From Peter Tchir of TF Market Advisors
Credit Is From Mars, Stocks Are From Venus
So stocks rallied into the conference call. Stocks rallied after the conference call. I have the various headlines and stories surrounding the statements following the conference call. I am bearish, but I try to adjust for that as I read things to attempt to see if something has changed. I cannot find anything particularly appealing about the conference call summary. Certainly nothing new, and if anything, the bearish side of me could say they spent time figuring out how a post default Greece could remain in the Eurozone. That is too bearish, but I fail to see anything new or particularly compelling about the stories in the immediate aftermath.
It is still ironic that Greece's way to a budget surplus is through austerity, but our path to austerity is the big new jobs program?
The SPX is up over 3% on the week, but SocGen stock is down a smidgen, HYG is up less than 1/2% and IG16 is 4 bps tighter, while MAIN, at the center of the maelstrom is only 6 tighter. Stocks seem to have outperformed credit rather handily. It is particularly curious since the headlines imply that stocks are doing better because credit, and the PIIGS in particular are doing better. Yet the Greek 2 year bond hit an all time low of 47.5 today. That has to be the single cheapest asset out there. All Greece has to do is muddle along for 11 more months (the debt has an August maturity) and you would more than double your money! Heck, if you can buy the debt and get paid 71, where the bond was less than a month ago, that would be a 50% return. What are the odds of the SPX being at 1775 any time soon? What is recovery on Greece? If it is 40, you lose 7.5 points. Yes, that is a 16% loss, but will the SPX not breach 1100 if Greece defaults? From 1190 isn't there easily a 10% downside move in SPX?
The fact that stocks keep reacting more positively to Greek news, than Greek bonds is scary. It is somewhat reminiscent of 2008 when stocks kept rallying on allegedly good news even when debt struggled to perform on the news that was supposed to impact it most.
And for all the talk that Greece is priced in, the reaction after the erroneous headline about Austria approving EFSF shows that is unlikely true. Stocks hit 1163 on that news and the decline only stopped because the correction was printed. That is over 2.5% lower than we are right now, so I don't think Greek default is priced in. Stock futures are up a full 3% from their overnight lows. Crazy and broken moves.
For all the talk of BRIC's buying PIIGS debt, Italian 10 year bonds are still 1.5% lower on the week. Yes, stocks are up because Italian debt is not as down as much as it might be? Fuzzy logic at best. At least earlier in the week, treasuries participated in the risk on trade by selling off. Today, in spite of such a strong move in stocks, treasuries are barely unchanged.
The truly scary thing is we haven't even had the full "Eurobonds announced" rally. Where does that take SPX? 1230 again? I just can't convince myself that long is the right trade right now. Ironically, strong stocks may be their own worst enemy, as they give some European politicians the strength to do what they want - and not provide more funds to bailouts. Now I'm clutching at straws, but hey, what else to do as stocks march higher. I have checked the newswire several times while writing this. Expecting to see some new comments or twist on the comments that justifies this push in stocks, and I just can't see it. And I really don't see a strong reaction in the credit markets either. Even BAC cannot seem to rally back to Warren's strike price, let alone where they got in the immediate aftermath of his headline grabbing, stock spiking, investment.
As an aside to Pete's excellent point, we noticed that Capital Context's risk-basket was indicating equities are in a world of their own to some extent this afternoon relative to broad risk-assets: