High Yield

Something different today. A dip was bought and kept a little momentum - aided and abetted by some late-afternoon desperation EUR buying correlation-help which dragged the Dow back over the magical 12,500 level. Stocks and high-yield credit bounced nicely today - with the latter dragging the former higher from what we could tell (on the back of reversion to fair-value in the ETF and credit market) - as the rest of risk-assets were generally stable. AAPL rotation (making yet another one of its 9-plus % drops-and-pops) helped drag NASDAQ up while FB dragged the entire social media segment down. Financials, while up as a sector, were ugly in the majors with JPM joining Citi and MS in the red YTD now and BAC back to 4 month lows. Gold was unch and silver down as Oil and Copper jumped (with the former testing $93 at the close). Treasuries were practically unchanged from Friday's close but the long-end rallied the most from its opening levels last night and the 2s10s30s curve was a significant risk-on driver. Stocks were on their own though when we look at Treasuries, the USD, and gold as it appears the credit compression arbs were enough to pull stocks up and AUD and EUR strength into the close was interestingly aggressive - short-squeeze or does someone know something? Heavy and large size volume into the close suggests it was another ramp to provide exits - and credit indices needed to shed some 'cheapness' - though we remember that Europe is due to open in 10 hours. VIX tumbled over 3 vols but remains above 22% with the term-structure fo vol still steep.

The policy responses and hints of policy responses are starting to come out.  What will they be, how big will they be, and what will they accomplish remains to be seen, but the market is due to rally on almost anything. We expect some announcements out of Europe.  A policy shift towards “growth” and some new ECB plans. We don’t think they will work well, especially if they don’t address the root of depositor fear in Spain, Ireland, Portugal, and Italy, but with so many indicators pointing to oversold conditions, the markets could snap back, and that is the way Peter Tchir of TF Market Advisors is leaning.

There's a big, fat "I told you so" coming down the pike. 

Today was special - full-retard kind of special - as the S&P 500 e-mini futures (ES) did a double-dip deja vu move extending the series to seven days in row of early buying and late selling as ES closed at new cycle lows and a plethora of other asset classes all dropped aggressively to multi-month records. Credit markets remain the indicator for weakness and while JPM's exaggerated the moves, bear in mind that IG credit is only correcting back to where its underlying names have been trading (forced rich - too high - by JPM's previous actions) and the late-day sell-off dragged stocks down near to convergence. Some early stability in IG9 provided a quiet rally in financials but as the afternoon began the selling restarted in the credit index (which pushed to new cycle wides - despite the skew collapsing - as momentum is in charge now). Commodities slid on USD strength and liquidation pressures as we note Gold held in well (better than its peers) until the last hour or so (which has the smell of margin/collateral calls). Equities recoupled with Treasuries today after 3 days of exuberance (again).

Many pixels have been 'spilled' trying to comprehend what exactly JPMorgan were up to, where they are now, and what the response will likely end up becoming. Our note from last week appears, given the mainstream media's 'similar' notes after it, to have struck a nerve with many as both sensible and fitting with the facts (and is well worth a read) but we have been asked again and again for a simplification. So here is our attempt, in 22 simple tweets (or sentences less than 140 characters in length) to describe what the smartest people in the room did and in possibly the most incredible irony ever, how the Fed (and the Central Banks of the world) were likely responsible for it all going pear-shaped for Bruno and Ina. The key factor is that if systemic risk had remained in even a 'normal' range of possible regions based on history, then the JPM CIO office would have had no need to over-hedge their tail-risk hedge position, no greed-driven need to press the momentum, and no need for such an epic collapse as we are seeing now. The point is - this was a trader/manager with a good idea (hedge tail risk) that was executed poorly (and with arrogance) but exaggerated by the unintended consequences of the Central-Banks-of-the-world's actions (and 'models behaving badly' as Derman would say).

When it comes to question of "who is right" in the market, the debate usually ends with credit (investment grade) or equity (and its high beta equivalents in the fixed income arena: high yield bonds). And since the question is rhetorical we will kill the suspense and cut straight to the answer: always, and without fail, credit. The chart below shows that once the manipulated ramp up in high beta risk equivalents such as the ES and HY is over (especially since IG is now losing its artificial JPM-induced bid, or technically offer, which is unwinding positions across all vintages and buying protection to close short positions), the way down to a credit-implied fair value of 1335 on the S&P will be fast and furious.

