High Yield

Yesterday we presented Goldman's first 3 Top Trades for 2013 as they come out, while also noting Goldman's recent disfatuation (sic) with gold. Today, we present Goldman's 4th Top Trade for 2013, which is, drumroll, to go long Spanish Government Bonds, specifically, the 5 year, which should be bought at a current yield of 4.30%. with a target of 3.50% and a stop loss of 5.50%. This reco comes out after the SPGB complex has already enjoyed unprecedented gains - but not driven by economic improvement, far from it - but merely on the vaporware threat of ECB OMT intervention. Of course, once the "threat of intervention" moves to "fact of intervention", everything will promptly unwind as it always does (QE was far more potent as a stock boost when it was merely a daily threat: the market's peak not incidentally occurred the day after Bernanke dropped his entire load: one simply can't move beyond infinity). And with Spain's massive bond buying cliff in Q1 2013, the days its bailout could be postponed are coming to an end.

1. Stay short AUD/NOK, opened at 5.90 on 03 Dec 2012, with a target of 5.00 and a stop on a close above 6.35, currently at 5.88.
2. Stay long risk (sell protection) on the CDX High Yield on-the-run index, opened at 506bp on 04 Dec 2012, with a spread target of 450 and a stop on a close above 550, currently at 516.
3. Go long the Commodity Carry Basket (Crude, Corn and Base), opened at 100 on 05 Dec 2012, with a target of 112 and a stop on a close below 94, currently at 100.

We warned yesterday that European equity's surge was not supported by credit and that truism is massively obvious in today's market moves. European stocks soared (especially Italy and Spain) to new cycle highs as corporate and financial credit capped in its recent range - actually widening from its opening gap tights. European sovereigns also gapped tighter on the open and then proceeded to bleed wider all day long - most notably in Spain, Italy, and Portugal. Spanish 2Y jumped over 25bps from low to high yield today (and we suspect Spain bond yields have bottomed in teh short-term). EURUSD remains practically unch on the week - having dropped from over 1.30 earlier when Van Hollen let some truth out on the US fiscal cliff deal. Oil recovered from its spike lows yesterday (as did Silver). GGBs were very quiet and stable at around 35 but Weidmann's comments into the close on transfer unions and not rewarding failure did spook some weakness into risk-assets. Europe's VIX, meanwhile, closed at 16.49% - its lowest since June 2007!

Equity indices bounced off re-coupled gold performance after Boehner's 'nothing'  led into European close pump which was supported by Obama's 'nothing' then pumped for one last stop-run over recent highs thanks to another 'nothing' from WSJ's Hilsenrath. Remarkable! A 2% rise off the day's lows moved us well above the recent Reid-top. Risk assets in general were far less exuberant as stocks really stepped up the decoupling after around 1300ET. AAPL ended red, bumped up against its closing VWAP and sold off every time; VIX traded from 17% highs to 15.5% at the close; and HYG plunged into the close to end the day unchanged (on huge volume). Today appeared very much a catch-up day for stocks to a number of asset-classes that were not sold hard yesterday - the recoupling is complete now.

Reid's sell-off has been entirely retraced by a Boehner-Obama double-act in which they didn't spit, scratch, and gnaw at each other. The algos have it now and so stop-runs in stocks are all that counts. Equities are in a world of their own as they decouple from everything from high yield credit to Treasuries and from oil to the USD. Correlations have dropped as we approach Reid's top - we wonder if reality will sink back in shortly. It would seem, once again, that EURUSD is the most-leveragable vehicle of the day once again... and of course this ramp enabled AAPL to get back to yesterday's VWAP.

It's one of those low-volume melt-up technical kinda days... so why is the should-be-correlated high-yield credit market selling off? (and Treasuries rallying as stocks push swing highs)

Stocks tend to experience very long periods (5-20 years) of either anemic or exceptional returns, which UBS calls Investment Regimes. Somewhat surprisingly (to some), they note that returns during these periods are not driven by divergences in economic or earnings growth. Rather, Investment Regimes are defined by secular multiple expansion or contraction - and it is critical to understand this dynamic as over the past 40 years (and four regimes) investors have tended to focus on only one dynamic at a time. From the 'Disco' regime to the 'Hangover II', UBS explains in a few simple charts why all eyes should be focused on high-yield credit - as we have noted time and again. Inflation signals are gone, the 'Fed model' is broken, and investment grade credit is too repressed to matter (until it does!)...

Today it is all about the elections. It is not about last night's relatively surprising RBA decision to not cut rates (on an attempt to create a reflexive feedback loop when it said that China has bottomed; it hasn't, and the RBA will be forced into another "surprising" rate cut as it did previously). It is also not about Europe missing its Service PMI estimate (just like the US), with the composite printing at 45.7 on expectations of a 45.8 print (with both core countries - Germany and France - missing badly, at 48.4 and 44.6 on expectations of 49.3 and 46.2, respectively).  It is not about reports that the EU believes Spain's GDP will again contract more than expected (it will, and certainly without any reports or beliefs). It is not about Greece selling €1.3 billion in 26-week bills even as, according to ANA, its striking power workers have taken 5 power plants online just as winter approaches. It is not about Jean-Claude Juncker telling the truth for once, and saying that Europe is still in crisis, and is facing the viability of the Euro (after saying weeks ago that the Euro is unshakable) and that some countries aren't facing up to their responsibilities. It most certainly isn't about German factory orders finally collapsing as the country is no longer able to delay its slide into full-blown recession, with a September decline of 3.3% on expectations of a modest drop of -0.5%, from the previous decline of 0.8% (the German ministry said that a weak Eurozone and lack of global growth are taking its toll; they will continue taking its toll for years and decades longer). No. It is all about the US elections, with the peak frenzy starting as soon as polls officially close at 8 pm. Everything else is noise.

