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As The Treasury Curve Pancakes Again, Bank Profitability Goes Out Of The Window (Making The Curve Flatter Still)
On November 14, we took full liberty of mocking ourselves and our call for a flattening of the long end (10s30s) over and above the din of virtually every sell-side analyst and so-called pundit out there, who, with the exception of Morgan Stanley, all were screaming that the 10s30s was about to embark to levels of unseen steepness. To wit: "After recently the market took all calls of a flattening in the 10s30s
to task, one would think that those anticipating a curve flattening
(Zero Hedge included) would finally have learned their lesson." Luckily we persisted in our obstinacy. And as the chart below shows it appears that was a very good decision: since that day, the 10s30s has collapsed by almost a quarter from a high of 160 bps to 124 bps. That said, in our opinion, the curve has much more flattening to undergo still: after all virtually the entire world was long the 10 Year, and short the 30 Year, expecting that Brian Sack would be able to maintain at least the belly, if not the long-end. To everyone chagrin, groupthink has once again proven to be a disastrous trade. Furthermore, keep in mind that the 10s30s was trading sub 100 bps as recently as this summer, which implies that technicals are favorable. And lastly, the drubbing in the curve means that that mythical bank profitability (thank you Dick Bove) is once again delayed, which also means that the broader economic prospects are deteriorating, making QE3 for Long End Treasurys (those securities that are not going to be monetized municipal bonds) very likely to be purchased next as the Fed realizes that it will have no option but to buy much more of the 30Y as it will already be full to the gills with all other sections of the curve. Bottom line: we expect the flattening to persist and in fact accelerate once the always late CNBC pundit crowd realizes that a 23% flattening in the curve (not to mention record low market volume) means that bank Q4 EPS are once again going to suck.
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Which is why Ben was setting you up for the next leg of the $70 trillion bailout (where DO I get that number?--it's just so HURTFUL).
However, keep your eye on BLS Bachelor's + unemployment: 5.1% in November. Hate BLS? OK. 10% Still, that's the signal: "Full speed ahead with Mellonesque looting via bailouts--NO haircuts and NO defaults."
Will continue til BLS 20%, and that will be.... (please provide month and year: latest candidate--March 2013).
And why 20%. Because that's when the revolution happens.
I am 100% certain that the bailout will not exceed $70 trillion. 100%. (Please please please don't ask whether that's in current or 'revalued' fiatscos.)
A flat curve is the best thing that could happen to banks.
Even better if short rates are raised and the curve flattens because the short end goes up in yield.
In this manner banks will be forced to take risk and lend money to business to continue with their profitability.
How come no one else is mentioning this...?
@Dickweed (LOL)
Do you REALLY think the objective of the banking plutocracy is to assume RISK? Bwahahahahaha! Let's just leave that in your civics textbook where it belongs.
Its not entirely improbable that a steep yield curve can occur at the same time as declining long term rates. The discount rate would have to go negative. The Japanese managed to avoid negative rates domestically for an extended period of time with an appreciating currency over decades with the exception that they had negative libor for a time.
Lower rates do not, however equate with solvent banks. In fact, the lower rates go, the more insolvencies. When I started referring to this blog, they only had 25 banks on the list.
http://bankimplode.com/
Secondly, somebody owns your risk if you've borrowed any money at all and trades it on Wall St. (or Bay St. as the case may be) They trade in your risk, they own you.
Because you aren't using your other avatars.
Also, no one is mentioning that bonds should have been sold in Sept - not necessarily now. That move is looking mature to me and today merely looked like a shake-out day towards the end of it. Once stocks and commodities start getting dumped, the funny money will go into these because they are the only thing decent (ok, decent is a stretch) on a relative basis.
some home-made breadth charts/commentary:
thelastcanary.blogspot.com
I'm telling you split second bonds are going to be all the rage in 2011.
http://www.youtube.com/watch?v=nycE98gSB0w
The shortest term bond is probably the swap or repo. What interest rate would you apply to this short term paper? The overnight rate? The discount rate?
Because if you issued repos with a zero-interest coupon, then you would literally be counterfeiting.
Don't the british call that LIBOR.
50 day weekly (barely) held on 30yr and still away for 10 yr but getting much closer. we'll see if the vigilantes mean business.
sure 10/30s flatter, but what about 2/10s? thats where the banks make their bread.
The 1m UST price rallied significantly yesterday too, no movement in the 3m.
