Must Read Introspective: A Look Back At 2010 Events, Key Market Themes And The Circular Nature Of Everything

Tyler Durden's picture

Tonight's must read piece of introspection comes from the keyboard of Russ Certo over at Gleacher, who has compiled a fantastic look back at the key events that transpired and shaped 2010, and summarizes the key market themes that prevailed in the now past year. In summary: "the answer to the question of what were the main themes in the market
is ...............valuations in equities, credit spreads, sovereign
spreads, exchange rates, mortgage interest costs, bank earnings, net
interest margin, accounting schemes, tax code, debt ceiling and more are
all related.  Related to the ebb and flow of monetary and fiscal policy
aspiring to make adjustments to imbalances caused by earlier failed
fiscal and monetary policies.  How, circular indeed." In other words, not only does history not only rhyme, but chases its tail, and the more things change, the more absolutely nothing has changed. We are where we started, and in fact are in a far worse position, as increasingly fewer last resort levers to push and pull are available to the fiscal and monetary authorities. We jest when we suggest that a Martian bail out of plant Earth will soon be required, but pretty soon, in our Onion (or is that Douglas Adams?) reality, NASA may find itself with the prerogative to rapidly find semi-intelligent and very wealthy life on other located within a few parsecs. We can only hope that the restaurant at the edge of the universe is an In and Out Burger.

It's A Wrap, by Russ Certo, Gleacher

We await a supply announcement tomorrow of next week's 2yrs, 5yrs, and 7yrs.  Further, there are two 3-4yr area buybacks next week as well to conclude the Fed buybacks/Tsy auction circular reality for the year.  Treasury selling Fed buying.

I recall in recent history that the Treasury market has suffered meaningful setbacks anticipating supply weeks during recent holiday shortened weeks/sessions in the last quarter.  I believe limited street balance sheet and an opportunistic leveraged community are/were the main culprits.  I'm guessing that by the end of the week, traders, trading accounts, and funds will likely be looking for a spot to push the market lower for a supply trade.  One man's opinion.

The above rate call is despite the fact that European bank funding is dysfunctional.  And we can see this anecdotally in a variety of expressions but also in the Fed's explictly telegraphed renewal of FX swap lines with foreign central banks yesterday.  Explicitly telegraphing a statement is policy action itself as the bank doesn't need to announce these measures.  But the desire to semantically communicate can provide a policy function which serves gradualist  preservation dry powder policy approaches to save the full arsenal of tools for some other time when capital markets sniffs out inbalances.  What does it mean when the Fed still has to provide year end FX liquidity?  What does it mean when the EU has to issue new paper as part of funding the new EU mechanism bail out fund? 

Will central banks buy?  Will they sell sovereign or supra or agency paper to make room for purchases?  With IMF and EFSF (European Financial Stability Mechanism), European Commission and ECB review and sponsorship along with triple A ratings from Moody's, Fitch and S&P it feels like central bank likely buyers are buying themselves.  Hey, new concept:  Try to figure the spread price talk of buying yourself?  What spread to yourself are you willing to buy?  All circular.

We'll skip over the agency debenture market mainly, which is supposedly a liquid market, only other to say that callables, in particular, are nearly untradable.  Although some may debate this conversations with traders that have yard+ books suggests otherwise.  So does personal experience.

The irony is that swaps have ratcheted in despite extreme illiquidity and low volumes in liquid markets and a lack of swappable new issue calendar and where large money center banks can't procure all their funding needs.

Mind you, liquid Treasury market volumes at 50% of normal with most of the activity in year end window dressing bill space.  Bills are half the volume today.  Off the run Treasuries were performing horribly as of late, almost near LTCM type on the run/off the run "itis" which not only had the belly of the curve underperforming but also the off-the-runs in the belly (7yr) faring the worst.

Go figure that when the Fed announced the newest rung of buybacks  two weeks ago that they conveniently started with the 7yr sector and the off the runs.  Further, the decision by the Fed 48 hours ago to "clarify" that they can acquire up to 70% of any issue, conveniently served as a "stability" lip service boon to off the runs.  Recall, they recently relaxed the rule which limited purchases of any one issue to not exceed 35%.   Again, communicated with explicit tongue and cheek for the desired effect during year end illiquidity and carnage in dealer sheets, balance sheets.

