The Great QE Unwind Compression Trade(s)

Tyler Durden's picture

Now that the market is finally starting to digest the end of QE2 (if not yet pricingin the inevitable transition to QE3), investors are wondering where the most violent "regression to the mean" snapback will occur. And whereas many talk about the dispersion between equities and commodities and speculate about this and that compression trade, the truth is that within equities themselves there is far greater dispersion between one of 9 traditional equity sectors. To wit, as the first chart below demonstrates, since the Jackson Hole confirmation of QE2, energy stocks have outperformed utilities by an 4x order of magnitude. An almost as pronounced dispersion can be observed between financials and industrials/consumer discretionary stocks. For those who believe that the market still has to price in the end of quantitative easing part 2 (and ignore the inevitable roll out of QEx), a compression trade which involves a long Utilities/Fins and short Energy/Industrials/Consumer Discretionary would seem quite appropriate. There is however one caveat. If the market, in its traditional stupidity and irrationality, proceeds to go ahead an unwind not only the impact of QE2 but go all the way back to QE1, than the compression cohorts change drastically. While utilities are once again the worst performing sector since March 2009, and bested just barely by healthcare and consumer staples, financials are by and far the best peforming sector, having returned over 150% in the past 2 years, with consumer retail and industrials following behind. Thus, it probably makes sense to avoid any long Financial leg and focus purely on Utilities and Consumer Staples as the long led in a compression trade, while shorting Industrials and Consumer Discretionary, leaving Financials alone (John Paulson's projections of Bank of America hitting $30/share by the end of 2011 notwithstanding).

Relative performance since QE2:

Relative performance since QE1:


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Hedgetard55's picture

Is it possible that QE2 ends and the stock markets do NOT fall as predicted by 90% of the pundits?


Is it possible it falls, and that QE3 is instituted, but that DOES NOT juice stocks but makes things worse?


Don't know the answers, just asking.

Alcoholic Native American's picture

Who is predicting the stock market will fall? All the major financial institutions just got bailed out, the FED bought all their toxic MBS in exchange for a shit load of liquidity at 0% from the discount window to prop up the stock market. That so far, has been our recovery.

OuaisBla's picture

Right on dude. Crude oil hasn't got even close to its all time high of 140$, but the price at the pump is.

That's a major improvement. They can do better with less. They are more and more efficient. They can squeeze more out of middle class people with fewer ressources. I was hoping for a crash long time ago, it never came, thanks to that 0% interest rate policy. 

Unless inflation starts to kick in in a very indecent way ... no way the market will fall.


If it does, then buy the facking dip. An borrow to add more. 

boiltherich's picture

ANA, you say "...the FED bought all their toxic MBS in exchange for a shit load of liquidity at 0% from the discount window to prop up the stock market..."  I could not agree with you more as far as what you say goes, in total 14 trillion or so and counting, but, and this is important, the amounts lent, given, or implicitly guaranteed against future defaults along with TARP, TALF, and the several governmental stimulus packages, these were just stopgap measures to keep the system alive, not prospering, but on life support. 

The important part is where you say the Fed bought all... because what the Fed bought was not all the toxic junk counterfeited over the years, they hooked up on a small fraction of it, and since household wealth is still dropping fast in real terms, as well as both real and nominal RE prices still going down with no bottom in sight, well for every 1% drop in RE value both residential and commercial the banks need another 4 trillion in support.  This is just my personal estimate that could be a bit lower or wildly higher, we can be pretty sure on the low side but the high side could literally be infinite. 

From the point of view of real accounting there was 12 trillion in mortgage debt on residential RE summer 2007.  About half of all res RE was mortgaged and that mortgage debt was about 30% of the total value of mortgaged RE.  Extrapolate and you get mortgaged RE worth 40 trillion market value which was half the market value of all RE so in total all RE in the USA was work about 80 trillion.  What our owners (the banks, GS and Chase et al) did was bet the worth of the nation itself that prices would keep rising and so they Ponzi schemed up all the alphabet soup of SIV's CDO's MBS's, and derivatives knowing it would exponentially go higher till it did not any more.  They knew then a day would come when payments would go into default, when RE flippers would say no more, too much.  Would it be when a 1 bedroom apartment in Miami hit 200K or 400K? It could go to a million or even two but one day it would end.  They leveraged the debt on house based derivatives to 40 to 1 with no reserves so one can guess that they either expected it to last much longer than it did or they were outright crooks destroying the country, if the former they should be unemployed and barred from the finance industry, if the later they should every last one of them get a life sentence in a none too clean prison facility in a cold dark place.  What they did was not simple fraud or theft, it was treason.

