High Yield

On a regular basis we are placated by commercials to satisfy our craving to know which bathroom tissue is the most absorbent; debates 'infomercials' assuaging our fears over which vice-presidential candidate has the best dentist; and reality-shows that comfort our 'at least I am not as bad as...' need; there is an inescapable reality occurring right under our propagandized nose (as we noted here). Economic Reason has gathered together the Top 15 'reality' economic documentaries - so turn-on, tune-in, and drop-out of the mainstream for a few hours...

Blowout quarter, or do US bank numbers just blow?

The market is so focused on this morning's BLS number it has completely ignored the latest round of Reuters "news" (after their last two market-testing, unsourced "exclusives" about European developments were roundly refuted nobody can blame it) on how the OMT will proceed once operational (assuming of course Spain ever requests an activation of the mechanism that has allowed it to consider not requesting it). So, on to the thing of importance via BBG: expectations is for a NFP print of 115,000 and an unemployment rate of 8.2%. Any major surprises to either side will likely be risk negative. The unemployment rate has held above 8% level for 43 consecutive months; U.S. labor force participation rate last month declined to 63.5%, lowest since Sept. 1981. Back to Europe, a possible bailout for Spain is not imminent, a European Union official said, as concerns grow over the country’s ability to reach its deficit-reduction targets. The German recession accelerates as factory orders fell 1.3% in August, more than forecast. Switzerland’s foreign-currency reserves rose to a record 429.3 billion francs at the end of September from 420.8 billion francs at the end of August.Around the world: the Bank of Japan held off from more easing after adding to stimulus last month; shoppers from China’s mainland curbed spending at Hong Kong luxury stores during the Golden Week holiday.

Tonight's session has been even more boring than yesterday's, when nothing happened. Several data points came out of Europe, some better than expected, some worse, but all massively beaten down to where any uptick is merely a dead cat bounce. Retail sales in the euro zone rose 0.1 percent in August from July, when they also gained 0.1 percent. From a year earlier, sales dropped 1.3 percent. A composite PMI of manufacturing and services industries in the euro area fell to 46.1 in September from 46.3 in August, Markit Economics said. That’s above an initial estimate of 45.9. The problem is that the PMIs of the most notable countries: Germany (at 49.7 on expectations of 50.6, lowest since March 2006), France (45.0, down from 46.1, and below consensus of an unchanged print -keep a close eye on this suddenly fast-motion trainwrecking economy), Spain, UK and Sweden all missed badly. In the U.K., where the services PMI dropped to 52.2 in September from 53.7 in August. But don't call it a stagflation: it's been here for years - U.K. retail prices rose 1 percent in September from a year earlier after a 1.1 percent gain in August, the British Retail Consortium said. Some additional data via BBG - Britons injected a net 9.8 billion pounds into their housing equity in the second quarter, the Bank of England said. Elsewhere, one central bank that refuses to join the global easefest is, not surprisingly, Iceland’s central bank kept the sevenday collateral lending rate unchanged at 5.75 percent for a second meeting. None of this has been able to move the futures which are net flat with Treasuries steady, before the US ISM Services number (est. 53.4 from 53.7), the total joke of an indicator which is the ADP Employment (est. 140k from 201k) but which wrong as it always is, is the only advance hint into Friday as traders prepare for Friday’s nonfarm payrolls report (est. 115k, unemployment rate rising to 8.2%).

From the knee-jerk spike after the ISM data, US equity markets sold off relatively calmly for the rest of the day. Headlines will crow of a gain to start the quarter and what that means empirically, the real stories are under the surface: AAPL dropped 3% from its early-day highs to end at one-month lows; VIX jumped 0.6 vols to 16.3%; HYG, the high-yield credit ETF, was weaker all day and dumped into the close on huge volume; Treasuries were bid into the close ending the day down 1-2bps; and FX carry slid all afternoon as the USD rallied from -0.4% to -0.1% at the close. Commodities were juiced by Evans' dovishness (and Iranian fears) but the spikes in Silver (and less so gold) were retraced - though they all ended outperforming USD's implied strength. Tech and Discretionary underperformed as Staples and Healthcare were the winners. Not exactly the herd of performance-chasing monkeys everyone expected eh?

