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Is JPMorgan's Whale Responsible For The Rising Equity Tide?

Tyler Durden's picture




 

Presented with little comment but given the seemingly unlimited balance sheet of the JPMorgan CIO office and the ability to sell as much protection (implicitly bullish) and gather premium as credit derivative index notionals soared at an incredible rate, are we stretching the point a little too far to claim that perhaps, just perhaps, one of the new transmission mechanisms for the global central banks' liquidity flows is leveraged credit - which implicitly enables stocks to be supported by lower funding costs and exhibit the kind of portfolio rebalancing effect that was desired. Perhaps even more critical is the fact that IG9 (the credit index in question) contains some of the most worrisome of the major corporate credits and thus the highest short-interest in stock-land - which implicitly exaggerates any non-MtM-based entity's ability to create a short-squeeze? Is the entire market now a function of one prop trader (hence forbidden by the Volcker Rule) being forced to (un)wind his trade now that he is finally in the public spotlight as we wonder - are recent market jitters merely the byproduct of Iksil selling some of his excess exposure, and being the marginal price setter across virtually every asset class?

This is the net notional risk exposure in IG9 (which has surged around $50bn this year) relative to the S&P 500...

This is not a correlation of one asset class with another but the 'flow' into one asset class (leveraged credit) relative to the stock of another (equities).

Chart: Bloomberg

(h/t Mary Childs & Shannon Harrington for DTCC data index)

 

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Tue, 04/17/2012 - 17:37 | 2352810 unununium
unununium's picture

You had me at "most worrisome of the major corporate credits".  Anything that AZO with its negative and declining book value, insider flight, and robo-erection stock price is part of needs deep pockets to "prop" it up. 

IG9 Components
http://lcdx.wikidot.com/ig9-summary

Tue, 04/17/2012 - 17:40 | 2352819 Jason T
Jason T's picture

thanks for that link.. 

Tue, 04/17/2012 - 18:06 | 2352876 I think I need ...
I think I need to buy a gun's picture

i'm going to disney world

Tue, 04/17/2012 - 18:26 | 2352917 NotApplicable
NotApplicable's picture

We're gonna need a bigger false-flag...

Wed, 04/18/2012 - 06:55 | 2354104 rufusbird
Tue, 04/17/2012 - 18:00 | 2352855 HedgeAccordingly
HedgeAccordingly's picture

i believe 100% one trader could move the enter capital/fixed income market.. - http://hedge.ly/I0pfdo .. he is a technican. 

Tue, 04/17/2012 - 17:37 | 2352814 Eric L. Prentis
Eric L. Prentis's picture

One person? diabolical, Batman. Could it be the IksilPropTrader?

Tue, 04/17/2012 - 17:42 | 2352821 Grin Bagel
Grin Bagel's picture

Thank you Tyler, let the sunshine in!

Tue, 04/17/2012 - 18:47 | 2352949 narnia
narnia's picture

The bigger the whale, the more invisible it is.  Same applies to elephants, gorillas & any other animal currently in the room.

Tue, 04/17/2012 - 17:45 | 2352830 slaughterer
slaughterer's picture


Corporate bonds are making a bit of a comeback following a weak and volatile beginning to the second quarter.

The CDX North America Investment-Grade Index, a proxy for risk sentiment in the corporate bond market, improved 3% in late trading Tuesday, while safe-haven Treasurys declined a bit, after Spain successfully sold EUR3.2 billion ($4.2 billion) of new bonds.

"There is some relief that Spain got through their debt auctions, and people are speculating there could be more help for them from the International Monetary Fund and others," said Kathy Jones, fixed-income strategist at Charles Schwab. "That eased up some of the risk-aversion from the day before."

Autozone Inc. (AZO) brought $500 million of 10-year debt into the primary market. The triple-B rated borrower sold the bonds at 1.70 percentage points over Treasurys for a yield of 3.702%, marking a 0.05 point improvement from earlier price guidance.

Bonds issued in the last week, which trade more often than older paper, were showing modest improvement in Tuesday trading, according to MarketAxess.