Too bad the government is even more stupid than the people because how did they react?  Rewarded this historic crime with your great grandchildren's futures, and their great grandchildren's futures.  The level of debt in households, governments, corporations, combined with the inflation and total future liabilities of all these entities is already in the quadrillions, just to pay debts, even with not one cent for future growth, mind you some will say it is less, but they are talking about the current payoff for all debt today, the same way your principal balance on your mortgage might be 130,000 but when you paid off 360 payments that is obligated you have paid 360,000.  If we take the current debt denominated in dollars from all sources, and outlaw any further debt be incurred from today, as well as mandate that the debts be the "principal balance" of a new mortgage we all must pay down so that one day we will be debt free, well the principal would be in excess of 50 trillion now, and at 6% interest over say 30 years, our payments would be over 4 trillion per year and that would not count ongoing life or government expenses, that would just be to pay debts.  And who would we be paying that to?  The same 1000 men that invented all this crap about CDO's and MBS's.  That also cannot be paid in faux made up FRN's or monopoly money or IOU's, but real wealth.  In essence we would all have to pay 80% or more of income to run governments and pay the mortgage for the rest of our lives to get out of debt.  Any lower payments would mean longer terms and longer terms mean higher overall cost of the repayment.  The reason why the longest mortgage is 30 years is that when you go beyond that one cannot practically live long enough to repay, you are renting not owning.  Our country is mortgaged and if we ever want it back we will pay in real terms to do so. 



Seriously, I called myself BOILTHERICH because that is how you render fat into soap.  Give them no warning so they can flee with portable wealth, just one day go up to their gated estates and arrest them all.  If a few do get away hunt them the way Israelis hunted Nazis.  We as a people only owe all this debt to essentially other people that made up the instruments of our enslavement, we must tear those documents up and make sure that those who have done this never can do it again.  Take back what is ours. 

Bob Sacamano's picture

Why did you sign those "instruments" of your enslavement?  What did they take from you that they did not provide to you? 

Just curious. 

Smiddywesson's picture

The fact that you don't profess to know puts you in the top eschelon of trading.  These markets are treacherous.  The US Government is like a beligerant homeowner who refuses to pay the mortgage, and is stripping the home of anything of value before defaulting.  How long can this continue?  Hell, I don't know, a lot longer than I would have ever imagined.  The only thing I can offer is the collapse will accelerate as we reach End Game.  

If this goes on three more years and you bunkered in something safe will you be happy?  I wouldn't be either.  What's the use of living during turbulent times if you don't seize the opportunities?  I have a safety play of physical gold, and an account to play the huge swings in the markets that accompany the death of a reserve currency.  If everything collapses overnight, you will be happy you have something to fall back on.  If everything takes longer than expected, you will be happy you kept part of your money in the crazy monstrosity we call a market.  If things keep limping along, and you keep taking risk money off the table and putting it into unimproved land, gold, art, wine, garden gnomes, you name it, the only risk you are facing is wishing you took on more risk during these turbulent times.  Is that regret really likely to ruin your life?


Hedgetard55's picture

"I don't mean to brag, don't mean to boast

But when it comes to trading, I am the butter on the toast."


Well, not really.

Alcoholic Native American's picture

2 holes were plugged during QE 1, one was buying treasuries, the other was buying up toxic MBS, if you stop one, does that mean you can claim replugging it is QE 2? I don't think so, QE never stopped.

rocker's picture

Every thing is fixed now.  It's all good. No more foreclosures. Home sales rebounding. ANF is going to make a all time high, (just for Robo). Even though their earnings are less than the last all time high. POMO induced, Eh.

