Via Peter Tchir of Brean Capital,
The one market seemingly everyone "knows" is a bubble is the treasury market. That is the market that just made new low yields on the 30 year bond for the year. The curves have flattened and there has been extremely strong support for the long bond and the 10 year (which I have been on the wrong side of for the last point). This is on the back of the strong dollar and global deflation fears.
At the same time, 5 year yields, remain well above their average for the year. In our end of September presentation, we highlighted the curve, and have seen that the prior 2 times that we had very steep curves, they reverted to extremely flat. What looks like "policy error" to me. Are we headed down that path again? This Fed seems far too dovish to make that mistake, but history does tend to have a way of repeating.
GTAT, which is the first true "jump to default" I have ever seen looks exactly like a "bubble" popping. With 20/20 hindsight the story seems obvious. One customer, loans from that customer, dwindling cash, weak cash flow, other debt, etc. Yet somehow the market didn't see it coming. If that isn't the actual definition of a "bubble" popping, then I don't know what is.
So I continue to believe that the bounce in high yield is over and that the GTAT situation, while almost exclusively a convertible arb, rather than HY bond, play, is spurring the rethinking of where the risk is in high yield. With some leverage allegedly creeping back into the market, I expect us to hit new lows on high yield.
Along with high yield, the stock market should see some pullback. This is a rude awakening on the stock front that not all stories end with a multi billion buyout from one of the big tech companies with lots of cash. So i would expect continued weakness, led by tech.
Then we have the real wildcard - OIL. Black Gold. Texas T. Or in this case, more specifically WTI. I have read several technical pieces. Some with compelling reasons WTI is a buy and headed to 95. Others, equally compelling, that it is a sell and is headed to 84.
Getting this one right is crucial as it has so many potential repercussions in the E&P space but beyond that too. Even the "shale miracle" is being questioned - prematurely, but I am seeing it be questioned.
This sector is where secured financing meets equity valuations and the story could get ugly as cost to finance increases and ability to finance decreases, in what can be a rapid spiral for smaller weaker companies who rely heavily on short term credit.
This would likely impact miners who are also facing pressure as commodities like Cooper are down 4% in a month.
So I am bearish high yield and U.S. stocks here and my model portfolio reflects that.
...
This is all extremely difficult in markets that seem to have somewhere between 0 and no liquidity. No one seems to be willing to take the other side and reverse big moves in EITHER direction. As a bear I am just as worried that there is no liquidity when the market decides it is time to turn, and maybe that has already started, but for now I would be selling any bounce.
