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Market Snapshot: Mixed Market And Correlations Low
Europe closed uneventfully with equities mildly outperforming credit (diverging for much of the day) as sovereign spreads were mixed with BTPs higher in yield (and spread), Belgium lower in yield/spread, and Spain unch. Volumes were obviously very light and bond markets went dead in the afternoon - especially gappy post BTP's break of 7% as bid-offer spreads cracked wider. Interestingly, cable (GBPUSD) slid relatively significantly into the close (GBP weaker, USD stronger) - losing around 100 pips from its earlier highs to close at pre-LTRO levels extending losses from the earlier weak data print. US markets have traded quietly all morning with most risk assets in line (credit and equities in sync) but TSYs are completely divergent on the day (from the start of the US day session). Stocks managed to pull back to CONTEXT but amid low volumes they are oscillating around VWAP and jumping a few pts on any flow. Credit looks to be simply reracked on ES moves - as we hear very little actual flow. Much is being made of the drop in VIX today but we suspect this is much more simply explained by vol steepeners across the holiday period - a very seasonal pattern that benefits from normally lower realized vols across the year-end - perhaps Greece's bond maturities next week will upset that plan this year?
European sub financials (light blue) underperformed all day. The rest of credit complex leaked wider from their gappy tight open. Equities (dark blue) and credit diverged from the middle of the European day.
Cable has stalled out from its earlier macro print weakness - losing almost 100pips on the day and holding at the gap higher levels from pre-LTRO.
TSYs are totally diverging from Equities and the USD today so far. Admittedly there is little flow away from stocks (and low volumes there also) but broadly speaking credit is in line with stocks and risk assets in general are lower but leaking very gently higher.
ES (the e-mini S&P 500 futures contract) has pulled back intraday to a more supportive braod risk asset level (CONTEXT) but a look in the lower right hand quadrant shows that the correlation between risk assets broadly and the equity market are dropping rapidly intraday (as is anecdotally evident from the TSY vs ES vs DXY chart above). In general risk ETFs (upper left quadrant) are tracking each other well for now with HYG behaving for once (this is comparing SPY with HYG-VXX-TLT).
Much is being made - as always - of the at-best contemporaneous risk index VIX drop today (and note from the chart above this one that we see VIX as notably below expectations given empirical relationships to HY credit markets - lower left quadrant). One look at the seasonals for the short-end term structure of Vol (above in light blue dotted line for average over last ten years) shows a very clear pattern of vol curve steepening into the year-end. Actually the steepening tends to be to the Christmas holiday and then flattens/decompresses into the new year. This year's steepening (selling very short-dated Vol and buying slightly further out Vol) is more notable than average but is also reacting from a much more significant flattening mid-year.
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Here is a note for Tyler and the rest of the muni-bond bashers on ZH:
Municipal Bond ETFs Turn in Solid Year
By Tom Lydon
ETF Trends: Tue, Dec 20, 2011
http://finance.yahoo.com/news/municipal-bond-etfs-turn-solid-120351408.h...
BTW, Meredith Whitney missed re. her dire prediction for municipal defaults in 2011 by a country mile.
yes because clearly municipalities are doing so extraordinarily well.
Things are just fuckin peachy aren't they?
Read on, swami:
The Worst Prediction of 2011
Published Fri, Dec 23rd, 2011
Louis Basenese
http://www.wallstreetdaily.com/2011/12/23/the-worst-prediction-of-2011/
are you saying that municipalities are doing well?
or are you just prancing to make yourself feel good?
Trolling, actually. Growth industry. Great business, like cancer.
I am no troll. However, I would rank being a troll over being a proud fool who refuses to admit they are wrong.
at least you have the good sense to call yourself a proud fool.
Ad hominem, bitchez!
was "Ad hominem" on your word a day calendar?
Are you going to keep trying to get in another verbal attack despite the fact that I was correct? Are you that puerile?
You are just a funny man.
Thank you, mate, but flattery will get you nowhere.
Good luck in 2012.
Ad hominem is two words, not one.
DavidC
Alien-IQ,
Your logic is at fault.
Not being a troll and comparing a troll to a proud fool does NOT mean he/you/I/etc am/are a proud fool.
DavidC
I did nothing more than provide data that clearly contradicts a bold claim by Meredith Whitney.
Yes you did. Good little troll.
