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Market Analogies And Things Worth Keeping In Mind
Submitted by Nic Lenoir
A few things are of particular interest today. First I will start following up on 10s30s and the steepening of the curve. The structures discussed yesterday and last week have finally seen negative premiums today and we saw traders jump on it. In particular the following structure traded: Buy 1.9 x TYZ0 125 Puts / Sell 1 USZ0 129 Puts, receive 1 or 2 ticks (both levels traded). The exact same structure can be done symmetrically using calls receiving a premium as well for those who are not comfortable being short USZ0 puts (this is a curve position, people need to realize that you are not outright short puts).
I had interesting conversations with people discussing how steep the curve can get if hyperinflation gets priced in, or if US treasuries get sold aggressively. Pulling out 10s30s yield spread in Japan and Greece is instructive when thinking of those issues. Japan's 10s30s curve has been in a 35bps/120bps range between 2000 and 2010. Many times like we are seeing in the US right now the curve went vertical, and everytime is came back where it came from about just as fast. Even for those who are believers in further steepening at an unabated pace, based on your directional view on outright rates the possibility of hedging with a positive carry is hard to pass let's be honest. This is just about the perfect hedge for all your QE trades like long commodities, short USD, and long just about anything that has a yield and shorts to squeeze.
The other question comes if people get overly worried about inflation or USD devaluation and there is a flight out of Treasuries. Well Greece does not have its own currency and the problem was slightly diferent, but overall the EUR was butchered from November to July and PIIGS bond were being fled like the plague: the curve flattened aggresively, with 10s30s going ballistic at -4% and more.
I am not worried about that happening in the US even though I am definitely a pessimist. However I think that leaves us with a case where we are closer to what happened in Japan. The key difference is the balance of payments and that's a big one, but should that mean we do not have the rope Japan did and the USD's fall accelerates dramatically, then I think the risk could rapidly turn to hard flattening. With that in mind I think the curve in the US must be played when carry is attractive. One last thing: The curve in Japan has traded quite in sync with the Nikkei's cycles during the last decade. Having a steepener in 10s30s is like being long stock... buyer beware.
That leads us to my second point. While we bypassed the levels I thought would see us top and I walked this morning having thrown the towel, like many other bears it seems, we had an interesting fractal development on the S&P today. First of all looking at the price chart daily, one cannot help but draw a parallel with April 14 2010. The exit outside the bollinger is very similar, and so was the failed topping attempt preceding it. The other noteworthy technical observation is that we had a bullish reversal below the Bollinger band in VIX. That signal betrayed us in September, but amusingly it had occurred on a holiday (Labor day weekend) and that might well be why the price action was to be looked at suspiciously. I still went with it because of the track record of the signal, but it is worth keeping that in mind before discarding today's Vix reversal. I would however recommend caution and wait to see tomorrow if we do get any form of confirmation. At the open Tuesday we had a perfect set-up and the market reversed intraday...
To me this market in general screams deja-vu 2008 all over again. USD is trading very weak, commodities are through the roof, everybody is focused on decoupling, and the ECB is talking hikes when the Fed is in easing mode... You better hope somehow the leading indicators on the ISM are all wrong and it will not go below 45 otherwise... well we all know what happens.
Good luck trading,
Nic
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What happens when the housing market completely freezes up because of the robo-signing fraud and lawsuits?
I'm guessing that the full effects will be felt in just a few months.
My best guess is that those who, like yours truly, did not go into debt to buy a house since 1992, will be premium offerors, as in "Get your clear, unencumbered title here!" Next will be those with aged mortgages, prior to around 1996 (who will be few and far between, and more than likely senile). All bets are off for anybody seeking to move from, or into, anything not in the above categories. That's still about 40% of the US housing stock. So things will not come to a complete standstill, but it will certainly feel that way.
I was looking at a property in Tehachapi, CA that was foreclosed and owned by Freddie Mac, on the market for $180k last month. Shortly after the foreclosure problem hit the news, they reduced it to $109K. It last sold for about $280k when foreclosed and originally sold for $350k. I'm going to be in the area next week and I might talk to the realtor to see what the story is. :D They sure are motivated.
Nice place, up on a hillside:
http://www.realtor.com/realestateandhomes-detail/24500-Yucca-Court_Tehac...
My inside sources tell me the house is on a hillside, it's sinking and has major cracks through the floor. Plus, whoever owned it took everything out. And to boot, it has major foundation issues. Nice outside, big 'ol mess inside, kind of like our economy. Perhaps the bank thought they could get somebody to buy it site unseen?
One of the ads had noted "bring your tools and paintbrush" :)
I might haggle with the realtor for a good time. I'm wondering if someone got killed in the place before it was foreclosed.
one can only hope.
you see it in the ETF: "the real estate index rallies." best performer YTD i believe.
TARPII, of course!!
Hopefully, Bruce Berkowitz will have ANOTHER bad day tomorrow and financials will be sold en masse. (You can't escape The Curse of the Fund Mgr. of the Year cousin Brucie!!) **insert sinister laugh here**
But what about the Hindenburg indicators!
The markets reversed into a glorious rally that I missed out on, right after the HO meme got parroted.
What's the latest catchphrase these days? ;)
I believe it's - OH.