While it is just as perplexing that Goldman still has clients, what is most surprising in this week's David Kostin "weekly kickstart" is that Goldman's clients have shown a surprising lack of stupidity (this time around) when it comes to the impact of QEtc. Shockingly, and quite accurately, said clients appear to be far more worried about the inflationary shock that endless easing may bring (picture that), than what level the S&P closes for the year. Incidentally with Q3 now over, and just 3 months left until the end of the year, Goldman's chief equity strategist refuses to budge on his year end S&P forecast, which has been at 1250 since the beginning of the year, and remains firmly there. From Goldman: "QE has succeeded in increasing asset prices and inflation expectations but has not convinced investors to raise their US growth expectations. Instead, equity investors have expressed concern about inflation risks while both gold prices and implied inflation rates show similar shifts."

We have not been aggressive anti-CDS fanatics in the past - since the ignorance of mainstream media types satisfies that need - as the reality in the credit market is less extreme than many would love it to be. However, the latest move by Markit and its self-aggrandizing dealer owner/clients, to bring names into the high-yield credit index that do not even have CDS trading on them, is simply remarkable. While they will defend the move on the basis that it will force dealers to provide single-name CDS liquidity in three of the high-yield credit markets most-indebted companies (CIT, Charter Comms, and Calpine), the fact is that they are using the liquidity/fungibility of the index to enable risk to be unwound on what is likely bloated balance sheets containing too much of this crap. By imagining (or fixing LIBOR-style) where the CDS would trade, based on where the firms' bonds trade, we worry that the hitherto somewhat liquid source of 'fast' macro-hedging or positioning has become even more manipulable than before - and in the event of a default (or stress/illiquidity event), we can only imagine the law-suits. As the FT notes - all this does is provide more 'arbitrage' opportunities as opposed to real hedging; simply amazing that as with equities - it is now the synthetic indices that run the entire market.

UPDATE: CAT is sliding AH after noting higher chance of recession and cuts 2015 EPS guidance from $15-20 to $12-18 - Slide attached

Following Friday's two-year high volume levels on the NYSE - as OPEX and rebalancing dominated - today saw reversion to the dismal mean in both cash and futures market volumes. It seems sell-the-news was the meme today as builders (LEN earnings exuberance) and AAPL (less than whisper sales) sold off and broadly speaking we saw the month/quarter's winners lagging as safety and stability lead the way.

It is always amazing to observe how people become less risk averse after risk has markedly increased and more risk averse after it has markedly decreased. The stock market is held to be 'safe' after it has risen for many weeks or months, while it is considered 'risky' after it has declined. The bigger the rally, the safer the waters are deemed to be, and the opposite holds for declines. One term that is associated in peoples' minds with rising prices is 'certainty'. For some reason, rising prices are held to indicate a more 'certain' future, which one can look forward to with more 'confidence'. 'Uncertainty' by contrast is associated with downside volatility in stocks. In reality, the future is always uncertain. Most people seem to regard accidental participation in a bull market cycle with as a kind of guarantee of a bright future, when all that really happened is that they got temporarily lucky. Perma-bullish analysts like Laszlo Birinyi or Abby Joseph Cohen can be sure that they will be right 66% of the time by simply staying bullish no matter what happens. This utter disregard of the risk-reward equation can occasionally lead to costly experiences for their followers when the markets decline.

While others were buying TSYs in the month of August on hopes of frontrunning the central printer, and expectations that Bernanke's NEW QE announcement will lead to even more flattening in the curve (even though as we explained there is only $650Bn in free 10-30 year private sector inventory available in the entire market), Bill Gross, via PIMCO's flagship Total Return Fund, was busy selling. So busy in fact that over $30 Billion in US paper was dumped to unwitting investors, resulting in the move wider by the 10 Year paper which at auction earlier today priced at a multi-month high yield. As a result at the end of August, PIMCO's total Treasury exposure was just 21% of total AUM, the lowest since August 2011. And what did Pimco do with the proceeds? Nothing - it merely satisfied its margin cash position, which plunged from -18% to -6%.

The stellar 3 Year bond auction from yesterday is a memory, as Treasury prices $21 billion in very much unmemorable 10 year reopening. At 1.764%, the high yield was a tale to the 1.760% When Issued, and the highest yield since May 2012. The Bid To Cover also was also rather weak, at 2.85, well below the TTM average 3.07. Internals were also unspectacular with Indirects taking down a well below average 36.2%, compared to 41.94% avg in the past 12 auctions, Dealers taking down 52.2%, and Directs responsible for the rest or 11.6%. All in all very much a run off the mill auction, which takes us two thirds of the way to raising a net $28 billion in new debt this week, and closing just why of $16.1 trillion in debt (yes, it does seem like we just crossed the $16,000,000,000,000 barrier yesterday).

