Our "silver lining" concluding remark to last week's lackluster 10 Year bond reopening auction was that "the good news is that with the reopening, dealers should have some additional collateral for a while, or at least until the Fed monetizes it. Look for this CUSIP - VB3 (On The Run) to remain on the POMO exclusion lists for white a while." Sure enough, following the Friday settlement of this auction, things in the Treasury repo market have normalized somewhat after hitting very dangerous levels. How bad did it get? The following chart of failures to deliver from the NY Fed shows just how acute the shortage of "high quality collateral" (where the 10 Year is the fulcrum instrument) got in the past two months, with the total rising to $129 billion, or the biggest freeze in the repo market since the debt-ceiling crisis in the summer of 2011 when this number hit $280 billion.
The announcement by the UK Treasury and BoE to take co-ordinated steps to boost credit and with the central bank re-activating its emergency liquidity facility has resulted in a sharp move higher in UK fixed income futures. GBP swaps are now pricing in a cut of 25bps in the base rate by the end of this year and following on from Goldman Sachs, analysts at Barclays and BNP Paribas are now calling for an increase in QE next month. The new measures have seen the likes of Lloyds Banking Group (+4.3%) and RBS (+7.0%) outperform the more moderate gains observed in their European counterparts. Meanwhile in Europe the focus remains on the possibility of co-ordinated action from the major central banks. However, it would seem more realistic that any new measures will likely come after the Greek election results are known and once ministers have conducted their G20 meetings. Given that there is an EU level conference call this afternoon scheduled for 1500BST the likelihood of rumours seem high but as the wires have indicated already these conversations are purely based upon co-ordination ahead of the meeting which is usual practice. The yields in Spain and Italy have been a lot calmer so far with the 10yr in Spain at 6.88%, off the uncomfortable test of 7% seen yesterday.
"Stocks off just shy of 1%, which erases most of yesterday’s gains, which erased most of Monday’s losses. After tomorrow, will you be able to say that Thursday’s gains erased most of Wednesday’s losses, which erased most of Tuesday’s gains, which had erased most of Monday’s losses? With apathy running high and conviction low, that sounds just as reasonable as anything else."
With the EUR imploding following the recent note out of witchhunt target extraordinaire Egan-Jones, and the apparent inability of the ECB to handle the sandtrap on the 18th (they were supposed to announce the magical mystical bailout announcement 20 minutes ago), it makes sense to check up on the most recent InTrade odds for a [Insert first two letters of a peripheral European country]-xit, or, technically, the odds"Any country currently using the Euro to announce intention to drop it before midnight ET 31 Dec 2012." As of minutes ago, this number was 40%. This, however, appears to be a simple Fibonacci retracement to the all time high of 60% seen last November. And while we don't have an opinion one way or another, this level certainly provides pair trade opportunities: recall that according to Buiter, Greece is out by January 1, 2013, so technically a 100% probability, while the ECB gives 0% odds of a Grexit, ever. In other words, two pair trades of Buying ECB while Shorting InTrade, and Buying InTrade while Shorting Citi, virtually guarantees profits.
Remember when Jamie Dimon told the world the CIO stories were a "tempest in a teapot" during the firm's Q1 conference call the very same day we accused the CIO of being the world's biggest prop desk (aside from the Fed of course) and that the JP Morgan was merely "hedging" its positions? It appears that just like Vegas, it's the lie that keeps on giving. Because as it turns out in addition to being a massive undisclosed loss leader courtesy of 'unlimited downside' CDS pair trades (anyone remember DB employee Boaz Weinstein?) which have yet to be unwound, and which may have a total book loss of up to or over $31.5 billion as explained before, that was merely the tip of the prop-trading iceberg. The WSJ reports: "The JPM unit whose wrong-way bets on corporate credit cost the bank more than $2 billion includes a group that has invested in financially challenged companies, including LightSquared Inc., the wireless broadband provider that this month filed for Chapter 11 bankruptcy protection. The group within the CIO doing the distressed equity investing is known as the Special Investments Group. Whether it should be part of the CIO in the future is something that Matt Zames, who was put in charge of the CIO this month after the losses were disclosed, is evaluating, according to a person familiar with the bank. He is also examining whether the bank should keep some of these investments, the person said... The Special Investments Group last year took a $150 million stake in closely held LightSquared, in a deal that J.P. Morgan lost money on, according to a person familiar with the bank." But, but, surely they were hedging their offsetting position in er, uhm, non-satellite, telegraph stocks? In yet other words, an SIO within the CIO... once again Wall Street's only value added shines through - baffle them with acronym-based bullshit. And of course, everyone is busy hedging, hedging, the firm's other positions... Or not: as these are pure play directional prop bets. And all are funded by, you guessed it, your deposit dollars. Which one day will go boom, when JPM suffers a loss so large that not even the Fed bails them out any more (Jon Corzine anyone?).