For the first time since last July, right before the market's grand plan collapse, the Dow has fallen for 6 days-in-a-row. We could of course have just copy/pasted yesterday's end-of-day as today was a case of deja deja vu all over again as we sold off hard overnight (basically top-ticking right before the US day-session close), made new overnight lows, then managed a miraculous rally into and across the European close only to stall once again as the dip-buying algos enabled bigger blocks to dump into momentum retail players. The European close hour saw your standard 4-sigma swing (low to high) in ES (S&P 500 e-mini futures) but gave half of it back it its typical VWAP reversion as for three days in a row we have dipped and tested the S&P's 50DMA and rallied on lower volume (though ended the day with the 3rd highest volume of the year). The USD rallied further with the EUR ending around 1.2950 (though off its lows of the day) but once again commodities (which sold off pretty hard overnight) managed to crawl their way back higher (closing rather interestingly at the same levels at which they opened the European day-session). VIX ended above 20% (its highest close in a month) and its flattest term structure in five months. Treasuries ended the day marginally changed (-1bps 10Y, +1bps 3Y) but ended well off their low yields of the day. High yield credit was a major underperformer - ending below yesterday's lows (as was IG credit) - bearishly diverging from equities again.

Three important things occurred today: 1) US equities converged down to high-yield credit's less sanguine view of the world; 2) US equities converged to US Treasuries hope-less view of the world; and 3) Gold was the leading indicator for where risk assets should be today - as its stability was the only rock upon which to anchor expectations of intervention once again. The equity market fulfilled every technical analyst's wet dream today with a low volume gap-fill - which notably left today's VWAP at almost exactly the closing price from Friday (i.e. gave bigger players a chance to get out without losing their short - which was exemplified by the sell-off into the close on much bigger than average trade size). Never have we heard just whimsical exuberance at the market closing practically unchanged (ES +2pts) but critically risk markets in general did nothing but revert ahead of tomorrow's real action as the UK (and that means the European credit market) comes back from a long-weekend. Broadly speaking - US equities outperformed risk-assets modestly until the late-day give back dragged them back to reality but overall - IG credit underperformed, HYG outperformed (inflows dominant), and HY and S&P 500 e-mini futures (ES) stayed in sync.

Just like Rome wasn’t built in a day, the Eurozone won’t be destroyed in a day, but it is on a path that leads to eventual dismantling. This week we will see everyone play nice. Conciliatory words will be spoken.  Growth will become the topic de jour.  The markets will fall all over themselves once again on news of bank bailouts.  The headlines we get in the early part of this week will once again be overwhelmingly designed to encourage people and the markets.  Europe will have a new spirit of co-operation and will welcome fresh insights into the process.  Growth, growth pacts, plans to grow, infrastructure growth, etc., will be talked about.  There will be talk, and maybe even action on the bank recapitalization efforts.  Good banks and bad banks will abound.  Governments will promise money to banks at rates so low no sane investor would even consider. Ultimately these plans will fail, and we will see fresh lows on the year for stocks, with the U.S. and Germany hit hardest as justifying further bailouts for the core will be nigh on impossible, growth is not easy to achieve, and the good-bank-bad-bank model is a loser from the start.

April ended on a weak tone (after another set of weak macro data) with a day of risk-asset deterioration amid low ranges and low volumes as the S&P 500 broke its 4-day rally streak. AAPL was a standout having given back over 60% of its post-earnings spike and nearing a break below its 50DMA once again. HY credit outperformed with an afternoon surge (in HYG also) taking it back into the green for the month - even as the S&P 500 remains marginally off March's close and underperformed along with IG credit today. Treasuries leaked lower in yield for most of the day but gave half of it back into the close (after Treasuries' best month in 7 months - perhaps a modestly expected give back on some rebalancing). Gold outperformed Silver once again today as Silver fell back to basically retrace all of its YTD gains relative to stocks - both up just over 11% YTD now (note that Silver was +32% prior to LTRO2). Stocks remain rich relative to Treasuries less-than-stellar implications but financials (which had their worst month since November) dragged the broad market down for its first losing month in the last six, as Utilities and Staples the only sectors with a reasonable gain this month. JPY strength and AUD weakness were evident and implied weakness today but in general the USD did very little on this last day of the month. VIX ended above 17% on the day, up almost 1vol as the term structure bear-flattened a little. Overall, a weak-end to the month with little apparent confidence in extending the QE-hope trend of the last few days as stocks remain hugely rich to broad risk-assets overall and most notably Treasuries.

