Market Snapshot: Financials Flop, Credit Collapses, S&P Closes At 2011 Lows

Tyler Durden's picture

The S&P cash made new lows for the year as we aggressively probed lower into the close and penetrated Doug Kass's bottom from Aug 9th with cash and futures closing below 1100 back to 13 month lows, with the pain spreading wide following rumors of hedge fund blow ups. Financials led the dance and just could not get a break all day despite the early perfectly fadable cheerleading from Cramer et al.

Credit markets were a disaster with red everywhere and notable gaps suggesting some desperate reaching for hedges/unwinds as index overlays started to disengage from single-names. IG closed over 5bps wider at 149.5bps (while underlyings popped notably more) and HY cracked 50bps wider to around 900bps! Tail names were crushed as IG9 (the short-dated but most exposed to high tail risk and correlation traders) widened 14bps to 164bps and CMBX and ABX tranche prices all blew lower with seniors underperforming juniors (which represents more long correlation/systemic risk bets). 

Source: CMA

We have warned that sooner or later, managers/traders will need to sell/unwind longs as basis risk in the hedges/overlays becomes too much and the moves today suggest we are getting there (especially in financials) as it was the widest names in IG that cracked the most ( absolutely) even as low beta credits hugely underperformed relatively as traders grabbed at whatever was low cost protection with some market exposure (e.g. insurers). Insurers have been one of the best low cost long vol trades of the year as buying protection on a basket versus IG was very low carry and had excellent beta to HY (as these names are basically over-stuffed HY new issue soaks - they need the yield).



We have discussed the financials extensively today but while the chart and table above shows both stocks and credit getting sold aggressively, we thought it worth noting options activity and the front-end of the CDS curve. While counterparty risk is obviously significant (what else is a major trading partner to do when he sees this kind of market action?) the moves in the 1Y CDS today were dramatic in MS (and the other TBTFs to some extent). We opened 580/630, pushed wider, then flattened at 640/690 for much of the day until the last hour or so when the offer side got lifted aggressively to 650/725. At the same time volume in OTM puts was very large with $5 strikes most notably. While the stock and CDS weakened very significantly into the close, the $5 strike puts did not continue to push too much higher from their midday levels. The point is that we suspect with implied vols north of 200%, that capital structure arbs were in play, selling 'expensive' equity puts and buying 'cheap' protection (we discussed this rather complex idea a few times in the past - most notably here). We bring this up as it helps explain the moves at the front-end of the curve but while this may reduce some fear, the action in bonds and the rest of the credit-equity complex were horrible.

TSYs saw an enormous day as 'Twist' started with 30Y -19bps and 10Y -17bps and both investment grade and high yield bonds were net sold - something we have not seen for a while. Financials were the most net-sold corporate bonds (didn't we warn that the buying last week was basis traders and not 'real' money?) followed by Communications names. What was also worrisome - but in line with the huge flattening in TSYs - was the rush to net sell anything with duration/risk as 3year and above maturities were net-sold while 0-1Y was the most net-bought on the day

Instead of its normal sideways plod after Europe closes, FX
markets continued to weaken dramatically against the USD with only JPY holding stronger while EUR broke to a 1.31 handle and closed at its lows of the day as DXY managed to trade at its highest since Jan 13th 2011. Gold and Silver managed decent gains (the former outperforming the latter) as oil and copper lost 2-3% on the day.

As we closed broad risk assets (CONTEXT) and the S&P managed to reconnect - with ES overshooting a little after cash closed. While relative to credit we still see 20-30pts of downside for the S&P (based on current HY levels which obviously can deteriorate), we need to see further weakness in carry FX and oil as well as strength and flattening in TSYs (more 2s10s30s compression) to really 'enable' this sell-off to reach Janjuah levels - but given the momentum into the close, nothing would surprise us.

Charts: Bloomberg

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jm's picture

Doug Kass can't be happy right now.

mfoste1's picture

james altucher cant be happy either

jm's picture

Frankly, I'm not all that fucking happy aboutg today either.

I did trade down into some of that spread blow-out.  We'll see.

Troll Magnet's picture

my agro stocks took a big hit but i also bought three 100 ozt JM & Engelhard bars over the weekend. holding them is so empowering!

AldousHuxley's picture

feels like 2009.....


no safe haven except money markets.

max2205's picture

How can Ben not committ suicide. Look at the carnage he has caused by running IWM up last year. Now 87 to 61 in 2 months. Nice price stability Ben. Go fuck yourself. Hope you all didn't get burned

franzpick's picture

Today's markets have given us lehmans, but there's still no way to make lehmanaide out of this technical, across the board, chart break.  My screens are pointing way down 5% plus.

Mauibrad's picture

Would love to see Goldman go under.

SwingForce's picture

Biggest Blatant HAIR ON FIRE day in a long time. Insert WB7's Jamie LIFE cover here. Total BS.

UBIGDummy's picture

Your right.

I expect the very same headline as this article, repeated for several days this week.  ESPECIALLY the part where it says  S&P closes at 2011 lows;)

pasttense's picture

I would expect most people on  ZH would be happy today--since gold went up  2.22% and silver went up 1.74%.

kito's picture

i heard he likes having his bottom penetrated

zorba THE GREEK's picture

"Nothing could surprise us.."

