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Even Citi's Bullish Spin On Credit Can Not Help But Be Amused By The Melt Up
From a Citi report High Yield weekly report (yes, we thought the same thing: somehow the nationalized firm still has some talent remaining).
We understand investors are not supposed to fight the cash, but this is starting to become a bit ridiculous. It seems buyers of the market cannot be satiated and are vociferously purchasing the lowest of credit quality without restraint. With the high yield priced at roughly 770bp over Treasuries, it can be argued the market is still historically cheap – because it is. The visceral reaction to the 80bp tightening of the last two weeks has been, “too much, too soon,” and that sentiment is probably correct too. Unfortunately, these are the kind of dynamics that cause strategists to wake up in the middle of the night and go for a long run. Short-term technical concerns are running at odds with our longer-term fundamental view.
Coming into September, we were on the watch for three items that could have had a disruptive effect: too much supply, selling ahead of the quarter’s end (as the market experienced in June), and profit-taking. The last of the three elements likely will not hit until fourth quarter, and our overriding fear is the Street might not be a buyer when that paper comes crashing to the shore.
However, it certainly does not look like there will be any need for quarter-end window dressing, which supports the notion investors may be overly optimistic. One of our strategist friends calls it, “expecting greater-than-expectations earnings.” We are not sure what that means, but it seems to imply the need for a correction.
Yet in case someone consider for a second that Citi may in fact be realistic about the prospects of how much further the tightening will go, read on.
Before we determine if the market is about to experience an overhyped and long-awaited correction, we should probably reiterate the belief that any widening or deterioration represents a buying opportunity. It is beginning to feel like enough investors and other participants have convinced themselves high yield and loans are in need of a pullback. There ought to be enough catalysts – not the least of which is the upcoming earnings season. Remarkably, at a time when investors are worrying, the economic data are improving rapidly and company fundamentals ought to follow. Not surprisingly, the market often suffers at the time it seems most impenetrable. For those who are doubters, no one thought the great Roger Federer would lose to a little known Argentine in the US Open final either.
With all due respect to Dan Patrick, the phrase en fuego does not do justice to how hot the credit markets were this week. The technical firmness remains in place and pushed both cash and derivatives higher. High yield was up more than 2 points on the week and investors continued to target low-end credits. With the capital markets wide open, names that might have had a hard time getting something done earlier in the year seemed to be catching a bid in hopes of some kind of a salvaging transaction. The loan market again lagged as it improved about 1 1/2 points. Derivatives were every bit as firm with HY CDX rallying 3 points and LCDX was 2 points better. With the upcoming roll, some of the CDX arbs have been active.
A simpler paraphrase of the entire Citi piece is where is all the risk demand coming from? Is the dollar collapse which is resulting from the ceaseless printing of treasuries a leading factor to market movement? We would venture to say a resounding yes. And as equities have gotten to a point where no sensible non-computerized asset manager would purchase any stock without a gun to their head, the risk spillover has caught the HY space on fire. Or worse, are the UST/dollar complex and the stat arb bid in equities completely disjointed and responding to two independent realities? That would be a stretch, especially seeing the drop in the dollar and the immediate jump in equities the second today's POMO was announced. Yet the second derivative of excess liquidity (assuming equities are first) is corporate debt, and especially HY debt. So at the first whiff of bid hitting and all bets in HY land will be off.
So the question then, as always, is when will the liquidity ebb finally occur? The answer, if the Fed has its way, is never. Yet globalization and world trade flows will simply not allow this. As a reference see today's downgrade of the pound, and BOE comments pushing for a weaker currency. The ECB, the Swiss Bank and all other foreign banks are seething internally that they are not allowed to recreate the same domestic currency drubbing that seems afforded just to the Federal Reserve. To have been a fly on the wall at the most recent G-7/G-20 meetings: US - "By killing the dollar we will make sure everyone's stock markets will go up." But while to Obama a resurgent stock market may be relevant, this is by no reason the reality for the other developed countries. Yet their time will come too. At some point the world will need to trade once more as it i)emerges from speculative bubble mania and ii)GDP needs to grow organically instead of based on "one time" governmental stimuli: when that happens watch those dollar shorts go scurrying in the night as the real relative strength of all global economies is reevaluated with an unprejudiced eye.
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Spin = Lies
don't mean to nag but where is Mayhem?
Just now on CNN - a piece on eugenics as the key to reducing Carbon emissions - I thought for a second Alex Jones has seized control of the network - friggin unbelievable
lol
was just going to post the abridged version via Bloomberg
Let the Bernanke GLOBAL PUT live! Buy anything, Ben has your back
http://www.bloomberg.com/apps/news?pid=20601110&sid=aqIgdLswlZeg
If you missed FT.com's Martin Wolf, some nice videos today via Yahoo Tech Ticker
if you can only pick one do the first
http://www.fundmymutualfund.com/2009/09/martin-wolf-on-yahoo-tech-ticker...
p.s. did they mention their own bonds as "ridiculous" to buy?
Oh wait, Citi is now the 9th branch of government. Risk free.