Retirement must be on again as the Dow creeps up to close at its highest since 12/28/2007 - no more reassuring sign that we need QE stat!! The high-yield bond ETF (HYG) also pushed to new highs - amid heavy volume - as it left its credit-spread and equity risk reality in the dust (as well as its intrinsic value) but who cares - QE/ESM/OMT/WTF - it's on like donkey kong. At least VIX kept some sense of rationality as it closed near its highs on the day, pricing in somewhat the binary concerns of the next 24-36 hours. Volume was nothing to write home about - nor was average trade size - as S&P futures rolled well off their highs to fall back below VWAP into the close and after-hours (when volume picked up). Commodities were mixed with Oil and Copper up, Gold flat and Silver down as the USD dropped (down 0.3% on the week) and stabilized after Europe's close. Treasuries leaked higher in yield (despite a record-breaking 3Y) but remain below Friday's peak-yield levels.

Moments ago the US Treasury auctioned off the latest monthly batch of 2 Year bonds, this time $35 billion, or toward the higher end of the issuance range, which was a bit of a dud. Pricing at 0.273%, this was a brisk move from July's record low 0.22%, a weakness which was substantiated by the expected pricing of 0.266% even though the When Issued traded at 0.275% coming into the auction, so technically there was no tail. That said, a very modest 9.01% was allotted at the high yield, implying the bulk of the action in the Dutch Auction was below the closing yield. Beneath the headline, the internals were not pretty either, with just 22.3% of the total bond taken down by Indirect bidders, well below the 32.78% TTM average, demanding an increase in both the Direct and Primary take downs, the former taking down 16.08% while the Dealers having to push 54.66% of the entire auction promptly into the tri-party repo market in exchange for cash to be used for much wiser purposes, such as buying Las Vegas REO real estate and converting it into rentals. Was the weakness of the auction a harbinger of disappointment from Jackson Hole - stay tuned for an opinion from Credit Suisse which says precisely this. And while the auction itself may have been unspectacular, there is a very historic aspect to this particular $35 billion bond issue, which we will reveal after market close.

The reason the market is up today? Jefferies' Peter Misek hikes his price target on Apple from $800 tio $900 (the same AAPL which is now supposed to grow almost exclusively in China, and where as Apple Insider just reported "China's second-largest carrier may end contract sales of Apple's iPhone"). Yes, middle market, $100-$200MM high yield bond issuer Jefferies has an equity research group. And yes, after working at JPmorgan, Scotia, Orion, Alpcap, and Canaccord in the past decade, Misek finally has found a place he can call home (for more than 2 years), or at least until the next bonus renegotiation-cum-upgrade option time. And yes, Jefferies actually is moving the volumeless market for the first and only time ever courtesy of 1.000 implied correlation between the NASDAPPLEURUSD. Which is great. Maybe Misek will be right here.,, Unlike his calls on DragonWave for example, where he was buying all the way from $7 until $2, in the interim moving his Price Target from $9.00 to $3.50 to $10.00 to $3.00. Peter likes even numbers. He keeps it simple, except for his $699 PT on AAPL back in March- why $699? "It's one iPad." Sometimes he likes it complicated.

Today was the lowest volume in S&P 500 e-mini futures (for a non-holiday trading day) in, well, bloody years (and NYSE volume was as dire as Monday's). Today's ES range, under 9 points, was the lowest in the last eight days of low ranges and in fact the eight-day range has only been this low a few times in the last few years and all but one of those marked a significant top. The S&P wavered around unch for most of the day with a US day-session-open ramp, post weak-data that signaled bad-is-good buying in Gold and stocks. Treasuries kept on leaking higher in yield, now up 12-16bps on the week as the USD meandered around unch on the week - with EUR weakness pulling it also back to unch on the week. VIX limped lower by 0.25 vols to 14.6 (after touching unch) but we do note that VVIX (the implied vol of VIX) has been diverging higher in the last two days but it's getting kinda crazy when we are looking at compound options for any signal. HY credit underperformed once again - with a quite ugly flush into the close (on heavy volume).