Which reminds me, Tyler if you haven't already, you need to start a chart of the exponential rise in trolls and hacks that are posting here as the mass delusion clearly must carry on...
No, I did not.
Meredith made a bold call. I provided data that proves she was wrong. Infer what you like, but you will not ascribe your false characterization of me to me.
Care to make a call yourself? Be sure to put a date on it.
BTW, it's clear Whitney was simply early.
I predict that I will not lose ONE CENT on my muni holdings from a municipal default in 2012.
I predict that I will not miss ONE CENT from scheduled interest payments in 2012 from any of the munis that I own.
Good luck to you, comrade.
"Comrade" is a tell. Do you not realize that muni performance was greatly hepled by barry shifting mega bucks from fed to muni coffers? What do you think that stimulus was? (No, it wasn't a new toy from harry wangers shop) Good luck in 2012 and beyond. Those huge shifts will not be sustainable...
"Do you not realize that muni performance was greatly hepled by barry shifting mega bucks from fed to muni coffers? What do you think that stimulus was?"
I do not trade munis or muni ETFs. The articles I posted did reference ETFs, but I don't own them or advocate owning them. I cited those articles only because they contradict Meridith Whitney's bold claim re. municipal defaults in 2011. She was way off.
I only purchase muni bonds (not bond funds or ETFs), and I hold the bonds until maturity (or until they are called). I personally do not particularly care about the daily market value fluctuations of the munis I hold because I don't sell them. I only care that the munis I own pay interest as scheduled and they return 100% of the principal when they mature (or are called). The munis I have owned have a 100% performance record in that regard since the 1980s when I started acquiring them. I live in Texas, so I pay no state income tax. I also pay no federal income tax or SS tax or Medicare tax on the interest earned on the munis I own. Not too shabby of an investment strategy when you think about it.
She's just a bit early, it happens, her prediction will come true in 2012!
Good luck with your expectations of a 'Mad Max' world in 2012. Don't forget to come up for air once in a while.
Straw man attack, bitchez!
You need to wash that smelly vertical slit of a mouth.
You are mistaken, comrade. I don't need to resort to logical fallacies.
I have consistently defended munis as an asset class here on ZH. I merely pointed out that MW was wrong. She was wrong by an order of magnitude.
Mad max is unlikely, an economic collapse is more probable.
Right... now, can you 'prove' Whitney wrong by not linking to propaganda?
Whitney's words speak for themselves. She was wrong by a country mile. Do your own DD.
I have. I wouldn't touch them with a detachable panda's dick going forward. MW's numbers are dead on.
"MW's numbers are dead on."
You are chock full 'o nuts...
Read on, swami:
The Worst Prediction of 2011
Published Fri, Dec 23rd, 2011
Louis Basenese
http://www.wallstreetdaily.com/2011/12/23/the-worst-prediction-of-2011/
There's a chart of performance. Nothing that signifies anything close to fundamentals. But... troll on.
It's useless. He's one of those retards that believes that the stock market IS the economy.
You'd have a better chance of teaching a walrus to perform an appendectomy than convincing him that the stock market and the economy are not the same thing.
Resorting to ad hominem attacks to make ourselves feel superior, alien-IQ?
I said nothing about the stock market as it correlates to the broad economy. I do not own any stock. I have said repeatedly on this website that I do not participate in the stock market. I DID say that Meredith Whitney missed her prediction by a country mile. She did. End of discussion.
Now, feel free to fling another cheap insult (or two) and go have a mint julep and feel good about yourself...
are you always the first to give your posts a "thumbs up"?...If so, it looks like you are often also the ONLY one to give your posts a thumbs up.
but we're all stupid for not agreeing with you...you are the real genius here. We are merely fawning at your brilliance, too overwhelmed to hit the mouse. It is our loss.
please...say more. i want to save your words and pass them on to future generations.
Now, I suspect your retort will somehow comment on how "it doesn't matter to me what others think"...but if that were truly the case...why are you giving your posts a thumbs up if not to make others think someone agrees with you?
Let us review the facts here:
1. I have long advocated munis (specifically GOs) as a safe asset class on ZH.
2. Meredith Whitney made a bold claim calling for a massive level of municipal defaults in 2011.
3. I provided hard evidence that she was wrong.
There is nothing more that needs to be said re. this topic.
Good luck to you in 2012.
Care to make a prediction?
I predict that I will not lose ONE CENT on my muni holdings from a municipal default in 2012.
