Bank Of America's Latest Credit Trade Reco: "We Got Crushed"

Tyler Durden's picture

It is one thing for Bank of America's chief credit strategist Hans Mikkelsen to be wrong on his long-term strategic call about a "Great Rotation" out of bonds and into stocks year... after year... after year (somewhat ironic that the credit guy gets the equity call right, and is dead wrong on the credit side). After all, it has gotten to the point where the buyside bets how long it takes until the latest vintage of said "great" call blows up in his face. These are, after all, "strategic" call, and as everyone knows, when the sellside says one thing strategically, it is time to do the other. However, not even the most jaded and cynical of market observers had any clue just how spectacular Mikkelsen's "tactical" call implosion would be.  Apparently, neither did he. And judging by his language, his clients - if there are any left of course - most certainly did not either.

From BofA's head credit strategist.

Crush time


We wrote last Friday that this week would be crunch time for our challenged tactical (short term) short stance on the market, expressed by buying protection on the CDX.IG. We got crushed. Thus we remove our tactical view and cover the short. Our strategic (long term) recommendation on high grade bonds continues to be overweight, as we expect the housing market to pull the economy and interest rates higher in the second half of the year. Thus we maintain our 130bps year-end spread target – a 17bps spread tightening from current levels. Our strategic sector recommendations reflect that stance as well, as we are overweight financials and certain lower quality industrials, underweight higher quality industrials, especially those with elevated event risk.


Challenged by the market and the data


Starting with the March ISM numbers and payrolls, US economic data had come in fairly consistently below consensus (Figure 7), supporting our short tactical stance on credit. However, the market has equally consistently challenged our trade by interpreting bad news as good news leading to more QE, and looking through the data to a stronger 2H. The strong jobs report validates the market. Private payrolls have now added 216K jobs per month for the past seven months. That was the kind of calculation Chairman Bernanke focused on at the press conference following the March FOMC meeting. If the numbers continue to be strong in the coming months it appears to us that sooner rather than later we should be seeing higher interest rates and resurging fears about the rotation. Finally, the improvements in Europe (see long main, short ig) have removed yet another of our concerns that motivated our tactical short.


So... is that supposed to bring solace to those who have been waiting for said "rotation" ever since 2011... or 2012...or just the most recent batch of suckers or, in the parlance of the Goldman times, muppets?

And does it assume that all those who have gotten crushed betting on a 10 Year short just in time for its yield to hit a 2013 low last week, actually still had some disposable AUM to see that doubly crushed, in the words of Bank of America, on said tactical IG call?

Somehow, hilariously, Hans managed to blow up both sets of camps: those who were short rates and those long credit risk at the same. In theory one has share at least some key exon fragments with Tom Stolper to get what is effectively both sides of the same trade wrong at the same time!

But that's what happens when "strategists" try to be swing traders in a centrally-planned market in which nobody has any idea what is coming next, and the best predictive tool is a coin toss.

Although in retrospect, maybe we are just a little too hard on poor Hans.

After all who could have predicted that just as he was pitching buying IG, the credit bubble would blow right back up to its all time record size last seen in 2007. Of course, the question of when the bubble pops is a very different one, and one which we would very much advise against listening to Mr. Mikkelsen on the timing of its unwing.


It is credit that has supported the 'faith' in P/E multiple expansion - but as is clear from teh chart above, there is a limit to how tight credit can get (and thus how high the P/E can reach, especially with declining earnings)...


Based on Capital Context's Tactical Asset Allocation model, this most recent screaming capitulation in corporate debt has pushed credit to be the most 'expensive' now relative to equities (or equity is the 'cheapest' to credit) since Mid 2010 - the credit richness does not tend to last for medium-term trading signals...


Finally, if anyone wishes to buy IG 20, the time when BAC is covering its own tactically humiliating bet is probably the best time if any.

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Burt Gummer's picture

F'k BAC, who fk'n' cares if their whole ponzi scheme of a bank collapses under the own weight of their stupidity and over leveraged derivative corzine rehypothecated style malinvestments. F'k em'.

fonzannoon's picture

This is why he should stop fucking speculating and stick to golf.

I can't even take this shit seriously anymore.

flacon's picture

Gold has a "D" at the end not an "F". :)

Freebird's picture

Couldn't happen to a nicer bunch of cunts

Manthong's picture

as long as they don let Merrill dick with anything metallic.

NoDebt's picture

Why am I hearing Japanese techno music in my head? 

How many years running were "investment professionals" wrong about JGBs?  How many years are they going to be wrong when it keeps happening here again and again and again?


max2205's picture

Today you could make 4% in the Japanese market.  Fuck bonds

fonzannoon's picture

It's like a JPMorgue in here tonight.

NoDebt's picture

I think even the trolls and the "end of the world" guys realize there's no action in this any more.  It should be pretty obvious to everyone by now that the world isn't going to end quickly, nor is it going to be particularly exciting when it happens.