Lowe's Cos. (LOW) 1.65% bonds due 2017 improved 0.04 percentage point, relative to Treasurys, to a spread of 0.72 point. Deere & Co. (DE) 0.875% bonds due 2015 also strengthened 0.04 point to a spread of 0.37.

That trend can lure investors into the primary market, helping companies to borrow at cheaper rates. However, new volume is expected to be subdued this month as companies focus on releasing first-quarter earnings.

Other actively traded bonds were mostly improving too, including bank debt generally perceived as riskier than industrial paper. Goldman Sachs Group (GS) 2022 bonds, for instance, improved 0.11 percentage point to a spread of 3.42 points. Morgan Stanley (MS) bonds due 2017 strengthened 0.11 point to a spread of 4.09 points.

Jones said the corporate market remains in push-pull dynamic. "The U.S. economy is gaining traction, but deleveraging and the European debt situation is holding us back," she said. "Frankly, that's going to continue."

Average corporate bond yields finished Monday at 3.32%, just 0.05 point from the record low achieved in early March, according to the Barclays U.S. investment-grade index. But spreads rose to 1.88 points, versus 1.85 last week.

Copyright © 2012 Dow Jones Newswires



Read more: http://www.foxbusiness.com/news/2012/04/17/risk-rally-extends-to-corporate-bonds/#ixzz1sKvlDvSI

Tue, 04/17/2012 - 17:48 | 2352835 saycheeeese
saycheeeese's picture

very interesting comment but as we know....correlations come and go so... we might be at a turning point as you indicate

Tue, 04/17/2012 - 18:39 | 2352840 Cursive
Cursive's picture

Akin to the Butterfly Effect...or how I met your mother after her girlfriend puked in her purse....

Tue, 04/17/2012 - 17:54 | 2352844 slaughterer
slaughterer's picture

AZO is the top stock in my short portfolio.  

Look at the outflows in SPLV today.  

Tue, 04/17/2012 - 18:00 | 2352859 vote_libertaria...
vote_libertarian_party's picture

More importantly...will Iksil be on American Idol?

Tue, 04/17/2012 - 17:59 | 2352862 BlankfeinDiamond
BlankfeinDiamond's picture

I'm stil trying to figure what the fuck this article means.

Tue, 04/17/2012 - 18:08 | 2352877 skepticCarl
skepticCarl's picture

I'm still trying to digest that first 94 word sentence.  I'll have a pithy, insightful, and entertaining comment once I'm finished with it.

Tue, 04/17/2012 - 18:10 | 2352885 SumGuy
SumGuy's picture

> Presented with little comment

No - you mean presented with the usual amount of comment...

 

Tue, 04/17/2012 - 18:11 | 2352886 MFL8240
MFL8240's picture

Crime inc.

Tue, 04/17/2012 - 18:18 | 2352904 slaughterer
slaughterer's picture

Iksil => Bernanke's twin separated at birth.

We pass from the AAPL rally to the IKSIL rally.

 

Tue, 04/17/2012 - 18:19 | 2352905 slaughterer
slaughterer's picture

Or maybe a stand-in for the now departing Brian Sack?

Tue, 04/17/2012 - 18:45 | 2352924 NotApplicable
NotApplicable's picture

Of course! Both Iksil and his portfolio can be transferred to the NYFed, restoring calm and order in the markets so that the Wall Sheeple don't have to be scared of a big bad seller tanking the market.

Brilliant!

Tue, 04/17/2012 - 18:20 | 2352906 DavidC
DavidC's picture

Nothing goes on forever, whether it's the Berlin Wall or Iksil the trader...

DavidC

Tue, 04/17/2012 - 18:29 | 2352922 Death and Gravity
Death and Gravity's picture

Leveraged debt pushing the markets up now?

 

My God, the crash with be gargantuan.

Tue, 04/17/2012 - 18:30 | 2352925 IveBeenHad
IveBeenHad's picture

Is there any word on if the ECB bought bonds in the secondary markets today ? 

Tue, 04/17/2012 - 18:46 | 2352942 NotApplicable
NotApplicable's picture

That's rhetorical, right?

