, with 71% of them being done at the ask or above. Just 610 calls have traded, with 77% happening at the bid or below.
There was a transaction at 11:22 a.m. (just as today's decline really started) in which someone bought 520 June $30 puts for a nickel -- a $2,600 outlay that could turn into $260,000 if this deal got killed and Cooper traded to $25 by Friday. (where it was before the deal).
There is also some heavy action in the July $30 puts, with many trades going through at the ask.
Stay tuned -- could be trouble brewing here!
Thursday, June 20, 2013
A Potential Tail WAGging the Market Dog
While everyone has been talking about the Fed, tapering, and what that means for stocks, I've been looking at the bond complex. We're seeing lots of selling across the board on Treasuries, and we've been seeing it for the past month. To put in perspective just how much, we've seen the 10-year back up in yield from about 1.6% in mid to late May to nearly 2.4% now, a near 50% back-up in yield in a month.
You know what else has been gaining steam? The rumblings of short-term liquidity issues in China. With the Chinese government trying to drain excess liquidity and speculative lending out of their market, we're seeing dramatic increases in short-dated rates. In the Wall Street Journal this morning, I'm reading that 1-year Chinese government paper is at 4% while 10-year paper is at 3.75%. The curve over there is inverted. On top of that, 7-day repo was at 12.36% midday Thursday on a weighted average basis. It was at 8.22% just Wednesday.
I can't believe for one second we're not seeing spillover in Treasuries from that. After all, they're one of the biggest buyers of our debt. But the problem is we don't know who or what kinds of entities in China have been buying our paper. But if liquidity is this tight, they're bound to be selling anything they can get their hands on just to convert it into Yuan. And Treasuries are deep and liquid.
Let's assume this is the case, just for a second. If you're on a bank balance sheet management desk responsible for asset-liability management, what do you do? You'll need to go in and place bids at some point if for no other reason than to defend your bank's holdings. The question is when.
So, this may not be a question of a Fed exit. This may be a question of how long the bloodletting goes on over in China.
Where Have I Seen This Movie Before
Wednesday, Thursday, Friday options expiration tumble…Monday, mother of all hangovers?
There have been a handful of these setups since 1987, where Mr. Market failed to have a tantrum.
But it is interesting that this first half spread between the performance in equities and bonds is the greatest since…1987.
Round number psychology: 1987 - 300 S&P 500, 2013 - 1,600 S&P 500
I'm not sayin'; I'm just sayin'.
For several years, I have held onto this quote from the European debt team at Morgan Stanley (NYSE:MS):
I bring this quote forward today to remind Minyans that every investment has a story behind it. Why we buy or sell something matters.
Over the past thirty years, the story for sovereign debt has evolved to "safety, liquidity, low volatility and a negative correlation with risky assets". But I would note that those characteristics aren't just a story at this point but a promise. The traits are bonds' "brand" as it were and as a result, bonds are the yin to the equity market's yang. It is why most institutional investors have balanced portfolios.
I don't pretend to know where things are headed from here, but one thing I am watching closely is whether bonds' promise holds true. As the folks from Morgan Stanley rightfully pointed out for periphery sovereign debt, when an investment's promise fails to be true, whatever it is - a particular company stock, a commodity, a sector, or a market - the investment becomes an asset class in search of a new investor base.
From my perspective, we have just witnessed that with gold. I would pay close attention as to whether bonds are next.
I hope not. But given how elevated bond prices became, and how much everyone believed the brand at the peak, it is a distinct possibility.
Friday, June 21, 2013
The Morning Dew!
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More than $1.8 trillion of global equity market value was lost yesterday. The sell-off cut deep, it cut hard, and it cut fast. The question on every-body's lips is "will it cut more?"
We dove deep yesterday in an attempt to navigate our forward path, mapping levels of lore, catalysts du jour and perhaps most importantly, the psychology surrounding the issues at hand.
To top-line a topic that is anything but a quick at-a-glance, I will offer the following observations:
Everyone seemingly pointed to Ben Bernanke and his tapering agenda. I would offer that China--and Chinese interbank lending rates, or Chibor--was an equal of larger catalyst for the sell-off. Some liken this Asian juncture to the early stages of our stateside situation in 2007. It's too early to tell if that will play through--there are many moving parts--but the global marketplace began to discount that, in my view. It should be noted that the Chinese government took steps to alleviate fears overnight, which is helping to shape market psychology.
The long-standing S&P uptrend--in place since November, generating 25% of upside return--broke with vigor yesterday, shifting the technical landscape in one fell swoop. In the absence of clarity--it's difficult to have too much confidence in the system formerly known as capitalism--traders and investors alike embrace metrics that are definable. If the trend is your friend, this progression warrants attention.
Today is expiration Friday (index options expire on the open; single stock options expire on the close), which pushed the tape around yesterday (expiration influences tend to manifest, through increased volatility, in the days prior to the actual expiry). It felt like the tape tried to pin S&P 1600--where there is out-sized open interest--and once that gave way, lower strikes served as a price magnet. It should be noted that this dynamic will disappear after stocks open this morning.
Gold, and the rest of the commodity complex, took it on the chin. This is a continuation of a preexisting trend, but the price action was notable nonetheless. I offered my humble take on the forward direction of gold; in short, if monetary policy was going to drive gold higher, it would have done so long ago. Opinions aside, we would be wise to note the correlation between Gold and the S&P, per the second chart below.
- Social mood continues to sour. This wasn't a "Thursday topic," but it is relevant to this conversation as social mood and risk appetites shape financial markets. With social unrest sweeping streets the world over--and that was with the stateside tape near all-time highs--the mindset of the masses will be put to the test as risk assets decline, even if the wealth gap represents a slimming margin of society.
So what now? Expiration, for starters, which is happening as we speak. Traders who are short gamma--click here for that conversation--are hedging their risk, which is impacting the early morning price action, and will continue to drive single stocks through the day. These flows are difficult to monitor, but they should be respected nonetheless.
Following an out-sized move, such as the one we had yesterday, the tape tends to probe that direction at least once the following session. As such, while the futures are green, I would expect a downside test, from which we will monitor our tells for guidance. Yes, we're short-term oversold--the Dow Jones Industrial Average lost +/-600 points, the S&P lost +/-70 points and the NASDAQ lost +/-100 points since the FOMC, but we remain +/-5% from recent and in some cases all-time highs.
I've been trading around a short bias, with 50% of a full position in December SPY puts against a few long positions, including Facebook with a tight stop. Rather than cover my S&P short, I gently nibbled on my longs into the close (full disclosure: I'm actively trading them both ways). Water pistol to my head, S&P 1500, which is +/- a 10% correction from recent highs, remains viable, perhaps probable, although I've rolled down my stops on the S&P (to the other side of the trend-line) in an effort to manage risk, rather than chase reward.
Lemme get this to you; I'll be back!
XHB Trade Update
Closing the remaining SPDR S&P Homebuilders short position at 29.05 (initiated at 31.30). There is no need for greed. This was a very nice trade taken right after FOMC announcement. Closing too soon always makes money in the long run.
Warning: Liquidity Problem in US Treasuries
I have heard from six different people today that they are having liquidity issues in the US Treasury (cash) market and that dealer inventories are all full. This is a warning sign to avoid taking risk when possible in the near future. Remember that the biggest complaint over Dodd-Frank is that it cut dealer inventories by 90% and penalized them for taking risk. Now we're seeing it show up in spades.
Additionally, the Brazil Treasury just held another $2 billion FX swap line after $3 billion yesterday.
Better hope the Fed does some FX swap lines because this is getting unruly.
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