It is only fitting that on the morning in which Europe levied the largest cartel fine in history against the criminal syndicate known as "banks", that Goldman Sachs would issue its #6 "Top Trade Recommendation" for 2014 which just happens to be, wait for it, a "long position in large-cap bank indices in the US, Europe and Japan." Supposedly, in a reflexive back and forth that should make one's head spin, this also includes Goldman Sachs (unless they specifically excluded FDIC-insured hedge funds, which we don't think was the case). So is Goldman recommending... itself? Joking aside, this means Goldman is now dumping its bank exposure to muppets.
The broad-based measure of Treasury bond volatility - MOVE - has broken higher, and, as BofAML's MacNeil Curry notes, confirms a base and change in trend (to higher or more volatility). With the month of December traditionally a strong month for the MOVE Index and Treasury volatility in general, Curry warns there are two ways the volatility can move higher - either higher rates or lower equities.
If you want to make a killing in the markets, you need to be willing to see the world the way it really is, NOT how you THINK it is. Most investors think the VIX measures the market’s risk, but really, it’s almost the opposite: a spike in the VIX almost always picks market bottoms!
First the ECB, then the Fed, and now the Dutch central bank have come out and explicitly warned of the dangers of virtual currencies like Bitcoin and Litecoin. Their explicit statement this morning, raising questions about deposit guarantees, central issuer responsibility, and volatility do their best to inform potential users (or traders) of the alternative currency that it is the devil incarnate. It seems, despite the mainstream media's guffawing at the swings and outrageous fortune in the market's early days, that the powers that be see these crypto-currencies as anything but benign.
"What keeps us up at night? Well I can’t speak for the others, having spoken too much already to please PIMCO’s marketing specialists, but I will give you some thoughts about what keeps Mohamed and me up at night. Mohamed, the creator of the “New Normal” characterization of our post-Lehman global economy, now focuses on the possibility of a” T junction” investment future where markets approach a time-uncertain inflection point, and then head either bubbly right or bubble-popping left due to the negative aspects of fiscal and monetary policies in a highly levered world. ... investors are all playing the same dangerous game that depends on a near perpetual policy of cheap financing and artificially low interest rates in a desperate gamble to promote growth. The Fed, the BOJ (certainly), the ECB and the BOE are setting the example for global markets, basically telling investors that they have no alternative than to invest in riskier assets or to lever high quality assets. “You have no other choice,” their policies insinuate.... Deep in the bowels of central banks research staffs must lay the unmodelable fear that zero-bound interest rates supporting Dow 16,000 stock prices will slowly lose momentum after the real economy fails to reach orbit, even with zero-bound yields and QE." - Bill Gross
Goldman Reveals "Top Trade" Reco #5 For 2014: Sell Protection On 7-Year CDX IG21 Junior Mezzanine TrancheSubmitted by Tyler Durden on 12/03/2013 07:22 -0500
If the London Whale trade was JPM selling CDS in tranches and in whole on IG9 and then more, and then even more in an attempt to corner the entire illiquid IG9 market and then crashing and burning spectacularly due to virtually unlimited downside, Goldman's top trade #5 for 2014 is somewhat the opposite (if only for Goldman): the firm is inviting clients to sell CDS on the junior Mezz tranche (3%-7%) of IG21 at 464 bps currently, where Goldman "would apply an initial spread target and stop loss of 395bp and 585bp, respectively. Assuming a one-year investment horizon, the breakeven spread on this trade is roughly 554bp (that is, 90bp wider than where it currently trades)." In other words, Goldman is going long said tranche which in an environment of record credit bubble conditions and all time tights across credit land is once again, the right trade. Do what Goldman does and all that...
Something snapped overnight, moments after the EURJPY breached 140.00 for the first time since October 2008 - starting then, the dramatic weakening that the JPY had been undergoing for days ended as if by magic, and the so critical for the E-Mini EURJPY tumbled nearly 100 pips and was trading just over 139.2 at last check, in turn dragging futures materially lower with it. Considering various TV commentators described yesterday's 0.27% decline as a "sharp selloff" we can only imagine the sirens that must be going off across the land as the now generic and unsurprising overnight carry currency meltup is missing. Still, while it is easy to proclaim that today will follow yesterday's trend, and stocks will "selloff sharply", we remind readers that today is yet another infamous double POMO today when the NY Fed will monetize up to a total of $5 billion once at 11am and once at 2 pm.