Tue, 04/17/2012 - 18:33 | 2352926 holdbuysell
holdbuysell's picture

FWIW (taken with a grain of salt as merely another data point who has made some correct calls), Lindsey Williams said in March that the dollar will be 'dead' in 2012. My interpretation is that means a significant devaluation and damaged world reserve currency status, not necessarily that it collapses.

He also said the trouble will be seen first in derivatives.

http://lindseywilliams101.blogspot.com/2012_03_30_archive.html

 

Tue, 04/17/2012 - 18:36 | 2352927 razorthin
razorthin's picture

Despite the ramp, weak candles abound on atrocious volume.  The atrocious volume is nothing new, but the former should be heeded.  Shooting stars are not good.

Tue, 04/17/2012 - 18:41 | 2352935 ArkansasAngie
ArkansasAngie's picture

Some day ... somebody is going to call up and ask for cash.  And the printing press will be broken and ... and ... the virtual line at the bank won't last long.

Tue, 04/17/2012 - 18:56 | 2352966 Jake88
Jake88's picture

Can anyone tranlate this article into lay English?

Tue, 04/17/2012 - 19:03 | 2352989 chump666
chump666's picture

One trader (JP Morgan) holding a huge leveraged credit trade, cuts trade and dumps into equities - thus the theory that the market jacked higher on liquidity from a leverage unwind.

JP Morgan are addicted to corner trades as is most of Wall Street.  Obama, bless him, has perpetrated the Wall Street greed x1000+

There will be crash soon, maybe a severe unwind of leverage and derivative trades, it will be terrible.  Should officially KO Europe into financial oblivion (ECB encouraged leveraged bailouts of sovereign debt).  CB's globally will print like no tomorrow, but if Obama bails out Wall Street again...

Tue, 04/17/2012 - 18:58 | 2352974 chump666
chump666's picture

The S&P looks weak and vulnerable.

Tue, 04/17/2012 - 19:32 | 2353050 Jake88
Jake88's picture

Now I get it. Thanks.

Tue, 04/17/2012 - 19:33 | 2353057 asteroids
asteroids's picture

All the important trading happens in darkness. What we mortals see on our screens are shadows on the wall.

Tue, 04/17/2012 - 19:36 | 2353059 rosiescenario
rosiescenario's picture

..and in "the other credit market" market, muni bonds appear to be finally entering the dead zone. Their forecast death was a bit premature, accurate, but just a bit early. After the crash in 1929 it took about 4 to 5 years for munis to meet their maker. The first quarter of this year muni defaults have already matched last year which of course was up from the proceeding year.

 

It appears that decreased property taxes have arrived as it took time for the new appraisals to get on the books or for the property owners to demand lower appraised values. Unlike the Feds with a press, the municipalities that issued bonds cannot borrow what they must spend to cover the bonds. Their property tax base has been severely eroded and their share of sales' taxes has also declined.

 

A fearless prediction......we shall be reading more and more about cities defaulting. And we were wondering why Ruger is sold out?

Tue, 04/17/2012 - 20:03 | 2353103 Clowns on Acid
Clowns on Acid's picture

Tyler....ahmmm...it is a bit of a stretch...but if your theory is true then:

  • The rebalancing flow would have gone into AAA type blue chips (why go down the capital structure and invest in equities whose credit is shaky if one doesn't like the IXG Index)\
  • So...with relatively light equity volume, one would expect to see the MSFT, P&Gs, J&J, McDonalds, Coke, Ford, etc...exceed their historical betas to S&P on the day. I don't know if this happened.
  • Of course the after market did soften as Intel and IBM disapointed slightly on balance.
  • But your point is taken that with free money....one can easily just empty one bucket and slosh the liquidity into another....hey who cares...there is more of that where that came from.
Tue, 04/17/2012 - 20:24 | 2353145 ciao
ciao's picture

Shadow banking isn't an inetllectual pursuit.  The latest era of the big bets has momentarily moved on from shaking down client muppets, and stealing from commodities producers and their supply chains that have derivatives that they stupidly think of as insurance blow up in their faces.  This era has shadow banking on the new mass one way TBTF bet of following the reserve banker liquidity.  4 reserve banks with nbalance sheets now at 9 trillion is a no brainer for a shadow banker.  All the hard work is being done setting up the kthundering herd by the ZIRP reserve bankers and their carry trading and shadow banking ticket clippers are just whistling dixie for their sugar daddies.

