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A Pound Of Flesh, An Aapl A Day, Cheap HYG Vol
From Peter Tchir of TF Market Advisors
A Pound Of Flesh, An Aapl A Day, Cheap HYG Vol
Europe has moved into the “pound of flesh” stage of negotiations. Everyone just wants to make their point and the probability of a deal is dropping by the day. Europe is running out of time, and is just clueless. Yesterday has to confirm that even for the most optimistic person out there. They decided they should wait until the elections. Then they realized they had to deal with the March 20th bonds. Then they came up with a “bridge loan”. Clearly they didn’t bother to look up the definition of a bridge loan. A bridge loan is a loan that is meant to be temporary and has such punitive rates over time that the borrower is heavily encouraged to pay it back with new debt. This is just a “small” loan but one that is permanent and probably never getting paid back. I’m not sure if they asked the contributors whether they wanted to put up €16 billion which is somehow now “small”. Then noise came out that maybe Greece just shouldn’t have elections.
The Troika and Greece have been negotiating all this time and no effort was spent on figuring out a plan in the event of default. They are scrambling to come up with one. I remain convinced that Greece could do well in default if it is managed properly, but the chances of them doing anything properly is low.
The LTRO and its “infinite” capacity to lend to banks made everyone too complacent. Somehow the market took the backstop line as meaning bank credit risk was virtually non-existent. While we thought LTRO provided a lot of value to banks, it is not a cure all, and banks highly levered (stuffed to the gills) with bad loans are not completely safe. We are seeing a turnaround in CDS spreads for European banks. They are off the wides of earlier this morning, when the index got to 254 bps but the trend is disturbing. This is the graph as yesterday. Today’s move isn’t included, but we are giving up most of this year’s gains and although still much better than pre-LTRO, it is worth watching. So many people were talking about how “riskless” financials had become post LTRO that this move has to be hurting a lot of people. They avoided financials in Europe for most of last year, only to pile in near the tights.
I’m not the first person to note Apple’s parabolic move, nor will I be the first to point out that parabolic moves tend to end badly, but it is worth repeating.
It has been on a tear and yesterday had some of the makings of capitulation as it screamed higher in the morning only to reverse and fade hard. Is that the end of the up move? Maybe not, but since it makes up about 3.7% of the S&P 500 it needs to be watched. Financials have been weak for about a week or so, but that move was masked in the indices by the performance of Apple. Another thing to worry about from the long side.
And finally, let’s look at the high yield market. HYG just had two days without any new share creation. That breaks a trend of almost relentless inflows. Is retail finally done throwing money at high yield? Without those new flows, the market could be at some risk, especially with the robust new issue calendar. HYG is trading at a discount to NAV. I don’t believe it is really at a discount, this is more of a function that NAV is still being marked closer to the offer side of the market in spite of the fact that the market has switched from being well bid, to well offered.
I am being told that many “credit hedge funds” are still sitting on 30% cash or something like that, so there is plenty of money on the sidelines. I continue to think that the concept of cash on the sidelines for a hedge fund is silly. They should be having longs and shorts. They should not just be beta funds (in spite of the fact that many are). So if a fund is supposed to have long and short ideas, the “cash on the sidelines” argument is foolish. Also, many funds use CDS, so they may in fact be levered but have cash on the sidelines. If you write 100 million of IG17 CDS, you only use a couple million of cash (as collateral), but that doesn’t mean you are “underinvested”. And finally, for the beta chasing funds, it means that they are 70% invested. So the long biased type funds have 70% of their money invested in a market yielding about 7%. So in the month of February, their carry would be about 0.625%. If the bonds drop 2%, they are down about 1% of NAV on the month. How many of these funds have that tolerance? Hedge funds always act as though they are levered because they cannot stomach negative months, and really, who out there “loves” high yield when it is providing low yields.
I really like buying puts on HYG. The implied vol is about half of that of the S&P, and I think a 4-5% move in the S&P will result in a 3-5% drop in HYG, so buy March puts on HYG to play an overall correction, and more importantly a correction in high yield. The flows are slowing, the market is rich, and liquidity is non-existent. The street has already done a self-imposed Volcker rule and is not taking much risk, and it is very safe to assume, that the average desk has used whatever risk limits they have to build up a little inventory because let’s face it, they like the carry, and figured they could sell the bonds to the ETF’s as they got more inflows.