I predict that I will not miss ONE CENT from scheduled interest payments in 2012 from any of the munis that I own.
Good luck to you, comrade.
Feel free to investigate the historical rate of default on munis (specifically GOs which are what I purchase). Gee, it is quite low... but I suppose you and Meredith Whitney are both sure she will be proven correct in 2012 re. her dire prediction for the broad asset class (i.e. the dire prediction that didn't come true in 2011)...
Looks to me like they are gonna try to take the /ES over 1300 before the end of year. This can only happen with no volume...and no volume is what we've had this week and will be for next week.
sick.
John Law, you of all people should know that timing can make you look very wrong. As I recall there were many people who said your Mississippi Company was a'scam' in 1719.. and they too were 'wrong'.. (until 1720)
Whitney made a bold prediction re. municipal defaults in 2011 and she was wrong by a country mile. Do your own DD.
As an FYI, I have been acquiring minus since the 1980s. I never lost ONE CENT to default, and I never owned a muni that did not pay EVERY CENT in interest as per its schedule until the bond matured (or was called).
The railing against munis as a broad asset class by ZH is simply not justified. Do your own DD.
There is absolutely a danger in making a bold call - because the call is part fundamental analysis, and part timing. MW's fundamental analysis is strong, but her timing was off. Great that you've never lost a cent in munis, but I expect you may see a change in that 'at some point' -
"Great that you've never lost a cent in munis,.."
Agreed. Thank you.
"...but I expect you may see a change in that 'at some point' -"
I will take that under consideration. Well, I considered it, and I will not be selling my munis.
Good luck to you.
JLL - you're right, OK? MW made a call and she was wrong. I feel she overstretched herself in making that call - timing something correctly is a difficult thing to accomplish.
On the other hand, hubris is also dangerous. She did make the correct call on the financial crisis. Look at what she has to say with an open mind - won't hurt in the long run, and may be good for your portfolio. Just sayin'
I appreciate the input. What I do not comprehend is why some subset of ZH followers seem to WANT Meredith Whitney to be right. Do some people here really WANT to see municipalities fail and have the bondholders lose their principal? If so, there are some seriously jaded people here.
No probs dude.
"What I do not comprehend is why some subset of ZH followers seem to WANT Meredith Whitney to be right. Do some people here really WANT to see municipalities fail and have the bondholders lose their principal?"
Look, honestly speaking I'm torn. On the one hand, I know what a crash could lead to - chaos and blood in the streets. On the other hand, I can't help feeling that there needs to be some serious soul-searching and change of how we think, and maybe a crash is a good catalyst to enable that. However you're right - a failure would really hurt bondholders, pension funds etc, which would suck for people like you and many ordinary people as well. So I'd like for her to be right to some extent, but not completely right. But right enough to wake people up.
It's hard for me. As an example I have an account at BAC due to the fact that I used to live in the US (ucsb in ucsbcanuck refers to UC Santa Barbara), I still travel a lot into the US for business/pleasure, and I need a bank that is nationwide so that I can get money from an ATM without fees. I need money in that account as a buffer, in case I run into an emergency and I need cash. Right now I have ~ $5k, so it's well under the FDIC guarantee liimit etc.
On the other hand, I think BAC is a steaming pile of shite. Who knows what lurks off the balance sheet or even on the balance sheet but hasn't been properly accounted for. Both the credit and equity markets also seem to think BAC is a steaming pile of shite. So I have puts on BAC.
So the best outcome for me would be that BAC drops enough so that I make money on my puts, but doesn't fail completely.
Euro bond yields up in PIGS. US economic numbers less than exepected. All in all, not good. And housing still in a coma.
http://confoundedinterest.wordpress.com
Apart from the muni rhetoric, does anyone have an opinion on whether it makes sense to hold a core position on the VXX (clearly leaving $$ on the table by not trading VIX, spx options etc with rolling, etc) at these levels as we wait for the melt down? Seems cheap vs where it has been, with a reasonable correlation.
Go easy on me. My first post!
Happy Holidays and thanks for all the great posts Tyler, et al.
Cliff- avoid vxx like the plague. Decay is a HUGE issue with it- pull up a weekly chart on it and you'll see what I mean. Do not ask how I know about what a crap etf it is- hurts too much to say...
VQT holds a mixture of SPY & VXX that varies based on some rules; it's less prone to the time decay problem just mentioned, so perhaps more suitable for a core position.