Selling gold & buying UST bills!?
Funny how my former employer's stock is now rocketing after getting killed when it charged off an $84 million loan to its largest customer.
do you know why you continually get 'junked'? i generally find your comments to be inoffensive at the very least, and often rather informative and / or humorous. just curious. TIA
My take is Robot is really not thrilled with this market, but is smart enough to get and find the deals. He has the intelligence to do that. I don't. I have to take a position and stick with it and ride it out. I don't want to speak for him, but I believe he is bearish, but an opportunist as a good trader should be. I use his comments as a barometer, and it pisses me off sometimes, yet I have learned much from his postings.
Those that Junk him are bears like me, but they refuse to see the opportunities and are pissed at the market manipulators, and take it out on Robot.
BTW Robot, thanks for the posts. But WHERE ARE THE GIRLS?? I think you are getting "junked" because you don't post those great women anymore.
I'm with Everyman. I'll take insights wherever I can find them - bull or bear. But I miss the pictures.
He gets junked because he doesn't post enough boobies.
And yet the stock market continues to hold up and move higher. DJIA 36K here we come!
Go FAZ!
I swear by god one day I will get rich off FAZ before this is all over. I have every invested cent free in FAZ since Nov of 09. I just stopped trading and said screw it when this pinch unravels I must own FAZ. These REITS and Zombie banks will make me rich soon enough and then I will buy equities in about 4 years.
Faz has raped many a bear since march 09. But this time I think things will stick. Banks have not participated in the run up this year. Even though anyone who invests with a brain knows banks must lead us up because they lead us down.
There is no condifience when BAC is sitting at 18 month lows. Too much shit going down and shrugged off.
Cnbs will have a WTF moment when the house cards falls apart on another flash crash day
I vote a violent protest at CNBC to the point it is shut down. When is ComCast going to take over anyway. Kramer and Kudlow need to GO GO GO!
@John McCloy
FAZ is the choice of all Dead Presidents! BAC is being prepped for an autopsy as I type. BTW, been enjoying all your posts.
Honestly I don't see Robot make many bad calls. They may fly in the face of fundamentals sometimes, but if you've been paying attention, you also know fundamentals don't mean shit anymore.
Bear as I am, I know like Robot that this can go on for an undetermined amount of time before the music stops.
I'm also pretty sure Robot will be just fine if the shtf. I doubt he is playing with his rent money, and would be willing to bet he owns as many ounces as the next guy.
...of weed...
Thats because RT doesn't make any calls. He shows you 5 minute charts after the fact without any indication that he put his money where his mouth is.
Now, if RT ever posted a stock pick and analysis and then came back 24 hours latter to show how his call was right, I will begin to respect him a bit. Until then, he is just reporting the news, not predicting anything.
This is insignificant if you look at the consumer side, ie 7% business loans, 10-20% credit cards.
Are bank stocks even trading on earnings rather than perceived asset values?
Earnings from perceived asset values, aka income via mark2myth. It's all unicorns, rainbows and purple plastic hippos from china.
They are trading purely on the fact that sheeple continue to look the other way. This is bullish for bank stocks. Sell when you hear that the extra zero on the new FR notes gives the Bernank likeness on it a third eye 100000000000000000000000000000000000000000000000000000000000000000000000000000000000000000000000000000000000
Or when you are told you can use your high yield cd as a postage stamp. That might be bearish....
Hmmmm....time to agree with Tyler.
Now that they've totally lost control, Bubbles and the Sackman will have to buy enough 30 year bonds to rip the shorts faces off and thereby enforce discipline across the rest of the curve. Shouldn't be that difficult
cause there ain't much of a supply that far out.
By my calculation, the Fed has
wiped out its own net equity of $56B in the past three months as yields
have risen on it's 2.2TR portfolio.
So Ben is technically broke and in
need of a bond rally. Hmmmm...how do
you get a bond rally?
while it's interesting that the LONG END of the curve, more commonly know as 10s-bonds is flattening from extraordinary wides, its nowhere close to its LT avg of ~18bps. Wake me when it gets there. NOW, "THE CURVE", more commonly known as 2s-30s, is flirting with all time wides.
I realise not everybody was lucky enough to get proper training in bonds because they worked at Dean Witter and never went through the Solly training class, but PLEASE do a better job of hiding your ignorance - it's embarassing.
Tyler, thanks for the timely and accurate article.