Cheney report, "Deficits Don't Madder". LOL  America loves IPhones. Buy one. Uncle Sam needs to follow you.

Bank profits are soaring, reserves are back on our income statement. GS has been forgiven. Buy GS, they need the money.

Americans are feeding themselves now. They have their own debit card. Wages soaring, no worry about gas prices.

It's just so fucking great. JPM, GS, BAC and C  are the best traders in the world. Just like Bernie Madoff. Yup, all good.

surfersd's picture

The unwind on Nymex continues as demand suffers here and China has stopped any crude buying for its SPR. The question across the energy sector is when will a lower price encourage QE3 believers back into the market.

Silver is close to breaking a major daily trend line 32.45 as of tomorrow. As Silver has seem to have been a bellwether of spec commodity players it will be interesting to see if JPM takes it below that price and settles it. 

Quinvarius's picture

What would be interesting is meeting someone who didn't put on a silver short after CNBC hyped ZSL.  And considering silver has not gone down at all since the last margin rape, perhaps you should be looking at the trendline on the falling wedge at 34.75.

Smiddywesson's picture

And look at the big brain on Quin.  Yes, gold and silver have shown their resilience.  Silver in particular, after the most historic market manipulation in human history, should be quivering in the gutter like a rape victim.  But, it just keeps marching back up.  

Probably just a bubble right?  Those tech stocks from 2000 just bounced right back right?  How are those tulip bulbs doing?  Or house prices?

You never kiss your ex-wife with the same gusto.  Bubbles don't reinflate.  If they do, they weren't bubbles.  The team, who has so desperately tried to coax retail back into stocks, is simultaneously trying to convince you that gold and silver is just a bubble.  I'm not buying it for a lot of fundamental reasons, but I also know they aren't bubbles because of the price action.  If they were bubbles, they would be toast after this much manipulation.

JohnG's picture

Personally, my ex wife and I have never had a better relationship than now.

With gusto! :)



Don't tell my wife or my girlfriend, may they never meet.

slaughterer's picture

I charted $34.10 as support for spot silver... till yesterday.

Hephasteus's picture

Paper silver doesn't have good support till 0.

tradewithdave's picture

The Associated Press filed a video report on the Strauss-Kahn story:

Dave Harrison

Smiddywesson's picture

You can't make this shit up man, it is absolutely crazy.  The head of the IMF is charged with rape, right at the height of negotiations over our reserve currency status and the preservation of the EU.  He just happens to be a socialist, so he makes waves, and we can't have waves at these critical times, can we?  Unfortunately, he also was the widely favored "shoe-in" candidate the next French presidential election.  Now here's someone with a target on his back.  Every central banker has his photo on his dart board.  The head of WikiLeaks had a target on his back too, and he wound up with a rape charge against him too.  Probably a coincidence (wink).   "No socialist is going to screw with us ripping off the middle class from Shanghai to LA, and all the places in between, the sheep are ours".  - Ben Bernanke Strauss-Kahn has access to unlimited money, has traveled the world in very elite company, is ambitious enough and capable enough to become the head of the IMF, and now has presidential ambitions.  You would think he understands his political peril and is on his best behavior.  You would think, given the proclivities we are led to believe he has, learned in his 62 years how to pick up a phone and find a high priced hooker.  This guy has been everywhere.  He's been to Jackson Hole for Christ's sake, where all the best professional female talent goes.  These guys have money, and the ladies they like know how to find them.  Central banker types only seem stuffy, they know how to party, only discretely, and that means you have to pay for privacy.  Instead, he ATTACKS the maid?  He waits 62 years to attack a maid?  He waits until just before his presidential run to attack a maid?  She just happens to look better than a $5000 hooker?  Would you choose the maid over a $5000 hooker that can get your mind off the endless droning presentations of tomorrow's meeting?  Hey, maybe he couldn't find a professional, IN NEW YORK CITY!  Does this sound right to you? I also love the "fellow victim" coming forward on the same day.  It took months and months, shit it took years, for the victims of the catholic church pedophiles to come forward, but this victim pops up in time for the 6 o'clock news.  Yeah, right.  Just because it is possible doesn't mean I believe it.  It is just too convenient.   New York City being ground zero to the conspiracy of central banking is just icing on the cake.  He's dead.  He will never, ever, get a fair trial, but that doesn't matter, he has been politically neutralized. In the mind of the central bankers, nothing is too underhanded.  They really believe they are saving the world.  It's "God's Work"