It has been a while since we have seen any clearly actionable compression (or divergence) trade opportunities in a market that so far in 2012 been abused almost exclusively by central planners and robots. However, today we believe it is time to point out what appears to be a very distinct arb pair: specifically, the divergence between the EURUSD and the Italian-Bund spread. As can be seen on the chart below, the first time we saw a material divergence between the two very tightly correlated series was in mid-March when the phase out of LTRO2 spooked the FX market but still left enough dry powder at Italian banks to provide a fake support for Italian bonds. That did not last long, and the subsequent month saw another push wider in Italian (and Spanish, and all other PIIG) spreads to Bunds, however not wide enough. It appears that a long EURUSD vs. short Italian bonds (or rather Italian-Bund spreads widening) here could provide for substantial alpha, with either roughly 300 pips in EURUSD upside, or nearly 75 bps of Italian spread upside once the dust settles and the two series reconverge.
Update: JPMORGAN SAYS DIMON TO AGREE TO TESTIFY TO SENATE. Ummmm, there was an option?
As everyone (or at least Zero Hedge) long expected, JPM's prop trading debacle just got political and senators are about to demonstrate to the world just how little they understand about modern IG9-tranche pair trades. Expect to hear much more about JPM's "shitty" prop deal.
In the neverending saga that is the Greek exchange offer we have a new and very important player: the head of the Greek debt management agency, Petros Christodoulou, who is now actively threatening any Greek hold out hedge funds against doing what is in their LPs' best interests (suing Greece and the EU and holding out for par recoveries - as discussed here), by using not only the now trite and idiotic Mutual Assured Destruction clause which only those stuck in 2008 believe is remotely credible, but by advising hedge funds (which are actively forming ad hoc hold out committees as we speak, just as we predicted 6 weeks ago) that "there is just no money for holdouts...We are prepared for legal challenges but the risk here is that people are trying to be too smart." Oh, so now if one does what is in their interest, and dare hold out against collectivist fascist interests, they are "trying to be smart." We wonder if Mr. Christodoulou learned such brute force negotiating tactics at one of his former employers: JP Morgan or Goldman That's right - as we wrote over two years ago, the man who is now negotiating for Greece's and Europe's life (because a failed PSI will not only trigger CDS, more importantly it will result in an out of control default of Greece and likely its exist from the Euro and the Eurozone - two things that Germany would be delighted to see) is a former employee of the two companies that just so happens are the co-chairmen of the US Treasury Borriwng Advisory Committee, or as we have also called it before, "The Supercommittee That Really Runs America." Is the pattern finally emerging?
While we are aware of politicians' repeated vows about the uniqueness of the Greek case, we remain deeply skeptical. After all, hasn't it been a winning investment strategy to assume that the exact opposite of whatever Europe's elite says will become fact? The recently overheard and filmed conversation between Germany's and Portugal's finmins (http://t.co/iDA9HJPo) points in the direction of an imminent review of the Portuguese case and might be a harbinger of PSI, OSI etc à la Gréce. And why stop there? Why not relieve the Italians, Spaniards, Portuguese etc. of their troublesome load? Wouldn't it be nice to pull a Greek and finally make it for those pesky Maastricht criteria? But regardless of one's view on the ongoing crisis, it makes perfect sense to go where no investor has gone before. We did the unthinkable, read the unreadable and made it back alive to tell the tale: we ploughed through all of the individual bond prospectuses of our favorite list of countries in peril and actually found a lot of useful information for the investor. Given that the sovereign bonds of the Eurozone used to be looked at as riskless assets, it is safe to assume that the exercise hasn't been done by a lot of investors on a regular basis. Judging by the difficulty to even obtain the information, both the interest of investors to obtain it and that of issuers and underwriters to provide it has been and remains extremely limited.