While the idea of the interventionist suppression of short-term 'normal' volatility leading to extreme volatility scenarios is not new, hearing it explained so transparently by a current (and practicing) central banker is still somewhat shocking. As Buba's Jens Weidmann recent speech at Harvard attests, "The idea of monetary policy safeguarding stability on multiple fronts is alluring. But by giving in to that allure, we would likely end up in a world even less stable than before."
Taking a “short position” in either Japanese interest rates or their currency is a fundamentally sound idea; however it may take three to seven years for the “Macro-profits” to be fully realized. Over that time, a short position will demand a cost, either in the terms of the negative carry of a spot position or the time decay of a short-dated option. Additionally, since it is unlikely you will enter the trade at the extreme, there could be some mark-to-market vibrations that may breach your risk limits. To the rescue is the strange circumstance of a widening USD vs. JPY Rate differential in conjunction with a flattening Volatility Term Surface. Below is a table of mid-market values for Par Strike USD call // JPY put options with expiries from one-year to ten-years. The critical observation is that a five-year option costs more than a ten-year option; thus the weird dynamic of owning an option with (effectively) positive “theta”: You are paid to own an option !
Think of it this way: You’re a baseball player trying to break into the majors despite mediocre fielding skills, no foot speed, and a batting average that hovers around 250. Egged on by your friend, A-Rod, you think you can make it by using steroids and turning yourself into a power hitter. But it doesn’t work out as planned. After a year, you’re losing hair, your skull’s gotten bigger, there’s fatty tissue on your chest that wasn’t there before, and you’ve still only managed 18 home runs in a season. You finally accept that it’s not going to happen for you. In the baseball scenario, steroids didn’t show enough payoff before the side effects told you enough was enough. And you can say pretty much the same thing about our economic scenario and monetary steroids. We’re seeing dubious benefits and fast developing side effects from the Fed’s actions, causing many observers to recommend a rethink of the Big Experiment. Yet, the experiment continues...
I know why someone who is so wrong can get so much media attention. My big question is why do so many "so-called" smart people actually believe him! We need a new, new media outlet, no?
The correlation between stock prices and margin debt continues to rise (to new records of exuberant "Fed's got our backs" hope) as NYSE member margin balances surge to new record highs. Relative to the NYSE Composite, this is the most "leveraged' investors have been since the absolute peak in Feb 2000. What is more worrisome, or perhaps not, is the ongoing collapse in investor net worth - defined as total free credit in margin accounts less total margin debt - which has hit what appears to be all-time lows (i.e. there's less left than ever before) which as we noted previously raised a "red flag" with Deutsche Bank. Relative to the 'economy' margin debt has only been higher at the very peak in 2000 and 2007 and was never sustained at this level for more than 2 months. Sounds like a perfect time to BTFATH...
No matter what measure of confidence, sentiment, or animal spirits one uses, the consumer is not encouraged by the record-er and record-er highs in the US equity market. The Conference Board's consumer confidence data missed for the 2nd month in a row - its biggest miss in 8 months - as it seems in October consumers were un-confident due to the government shutdown... but in November they are un-confident-er due to its reopening. As we have noted in the past a 10 point drop in confidence has historically led to a 2x multiple compression in stocks (which suggests the Fed will need to un-Taper some more to keep the dream alive). Ironically, more respondents believe stocks will rise of stay the same over the next 12 months even as the 'expectations' sub-index collapsed to its lowest in 8 months.
The only thing that prevents us from going all in short the S&P following the revelation that Goldman's first revealed top trade of 2014 is to go long the S&P Dec 2014 futures with a target of 2250 and a close below 1855, is that the reco is not from Tom Stolper but his colleague Noah Weisberger whose muppet wipe out record is not quite as prominent. Still, for Goldman clients to buy S&P futs, Goldman has to sell it to them, and as always - do what Goldman does, not what it says.
It is hard to believe that the end of the year is fast approaching. This weekend's list of things to ponder covers a range of issues that caught our attention this week. Will the economy continue to grow, are stocks under owned, what about Fed - rising credit risk (and collapsing credit risk premia) and the question of "when or if to taper?" These are all important questions that all investors must answer as the new year rapidly approaches.