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A "Recycled-Pig" Market

Submitted by Tyler Durden on 03/16/2010 10:01 -0400

Another day, another phrase of ridicule to describe the grotesque absurdity of equity trading (do I hear a bid for a 100 block of SPY, going one once, going twice... etc). The latest version comes courtesy of David Rosenberg, who, approrpriately, comes up with a bacon-parable to describe just what is going on.

One can only marvel at how the U.S. market managed to bounce back in the last hour of trade yesterday — the intraday move in the Dow exceeded 70 points. Yet, once again, volume faltered on the major exchanges. This remains one weird market, and reminds us of the story of the pig farmer — one sells a pig to the other for a dollar only to then have it sold back to him for $1.25 and then sold back to the other farmer for $1.75 and so on and so forth. It’s two pig farmers selling the same pig back and forth and driving the price higher in the interim — until of course, the price dynamics shift into reverse. It’s a great story (courtesy of Doug Behnfield at UBS) and probably apropos to what we are seeing today in this low-volume rally but still impressive comeback from the January lows.

And some further against the grain observations:

The problem remains one of what we saw back in 2007, which is that in a credit contraction cycle, it is never apparent to the long-only crowd when the time comes to reverse course. And, let’s not forget that following two government-induced rallies in the past decade, we also had two colossal collapses. With corporate balance sheets in superb shape and BBB-rated paper still yielding well over 5% (and single-A at about 4½%), why not get paid to wait? Longer-dated (15 years+) carry a coupon in excess of 6%. Equities only carry a 2% dividend yield and require a strong economy to generate the earnings, which it is not going to get in the future because we can see things slowing down already this quarter (looks like GDP growth is going to get sliced in half from the Q4 pace); corporate bonds only need the company to survive and meet its servicing obligations.

Also, a full month after we have been warning about the High Yield roll threat, somehow everyone is now on the topic.

Staying in short-duration paper may be the safest route to go. The reason for that is contained in the must-read article on the front page of today’s NYT (Tight Credit seen as Corporate Debts Come Due). In a nutshell, Corporate America has managed to only delay an inevitable refinancing spree that is expected to commence in 2012 when $700 billion of high-yield corporate debt comes due, and this rollover process is expected to last three years (compare that to the miniscule $21 billion in refinancing requirements this year). The maturity calendar looks like this:

$155 billion in 2012;

$212 billion in 2013, and;

$338 billion in 2014.

This is ‘payback time’ for all that excessive credit that was taken on 5-7 years ago at the height of the debt and asset bubble.

At the same time, all of this high-yield debt is going to be competing with an estimated $1.2 trillion of investment-grade corporate bonds that are expected to mature from 2012-2014; not to mention $4.6 trillion of federal government debt rollovers ($1.8 trillion in 2012 and $1.4 trillion in the next two years — and that is just based on current projections).
Then tack on the tripling in CMBS rollovers by 2012, to $60 billion. So while there has been ‘terming out’ of bank loans in this past year’s debt-issuance frenzy, it would seem as though what the corporate sector has bought was time … two year’s worth.

Rosenberg picks up on the Iran story, which has so far not seen much MSM discussion:

As an aside, when we see the front pages of the National Post (U.S.-Israel Rift ‘Historic’), Wall Street Journal (Israel Rift Threatens U.S. Plans In Mideast) and NYT (Israel Feeling Rising Anger From the U.S., But Netanyahu is Firm on Housing Dispute) we think of a lot of things, such as how this is diverting attention and resources away from the real source of tension in the Middle East, which is Iran.

However, for investors we can’t help but think of where the oil price is headed; and energy stocks as well. After all, one of the few sectors that has not advanced this year in the stock market is the energy complex — it may be time to start looking at it again. As Chart 1 shows, the ratio of the oil price to the S&P 500 Oil & Gas index is at the low end of the range of the past two decades.

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Tue, 03/16/2010 - 10:13 | 267057 BS Inc.

Oh, look, a graveyard. I think I'll just walk on by whistling.

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Tue, 03/16/2010 - 10:17 | 267060 Cognitive Dissonance

It's actually the story of the three little pigs. It's where you have two little pig traders and one very fat little pig Fed, who is feeding liquidity to the two pig traders in an effort to fatten up the herd for the slaughter.

The rest, as they say, is (or will be) history.

http://en.wikipedia.org/wiki/Three_Little_Pigs

Tue, 03/16/2010 - 10:16 | 267063 Racer

So in this market all you need is two HFT computers playing with each other and as long as the market is going up nothing will be done about it.

But the idiots who let the sub-prime mess become a stinky mess are allowing yet another even bigger mess happen

Tue, 03/16/2010 - 10:21 | 267069 BS Inc.

The real goal, of course, is to get a third farmer (a.k.a. the retail equity investor) to come along, buy the pig at the going rate and then have the first two farmers split the profits. The problem is, the third farmer is nowhere insight and is actually off buying chickens (a.k.a. bonds) because he's decided, after trying pig twice and getting sick from it, that he's not going to eat pig anymore.

Metaphors aside, I think Wall Street may have made a great strategic error in thinking that if they just drove up equity prices, they'd be able to offload them to retail investors at higher prices. It appears they completely misread the public's shifting asset preferences and someone's going to get stuck holding the bag.

Tue, 03/16/2010 - 10:29 | 267082 Cognitive Dissonance

"actually off buying chickens (a.k.a. bonds) because he's decided, after trying pig twice and getting sick from it, that he's not going to eat pig anymore."

Sadly, the Fed will only be able to keep it's finger in the hole of the interest rate dike for so long. When the dike breaks and interest rates go up (and up and up and up) the retail investor will find that s/he is once again the greater fool at the rigged poker table

Tue, 03/16/2010 - 10:22 | 267070 Popo

Why use a pig analogy when the contemporary art market will do just fine?

Tue, 03/16/2010 - 10:43 | 267107 Internet Tough Guy

Just keep putting lipstick on it, and things will be fine.

Tue, 03/16/2010 - 10:47 | 267110 M31Capital

I wonder why Rosie isn't at BAM-ML.....

Tue, 03/16/2010 - 11:05 | 267141 Gimp

Senor Ponzi would be proud.

Tue, 03/16/2010 - 11:24 | 267167 AnonymousMonetarist

Groundhog day.

Slaughterhouse Fine.

Tue, 03/16/2010 - 11:36 | 267188 Double down

"That will do, that will do"

Tue, 03/16/2010 - 13:29 | 267406 gratefultraveller

There is one more way that S&P 500 Oil & Gas index ratio can move higher...

Wed, 04/14/2010 - 09:28 | 299844 mark456

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A "Recycled-Pig" Market

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