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Credit Once Again Not Drinking The Equity/High Yield Kool Aid
A chart comparing the relative performance of the S&P and Investment Grade (inverted spread, on the run) demonstrates that once again the equity algos have jumped the shark on the post crash rebound. While investment grade credit is only at mid-February levels, equities are attempting to retrace the entire loss from 2010 highs and are now at early April levels. As always, choose equity over credit, which is a market at least double the size of stocks, at your own risk. On the other hand, a short SPX, short IG risk convergence trade would seem a relative safe bet to pick a few bps. Of course, that's what everyone said about selling the basis trade in late 2007.
Not surprisingly, the correlation between stocks and credit funds proxy for stocks, high yield, is much tighter. With the beta in HY in same cases worse than the S&P, look for the otherwise relatively safe realm of bonds (even riskiers ones), to take a massive plunge the next time we have a 1000+ Dow crash. The tight correlation also begs the question why HY fixed income managers don't just invest in stocks: they have much better upside as debt is traditionally capped at par, and as the chart shows, the downside risk/return is about the same these days.
Lastly, here is a chart comparing VIX and HY. As credit trader points out: "A
lot of people make the mistake of modeling VIX and credit spreads as a
correlation or linear model - they are not! They are highly non-linear,
cyclical, and regime-dependent (unfortunately for all those cap arb
folks). Simple example here of HY vs VIX showing the linear
relationship has very little explanatory power (30% r^2). I have tried
to show how the relationship changes as risk premia decrease (green)
and increase (red)."
h/t Credit Trader
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Like goldman and JPM are gonna let the market go down! come on, get real. there are still peasants' mutual funds that have something in them!
I'm sorry and I'm not trying to be controversial, I hope you were being sarcastic, but if you weren't; I get so sick of seeing this line...JPM and the squid are mere cat's paws of TPTB. It's simple. Cook the books and artificially inflate the targeted market, then debase the targeted market. The trick for us hens is to try to know when to split from the herd.
I get so tired of hearing "well that'll never happen, the government will never ever ever let the market crash because the pensioners and this, that and the other" reason.
The money that was there was an illusion to begin with, it's already gone and all that's left is to let the plebs know it. When the Dow hits 3000 is it really going to be worth any less than it is now? You couldn't pay me to put my money in with the hens nest eggs. Every older person I know has been trying to talk me into buying a house "before you get priced out". Housing prices just dropped 30% in 1 month in Beijing. You think it's not headed this way next? The middle class is FINISHED and they were more than willing to hand it over for their chemical lobotomies, an idiot box in the living room and a nice big roof over their heads and all the other worthless, mass produced, nonproductive shit the third world could heap on them. I remember being younger and wondering how the hell people lived on credit like there was no tomorrow and it just felt wrong. You think all these consumers never gave that a second thought? Well they got what they sold out for and all that's left is to let the numbers reset. Math is about to become the least favored subject.
"Reality is merely an illusion, albeit a very persistent one." - Albert Einstein
Morpheus: What is real? How do you define real? If you're talking about what you can feel, what you can smell, what you can taste and see, then real is simply electrical signals interpreted by your brain as you make a strade on the Stock Market.
Morpheus: You've been living in a dream world, Neo. This is the world as it exists today. (Photo of Fed computers, JPM and Vampire Squid GS servers)
Morpheus: As we gave birth to HFT.
Neo: You mean Artificial Market Trading?
(Neo stares at Morpheus, with his mouth open.)
Morpheus: The stock market HFT computers steal more money from the 'open' market than 25,000 human trades a second. I wouldn't belive it... and then I saw the server farms with my own eyes. Watch them liquefy dumb money, so they could be fed intravenously to the Vampire Squid. I came to realize the obviousness of the truth. What is The Matrix?
Control. The Matrix is a computer generated HFT dream world built to keep sheeple/dumb money under control in order to change a human being into this.
(Morpheus holds up a photo of the new USA 'middle class' family on food stamps)
(Neo begins to panic.)
Neo: No... I don't belive it!! It's not possible.
Morpheus: I didn't say it would be easy, Neo. I just said it would be the truth.
Neo: Noooo!! Stop!! Let me out!! I want out!!
LOL
Nice adaptation of an old classic into a (soon to be) new classic. My favorite part?
"Watch them liquefy dumb money, so they could be fed intravenously to the Vampire Squid."
Awesome! Love that scene. Love that movie!
Perhaps they think they are -- the HY folks will be the equity holders after the next shake-out.
There is an old mariners' saying that there are two kinds of sailors: those aground and those about to run aground.
HY is one grounding away from equity, and if you think the up-side trade is weak, being in position to pick up the pieces of your favorite company and get paid interest while you wait isn't so bad, as long as you have the cast iron stomach and brass pair to be on the creditors' committee.
Jeremy Siegel of Wharton declares last Thursday's 1,000 point 15 minute crash as a full fledged correction that shook out the weak hands. So now it's on with the bull market according to Professor Shillgel
mms://media2.bloomberg.com/cache/vbmRnn5S4Tf4.asf
What did we expect from the B-school, fiat-indoctrinated, central bank-loving, we're smarter than everyone else, command-and-control economy crowd?
The reason these guys are so cocksure and disdainful of alternate view is jus the simple fact that they have been so damn successful. Canyt argue with a winner .
Oops - what the stock market is barely back to where it was in 1999? 11 years with zero gains in a fiat economy with greenie/bennie at the presses? How could that be? Hahahahahahahahahah.
My main problem with that thesis is that the amount of volume transacted during that time was minimal. It's doubtful that it represented the accumulated volume of all the "weak hands". It was just too quick.
Volataility itself seems like a good trend play with the probability of new shit popping up more often as time passes. The lows are not as lows but the pops are violent. Wonder what's next?
The daytrading crowd is not being stopped out as much, fool me once. The algos are not having the same big momentum thrusts. Too much bad news.
Below is a chart from "VIX and More" showing the Euro ETFs with anti-linear VIX.
http://content.screencast.com/users/orth1/folders/Default/media/aecd391c-7d76-4be7-85f6-b805001e40b8/2010-05-13_1200.png
+10000
I hv explored pattern rec techniques ... but 100% sure shouldn't model using linear models
On a long enough timeline, the survival rate for everyone and everything goes to zero.
Forgive if this is purely dumb, but is the Russell 2K better to compare against HY than the SP500?
High yield "bot" GM and other credits at their lows that were downgraded to junk in the Dec 08 to March 09 time frame, hence HY v IG outperformance. Oh, and Sell it now.