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