Intraday Commentary: Rolling Buy-Ins
Ah, what the conflicted desks will not do to keep the market up ahead of the offerings. Rolling buy-ins are prevalent today as repos and stock loans get "reduced borrow" marching orders, forcing traders and clients to cover shorts.
This [dislocation/short covering rally/stupidity/manipulation/pedophilia/aggression] will not stand, man.
Also some points from the Dave the man himself:
The new Wall Street?
For a look at what the new Wall Street may look like, see page C1 of today’s Wall Street Journal, “Firms Find Low Profile, Basic Banking Are Paying Off”. The big revenue drivers are now coming from the trading of plain-vanilla securities like currencies, Treasury bonds, and other products tied to interest rates. Banks are trading for clients through high volumes and low margins.
Credit quality hits 25-year low
According to Moody’s, the ratio of companies having their credit ratings cut versus the number being upgraded (an indicator of declining credit quality) has reached its highest level since 1983. For more, take a look at page 14 of today’s Financial Times, “Moody’s Reveals Level of Credit Quality has Hit 25-Year Low”.
Music to the equity market’s ears
All of a sudden, policymakers are discovering that they don’t really have to do anything at all to get investors excited – soothing words are all that is needed: It all started with the “the green shoots of economic revival are already evident” from Mr. Bernanke back in mid-March (1,000 points ago on the Dow), to Larry Summers on Thursday, who declared that “the period of free fall will end soon”, to President Obama’s declaration that “what you’re starting to see is glimmers of hope across the economy” on Friday (but don’t tell that to the 663,000 souls who lost their jobs last month). The cavalry is definitely out … just in time for spring.
Stats on how overbought this rally has become
Further to Kopin Tan, some statistics he cites this week go a long way toward illustrating just how overbought this rally has become: Fully 84% of the stock market is now trading above the 50-day m.a.; financials are running 26% above their 50-day m.a. in a gap we have not seen in 20 years.
Portfolio managers are hoarding cash
It’s not just the banks that are hoarding cash – so are portfolio managers (ah yes, the proverbial “dry powder” … or maybe, just maybe, cash has become an integral part of money management): According to Morningstar, almost 30% of diversified US stock funds now have more than 5% of their assets in cash; for the entire fund industry, the cash-stash stands at a 5.9% share compared with 4.2% a year ago.
Equity market rally continues — but will it last?
The S&P 500 is now up 27% from the March lows, so even if it is a spasm in a bear market, it is the most significant in the past 70 years and does put to shame the other six (failed) rebounds so far this down-cycle. We see in the morning papers that all 19 banks are expected to pass the stress test (then again, weren’t they based on the banks’ own models?); the end to mark-to-market accounting is a boon for the banks; many banks are apparently now in such great shape that they are lining up to pay back the TARP money (but if they do, how does the government still call the shots?); and the SEC is doing its part as it is on the precipice of reinstating the ‘uptick rule’. The VIX has fallen below 40 for just the second time this year, the CRB has climbed 9.3% since the equity market hit bottom (with copper touching a five-month high), the TED spread has narrowed to below 100 bps. The only area of non-ratification is in the credit market, where Baa corporate spreads are actually more than 20 bps wider now than they were when the stock market was at its cycle low a month ago. Maybe the bullish extreme in terms of sentiment is another fly in the ointment for a sustained rally – the weekend WSJ cited a survey showing that 79% of “affluent investors” (those with $500k or more in investable assets) expect to see improvement in their financial assets over the next 12 months.
The irony of ironies is that March enjoyed such a huge jump in equity valuation on hopes that the worst of the financial crisis was over, and here in that same month we saw the most speculative-grade debt defaults globally (35) since the Great Depression (and there were 79 for all of 1Q compared with only 16 a year ago). Come again? And despite all the brouhaha over the sudden turnaround in banking sector profitability, lending continues to contract – by 0.1% in the week to April 1st, which was the third decline in a row. In the past month, as the equity market has been on fire, bank credit has declined at nearly a 10% annual rate. The banks continue to hoard cash, which rose to 8.3% of total assets, up from 6.9% a month ago and the highest in over twenty years.
PS. Dave, as in David Rosenberg
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