scatterbrains's picture

actualy, I'd guess her resistance is what fueled his compulsion to overpower and steal some pussy from her.  As though he feels like he could and should be the most powerful man in the world but knows that he is no more then a front man or puppet to shadow bankers, so his way of relief from that reality comes through victemizing little slave workers.

Mec-sick-o's picture

Ever heard of Murphy's law?

Reality surpasses fiction, sometimes by a long shot.

This guy was not only a long shot, but a big shot.  The higher they fly, the harder... well you get the idea.

Just like Eliot Spitzer... tickle and make a fool of the beast, the beast will retaliate with a BIG LIE.


JohnG's picture

Mean reversion bitchezzz!



Bold call on no Fins...QE something is a given imho.

Pepe's picture

I think bernanke and his trainer/master are the only ones who know 

apberusdisvet's picture

Whether no QE or QEn seems rather a rediculous choice for an ordinary investor to "game" one way or another except, of course, to keep loading up on PMs.  The bigger issue in our now ever decreasing lifetimes, will be the Fukushima radiation fallout, now at cancer causing levels all ove the North American continent.  I'm sure that when the news blackout curtain is finally lifted, we will all worry less about the markets and more about our families.

trainrobbery's picture

My system was bringing up the same patterns yesterday.  Though, I also would add Biotech to that list of names.

vote_libertarian_party's picture

Everybody misses the big picture with QE2.  It's Econ 101, supply and demand.  At current prices there is no demand for Treasuries.  That's why the Fed is buying 80% of the new issuance.


With supply increasing by $1.5-$1.8T a year for the forseable future that balance gets even more warped.


The Mexian standoff may get go on a little longer but eventually rates are going a lot higher.  Just like the MBS charade.  Everybody was in denial until it completely fell apart.


Econ and demand.

Alcoholic Native American's picture

Yea, like silver, I'm not sure the old rules even apply nowadays.

JohnG's picture

Please allow me to ensure you that they do not.

Smiddywesson's picture



Personally, I'm reading Stocks for the Long Run and trading in what used to work before the world came to an end.  Too funny

Urban Redneck's picture

Credit Analysis 101

Nominal and Relative Interest Rate changes are not the same.

When a sub-prime interest-only borrower's  (Timmay) mortgage rate goes from 1% to 5%, his payments are not increasing by 4%, they are increasing by 400%.

Hence the mortgage meltdown is repeated as a sovereign meltdown.

The FED is putting on great kabuki theater and moving the markets, but regardless of the supply of US debt, the Treasury needs to place the US debt at basically 0% or the wheels come the bus. 

Mec-sick-o's picture

I love Mexican standoffs.  Let's play chicken, hehe.

jkruffin's picture

Got to get short the EUR tonight, the big 200 pip collapse comes by morning.

Id fight Gandhi's picture

Easy trade is just hold some index etfs 1x negative and silver and gold. Metals will probably fall back with everything else.

When the dollar dies, metal will soar. I expect to be able to get some silver in the mid low 20s in the next few months.

Mr Lennon Hendrix's picture

Silver is going to roar higher in a few weeks when Bernanke says with his pinky to the corner of his mouth, 'One trillion dollars!'

Smiddywesson's picture

You are probably right.  However, everybody is saying that, and that is not a good omen for shorting precious metals.

The Fed hates gold and silver, and yet, silver is staging a comeback and gold was very resilient during the manipulation onslaught.

Abandon what you think and observe.  I too agreed with you, but now I doubt what I thought.  The central banks are buying and the precious metals refuse to go any lower despite the combined efforts of the central banks, the media, the CME, and the big trading banks that shouted fire to all their customers at the same time  That is unnatural. 