I'm theyenguy, a populist economist, and an apocalyptic blogger.
I wrote yesterday that the the gold mining stocks turned lower on a flattening yield curve.
The 30 10 US Sovereign Yield Curve, $TYX:$TNX, flatten today. The 30 10 is a measure of investment and risk cycles. The flattening seen in the chart of the yield curve documents disinvestment from risk that commenced on November 5, 2010 as the bond vigilantes sustained the Interest Rate on the 30 Year US Government Bond, $TYX, higher, and as the currency traders sold the world currencies, DBV, and the emerging market currencies, CEW.
The gold mining stocks, GDX, fell 2.2%
The junior gold mining stocks, GDXJ, fell 3.6%
The silver mining stocks fell, SIL, fell 2.6%
Silver Standard Resources, SSRI, fell 5.3%; its chart performance shows that it to be one of the top swing stocks.
The HUI precious metal stocks, ^HUI, traded lower as the 30 Year US Government Bonds, EDV, traded lower. The chart of the HUI Precious Metals relative to the 30 Year US Government Treasuries, $HUI:$USB, turned lower, after having gone parabolically higher yesterday. The gold mining stocks and the US Treasuries have often turned lower in the past together. The chart suggest that the great price paid for value is now over as well as risk is now over.
The Gold Mining shares Relative To Gold, GDX:GLD, manifested a lollipop hanging man candlestick, suggesting that the rise in gold mining stocks relative to physical gold is complete.
he precious metals in the futures market, JJP, manifested bearish engulfing candlestick at the top of an ascending wedge, “suggesting” that the end of end of a cycle is at hand. This of course does not mean that the price of the metals in the futures will turn lower, it just means that some see the end of a cycle. And of course this does not preclude that an even greater cycle might commence soon. It just means that some see the conclusion of an investment wave.
Gold mining stocks are the ultimate value stock … they are the ultimate cyclical stock … they are the ultimate swing stock and “the great swing of the age is in”. The gold socks fell on falling yield curve.
Investors have been buying risk, that is risk both in the gold mining stocks and in the 30 Year US Government bonds. And today investors sold out of both risks with the ultimate risk being in holding the ultimate value stock, that being the precious metal mining stocks.
People invest in gold mining stocks because they like to swing. People who are gold stock investors, have risk appetite, and today they chose the opposite, that being risk avoidance, recognizing that digging around for precious metals is risky in every since of the word, and that there comes an end to a risk cycle and that day arrived today as the bond vigilantes picked the global investment bubble, by calling interest rates higher as the US President and the Republican Congress have refused to trim the deficit and raise taxes.
The Morgan Stanley Cyclical Index has 30 components, one of which is Freeport-McMoRan Copper & Gold, FCX, a basic materials company, and it rose 0.7% today, showing its copper component, as Copper Mining Stocks, COPX, rose 2.0% as the metal copper, JJC, rose 0.1%.
Copper Mining Stocks, COPX, rose manifesting a hammer candlestick, often a termination indicator.
Copper, JJC, the metal, rose manifesting a lollipop hanging man candlestick, often a pivoting indicator.
The chart of the Morgan Stanley Cyclical Index, ^CYX, $CYC, shows a hammer, suggesting that its rise, that came with the rise in the Euro, FXE, with the announcement of the European Financial Stability Facility, EFSF, is over, and that a down cycle is now ready to commence, as concerns grow over the US Budget, monetization of US debt by the US Federal Reserve QE2, and by sovereign debt residing in European Financial Institutions.
Massive debt deflation and an unwinding of yen carry trade and dollar carry trade investment is imminent.
Competitive currency deflation, that is competitive currency devaluation at the hands of the currency traders will be taking commodities, bonds, and stocks lower.
The age of deleveraging is about to commence.
I suggest that the coming down cycle is an entrance into an Elliott Wave 3 Down, which is the most destructive of all economic waves … The wave ends up, for all practical purposes ,destroying all wealth. … In this case, the destruction of most all the value in the cyclical stocks found in the Index.
If one can stand more bearishness then I suggest a full reading of my blog article .... but if you see only bullishness, well then, please just move along, yes move along.
http://theyenguy.wordpress.com/2010/12/07/the-end-of-the-current-economic-cycle-manifests-as-the-euro-gold-stocks-and-bonds-turn-lower/
That's gonna leave a mark. Can't wait for "earnings season" this Feb.