An ugly European market initially dragged stocks notably weaker overnight, with plenty of headline-makers from Apple's moves to WMT's 'Sinko-de-Abril' accounting for 20% of the Dow's loss, and Europe's macro data but after the first 30 minutes or so, S&P futures bounced off 4/10 day-session lows and leaked higher all day from there to end around last Monday's closing print. Volumes lagged as we rallied - as did average trade size - but in the last few minutes heavy volume and large average trade size stepped back in more biased to the downside. Stocks and volatility continue to follow very similar paths during this reflation phase as they did in 2010 and 2011 and while much was made of VIX's more-positive-than-expected performance today, we remind readers that we are at 8-month wides relative to realized vol - suggesting markets are anticipating a lot more anxiety ahead. FX markets leaked higher in the USD until shortly after the US day-session open and then drifted USD weaker from there as Treasury weakness coincided with EUR buying - smelling a lot like more repatriation flows. The drift higher in equities is therefore supported from a correlation-perspective as carry and rates (and oil) pushed up from soon after the US open. The USD ended up around 0.25% from Friday's close (with JPY the best performer and stable from the Tokyo close) which matches gold's 0.25% loss (though still best of the group) as Commodities all lost ground today with Silver underperforming. WTI managed to get back over $103 by the close. Credit markets underperformed close-to-close but from the lows intraday, they managed to out-gain stocks with a late-day pop in HYG bringing it in line with its intrinsic value and SPY for the first time since 3/29.

As retirement is evidently on again in 2012, let's not forget to keep an eye on HYG

A sea of red is flowing from European equity markets and it seems they are unable to stem the flow as IBEX (the Italian Spanish equity index) nears March 2009 lows (down 18% YTD) but dispersion across European indices is very high from the DAX +14% YTD to Italy, Greece, and Spain very much in the red YTD. However, for the second week in a row, European equity markets (as tracked by the narrow Dow-equivalent Euro Stoxx 50) close with a negative return year-to-date -0.3%. The broader BE500 index is still up around 5% (compared to over 10% YTD gains in the S&P 500). European high yield credit is back at 3-month lows and investment grade credit at 2-month lows. This week, however, followed the exact same path as last week with equity and credit trading in a wide range but notably this week credit markets dramatically underperformed the ever-hopeful equity market with financials underperforming the heaviest. European sovereigns are generally wider close-to-close on the week but just like corporate credit and equity, they generally followed a similar path to last week with a broad range trade - though a clear trend generally wider overall. Italy underperformed Spain on the week and Portugal, as we noted earlier was the big winner on what looked like basis trade-driven flows as opposed to whole new world of relief. Ahead of the G-20 meetings, it did not seem like there was much hope in sovereign credit - even as financials and corporates did lift a little off their multi-month lows and having seen the headlines of the G-20 draft, it appears there is no magic bullet there anyway - no matter how big they think their bazooka is.

My most recent trip to Calgary gave me a welcome chance to catch up with friends and colleagues in Cow Town's oil and gas sector. I found out about new projects, investigated companies of interest, and came away with an improved feel for the current state of affairs – what's hot, what's not, and why. The outlook from here is not great. When markets turn bearish, investment strategies often turn toward income stocks, and rightly so: if market malaise is expected to keep share prices in check, dividends become a very good place to look for profits. But whenever a particular characteristic – such as a good dividend yield – becomes desirable, it also becomes dangerous. The sad truth is that scammers and profiteers jump aboard the bandwagon and start making offers that seem too good to refuse. It was just such an offer that reminded me of this danger. In the question-and-answer period following my talk in Calgary at the Cambridge House Resource Conference, an audience member asked my opinion of a new, private company that was offering a 14.7% monthly dividend yield.

"In the last three plus years, central banks have had little choice but to do the unsustainable in order to sustain the unsustainable until others do the sustainable to restore sustainability!" is how PIMCO's El-Erian introduces the game-theoretic catastrophe that is potentially occurring around us. In a lecture to the St.Louis Fed, the moustachioed maestro of monetary munificence states "let me say right here that the analysis will suggest that central banks can no longer – indeed, should no longer – carry the bulk of the policy burden" and "it is a recognition of the declining effectiveness of central banks’ tools in countering deleveraging forces amid impediments to growth that dominate the outlook. It is also about the growing risk of collateral damage and unintended circumstances." It appears that we have reached the legitimate point of – and the need for – much greater debate on whether the benefits of such unusual central bank activism sufficiently justify the costs and risks. This is not an issue of central banks’ desire to do good in a world facing an “unusually uncertain” outlook. Rather, it relates to questions about diminishing returns and the eroding potency of the current policy stances. The question is will investors remain "numb and sedated…. by the money sloshing around the system?" or will "the welfare of millions in the United States, if not billions of people around the world, will have suffered greatly if central banks end up in the unpleasant position of having to clean up after a parade of advanced nations that headed straight into a global recession and a disorderly debt deflation." Of course, it is a rhetorical question.