Spreads were broadly wider in the US as all the indices deteriorated. IG trades 14.3bps tight (rich) to its 50d moving average, which is a Z-Score of -1.5s.d.. At 79.25bps, IG has closed tighter on only 5 days so far this year (268 trading days). The last five days have seen IG flat to its 50d moving average.
Indices generally outperformed intrinsics with skews widening in general as IG's skew decompressed as the index beat intrinsics, HVOL outperformed but widened the skew, ExHVOL outperformed but narrowed the skew, HY outperformed but narrowed the skew.
The investment world has been bombarded with leveraged ETF products. These products are specifically designed for use as short term trading vehicles...they are not meant to be held for long periods of time as the inherent decay factor will eat away at your principal (some levered ETF's decay faster than others, but they all decay). All too often folks write about these products without properly warning investors of the built in dangers. In this example, I'd like to mathematically show how the 2x levered short treasury ETF (TBT) stacks up over time.
The following are the items demanded by Edolphus Towns and the House Committee on Oversight and Government Reform from the Federal Reserve. We, for one, can not wait to see what ends up being dug up, seeing how the New York Fed has blatantly "forgotten" about our FOIA request for release of precisely the same data.
CLSA's Mike Mayo Discusses A Financial Industry On Steroids, Lays Out The 10 Main Problems With BanksSubmitted by Tyler Durden on 01/13/2010 - 16:39
"In summary, the banking industry has been on the equivalent of steroids. Performance was
enhanced by excessive loan growth, loan risk, securities yields, bank leverage, and consumer
leverage, and conducted by bankers, accountants, regulators, government, and consumers.
Side effects were ignored and there was little short-term financial incentive to slow down the
process despite longer-term risks." - Mike Mayo
Since the SEC is beyond incompetent, and all it knows is how to place its employees at major Wall Street firms, the regulator is appealing to you, dear reader, to inform Mary Schapiro just how busted up the current equity market truly is, and to provide ideas on how to fix it, and to explain why "the current highly automated, high-speed market structure" is fundamentally unfair for investors.
OUTLOOK: The negative outlook reflects our concerns about the large structural projected budget deficits facing the state and their implications for the state's cash position. Following a year in which the state grappled with a more than $60 billion deficit, we think the current deficit of approximately $19 billion could be more difficult to resolve given the state's extensive reliance on nonrecurring measures in the prior budget cycle. We believe indications of economic stabilization suggest that a recovery, if underway, remains precarious. Furthermore, if economic or revenue trends substantially falter, we could lower the state rating during the next six to 12 months.
The December budget numbers are out and they are ugly. December was the record 15th straight budget deficit in a row with -$91.9 billion more in outflows than inflows, compared to a $51.8 billion deficit in December of 2008. Fiscal 2010 budget deficit so far is -$388.5 billion, and $1.47 trillion for the trailing twelve months.
CRE is still the biggest wildcard: "Commercial real estate was still weak in nearly all Districts with rising vacancy rates and falling rents. Since the last report, loan demand continued to decline or remained weak in most Districts, while credit quality continued to deteriorate." - Beige Book
“I am very pleased that the Commission is ready to ask serious questions and drill down beneath the standard-issue ‘provides liquidity’ defense of high frequency trading. The SEC needs to understand and control technology and its benefits, not permit technology to operate without regulatory understanding or access to needed data, and in doing so outrace the regulators’ ability to ensure market fairness for long-term investors. I am hopeful that a variety of independent parties will provide the Commission with the empirical studies needed to assess the price impacts of these trades on long term investors, though I worry that the data needed to undertake those studies is still not available,” - Senator Ted Kaufman
$21 Billion 10 Year Reopening Closes At 3.754%, Indirect Bidder Take Down Scarce At 29%, Vs 43% For Last Eight AuctionsSubmitted by Tyler Durden on 01/13/2010 - 14:18
Yields 3.754% vs. Exp. 3.763%
Bid To Cover 3.00 vs. Avg. 2.86 (Prev. 2.62)
Indirects take down 29.0% vs. Avg. 43.05% (Prev. 34.76%)
Indirect Bid To Cover 1.89
Alloted at high 49.95%
Direct bid take down surges again to 17%from 8.9%
With Greece imploding, the last thing we need is for the US market to do what it did when Dubai faced a near-death experience in November. Whether or not that is the reason, we don't know, but someone just purchased a massive order of ES futures contracts in the open market, causing a dramatic spike in the market, and breaking the dollar's trendline.
Low policy rates don’t impact speculative grade debt so much. Mortality rates for lower-rated debt are much higher than investment-grade debt; the three year mark is where defaults really start to bite. Three years ago (2007), 51% of HY issuance was rated B or below. Mortalities have been accelerated by economic factors, but cumulative default rates will still be high. A buy-and-hold strategy with a broad index of HY debt consistently outperforms the Treasury benchmark. Trading strategies benefit from treasury positioning.
The latest indication of the exuberance in high yield was today's announcement from oil-tanker owner Teekay. The firm is offering $300 million of debt to finance a tender offer of the firm's 8.875% 2011 senior notes. Nothing has changed from the frothy days of 2007: tender short, provide sweetener, price longer maturity deal, wait out the next crash, repeat. In the meantime, the company's products are used as glorified warehouses to store ever greater amounts of oil for that day when Goldman's $1,000,000/barrel price prediction finally comes through. In the mean time, EIA reported another 3.7 million crude inventory build to 331 million barrels. Of course, massive supply will bring its own demand... Eventually.
Dubai - meet Greece. Apparently credit traders appreciate biblical allusions, as Greek Prime Minister George Papandreou "promised" for the third time today that all is good in the debt-stricken country, claiming there is "no way" the country would leave the euro or seek aid from the IMF. Credit's response: Greek CDS surges to an all time high of 327 bps, and the country now represents 24% of SovX risk.