I Love The Smell Of Denial In The Morning...

Tyler Durden's picture

From Peter Tchir of TF Market Advisors

I Love The Smell Of Denial In The Morning...

It is not often that you can look at stock futures implying an open of down more than 1% and wonder why they are so optimistic.

European credit can be summed up as "the horror, the horror, the horror".  XOVER hit 808 or 35 wider on the day.  Main is at 202, or +11.  Financials are a mess - Fins Snr is 315 or +22 on the day.  All are back to near their wides.  SocGen stock is below 16 and DB was down almost 10% and 46% on the year.

SOVX is all the way to 350, 13 wider on the day and a level very few thought it would ever reach. 

And that was the good news!  Greek bonds are dropping again.  Yield is largely meaningless for Greece, but it is still eye-catching to mention that Greek 1 year bonds yields more than 100% at a price of 53.5% of par.  With the 10 year bonds at 45% of par, the yield inversion is almost over, and the next phase is for the market to create a rumor that Greece is going to be trading "flat" (trading with no accrued is the final step before default).

Spanish 5 year bondsd are trading 9 bps cheaper (and out more on a spread basis as German bonds rally).  Italian 5 years are back to almost 5%. 

There are few buyers in European credit right now, and even the attempts to rally on any bounce in stocks are half-hearted.

IG here is opening at 139, a new high for this part of the crisis and 8 wider on the day.  HY is down to 90, and 1 point lower on the day.

I think HY is looking cheap.  LCDX also seems to be getting to reasonable levels.  The leveraged loan market will struggle a bit as income will be low with LIBOR stuck perpetually at zero, but at 91, there is room for price appreciation, and the seniority has value here if the economy takes another leg down.  Both markets will be dragged down with the broader credit markets, but are looking like relatively expensive shorts - especially LCDX, given the senior secured nature.  HYG, JNK, and the cash market still look rich relative to the CDS indices and even to stocks.  I think the market needs one good round of capitulation and bid hitting to catch up to the CDS levels.  SPX is down about 9% for the year, HY16 is down a similar amount, and HYG is only down about 6%. We may get a move down today in the cash markets and it could be the opportunity to get long some cash or ETF's.  I would wait until we see that capitulation, otherwise you are overpaying for the right to own bonds with limited liquidity in a volatile market.

The DAX in particular, and most of Europe is now down 25% or so on the year.  They are down 3-4% today.  The S&P is down only 9%.  The outperformance is either well thought out and a clear sign of how much better it is here, or is just a short sighted parochial view of the world.  I'm betting on the latter as credit is too important for stocks to be ignoring it this much.  The move in the EUR has also been dramatic and the "cheap" dollar story is falling apart, with little fanfare.  Somehow the logic has been that if Greece gets kicked out a strong Euro will hurt Germany's exports.  That makes sense, but so far the Euro is reacting negatively to the problems in Greece, so that whole thesis may be gone.  I like remaining short SPX here, as I still believe we have to breach 1100, but on bounces, it does seem like European stocks may offer more value, as more pessimism seems to have been priced in, while we live in denial.