EU stock futures have come off the initial lows at the open today following news that EU’s Rehn expects a PSI conclusion to be reached over the weekend, however this news comes amid the IIF’s offer to private bondholders of a 70% haircut. Further Greek PSI talks are expected later in the session following a meeting between IIF’s Dallara and Greek PM Papademos in Athens at 1630GMT. Euribor 3-month rate fixing continues to decline, however the pace at which the rates are falling is slowing, showing a fall of 0.005% compared with a 0.013% fall at this time last week. The slowing speed of decline has prompted hesitancy in financial markets, pushing the Euribor strip downwards. Further evidence of this impact comes from Portuguese bond yields, which today hit record Euro area highs. Spanish and Italian spreads have tightened this morning following market talk that the ECB were buying Spanish debt through the SMP in the belly of the curve. The Italian BOT auction this morning came in well-received following strong domestic demand, with 6-month yields falling from previous auctions.
Fed and/or ECB intervention is coming: whether it is called LSAP, QE x, Nominal GDP targetting, selling Treasury puts, or what have you. A regime that now exists only by central planning intervention, by definition requires ever more central planning intervention to sustain itself, let alone grow further. Furthermore, the banks not only want QE, they need QE. And since central banks serve other banks, not the people it is only a matter of time. Don't believe us? Read anything written by Bill Gross in the past year. So what to do ahead of QE3? Luckily, SocGen has released a complete cheat sheet of not only the dates of the next steps, but what to buy and what to sell ahead of the announcement. In short - one should buy Mortgage Backed Securities, in order to "simply buy MBS before the Fed" - something Bill Gross knows too well and has been hoarding MBS relentlessly as a result, as reported here. More importantly - one should buy gold. Lots of it as "USD debasement restarts." You didn't think the Fed will allow US corporate earnings - the only thing keeping the market alive - to be crushed with a EURUSD that will soon go under 1.20, now did you? And as for crude going to $250 - yes, it may cause huge headaches for regular folks but for banks it means record bonuses, and as a reminder, the Fed works for the banks, not the people, pardon neo-feudal debt slaves...
As we head into the artificial investing horizon of year-end, sell-side research is compelled to offer its best-guess at what will be key for the year ahead. We certainly head into 2012 with considerable potential downside risks - US recession?, breakup of the Euro?, hard-landing in China? - and BofA Merrill Lynch's RIC Report bears these in mind as it suggests investors position for these ten key macro themes (some positive, some negative) from slower global growth to a weakening US consumer and QE in US and Europe. Starting from a neutral equities, long gold, long US corporate bonds, they favor growth, quality, and yield in one of the more complete summaries of expectations we have read.
So we all know that gold prices and UST 10Y yields are as high, and low, respectively, as they have ever been. This is nothing more or less than human adrenaline overriding reason and logic, driving return expectations to the distribution of max entropy. It’ll pass. Sometimes it makes sense to fight the crazy impulses of greed and fear. But often this gets you creamed in the center. Sometimes it doesn’t. For those times, the prices of straightforward hedges like 10Y Ts and gold make them very unhedge-worthy. There is no sense in jumping on trades that already have the risk premium baked in. The alternative is to ride the apocalypse with an eye on the relative mispricing of extremal points. I’m creating what I call a braided basket to do this. I’ll take two pair trades and go short the rapier points of the apocalypse and long something correlated, but underperforming it. In this way I’ll catch some hedge on tail risks on my core book due to the darkening outlook. At the same time, I’ll catch some cover when people come back to their senses. Why braided? Check out the charts, and see how the pairs interweave.
Ok, someone needs to step in here before people get hurt... Well, more. The chart below is not of some biotech strategically bought by various CT hedge funds having just announced a successful obesity Phase 3 trial. It is corn: one of the most widely consumed commodities in the world. And while corn appears to be today's limit up commodity, elsewhere cotton has just limited down as a continuation of the recent ICE plundering, courtesy of the exchange's margin hike; rice, after touching on highs, has decided to drop aggresively, as have cocoa (never mind the Ivory Coast government vacuum) and coffee. This is the kind of environment in which companies that do not have commodity price hedges can go bankrupt in a span of months. Which reminds us to create a basket of companies that do versus those that do not have input price hedges. That could be one of the most profitable pair trades in 2011.
Perusing the latest hedge fund trend monitor from Goldman Sachs, we find that the world's biggest groupthink stock and hedge fund hotel, Apple has just been upgraded from 5 stars to 6 stars. Compared to our last update, when we uncovered that a whopping 181 funds were long the name, this number has subsequently risen even more, and most recently 190 hedge funds (not including mutual funds) were long the name. Should the company, which is priced beyond perfection, have some unpleasant news to report ever in its future, just hedge funds will need at least 2 straight days to liquidate their holdings in the name.