The most you can say is "the game is rigged".  Choose to participate at that point or walk away, but there's little point in debating the game further.  Unless you're a member of congress there's no edge to be had here.  Both fundamental and technical analysis have failed.  There is only one path in the macro sense.  Walk it or punch out.  Neither is very appealing.

fonzannoon's picture

You think? It's an interesting mental exercise. I notice when Tyler puts up a controversial article the junks come out in force. Follow that up with Bartiroma Schiff. They basically screamed "yeah this market is rigged motherfker!"

It may not be tonight, but one eerily quiet night, when no one is around and everyone has resigned themselves to their fate, that they will wake up in the middle of the night with the furnature flying.

You ever read "The perfect storm"? When they described the conditions just prior to the storm? Not a ripple. Calm, quiet, eerily so. Then...Whamo. Total shitstorm in an instant.

That is how I expect my great grandkid to describe it to me when it happens while he is feeding me jello through a straw in 2050.

flacon's picture

Ditto. Markets could EASILY open limit down at any time. And then when they re-open after a mandatory "rest period" they open again "limit down" in less time than it takes to read Keynes GDP equation. 



NoDebt's picture

Yeah, really.  I think about stuff like that too occasionally.  Some random Tuesday night somwhere in the world some seemingly unimportant part in the Great Financial Machine will quiety snap.  It won't be noticed by many for a few days but the cascade failure will already be set in motion, ending in "oh, shit!"  Good times.  Good times.

Ya know, I like the part in The Perfect Storm" where they have been driving through the storm all night and start to see the sun coming up in the distance through the clouds.  For a minute they think they've made it through.  Then it all closes in on them again twice as bad and that's it for them. 

Ahhhhhhh...... fuck it.  I prefer to think about Jello right now.  It's yummy.  I can deal with sucking it through a straw.

tenpanhandle's picture

That would be soylent jello in 2050.  Long before then you will be living it yerself.

Yen Cross's picture

      That dumb ass picked the wrong week to stop sniffing glue! Jobs improving, and europe improving. He needs to lay off the crack pipe. A three year could see the Bernanke put would be increased if macro news continued to deteriorate. He completely contradicts himself...

NoDebt's picture

Hey, Yen, what's going on, man?  Just us and the wait staff in the restaurant tonight, I guess.  Everything going up in unison is a tough market to make a contrarian call.  He's brave for trying but stupid for not seeing there's an endless bid in the market thanks to the Fed.

Great market for making money.  Boring market to argue about.

I'm sure the other shoe will drop eventually, but as another board member said recently, that shoe must be coming in from Pluto for as long as it's taking.

Yen Cross's picture

   Waiting for the RBA rate decision. I'm short aud/jpy from above 102.00. I think this is going to be a rough week for risk. He got out of that trade too soon IMHO. Thanks for asking.

Its Only Rock N Roll's picture

Was wondering myself what Euro improvement he was talking about?  The rate cut maybe?  WTF

buzzsaw99's picture

dumb ass is an apt description. this guy manages opm and yet just now figured out the bad news is really good news trade? omg, he is at risk of his name becoming a verb.





it doesn't exactly roll off the tongue but hey, neither does stolpered


imaginalis's picture

neither does saying "burglar alarm" if you are a drunk Scotsman

NoDebt's picture

Zzzzzzzzzzz.  Hello?  Is this thing on?

RSDallas's picture

I wonder what the Zimbabwe citizens were saying at the peak of their market?

Flagit's picture

I wonder what the Zimbabwe citizens were saying at the peak of their market?


"man, i wish i had some food."

"wow, that dude just got eaten by a lion."

"did she have a.i.d.s.?"

Confundido's picture

IG20 will get to 35bps before it widens.

dunce's picture

In a free market bond prices are inversely proportional to interest rates, we have had almost complete  govt. control of interest rates for the last several years and there is no end in sight for QE. Equities represent the total productive effort of the world and every person and company strives to do better than the previous year so the total value produced is usually greater than before resulting in higher priced equity in spite of the governments around the world bleeding them with taxes and burdening them with more regulations. When they stop QE then the market will return to normal and rotation can make investment sense.

chump666's picture

Last of the bullish central banks (Australia) cut rates.  Nice move amidst a war trade (Syria/Iran V's America's attack dog Israel, then we got Japan/China should blow any-day) = oil bid, so will the USD.  Oil inflation + commodity deflation = FTW



theliberalliberal's picture

Australia just cut reserve rated 0.25% to 2.75%

"Surprise rate cut"

nope,  RBA to follow lead of every other fucking dicksnap country

*large sigh*


Ban KKiller's picture

Is this hopium pipe lit? 

WhiteNight123129's picture

Short Treasuries Bitchez!


monad's picture

np The dictator gave BAC the EBT franchise, GS got the PIC. They can make more money destroying America than working on margin, so they will.