This is a once in a lifetime event.  I don't know when the time to go long is.  All I know is you don't see price action like this without some extremely strong underlying trends.  If you want to short gold and silver, go ahead, you will most likely make some money, but be quick to bank it.  Nothing defies the Fed and we just saw two small markets do so.  THAT bespeaks titanic forces coming to a head.

JohnG's picture

" The central banks are buying"

That is one big fat reason to buy gold right now.  No doubt.

Mr Lennon Hendrix's picture

Bernanke has made investing so easy, I almost want to thank him, but won't, because he is destroying the world.  Long precious metals/long oil, and buy the dips in equity, and buy corporate debt, and short Treasuries.  The Dow is going to serpintine in the 12k range until Bernanke says, "We need...QE3!"  And then BAM!  The Dow will skip through 13k like anyone remembers that is an unlucky number...except for those who call 13.  Call it down, watch the world burn like the fiat dollars you hold in your hand.

I am a Man I am Forty's picture

tough to get any yield on corporate debt these days, new ones anyway

GittyUP's picture

Something to think about if QE2 ends without any new QE.... Commodities will most likely drop (PM's will outpreform though even if dropping) and deflation starts to rear its ugly head the extra liquidity will flock to fixed income.  Treasuries might actually rally!! Not because they are desired but because they still are the safest investment. 

The big question mark on whether this happens or not is if emerging (growth) markets decouple from the developed world.  They have supposedly been decoupling for years now so we will see...  China looks to be in greater trouble then rest.

Im thinking a pairs trade long PM's and short crude/copper maybe.  Also some sort of synthenthic china short/long brazil and india. Not sure the best method to achieve the latter though. 




JohnG's picture

"Treasuries might actually rally!! Not because they are desired but because they still are the safest investment. "


Check your premises.

GittyUP's picture

So your saying its impossible for people to buy something they dont desire in place of something they desire even less??

Treasures might be the least worst place to park your money should deflation show up again. 

Smiddywesson's picture

All markets are tied together in the greatest sargasso sea of derivative that the world has ever known.  There will be no decoupling, that was a pipe dream to lure suckers into a fiat controlled global trade era.  Yes, China is screwed.  There is a picture in the dictonary of China under the definition of over capacity.  They tried to spur their economy when the crash hit by building more capacity in an economy already dependant upon global trade.  Demand destruction and trade barriers are the meal du jour.  So sorry Charlie.  No oil, gas, coal, farmland, or water, China is screwed.  Their people live in poverty, and the ones that don't make too much in wages to compete with neighboring countries for exports.  The idiots that made easy money in American markets and then sold books about the miracle of China are about to learn that the future is not just an incremental linear extrapolition from the past.  The cycle is turning.  The Century of China will come, but it sure as heck won't be this century.

Neurolama's picture

Tyler, I put out something on this today that Doug Short posted.


slewie the pi-rat's picture

the utilities have had a nice little bull market going, recently, too.  so, i think they are seeing value as defense, here.  compared to the mixed reviews financials have been getting and the recent headwinds for the economy. 

so + for staples, and the shorts seem ok, too:  industrials and discretionary spending.

fuk lululemon

JohnG's picture

No.  The world needs more yoga girls.  120 lb spinners.

Plus those $300 yoga pants look good on the floor.


ebworthen's picture

Rotation and churn money making.

Bet J.P. Morgue is buying silver now that the prices plunged, and I'd be they sold their Financials and Tech stocks a couple of weeks ago with a hat tip to pre-notificaton from Ben.

They'll milk the rotations and churn for a couple of months until they get the heads up from Benny boy that QE3 is in tap so they can rotate and churn some more.

Who do Ben and Timmy and Congress care about?  That's right, the BANKS, not you - you worthless plebian, commoner, citizen trampled under foot...

shahroodi's picture

I Think after end of QE2 in june,FED will stand on hold the summer quarter and wait to deflation and economic downside outcry to be shown and then submit another QExx.




dcb's picture

say what you want, but today was the bottom as per the speed line, so it it drops below today, don't know where it will end.