Excellent Analysis, Tyler. Growing valuations is key to the Big Con. To succeed it requires conspiracy at many levels, too. The fly in the ointment of ongoing liquidity from the Fed will be growing political pressure. I know....they're supposed to be exempt from that. Example:
I laughed like hell watching Glenn Beck describe the Fed/UST debt transactions.....he had CUSIPS and the whole deal. He fumbled along with a ragtag analyzer by his side who looked good in a suit. Anyway, I just love reformed alcoholics getting into high finance......better than watching Survivor.
Anyway, Grandpa is watching at home and he don't know shit about liquidity, but he remembers the old shell games at the carnival where they played hide the pea for a bet. That's the only message he took from the show....." We're getting FUKKing ripped " !!
Phone calls surge to the local CongressCritter .
US - "By killing the dollar we will make sure everyone's stock markets will go up."
even if that is the claim they make, it is not true...japan is on the verge of total collapse...if the dollar makes any significant drops from here...japan is done. finito. kaput. byebye.
I think there are a lot of individual investors who don't trust the stock market but also can't live with 1.5% in a CD so they're reaching for yield. There have been record inflows into several large bond funds in recent months and I would suspect into junk bond funds as well. The fund managers have to invest that new cash in something, hence the demand for new issues. I don't recall who it was that first said "More money has been lost reaching for yield than at the point of a gun."
I think I figured out why wallstreet is hustling so hard. They apparently just lost
60 million homes.
http://www.globalresearch.ca/index.php?context=va&aid=15324
Hmmm.....Interesting. So cutup CDS will require a vote to settle ?? Or the whole security is prononced bogus on legal enforcement as to deed conveyence ?? I suspect this is Door # 3 !!
Hope it all gets legs out of Kansas....interesting legal argument.
That judge just invalidated the lot of them. Good way to put a stop to cutting them up. If you own a cut up house. It's yours.
I challange anyone to tell me why was the $$ strong today. All other currencies were down-except the Y. It had to have been coordinated. If and when the sucker goes up there will be a world of hurt. POMO push was precious. Right about the time short were tittering.
http://www.reuters.com/article/hotStocksNews/idUSTRE58K2XR20090921
"The dollar rose broadly, extending its pullback from a one-year low against the euro. Gold and the U.S. currency often moves in opposite directions as bullion is used by investors as a currency hedge."
"On Friday, International Monetary Fund member countries formally endorsed a plan for strictly limited sales of 403.3 tonnes of gold from its stockpile but the IMF said sales would be done in a way that did not disrupt gold markets."
So...the sale (or announcement of) was dollar bullish. The IMF is diluting the gold market (or attempting to) and taking dollars out of the market assuming the sales are done in dollars. Fundamentals remain unchanged. However, even in light of this news gold didn't sell off as much as I thought it might have today. Also, concerns over the economy caused speculative equity/commodity longs to exit the market and flee to "safety" which is also why you saw the selloff in oil today.
That is the way I interpreted the move.
Just another bubble in the early stages. Of course, the FED won't find it until it blows up because in fact, they're perpetrating it with the zero interest rate policy and liquidity pumping to blow up asset prices.
.."the economic data are improving rapidly and company fundamentals ought to follow"
The great prayer of corporate America and the markets. The question the bulls fail to answer is where is this vast and rapid improvement in earnings power supposed to come from.
Deleted. Apologies to all.
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There is one group of people who will buy stocks in quantity without a gun to their heads: bears scrambling to cover.
I'm convinced this is one of the ways GS are making so much money. With endless free cash coming from the Fed, GS can target any stock with high short interest and low volume, inject a perma-bid and make some easy money shooing the bears away. For banks thar are *desperate* for new capital to cover their black-holes off the books, they've resorted to bear hunting, explaining why the shittiest stocks continue to rally the most.
Fundamentals be damned, the market will keep rising so long as there are bears around prepared to short it and the Fed continues to fill HAL's fuel tank with easy money. HAL lets the market drift for a while, looking weak, enough to sucker the daily contingent of bears into position, then here comes the permabid at 3:30 to ramp away and suck more bears dry. It's like watching waves of Zulus charge into British machine guns. Tragic.
Problem of course is that once every bear has given up in disgust there will be no more buyers and hugely inflated prices. Investment banks will have accumulated large positions in shit stocks in order to profit from bear-hunting, and will find it impossible to offload. Then we'll see the mother of all collapses.
"So at the first whiff of bid hitting and all bets in HY land will be off"
Yes they will, but don't underestimate either the amount of macro money that is poised to short the sh1t out of credit.
Some of the bigger players out there haven't had the greatest year being long vol and at the first whiff of some long liquidation they will be making the credit investors job more difficult still.
Of course people are buying credit, there is a hunt for yield.
Govt pumping so much money into the economy, what would you do? Put it in a deposit account earning Fed Funds, or buy some reasonable quality corporate debt yielding 40x as much??
And it's bullshit to say equities are the first derivative of excess liquidity and credit is the second. Whichever of Tyler Durden's alter egos wrote this piece is evidently an equity-n00b.