I was asked earlier how to summerize trading themes of 2010.  Well, after looking at some notes and a walk down memory lane, I am reminded of Tiger woods being cited for "careless driving" and I have the official photo post "accident".  But as I look back to 12/09 is see headlines:

  • banks paying off TARP and windfall tax on bonus discussions, bank compensation changes, and Fannie and Freddie seeking more aid.  
  • Senate cleared health care measures for crucial test vote,
  • Greece may need to borrow $54 billion,
  • Fed economist calls for US Government MBS guarantees,
  • mining taxes, "retiree annuities" may be promoted,
  • protectionism,
  • Dubai CDS rising to record,
  • IMF selling gold reserves (hey announced again this morning),
  • largest CMBS Stuytown default,
  • Buffet's rail purchase.
  • Vix surge 30%,
  • Crises may force EU to buy govt bonds,
  • ECB bond purchases,
  • Estonia wins EU commission backing to adopt Euro :),
  • Spanish Central bank takes control of CAJASUR,
  • guest bartending (oops),
  • Build America bonds,
  • bond sales fall to least in decade,
  • jingle mail and voluntary foreclosure website,
  • Swiss intervention to buy Euros and CHF,
  • Jim Rogers buys Euros,
  • Hindenburg,
  • Apple.       
  • All Spanish banks pass stress test,
  • IMF says financial system may need $76 billion,
  • banks profits down-squeeze in trading profits,
  • new Basil capital rules,
  • Fed mulls symbolic shift,
  • Treasury buybacks! 
  • SOMA account,
  • Social Security cuts weighed,
  • FLASH CRASH, 
  • Fidelity sees record numbers raid 401ks,
  • PIIGS,
  • Muni crises,
  • Gold,
  • Petrobras,
  • GM,
  • Dubai holdings,
  • Rabo 100 year deal.
  • Summer resigns from White House,
  • Axelrod resigns from White House,
  • Rahm Emmanuel resings from White House.
  • Walmart midnight food stamp sales,
  • Fed investigates what constitutes a prop trade,
  • Fabrizio on the hill:CDOs,
  • Stanly Druckenmiller is leaving,
  • QE2,
  • Mexico 100 year bonds at 6.1%,
  • all time low yields in front end Tsys,
  • steepest curve,
  • stop bashing business:Ken Langone/Charles Schwab/Jeff Immelt,
  • Fed assets rise to $2.1 trillion.
  • Fed weighs new stimulus plan AGAIN,
  • Fed credibility,
  • Bernanke 60 minutes,
  • State bailouts,
  • Fed lifs self imposed Treasury limits,
  • Wall Street II, the movie, 
  • $110 oil call,
  • Iran switches 15% reserves to gold,
  • the search for a new currency system,
  • China tightens,
  • IMF reduces dollar weight,
  • China to curb food/cotton prices,
  • Warren Buffet writes "thank you" letter to Uncle Sam,
  • Philli GOs muni debt cut to A2,
  • Fed debates mandate from three to two to???,
  • bond vigalantes ride again! 
  • China should stop buying Treasuries.
  • Irish bank haircuts,
  • pay freeze for Government,
  • Wikileaks,
  • 99 week streak of bond inflows broken,
  • Portugal debt rating cut,
  • 6 buybacks in 5 days,
  • CyberMonday sales up 35%,
  • Seoul threatens air strikes,
  • extension of tax cuts, omnibus spending bill scrapped,
  • France's AAA grade at risk of ratings cuts,
  • Fed expands swap lines.

Given the rudimentary walk down memory lane above, I think themes have come full circle.  So the answer to the question of what were the main themes in the market is ...............valuations in equities, credit spreads, sovereign spreads, exchange rates, mortgage interest costs, bank earnings, net interest margin, accounting schemes, tax code, debt ceiling and more are all related.  Related to the ebb and flow of monetary and fiscal policy aspiring to make adjustments to imbalances caused by earlier failed fiscal and monetary policies.  How, circular indeed.