Buzz on the Street: May Ends on a Sour Note
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, May 27 , 2013
Markets closed in observance of Memorial Day.
Tuesday, May 28, 2013
Buzz Op-Ed: A Question for Mr. Bernanke
Author is Anonymous
How can this market disregard what is happening in Japan?
Besides the Nikkei (INDEXNIKKEI:NI225), how about the yield on the Japanese Government Bonds? With debt to GDP over 250%, how high can the yield go on their bonds before bankrupting the entire nation? And what would Japan do with the $1.7 trillion in US bonds they hold if that happens?
When one member of Congress mentioned to Bernanke last week that his policy is behind the run up in stocks, Bernanke hurried to interject that it is the fundamentals and profits that may be driving the markets. As long as the P/E of stocks is within historical levels, I guess the Fed is okay with everything, even if the 35% gains in profits that companies have experienced are the result of lower interest rates.
It looks like companies are having trouble growing their top line, so maybe they will lay more people off to make the bottom line. Our government is punishing people who like to save money; punishing our elderly population so that home prices can be driven higher by the investment community due to cheap money.
Like Todd often says, "it doesn't matter until it matters." Bernanke was asked about this by a Congresswoman from California and he didn't seem to understand the question. He responded by saying that housing is still down 30% from the highs. Well Mr. Bernanke, the Fed encouraged and helped drive the housing bubble with their policies (housing should have never became so expensive) and if the REAL market price housing was a small fraction of the height of the bubble, than that would be the real price because the real market should determine prices.
Sometimes, I feel the Fed will scale back purchases (especially because the percentage of the treasury and MBS purchases they are making will be growing dramatically, because of the fact the government will be selling less bonds and home refinancing will slow) but why would Bernanke do that when he can leave at the end of his term and watch the disaster he created on TV while he writes a book about how smart he is and how his successor is doing everything wrong?
Most of the bulls are focused squarely on the Fed in judging when they believe this rally will end. As a self-professed bear, I am convinced it will be something else that ends this party. It is too simple for the Fed to cause this bull market (which I still believe is within the confines of a larger financial shift/change in the world economy as we know it) to end.
Thank you for your time. This has been my therapy for the week.
The Retest Fail
One of my all-time favorite risk-reward entries is happening. The market opened up with a nice gap, ran straight in to the old trend line, and has been falling ever since. The trade goes like this:
1) Short against the old trend line.
2) Stops at old highs.
3) Target next trend line or 50-day moving average.
That being said, I added more SPDR S&P 500 ETF (NYSEARCA:SPY) puts to my existing hedge I added back on Friday. I plan to take off a good portion of what I put on today by the end of the day to keep the hedge size in my comfort zone.
Click to enlarge
Correction Catalyst? Rates
The bond market continues to sell off as the yield curve steepens, helping push stocks higher at the margin. Following the freakout in Japan over JGBs last week, it does seem that for now, the honey badger stock market is alive and well. The stock market does like rising interest rates IF it's indicative of demand for money. Sharp increases, however, would be very negative for risk assets, and the risk is growing for such a scenario in the summer.
The complacency is not in the stock market, but rather in the speed of the bond market's movement. In the near-term, behavior remains bullish, as our ATAC models used for managing our mutual fund and separate accounts favor small-cap stocks. However, the global cyclical trade/emerging markets fat pitch remains quite muted.
Great rotation? Perhaps Summer 180.
Wednesday, May 29, 2013
Don't Get Comfortable
Credit and credit derivatives are all over the place this morning. Italy and Spain are notably worse, while large US financials CDS are flat to slightly worse, and the US CDS is better. As I tweeted yesterday, the 2-year swaps spread has been the best precursor of equity weakness for every one of the most recent -- albeit shallow -- pullbacks. Yesterday, the spread traded above 17 bps (my advertised level to watch is 15bps) and overnight it briefly spiked above 19 bps before pulling back to the 16.5 range. Sure enough, after yesterday's early jump, equities have been trading down since.
To make matters even more confusing, the corporate bond market remain white hot, with $8.3b of new issues yesterday, with HY and IG rates keeping steady.
The potential convexity risk driven by the re-hedging of MBS is growing after the 10-year and 30-year bonds (US1) were crushed yesterday. Bonds are oversold and the very important 139-30 level on the 30-year. is not far away. Throw in the fact that the Fed can't be happy that Treasuries traders are thumbing their nose at the almighty POMO, and 2-way risk is getting amped up.
P.S. Just as I was typing this, the 2-year swaps have dropped back below 16 bps, and the equity futures are coming off the lows. Buckle up!
Another Short Squeeze on Tap?
Just when markets were starting to become reasonable, another potentially bullish setup has emerged in the Russell 2000 (INDEXRUSSELL:RUT) targeting another 3%+ move above current levels to 1036. Possible catalysts: window dressing (for funds on November to May fiscal half-year ) and 401K deposit seasonality.
I’m going to write more about this later, so stay tuned for future Buzzes on this topic. Head’s up!!!
Click to enlarge
Will Snapper Last Through Contra-Hour?
I return from physical therapy -- I think I've discovered the Fountain of Youth, as I was 40 years younger than anyone else at the joint -- to find the bulls enjoying a Snapper higher. The banks (flagged earlier as trading dry) and semis are leading the upside speed, although breadth on the big board remains 4:1 negative.
S&P (INDEXSP:.INX) 1650 -- past support, current resistance -- should offer a road-map as we turn into contra-hour, while S&P 1635 is a half-step support on the way to S&P 1600, if and when, per the chart below.
And yes, I see the nuttiness that is Fannie Mae (OTCBB:FNMA) -- either that, or I'm having a vivid, and somewhat disturbing flashback!
Somewhere, some table has a ton of money on it, right where I left it with the rest of my $70-line puts that expired worthless.
As always, I hope this finds you well.
Click to enlarge
The information on this website solely reflects the analysis of or opinion about the performance of securities and financial markets by the writers whose articles appear on the site. The views expressed by the writers are not necessarily the views of Minyanville Media, Inc. or members of its management. Nothing contained on the website is intended to constitute a recommendation or advice addressed to an individual investor or category of investors to purchase, sell or hold any security, or to take any action with respect to the prospective movement of the securities markets or to solicit the purchase or sale of any security. Any investment decisions must be made by the reader either individually or in consultation with his or her investment professional. Minyanville writers and staff may trade or hold positions in securities that are discussed in articles appearing on the website. Writers of articles are required to disclose whether they have a position in any stock or fund discussed in an article, but are not permitted to disclose the size or direction of the position. Nothing on this website is intended to solicit business of any kind for a writer's business or fund. Minyanville management and staff as well as contributing writers will not respond to emails or other communications requesting investment advice.
Copyright 2011 Minyanville Media, Inc. All Rights Reserved.