Spreads were mixed in the US with IG unch, HVOL improving, ExHVOL weaker, XO stronger, and HY rallying (as we note all the indices ended well off their tights and did not partake of the swings we saw in equity land today). Indices typically underperformed single-names with skews widening in general (although we do note a significant tendency for off-the-run IG-HY decompression relative to IG12-HY12 compression and roll compression in ExHVOL's curve) as IG underperformed but narrowed the skew, HVOL outperformed but widened the skew, ExHVOL intrinsics beat and narrowed the skew, XO's skew increased as the index outperformed, and HY's skew widened as it underperformed.
The Federal Reserve's and Treasury's actions have become the new catalysts for market movement, as they flood and drain the system with liquidity. An analysis of their options looking forward, particularly in the realm of the high interest rates that QE and the constant equity market bid have left us with, may be a better indicator than any in regards to future market direction.
After some interesting disclosures over the past week -- including the fact that a large percentage of the U.S. market volume is comprised of just five financial stocks -- let us review new information and take a look at the week ahead, in order to make some sense of the train wreck already in progress.
Is Goldman's Selective Trading Disclosure A Legal Way For Preferred Clients To Front Run The Market?Submitted by Tyler Durden on 08/23/2009 20:08 -0500
Zero Hedge has long been discussing the impact of selective informational disclosure, be it in the context of trading or research asymmetries, which promote a two-tiered market, where privileged accounts of major broker dealers receive "tips" ahead of "everyone else." The quid's pro quo is that these "privileged" few end up executing the bulk of their trades with the broker-dealer, thus ramping up riskless agency revenues. In essence the clients' capital risk is mitigated, while the return to the "perpetrator" is augmented by collecting a disproportionate share of the bid/offer spread in the given security. Whether this tiering mechanism occurs via Flash orders, SLP provisioning, actionable IOIs, advance selective notice of a large flow order, a phone call, a limited Bloomberg blast, or an Instant Message, the ethics of the practice are undoubtedly shady, and potentially borderline criminal. But no one is the wiser, as both sender and receiver of information know to keep their mouth shut. Until today, when the WSJ blows one aspect of this practice out of the water, by focusing on Goldman's selective informational disclosure to preferred clients, and is likely to create much more headache for Goldman's PR department and its staunchest CNBC-based prosecutor-turned-supporter and soon to be Sellout author.
The challenge before regulators, politicians and anti-trust commissioners with regard to all these very salient issues is greater now than it has ever been in the history of a "free and fair" equity capital market. Whether the approach taken is one that will perpetuate the dominance and the increased profitability of a select few or will bring back a sense of democracy and remove the highly speculative element Mr. Merrin discusses, will be critical for the future of US capital markets, and the participation of retail investors in what was once the only way to reward success and punish failure. But then again, the last two seem to be no longer a key concern for the administration, which has taken a sharp detour from the primary tenets of the capitalist system that over the past 200 years managed to make America the greatest country in the world. We hope the right choice is made for the sake of continuing America's greatness, even if it means one quarter where a company like Goldman Sachs has more than 2 trading days of capital loss.
Spreads ended this tempestuous week mixed with breadth generally weak (wideners outpacing tighteners by over two-to-one) and curves flattening more than steepening in single-names. HY outperformed IG as both IG and HY managed gains on the week (Friday-to-Friday close) and even more so from Monday's gap wider openings as the intraday ranges increased as the week progressed.
A new proposal by MIT professors seeks to involve the Fed directly in the wholesale selling of CDS. According to recent TIC data, perhaps the Fed is doing this already.
While over the past several weeks Goldman's stock price has been steady as a rock (except to precipitate an occasional headfake in a volumeless and directionless market), its CDS has spiked wider by about 50% since its lows (from low 90s to mid 140s). Either some arb desk is currently collecting all its possessions in banker boxes as it is escorted out of the building, or look for a convergence of these two trades soon.
After several consecutive weeks of equity market mimicking and rerisking, the CDS market finally saw a net derisking in the week ended August 14, across virtually sectors, with the biggest action concentrated in the financials arena. Total net notional change was substantially higher than last week's -$14.5 billion, increasing to $66.1 billion, with a marked derisking in financials at $62.6 billion. Other notable derisking spaces were Consumer Services at $27.6 billion (again) and Utilities at $20 billion.
Spreads widened in general today in the face of a surprisingly resilient US equity market as overnight saw more Asian angst and dollar doldrums. HY underperformed IG but both were wider as indices underperformed intrinsics and low beta underperformed high beta. Intraday ranges were wider than average in IG and HY today but both closed much nearer their wides than tights, as stocks closed at their highs. HY's resilience yesterday (following the AXL debacle) seems to have run its course with both IG and HY now wider on the week. IG and HY are both significantly wider than their Friday closes and Monday opens whereas the S&P seems modestly worse than Friday's close but considerably better than Monday's open - infer what you will.
When last week we said "look for loans to trade as wide as US CDS, with bonds squeezed to nano bps over zero" we thought we were kidding. We were wrong. Last week the across the board tightening continued, with the loan universe positioned exactly at 400 bps, an 11 bps tightening from the prior week, while bond tightened by 28bps to 733 bps. Yet while there were the rubber band movements tighter across several high beta bond names such as Select Medical and Aeroflex which screamed much tighter and took the index in, for the first time a more substantial widening was also notived, that of FDC bonds going wider by 150bps.
Spreads were broadly wider in the US as all the indices deteriorated (with HY underperforming IG once again as both reached 3-4 week wides but IG maintained a very tight range like stocks while HY slipped all day). Indices generally outperformed intrinsics with skews widening in general as IG's skew decompressed as the index beat intrinsics (HY-IG and IG hedge technicals holding IG back), HVOL underperformed but narrowed the skew, ExHVOL outperformed pushing the skew wider, XO's skew increased as the index outperformed, and HY's skew widened as it underperformed. (The HY-IG differential is a better indeication of risk aversion currently than IG since technicals are holding IG back and we note thios would imply a higher VIX and 950 S&P give or take - given empirical levels).
The below chart sorts the over 350 names that make up the DTCC most liquid index, sorted from most risky to least risky.
Credit significantly underperformed stocks this week as last week's capitulation in CDS markets did seem to be the turning point for this swing. HY underperformed IG considerably as single-names led the weakness but with spreads so much wider close-to-close, the S&P is almost unch, VIX is down, and Oil and Gold both fell with the dollar (unexpectedly) and we sense some weakness (following today's flatline in stocks midday) to come in equity markets.
Bank of America stock up 2% at last check, while CDS is 5 bps wider. Someone please explain that one to us.