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it is worth repeating - edification.
let’s face it, they like the carry
lifting the animal spirits
Had they defaulted at 'first light' they could have done it. Now, with a couple a hundred billion in unpaid debt they have no chance.
Collapse it is...
"Then noise came out that maybe Greece just shouldn’t have elections."
I see, so should we call the nation the Banker non-Republic of Greece ?
it would seem Hellenic would still fit as it seems Greece is devolving back to 4th century bc. As to republic, eu's appointed minister done that in a long time ago so got to agree with ya on that one.
Actually, in ancient Greece, most public positions were not filled by election. The ancient Greeks thought that elections were too prone to becoming corrupted by money (that sounds familiar, don't it?), and favored sortition, literally, the drawing of lots, to select people for public service.
But so long as politicians are controlled by the vampire squids, it doesn't really matter what sociopath gets elected to what office. In Greece, or anywhere else.
though the Dr. Strangelove that made this remark "maybe Greece just shouldn’t have elections" thinks that the two troublesome ministers he hates are minions of the Holy Vampire Squid.
the proposal is still beyond any reason, though, a foreigner has no business in asking the postponement of elections in any case
most people are corruptible, all republics have this problem, the trick is to keep corruption as low as possible
There should be no doubt at all that the elections can be postponed. They weren't actually due to be held until 2013 (according to the constitution) but that was only changed in December 2011 when "they" appointed Papademos.
The Troika hardly give a shit about democracy as it is so they will do whatever they wish. I will be very surprised if they aren't delayed, and if they do, whatever new date they come up with is irrrelevant, they are fascists.
Ironic. The place where democracy first flowered shall also be the the locale where corporacracy first takes root. Is that why the powers that be are so worried about Persia? It almost put paid to democracy two millennia ago.
If people had more integrity, they wouldn't buy anything from these slaves owning scum at Apple.
march 20th is the beginning of the end in more ways than one:
"wait for March 20, when the Iranian oil bourse will start trading oil in other currencies apart from the US dollar, heralding the arrival of a new oil marker to be denominated in euro, yen, yuan, rupee or a basket of currencies.
That would suit Asian clients - from BRICS members India and China to US allies Japan and South Korea, not to mention NATO member Turkey.
But that would also suit European clients, to pay for oil in their own currency.
Tehran - as well as many key players in the developing world - does want to sink the petrodollar."
and
"Iran is willing to trade in local currencies with the BRICS countries and it is suiting those in the developing World who have their own currencies.
This is a tacit encouragement from Iran to those economically struggling countries in EU to drop out of EU (thus freeing themselves from the machinations of Messers Brussels and Washington) and trade with Iran using their own currencies.
Ultimately Iran kills two birds using one stone. The Petrodollar and the EU."
Everything that has happened on the surface is indicative of "stalling". There are some sort(s) of backdoor accomodations occuring, however not for Greece (and the others in the EU), but rather for the banks. The rumors, feet dragging, mis/disinformation for years has been purely "buffer time" (not to be confused with "Buffett time") for...the...banks...period.
Hell, the top heavy Goldman political "leadership" (all nonelected) should be clue enough as to the grand plan.
Also, when you think about it wasn't it Hank Paulson, former CEO of Goldman that supposedly lead us out the the Banking Chrisis. Now we have another Goldman Guy trying to lead the European Nations out of the Greece problem.
Just because there is a market doesn't mean one has to play. Being 100% long/short is my ideas of foolish. Only if you can find enough trades that meet your criteria should one be all in. IMO
When you think about it all, you have to go to the origination of admitting Greece into the European Union. We have to remember that Goldman Sachs worked out a devious way for them to be admitted in the first place. Then as Goldman always does it took out Insurance on Greece and the other European Countries in the event of an eventual default.
It resembles the Toxic Mortgages created by Goldman (which of course they "Insured" in the event of default) that took down the whole Banking Industry in 2008.
I guess that taking down the Banking sector was not enough for them they wanted the WORLD.
This Greece charade reminds me of an old Bob Hope Movie......
http://www.youtube.com/watch?v=6KP5_aqXdrE&feature=related
first off i'm so glad your an expert on parabolic moves. second "the people who know anything about Europe have already moved beyond it." Obviously you are not in this camp. The fact is once the "Afghanistan set" moves into Athens then all contracts are null and void and no money will be paid out save for "essential government services." The vast majority of the morons on the tele will now be flat broke with nothing but claims in their pocket for what we up here call "Erie Canal Bonds." And of course "you're loaded on that shit paper"...
Greece..a flyover..
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