They turned into the Heisenburg Uncertainty Principle.
As of today's close ---> 93% of S&P 500 trading above their 50DMA...higher than any time during our rally since 2008. Everything is up now. Laggards are up.
When everybody knows market can only go up but it's all premised on a single entity providing unlimited buying power (except market doesn't really know what that number is but assumes massive...well you know what they say about assumptions, especially those assumptions to be revealed the day after an election).
Be afraid...be very afraid.
My view is pretty similar to hambones. I think we're in a situation that is very unlike 1999/2000 but somewhat similar to 2007/2008 in that we have a Federal Reserve that would like nothing more than a higher stock market but a fundamental picture that screams SELL! I've been unwilling to take an aggressive stance on this market either on the long or short side because there are no indicators that tell the story. Instead, I firmly believe we have a market that is nothing more than hot money aggressively seeking positions that have heavy shorts.
From a structural standpoint, we have real equity money leaving in the form of mutual funds and insiders, replaced by increasing levels of hot money on a seek and destroy mission for short sellers. Like Nic said, if that hot money, which for all intents and purposes is cowardly money, sniffs anything to fear such as a bad housing number, employment, or ISM, it's lights out. It will be a stampede trying to get through a mouse hole.
On the upside, I watch short positions and they've been pretty high, which explains the relative ease in taking this market higher. Until they're exhausted, we may have more room to run but the moment they're gone, this market tanks.
I appreciate the perspective of the guys like Robo, Leo, and Harry who seem to have an abiding faith in the Fed but I hope, for their sakes, that they have a downside plan because once short sellers are exhausted, this is a market that can collapse quickly.
The Fed can add liquidity but the Fed hasn't shown itself willing to hold long positions in the equity market and until they do, they're limited to short squeezes.
deleted.
TARP II for a T-USD on Christmas Eve or Sanny Claus won't make good without our worthless savings and bail out the bad bets at the casino
It does feel like 2008, but the fundamentals a lot worse now.
Worldwide.
Then, in the US, there was "predatory lending", now it is "predatory repossession". Real property taken away by corrupt financial institutions with families put on the street. This fraud is orders of magnitude graver than the previous.
far worse in nominal terms actually. All the more reasons for an "uber rally"? But let us not speak of such things...let us, let us....
It ain't an airship full of Hydrogen. It's a helicopter full of rocket fuel.
ha!
That deserves a meme. Awesome
Canadian dollar is now at par. (I thought it would've taken a few more months.) Now what - not sure.
We've been here several times over the last 3 years. Tippy toppy time.
Off the cliff it goes again.
Actually the stock market feels a lot like last fall. Come to think of it, a lot of the comments in general seem like last fall. Everyone short could not fathom why the market kept running up and up from its July low.
Remember July '09, we had that head and shoulders pattern that was supposed to spell doom but the market rocketed higher through the EOY. Same pattern this year, same result.
Last fall we still had the impact of US and Chinese stimulus going nuts on global economies. Now that stimulus has faded so the chart patterns may be similar but the backdrop is entirely different. Too many people are looking for fractal similarities without acknowledging the systemic backdrop. That said, congratulations on being right thus far!
You are still a troll Wanger and none of us old timers forget that.
Feels like 1999.... sell now and avoid the rush...
:^)
Two men say they're Jesus, one of them must be wrong. There's a protest singer he's singin' a protest song.
Oh no, Nic threw in the towel today.
No bears left standing now.
We must top soon then.
Prechter and Co. are all the more certain that this bear market rally is near its end, and recommending going short with MAXIMUM LEVERAGE and long the dollar. I don't think Prechter got rich by making mistakes........ (except in the gold / silver markets)
Nic, remember, the 2nd largest company in the world goes up 1 or 2% every day. Until that changes, the market will drag along with it.
Royal Dutch Shell?
http://money.cnn.com/magazines/fortune/global500/2010/
Why have the shorts not capitulated nor the Financials participated? The Tax issue is coming up soon.
On top of that, the tax on long-term capital gains and dividends is set to rise. The top rate on long-term capital gains—profits on shares or other assets held for more than a year—would rise from 15 percent to 20 percent. On qualified dividends, the rate would rise from a maximum of 15 percent to an investor’s marginal income tax rate.
I'm sure Holding stocks to pay higher taxes is in everyones plan.
That's good. So why wouldn't the uber rich make the most of this opportunity?
Ramp the markets until the last day to maximize profits and beat the taxman.
Dow 12,000 on Pomo lite and QE 2.
Hand flying over my head. Slv vxx pair in booster mode
Spx vxx pair turn will show you the way before the market turns. BTW have you ever seen so many high flyers pull back 20% like this week and last.
Calm down, Nick.
You know better.
History never repeats
(but sometimes it rhymes ...)
VIX action may be iffy. As deftly noted on ZH a couple of times this week the time structures on the VIX are a bit distorted and Monday was a "rollover day" for calculating the VIX - rolling off the current month as the nearest in time. Also, VIX option expiration this month is after stock expiration. Feels like someone is ready to pull the plug. I still like a little more max pain on the NDX followed by an SPX short at 1188, stop 1202, target 1142. All longs sold over last few days for a reset.
-profd
Really this is a great post from an expert and thank you very much for sharing this valuable information with us.
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