Tue, 04/17/2012 - 20:29 | 2353147 Stoploss
Stoploss's picture

They are also shorting the shorts. Go ahead and throw that in. Not that i short much anymore, Duh.

I do like jewlry shopping though...

Tue, 04/17/2012 - 20:45 | 2353179 buzzsaw99
buzzsaw99's picture

This means the market is strong, highly liquid, and that the pension fund money in equities is secure for whatever day in the future they might need it back? [/rhetorical] [/sarcastic]

Wed, 04/18/2012 - 01:34 | 2353828 Ted Baker
Ted Baker's picture

A SIMILAR UNIT OPERATES WITHIN THE CAVE OF THE SQUID WHICH IS GOLDMAN SACHS - THIS IS ALL TO AVOID THE VOLCKER RULE AND THE EXISTENCE OF A PROP TRADING UNIT WITHIN THESE INSTITUTIONS...THE SAME APPLIES TO MORGAN STANLEY, AND THE REST OF BIG INVESTMENT BANKING PLAYERS....

Wed, 04/18/2012 - 05:38 | 2354050 LarryDavis
LarryDavis's picture

I dont really get the nuance of this leveraged credit business but I'm significantly better at linear algebra, calculus, and bilingual (also conversant in German) than the people trading them. I'm therefore exponentially smarter than 99 percent of Wall St. so its probably something remedial that only institutional investors can utilize to defraud taxpayers. Stealing isnt a vice of mine and I really despise thieves more so than other criminals (unless they are stealing from investment bankers or large publically traded companies). There are alot of economists and mathematicians MUCH SMARTER THAN I COULD EVER FUCKING BE EVEN WITH SOME LAWNMOWER MAN HELMET AND CYBORG BRAIN/GADGET PENIS WHO THINK THE MARKET ESSENTIALLY BEHAVES RANDOMLY (RANDOM WALK WITH SOME NEAR-TERM MEMORY). TO MAKE MONEY IN A "RANDOM" ENVIRONMENT YOU NEED TO BE LUCKY OR CHEAT AND HERE IT'S THE LATTER. SO, LET'S JUST FUCKING BE HONEST IF YOU STAKE ME 100 BILLION AND I REHYPOTHECATE THAT I CAN INVENT SOME CRAZY DERIVATIVES SHIT WITH MY TEAM OF PhD WEIRDOS THEN HIRE PEOPLE TO TOUT/TRADE THESE NEW PRODUCTS (LIKE CDS). HAS WALL ST. FOUND THE PERPETUAL MOTION MACHINE THROUGH CENTRAL BANKING? IS THE S&P A GYROSCOPE? WHAT YOU NEED TO UNDERSTAND IS THAT WALL ST. HAS PREVENTED/PERVERTED THE MASSES FROM HAVING THE ABILITY TO INVEST MONEY WITOUT THEM GETTING THEIR GREEDY FUCKING HANDS ON IT SO THEY ALWAYS HAVE DOUGH COMING IN TO RISK IN THE "MARKET." WOULD SOMEONE WHO OWNS A PIZZARIA RISK HIS CAPITAL TO MAKE 7% WHEN THAT DOESN'T COVER CHEESE INFLATION? WALL ST. IS A PARASITE LEECHING MONEY FROM YOU AND ME AND LEVERAGING IT TO PAY FOR A LIFESTYLE SEEN IN A FUCKING MASTRIANI MOVIE. WITH ENOUGH BROWNIAN PATHS SOME OF THESE LEVERAGED PLAYS MIGHT HIT BUT IF THEY DON"T IT"S GOING TO BE LIKE THOSE WAY OUT OF THE MONEY CALLS YOU BOUGHT HOPING FOR THE BIG MOVE. THEY ARE GOING TO BE UNEQUIVOCALLY FUCKED.

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