It is nearing time for another short-covering rally.

scatterbrains's picture

I wouldn't be surprised if we see a slow hypnotic grind lower into the 1st circuit breaker followed by a 2nd day of slow grind down into another circuit breaker (this time loading the bear trap) In the 2nd lock up they announce printing where upon we don't even bother to open as we re-lock this time on the upside.. by the time real trading takes place all Bears are boiled alive. 

reader2010's picture

Financial Weapons of Mass Destruction finally arrived.

AldousHuxley's picture

banksters (aka. financial terrorists) already detonated it, but Fed tried to contain it with paper dollars. Well that failed and now we have clusterfuck of a society.


Lone superpower self destructs from her own stupidity.



slackrabbit's picture

or his ass.

<Hey is that Liesman up there?>

razorthin's picture

We penetrated his bottom?

z123's picture

so after all these QE the us dollar is still the strongest currency in the world, it didn't lose that much, it isn't trading @ 0.5 euros

AldousHuxley's picture

fiat vs. fiat.


compare fiat vs. metal



redpill's picture

DXY should be a basket of commodities, it would be a lot more meaningful.

Esso's picture

No kidding. Comparing failing fiats to other failing fiats is just stupid.

It's like the people on the stern of the Titanic saying, "Those idiots on the bow are really in trouble!"

SwingForce's picture

S. O. 

Beautiful, standard oil would be the biggest company in the world if you were to put that humpty dumpty back together again. I love that story, PS its about DIVIDENDS.......

redpill's picture

The US Economy is fine.



Strider52's picture

Cramer shoudn't take a triple-dose of crack + meth ice + caffeine before he goes on. He looks like his head is gonna explode from blood pressure.

CharlieSDT's picture

That would be the only reason to watch that garbage program.

AldousHuxley's picture

I like Cramer because he tells you WHAT NOT TO DO.

You know he is a shill for banksters who are either trying to unload at highs or load up cheap.

so when Cramer says to buy BAC, wall st. insiders are trying to unload their positions.

When Cramer says to sell BAC, insiders know bailout is coming and they are trying to get in lower.


I'd be curious to know what is the alpha on a portfolio trading on exact opposite of Cramer's recommendations VS. another portfolio on all of his recommendations.


He is a journalist btw.....talker/entertainer speculator. Real traders trade and hide their secrets even within firms.



CClarity's picture

I'm thinking that with Operation Twist, there is also an "Untwist" ala the hedge overlay unwinds.  Potentially, some violent traps are gonna snap in here.

Intended or unintended consequence? 

swissaustrian's picture

Why are health care stocks getting slaughtered? Doesn´t make sense to me. They should be holding up like consumer staples...

razorthin's picture

If this is indeed the big implosion, you expect any equity to be spared?

SwingForce's picture

Your avatar is awesome. If we implode, Ron Paul will be elected President. 

CClarity's picture

They're liquid and can be sold.  Offsets for things with less liquidity.  

Really ugly 1st of month and quarter.  Doesn't auger well for rest of year, though there will be some brief spectaculr dangerous rallies.

SwingForce's picture

What's more liquid than Tbonds? Where's the most profit? 

335 of 500 S&P stocks now pay more than the 10 yr Tnote. That's 2/3's.

SPY pays more than 10T, XLU pays 1.5x 10T, IYR for chrissakes pays 2x 10yrT AUGH!

john39's picture

how can the gov or individuals pay for outragously expensive (and largely useless) healthcare if both are broke?

jm's picture

Hospitals and such--they carry huge amounts of debt and Medicare reimbursement rate cuts have screwed their business model.  Then you can see why they aren't going to be leasing a $10 mil/year robot surgical suite.  It all rolls downhill.

AldousHuxley's picture

all equities and even bonds are taking a hit. also commodities, except gold/silver and for some reason Nickle (up 5%)


economic depression (aka. reality without Fed)...portfolio asset rebalancing...


even funeral parlors (SCI) are down....


Get Low about a funeral party


"people are dying in bunches everywhere but here"

"What are the odds of a funeral home going broke?"

"You have a business that everyone on Earth needs. If you can't make that work, it's you, right?"

Financial_Guardian_Angel's picture

One sentence summary: "It's the end of the world as we know it, and I feel fine."

Minoan's picture

Latest rumour:reverse split for Citi

Fips_OnTheSpot's picture

Tag: Investment Grade


Right.. countdown there.

mist929292's picture

Good thing I bought SPXU yesterday. 

falak pema's picture

banks/insurance, MIC, Health care, all govt supported all in trouble.

LawsofPhysics's picture

Any update on how the Fed will inject the 400 billion.  Specifically will this be more POMO or some other event that we can front run? 

bill1102inf's picture

4 trading days until Anon takes out the NYSE 

marcusfenix's picture

very, very suspicious them targeting wall street, an attack on the NYSE plays right into the federal govts hands while doing no damage to them. it helps no one as the NYSE is already sinking like the titanic anyways and all this attack would achieve is not allowing us to watch it go under.

an attack on a major civilian institution will strengthen the feds position on "cyber terror" and will pave the way for further internet censorship, control and regulation all in the name of security and safety.

I would like to believe anon is legit but this casts to much doubt..

I call false flag.