As we warned here first, and as the sellside crew finally caught on, while the key macro event this week is the US presidential election, the one most "under the radar" catalyst will take place in Greece (currently on strike for the next 48 hours, or, "as usual") on Wednesday, when a vote to pass the latest round of Troika mandated austerity (too bad there is no vote to cut corruption and to actually collect taxes) takes place even as the government coalition has now torn, and there is a high probability the ruling coalition may not have the required majority to pass the vote, which would send Greece into limbo, and move up right back from the naive concept of Grimbo and right back into Grexit. Which is why the market's attention is slowly shifting to Europe once more, and perhaps not at the best time, as news out of the old continent was anything but good: Spain's October jobless claims rose by 128,242, higher than the estimated 110,000 and the biggest jump in 9 months, bringing the total number of unemployed to 4,833,521, a rise of 2.7%, according to official statistics released Monday. This means broad Spanish unemployment is now well above 25%.  In the UK, the Services PMI plunged from 52.2 to 50.6, which was the lowest print in nearly two years or since December 2010, and proved that the Olympics-driven bump of the past few months is not only over, but the vicious snapback has begun.

"Obama/Romney, Romney/Obama – the most important election of our lifetime? Fact is they’re all the same – bought and paid for with the same money. Ours is a country of the SuperPAC, by the SuperPAC, and for the SuperPAC. The “people” are merely election-day pawns, pulling a Democratic or Republican lever that will deliver the same results every four years. “Change you can believe in?” I bought that one hook, line and sinker in 2008 during the last vestige of my disappearing middle age optimism. We got a more intelligent President, but we hardly got change. Healthcare dominated by corporate interests – what’s new? Financial regulation dominated by Wall Street – what’s new? Continuing pointless foreign wars – what’s new? I’ll tell you what isn’t new. Our two-party system continues to play ping pong with the American people, and the electorate is that white little ball going back and forth over the net. This side’s better – no, that one looks best. Elephants/Donkeys, Donkeys/Elephants. Perhaps the most farcical aspect of it all is that the choice between the two seems to occupy most of our time. Instead of digging in and digging out of this mess on a community level, we sit in front of our flat screens and watch endless debates about red and blue state theologies or listen to demagogues like Rush Limbaugh or his ex-cable counterpart Keith Olbermann."

Wizened old market participants are often heard mumbling into their cups of green tea that "credit anticipates, and equity confirms" and so it is once again that the credit markets - fresh from the exuberance of endless technical flows, CLOs, and PIK-Toggles - has made a rather abrupt U-Turn in recent weeks. As Barclays points out, the ratio of High-Yield bond spreads to Investment-Grade bond spreads is its highest in three years as IG has been dragged lower by QEtc's impact on MBS and rotation up the spread spectrum. Typically, this kind of push would mean high-beta credit would outperform but far from it as cash bond markets have gapped out very recently. With call constraints (thanks to ZIRP) on high-yield bonds, the extreme price dislocation (given HY's inability to rally 'enough') will likely drag IG credit out - and that is a very crowded trade. Just one more unintended consequence from the Fed.

With all the hope slooshing around the world, it is likely no surprise that some risk-reward connections have 'broken' or become misaligned. In an effort to simplify the view of asset class risk and return, we present Morgan Stanley's Yield vs Volatility chart. It seems relatively plain to see that the Russell 2000 (and European stocks SX5E) are dramatically over-priced (under-'yielded') relative to their risk, while Asian and European High Yield credit (and to a lesser extent Asian and European Investment Grade Credit) are trading notably cheap relative to their volatility. So for all those performance chasing asset-allocators who remain fundamental bulls, buying European High Yield credit seems the best bang for your buck - instead of piling into more Russell 2000 beta...interestingly the S&P 500 appears 'fair' compared to risky sovereigns, global stocks, and global credits from a risk-reward perspective.

Twice this year we have seen the US equity market become enamored of its own hope-holding, momentum-trapping, liquidity-driven, success while the bond markets (Treasury and High Yield) have remained a little less sanguine. This lack of exuberance among all but the equity players perhaps better reflects the sad reality of fundamentals (as we noted here) or perhaps this time it is different. To wit, the following two charts as a gentle reminder that gravity still exists and where the short-term floors might be...

Over the weekend there appears to have been more confusion about pretty much everything finance related by aspiring CTRL-V majors-cum-'market experts.' In this specific case, the correlation between the soaring US deficit is magically supposed to imply the causation of surging corporate profits. Standalone this would be wonderful, because in a socialist utopia thought experiment, where one could hit infinite deficits funded by some magic MMT money tree, corporation would make, well, an infinite amount of profits, and would be an incentive for the government to spend itself to oblivion. And everyone would be happy right: infinite corporate profits means at least some trickle down wealth, and infinity even minus a big number is still infinity, meaning full employment for everyone. Hence utopia. Idiocy of this conclusion aside, the bigger problem with making the biggest rookie mistake in finance (and statistics), namely confusing correlation with causation, is that it is, as usual, 100% wrong when presented with one counterfactual. And when it comes to counterfactuals of soaring deficits, one always goes to the place that has "been there and done all of that" before. Japan.

From 1987: How much time do I have to liquidate?    Answer:  We need you to do this by Monday night.